An Eye On Cooper...

(RTTNews) - This medical device company has a very impressive track record of growing business over the past decade. increasing sales from $490.2 million in 2004 to $1.72 billion this year. The Silicone Hydrogel daily disposable lens portfolio constitutes a major avenue for growth.

Investment Highlights

* Operating In Two Solid Markets With High Barrier To Entry

* Revenue Growth Exceeding The Market

* Accelerated Earnings Growth Since 2011

* Proven Track Record Of Successful M&A Execution And Integration

* Positioned To Achieve Long Term Objectives (2014 - 2018)

* Continued Growth Through New Technologies

Company Snapshot

Cooper Companies Inc. (COO) operates through two business units:

1. CooperVision or CVI, which represented 81% of company revenues in 2014, produces a wide variety of spherical, toric and multifocal contact lenses with monthly, two-week and daily disposable replacement schedules.

CooperVision clariti 1day is the world's first and only family of silicone hydrogel, daily disposable contact lenses. Silicone hydrogel lenses are a healthier alternative to hydrogel daily disposables. That's because they allow more oxygen to pass through to your corneas than hydrogel lenses.

2. CooperSurgical or CSI, which represented 19% of company revenues in 2014, provides medical devices and procedure-based solutions to the women's healthcare segment regardless of clinical setting. Its products fall into three main segments based on the point of healthcare delivery: Hospital, Office and Fertility Clinic.

CooperVision

CooperVision sales totaled $1.39 billion for fiscal 2014, up 10% year over year and up 10% pro forma, driven by the success of silicone hydrogel and 1-Day lenses.

For the fourth quarter, CooperVision sales increased 18% to $385 million from last year, and was up 9% pro forma. Included in this is the Sauflon business, which had revenues of $50 million, up 50% above the prior year. And this was in spite of the backorder and logistics issues in the US.

Its silicone hydrogel family continues to drive CooperVision top line with $198 million in revenues, its two-week family of products, Avaira, also grew very nicely, up 31% in constant currency. Regarding silicone dailies, MyDay had a solid quarter, up 79% in constant currency.

The company plans to launch MyDay in the U.S. in March to key opinion leaders and then roll it out more aggressively in the back half of the year. Cooper Companies continue to believe there is a great opportunity to split the market with a premium daily silicon hydrogel lens and a mass market lens.

Category wise, the toric business remains strong, growing 13% to $111 million in the latest fourth quarter from last year, or up 12% constant currency, and torics now represent 29% of CooperVision's revenue. Multifocals grew 26% YoY to $40 million, up 20% on pro forma basis and now represent 10% of CooperVision's revenue.

Single-use sphere revenues rose 32% to $93 million from last year, or 11% on constant currency basis, and represent 24% of CVI revenues. Other Non single-use sphere revenues inched up 2% in constant currency, and up 12% YoY to $141 million, representing 37% of CVI revenues.

Regarding Proclear, sales were up 5% in constant currency for the latest fourth quarter and represent 22% of CooperVision's revenues. This was a pretty solid quarter for Proclear and shows there's still some growth in the non-silicone hydrogel space.

Regionally, Cooper is very strong this quarter, growing solid throughout the world. The Americas sales totaled $153 million, up 8% year-over-year, or up 5% on pro forma basis. In EMEA, or Europe, Middle East and Africa, sales rose 43% to $163 million from last year, or up 13% on constant currency. Meanwhile, sales from Asia Pacific declined 2% to $69 million, but up 7% on constant currency.

CooperVision's annual sales is expected to grow by a CAGR of 9.3% from $1.12 billion in fiscal 2011 to $1.6 billion in fiscal 2015.

For fiscal 2015, the company expects CooperVision to generate sales between $1.575 billion and $1.620 billion. Pro forma revenue growth is expected to be in the range of 8% - 11%, which is higher than the 7% - 10% target issued in September.

CooperVision has consistently outperformed the market. If we look at the trailing twelve months through September 2014, worldwide soft contact lens market grew 5%, while CooperVision grew 9%. During the calendar years, 2010, 2011, 2012 and 2013, market grew 6%, 4%, 5% and again 5%, respectively, while CooperVision grew 10%, 7%, 11, and 12%, respectively, over the same period.

CooperSurgical

Annual sales from CooperSurgical improved 2% to $325 million in 2014 from last year, and up 2% on constant currency, aided by Fertility.

CooperSurgical sales was $82.6 million, down 3% from last year's fourth quarter, down 1% in constant currency. Fertility was down 5%, or 1% in constant currency, while the office surgical procedures business was down 1%.

Meanwhile, the company's office and surgical procedures business continues to deal with the pains of lower OB-GYN office visits in the United States. On the plus side, its CooperSurgical team is very focused on driving operational improvements, and their stand alone non-GAAP operating margin increased from 25% - 28% for the quarter, led by an increase in non-GAAP gross margins from 64% to 65% and strong expense control.

Witnessing a little sunshine on the horizon, the company expects CooperSurgical to generate 2015 sales of $325 million - $340 million, up 3% - 7% on constant currency basis. This should result in non-GAAP earnings per share of $7.30 - $7.70, up 16% - 22% from FY14 on a constant currency basis.

CooperSurgical sales is expected to increase by a CAGR of 12.2% from $210 million in fiscal 2011 to $332 million in 2015, midpoint of management estimate.

Regarding free cash flow and CapEx, the company believes both to be slightly over $200 million, and expects to see a reduction in CapEx in FY16 while operating cash flow continues to grow.

Revenues Growth

Cooper generated 15 consecutive years of revenue growth.

Annual sales increased to $1.72 billion in fiscal 2014 from $1.33 billion generated in fiscal 2011.

Cooper Companies is expected to grow its proforma top line between 2011 and 2015 at a Compound Annual

Growth Rate or CAGR by 9.7%. Sales for 2015 is now projected to be $1.93 billion, representing the midpoint of management guidance range of $1.90 billion - $1.96 billion.

Earlier, the company had projected 2015 sales of $2 billion - $2.06 billion.

Accelerated Earnings Growth Since 2011

Earnings per share totaled $7.29 in fiscal 2014, higher than the $6.41 per share in 2013, $5.54 per share in 2012, and $4.82 per share in 2011.

The company is expected to grow its proforma earnings between 2011 and 2015 at a CAGR by 11.7%. The company sees fiscal 2015 bottom line of $7.50 per share, which represents midpoint of management guidance range of $7.30 - $7.70 per share.

Earnings per share drivers include revenue growth, gross margin improvements, operating expense leverage and lower tax rates.

Previously, the company expected 2015 earnings in the range of $8.20 - $8.60 per share.

Strong Operating Margin Improvement

Led by the consistent revenue growth and gross margin expansion, operating income rose to $404 million or 23.5% margin in 2014 from $281 million or 21.1% margin. Operating margin is expected to grow at a CAGR of 12.1% between 2011 and 2015, and the company targets 2018 non-GAAP operating margin of 26%+.

Latest Q4 Performance

Net incomes for the latest fourth quarter was $30.8 million or $0.63 per share versus $57.4 million or $1.15 per share last year.

Excluding items, adjusted earnings rose to $95.8 million or $1.95 per share from $79.6 million or $1.60 per share a year ago.

Revenues were $468 million, an increase of 14%, compared to $411.9 million in the prior year period.

Analysts polled by Thomson Reuters estimated earnings of $2.03 per share on revenues of $481.6 million for the quarter. Analysts' estimates typically exclude special items.

CooperVision revenue grew 18% year over year, or 9% pro forma, while CooperSurgical was down 3%.

Robert Weiss, Cooper's president and chief executive officer said, "I am pleased to report record revenue this year at both our business units and record non-GAAP EPS. We accomplished this through continued market share gains across all geographies and the acquisition of Sauflon Pharmaceuticals."

Total debt increased $1,034.4 million from July 31, 2014, to $1,382.4 million, due primarily to the acquisition of Sauflon, offset by operational cash flow generation. Interest expense was $3.3 million compared with $1.9 million in last year's fourth quarter.

Cash provided by operations of $152.1 million, capital expenditures of $60.1 million, and excluding acquisition costs of $16.0 million, resulted in free cash flow of $108.0 million.

Sauflon's operating margins were impacted by temporary halt in all direct and indirect integration activity in the U.K., following the UK Competition in Markets Authority, or CMA's decision to evaluate the acquisition.

As a result of the CMA order, non-GAAP operating margins at Sauflon came in lower than it expected in the fourth quarter at at 13%. Included in the 13% was a large number of operational costs which will be rationalized over the next year.

Vision For 2015...

The company currently sees adjusted earnings in the range of $7.30 - $7.70 per share on revenues of $1.9 billion - $1.96 billion. It earlier expected earnings of $8.20 - $8.60 per share on revenues of $2 billion - $2.06 billion.

Analysts are looking for earnings of $8.24 per share on revenues of $2.01 billion.

The revised guidance reflects the moves in currency from September 4, 2014, the date of last guidance, offset by a slight increase from operational improvements. This guidance assumes constant currency as of December 3, 2014.

Excluding currency, the company actually increased earnings per share $0.10 to reflect greater synergies from Sauflon.

Long Term Objectives (2014 - 2018)

The company anticipates reporting operating margin of 26%+ by 2018, and generate free cash flow of over $1.3 billion, which is cumulative over five years, 2014 - 2018.

M&A Execution And Integration

October 8, 2014, CooperSurgical acquired EndoSee Corp., a developer of an office-based disposable hysteroscopy system, in a transaction valued at about $44 million. The transaction is expected to be neutral to fiscal 2015 earnings per share excluding one-time charges and deal-related amortization.

Early August, the company completed its acquisition of Sauflon Pharmaceuticals Ltd., a European manufacturer and distributor of soft contact lenses and solutions, for a purchase price of about $1.2 billion. Excluding one-time charges and deal-related amortization, the transaction is expected to be accretive to earnings per share in fiscal 2015. The deal was announced on June 30, 2014.

The Sauflon acquisition expands Cooper's contact lens product portfolio particularly with their clariti 1day brand of single-use sphere, toric and multifocal silicone hydrogel lenses. Clariti lenses received United States FDA clearance in August 2013.

Proven Track Record Of Success - Highlights

* Revenue - Grew faster than the market in each of the last 5 years

* Gross Margin - Grew from 58% to 65%

* Operating Margin - Grew from 18% to 24%

* EPS - Grew faster than revenue in each of the last 5 years

* Cash Flow - Generated more than $1.0 billion cumulatively (2010 - 2014)

* Accretive acquisitions - Closed eleven acquisitions

Daily Disposable Contact Lens Market Opportunity

Demand for daily disposable contact lens is extremely strong, and the company believes that it well positioned to capitalize on this opportunity, as it claims to be the only company offering a full daily hydrogel product portfolio.

Management estimates that the 1-Day product category will increase its market share in the overall soft contact lenses market to 50% in 2019 from 42% in 2014, and grow by a CAGR of 9% versus 6% CAGR for total market over the same period.

Modality by region - daily disposable contact lenses accounts for 26% in America, 46% in Europe, Middle East and Africa or EMEA, 60% in Asia pacific and 42% in Rest of the World.

Currency Impact On Top And Bottom Lines

Currency rates have moved significantly down over 8% on a weighted average basis, since September 4, 2014, when the company first issued fiscal 2015 outlook. The yen led the way, down 14% and the euro down over 6%.

This has had a significantly negative impact on the company's revenues and earnings per share. From an incremental standpoint from its September guidance, revenues have been reduced $100 million and EPS $1.

Revenue calculation is based on roughly 60% of the company's revenues being outside the U.S. The EPS impact is calculated off of the revenue impact, offset by offshore costs including manufacturing and operating expenses.

On a year over year perspective, Cooper Companies expect FX to negatively impact its fiscal 2015 earnings per share by $1.19. This is a very significant impact, and is driven by an overall decline in currencies of 10% on a weighted average year over year basis. This is primarily the result of the weakening of the yen, which has moved against us by 16% year over year and the euro, which has moved against us by 10% year over year.

Rolling All This Together...

Foreign currency fluctuations remain a major headwind for the company, as contact lenses are a discretionary purchase that are often deferred by cash-strapped consumers.

While the unfavorable foreign currency continue to weigh over the company's performance in the near term, it believes that the recent Sauflon acquisition will create a long-term growth platform, providing the company with the ability to improve distribution network, ramp up production, invest and leverage prudently, thereby delivering optimized total shareholder value.

The company believes that its business fundamentals remain strong and expects "fiscal 2015 to be a year of strong operational performance."