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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 July 31, 2002
----------------------------------
( ) 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.
- --------------------------------------------------------------------------------
(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 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 15,324,757 Shares
- ---------------------------- ------------------------------
Class Outstanding at August 31, 2002
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three
and Nine Months Ended July 31, 2002 and 2001 3
Consolidated Condensed Balance Sheets - July 31, 2002
and October 31, 2001 4
Consolidated Condensed Statements of Cash Flows - Nine
Months Ended July 31, 2002 and 2001 5
Consolidated Condensed Statements of Comprehensive
Income - Three and Nine Months Ended
July 31, 2002 and 2001 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
Certifications 33
Index of Exhibits 34
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- ------------------------
2002 2001 2002 2001
------- ------- -------- --------
Net sales $90,563 $61,365 $220,585 $168,523
Cost of sales 34,844 22,336 83,217 58,839
------- ------- -------- --------
Gross profit 55,719 39,029 137,368 109,684
Selling, general and administrative expense 37,055 22,516 88,439 65,686
Research and development expense 1,118 1,055 2,893 2,836
Amortization of intangibles 565 1,457 1,265 3,866
------- ------- -------- --------
Operating income 16,981 14,001 44,771 37,296
Interest expense 2,347 914 4,681 2,814
Other income, net 3,668 131 4,686 908
------- ------- -------- --------
Income before income taxes 18,302 13,218 44,776 35,390
Provision for income taxes 4,941 2,857 12,092 10,010
------- ------- -------- --------
Net income $13,361 $10,361 $ 32,684 $ 25,380
======= ======= ======== ========
Earnings per share:
Basic $ 0.87 $ 0.69 $ 2.14 $ 1.72
======= ======= ======== ========
Diluted $ 0.86 $ 0.67 $ 2.10 $ 1.68
======= ======= ======== ========
Number of shares used to compute earnings
per share:
Basic 15,308 14,992 15,257 14,734
======= ======= ======== ========
Diluted 15,605 15,384 15,570 15,128
======= ======= ======== ========
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
July 31, October 31,
2002 2001
-------- --------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 8,790 $ 12,928
Trade receivables, net 69,779 55,318
Marketable securities 5,156 7,982
Inventories 77,444 51,153
Deferred tax asset 19,991 17,308
Other current assets 17,109 10,516
-------- --------
Total current assets 198,269 155,205
-------- --------
Property, plant and equipment, net 93,918 61,028
Goodwill, net 213,091 131,732
Other intangible assets, net 17,507 13,890
Deferred tax asset 25,761 31,246
Other assets 4,094 3,748
-------- --------
$552,640 $396,849
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 32,941 $ 8,249
Accounts payable 14,486 11,149
Accrued acquisition costs 19,778 16,378
Accrued income taxes 10,250 7,688
Other current liabilities 40,370 24,509
-------- --------
Total current liabilities 117,825 67,973
Long-term debt 135,342 60,553
Other liabilities 4,608 12,039
-------- --------
Total liabilities 257,775 140,565
-------- --------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, $.10 par value 1,599 1,588
Additional paid-in capital 284,238 278,459
Accumulated other comprehensive loss (1,711) (3,305)
Retained earnings (deficit) 21,045 (10,112)
Other (105) (145)
Treasury stock at cost (10,201) (10,201)
-------- --------
Total stockholders' equity 294,865 256,284
-------- --------
$552,640 $396,849
======== ========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
July 31,
--------------------------
2002 2001
--------- --------
Cash flows from operating activities:
Net income $ 32,684 $ 25,380
Depreciation and amortization 8,489 7,906
Deferred income taxes 5,955 7,329
Net increase in working capital (3,502) (15,263)
Net decrease in non-current liabilities (3,665) (5,056)
Net increase in non-current assets (27) (357)
--------- --------
Net cash provided by operating activities 39,934 19,939
--------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (16,962) (11,791)
Sale of marketable securities 4,382 -
Acquisitions of businesses (130,522) (35,939)
Other 112 (194)
--------- --------
Net cash used by investing activities (142,990) (47,924)
--------- --------
Cash flows from financing activities:
Net proceeds from/(repayments of) short-term debt (3,019) 1,311
Repayments of long-term debt (98,000) (1,690)
Proceeds from long-term debt 198,454 7,346
Dividends on common stock (1,527) (1,038)
Exercises of stock options 3,190 18,445
Other 47 -
--------- --------
Net cash provided by financing activities 99,145 24,374
--------- --------
Effect of exchange rate changes on cash and cash equivalents (227) 271
--------- --------
Net decrease in cash and cash equivalents (4,138) (3,340)
Cash and cash equivalents - beginning of period 12,928 14,608
--------- --------
Cash and cash equivalents - end of period $ 8,790 $ 11,268
========= ========
See accompanying notes.
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------ ------------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $13,361 $10,361 $32,684 $25,380
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 2,998 (227) 2,970 (563)
Change in value of derivative instruments (73) (134) 337 (875)
Minimum pension liability (616) - (616) -
Unrealized loss on marketable securities:
Gain (loss) arising during period (417) 326 (353) (855)
Reclassification adjustment (6) - (744) -
------- ------- ------- -------
Unrealized loss on marketable securities (423) 326 (1,097) (855)
------- ------- ------- -------
Other comprehensive income (loss), net of tax 1,886 (35) 1,594 (2,293)
------- ------- ------- -------
Comprehensive income $15,247 $10,326 $34,278 $23,087
======= ======= ======= =======
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, and multifocal
lenses designed to correct for presbyopia, an age-related vision defect, and
lenses for patients with dry eyes. Its leading products are disposable-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, 2001. 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
current period 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 July 31, 2002 and October 31, 2001, the consolidated
results of its operations for the three and nine months ended July 31, 2002 and
2001, and its consolidated cash flows for the nine months ended July 31, 2002
and 2001. All of these adjustments are normal and recurring, other than any
disclosed in this report.
See "Estimates and Critical Accounting Policies" in Item 2. Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
Note 2. Inventories, at the Lower of Average Cost or Market
July 31, October 31,
2002 2001
-------- -----------
(In thousands)
Raw materials $12,553 $ 9,889
Work-in-process 12,617 8,491
Finished goods 52,274 32,773
------- -------
$77,444 $51,153
======= =======
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 3. New Accounting Pronouncements
We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142") on November 1, 2001. In accordance with
the requirements of SFAS 142, during the six months ended April 30, 2002, we:
o Evaluated the balance of goodwill and other intangible assets recorded on
our consolidated balance sheet as of October 31, 2001. Apart from goodwill,
no reclassifications were required to conform to the new criteria for
recognition.
o Reassessed the useful lives and residual values of all acquired intangible
assets. No amortization period adjustments were required, and we had no
intangible assets (other than goodwill) with indefinite useful lives.
o Determined that the reporting units to be used to test for goodwill
impairment in accordance with SFAS 142 were CVI and CSI.
o Determined that the fair value of each reporting unit exceeded its carrying
value. Accordingly, none of our goodwill was impaired.
We performed our first annual evaluation of our goodwill effective May 1, 2002,
determining that the fair value of each reporting unit continued to exceed its
carrying value.
Pro Forma Earnings Per Share ("EPS"): In accordance with SFAS 142, we no longer
amortize goodwill. Actual information for the 2002 periods and pro forma EPS for
the 2001 periods is below:
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- ------------------------
2002 2001 2002 2001
------- ------- ------- -------
(In thousands, except for earnings per share)
Net income $13,361 $10,361 $32,684 $25,380
Add back goodwill amortization* - 861 - 2,210
------- ------- ------- -------
Pro forma net income $13,361 $11,222 $32,684 $27,590
======= ======= ======= =======
Earnings per share:
Basic $ 0.87 $ 0.75 $ 2.14 $ 1.87
======= ======= ======= =======
Diluted $ 0.86 $ 0.73 $ 2.10 $ 1.82
======= ======= ======= =======
Number of shares used to compute earnings per share:
Basic 15,308 14,992 15,257 14,734
======= ======= ======= =======
Diluted 15,605 15,384 15,570 15,128
======= ======= ======= =======
* Net of tax, assuming a pro forma effective tax rate of 27%.
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 4. Intangible Assets
As of July 31, 2002
-----------------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
(In thousands)
Other Intangible Assets
Trademarks $ 578 $ 137
Patents 12,711 4,229
License and distribution rights 9,329 1,620
Other 903 28
------- ------
$23,521 $6,014
======= ======
Estimated annual amortization expense is about $1.4 million for each of the
years in the five-year period ending October 31, 2006.
Goodwill (In thousands)
Balance as of November 1, 2001 $131,732
Net additions through July 31, 2002 79,375
Other adjustments* 1,984
--------
$213,091
========
* Primarily translation differences in goodwill denominated in foreign currency.
Note 5. Acquisitions
Biocompatibles: On February 28, 2002, Cooper acquired the contact lens business
of Biocompatibles International plc. ("Biocompatibles"), comprised of its wholly
owned subsidiaries Hydron Limited ("Hydron"), Biocompatibles Eye Care Inc. ("BE
Inc.") and Biocompatibles Canada Inc. ("BE Canada"). Under an International
Share Sale Agreement (the "Sale Agreement") dated January 15, 2002, among
Biocompatibles, Cooper and Cooper's wholly owned subsidiary Aspect Vision
Holdings Limited ("AVH"), Biocompatibles sold all of the outstanding shares of
Hydron to AVH and all of the outstanding shares of BE Inc. and BE Canada to
Cooper. The Biocompatibles results have been included in our financial
statements from the date of the acquisition.
Biocompatibles had worldwide revenue in calendar 2001 of about $70 million,
about 70% outside of North America. The Proclear line of products, manufactured
with proprietary technology that helps enhance tissue-device compatibility,
accounted for about 45% of revenue. Biocompatibles Proclear family of soft
contact lenses includes the Proclear compatibles monthly replacement sphere and
toric lenses, the Proclear conventional six-month planned replacement lens and
the Proclear Tailor Made Toric, a custom toric product that complements CVI's
toric product line. Biocompatibles products include products acquired from
International Hydron in March 2000, including a line of non-Proclear soft
planned replacement sphere and
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
toric lenses and a line of conventional soft contact lenses. Revenue for the
Hydron products declined about 10% in 2001. In North America, CVI plans to
continue Biocompatibles practitioner-oriented marketing approach with the
Proclear monthly product line. Biocompatibles products are manufactured in
Norfolk, Virginia; Farnborough, United Kingdom; Adelaide, Australia and Madrid,
Spain.
The aggregate consideration paid for the shares and to repay outstanding
indebtedness of the acquired business was 'L'68 million (about $97 million)
plus transaction costs. In the initial purchase price allocation (pending an
independent valuation), $60.8 million has been ascribed to goodwill, which is
not being amortized, and other intangible assets of $3.8 million being amortized
over 8 years. The initial purchase price allocation also included $14.4 million
of working capital (including $11.8 million of accrued acquisition costs) and
$19.6 million of property, plant and equipment. Cooper paid 'L'24 million
(about $34 million) in cash at closing, from its line of credit, and together
with AVH issued promissory notes of 'L'44 million (about $62.2 million) to
Biocompatibles, maturing on November 15, 2002 and bearing interest at 5% per
annum. The notes could be prepaid at any time at the option of Cooper and AVH
without penalty. We negotiated an expanded bank credit facility which was
completed May 1, 2002, and used part of the proceeds to repay the notes.
The following unaudited pro forma consolidated condensed results of operations
for the three-month period ended July 31, 2001 and the nine-month periods ended
July 31, 2002 and 2001 are presented as if Biocompatibles had been acquired at
the beginning of each period presented. The unaudited pro forma information is
not indicative of either the results of operations that would have occurred if
Biocompatibles had been purchased during the periods presented or of future
results of the combined operations. Pro forma net income does not include
goodwill amortization expense in any period. We used a 27% effective tax rate
for all periods.
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- ------------------------
2001 2002 2001
2002 Pro Forma Pro Forma Pro Forma
------- --------- --------- ---------
(In thousands, except for earning per share)
Net operating revenue $90,563 $78,371 $245,226 $220,345
======= ======= ======== ========
Net income $13,361 $11,240 $ 33,573 $ 21,622
======= ======= ========= ========
EPS:
Basic $ 0.87 $ 0.75 $ 2.20 $ 1.47
======= ======= ======== ========
Diluted $ 0.86 $ 0.73 $ 2.16 $ 1.43
======= ======= ======== ========
Shares outstanding for:
Basic 15,308 14,992 15,257 14,734
======= ======= ======== ========
Diluted 15,605 15,384 15,570 15,128
======= ======= ======== ========
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Ackrad Laboratories: On May 21, 2002, CSI acquired privately held Ackrad
Laboratories, Inc., ("Ackrad") a developer and manufacturer of disposable
medical devices used primarily in the assessment of infertility and other
gynecologic disorders.
We paid $12 million at closing for Ackrad, with $1 million held in escrow for
representations and warranties. Ackrad had revenue of $5.3 million in its 2001
fiscal year. Cooper expects that the acquisition will be accretive to earnings
per share by the end of its first 12 months as a part of CSI. The Ackrad results
have been included in our financial statements from the date of acquisition. The
initial purchase price allocation ascribed $11.5 million to goodwill, $1.6
million to working capital (including accrued acquisition costs of $2.4
million), $442,000 to net property, plant and equipment and $847,000 to deferred
tax assets.
Ackrad's principal product, which accounts for about 65 percent of its revenue,
is the H/S Elliptosphere Catheter, used in hysterosalpingography and saline
contrast hysterosonography, the noninvasive assessment of the female
reproductive anatomy. It is used primarily for fertility studies, and also to
assess abnormal uterine bleeding and pelvic pain.
Norland Medical Systems: On April 15, 2002, CSI acquired the assets of the bone
densitometry business of Norland Medical Systems ("Norland").
Norland's densitometry products, which are used in the evaluation of
osteoporosis, had sales of $8.5 million in its 2001 fiscal year. CSI plans to
maintain operations at the Norland's Fort Atkinson, Wisconsin, facility and will
continue to use the Norland brand name. CSI has been a distributor of these
products since November 2000.
The Norland business offers both peripheral and central bone density measurement
systems.
Cooper paid $3.5 million at closing, net of $1.5 million held back against
representations and warranties, and may pay additional amounts not to exceed a
maximum purchase price of $12 million based on performance over three years. The
initial purchase price allocation ascribed $6.4 million to goodwill, ($2.2)
million to working capital (including accrued acquisition costs of $1.6
million), $200,000 to net property, plant and equipment and $600,000 to deferred
tax assets.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 6. Debt
July 31, October 31,
2002 2001
-------- -----------
(In thousands)
Short-Term:
Notes payable to banks $ 3,755 $ 6,312
Current portion of long-term debt 29,186 1,937
-------- -------
$ 32,941 $ 8,249
======== =======
Long-Term:
Promissory notes - Aspect $ 22,277 $20,714
KeyBank line of credit 60,302 28,955
KeyBank term loan 75,000 -
Aspect Vision bank loans - 5,019
County of Monroe Industrial Development
Agency ("COMIDA") bond 1,995 2,175
Capitalized leases 4,939 5,338
Other 15 289
-------- -------
164,528 62,490
Less current installments 29,186 1,937
-------- -------
$135,342 $60,553
======== =======
KeyBank Line of Credit: On May 1, 2002, Cooper obtained a $225 million
syndicated bank credit facility. The facility consists of a $75 million
five-year term loan with an interest only payment in the first year then fully
amortized in the next four years, and a $150 million three-year revolving credit
facility. KeyBank is the agent for the eleven-bank syndication.
At closing, Cooper paid off $62 million under its existing line of credit and
'L'44 million ($62.2 million) in notes owed to Biocompatibles International
plc as a result of Cooper's purchase of Biocompatibles Eye Care, Inc., completed
on February 28, 2002. $21 million of the revolving credit facility is reserved
to retire loans due in December 2002 to note holders of Aspect Vision Care,
Ltd., a contact lens business that the Company purchased in December 1997
("Promissory notes - Aspect"). Cooper plans to use the remainder of the facility
for general corporate purposes, capital expenditures and acquisitions.
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Interest rates under the new facility are based on London Interbank Offered Rate
("LIBOR") plus additional basis points determined by Cooper's ratio of debt to
its earnings before interest, taxes, depreciation and amortization (EBITDA.)
These range from 125 to 225 basis points for the term loan and from 100 to 200
basis points for the revolver. The current additional basis points are 200 on
the term loan and 175 on the revolver. At the Company's option, it can choose to
pay a base rate that is within a range above the prime rate.
The credit agreement:
o Limits Cooper's debt to a maximum of 50% of its total capitalization, which
is defined as the sum of total debt plus shareholders' equity.
o Limits cash dividends on our common stock to $1.25 million per fiscal
quarter.
o Requires that the ratio of EBITDA to fixed charges (as defined) to be at
least 1.3 to 1.
o Requires that the ratio of total debt to pro forma EBITDA (as defined in
the agreement) be no higher than 2.75 to 1 though January 30, 2003 and 2.5
to 1 thereafter.
At July 31, 2002, Cooper's debt was 36 percent of total capitalization, its
ratio of EBITDA to fixed charges (as defined) was 2.0 to 1 and its ratio of debt
to pro forma EBITDA was 2.0 to 1.
At July 31, 2002, we had $62.7 million available under the KeyBank line of
credit.
(In millions)
Amount of line $ 225.0
Reserved for Aspect promissory notes (21.0)
Outstanding loans (excluding translation) (141.3)*
-------
Available $ 62.7
=======
* Includes $6.2 million in letters of credit backing other debt.
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 7. Earnings Per Share ("EPS")
(In thousands, except for per share amounts)
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $13,361 $10,361 $32,684 $25,380
======= ======= ======= =======
Basic:
- -----
Weighted average common shares 15,308 14,992 15,257 14,734
======= ======= ======= =======
Basic earnings per share $ 0.87 $ 0.69 $ 2.14 $ 1.72
======= ======= ======= =======
Diluted:
- -------
Basic weighted average common shares 15,308 14,992 15,257 14,734
Add dilutive securities:
- -----------------------
Stock options 297 392 313 394
------- ------- ------- -------
Denominator for diluted earnings
per share 15,605 15,384 15,570 15,128
======= ======= ======= =======
Diluted earnings per share $ 0.86 $ 0.67 $ 2.10 $ 1.68
======= ======= ======= =======
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 Nine Months Ended
July 31, July 31,
-------------------------------- ----------------------------------
2002 2001 2002 2001
------------- ------------- ------------- ------------
Number of shares excluded 522,750 153,000 522,750 238,000
============= ============= ============= =============
Range of exercise prices $47.85-$62.21 $51.84-$62.21 $47.85-$62.21 $43.20-$62.21
============= ============= ============= =============
14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 8. Income Taxes
The effective tax rate ("ETR") for the provision for income taxes of $4.9
million and $12.1 million for the three and nine months ended July 31, 2002 was
27% for both periods, which is what we expect for the full year. The ETR used to
record the provision for income taxes of $2.9 million and $10 million for the
three and nine months ended July 31, 2001 was 22% and 28%, respectively. In
fiscal 2001, based on full-year projections at that time, we revised our ETR for
continuing operations from 32% in the second quarter to 31% in the third quarter
of 2001. This change, along with the taxes related to the Quidel and Litmus
transaction and the reversal of $1 million of state income tax reserves no
longer required, resulted in the reported ETRs for the three and nine months
ended July 31, 2001.
Note 9. Commitments and Contingencies
Pending Litigation: Cooper has been engaged in patent litigation in the United
States, the United Kingdom and France with CIBA Vision, a division of Novartis,
alleging that CVI's Frequency Colors and Expressions opaque contact lenses
infringe certain patents of CIBA Vision.
On August 22, 2002, CVI received an Order in the U. S. litigation involving U.S.
Patent No. 5,414,477 (the " `477 patent") related to cosmetic contact lenses.
In the Order, the Court granted Wesley Jessen's motion for summary judgment of
infringement and found that CVI's Expressions lenses sold in the United States
infringe Wesley Jessen's `477 patent.
CVI's counter claim challenging the validity of the `477 patent is scheduled for
trial in October. The Company remains confident that it will ultimately prevail
on its defense that the `477 patent is invalid based on prior art.
In July, in related litigation in the United Kingdom, CIBA Vision (UK) decided
to revoke the British counterpart to the `477 patent, Patent EP (UK) 0498835
(the Jahnke patent), also issued to Jahnke. CIBA Vision consented to an Order of
the Court that the Jahnke patent be revoked in the United Kingdom and agreed to
reimburse CooperVision's legal costs in the United Kingdom in relation to the
Jahnke suit. The U.K. Court has also heard arguments with regard to the validity
and infringement of another opaque lens patent (the Knapp patent), and a
decision is expected in September.
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
In the United States, CVI received an Order in the lawsuit involving U.S. Patent
No. 4,668,240 (the " `240 patent"). The Court had previously ruled in Wesley
Jessen's favor with respect to the meaning of disputed terms in the `240 patent.
In response to a motion for reconsideration recently filed by CVI, the Court
found that evidence presented by CVI placed doubt on the Court's prior
interpretation of the `240 patent. Accordingly, the Court granted CVI's request
to appoint an independent technical advisor to assist the Court in resolving the
questions presented by the parties with respect to the technical terms in the
patent. CVI is confident that it will also prevail on its defense that it does
not infringe on the `240 patent.
Revenue from products that include the disputed technology accounts for about 2
percent of Cooper's year-to-date worldwide revenue in fiscal 2002.
Patent License Agreement: On February 13, 2002, we renegotiated the terms of a
license agreement between CVI and certain former shareholders of Aspect. The
renegotiated agreement calls for a fixed license fee of 'L'21.4 million
(about $31 million) including interest, due in quarterly installments, which
escalate 5% annually, over an eight-year term. Previously, payments were based
on levels of revenue.
Note 10. Cash Dividends
Consistent with our policy of paying annual dividends of 10 cents per share, we
paid a semiannual dividend of 5 cents per share on January 4, 2002 to
stockholders of record on December 14, 2001 and on July 3, 2002 to stockholders
of record on June 13, 2002.
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.
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
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 Nine Months Ended
July 31, July 31,
------------------------ -------------------------
2002 2001 2002 2001
------- ------- -------- --------
(In thousands)
Sales to external customers:
CVI $70,596 $45,974 $168,843 $126,409
CSI 19,967 15,391 51,742 42,114
------- ------- -------- --------
$90,563 $61,365 $220,585 $168,523
======= ======= ======== ========
Operating income:
CVI $16,843 $13,189 $ 40,475 $ 35,563
CSI 2,463 2,610 10,049 6,724
Headquarters (2,325) (1,798) (5,753) (4,991)
------- ------- -------- --------
Total operating income 16,981 14,001 44,771 37,296
Interest expense (2,347) (914) (4,681) (2,814)
Other income, net 3,668 131 4,686 908
------- ------- -------- --------
Income before income taxes $18,302 $13,218 $ 44,776 $ 35,390
======= ======= ======== ========
July 31, October 31,
2002 2001
-------- -----------
Identifiable assets:
CVI $385,104 $246,563
CSI 109,126 87,056
Headquarters 58,410 63,230
-------- --------
Total $552,640 $396,849
======== ========
Goodwill:
CVI $148,776 $ 85,107
CSI 64,315 46,625
-------- --------
Total $213,091 $131,732
======== ========
17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Geographic information:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------ -------------------------
2002 2001 2002 2001
------- ------- -------- --------
(In thousands)
Sales to external customers by
country of domicile:
United States $56,597 $45,975 $145,904 $127,626
Europe 28,971 11,191 62,149 29,644
Canada 4,995 4,199 12,532 11,253
------- ------- -------- ----------
Total $90,563 $61,365 $220,585 $168,523
======= ======= ======== ========
July 31, October 31,
2002 2001
-------- --------
Long-lived assets by country of domicile:
United States $162,806 $ 80,735
Europe 159,618 123,742
Canada 2,092 2,173
-------- --------
Total $324,516 $206,650
======== ========
18
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: 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, and 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,
the impact of an undetected virus on our computer systems, acquisition
integration delays or costs, 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, changes in tax
laws, significant environmental cleanup costs above those already accrued,
litigation costs including any related settlements, 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, 2001. We caution investors that forward-looking statements
reflect our analysis only on their stated date or the date of this Form 10-Q. 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 third quarter
and nine months of fiscal 2002 and compare them with the same periods of fiscal
2001. We discuss our cash flows and current financial condition beginning on
page 26 under "Capital Resources and Liquidity."
Third Quarter Highlights vs. 2001's Third Quarter:
o Sales up 48% to $90.6 million.
o Gross profit up 43%; margin down two percentage points to 62% of revenue.
o Operating income up 21% to $17 million.
o Diluted earnings per share up 28% to 86 cents from 67 cents.
19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Nine-Month Highlights:
o Sales up 31% to $220.6 million.
o Gross profit up 25% on margin of 62%, down three percentage points from last
year.
o Operating income up 20% to $44.8 million.
o Diluted earnings per share up 25% to $2.10 from $1.68.
Selected Statistical Information - Percentage of Sales and Growth
Percent of Sales Percent of Sales
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- % ----------------- %
2002 2001 Growth 2002 2001 Growth
---- ---- ------ ---- ---- ------
Net sales 100% 100% 48% 100% 100% 31%
Cost of sales 38% 36% 56% 38% 35% 41%
Gross profit 62% 64% 43% 62% 65% 25%
Selling, general and administrative 41% 37% 65% 40% 39% 35%
Research and development 1% 2% 6% 1% 2% 2%
Amortization 1% 2% (61%) 1% 2% (67%)
Operating income 19% 23% 21% 20% 22% 20%
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, surgical instruments and
accessories for the gynecological market, primarily in the U.S.
Cooper's consolidated revenue grew $29.2 million (48%) and $52.1 million (31%),
respectively, in the three- and nine-month periods:
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------------------- ----------------------------------------
2002 2001 % Incr. 2002 2001 % Incr.
-------- -------- ------- -------- -------- -------
($ in millions)
CVI $70.6 $46.0 54% $168.9 $126.4 34%
CSI 20.0 15.4 30% 51.7 42.1 23%
----- ----- ------ ------
$90.6 $61.4 48% $220.6 $168.5 31%
===== ===== ====== ======
CVI Revenue: 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 daily or for two-week wear; frequently replaced
lenses are replaced after one to three months. We refer to the combination of
disposable and frequently replaced lenses as "DPR" lenses in this report.
20
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
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 64% and 40% for the
three- and nine-month periods, respectively. 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 $22.4
million and $34.9 million in the three- and nine-month periods, total soft lens
revenue grew 10% in both the three- and nine-month periods. 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.
Sales in 2001's nine-month period included a $2.2 million initial stocking order
from Rohto Pharmaceuticals, CVI's marketing partner in Japan. This order was not
repeated in fiscal 2002. Excluding the Rohto 2001 order, soft lens revenue
(excluding Biocompatibles) increased 12% year to date. 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 and five-months ended July 31, 2001. (Such amounts were derived from the
unaudited ledgers of Biocompatibles for those periods.) Because we adjusted
year-to-date 2001 revenue for five months, our 2002 revenue does not require any
adjustments to be comparable. We think that adjusting the five-month period is
more meaningful because we did not begin to control Biocompatibles' operations
until March 1, 2002. 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 14% in the three months and 11% in the
nine months ended July 31, 2002.
21
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CVI Revenue:
Reported: Third Quarter Nine Months
----------------------------------- ----------------------------------
Segment 2002 2001 Growth 2002 2001 Growth
- ------- ------ ------ ------ ------ ------ ------
($ in millions)
U.S. $35.8 $27.0 33% $ 90.9 $ 75.8 20%
International 32.2 14.4 124% 70.0 39.2 79%
----- ----- ------ ------
Soft lens revenue 68.0 41.4 64% 160.9 115.0 40%
Miscellaneous revenue 2.6 4.6 (43%) 8.0 11.4 (30%)
----- ----- ------ ------
Total reported $70.6 $46.0 54% $168.9 $126.4 34%
===== ===== ====== ======
Adjustments -- To include Biocompatibles revenue for comparable periods:
Three Months Ended July 31,2001 Five Months Ended July 31, 2001
------------------------------- -------------------------------
Segment (In millions)
- -------
U.S. $ 4.3 $ 7.1
International 14.0 23.0
----- -----
Soft lens revenue $18.3 $30.1
===== =====
As adjusted:
Third Quarter Nine Months
-------------------------------- ---------------------------------
2002 2001 Growth 2002 2001 Growth
---- ---- ------ ---- ---- ------
Segment ($ in millions)
- -------
U.S. $35.8 $31.3 14% $ 90.9 82.9 10%
International 32.2 28.4 13% 70.0 62.2 13%
----- ----- ------ ------
Soft lens revenue 68.0 59.7 14% 160.9 145.1 11%
Miscellaneous revenue 2.6 4.6 (43%) 8.0 11.4 (30%)
----- ----- ------ ------
Total as adjusted $70.6 $64.3 10% $168.9 $156.5 8%
===== ===== ====== ======
The 124% and 79% growth in reported international soft lens revenue, from $14.4
million and $39.2 million to $32.2 million and $70 million in the three- and
nine-month periods, respectively, was largely driven by international sales of
Biocompatibles products of $16.5 million in the third quarter of 2002 and $23
million in the five months for which Biocompatibles' revenue has been
consolidated with our results. Our $2.2 million initial stocking order to Rohto
made in the second quarter 2001 also impacted the comparative amounts for the
nine-month period in the international market.
Reported soft lens revenue in the United States grew 33% in the quarter and 20%
in the nine-month period, and included Biocompatibles revenue of $5.9 million
and $8.9 million in the respective periods. On an as adjusted basis, U.S. soft
lens revenue growth was 14% and 10% in the respective three- and nine-month
periods, driven primarily by increased sales in toric and other specialty
lenses.
22
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 remaining are 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 third quarter revenue increased 30% to $20 million and is up 23% year to
date. Organic growth from existing gynecology products in the third quarter was
about 10%. The majority of our organic growth is coming 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 (see Note 5).
Cost of Sales/Gross Profit: Gross profit as a percentage of sales ("margin")
was:
Margin % Margin %
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
CVI 66% 66% 66% 69%
CSI 44% 55% 50% 55%
Consolidated 62% 64% 62% 65%
CVI's margin for the third quarter of fiscal 2002 improved from 63% in the
previous quarter of the current year to 66%, equal to the third quarter of 2001.
The improvement was primarily triggered by favorable mix (increased sales of
higher-margin specialty lenses), ongoing manufacturing efficiencies in our U.K.
manufacturing facility and cost improvements associated with the integration of
Biocompatibles, which is ahead of schedule. On a year-to-date basis, our margins
at CVI continue to lag last year's primarily because a higher percentage of our
sales are now generated through distributors outside the United States. Because
distributors incur sales and marketing expenses on our behalf, our sales to them
generate gross margins below those we generate by direct sales to optometrists,
ophthalmologists and retail chains. Corresponding lower operating expenses
associated with our sales to distributors offset the lower gross margin.
Accordingly, we expect that CVI's operating income as a percentage of revenue
will remain at traditional levels as this mix shift continues. In addition, we
expect that Biocompatibles' margin will continue to improve as we complete the
integration of the business and gain additional manufacturing efficiencies.
At CSI, margin for the third quarter was atypically low at 44%. During the
quarter, Management decided to phase out the Cerveillance colposcopy system,
which captures and stores digital images of the cervix, and recorded a charge
against cost of sales (primarily write down of inventory distribution rights and
prepaid royalties) of about $2 million. Cerveillance is being phased out because
the Leisegang Prism system, which we acquired with the acquisition of
23
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Leisegang Medical Inc. in 2000, is known for having the finest colposcopy
equipment in the world. CSI elected to consolidate its efforts in a rapidly
evolving market with its Leisegang Prism system, to capitalize on its reputation
for providing superior optics. Margins generated from recurring activities
(excluding the charge described above) were 54% for both the third quarter and
for the nine-month period at CSI, and consolidated margins of 62% for both
periods would improve to 64% and 63%, respectively.
Selling, General and Administrative ("SGA") Expense:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------------- ------------------------------------
2002 2001 % Incr. 2002 2001 % Incr.
---- ---- ------- ---- ---- -------
($ in millions)
CVI $29.1 $16.0 82% $68.2 $47.4 44%
CSI 5.6 4.7 19% 14.5 13.3 9%
Headquarters 2.3 1.8 29% 5.7 5.0 15%
----- ----- ----- -----
$37.0 $22.5 65% $88.4 $65.7 35%
===== ===== ===== =====
Consolidated third quarter SGA increased 65% and as a percentage of revenue
increased from 37% to 41%. On a year-to-date basis, the increase was 35%, and
the percentage of revenue was 40% in 2002 and 39% in 2001. Both the overall
increase and the increase at CVI were driven primarily by the acquisition of
Biocompatibles, including third quarter integration costs of about $1.4 million.
We expect CVI's SGA as a percentage of revenue to decline as we integrate
Biocompatibles and have targeted a 30% operating income margin for CVI midterm.
SGA at CSI was impacted in the third quarter by integration costs of the Ackrad
and Norland acquisitions.
Research and Development ("R&D") Expense: We expect R&D spending to remain a low
percentage of revenue, as Cooper plans to continue to acquire products that do
not require large expenditures before introduction. Most of our R&D expense
relates to costs of clinical and regulatory and other development activities
rather than basic research.
Amortization of Intangibles: Amortization expense decreased to $565,000 and $1.3
million in the three- and nine-month periods of fiscal 2002 from $1.5 million
and $3.9 million in last year's three- and nine-month periods, primarily because
following our adoption of SFAS 142 (see Notes 3 and 4), we no longer amortize
goodwill. Goodwill amortization included in fiscal 2001 results reduced
operating income by $1.2 million in the third quarter and by $3 million in the
nine-month period.
24
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Operating Income: Operating income improved by $3 million, or 21%, and $7.5
million, or 20%, for the three- and nine-month periods:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------------------ ----------------------------------------
2002 2001 Incr. 2002 2001 Incr.
------------------------------------------ ----------------------------------------
(In millions)
CVI $16.8 $13.2 $ 3.6 $40.5 $35.6 $4.9
CSI 2.5 2.6 (0.1) 10.0 6.7 3.3
Headquarters (2.3) (1.8) (0.5) (5.7) (5.0) (0.7)
----- ----- ----- ----- ----- ----
$17.0 $14.0 $ 3.0 $44.8 $37.3 $7.5
===== ===== ===== ===== ===== ====
Interest Expense: Our outstanding debt more than trebled, from $55 million at
July 31, 2001 to $168.3 million one year later, and interest expense increased
$1.4 million, or 157%, in the third quarter and $1.9 million, or 66%, in the
nine-month period, primarily due to increased borrowings required to fund the
acquisition of Biocompatibles at the end of February 2002.
Other Income (Expense), Net:
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Interest income $ 47 $105 $ 125 $ 378
Foreign exchange 1,539 49 1,365 (134)
Gain on Quidel stock 40 -- 1,168 --
Gain on Litmus/Quidel
transaction 2,075 -- 2,075 719
Other (33) (23) (47) (55)
------ ---- ------ -----
$3,668 $131 $4,686 $ 908
====== ==== ====== =====
Foreign Exchange: In conjunction with the closing of our acquisition of
Biocompatibles, we provided about $10 million in pounds sterling to a U.K.
affiliate to settle a short-term financing. We were unable to hedge this
transaction, as we were unsure as to the exact time of repayment. During the
time this loan was outstanding, the pound strengthened against the dollar,
resulting in a gain of about $1 million upon repayment. An additional $500,000
in gains resulted from exposures acquired that were not hedged. Our policy
continues to be to hedge foreign exchange exposure whenever possible. As such,
we do not expect large gains or losses in the future.
Gain on Quidel Stock: In the nine months ended July 31, 2002, we sold 592,000
shares of Quidel stock, realizing a gain of approximately $1.2 million.
25
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Gain on Litmus/Quidel Transaction: In the first quarter of 2001, Quidel
Corporation ("Quidel") acquired Litmus Concepts, Inc. ("Litmus") through an
exchange of common stock. Cooper held a preferred equity position in Litmus,
which equated to approximately a 10 percent ownership. As a result of this
transaction, we received 1,138,725 shares of Quidel's common stock, and at that
time, we recorded a gain of $719,000, as the market value of the Quidel shares
received exceeded the carrying value of our investment in Litmus. In the third
quarter of 2002, we received an additional 334,727 shares of Quidel that were
held in escrow and recorded a gain of $2.1 million, based on the fair market
value of Quidel shares on the day we received them.
Provision for Income Taxes: We estimate that our effective tax rate ("ETR") --
provision for income taxes as a percentage of income before income taxes -- for
fiscal 2002 will be 27%, down from fiscal 2001's ETR of 29%. The reduction of
our ETR resulted from a higher percentage of our income coming from our
international operations (including the international operations of
Biocompatibles). Our ETR is based on our estimate for the full year. Assuming no
major acquisitions, we expect our ETR to continue to decline, and we expect our
ETR to be about 26% in fiscal 2003.
We implemented a global tax plan 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 plan consists of a restructuring of the legal ownership structure
for the CooperVision foreign sales and manufacturing subsidiaries.
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
domicile. Assuming no other major acquisitions or large stock issuances, we
currently expect that this plan will extend the cash flow benefits of the
existing NOLs through 2004, and that actual cash payments of taxes will average
less than 5% of pretax profits over this period. After 2004, actual cash
payments of taxes are expected to average less than 25% of pretax profits.
26
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Capital Resources & Liquidity
Third Quarter Highlights:
o Operating cash flow $15.3 million vs. $9.8 million in 2001's third quarter.
o "Cash flow" (pretax income from continuing operations plus depreciation and
amortization) per diluted share $1.39 vs. $1.04 in 2001's third quarter.
o Cash payments for acquisitions totaled $85.6 million.
o Expenditures for purchases of property, plant and equipment ("PP&E") $5
million vs. $4.6 million in 2001's third quarter.
Nine-Month Highlights:
o Operating cash flow $39.9 million vs. $19.9 million in the first nine months
of 2001.
o Cash flow per diluted share $3.42 vs. $2.86 in the first nine months of 2001.
o Cash payments for acquisitions totaled $130.5 million.
o Expenditures for purchases of PP&E $17 million vs. $11.8 million in the first
nine months of 2001.
Comparative Statistics (Dollars in millions, except per share amounts):
July 31, 2002 October 31, 2001
------------- ----------------
Cash and cash equivalents $8.8 $12.9
Total assets $552.6 $396.8
Working capital $80.4 $87.2
Total debt $168.3 $68.8
Stockholders' equity $294.9 $256.3
Ratio of debt to equity 0.57:1 0.27:1
Debt as a percentage of total capitalization 36% 21%
Operating cash flow -- twelve months ended $46.1 $25.6
Cash flow per diluted share -- twelve months ended $4.71 $4.14
Operating Cash Flows: Our major source of liquidity continues to be cash flow
provided by operating activities, which totaled $39.9 million in the first nine
months of fiscal 2002 and $45.6 million over the trailing twelve months ended
July 31, 2002.
Cooper continued to improve its receivable collections following difficulties
caused by the installation of a new enterprise resource planning system at CVI.
These problems resulted in an unusually high level of Day of Sales Outstanding
("DSO's") at the end of 2001 and the first quarter of 2002. At the end of the
current quarter, Cooper's DSO's were 69 days, an improvement of 20% from the 86
days reported at the end of the first quarter. Looking forward, we expect that
DSO's will remain in the high 60's to low 70's range, although continued
international expansion could tend to increase DSO's moderately.
27
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Major uses of cash for operating activities included payments of $4 million on a
previously accrued dispute settlement with Medical Engineering Corporation, $1.8
million to fund entitlements under Cooper's bonus plans in the first quarter and
$5.2 million in interest payments and debt acquisition costs in the nine-month
period. Debt acquisition payments totaled $2.6 million in the third quarter.
Investing Cash Flows: The cash outflow of $143 million from investing activities
was driven by the acquisition of Biocompatibles and other businesses totaling
$130.5 million and capital expenditures of $17 million. The cash outflow was
partially offset by $4.4 million cash received from the sale of Quidel shares.
Financing Cash Flows: Financing activities provided $99.1 million of cash,
required primarily to fund acquisitions. Most of this cash was provided by our
$225 million line of credit. Also, $3.2 million was provided by stock option
exercises, and we disbursed $1.5 million for dividends on our common stock in
the year-to-date period.
Outlook: We believe that cash and cash equivalents on hand of $8.8 million plus
cash from operating activities will fund future operations, capital
expenditures, cash dividends and smaller acquisitions. During the third quarter,
in order to afford increased flexibility for larger potential transactions, we
expanded our credit facilities with KeyBank as agent from $75 million to $225
million (see Note 6). Funds will be used, as required, to fund acquisitions and
potentially repay debt carrying higher interest rates. At July 31, 2002, we had
$62.7 million available under the KeyBank line of credit.
Estimates and Critical Accounting Policies
Estimates and judgments made by Management 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 be different from
estimated amounts included in our financial statements. We believe that the
following critical accounting policies address the 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 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.
28
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
o Net realizable value of inventory -- GAAP states that inventories be stated
at the lower of cost or market, 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 reduce the value of
inventory if there are indications that the carrying value is greater than
market.
o Valuation of goodwill -- We evaluate our goodwill balances and test them for
impairment in accordance with the provisions of Statements of Financial
Accounting Standards 141, "Business Combinations," and No. 142, "Goodwill and
Other Intangible Assets" (see Note 3).
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.
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 the majority of our debt varies with the London Interbank
Offered Rate. At July 31, 2002, we had about $135 million of debt outstanding
subject to variable interest rates.
Trademarks
The Cooper Companies, Inc., its subsidiaries and/or affiliates, own, license
or distribute the following trademarks, which are italicized in this report:
Expressions'r', Frequency'r' Colors, Proclear'r' and Cerveillance'r' and CV
Encore Toric'TM', Xcel'TM', H/S Elliptosphere Catheter'TM 'and Leisegang'TM'.
29
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.
30
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
May 1, 2002 to July 31, 2002.
Date of Report Item Reported
-------------- -------------
May 1, 2002 Item 5. Other Events.
May 21, 2002 Item 5. Other Events.
June 4, 2002 Item 5. Other Events.
31
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: September 13, 2002 /s/ Stephen C. Whiteford
--------------------------------------------
Vice President and Corporate Controller
(Principal Accounting Officer)
32
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; and
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.
Date: September 13, 2002
/s/ A. Thomas Bender
----------------------------------
A. Thomas Bender
Chairman of the Board, President and Chief Executive Officer
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; and
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.
Date: September 13, 2002
/s/ Robert S. Weiss
----------------------------------
Robert S. Weiss
Executive Vice President and Chief Financial Officer
33
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.
34
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
The British pound sterling sign shall be expressed as.................. 'L'
The section symbol shall be expressed as............................... 'SS'