Cooper Companies, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 31, 2012; compared with the three months ended January 31, 2011. Amounts are in U.S. dollars.
Business context
Cooper is a global medical-device company operating through CooperVision, which makes contact lenses, and CooperSurgical, which sells women’s-healthcare medical devices and procedure solutions.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $326.1 million | $293.2 million | +11% |
| Gross profit / margin | $210.5 million / 65% | $176.6 million / 60% | Profit +19% |
| Operating income / margin | $61.7 million / 19% | $48.7 million / 17% | +27% |
| Net income | $54.6 million | $39.2 million | +39% |
| Diluted EPS | $1.12 | $0.83 | +35% |
| Operating cash flow | $41.6 million | $72.9 million | Down $31.4 million |
- Revenue by business: CooperVision sales were $268.9 million, up 10%; CooperSurgical sales were $57.1 million, up 15% (9% excluding acquisitions). CooperVision growth included multifocal lenses +25%, silicone-hydrogel products +39%, and single-use spheres +14%.
- Profitability: Management attributed higher gross margin primarily to manufacturing efficiencies and product mix, including greater silicone-hydrogel sales. Operating-expense growth partly offset gross-profit gains: SG&A rose 16%, R&D rose 17%, and amortization rose 18%.
- Taxes and interest: Interest expense fell to $3.7 million from $7.0 million, reflecting lower average debt and the prior-year redemption of senior notes. The effective tax rate was 7.0%, versus 4.4%; management said the rate was below the U.S. statutory rate because more income was earned in lower-tax foreign jurisdictions.
- Cash flow and investment: Capital expenditures were $20.0 million, versus $28.8 million. Operating cash flow was pressured by working-capital changes, including a $19.2 million inventory increase, and a $10.0 million payment to settle the Rembrandt Vision Technologies lawsuit. Cash at period-end was $7.7 million.
- Liquidity and debt: Working capital was $348.9 million, compared with $273.1 million at October 31, 2011. Total debt was $410.3 million, up from $380.4 million; debt-to-equity was 0.21:1. The company reported $603.9 million available under its $750 million revolving facility and compliance with its financial covenants.
Material changes and notable items
- Sales and earnings increased year over year, while quarterly operating cash flow declined. Inventory months on hand rose to 7.1 from 6.2 a year earlier; management linked the inventory build to new product launches and preparation for a possible Avaira Toric relaunch.
- The company repurchased 663,000 shares for $46.1 million at an average $69.60 per share under a newly authorized $150 million program; $103.9 million remained authorized at January 31.
- Foreign-currency translation reduced other comprehensive income by $11.8 million in the quarter.
- Avaira Toric and Avaira Sphere recalls covered limited lots. The company said the manufacturing issue had been identified and process changes implemented; FDA review remained relevant to Avaira Toric’s return to market. The affected products represented less than 2% of FY2011 sales; Avaira Sphere remained on the market.
Outlook, risks and contingencies
Management expressed optimism about the long-term contact-lens and women’s-healthcare markets but gave no specific numerical FY2012 guidance in the supplied filing text. It identified macroeconomic and credit-market uncertainty, the European debt crisis, recall impacts and regulatory timing, manufacturing or supply disruptions, competition (including silicone-hydrogel single-use products), foreign-exchange and interest-rate movements, and regulatory, reimbursement, tax and litigation matters as risks. The company was developing new products, including silicone-hydrogel and multifocal lenses, and planned further CooperSurgical investment and acquisitions.
Two securities class actions alleged disclosure and projection violations relating, among other matters, to manufacturing issues and the Avaira recalls; the court consolidated them and appointed a lead plaintiff. A related shareholder derivative action was also filed. The company said it could not assess whether a loss was probable or estimate a potential loss range. Separately, an IRS tax dispute was settled with an agreed net deficiency of approximately $50,000. The filing also disclosed $27.4 million in gross unrecognized tax benefits as of November 1, 2011, with no material change during the quarter.
Key facts for investors to verify
- FDA status and commercial recovery of Avaira Toric, and any further recall-related costs or sales effects.
- Whether the elevated inventory converts into sales and operating cash flow, and whether working-capital demands ease.
- Continuation of silicone-hydrogel and CooperSurgical growth, including the contribution from acquisitions and new products.
- Debt, borrowing capacity and covenant headroom as the company funds capital spending, repurchases, dividends and potential acquisitions.
- Developments in the securities and derivative litigation and any resulting financial exposure.