The Cooper Companies, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended October 31, 2010. The filing also reports unaudited fourth-quarter results. Amounts below are U.S. dollars; financial statement figures are rounded to millions unless otherwise indicated.
Business context
Cooper is a global medical products company operating through CooperVision (CVI), which sells contact lenses, and CooperSurgical (CSI), which sells medical devices and related products, primarily for women’s healthcare. CVI generated $970.5 million of FY2010 sales; CSI generated $188.0 million.
Financial results and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net sales | $1,158.5 million | $1,080.4 million | Up 7% |
| Gross profit / gross margin | $676.7 million / 58% | $596.5 million / 55% | Margin up 3 percentage points |
| Operating income / margin | $189.9 million / 16% | $149.9 million / 14% | Up 27% |
| Net income | $112.8 million | $100.5 million | Up 12% |
| Diluted EPS | $2.43 | $2.21 | Up 10% |
| Interest expense | $36.7 million | $44.1 million | Down 17% |
| Cash from operations | $267.7 million | $223.1 million | Up 20% |
| Capital expenditures | $73.8 million | $93.9 million | Down |
Fourth quarter: Sales were $313.4 million versus $283.5 million in Q4 FY2009. Net income was $48.2 million versus $30.1 million, and diluted EPS was $1.03 versus $0.66. Q4 FY2010 included the effects of litigation-related charges recorded during the year; the filing identifies a $27.0 million securities settlement charge in Q2.
Balance sheet at October 31, 2010: Cash was $3.6 million; current assets were $491.3 million and current liabilities $199.5 million, with reported working capital of $291.8 million. Total debt was $611.1 million, down from $781.5 million; stockholders’ equity was $1,666.8 million. The company reported $397.1 million available under its revolving credit facility and compliance with its debt covenants. The revolving facility matures January 31, 2012; $339.0 million of 7.125% senior notes are due in 2015.
Operating cash flow funded capital spending, acquisitions and debt repayment. Investing cash outflow was $106.6 million, including $32.8 million for acquisitions; financing cash outflow was $161.6 million, including net long-term debt repayments. Dividends were $0.06 per share, or $2.7 million in total.
Material changes and unusual items
- CVI sales rose 7% to $970.5 million. Silicone hydrogel lens sales grew 108%; toric sales grew 13%, while multifocal sales grew 1%. Older conventional and cosmetic lenses declined 14% and 12%, respectively.
- CSI sales increased 10% to $188.0 million, including 6% organic growth. Surgical-procedure product sales grew 18% and reached 33% of CSI sales.
- Higher gross margin reflected manufacturing efficiencies and product mix, including more silicone hydrogel products; CSI also recognized a one-time $1.5 million vendor-dispute settlement. CVI’s restructuring costs recorded in cost of sales were $16.0 million, versus $5.0 million in FY2009.
- The company recorded $27.75 million in litigation settlement charges. A $27.0 million securities class-action settlement was funded into escrow; final court approval followed on December 13, 2010. A separate derivative-litigation settlement, subject to court approval, involved governance measures and attorneys’ fees capped at $750,000.
- CVI recorded $10.1 million of reductions to Americas sales in Q1 FY2010 for out-of-period adjustments to increase rebate accruals that had been understated in FY2009.
- Goodwill was $1,262.0 million, and the annual impairment test found no impairment. FY2008 comparative figures reflect retrospective adoption of convertible-debt accounting guidance.
Outlook, commentary and risks
Management was optimistic about long-term prospects but noted that economic uncertainty and weaker-than-historical contact-lens market growth remained risks, with lower-than-historical market-growth expectations for 2011. The filing provides no specific numerical FY2011 revenue or earnings guidance. CVI planned additional silicone hydrogel and PC Technology lens launches over the following two years; management cautioned that late entry, limited silicone hydrogel multifocal capacity and the absence of a silicone hydrogel single-use product could constrain growth. CSI intended to continue selective acquisitions.
Management expected cash, operating cash flow and existing credit facilities to fund operations, capital expenditures, dividends, settlement obligations and acquisitions. It intended to renegotiate the revolving facility before its 2012 maturity and said it might repurchase senior notes.
- Intense competition, particularly in silicone hydrogel lenses, and uncertainty about new-product acceptance, approvals and manufacturing efficiency.
- Supply-chain exposure: CVI relied on a sole supplier for key silicone hydrogel lens material. Cooper acquired certain Aime assets on December 1, 2010, after year-end, but the filing still describes Asahi as the primary-material supplier.
- Execution and cost risks from the manufacturing restructuring, expected to total about $24.3 million, with remaining Norfolk activities expected to finish in Q1 FY2011.
- Debt, refinancing and interest-rate exposure; a 1 percentage-point rate change was estimated to affect annual interest expense by about $2.2 million. Foreign-exchange movements also affect results.
- Regulatory, product-liability, patent, environmental and healthcare-reform risks. The filing notes a 2.3% U.S. medical-device excise tax scheduled to begin in 2013, with CSI expected to be affected.
- The IRS was examining FY2005–FY2007 returns; management did not expect proposed adjustments to materially change financial position. Unrecognized tax benefits were $19.7 million at year-end.
Most important facts for investors to verify
- Whether CVI can sustain silicone hydrogel growth, expand capacity and compete effectively in single-use and multifocal products.
- Progress and final costs of the manufacturing restructuring, and whether anticipated savings materialize.
- Revolver refinancing terms and the company’s ability to manage the 2012 facility maturity and remaining debt obligations.
- Final status and cash cost of the securities and derivative litigation settlements, including any appeal or court approval developments.
- Effects of the rebate accrual adjustment, the 2013 medical-device tax, tax examinations and foreign-exchange changes on future results.
- The filing reports that KPMG issued an unqualified audit opinion and that management and the auditor assessed internal control over financial reporting as effective at October 31, 2010.