Cochlear: Result 2012

Hearing implant manufacturer Cochlear reported its results for the 2012 year yesterday. What was clear was that the company managed last year’s product recall exceptionally well.

Unit sales fell 6% to 23,087, but second half units sold was up strongly on the first half. Full year revenues fell 4% to $779m, while net profit, excluding the effect of the recall, fell 12% to $158m. Indeed, most of this decline can be attributed to the rising Australian dollar. After the recall provision of $139m, bottom line profit fell 68% to $57m. A final dividend of 125 cents was declared, franked to 35% (lower tax on this year’s profit means fewer franking credits).

While Cochlear increased its debt facility to $200m last year to give it flexibility to deal with the recall, it hasn’t needed the funds. The company’s cash flow has been strong enough to finance the higher dividends management flagged in Cocky Cochlear boosts payout from 21 Oct 11 (Hold – $56.97). It’s a demonstration of this business’s resilience.

But with more than 1,200 people now requiring surgery to replace their implants, it was probably inevitable the company would face litigation. Management believes its provisioning for this is adequate but there are, of course, no guarantees.

Five years hence, this recall should look like a hiccup on an upward trend. Unfortunately defensive businesses are generally premium-priced at present, and Cochlear is a good example. While we’re increasing the prices in the recommendation guide to reflect the company’s quality, we’d require a price below $55 before upgrading a notch. The stock is up 9% since ResMed v Cochlear a two horse race from 20 Mar 12 (Hold – $57.95) and remains a HOLD.

Note: The Growth portfolio owns shares in Cochlear.