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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 January 31, 2004
----------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ____________
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
--------------
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 32,397,646 Shares
- ---------------------------- -----------------
Class Outstanding at February 29, 2004
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three Months
Ended January 31, 2004 and 2003 3
Consolidated Condensed Balance Sheets - January 31, 2004
and October 31, 2003 4
Consolidated Condensed Statements of Cash Flows - Three
Months Ended January 31, 2004 and 2003 5
Consolidated Condensed Statements of Comprehensive Income -
Three Months Ended January 31, 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 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Index of Exhibits 27
Certifications 28
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except for earnings per share)
(Unaudited)
Three Months Ended
January 31,
------------------
2004 2003
-------- -------
Net sales $109,734 $94,014
Cost of sales 39,778 34,647
-------- -------
Gross profit 69,956 59,367
Selling, general and administrative expense 43,237 37,877
Research and development expense 1,525 1,315
Amortization of intangibles 345 356
-------- -------
Operating income 24,849 19,819
Interest expense 1,491 1,824
Other income, net 480 478
-------- -------
Income before income taxes 23,838 18,473
Provision for income taxes 5,483 4,618
-------- -------
Net income $ 18,355 $13,855
======== =======
Earnings per share:
Basic $ 0.57 $ 0.45
======== =======
Diluted $ 0.55 $ 0.44
======== =======
Number of shares used to compute earnings per share:
Basic 32,167 30,904
======== =======
Diluted 33,543 31,601
======== =======
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
January 31, October 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 45,324 $ 47,433
Trade receivables, net 86,078 84,607
Marketable securities 4,987 5,746
Inventories 99,951 89,718
Deferred tax asset 15,644 14,616
Other current assets 23,852 22,104
-------- --------
Total current assets 275,836 264,224
-------- --------
Property, plant and equipment, net 124,647 116,277
Goodwill, net 288,564 282,634
Other intangible assets, net 15,765 15,888
Deferred tax asset 16,372 22,367
Other assets 4,353 4,174
-------- --------
$725,537 $705,564
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 22,046 $ 20,658
Accounts payable 14,404 16,227
Employee compensation and benefits 14,807 15,846
Accrued acquisition costs 14,186 15,299
Accrued income taxes 18,594 18,771
Other current liabilities 22,453 31,513
-------- --------
Total current liabilities 106,490 118,314
Long-term debt 160,010 165,203
-------- --------
Total liabilities 266,500 283,517
-------- --------
Stockholders' equity:
Common stock, 10 cents par value 3,298 3,268
Additional paid-in capital 315,628 309,666
Accumulated other comprehensive income and other 27,632 14,119
Retained earnings 121,531 104,139
Treasury stock at cost (9,052) (9,145)
-------- --------
Total stockholders' equity 459,037 422,047
-------- --------
$725,537 $705,564
======== ========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
January 31,
-------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 18,355 $ 13,855
Depreciation and amortization 3,589 2,971
Increase in operating capital (22,029) (15,828)
Net increase (decrease) in non-current liabilities -- (3,000)
Net decrease in non-current assets 6,403 4,084
Other non-cash 491 1,030
-------- --------
Net cash provided by operating activities 6,809 3,112
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (6,864) (5,898)
Acquisitions of businesses (5,145) (32,243)
Sale of marketable securities and other 2,145 (29)
-------- --------
Net cash used by investing activities (9,864) (38,170)
-------- --------
Cash flows from financing activities:
Net proceeds (repayments) of short-term debt 1,215 (1,248)
Repayments of long-term debt (5,276) (10,213)
Proceeds from long-term debt 17 45,400
Dividends on common stock (963) (927)
Exercise of stock options and other 5,829 657
-------- --------
Net cash provided by financing activities 822 33,669
-------- --------
Effect of exchange rate changes on cash and cash equivalents 124 188
-------- --------
Net decrease in cash and cash equivalents (2,109) (1,201)
Cash and cash equivalents - beginning of period 47,433 10,255
-------- --------
Cash and cash equivalents - end of period $ 45,324 $ 9,054
======== ========
See accompanying notes.
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended
January 31,
------------------
2004 2003
-------- -------
Net income $18,355 $13,855
Other comprehensive income, net of tax:
Foreign currency translation adjustment 13,182 7,673
Change in value of derivative instruments 5 28
Unrealized gain on marketable securities:
Gain arising during the period 748 178
Reclassification adjustment (427) --
------- -------
321 178
------- -------
Other comprehensive income, net of tax 13,508 7,879
------- -------
Comprehensive income $31,863 $21,734
======= =======
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," "we," "our" or similar pronouns) 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 January 31, 2004 and October 31, 2003, the consolidated
results of its operations and its cash flows for the three months ended January
31, 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
(APB) 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
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
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:
Three Months Ended
January 31,
---------------------
2004 2003
------- -------
(In thousands, except
per share amounts)
Net income, as reported $18,355 $13,855
Deduct: Total stock-based employee and director
compensation expense determined under fair value
based method, net of related tax effects 976 2,116
------- -------
Pro forma net income $17,379 $11,739
======= =======
Basic earnings per share:
As reported $ 0.57 $ 0.45
Pro forma $ 0.54 $ 0.38
Diluted earnings per share:
As reported $ 0.55 $ 0.44
Pro forma $ 0.52 $ 0.38
Note 2. Inventories, at the Lower of Average Cost or Market
January 31, October 31,
2004 2003
----------- -----------
(In thousands)
Raw materials $16,165 $15,392
Work-in-process 11,657 13,792
Finished goods 72,129 60,534
------- -------
$99,951 $89,718
======= =======
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 3. 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 instead of implants
to restore continence.
We paid $2.95 million for this SURx technology. 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.
The SURx system, consisting of the LP and TV products, received U.S. Food and
Drug Administration marketing clearance in 2002.
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 Jan. 31, 2004
- -------------------------- ------------- --------- -------- -------------
(In thousands)
Severance $ 5,608 $ 20 $ 184 $ 5,444
Legal and consulting 291 300 530 61
Plant shutdown 6,691 75 411 6,355
Hold back due 1,081 500 608 973
Preacquisition liabilities 990 -- 169 821
Other 638 242 348 532
------- ------ ------ -------
$15,299 $1,137 $2,250 $14,186
======= ====== ====== =======
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 5. Intangible Assets
Goodwill
(In thousands)
CVI CSI Total
-------- -------- --------
Balance as of October 31, 2003 $182,843 $ 99,791 $282,634
Additions during the three months ended
January 31, 2004 -- 3,077 3,077
Other adjustments* 2,853 -- 2,853
-------- -------- --------
$185,696 $102,868 $288,564
======== ======== ========
* Primarily translation differences in goodwill denominated in foreign currency.
As of January 31, 2004 As of October 31, 2003
------------------------------ ------------------------------
Accumulated Accumulated
Gross Carrying Amortization Gross Carrying Amortization
Amount & Translation Amount & Translation
-------------- ------------- -------------- -------------
(In thousands)
Other Intangible Assets
Trademarks $ 578 $ 178 $ 578 $ 171
Patents 13,639 5,317 13,200 5,072
License and distribution rights 8,454 2,221 8,454 2,083
Other 908 98 1,145 163
------- ------ ------- ------
23,579 $7,814 23,377 $7,489
------- ====== ------- ======
Less accumulated amortization
and translation 7,814 7,489
------- -------
Other intangible assets, net $15,765 $15,888
======= =======
We estimate that amortization expense will be about $1.6 million per year in the
five-year period ending October 31, 2008.
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 6. Debt
January 31, October 31,
2004 2003
----------- -----------
(In thousands)
Short-term:
Notes payable to banks $ 1,347 $ --
Current portion of long-term debt 20,699 20,658
-------- --------
$ 22,046 $ 20,658
======== ========
Long-term:
Convertible senior debentures $112,209 $112,181
KeyBank facility 63,937 68,625
Capitalized leases 2,712 2,983
County of Monroe Industrial Development
Agency bond 1,575 1,645
Other 276 427
-------- --------
180,709 185,861
Less current portion 20,699 20,658
-------- --------
$160,010 $165,203
======== ========
KeyBank Line of Credit: A syndicated bank credit facility consisting of a
term loan ($60.9 million outstanding at January 31, 2004) and a $150 million
revolving credit facility. The credit facility matures April 30, 2007.
At January 31, 2004, we had $143.1 million available under the KeyBank line of
credit:
(In millions)
Amount of facility $210.9
Outstanding loans (67.8)*
------
Available $143.1
======
* Includes $3.9 million in letters of credit backing overdraft accounts.
Convertible Senior Debentures: Our $115 million of 2.625% convertible senior
debentures, net of discount, are due on July 1, 2023.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 7. Earnings Per Share (EPS)
(In thousands, except for EPS)
Three Months Ended
January 31,
------------------
2004 2003
-------- -------
Net income $18,355 $13,855
======= =======
Basic:
- ------
Weighted average common shares 32,167 30,904
======= =======
Basic EPS $ 0.57 $ 0.45
======= =======
Diluted:
- --------
Basic weighted average common shares 32,167 30,904
Add dilutive securities:
- ------------------------
Stock options 1,376 697
------- -------
Denominator for diluted EPS 33,543 31,601
======= =======
Diluted EPS $ 0.55 $ 0.44
======= =======
For the three months ended January 31, 2004 and 2003, we excluded zero and
136,000 (exercise price of $31.11) options to purchase Cooper's common stock,
respectively, from the computation of diluted EPS because their exercise prices
were above the average market price.
Note 8. Income Taxes
Cooper expects its effective tax rate (ETR) (provision for income taxes divided
by pretax income) for fiscal 2004 will be 23%. 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 three-month period ended January 31, 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.
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.
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 10. Business Segment Information
Cooper is organized by product line for management reporting with operating
income, as presented in our financial reports, as the primary measure of segment
profitability. We do not allocate costs from corporate functions to the
segments' operating income. Items below operating income are not considered when
measuring the profitability of a segment. 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
January 31,
------------------
2004 2003
-------- -------
(In thousands)
Net sales to external customers:
CVI $ 87,018 $72,820
CSI 22,716 21,194
-------- -------
$109,734 $94,014
======== =======
Operating income:
CVI $ 22,607 $18,379
CSI 5,365 3,832
Corporate (3,123) (2,392)
-------- -------
Total operating income 24,849 19,819
Interest expense (1,491) (1,824)
Other income, net 480 478
-------- -------
Income before income taxes $ 23,838 $18,473
======== =======
January 31, October 31,
2004 2003
----------- -----------
(In thousands)
Identifiable assets:
CVI $485,078 $462,581
CSI 158,408 154,199
Corporate 82,051 88,784
-------- --------
Total $725,537 $705,564
======== ========
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Geographic information:
Three Months Ended
January 31,
------------------
2004 2003
-------- -------
(In thousands)
Net sales to external customers by country of domicile:
United States $ 63,541 $57,213
Europe 33,409 28,224
Rest of world 12,784 8,577
-------- -------
Total $109,734 $94,014
======== =======
January 31, October 31,
2004 2003
----------- -----------
(In thousands)
Long-lived assets by country of domicile:
United States $209,492 $205,410
Europe 212,458 202,613
Rest of world 7,026 6,776
-------- --------
Total $428,976 $414,799
======== ========
Note 11. Subsequent Events
Milex Acquisition: On February 2, 2004, Cooper completed the acquisition of
Milex Products, Inc. Milex, which had annual revenue of about $14 million,
manufactures and markets obstetric and gynecologic products and customized print
services. We paid about $26 million for Milex.
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.
We paid about $2.1 million for the Argus assets with future royalties payable on
AlphaCor sales. The Argus products will be developed and marketed to corneal
surgeons by a newly formed ophthalmic surgery business unit, CooperVision
Surgical.
14
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. 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 first quarter
of fiscal 2004 and compare them with the same period of fiscal 2003. We discuss
our cash flows and current financial condition beginning on page 21 under
"Capital Resources and Liquidity."
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
First Quarter Highlights:
o Sales of $110 million up 17%, 10% in constant currency.
o Gross profit up 18%; margin up one percentage point to 64% of revenue.
o Operating income up 25% to $24.9 million.
o Diluted earnings per share up 25% to 55 cents from 44 cents, with a 6%
increase in the number of shares.
Selected Statistical Information - Percentage of Sales and Growth
Percent of Sales
Three Months Ended
January 31,
------------------ %
2004 2003 Growth
---- ---- ------
Net sales 100% 100% 17%
Cost of sales 36% 37% 15%
--- ---
Gross profit 64% 63% 18%
Selling, general and administrative 39% 40% 14%
Research and development 2% 2% 16%
--- ---
Operating income 23% 21% 25%
=== ===
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 $15.7 million, or 17%:
Three Months Ended
January 31,
------------------ %
2004 2003 Increase
------ ----- --------
(In millions)
CVI $ 87.0 $72.8 19%
CSI 22.7 21.2 7%
------ -----
$109.7 $94.0 17%
====== =====
CVI Revenue:
First Quarter
-------------
2004 2003 Growth
----- ----- ------
Segment ($ in millions)
- -------
U.S. $41.4 $35.4 17%
International 45.6 37.4 22%
----- -----
Total $87.0 $72.8 19%
===== =====
CVI's worldwide revenue grew 19% in the quarter, 11% in constant currency. Total
international revenue grew 22%, 5% in constant currency, with European sales up
24%, 8% in constant currency. Sales in the United States grew 17%.
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.
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
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 64% of
CVI's soft lens 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.
In the first quarter, soft contact lens revenue grew 24%, 15% in constant
currency. Soft lens revenue in the United States, 48% of CVI's soft lens
business, grew 20% and soft lens revenue outside of the United States, 52% of
CVI's soft lens revenue, grew 28%, about 10% in constant currency. European soft
lens revenue, about 37% of CVI's soft lens revenue, grew 30%, 13% in constant
currency.
The primary reasons for CVI's growth include continued global market share gains
during the quarter with toric product revenue up 31% and disposable sphere
revenue up 31%. Overall growth of CVI's line of specialty lenses was up 30%
during the quarter.
17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Other components of total revenue include revenue from sales to other contact
lens manufacturers, freight reimbursement, royalty income and rebate programs.
Other revenue declined from $3.6 million to $1.l million primarily because of
lower sales to other contact lens manufacturers and reductions to sales from
a new distributor rebate program.
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 first quarter revenue increased 7% to $22.7 million.
The growth of $1.5 million was primarily from recent acquisitions, with organic
growth of 3%. Organic revenue growth has been adjusted to exclude $2.4 million
of sales of a product before the termination of a supply contract on
January 31, 2003.
Cost of Sales/Gross Profit: Gross profit as a percentage of net sales (gross
margin) was:
First Quarter Margin
--------------------
2004 2003
---- ----
CVI 66% 67%
CSI 54% 50%
Consolidated 64% 63%
CVI's gross margin for the first quarter of fiscal 2004 was 66% compared with
67% for the first quarter last year. CVI manufactures about 65% of its lenses in
the United Kingdom. The favorable impact of currency on revenue is offset by the
unfavorable impact on manufacturing costs.
CSI's gross margin was 54%, compared with 50% for the first fiscal quarter last
year. Higher gross margin reflects continuing efficiencies from the integration
of acquisitions. Last year's results include temporarily lower margins of then
recently acquired infertility products and sales of product before the
termination of a supply contract.
Selling, General and Administrative (SGA) Expense:
Three Months Ended January 31,
------------------------------------------
% Net % Net
2004 Sales 2003 Sales % Increase
----- ----- ----- ----- ----------
($ in millions)
CVI $33.7 39% $29.2 40% 15%
CSI 6.4 28% 6.3 29% 2%
Headquarters 3.1 N/A 2.4 N/A 31%
----- -----
$43.2 39% $37.9 40% 14%
===== =====
18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
In the first quarter of 2004, consolidated SGA increased 14% but declined as a
percentage of revenue by 1% as compared with 2003. About $2.3 million of the SGA
increase reflects the relative weakness of the U.S. dollar against foreign
currencies; with $18.3 million of our SGA outside the U.S. Corporate
headquarters' expenses, which increased 31% to $3.1 million, include continued
expenses for projects to maintain the Company's global trading arrangement and
costs to comply with recently enacted corporate governance requirements.
Acquisitions also contributed to the SGA increase.
Research and Development (R&D) Expense: During the first fiscal quarter, CVI
research and development expenditures were $1 million, up 22% over the first
quarter of 2003, supporting previously announced plans to develop both new and
improved contact lens products. CVI is investing in two previously announced
research programs: the development of an extended wear contact lens and an
improved contact lens technology.
Operating Income: Operating income improved by $5.1 million, or 25%, in the
fiscal first quarter:
Three Months Ended January 31,
------------------------------------------
% Net % Net
2004 Sales 2003 Sales % Increase
----- ----- ----- ----- ----------
($ in millions)
CVI $22.6 26% $18.4 25% 23%
CSI 5.4 24% 3.8 18% 40%
Headquarters (3.1) N/A (2.4) N/A N/A
----- -----
$24.9 23% $19.8 21% 25%
===== =====
Interest Expense: Interest expense decreased by $333,000 or 18%, reflecting a
general decrease in interest rates and the Company's refinancing of a portion of
its debt carried at higher interest rates.
19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Other Income, Net:
Three Months Ended
January 31,
------------------
2004 2003
----- ------
(In thousands)
Interest income $ 102 $ 34
Foreign exchange transactions (342) 1,064
Settlement of dispute -- (500)
Gain on sale of marketable securities 712 --
Other 8 (120)
----- ------
$ 480 $ 478
===== ======
In the first quarter of 2004, we sold 220,000 shares of marketable securities,
realizing a gain of approximately $712,000.
Provision for Income Taxes: We estimate that Cooper's effective tax rate (ETR)
for fiscal 2004 (provision for taxes divided by income before taxes) will be
23%, down from 24% in fiscal 2003, as a greater percent of our income now comes
from jurisdictions with lower tax rates.
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.
20
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
First Quarter Highlights:
o Operating cash flow $6.8 million vs. $3.1 million in 2003's first quarter.
o Cash payments for acquisitions totaled $5.1 million.
o Expenditures for purchases of property, plant and equipment (PP&E) $6.9
million vs. $5.9 million in 2003's first quarter.
Comparative Statistics (dollars in millions, except per share amounts):
January 31, 2004 October 31, 2003
---------------- ----------------
Cash and cash equivalents $ 45.3 $ 47.4
Total assets $ 725.5 $ 705.6
Working capital $ 169.3 $ 145.9
Total debt $ 182.1 $ 185.9
Stockholders' equity $ 459.0 $ 422.0
Ratio of debt to equity 0.40:1 0.44:1
Debt as a percentage of total capitalization 28% 31%
Operating cash flow - twelve months ended $ 83.3 $ 79.6
Operating Cash Flow: Cash flow provided from operating activities continues as
Cooper's major source of liquidity, totaling $6.8 million in the first quarter
of fiscal 2004 and $83.3 million over the twelve-month period ended January 31,
2004.
Major uses of cash for operating activities in the first quarter included final
payment of $3 million on a previously accrued dispute settlement and $3.1
million to fund entitlements under Cooper's bonus plans and $2.1 million in
interest payments.
Working capital increased by $23.4 million in the first quarter, as inventory
and trade receivables increased by $11.7 million, and current accrued
liabilities and accounts payable decreased by about $13.2 million partially
offset by an increase of $1.4 million of short-term debt. At the end of the
first fiscal quarter, Cooper's inventory months on hand was 7.5 versus 7 in last
year's first quarter, reflecting the Company's intent to build a higher level of
inventory to address capacity constraints experienced in fiscal year 2003 that
limited several product rollouts. Also, our days sales outstanding (DSO)
decreased to 69 days from 79 days in last year's first quarter. DSO's are
expected to remain in the high 60's to low 70's.
21
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 $9.9 million from investing activities
was driven by capital expenditures of $6.9 million primarily to expand
manufacturing capacity and continue the rollout of new information systems and
payments of $5.1 million for acquisitions. This was partially offset by the sale
of marketable securities of $2.1 million.
Financing Cash Flow: Financing activities provided $822,000, $5.8 million from
exercises of stock options, net of repayment of other debt of about $4 million
and dividends on our common stock of $963,000 in the first quarter of 2004.
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 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.
22
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
o Income taxes - As part of the process of preparing our consolidated
financial statements, we 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 $45.3 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 January 31, 2004, we
had $143.1 million available under the KeyBank line of credit.
Risk Management
We are exposed to risks caused by changes in foreign exchange, principally 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
Proclear'r', AlphaCor'r' and SURx'r' are registered trademarks of The Cooper
Companies, Inc., its affiliates and/or subsidiaries and are italicized in this
report.
23
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 January 31, 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.
24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
- ------- -----------
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) The Company filed the following reports on Form 8-K during the period
November 1, 2003 to January 31, 2004.
Date of Report Item Reported
- ---------------- ----------------------
November 4, 2003 Item 5. Other Events.
December 4, 2003 Item 5. Other Events.
The Company furnished on Form 8-K dated December 19, 2003 a report of Item 12 --
Results of Operations and Financial Condition.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Cooper Companies, Inc.
-----------------------------------
(Registrant)
Date: March 12, 2004 /s/ Rodney E. Folden
-----------------------------------
Rodney E. Folden
Corporate Controller
(Principal Accounting Officer)
26
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Index of Exhibits
Exhibit No. Page No.
- ----------- --------
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.
27
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as..................... 'r'
The section symbol shall be expressed as.................................. 'SS'