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 April 30, 2004
---------------------
( ) 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
The Cooper Companies, Inc.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(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 32,671,796 Shares
- ------------------------------ ---------------------------
Class Outstanding at May 31, 2004
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three
and Six Months Ended April 30, 2004 and 2003 3
Consolidated Condensed Balance Sheets - April 30, 2004
and October 31, 2003 4
Consolidated Condensed Statements of Cash Flows - Six
Months Ended April 30, 2004 and 2003 5
Consolidated Condensed Statements of Comprehensive
Income - Three and Six Months Ended
April 30, 2004 and 2003 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
Index of Exhibits 29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales $120,552 $ 96,368 $230,286 $190,382
Cost of sales 42,167 33,948 81,945 68,595
-------- --------- -------- --------
Gross profit 78,385 62,420 148,341 121,787
Selling, general and administrative expense 48,877 39,590 92,114 77,467
Research and development expense 1,222 1,279 2,747 2,594
Amortization of intangibles 463 399 808 755
-------- --------- -------- --------
Operating income 27,823 21,152 52,672 40,971
Interest expense 1,488 1,688 2,979 3,512
Other income, net 1,182 818 1,662 1,296
-------- --------- -------- --------
Income before income taxes 27,517 20,282 51,355 38,755
Provision for income taxes 5,818 5,071 11,301 9,689
-------- --------- -------- --------
Net income $ 21,699 $ 15,211 $ 40,054 $ 29,066
======== ========= ======== ========
Earnings per share:
Basic $ 0.67 $ 0.49 $ 1.24 $ 0.94
======== ========= ======== ========
Diluted $ 0.64 $ 0.48 $ 1.19 $ 0.92
======== ========= ======== ========
Number of shares used to compute earnings per share:
Basic 32,554 31,003 32,359 30,953
======== ========= ======== ========
Diluted 33,931 31,789 33,742 31,696
======== ========= ======== ========
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
April 30, October 31,
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 20,731 $ 47,433
Trade receivables, net 84,682 84,607
Marketable securities 2,372 5,746
Inventories 103,266 89,718
Deferred tax asset 20,381 14,616
Other current assets 22,819 22,104
-------- --------
Total current assets 254,251 264,224
-------- --------
Property, plant and equipment, net 138,776 116,277
Goodwill, net 308,448 282,634
Other intangible assets, net 26,417 15,888
Deferred tax asset 12,667 22,367
Other assets 4,194 4,174
-------- --------
$744,753 $705,564
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 23,877 $ 20,658
Accounts payable 13,658 16,227
Employee compensation and benefits 16,961 15,846
Accrued acquisition costs 12,943 15,299
Accrued income taxes 23,198 18,771
Other current liabilities 22,831 31,513
-------- --------
Total current liabilities 113,468 118,314
Long-term debt 154,872 165,203
-------- --------
Total liabilities 268,340 283,517
--------- ---------
Stockholders' equity:
Common stock, $.10 par value 3,325 3,268
Additional paid-in capital 320,671 309,666
Accumulated other comprehensive income and other 18,163 14,119
Retained earnings 143,230 104,139
Treasury stock at cost (8,976) (9,145)
-------- --------
Total stockholders' equity 476,413 422,047
-------- --------
$744,753 $705,564
======== ========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
April 30,
-----------------------------
2004 2003
---------- -----------
Cash flows from operating activities:
Net income $ 40,054 $ 29,066
Depreciation and amortization 7,527 5,948
Increase in operating capital (15,654) (12,557)
Other non-cash items 4,932 7,686
-------- --------
Net cash provided by operating activities 36,859 30,143
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (19,247) (13,406)
Acquisitions of businesses (50,844) (38,525)
Sale of marketable securities and other 3,810 (20)
-------- --------
Net cash used by investing activities (66,281) (51,951)
-------- --------
Cash flows from financing activities:
Net proceeds (repayments) of short-term debt 3,200 (2,579)
Repayments of long-term debt (26,690) (44,527)
Proceeds from long-term debt 16,031 67,700
Dividends on common stock (963) (927)
Exercises of stock options and other 10,975 3,255
-------- --------
Net cash provided by financing activities 2,553 22,922
-------- --------
Effect of exchange rate changes on cash and cash equivalents 167 526
Net increase (decrease) in cash and cash equivalents (26,702) 1,640
Cash and cash equivalents - beginning of period 47,433 10,255
-------- --------
Cash and cash equivalents - end of period $ 20,731 $ 11,895
======== ========
See accompanying notes.
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
----------------------- ------------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income $21,699 $15,211 $40,054 $29,066
Other comprehensive income, net of tax:
Foreign currency translation adjustment (8,119) 1,379 5,063 9,052
Change in value of derivative instruments 25 31 30 59
Unrealized gain (loss) on marketable securities:
Gain (loss) arising during period (938) 940 (190) 1,118
Reclassification adjustment (439) - (866) -
------- ------- ------- -------
(1,377) 940 (1,056) 1,118
------- ------- ------- -------
Other comprehensive income (loss), net of tax (9,471) 2,350 4,037 10,229
------- ------- ------- -------
Comprehensive income $12,228 $17,561 $44,091 $39,295
======= ======= ======= =======
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) develops, manufactures and markets
healthcare products through its two business units:
o CooperVision (CVI) markets contact lenses to correct visual defects. Its
leading products are specialty contact lenses: toric lenses to correct
astigmatism, cosmetic lenses to change or enhance the appearance of the
eyes' natural color, multifocal lenses designed to correct for presbyopia,
an age-related vision defect, and lenses for patients experiencing mild
discomfort relating to dry eyes during lens wear.
o CooperSurgical (CSI) markets medical devices, diagnostic products and
surgical instruments and accessories used primarily in gynecologists' and
obstetricians' practices.
During interim periods, we have followed the accounting policies described in
our Form 10-K for the fiscal year ended October 31, 2003. Please refer to this
and to our Annual Report to Shareholders 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. You should not assume that the results reported
here either indicate or guarantee future performance.
The unaudited consolidated condensed financial statements presented in this
report contain all adjustments necessary to present fairly Cooper's consolidated
financial position at April 30, 2004 and October 31, 2003, the consolidated
results of its operations for the three and six months ended April 30, 2004 and
2003 and its cash flows for the six months ended April 30, 2004 and 2003. All of
these adjustments are normal and recurring.
See "Estimates and Critical Accounting Policies" in Item 2. Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of FASB Statement No. 123," Cooper applies Accounting Principles Board
Opinion No. 25 and related interpretations to account for its plans for stock
options issued to employees and directors. Accordingly, no compensation cost has
been recognized for its employee and director stock option plans. Had
compensation cost for our stock-based compensation plans been determined under
the fair value method included in SFAS 123, as amended by SFAS 148, our net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
----------------------- --------------------
2004 2003 2004 2003
------ ------ ------ ------
(In thousands, except per share amounts)
Net income, as reported $ 21,699 $ 15,211 $ 40,054 $ 29,066
Deduct: Total stock-based employee and
director compensation expense determined
under fair value based method, net of
related tax effects 1,347 3,089 2,323 5,205
-------- -------- -------- --------
Pro forma net income $ 20,352 $ 12,122 $ 37,731 $ 23,861
======== ======== ======== ========
Basic earnings per share:
As reported $ 0.67 $ 0.49 $ 1.24 $ 0.94
Pro forma $ 0.63 $ 0.39 $ 1.17 $ 0.77
Diluted earnings per share:
As reported $ 0.64 $ 0.48 $ 1.19 $ 0.92
Pro forma $ 0.60 $ 0.39 $ 1.12 $ 0.76
Note 2. Inventories, at the Lower of Average Cost or Market
April 30, October 31,
2004 2003
--------- -----------
(In thousands)
Raw materials $ 18,196 $15,392
Work-in-process 11,953 13,792
Finished goods 73,117 60,534
-------- -------
$103,266 $89,718
======== =======
Note 3. Acquisitions
SURx Acquisition: On November 26, 2003, Cooper purchased from privately-held
SURx, Inc., the assets and associated worldwide license rights for the
Laparoscopic (LP) and Transvaginal (TV) product lines of its Radio Frequency
Bladder Neck Suspension technology, which uses radio frequency based thermal
energy rather than implants to restore continence.
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
We paid $2.95 million in cash for SURx whose technology received U.S. Food and
Drug Administration marketing clearance in 2002. Results of operations related
to the purchased assets have been included in our financial statements from the
date of acquisition. Initially, we have ascribed $2.5 million to goodwill, a
negative $20,000 to a working capital deficit (including acquisition costs of
$530,000), $350,000 to other intangibles and $77,000 to property, plant and
equipment. The allocation for the purchase price is subject to refinement as we
are in the process of obtaining a third party valuation of the fair value.
Milex Acquisition: On February 2, 2004, Cooper acquired Milex Products, Inc.
(Milex), a manufacturer and marketer of obstetric and gynecologic products and
customized print services for $26 million in cash.
Initially, we have ascribed $19.3 million to goodwill, $6.9 million to property,
plant and equipment, a negative $1.2 million to working capital deficit
(including acquisition costs of $2.9 million), and $1 million to deferred tax
assets. The allocation for the purchase price is subject to refinement as we are
in the process of obtaining a third party valuation of the fair value.
Milex is a leading supplier of pessaries - products used to medically manage
female urinary incontinence and pelvic support conditions - cancer screening
products including endometrial and endocervical sampling devices, and patient
education materials tailored to individual physician preferences.
Argus Acquisition: On February 23, 2004, Cooper acquired from privately owned
Argus Biomedical Pty Ltd the assets related to AlphaCor, an artificial cornea,
and AlphaSphere, a soft orbital implant.
Cooper paid $2.1 million in cash for Argus with future royalties payable on
AlphaCor sales. Initially, we have ascribed $2.1 million to goodwill, a negative
$100,000 to a working capital deficit (including acquisition costs of $500,000)
and $100,000 to property, plant and equipment.
The Argus products will be developed and marketed to corneal surgeons by a newly
formed ophthalmic surgery business unit, CooperVision Surgical.
Opti-Centre Acquisition: On March 31, 2004, Cooper acquired all the outstanding
shares and certain patents of Les Laboratoires Opti-Centre Inc. (Opti-Centre), a
Quebec-based contact lens manufacturer which holds the patents covering
CooperVision's multifocal lens design technology used in its Frequency and
Proclear multifocal products.
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
We paid $11.6 million in cash for Opti-Centre. Initially, we have ascribed $1
million to goodwill, $10.3 million to other intangibles, $400,000 to property,
plant and equipment and a negative $100,000 to a working capital deficit
(including acquisition costs of $100,000). The allocation for the purchase price
is subject to refinement as we are in the process of obtaining a third party
valuation of the fair value.
Note 4. Accrued Acquisition Costs
When we record acquisitions, we accrue for the estimated costs of severance,
legal, consulting, due diligence, plant/office closure of the acquired business
and deferred acquisition payments.
Balance Balance
Description Oct. 31, 2003 Additions Payments April 30, 2004
- ----------- ------------- --------- -------- --------------
(In thousands)
Severance $ 5,608 1,600 2,033 $ 5,175
Legal and consulting 291 1,100 795 596
Plant shutdown 6,691 355 1,269 5,777
Hold back due 1,081 500 1,581 -
Preacquisition liabilities 990 - 172 818
Other 638 487 548 577
-------- ----- ----- --------
$ 15,299 4,042 6,398 $ 12,943
======== ===== ===== ========
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 5. Intangible Assets
Goodwill
CVI CSI Total
--- --- -----
(In thousands)
Balance as of October 31, 2003 $182,843 $ 99,791 $282,634
Additions during the six months ended
April 30, 2004 2,914 21,479 24,393
Other adjustments* 1,421 - 1,421
-------- -------- --------
$187,178 $121,270 $308,448
======== ======== ========
* Primarily translation differences in goodwill denominated in foreign currency.
Other Intangible Assets
As of April 30, 2004 As of October 31, 2003
--------------------------------- -------------------------------
Accumulated Accumulated
Gross Carrying Amortization Gross Carrying Amortization
Amount & Translation Amount & Translation
-------------- -------------- -------------- -------------
(In thousands)
Trademarks $ 805 $ 184 $ 578 $ 171
Patents 24,275 5,728 13,200 5,072
License and distribution rights 8,849 2,361 8,454 2,083
Other 908 147 1,145 163
-------- ------- -------- -------
$ 34,837 $ 8,420 $ 23,377 $ 7,489
-------- ======= -------- =======
Less accumulated amortization
and translation 8,420 7,489
-------- --------
Other intangible assets, net $ 26,417 $ 15,888
======== ========
We estimate that amortization expense will be about $1.8 million per year in the
five-year period ending October 31, 2008.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 6. Debt
April 30, October 31,
2004 2003
--------- -----------
(In thousands)
Short-term:
Notes payable to banks $ 3,200 $ -
Current portion of long-term debt 20,677 20,658
-------- --------
$ 23,877 $ 20,658
======== ========
Long-term:
Convertible senior debentures $112,245 $112,181
KeyBank facility 59,250 68,625
Capitalized leases 2,276 2,983
County of Monroe Industrial Development
Agency bond 1,505 1,645
Other 273 427
-------- --------
175,549 185,861
Less current portion 20,677 20,658
-------- --------
$154,872 $165,203
======== ========
KeyBank Line of Credit: A syndicated bank credit facility consisting of a term
loan ($56.3 million outstanding at April 30, 2004) and a $150 million revolving
credit facility. The credit facility matures April 30, 2007.
At April 30, 2004, we had $143.2 million available under the KeyBank line of
credit:
(In millions)
Amount of facility $206.3
Outstanding loans (63.1)*
------
Available $143.2
======
* Includes $3.8 million in letters of credit backing overdraft accounts.
Convertible Senior Debentures: $115 million of 2.625% convertible senior
debentures, net of discount, are due on July 1, 2023.
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 7. Earnings Per Share (EPS)
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ----------------
2004 2003 2004 2003
------ ------ ------ ------
(In thousands, except for EPS)
Net income $21,699 $15,211 $40,054 $29,066
======= ======= ======= =======
Basic:
Weighted average common shares 32,554 31,003 32,359 30,953
======= ======= ======= =======
Basic EPS $ 0.67 $ 0.49 $ 1.24 $ 0.94
======= ======= ======= =======
Diluted:
Basic weighted average common shares 32,554 31,003 32,359 30,953
Add dilutive securities:
Stock options 1,377 786 1,383 743
------- ------- ------- -------
Denominator for diluted EPS 33,931 31,789 33,742 31,696
======= ======= ======= =======
Diluted EPS $ 0.64 $ 0.48 $ 1.19 $ 0.92
======= ======= ======= =======
For the three- and six-month periods ended April 30, 2004 and 2003, we excluded
zero and 374,000 options (exercise price of $29.50 to $31.11), respectively, to
purchase Cooper's common stock from the computation of diluted EPS because their
exercise prices were above the average market price.
Note 8. Income Taxes
Cooper now expects its effective tax rate (ETR) (provision for income taxes
divided by pretax income) for fiscal 2004 will be 22%, down from 23% for the
three-month period ended January 31, 2004, resulting in a 21% tax rate for the
three months ended April 30, 2004. Accounting principles generally accepted in
the United States of America (GAAP) require that the projected fiscal year ETR
be included in the year-to-date results. The ETR used to record the provision
for income taxes for the quarter and six-month period ended April 30, 2003 was
25% and subsequently decreased to 24% for the fiscal year ended 2003. The
decrease in the 2004 ETR reflected the shift of business to jurisdictions with
lower tax rates.
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 9. Cash Dividends
We paid a semiannual dividend of 3 cents per share on January 5, 2004 to
stockholders of record on December 17, 2003.
On May 13, 2004, we declared a semiannual dividend of 3 cents per share, payable
on July 6, 2004 to stockholders of record on June 14, 2004.
Note 10. Business Segment Information
Cooper is organized by product line for management reporting with operating
income, as presented in our financial reports, the primary measure of segment
profitability. We do not allocate costs from corporate functions to the
segments' operating income. Items listed below operating income are not
considered when measuring segment profitability. We use the same accounting
policies to generate segment results as we do for our overall accounting
policies.
Identifiable assets are those used in continuing operations except cash and cash
equivalents, which we include as corporate assets. Long-lived assets are
property, plant and equipment, goodwill and other intangibles.
Segment information:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ----------------
2004 2003 2004 2003
------ ------ ------ ------
(In thousands)
Net sales to external customers:
CVI $ 95,045 $ 78,045 $182,063 $150,865
CSI 25,507 18,323 48,223 39,517
-------- -------- -------- --------
$120,552 $ 96,368 $230,286 $190,382
======== ======== ======== ========
Operating income:
CVI $ 25,784 $ 20,141 $ 48,391 $ 38,520
CSI 4,646 4,011 10,011 7,843
Corporate (2,607) (3,000) (5,730) (5,392)
-------- -------- -------- --------
Total operating income 27,823 21,152 52,672 40,971
Interest expense (1,488) (1,688) (2,979) (3,512)
Other income, net 1,182 818 1,662 1,296
-------- -------- -------- --------
Income before income taxes $ 27,517 $ 20,282 $ 51,355 $ 38,755
======== ======== ======== ========
April 30, October 31,
2004 2003
------ ------
Identifiable assets:
CVI $499,569 $462,581
CSI 187,171 154,199
Corporate 58,013 88,784
-------- --------
Total $744,753 $705,564
======== ========
14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Geographic information:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
(In thousands)
Net sales to external customers by
country of domicile:
United States $ 70,008 $ 58,509 $133,549 $115,722
Europe 36,285 28,226 69,694 56,450
Rest of world 14,259 9,633 27,043 18,210
-------- -------- -------- --------
Total $120,552 $ 96,368 $230,286 $190,382
======== ======== ======== ========
April 30, October 31,
2004 2003
-------- ---------
Long-lived assets by country of domicile:
United States $242,356 $205,410
Europe 216,080 202,613
Rest of world 15,205 6,776
-------- --------
Total $473,641 $414,799
======== ========
15
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.
Forward-Looking Statements: This Form 10-Q contains "forward-looking statements"
as defined by the Private Securities Litigation Reform Act of 1995. These
include certain statements about our capital resources, performance and results
of operations. In addition, all statements regarding anticipated growth in our
revenue, anticipated market conditions, planned product launches and results of
operations are forward-looking. To identify these 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.
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 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, worldwide regulatory issues, including product
recalls and the effect of healthcare reform legislation, cost of complying with
new corporate governance requirements, changes in tax laws or their
interpretation, changes in geographic 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, including impaired goodwill, changes in accounting
principles or estimates, including the potential cost of expensing stock
options, and other events 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, 2003. 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 second quarter
and six months of fiscal 2004 and compare them with the same periods of fiscal
2003. We discuss our cash flows and current financial condition beginning on
page 22 under "Capital Resources and Liquidity."
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Second Quarter Highlights:
o Sales up 25% to $120.6 million.
o Gross profit up 26%; margin constant at 65%.
o Operating income up 32% to $27.8 million.
o Diluted earnings per share up 33% to 64 cents from 48 cents.
Six-Month Highlights:
o Sales up 21% to $230.3 million.
o Gross profit up 22% on margin of 64%.
o Operating income up 29% to $52.7 million.
o Diluted earnings per share up 29% to $1.19 from 92 cents.
Selected Statistical Information - Percentage of Sales and Growth
Percent of Sales Percent of Sales
Three Months Ended Six Months Ended
April 30, April 30,
------------------- % ------------------ %
2004 2003 Growth 2004 2003 Growth
------ ------ ------ ----- ----- ------
Net sales 100% 100% 25% 100% 100% 21%
Cost of sales 35% 35% 24% 36% 36% 19%
Gross profit 65% 65% 26% 64% 64% 22%
Selling, general and administrative 41% 41% 23% 40% 41% 19%
Research and development 1% 1% (4%) 1% 1% 6%
Amortization - 1% 16% - - 7%
Operating income 23% 22% 32% 23% 22% 29%
Net Sales: Cooper's two business units, CooperVision (CVI) and CooperSurgical
(CSI) generate all its revenue:
o CVI markets, develops and manufacturers 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 $24.2 million (25%) in the three-month period
and $39.9 million (21%) in the six-month period:
Three Months Ended Six Months Ended
April 30, April 30,
-------------------------------------- ---------------------------------------
2004 2003 % Incr. 2004 2003 % Incr.
-------- -------- ------- -------- -------- -------
($ in millions)
CVI $ 95.1 $ 78.1 22% $182.1 $150.9 21%
CSI 25.5 18.3 39% 48.2 39.5 22%
------ ------ ------ ------
$120.6 $ 96.4 25% $230.3 $190.4 21%
====== ====== ====== ======
17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CVI Revenue:
Three Months Ended Six Months Ended
April 30, April 30,
------------------------------------- -------------------------------------
2004 2003 Growth 2004 2003 Growth
-------- -------- ------ -------- -------- ------
($ in millions)
Segment
U.S. $ 45.1 $ 40.4 11% $ 86.5 $ 75.8 14%
International 50.0 37.7 33% 95.6 75.1 27%
------ ------ ------ ------
$ 95.1 $ 78.1 22% $182.1 $150.9 21%
====== ====== ====== ======
CVI's worldwide revenue grew 22% and 21% in the three- and six-month periods,
14% and 13% in constant currency. Total international revenue grew 33% and 27%,
17% and 11% in constant currency, with European revenue up 35% and 29%,
respectively. Asia-Pacific revenue grew 29% and 22% and revenue in all other
markets outside the United States grew 29% and 23%. Revenue in the United States
grew 11% and 14% in the three- and six-month periods.
Practitioner and patient preferences in the worldwide contact lens market
continue to change. The major shifts are from:
o Conventional lenses replaced annually to disposable and frequently replaced
lenses. Disposable lenses are designed for either daily, two-week or
monthly replacement; frequently replaced lenses are designed for
replacement after one to three months.
o Commodity lenses to specialty lenses including toric lenses, cosmetic
lenses, multifocal lenses and lenses for patients experiencing the symptoms
of dry eye syndrome.
o Commodity spherical lenses to value-added spherical lenses such as lenses
with aspherical optical properties.
These shifts favor CVI's line of specialty products, which now comprise 62% of
CVI's revenue.
Definitions: Lens revenue consists of sales of spherical lenses, which include
aspherically designed lenses, and specialty lenses - toric, cosmetic, multifocal
lenses and lenses for patients with dry eyes.
o Aspheric lenses correct for near- and farsightedness, and they have
additional optical properties that help improve visual acuity in low light
conditions and can correct low levels of astigmatism and low levels of
presbyopia, an age-related vision defect.
o Toric lens designs correct astigmatism by adding the additional optical
properties of cylinder and axis, which correct for irregularities in the
shape of the cornea.
o Cosmetic lenses are opaque and color enhancing lenses that alter the
natural appearance of the eye.
o Multifocal lens designs correct presbyopia.
o Proclear lenses help enhance tissue/device compatibility for patients
experiencing mild discomfort relating to dry eyes during lens wear.
18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
The primary reasons for CVI's growth include continued global market share gains
during the quarter with total toric product revenue up 24%, disposable toric
revenue up 54% and disposable sphere revenue up 24%. CVI's line of specialty
lenses grew 26% during the quarter.
CSI Revenue: Women's healthcare products used primarily in obstetricians' and
gynecologists' practices generate about 90% of CSI's revenue. The balance are
sales of medical devices outside of women's healthcare where CSI does not
actively market. CSI's overall revenue increased 39% and 22% in the three- and
six-month periods, respectively. The incremental revenue growth of $7.2 million
and $8.7 million was primarily from recent acquisitions. Organic growth of
existing products was about 4%.
Cost of Sales/Gross Profit: Gross profit as a percentage of sales (margin) was
as follows:
Margin Margin
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
CVI 68% 67% 67% 67%
CSI 55% 53% 55% 52%
Consolidated 65% 65% 64% 64%
CVI's margin for the second quarter of fiscal 2004 was 68%, compared with 67%
for the second quarter last year. CVI manufactures about 64% of its lenses in
the United Kingdom. The favorable impact of currency on revenue is offset by the
unfavorable impact on manufacturing costs.
CSI's margin was 55%, compared with 53% for the second quarter last year. Higher
gross margin reflects continuing efficiencies from the integration of
acquisitions. Last year's results include temporarily lower margins of then
recently acquired infertility products.
Selling, General and Administrative (SGA) Expense:
Three Months Ended Six Months Ended
April 30, April 30,
------------------------------------------ ------------------------------------------
% Net % Net % Net % Net
2004 Sales 2003 Sales % Incr. 2004 Sales 2003 Sales % Incr.
------ ------- ------ ------- ------- ------ ------ ------ ------ -------
($ in millions)
CVI $37.6 40% $31.4 40% 20% $71.4 39% 60.7 40% 18%
CSI 8.7 34% 5.2 28% 67% 15.0 31% 11.4 29% 31%
Corporate 2.6 - 3.0 - (13%) 5.7 - 5.4 - 6%
----- ----- ----- -----
$48.9 41% $39.6 41% 23% $92.1 40% $77.5 41% 19%
===== ===== ===== =====
19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
In the second quarter of 2004, consolidated SGA increased 23%, and as a
percentage of revenue, was the same as the prior year at 41% for the three-month
period but decreased to 40% from 41% for the six-month period. About $2 million
and $4.3 million of the SGA increase in the three- and six-month periods
reflected the relative weakness of the U.S. dollar against foreign currencies on
the $20.3 million and $38.6 million in the three- and six-month periods of SGA
outside the U.S. Corporate headquarters' expenses decreased 17% sequentially and
13% from last year's second quarter as expenses to maintain Cooper's global
trading arrangement declined.
Research and Development Expense: During the first half of fiscal 2004, CVI
research and development expenditures were $1.7 million, supporting previously
announced plans to develop both a new extended wear contact lens and an improved
contact lens technology. CSI's research and development expenditures of $1
million were for product development activities.
Operating Income (Expense): Operating income improved by $6.6 million, or 32%,
and $11.7 million, or 29%, for the three- and six-month periods, respectively:
Three Months Ended Six Months Ended
April 30, April 30,
------------------------------------------ ------------------------------------------
% Net % Net % Net % Net
2004 Sales 2003 Sales % Incr. 2004 Sales 2003 Sales % Incr.
------ ------- ------ ------- ------- ------ ------ ------ ------ -------
($ in millions)
CVI $25.8 27% $20.2 26% 28% $48.4 27% $38.5 26% 26%
CSI 4.6 18% 4.0 22% 16% 10.0 21% 7.9 20% 28%
Corporate (2.6) - (3.0) - 13% (5.7) - (5.4) - (6%)
----- ----- ----- -----
$27.8 23% $21.2 22% 32% $52.7 23% $41.0 22% 29%
===== ===== ===== =====
Interest Expense: Interest expense decreased by $200,000, or 12%, in the
three-month period and $533,000, or 15%, in the six-month period, reflecting a
general decrease in interest rates and the Company's refinancing of a portion of
its higher interest debt.
20
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
ther Income, Net:
Three Months Ended Six Months Ended
April 30, April 30,
------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands)
Interest income $ 89 $ 55 $ 191 $ 89
Foreign exchange transactions 329 557 (13) 1,621
Settlement of disputes (365) - (365) (500)
Gain on sale of marketable
securities 731 - 1,443 -
Other 398 206 406 86
------ ------ ------ ------
$1,182 $ 818 $1,662 $1,296
====== ====== ====== ======
In the first half of 2004, we sold 339,725 shares of marketable securities,
realizing a gain of approximately $1.4 million.
Provision for Income Taxes: We now estimate that Cooper's effective tax rate
(ETR) for fiscal 2004 (provision for taxes divided by income before taxes) will
be 22%, down from 24% in fiscal 2003, as we now generate a greater percent of
our income from jurisdictions with lower tax rates. This resulted in an ETR of
21% for the three-month period ended April 30, 2004.
With anticipated faster growth outside the U.S. and a favorable mix of products
manufactured outside the U.S., Cooper expects that its net operating loss
carryforwards in the U.S. will last through 2006.
21
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Capital Resources and Liquidity
Second Quarter Highlights:
o Operating cash flow $30.1 million vs. $27 million in last year's second
quarter.
o Cash payments for acquisitions totaled $45.7 million.
o Expenditures for purchases of property, plant and equipment (PP&E) $12.4
million vs. $7.5 million in 2003's second quarter.
Six-Month Highlights:
o Operating cash flow $36.9 million vs. $30.1 million in the first half of
2003.
o Cash payments for acquisitions totaled $50.8 million.
o Expenditures for purchases of PP&E $19.2 million vs. $13.4 million in the
first half of 2003.
Comparative Statistics ($ in millions):
April 30, 2004 October 31, 2003
-------------- ----------------
Cash and cash equivalents $20.7 $47.4
Total assets $744.8 $705.6
Working capital $140.8 $145.9
Total debt $178.7 $185.9
Stockholders' equity $476.4 $422.0
Ratio of debt to equity 0.38:1 0.44:1
Debt as a percentage of total capitalization 27% 31%
Operating cash flow - twelve months ended $86.3 $79.6
Operating Cash Flow: Cash flow provided from operating activities continues as
Cooper's major source of liquidity, totaling $36.9 million in the first half of
fiscal 2004 and $86.3 million over the twelve-month period ended April 30, 2004.
Major uses of cash for operating activities in the first six months included the
final payment of $3 million on a previously accrued dispute settlement, $3.1
million to fund entitlements under Cooper's bonus plans and $2.9 million in
interest payments.
Working capital decreased by $5.1 million in the first half of fiscal 2004, as
cash decreased $26.7 million, primarily to fund acquisitions, and short-term
debt increased $3.2 million, partially offset by an increase of $13.5 million in
inventory, and a $11.4 million decrease in current accrued liabilities and
accounts payable. At the end of the first six months, Cooper's inventory months
on hand was 7.3 versus 7.2 in last year's second quarter. Also, our days sales
outstanding (DSO) decreased to 61 days from 71 days in last year's second
quarter. Future DSO's are expected to generally be in the upper 60's to low
70's.
22
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Investing Cash Flow: The cash outflow of $66.3 million from investing activities
was driven by capital expenditures of $19.2 million, used primarily to expand
manufacturing capacity and the continued rollout of new information systems, and
payments of $50.8 million for acquisitions. This was partially offset by the
sale of marketable securities of $3.8 million.
Financing Cash Flow: Financing activities provided $2.6 million, $11 million
from the exercise of stock options, offset by net repayment of debt of about
$7.5 million and dividends on our common stock of $963,000 paid in the first
fiscal quarter of 2004.
Estimates and Critical Accounting Policies
Management estimates and judgments are an integral part of financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). Actual results may differ 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 and knowledge of our individual customers. When our
analyses indicate, we increase or decrease our allowance accordingly.
o Net realizable value of inventory - GAAP states that inventory 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 inventory, measuring number of
months on hand and other indications of salability and, reduce the value of
inventory if there are indications that the carrying value is greater than
market.
o Valuation of goodwill - We record and evaluate our goodwill balances and
test them for impairment in accordance with the provisions of Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets," respectively. As required by
GAAP, we performed an impairment test in our third fiscal quarter of 2003,
and our analysis indicated that we have no goodwill impairment.
23
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
o Business combinations - We allocate the purchase price of acquisitions
based on our estimates and judgments of the fair value of net assets
purchased, acquisition costs and intangibles other than goodwill. On larger
acquisitions, we utilize independent valuation experts to provide a basis
in order to refine the purchase price allocation, if appropriate. Results
of operations for acquired companies are included in our consolidated
results of operations from the date of acquisition.
o Income taxes - As part of the process of preparing our consolidated
financial statements, we must 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 judging 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. We adjust
the estimated effective tax rate 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 $20.7 million plus cash
from operating activities will fund future operations, capital expenditures,
cash dividends and smaller acquisitions. We expect capital expenditures in
fiscal year 2004 of about $45 million as we double our U.K. manufacturing
capacity during a favorable cost of capital environment. At April 30, 2004, we
had $143.2 million available under the KeyBank line of credit.
Risk Management
We are exposed to risks caused by changes in foreign exchange, principally our
pound sterling and euro denominated debt and receivables and from operations in
foreign currencies. We have taken steps to minimize our balance sheet exposure.
We are also exposed to risks associated with changes in interest rates, as the
interest rate on our revolver and term loan debt under the KeyBank credit
agreement varies with the London Interbank Offered Rate.
Trademarks
Frequency'r', Proclear'r', AlphaCor'r' and AlphaSphere'r' are registered
trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries and
are italicized in this report.
24
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See "Risk Management" under Capital Resources and Liquidity 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 recognizes
that controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving desired control objectives. 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, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. The Company's Chief Executive Officer and
Chief Financial Officer, based upon their evaluation as of April 30, 2004, the
end of the fiscal quarter covered by this report, concluded that the Company's
disclosure controls and procedures were effective at the reasonable assurance
level.
There has been no change in the Company's internal control over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
25
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 2004 Annual Meeting of Stockholders was held on March 23, 2004.
Each of the eight individuals nominated to serve as directors of the Company was
elected:
Director Shares For Shares Against
-------- ---------- --------------
A. Thomas Bender 27,974,818 1,859,891
Michael H. Kalkstein 25,767,248 4,067,461
Moses Marx 29,269,126 565,583
Donald Press 26,873,264 2,961,445
Steven Rosenberg 25,767,245 4,067,464
Allan E. Rubenstein, M.D. 26,724,994 3,109,715
Robert S. Weiss 27,303,086 2,531,623
Stanley Zinberg, M.D. 27,208,961 2,625,748
Stockholders ratified the appointment of KPMG LLP as Cooper's independent
certified public accountant for the fiscal year ending October 31, 2004. A total
of 26,861,787 shares were voted in favor of the ratification, 2,955,821 shares
were voted against it and 17,101 shares abstained.
Stockholders adopted Cooper's Amended and Restated 2001 Long Term Incentive
Plan. A total of 17,452,362 shares were voted in favor of the adoption,
7,603,466 shares were voted against it and 93,651 shares abstained.
26
PART II - OTHER INFORMATION -- Continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
10.1 Amended and Restated 2001 Long Term Incentive Plan
11* Calculation of Earnings Per Share
31.1 Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934
32.1 Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350
32.2 Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350
* The information called for in this Exhibit is provided in Footnote 7 to the
Consolidated Condensed Financial Statements in this report.
(b) Cooper filed the following reports on Form 8-K during the period from
February 1, 2004 to April 30, 2004.
Date of Report Item Reported
-------------- -------------
February 3, 2004 Item 5. Other Events
February 24, 2004 Item 5. Other Events
March 24, 2004 Item 5. Other Events
The Company furnished on Form 8-K dated March 2, 2004 a report of Item 12 --
Results of Operations and Financial Condition.
27
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: June 14, 2004 /s/ Rodney E. Folden
----------------------------------
Rodney E. Folden
Corporate Controller
(Principal Accounting Officer)
28
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Index of Exhibits
Exhibit No. Page No.
- ---------- --------
10.1 Amended and Restated 2001 Long Term Incentive Plan
11* Calculation of Earnings Per Share
31.1 Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
32.1 Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350
32.2 Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350
* The information called for in this Exhibit is provided in Footnote 7 to the
Consolidated Condensed Financial Statements in this report.
29
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as ...................'r'
The section symbol shall be expressed as ................................'SS'