Cooper Companies, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2011; comparison periods ended July 31, 2010. The company operates CooperVision, a contact lens business, and CooperSurgical, a women’s healthcare medical-device business. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $351.4 | $295.6 | $969.9 | $845.2 |
| Gross profit | $202.8 | $176.0 | $581.2 | $489.2 |
| Gross margin | 58% | 60% | 60% | 58% |
| Operating income | $45.9 | $51.4 | $160.9 | $127.4 |
| Operating margin | 13% | 17% | 17% | 15% |
| Net income | $38.1 | $39.7 | $118.8 | $64.6 |
| Diluted EPS | $0.78 | $0.86 | $2.46 | $1.40 |
| Operating cash flow | $87.4 | $75.3 | $225.3 | $203.1 |
- Q3 revenue rose 19%; CooperVision revenue increased 20% to $298.3 million and CooperSurgical increased 14% to $53.1 million. Nine-month revenue rose 15%, with CooperVision up 16% and CooperSurgical up 11%.
- For the quarter, higher sales did not translate into higher operating income or EPS. CooperVision’s operating income fell to $41.5 million from $47.6 million; CooperSurgical’s rose to $13.0 million from $11.9 million.
- Nine-month net income and EPS increased substantially versus 2010, when results included a $27.0 million class-action settlement charge. FY2011 results included a $16.5 million debt-extinguishment loss. The 2011 nine-month effective tax rate was 8.5%, versus 8.4% in 2010.
Cash, debt and liquidity
- At July 31, cash was $7.9 million, working capital $305.9 million, total debt $445.2 million, and stockholders’ equity $1,887.7 million. Debt was 0.24 times equity, compared with 0.37 times at October 31, 2010.
- Nine-month investing cash outflow was $112.1 million, including $71.2 million of capital expenditures and $40.9 million for acquisitions. Financing cash outflow was $109.2 million; reported net cash increased $4.3 million to $7.9 million.
- The January 2011 refinancing established a $750 million revolving facility and $250 million term loan, both maturing January 2016. The company reported $574.8 million of available capacity and compliance with its covenants: interest coverage of 15.80x against a 3.00x minimum, and leverage of 1.26x against a 3.75x maximum.
- Management said cash, operating cash flow, and borrowing capacity should fund operations, capital spending, acquisitions, and dividends in the next 12 months and longer term.
Material changes, outlook and notable items
- Q3 included a $14.2 million reserve for inventory and returns related to a voluntary, limited recall of certain Avaira Toric lens lots. The company attributed the decline in CooperVision quarterly operating income primarily to this reserve and reversal of a $6.1 million gain related to the Aime acquisition.
- The $6.1 million gain was reversed as an out-of-period adjustment after the company determined it had misapplied acquisition-accounting guidance. Management deemed the adjustment immaterial to the estimated full-year results, prior quarterly statements, and Q3; it stated there was no effect on nine-month results because both the original entry and reversal fell within that period.
- Management reported that the Avaira Toric recall involved specific lots only, followed complaints of temporary hazy vision associated with residue, and that the manufacturing issue had been identified. The company expected inventory to return to normal by December 1, 2011. The product represented less than 1% of Q3 company sales.
- Management remained optimistic about long-term contact lens and women’s healthcare markets but cited macroeconomic and credit-market uncertainty as risks to the remainder of FY2011 and beyond. Product plans include additional silicone-hydrogel and PC Technology lenses, including multifocal and single-use products; management acknowledged competitive pressure and its later entry into silicone hydrogel.
- CooperSurgical acquired Summit Doppler Systems in August 2011, after quarter-end, and said it intended to continue pursuing acquisitions. No specific quantitative earnings or revenue guidance was provided in the filing.
- Other risks include contact-lens competition, supply and manufacturing disruptions, regulatory approvals and reimbursement, foreign exchange and variable interest rates, product liability and patent litigation, and goodwill impairment. The annual goodwill test found no impairment.
Contingencies and other items
- Rembrandt Vision Technologies filed a patent-infringement suit alleging claims involving CooperVision silicone-hydrogel lenses. The suit sought unspecified damages, potentially including treble damages, and injunctive relief. CooperVision had not been served; the company said it could not estimate a loss and intended to defend the matter.
- The IRS issued a deficiency notice concerning 2005–2006 tax returns and a proposed Subpart F adjustment. The company said existing federal net operating losses should offset most of the proposed tax, leaving $1.2 million, but warned that an adverse outcome could materially reduce those carryforwards and harm future net income.
- Disclosure controls were assessed as effective at the reasonable-assurance level, and the company reported no material quarterly change in internal control over financial reporting.
Investor facts to verify
- How the recall reserve, return experience, and production remediation affect subsequent sales, inventory, gross margin, and customer response.
- Whether CooperVision’s strong regional and silicone-hydrogel growth can continue while it expands its product range and faces established competitors.
- Progress on the patent lawsuit and IRS dispute, including any change in estimated exposure or tax attributes.
- Debt balances, facility availability, covenant headroom, and cash needs for planned investment and acquisitions.
- Whether growth in revenue and nine-month earnings translates into sustained operating-margin and per-share improvement after the recall and other unusual items.