COOPER COMPANIES, INC. annual report, FY2012

Cooper Companies, Inc. — FY2012 Form 10-K Summary

Reporting period: Fiscal year ended October 31, 2012. The filing also reports fourth-quarter results for the three months ended that date. The company operates CooperVision, a contact lens business, and CooperSurgical, a women’s healthcare medical-device business.

Financial performance

MetricFY2012FY2011
Net sales$1,445.1 million$1,330.8 million
Gross profit / gross margin$924.0 million / 64%$804.8 million / 60%
Operating income / margin$283.4 million / 20%$227.6 million / 17%
Net income attributable to Cooper stockholders$248.3 million$175.4 million
Diluted EPS$5.05$3.63
Operating cash flow$315.1 million$336.3 million
Capital expenditures$99.8 million$103.7 million
Total debt at year-end$373.7 million$380.4 million

Fourth-quarter sales were $396.3 million, compared with $360.9 million in Q4 FY2011. Net income attributable to Cooper stockholders was $71.9 million versus $56.6 million; diluted EPS was $1.46 versus $1.15.

Year-end cash was $12.8 million; working capital was $395.3 million. The company reported $653.7 million of availability under its amended credit facility, a 0.17:1 debt-to-equity ratio, and compliance with credit covenants. Its $1.0 billion revolving facility matures May 31, 2017. Operating cash flow declined despite higher net income, principally reflecting inventory growth and other working-capital movements.

Business trends and changes

  • CooperVision sales rose 6% to $1,189.2 million. Silicone hydrogel products grew 28% and represented 36% of its sales; multifocal lenses grew 26%. Older conventional and cosmetic lens sales declined.
  • CooperSurgical sales increased 22% to $255.9 million, including $25.1 million from Origio; growth excluding acquisitions was 6%.
  • Cooper acquired approximately 97% of Origio in July 2012 for about $147.4 million in cash, later increased ownership to 98%, and completed redemption of the remaining shares in November. Preliminary purchase accounting included $107.7 million of amortizable intangible assets and $95.5 million of goodwill.
  • Gross-margin improvement reflected manufacturing efficiencies and product mix, particularly CooperVision’s shift toward silicone hydrogel products. The effective tax rate was 9.7%, up from 9.0%, and remained below the U.S. statutory rate largely because of foreign earnings mix.

Outlook, risks and unusual items

  • Management remained optimistic about long-term market prospects but said economic uncertainty, including European debt concerns and currency volatility, meant lower-than-historical expectations for market growth in FY2013. No specific revenue or earnings guidance is provided in the filing.
  • CooperVision planned further product introductions, including silicone hydrogel, multifocal and single-use lenses. Management highlighted competitive pressure from rivals’ silicone hydrogel single-use products and the importance of building a full product range.
  • The Avaira Toric and Avaira Sphere recalls involved limited lots associated with silicone-oil residue. FDA clearance for the Toric corrective process was received in April 2012, and the product was relaunched in May; the company continued its market rollout.
  • FY2012 included a $5.0 million insurance-proceeds gain related to prior UK facility damage, a $1.4 million loss on amendment of the credit agreement, and $4.9 million of direct Origio acquisition costs. FY2011 included a $20.4 million Avaira recall charge, a $16.5 million debt-redemption loss, a $10.0 million patent-litigation settlement and $1.9 million of restructuring costs.
  • Origio integration, international exposure, foreign exchange, competition, regulatory approvals and compliance, product recalls/liability, and dependence on a sole supplier for key silicone hydrogel material are notable risks. The U.S. medical-device excise tax effective January 1, 2013 applies to almost all U.S. CooperSurgical product sales; contact lenses are excluded.
  • A securities class action alleging misrepresentations about Avaira lens safety and a related derivative action remained pending. The company said it could not assess the likelihood or estimate any potential loss from the class action.
  • KPMG issued an unqualified audit opinion and concluded internal control over financial reporting was effective as of October 31, 2012.

Investor verification priorities

  • Review the final purchase-price allocation, integration progress and contribution of Origio, including its acquisition-related debt and goodwill.
  • Monitor Avaira relaunch performance, any further recall-related costs, and developments in the securities and derivative litigation.
  • Track inventory levels, operating cash conversion and the impact of increased inventory on cash flow.
  • Assess execution of new silicone hydrogel launches, competitive position and CooperVision margin sustainability.
  • Evaluate the CooperSurgical excise-tax effect, foreign-exchange exposure, supplier continuity and credit-facility covenant headroom.