Business context and reporting period
The Cooper Companies, Inc. is a global medical-device company operating through CooperVision, which makes contact lenses, and CooperSurgical, which supplies women’s-health products. This Form 10-K covers the fiscal year ended October 31, 2011; the filing also reports fourth-quarter results.
Financial results and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $1,330.8 million | $1,158.5 million |
| Gross profit / margin | $804.8 million / 60% | $676.7 million / 58% |
| Operating income / margin | $227.6 million / 17% | $189.9 million / 16% |
| Net income | $175.4 million | $112.8 million |
| Diluted EPS | $3.63 | $2.43 |
| Operating cash flow | $336.3 million | $267.7 million |
| Capital expenditures | $103.7 million | $73.8 million |
| Total debt at year-end | $380.4 million | $611.1 million |
| Cash and working capital at year-end | $5.2 million / $273.1 million | $3.6 million / $291.8 million |
CooperVision sales increased 16% to $1,121.1 million; CooperSurgical sales rose 12% to $209.7 million, including 8% growth excluding acquisitions. FY 2011 fourth-quarter sales were $360.9 million versus $313.4 million a year earlier; net income was $56.6 million versus $48.2 million, and diluted EPS was $1.15 versus $1.03. The effective tax rate was about 9%, primarily reflecting the geographic mix of earnings and the debt-redemption loss.
Changes versus the prior year
- Annual sales grew 15%; gross margin expanded by about 2 percentage points, while operating income rose 20% and diluted EPS rose 49%.
- Operating cash flow increased 26%. Capital spending and acquisition payments also increased, to $103.7 million and $58.0 million, respectively.
- Debt fell by $230.7 million. The company refinanced its facilities, redeemed $339.0 million of senior notes, and recorded a $16.5 million debt-extinguishment loss. It reported $650.7 million available under its new credit agreement.
- Silicone hydrogel contact-lens sales grew 49% and represented 31% of CooperVision lens sales, up from 24%. Asia Pacific CooperVision sales grew 36%, including acquired product-line sales.
Outlook, risks, contingencies, and unusual items
- Management was optimistic about long-term market prospects but said economic and market uncertainty, including European debt concerns, meant fiscal 2012 growth expectations were below historical levels. No specific numerical FY 2012 guidance is provided in the filing text.
- CooperVision recalled limited lots of Avaira Toric lenses in August 2011 and expanded the recall to limited lots of Avaira Sphere in November. Residue on affected lenses could cause hazy vision, severe eye pain, or injury. A $20.4 million recall reserve was included in FY 2011 results; affected products represented less than 2% of FY 2011 sales. Avaira Toric awaited FDA authorization to return to market.
- After year-end, CooperVision received an FDA Warning Letter concerning labeling and packaging operations at its West Henrietta distribution center. It did not prohibit sales or require a recall, but unresolved observations could lead to enforcement, operating restrictions, or recall.
- The company recorded a $10.0 million charge for settlement of a patent case; the December 2, 2011 settlement provided for a lump-sum payment and covenant not to sue. A new securities class action filed in November 2011 alleged disclosure and projection failures; the company said it could not estimate potential loss.
- An IRS deficiency notice regarding 2005–2006 returns could reduce federal tax-loss carryforwards; the company said any proposed tax remaining after offsets would be $1.2 million and that it would contest the matter. The company also cited competition, sole-source silicone hydrogel material supply, product and regulatory risks, foreign exchange and interest-rate exposure, and macroeconomic uncertainty.
- The annual goodwill impairment test found no impairment. An immaterial out-of-period acquisition-accounting adjustment shifted $6.1 million between first- and third-quarter results, with no effect on FY 2011 totals. The independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Recall-related costs, product availability, FDA review of corrective actions, and resolution of the West Henrietta Warning Letter.
- FY 2012 sales and margin trajectory, including new silicone hydrogel launches and competitive performance in single-use and multifocal lenses.
- Cash generation after higher capital spending and acquisitions, debt repayment schedule, and continued compliance with credit-facility covenants.
- Developments in the securities litigation, IRS dispute, and other tax exposures.
- Acquisition contribution to growth and the sustainability of reported margin improvement, including the effects of unusual charges and foreign-currency movements.