UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarterly Period Ended January 31, 2003
--------------------
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number 1-8597
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The Cooper Companies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-2657368
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6140 Stoneridge Mall Road, Suite 590, Pleasanton, CA 94588
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 460-3600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $.10 par value 30,912,248 Shares
- ----------------------------- ------------------------------------
Class Outstanding at February 28, 2003
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three Months
Ended January 31, 2003 and 2002 3
Consolidated Condensed Balance Sheets - January 31, 2003
and October 31, 2002 4
Consolidated Condensed Statements of Cash Flows - Three
Months Ended January 31, 2003 and 2002 5
Consolidated Condensed Statements of Comprehensive Income -
Three Months Ended January 31, 2003 and 2002 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Certifications 28
Index of Exhibits 30
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except for earnings per share)
(Unaudited)
Three Months Ended
January 31,
-----------------------------
2003 2002
------- -------
Net sales $94,014 $58,112
Cost of sales 34,647 20,627
------- -------
Gross profit 59,367 37,485
Selling, general and administrative expense 37,877 23,213
Research and development expense 1,315 857
Amortization of intangibles 356 308
------- -------
Operating income 19,819 13,107
Interest expense 1,824 893
Other income, net 478 1,036
------- -------
Income before income taxes 18,473 13,250
Provision for income taxes 4,618 3,845
------- -------
Net income $13,855 $ 9,405
======= =======
Earnings per share:
Basic $ 0.45 $ 0.31
======= =======
Diluted $ 0.44 $ 0.30
======= =======
Number of shares used to compute earnings per share:
Basic 30,904 30,440
======= =======
Diluted 31,601 31,075
======= =======
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
January 31, October 31,
2003 2002
-------- --------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 9,054 $ 10,255
Trade receivables, net 83,886 74,545
Marketable securities 3,023 2,750
Inventories 81,045 76,279
Deferred tax asset 19,092 17,781
Other current assets 18,065 17,300
-------- --------
Total current assets 214,165 198,910
-------- --------
Property, plant and equipment, net 94,516 87,944
Goodwill, net 247,052 238,966
Other intangible assets, net 14,332 14,651
Deferred tax asset 22,500 26,806
Other assets 4,403 3,838
-------- --------
$596,968 $571,115
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 17,392 $ 36,333
Accounts payable 14,287 15,212
Accrued acquisition costs 20,481 24,773
Accrued income taxes 13,006 12,261
Other current liabilities 37,435 38,102
-------- --------
Total current liabilities 102,601 126,681
Long-term debt 158,963 127,318
Other liabilities 2,469 5,674
-------- --------
Total liabilities 264,033 259,673
-------- --------
Contingencies (Note 9)
Stockholders' equity:
Common stock, $.10 par value 3,156 3,153
Additional paid-in capital 286,354 285,619
Accumulated other comprehensive income (loss) 3,483 (4,396)
Retained earnings 50,164 37,236
Other (222) (78)
Treasury stock at cost (10,000) (10,092)
-------- --------
Total stockholders' equity 332,935 311,442
-------- --------
$596,968 $571,115
======== ========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
January 31,
----------------------------
2003 2002
-------- -------
Cash flows from operating activities:
Net income $ 13,855 $ 9,405
Depreciation and amortization 2,971 2,093
Net increase in working capital (18,655) (4,361)
Net (increase) decrease in non-current assets (1,297) 3,142
Net decrease in non-current liabilities (1,482) (5,288)
Increase (decrease) in translation adjustment and other 7,720 (823)
-------- -------
Net cash provided by operating activities 3,112 4,168
-------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (5,898) (6,273)
Acquisitions of businesses (32,243) (5,403)
Sale of marketable securities - 3,622
Other (29) (12)
-------- -------
Net cash used by investing activities (38,170) (8,066)
-------- -------
Cash flows from financing activities:
Net repayments of short-term debt (1,248) (1,330)
Repayments of long-term debt (10,213) (4,228)
Proceeds from long-term debt 45,400 1,847
Dividends on common stock (927) (761)
Exercise of stock options 741 330
Other (84) -
-------- -------
Net cash provided (used) by financing activities 33,669 (4,142)
-------- -------
Effect of exchange rate changes on cash and cash equivalents 188 (21)
-------- -------
Net decrease in cash and cash equivalents (1,201) (8,061)
Cash and cash equivalents - beginning of period 10,255 12,928
-------- -------
Cash and cash equivalents - end of period $ 9,054 $ 4,867
======== =======
See accompanying notes.
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended
January 31,
----------------------
2003 2002
------- -------
Net income $13,855 $ 9,405
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 7,673 (2,389)
Change in value of derivative instruments 28 27
Unrealized gain (loss) on marketable securities:
Gain arising during the period 178 437
Reclassification adjustment - (685)
------- -------
Unrealized gain (loss) on marketable securities 178 (248)
------- -------
Other comprehensive income (loss), net of tax 7,879 (2,610)
------- -------
Comprehensive income $21,734 $ 6,795
======= =======
See accompanying notes.
6
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The Cooper Companies, Inc. ("Cooper" or "we" and similar pronouns), through its
two business units, develops, manufactures and markets healthcare products.
CooperVision ("CVI") markets a range of specialty contact lenses to correct
visual defects, including toric lenses to correct astigmatism, cosmetic lenses
to change or enhance the appearance of the eyes' natural color, multifocal
lenses designed to correct presbyopia, an age-related vision defect, and lenses
for patients with dry eyes. Its leading products are disposable and planned
replacement toric and spherical lenses. CooperSurgical ("CSI") markets medical
devices, diagnostic products and surgical instruments and accessories used
primarily by gynecologists and obstetricians.
During interim periods, we have followed the accounting policies described in
our Form 10-K for the fiscal year ended October 31, 2002. Please refer to this
and to our Annual Report to Stockholders for the same period when reviewing this
Form 10-Q. Certain prior period amounts have been reclassified to conform to the
current period's presentation. Current results are not a guarantee of future
performance.
The unaudited consolidated condensed financial statements presented in this
report contain all adjustments necessary to present fairly Cooper's consolidated
financial position as of January 31, 2003 and October 31, 2002 and the
consolidated results of its operations and its cash flows for the three months
ended January 31, 2003 and 2002. All of these adjustments are normal and
recurring.
See "Estimates and Critical Accounting Policies" in Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Note 2. Inventories, at the Lower of Average Cost or Market
January 31, October 31,
2003 2002
----------- -----------
(In thousands)
Raw materials $13,656 $13,176
Work-in-process 14,230 14,067
Finished goods 53,159 49,036
-------- --------
$81,045 $76,279
======= =======
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 3. New Accounting Pronouncements
On December 31, 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (a "Statement") No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of SFAS
123 ("FAS 148"). This Statement amends Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, FAS 148 statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company will adopt the disclosure requirements of FAS 148 in its
second fiscal quarter of 2003, but will continue to account for its stock-based
compensation under the principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, adoption of FAS 148 will
have no effect on the Company's earnings or cash flows.
Note 4. Accrued Acquisition Costs
In conjunction with recording acquisitions, we accrue for the estimated costs of
severance, legal, consulting, due diligence, plant/office closure and deferred
acquisition payments. The chart below presents the balance at October 31, 2002
(opening balance), activity recorded in the first three months of fiscal 2003
and the balance at January 31, 2003 (closing balance).
Opening* Closing*
Description Balance Additions Payments Other Balance
- ----------- -------- --------- -------- ----- -------
(In thousands)
Severance $ 8,965 $ - $(3,225) $ - $ 5,740
Legal and consulting 3,542 123 (1,619) 334 2,380
Plant shutdown 7,807 400 (627) - 7,580
Hold back due 5,833 - (2,105) - 3,728
Pre-acquisition liabilities - 1,568 (203) - 1,365
Other 126 160 (98) - 188
------- ------- ------- ---- -------
Total $26,273 $ 2,251 $(7,877) $334 $20,981
======= ======= ======= ==== =======
* Includes $1.5 million and $500,000, respectively, carried in other
liabilities.
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 5. Intangible Assets
As of January 31, 2003 As of October 31, 2002
------------------------------------- --------------------------------------
Accumulated Accumulated
Gross Carrying Amortization Gross Carrying Amortization
Amount & Translation Amount & Translation
------ ------------- ------ -------------
(In thousands)
Other Intangible Assets
Trademarks $ 578 $ 151 $ 578 $ 144
Patents 12,711 4,472 12,711 4,289
License and distribution rights 6,654 1,724 6,654 1,602
Other 778 42 778 35
------- ------ ------- ------
$20,721 $6,389 $20,721 $6,070
======= ====== ======= ======
We estimate that annual amortization expense will be about $1.4 million for each
of the years in the five-year period ended October 31, 2007.
(In thousands)
Goodwill
Balance as of November 1, 2002 $238,966
Goodwill on acquisitions and acquisition adjustments 5,413
Other adjustments* 2,673
--------
$247,052
========
* Primarily translation differences in goodwill denominated in foreign
currency.
Note 6. Debt
January 31, October 31,
2003 2002
-------- --------
(In thousands)
Short-term:
Notes payable to banks $ 1,271 $ 2,519
Current portion of long-term debt 16,121 33,814
-------- --------
$ 17,392 $ 36,333
======== ========
Long-term:
Promissory notes - Aspect $- $ 22,291
KeyBank line of credit 168,806 132,310
County of Monroe Industrial Development
Agency ("COMIDA") bond 1,855 1,899
Capitalized leases 4,043 4,471
Other 380 161
-------- --------
175,084 161,132
Less current portion 16,121 33,814
-------- --------
$158,963 $127,318
======== ========
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
KeyBank Line of Credit: In December 2002, we used $21 million of the KeyBank
line of credit to retire the Promissory notes - Aspect. The current cost of
money for the use of the KeyBank line of credit was about 3%, whereas the
Promissory notes paid interest at 8%.
At January 31, 2003, we had $52.9 million available under the KeyBank line of
credit.
(In millions)
Amount of line $225.0
Outstanding loans (172.1)*
------
Available $ 52.9
======
* Includes $3.3 million in letters of credit backing other debt:
Note 7. Earnings Per Share ("EPS")
(In thousands, except for EPS)
Three Months Ended
January 31,
------------------------
2003 2002
------- -------
Net income $13,855 $ 9,405
======= =======
Basic:
Weighted average common shares 30,904 30,440
======= =======
Basic EPS $ 0.45 $ 0.31
======= =======
Diluted:
Basic weighted average common shares 30,904 30,440
Add dilutive securities:
Stock options 697 635
------- -------
Denominator for diluted EPS 31,601 31,075
======= =======
Diluted EPS $ 0.44 $ 0.30
======= =======
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
We excluded the following options to purchase Cooper's common stock from the
computation of diluted EPS because their exercise prices were above the average
market price.
Three Months Ended
January 31,
-----------------------------------
2003 2002
---- ----
Number of shares excluded 136,000 1,062,500
======= =========
Range of exercise prices $31.11 $23.66 - $31.11
====== ===============
Note 8. Income Taxes
Cooper's effective tax rate ("ETR") (income tax expense divided by pretax
income) was 25% for the quarter, the same rate as for the full fiscal year 2002.
This was below the 29% ETR in the first fiscal quarter of 2002, reflecting the
favorable effects of the acquisition from Biocompatibles International plc. at
the end of February 2002, which resulted in increased international operations.
Note 9. Contingencies
Pending Litigation: On April 25, 2001, Dioptics Medical Products, Inc. filed a
lawsuit against Cooper, CVI and A. Thomas Bender in the United States District
Court Northern District of California, Case No. C01-20356-JW. This lawsuit
alleges that CVI's CV Encore family of contact lenses infringes Dioptics' ENCORE
trademark registration for sunglasses. Dioptics alleges causes of action for
trademark infringement, dilution and unfair competition, and seeks damages and
injunctive relief. On September 30, 2002, the parties filed cross-motions for
summary judgment. The Court partially granted CVI's motion and held that
Dioptics' dilution claim fails as a matter of law because its ENCORE mark is not
famous. The Court denied the parties' motions with respect to the trademark
infringement and unfair competition causes of action, and set the matter for
trial commencing June 10, 2003. The Company believes that it does not infringe
any valid and protectable trademark held by Dioptics. Nevertheless, to avoid
ongoing legal costs and deflection of Management, Cooper is in discussions to
settle the pending trademark litigation and recorded a provision of $500,000 in
the current quarter for the potential settlement.
Note 10. Cash Dividends
In November 2002, our Board of Directors increased our annual dividend rate from
5 cents per share to 6 cents per share. On January 6, 2003, we paid a semiannual
dividend of 3 cents per share to holders of record on December 16, 2002.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 11. Business Segment Information
Cooper is organized by operating business segment for management reporting with
operating income the primary measure of segment profitability. Corporate
expenses are not allocated to segment operating income. Items accounted for
below operating income are not considered when measuring segment profitability.
The accounting policies used to generate segment results are the same as our
overall accounting policies.
Identifiable assets are those assets used in continuing operations excluding
cash and cash equivalents, which we deem to be corporate assets. Long-lived
assets are primarily property, plant and equipment and goodwill and other
intangibles.
Segment information:
Three Months Ended
January 31,
-----------------------
2003 2002
------- -------
(In thousands)
Sales to external customers:
CVI $72,820 $42,139
CSI 21,194 15,973
------- -------
$94,014 $58,112
======= =======
Operating income:
CVI $18,379 $11,319
CSI 3,832 3,533
Corporate (2,392) (1,745)
------- -------
Total operating income 19,819 13,107
Interest expense (1,824) (893)
Other income, net 478 1,036
------- -------
Income before income taxes $18,473 $13,250
======= =======
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
January 31, October 31,
2003 2002
-------- --------
(In thousands)
Identifiable assets:
CVI $430,484 $401,421
CSI 113,495 111,998
Corporate 52,989 57,696
-------- --------
Total $596,968 $571,115
======== ========
Goodwill:
CVI $178,929 $170,843
CSI 68,123 68,123
-------- --------
Total $247,052 $238,966
======== ========
Geographic information:
Three Months Ended
January 31,
----------------------
2003 2002
-------- --------
(In thousands)
Sales to external customers by country of domicile:
United States $ 58,513 $ 42,163
Europe 31,050 12,398
Canada 4,451 3,551
-------- --------
Total $ 94,014 $ 58,112
======== ========
January 31, October 31,
2003 2002
-------- --------
(In thousands)
Long-lived assets by country of domicile:
United States $161,665 $158,477
Europe 192,122 180,959
Canada 2,113 2,125
-------- --------
Total $355,900 $341,561
======== ========
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Note numbers refer to "Notes to Consolidated Condensed Financial Statements"
beginning on page 7 of this report.
Forward-Looking Statements: Some of the information included in this Form 10-Q
contains "forward-looking statements" as defined by the Private Securities
Litigation Reform Act of 1995. The forward-looking statements include certain
statements pertaining to our capital resources, performance and results of
operations. In addition, all statements regarding anticipated growth in our
revenue, anticipated market conditions and results of operations are
forward-looking statements. To identify forward-looking statements look for
words like "believes," "expects," "may," "will," "should," "seeks," "intends,"
"plans," "estimates" or "anticipates" and similar words or phrases. Discussions
of strategy, plans or intentions often contain forward-looking statements.
These, and all forward-looking statements, necessarily depend on assumptions,
data or methods that may be incorrect or imprecise.
Events, among others, that could cause actual results and future actions to
differ materially from those described by or contemplated in forward-looking
statements include major changes in business conditions, a major disruption in
the operations of our manufacturing facilities, new competitors or technologies,
significant delays in new product introductions, the impact of an undetected
virus on our computer systems, acquisition integration delays or costs,
increases in interest rates, foreign currency exchange exposure, investments in
research and development and other start-up projects, dilution to earnings per
share from acquisitions or issuing stock, regulatory issues, cost of complying
with new corporate governance regulatory requirements, changes in tax laws or
their interpretation, changes in geographical profit mix effecting tax rates,
significant environmental cleanup costs above those already accrued, litigation
costs including any related settlements or judgments, cost of business
divestitures, the requirement to provide for a significant liability or to write
off a significant asset, changes in accounting principles or estimates, and
other factors described in our Securities and Exchange Commission filings,
including the "Business" section in our Annual Report on Form 10-K for the year
ended October 31, 2002. We caution investors that forward-looking statements
reflect our analysis only on their stated date. We disclaim any intent to update
them except as required by law.
Results of Operations
In this section, we discuss the results of our operations for the first quarter
of fiscal 2003 and compare them with the same period of fiscal 2002. We discuss
our cash flows and current financial condition beginning on page 22 under
"Capital Resources and Liquidity."
14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
First Quarter Highlights vs. 2002's First Quarter:
o Net sales up 62% to $94 million.
o Gross profit up 58%; margin 63% of sales in fiscal 2003 and 65% in fiscal
2002.
o Operating income up 51% to $19.8 million.
o Diluted earnings per share up 47% to 44 cents from 30 cents.
Selected Statistical Information - Percentage of Sales and Growth
Percent of Sales
Three Months Ended
January 31,
--------------------- %
2003 2002 Growth
---- ---- ------
Net sales 100% 100% 62%
Cost of sales 37% 35% 68%
Gross profit 63% 65% 58%
Selling, general and administrative 40% 40% 63%
Research and development 2% 1% 53%
Amortization -% 1% 16%
Operating income 21% 23% 51%
Net Sales: Cooper's two business units, CooperVision ("CVI") and CooperSurgical
("CSI") generate all its revenue:
o CVI markets a broad range of soft contact lenses for the vision care market
worldwide.
o CSI markets medical devices, diagnostic products and surgical instruments
and accessories used primarily by gynecologists and obstetricians.
Our consolidated net sales grew $35.9 million, or 62%:
Three Months Ended
January 31,
------------------------- %
2003 2002 Increase
------ ------ --------
(In millions)
CVI $72.8 $42.1 73%
CSI 21.2 16.0 33%
------ ------
$94.0 $58.1 62%
===== =====
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Practitioner and patient preferences in the worldwide contact lens market
continue to shift away from conventional lenses that are designed for annual
replacement to disposable and frequently replaced lenses. Disposable lenses are
designed for either a daily or a two-week replacement cycle; frequently replaced
lenses are replaced after one to three months. We refer to the combination of
disposable and frequently replaced lenses as "DPR" lenses. An additional
transition in the industry involves the shift away from commodity lenses to
value added specialty products, such as toric lenses, cosmetic lenses and
multifocal lenses.
CVI's revenue growth is driven by unit volume rather than by price.
Nevertheless, our average selling price on a per lens basis is decreasing,
reflecting increased sales of DPR lenses, which are marketed in multiple lens
packages. This is an industry trend.
Soft Lens Revenue: CVI's worldwide soft contact lens revenue -- all revenue
except royalty revenue and miscellaneous items -- grew 75%, 68% when adjusted
for currency fluctuations. The increase in sales was driven by revenue from
Biocompatibles Eye Care, Inc. ("Biocompatibles"), which we acquired on February
28, 2002. Excluding Biocompatibles soft lens revenue of $22 million in the
three-month period, total soft lens revenue grew 20% and 16% when adjusted for
currency fluctuations ("constant currency"). The primary reasons for our soft
lens revenue growth include continued global market share gains in our two-week
toric products (CV Encore Toric and Xcel) and in our other specialty products as
well as continued momentum in Europe.
Soft lens revenue includes sales of both spherical lenses and aspheric and
specialty lens products -- toric, cosmetic, multifocal lenses and lenses for
patients with dry eyes:
o Aspheric lenses help improve visual acuity in low light conditions and
correct low levels of astigmatism;
o Toric lenses are prescribed to correct for astigmatism;
o Cosmetic lenses are opaque and color enhancing lenses that alter the
natural appearance of the eye;
o Proclear lenses help enhance tissue-device compatibility for patients
experiencing mild discomfort relating to dry eye during lens wear; and
o Multifocal lenses are designed to correct presbyopia, an age-related vision
defect.
CVI revenue as reported includes Biocompatibles beginning in March 2002. In
order to present growth in the total lens business we now own, we have adjusted
reported revenue in the following table by adding Biocompatibles revenue for the
three months ended January 31, 2002. (These amounts were derived from the
unaudited ledgers of Biocompatibles for those periods.) Since our acquisition of
Biocompatibles, CVI has placed a high priority on promoting their Proclear
lenses. In many cases, practitioners are now recommending Proclear lenses in
place of older CVI disposable spherical products. Adjusted soft lens revenue
grew 17% in the three months ended January 31, 2003.
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CVI Revenue:
Reported: First Quarter
--------------------------------
2003 2002 Growth
--------- --------- ------
Segment ($ in millions)
- -------
U.S. $34.2 $24.8 38%
International 35.0 14.7 138%
----- -----
Soft lens revenue 69.2 39.5 75%
Miscellaneous revenue 3.6 2.6 36%
----- -----
Total reported $72.8 $42.1 73%
===== =====
Adjustments - To include Biocompatibles revenue for comparable periods:
2002
----
Segment
U.S. $ 5.2
International 14.3
-----
Soft lens revenue 19.5
Miscellaneous revenue -
-----
Total $19.5
=====
First Quarter
------------------------------
2003 2002 Growth
---- ---- ------
Segment ($ in millions)
- -------
U.S. $34.2 $30.0 14%
International 35.0 29.0 21%
----- -----
Soft lens revenue 69.2 59.0 17%
Miscellaneous revenue 3.6 2.6 36%
----- -----
Total as adjusted $72.8 $61.6 18%
===== =====
Total adjusted worldwide revenue grew 18% (13% in constant currency). Adjusted
international soft lens revenue of $35 million grew 21% (11% in constant
currency).
The 138% growth in reported international soft lens revenue, from $14.7 million
to $35 million, was largely driven by international sales of Biocompatibles
products of $16.4 million in the first quarter of 2003.
Reported soft lens revenue in the United States grew 38% in the quarter
primarily due to the acquisition of Biocompatibles products that provided
revenue of $5.7 million in the first quarter of 2003. On an as adjusted basis,
U.S. soft lens revenue growth was 14% in the first quarter, driven primarily by
increased sales of Proclear toric and other specialty lenses.
17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CSI Revenue: Women's healthcare products used primarily by obstetricians and
gynecologists generate about 90% of CSI's revenue. The balance represents sales
of medical devices outside of women's healthcare that CSI does not actively
market. These are, therefore, excluded when calculating CSI's organic growth.
CSI's overall first quarter revenue increased 33% to $21.2 million. Organic
growth from existing gynecology products in the first quarter was about 11%,
coming primarily from businesses we acquired over the last two years. The
balance of the growth primarily comes from the acquisitions of Norland Medical
Systems in April 2002 and Ackrad Laboratories, Inc. in May 2002.
Cost of Sales/Gross Profit: Gross profit as a percentage of sales ("gross
margin") was as follows:
First Quarter Margin
-----------------------
2003 2002
---- ----
CVI 67% 69%
CSI 50% 53%
Consolidated 63% 65%
CVI's gross margin for the first quarter of fiscal 2003 was 67% compared with
69% for the first quarter last year. The decline was primarily due to the impact
of the stronger pound sterling on manufacturing costs. Because CVI manufactures
a major percentage of its lenses in the United Kingdom, the favorable impact of
currency on revenue is offset by the unfavorable translation of manufacturing
costs. The reduced gross margin also reflects lower gross margin sales to a
Japanese distributor and lower gross margin on sales of certain Biocompatibles'
products. Going forward, we expect that the Biocompatibles gross margin will
improve as CVI improves manufacturing costs and continues to shift customers to
higher gross margin Proclear products.
CSI gross margin was 50% compared with 53% for the first quarter last year. The
drivers of the lower gross margin included sales of recent acquisitions'
products, which have expanded our product line in the area of infertility, which
currently has lower gross margins. We expect gross margin to return to the 53%
range by the end of our second quarter as the new operations are integrated.
18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Selling, General and Administrative ("SGA") Expense:
Three Months Ended
January 31,
------------------------------------------
2003 2002
--------------- -----------------
($ in millions)
% Rev. % Rev. % Increase
------ ------ ----------
CVI $29.2 40% $16.8 40% 74%
CSI 6.3 29% 4.6 29% 35%
Headquarters 2.4 N/A 1.8 N/A 37%
----- -----
$37.9 40% $23.2 40% 63%
===== =====
Consolidated SGA increased 63% but was flat as a percentage of revenue at 40% in
2003 and 2002. Consolidated SGA increased primarily due to acquisitions, which
contributed to the 62% increase in revenue. The SGA increase was also due to the
unfavorable translation impact of expenses denominated in other than U.S.
currency.
Research and Development ("R&D") Expense: During the first fiscal quarter, CVI
research and development expenditures were $857,000, up 41% over the first
quarter of 2002, reflecting an initiative to develop new and improved contact
lens products. During the 2003 to 2005 period, CVI is investing in two new
research programs: the development of an extended wear contact lens and an
improved contact lens technology. We expect that research and development
expense will increase by between $1.5 million and $2.0 million in 2003.
Amortization of Intangibles: Amortization expense increased to $356,000 in the
first quarter of fiscal 2003 from $308,000 in last year's first quarter.
Operating Income: Operating income improved by $6.7 million, or 51%, in the
fiscal first quarter:
Three Months Ended
January 31,
------------------------------------------
2003 2002
--------------- -----------------
($ in millions)
% Rev. % Rev. % Increase
------ ------ ----------
CVI $18.4 25% $11.3 27% 62%
CSI 3.8 18% 3.6 22% 8%
Headquarters (2.4) N/A (1.8) N/A N/A
----- -----
$19.8 21% $13.1 23% 51%
===== =====
19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Interest Expense: Interest expense increased $931,000 or 104%, primarily driven
by debt incurred to fund acquisitions. Our total debt was $176.4 million at
January 31, 2003 vs. $63.9 million at January 31, 2002.
Other Income, Net:
Three Months Ended
January 31,
---------------------------
2003 2002
------- -------
(In thousands)
Interest income $ 34 $ 35
Foreign exchange transactions 1,064 (20)
Settlement of dispute (500) -
Gain on sale of Quidel stock - 1,028
Other (120) (7)
------ ------
$ 478 $1,036
====== ======
In conjunction with the acquisition of Biocompatibles, we inherited intercompany
accounts in various currencies, primarily pounds sterling. The pound
strengthened against the dollar in the first quarter of 2003, and a net gain of
about $1.1 million resulted. We have taken steps to minimize this exposure. Our
policy continues to be to hedge foreign exchange exposure whenever possible.
In the first quarter of 2003, we provided $500,000 for the potential settlement
of a legal dispute (see Note 9).
In the first quarter of 2002, we sold 480,000 shares of Quidel stock, realizing
a gain of approximately $1 million.
Provision for Income Taxes: We estimate that our effective tax rate ("ETR") for
fiscal year 2003 will be 25%, down from 29% used for the first quarter of 2002.
The reduction of our ETR resulted from a higher percentage of our income coming
from international operations (including the international operations at
Biocompatibles).
We implemented a global tax arrangement in fiscal 1999 to minimize both the
taxes reported in our statement of income and the actual taxes we will have to
pay once we use all the benefits of our net operating loss carryforwards
("NOLs"). The global tax arrangement consists of a restructuring of the legal
ownership structure for the CooperVision foreign sales and manufacturing
subsidiaries.
20
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
The stock of those subsidiaries is now owned by a single foreign holding
company, which centrally directs much of the activities of those subsidiaries.
The foreign holding company has applied for and received the benefits of a
reduced tax rate under a special tax regime available in its country of
residence. On February 28, 2002, the Company acquired Biocompatibles. Assuming
no other major acquisitions or large stock issuances, we currently expect that
this plan will extend the cash flow benefits of the NOLs through 2006, and that
actual cash payments of taxes will average less than 5% of pretax profits over
this period. After 2006, actual cash payments of taxes are expected to average
less than 20% of pretax profits.
21
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Capital Resources & Liquidity
Comparative Statistics (dollars in millions, except per share amounts):
January 31, 2003 October 31, 2002
---------------- ----------------
Cash and cash equivalents $9.1 $10.3
Total assets $597.0 $571.1
Working capital $111.6 $72.2
Total debt $176.4 $163.7
Stockholders' equity $332.9 $311.4
Ratio of debt to equity 0.53:1 0.53:1
Debt as a percentage of total capitalization 35% 34%
Operating cash flow - twelve months ended $54.9 $55.9
Operating Cash Flows: Our major source of liquidity continues to be cash flow
provided by operating activities, which totaled $3.1 million in the first
quarter of fiscal 2003 and $54.9 million over the twelve-month period ended
January 31, 2003.
Major uses of cash for operating activities in the first quarter included
payments of $4.5 million to settle the dispute with Medical Engineering
Corporation, a subsidiary of Bristol-Myers Squibb Company, $2.6 million to fund
entitlements under Cooper's bonus plans and $1.6 million in interest payments.
Our working capital increased by $39.4 million in the first quarter, driven
primarily by increases in trade receivables and the reduction of about $19
million of short-term debt. At the end of the first fiscal quarter, Cooper's
days sales outstanding ("DSO's") increased to 79 days from 71 days last quarter.
The increase reflects the impact of the strengthening pound and euro, the
ongoing shift to a higher mix of international and optical chain revenue and a
system integration issue in CVI international operations that delayed some
collection efforts. DSO's are expected in the mid-70's by the end of the next
quarter.
Investing Cash Flows: The cash outflow of $38.2 million from investing
activities was driven by capital expenditures of $5.9 million and payments of
$32.2 million on acquisitions including $22.4 million paid to the Aspect
Noteholders, the final payment for the Aspect acquisition.
22
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Financing Cash Flows: Financing activities provided $33.7 million of cash,
driven primarily by net borrowing from our credit facility of $35.9 million.
Cash received from the exercises of stock options provided $741,000. We repaid
net other debt of about $2 million. We paid dividends on our common stock of
$927,000 in the first fiscal quarter of 2003.
Estimates and Critical Accounting Policies
Estimates and judgments made by Management are an integral part of financial
statements prepared in accordance with accounting principle generally accepted
in the United States of America ("GAAP"). Actual results may be different from
amounts reported for or at the end of any period. We believe that the following
critical accounting policies address the more significant estimates required of
Management when preparing our consolidated financial statements in accordance
with GAAP:
o Revenue recognition - In general, we recognize revenue upon shipment of our
products, when risk of ownership transfers to our customers. We record,
based on historical statistics, appropriate provisions for shipments to
customers who have the right of return.
o Adequacy of allowance for doubtful accounts - In accordance with GAAP, our
reported balance of accounts receivable, net of the allowance for doubtful
accounts, represents our estimate of the amount that ultimately will be
realized in cash. We review the adequacy of our allowance for doubtful
accounts on an ongoing basis, using historical payment trends and the age
of the receivables, complemented by individual knowledge of our customers.
If and when our analyses indicate, we increase or decrease our allowance
accordingly.
o Net realizable value of inventory - GAAP states that inventories be stated
at the lower of cost or market value, or "net realizable value." On an
ongoing basis, we review the carrying value of our inventories, measuring
number of months on hand and other indications of salability and, when
indicated, reduce the value of inventory if there are indications that the
carrying value is greater than market.
o Valuation of goodwill - In accordance with the provisions of Statements of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" we will evaluate, by the end of our second fiscal quarter, the
reporting units to be used to test for impairment of goodwill.
23
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
o Income taxes - As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves estimating
our current tax exposures in each jurisdiction including the impact, if
any, of additional taxes resulting from tax examinations as well as making
judgments regarding the recoverability of deferred tax assets. To the
extent recovery of deferred tax assets is not likely based on our
estimation of future taxable income in each jurisdiction, a valuation
allowance is established. Tax exposures can involve complex issues and may
require an extended period to resolve. To determine the quarterly tax rate,
we are required to estimate full-year income and the related income tax
expense in each jurisdiction. The estimated effective tax rate is adjusted
for the tax related to significant unusual items. Changes in the geographic
mix or estimated level of annual pre-tax income can affect the overall
effective tax rate.
Outlook
We believe that cash and cash equivalents on hand of $9.1 million plus cash from
operating activities will fund future operations, capital expenditures, cash
dividends and smaller acquisitions. At January 31, 2003, we had $52.9 million
available under the KeyBank line of credit.
Risk Management
We are exposed to risks caused by changes in foreign exchange, principally pound
sterling denominated debt and from operations in foreign currencies. We have
hedged most of the debt by entering into contracts to buy sterling forward. We
are also exposed to risks associated with changes in interest rates, as the
interest rate on certain of our debt varies with the London Interbank Offered
Rate. There have been no material changes in sensitivity to market risk in the
three-month period ended January 31, 2003.
Trademarks
Proclear(R)is a registered trademark of The Cooper Companies, Inc., its
affiliates and/or subsidiaries. CV Encore Toric'TM' and Xcel'TM' are trademarks
of The Cooper Companies, Inc., its affiliates and subsidiaries.
24
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------
See Capital Resources and Liquidity under "Risk Management" in Item 2 of this
report.
Item 4. Controls and Procedures
- --------------------------------
The Company has established and currently maintains disclosure controls and
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission and that any material information relating to
the Company is recorded, processed, summarized and reported to its principal
officers to allow timely decisions regarding required disclosures. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and in reaching a reasonable level of assurance, management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
In conjunction with the close of each fiscal quarter, the Company conducts a
review and evaluation of the effectiveness of the Company's disclosure controls
and procedures. The Company's Chief Executive Officer and President, based upon
an evaluation completed within 90 days prior to the filing of this report, has
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
January 31, 2003.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
The information required by this item is incorporated herein by reference to
"Contingencies - Pending Litigation" under Note 9 of Notes to Consolidated
Condensed Financial Statements in Part I, Item I of this report.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
Exhibit
Number Description
------- -----------
11* Calculation of Earnings Per Share
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
* The information called for in this Exhibit is provided in Footnote 7 to
the Consolidated Condensed Financial Statements in this report.
(b) The Company filed the following reports on Form 8-K during the period
November 1, 2002 to January 31, 2003.
Date of Report Item Reported
-------------- -------------
November 5, 2002 Item 5. Other Events.
November 22, 2002 Item 5. Other Events.
December 12, 2002 Item 5. Other Events.
January 30, 2003 Item 5. Other Events.
26
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Cooper Companies, Inc.
----------------------------------------
(Registrant)
Date: March 17, 2002 /s/ Stephen C. Whiteford
----------------------------------------
Stephen C. Whiteford
Vice President and Corporate Controller
(Principal Accounting Officer)
27
CERTIFICATIONS
--------------
I, A. Thomas Bender, Chairman of the Board, President and Chief Executive
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Cooper Companies,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ A. Thomas Bender
---------------------------------
A. Thomas Bender
Chairman of the Board, President and Chief Executive Officer
28
CERTIFICATIONS
--------------
I, Robert S. Weiss, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Cooper Companies,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Robert S. Weiss
------------------------------------
Robert S. Weiss
Executive Vice President and Chief Financial Officer
29
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Index of Exhibits
-----------------
Exhibit No. Page No.
- ---------- --------
11* Calculation of Earnings Per Share
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
* The information called for in this Exhibit is provided in Footnote 7 to the
Consolidated Condensed Financial Statements in this report.
30
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as.................................'TM'
The section symbol shall be expressed as...................................'SS
'