Back to GetFilings.com
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, 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 32,724,796 Shares
- ---------------------------- -----------------
Class Outstanding at August 31, 2004
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three
and Nine Months Ended July 31, 2004 and 2003 3
Consolidated Condensed Balance Sheets - July 31, 2004
and October 31, 2003 4
Consolidated Condensed Statements of Cash Flows - Nine
Months Ended July 31, 2004 and 2003 5
Consolidated Condensed Statements of Comprehensive
Income - Three and Nine Months Ended
July 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 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 30
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
Index of Exhibits 33
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $129,079 $108,442 $359,365 $298,824
Cost of sales 45,945 39,810 127,890 108,405
-------- -------- -------- --------
Gross profit 83,134 68,632 231,475 190,419
Selling, general and administrative expense 49,012 41,518 141,126 118,985
Research and development expense 1,825 1,400 4,572 3,994
Amortization of intangibles 629 388 1,437 1,143
-------- -------- -------- --------
Operating income 31,668 25,326 84,340 66,297
Interest expense 1,454 1,655 4,433 5,167
Other (expense) income, net (459) 375 1,203 1,671
-------- -------- -------- --------
Income before income taxes 29,755 24,046 81,110 62,801
Provision for income taxes 5,707 5,383 17,008 15,072
-------- -------- -------- --------
Net income $ 24,048 $ 18,663 $ 64,102 $ 47,729
======== ======== ======== ========
Earnings per share:
Basic $ 0.74 $ 0.60 $ 1.97 $ 1.54
======== ======== ======== ========
Diluted $ 0.70 $ 0.58 $ 1.89 $ 1.49
======== ======== ======== ========
Number of shares used to compute earnings per share:
Basic 32,682 31,253 32,468 31,054
======== ======== ======== ========
Diluted 34,128 32,398 33,885 31,950
======== ======== ======== ========
See accompanying notes.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
July 31, October 31,
2004 2003
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 26,075 $ 47,433
Trade receivables, net 92,301 84,607
Marketable securities 1,187 5,746
Inventories 105,078 89,718
Deferred tax asset 17,601 14,616
Other current assets 25,211 22,104
-------- --------
Total current assets 267,453 264,224
-------- --------
Property, plant and equipment, net 143,500 116,277
Goodwill, net 313,415 282,634
Other intangible assets, net 25,527 15,888
Deferred tax asset 18,559 22,367
Other assets 3,739 4,174
-------- --------
$772,193 $705,564
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 20,682 $ 20,658
Accounts payable 15,624 16,227
Employee compensation and benefits 19,017 15,846
Accrued acquisition costs 10,816 15,299
Accrued income taxes 22,503 18,771
Other current liabilities 25,485 31,513
-------- --------
Total current liabilities 114,127 118,314
Long-term debt 149,746 165,203
-------- --------
Total liabilities 263,873 283,517
-------- --------
Stockholders' equity:
Common stock, $.10 par value 3,328 3,268
Additional paid-in capital 326,251 309,666
Accumulated other comprehensive income and other 21,420 14,119
Retained earnings 166,297 104,139
Treasury stock at cost (8,976) (9,145)
-------- --------
Total stockholders' equity 508,320 422,047
-------- --------
$772,193 $705,564
======== ========
See accompanying notes.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
July 31,
--------------------
2004 2003
-------- ---------
Cash flows from operating activities:
Net income $ 64,102 $ 47,729
Depreciation and amortization 11,555 9,092
Increase in operating capital (19,835) (13,629)
Other non-cash items 10,141 4,955
-------- ---------
Net cash provided by operating activities 65,963 48,147
-------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (30,555) (22,754)
Acquisitions of businesses (55,106) (63,722)
Sale of marketable securities and other 3,810 (7)
-------- ---------
Net cash used by investing activities (81,851) (86,483)
-------- ---------
Cash flows from financing activities:
Net repayments of short-term debt -- (419)
Repayments of long-term debt (44,918) (158,662)
Proceeds from long-term debt 29,031 208,891
Dividends on common stock (1,944) (1,952)
Exercises of stock options and other 12,201 10,509
-------- ---------
Net cash (used in) provided by financing activities (5,630) 58,367
-------- ---------
Effect of exchange rate changes on cash and cash
equivalents 160 512
Net increase (decrease) in cash and cash equivalents (21,358) 20,543
Cash and cash equivalents - beginning of period 47,433 10,255
-------- ---------
Cash and cash equivalents - end of period $ 26,075 $ 30,798
======== =========
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,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
Net income $24,048 $18,663 $64,102 $47,729
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 3,426 (233) 8,489 8,819
Change in value of derivative instruments (5) 34 25 93
Minimum pension liability 606 (1,745) 606 (1,745)
Unrealized gain (loss) on marketable securities:
Gain (loss) arising during period (770) 979 (960) 2,097
Reclassification adjustment -- -- (866) --
------- ------- ------- -------
(770) 979 (1,826) 2,097
------- ------- ------- -------
Other comprehensive income (loss), net of tax 3,257 (965) 7,294 9,264
------- ------- ------- -------
Comprehensive income $27,305 $17,698 $71,396 $56,993
======= ======= ======= =======
See accompanying notes.
6
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The Cooper Companies, Inc. (Cooper) develops, manufactures and markets
healthcare products through its two business units:
o CooperVision (CVI) markets contact lenses to correct visual defects. Its
leading products are specialty contact lenses: toric lenses to correct
astigmatism, cosmetic lenses to change or enhance the appearance of the
eyes' natural color, multifocal lenses designed to correct 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. Readers 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 July 31, 2004 and October 31, 2003, the consolidated
results of its operations for the three and nine months ended July 31, 2004 and
2003 and its cash flows for the nine months ended July 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
Opinion No. 25 and related interpretations to account for its plans for stock
options issued to employees and directors. Accordingly, no compensation cost has
been recognized for its employee and director stock option plans. Had
compensation cost for our stock-based compensation plans been determined under
the fair value method included in SFAS 123, as amended by SFAS 148, our net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -----------------
2004 2003 2004 2003
------- -------- ------- -------
(In thousands, except per share amounts)
Net income, as reported $24,048 $18,663 $64,102 $47,729
Deduct: Total stock-based employee and
director compensation expense determined
under fair value based method, net of
related tax effects 987 2,757 3,310 7,962
------- ------- ------- -------
Pro forma net income $23,061 $15,906 $60,792 $39,767
======= ======= ======= =======
Basic earnings per share:
As reported $ 0.74 $ 0.60 $ 1.97 $ 1.54
Pro forma $ 0.71 $ 0.51 $ 1.87 $ 1.28
Diluted earnings per share:
As reported $ 0.70 $ 0.58 $ 1.89 $ 1.49
Pro forma $ 0.68 $ 0.50 $ 1.80 $ 1.26
Note 2. Acquisitions
Ocular Sciences, Inc. Proposed Acquisition: Ocular Sciences, Inc. (Ocular) is a
global manufacturer and marketer of soft contact lenses, primarily spherical and
daily disposable contact lenses that are brand and product differentiated by
distribution channel. On July 28, 2004, Cooper and Ocular signed a definitive
agreement for Cooper to acquire Ocular in a merger in which each share of Ocular
common stock will be exchanged for 0.3879 of a share in Cooper common stock and
$22.00 in cash. Outstanding Ocular stock options will be redeemed in exchange
for a combination of cash and Cooper stock for the spread between their exercise
prices and the value of the merger consideration immediately prior to closing,
if not previously exercised. The total purchase price, based upon the number of
Ocular shares and options outstanding at July 27, 2004 and the average closing
share price of Cooper's common stock over the ten trading days ended July 27,
2004 of $56.72, will be approximately $1.2 billion. At closing, Cooper will pay
approximately $600 million in cash, to be funded with debt, and issue
approximately 10.5 million shares of its common stock to Ocular stockholders and
option holders.
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Completion of the transaction, which has been unanimously approved by the boards
of directors of both companies, is subject to customary closing conditions,
including approvals of each company's stockholders and expiration of the
requisite waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
(HSR Act). The initial submission to the Federal Trade Commission (FTC) under
the HSR ACT was made on August 6, 2004 and both Cooper and Ocular received a
Second Request for Additional Information from the FTC on September 8, 2004.
Cooper and Ocular are preparing a response to the request. No other regulatory
approvals are required prior to closing.
SURx Acquisition: On November 26, 2003, Cooper purchased from privately-held
SURx, Inc., the assets and associated worldwide license rights for the
Laparoscopic (LP) and Transvaginal (TV) product lines of its Radio Frequency
Bladder Neck Suspension technology, which uses radio frequency based thermal
energy rather than implants to restore continence.
Cooper paid $2.95 million in cash for SURx whose technology received U.S. Food
and Drug Administration marketing clearance in 2002. 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 currently obtaining a third party valuation.
Milex Acquisition: On February 2, 2004, Cooper acquired Milex Products, Inc.
(Milex), a manufacturer and marketer of obstetric and gynecologic products and
customized print services for $26 million in cash.
We have ascribed $24.3 million to goodwill, $3.6 million to property, plant and
equipment, a negative $3.1 million to a working capital deficit (including
acquisition costs of $3.8 million), and $1.3 million to deferred tax assets. The
allocation for the purchase price is subject to refinement as we are currently
obtaining a third party valuation.
Milex is a leading supplier of pessaries - products used to medically manage
female urinary incontinence and pelvic support conditions - cancer screening
products including endometrial and endocervical sampling devices, and patient
education materials tailored to individual physician preferences.
Argus Acquisition: On February 23, 2004, Cooper acquired from privately owned
Argus Biomedical Pty Ltd the assets related to AlphaCor, an artificial cornea,
and AlphaSphere, a soft orbital implant.
Cooper paid $2.1 million in cash for Argus with future royalties payable on
AlphaCor sales. Initially, we have ascribed $2.1 million to goodwill, a negative
$100,000 to a working capital deficit (including acquisition costs of $500,000)
and $100,000 to property, plant and equipment.
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
A new ophthalmic surgery business unit, CooperVision Surgical, will develop and
market the Argus products to corneal surgeons.
Opti-Centre Acquisition: On March 31, 2004, Cooper acquired all the outstanding
shares and certain patents of Les Laboratoires Opti-Centre Inc. (Opti-Centre), a
Quebec-based contact lens manufacturer which holds the patents covering
CooperVision's multifocal lens design technology used in its Frequency and
Proclear multifocal products.
We paid $11.6 million in cash for Opti-Centre. Initially, we have ascribed $1
million to goodwill, $10.3 million to other intangibles, $400,000 to property,
plant and equipment and a negative $100,000 to a working capital deficit
(including acquisition costs of $100,000). The allocation for the purchase price
is subject to refinement as we are currently obtaining a third party valuation
of the business.
Note 3. Accrued Acquisition Costs
When we record acquisitions, we accrue for the estimated direct costs in
accordance with applicable accounting guidance including EITF Issue No. 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination"
of severance and plant/office closure costs of the acquired business. Management
with the appropriate level of authority have completed their assessment of exit
activities of the acquired companies and have substantially completed their
plans. In addition, we also accrue for costs directly associated with
acquisitions, including legal, consulting, deferred payments and due diligence.
No material change in total accrued acquisition costs are anticipated for
businesses acquired through July 31, 2004. There were no adjustments of accrued
acquisition costs included in the determination of net income for the periods.
Beginning balances reflect a $2.4 million reclassification within the
Biocompatibles acquisition accrual to increase the accrual for plant shutdown
and decrease the accrual for severance. This reclassification is necessary to
reascribe costs, based on information acquired during the current fiscal year,
under our single worldwide reorganization plan. Below is a summary of activity
related to accrued acquisition costs for the nine months ended July 31, 2004.
Balance Balance
Description October 31, 2003 Additions Payments July 31, 2004
- ----------- ---------------- --------- -------- -------------
(In thousands)
Severance $ 3,208 $1,683 $ 2,557 $ 2,334
Legal and consulting 291 1,516 1,343 464
Plant shutdown 9,091 1,282 4,083 6,290
Hold back due 1,081 638 1,582 137
Preacquisition liabilities 990 -- 221 769
Other 638 759 575 822
------- ------ ------- -------
$15,299 $5,878 $10,361 $10,816
======= ====== ======= =======
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 4. Inventories, at the Lower of Average Cost or Market
July 31, October 31,
2004 2003
-------- -----------
(In thousands)
Raw materials $ 17,638 $15,392
Work-in-process 11,280 13,792
Finished goods 76,160 60,534
-------- -------
$105,078 $89,718
======== =======
Note 5. Intangible Assets
Goodwill
CVI CSI Total
-------- -------- --------
(In thousands)
Balance as of October 31, 2003 $182,843 $ 99,791 $282,634
Additions during the nine months ended
July 31, 2004 3,853 25,315 29,168
Other adjustments* 1,613 -- 1,613
-------- -------- --------
Balance as of July 31, 2004 $188,309 $125,106 $313,415
======== ======== ========
* Primarily translation differences in goodwill denominated in foreign
currency.
Other Intangible Assets
As of July 31, 2004 As of October 31, 2003
------------------------------ ------------------------------
Accumulated Accumulated
Gross Carrying Amortization Gross Carrying Amortization
Amount & Translation Amount & Translation
-------------- ------------- -------------- -------------
(In thousands)
Trademarks $ 818 $ 191 $ 578 $ 171
Patents 23,963 6,054 13,200 5,072
License and distribution rights 8,876 2,577 8,454 2,083
Other 908 216 1,145 163
------- ------ ------- ------
$34,565 $9,038 $23,377 $7,489
------- ====== ------- ======
Less accumulated amortization
and translation 9,038 7,489
------- -------
Other intangible assets, net $25,527 $15,888
======= =======
We estimate that amortization expense will be about $2.3 million per year in the
five-year period ending October 31, 2008.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 6. Debt
July 31, October 31,
2004 2003
-------- -----------
(In thousands)
Current portion of long-term debt $ 20,682 $ 20,658
======== ========
Long-term:
Convertible senior debentures $112,281 $112,181
KeyBank facility 54,562 68,625
Capitalized leases 1,906 2,983
County of Monroe Industrial Development
Agency bond 1,435 1,645
Other 244 427
-------- --------
170,428 185,861
Less current portion 20,682 20,658
-------- --------
$149,746 $165,203
======== ========
KeyBank Line of Credit: This syndicated bank credit facility consists of a term
loan ($51.6 million outstanding at July 31, 2004) and a $150 million revolving
credit facility. The credit facility matures April 30, 2007.
At July 31, 2004, we had $143.1 million available under the KeyBank line of
credit:
(In millions)
Amount of facility $201.6
Outstanding loans (58.5)*
------
Available $143.1
======
* Includes $3.9 million in letters of credit backing overdraft accounts.
Convertible Senior Debentures: $115 million of 2.625% convertible senior
debentures, net of discount, are due on July 1, 2023.
See Note 11 - Subsequent Events, for additional information regarding our
convertible senior debentures.
12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 7. Earnings Per Share (EPS)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(In thousands, except for EPS)
Net income $24,048 $18,663 $64,102 $47,729
======= ======= ======= =======
Basic:
Weighted average common shares 32,682 31,253 32,468 31,054
======= ======= ======= =======
Basic EPS $ 0.74 $ 0.60 $ 1.97 $ 1.54
======= ======= ======= =======
Diluted:
Basic weighted average common shares 32,682 31,253 32,468 31,054
Add dilutive securities:
Stock options 1,446 1,145 1,417 896
------- ------- ------- -------
Denominator for diluted EPS 34,128 32,398 33,885 31,950
======= ======= ======= =======
Diluted EPS $ 0.70 $ 0.58 $ 1.89 $ 1.49
======= ======= ======= =======
For the three- and nine-month periods ended July 31, 2004, we excluded zero
options; and for the three- and nine-month periods ended July 31, 2003, we
excluded 150,000 options (exercise price of $35.69) and 286,000 options
(exercise prices of $31.11 to $35.69), respectively, to purchase Cooper's common
stock from the computation of diluted EPS because their exercise prices were
above the average market price.
See Note 11 - Subsequent Events, for additional information regarding our
convertible senior debentures.
Note 8. Income Taxes
Cooper now expects its effective tax rate (ETR) (provision for income taxes
divided by pretax income) for fiscal 2004 will be 21%, down from 22% for the
six-month period ended April 30, 2004, primarily due to a release of
previously accrued amounts of about $700,000 related to the resolution of
certain tax contingencies. The 19% ETR for the three months ended July 31, 2004
reflects this release of tax accruals net of the 22% projected tax rate
excluding this amount. Accounting principles generally accepted in the United
States of America (GAAP) require that the projected fiscal year ETR be included
in the year-to-date results. The ETR used to record the provision for income
taxes for the quarter and nine-month period ended July 31, 2003 was 22% and 24%,
respectively, and ETR was 24% for the fiscal year ended 2003. The expected
decrease in the 2004 ETR also reflects the shift of business to jurisdictions
with lower tax rates.
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Beginning in fiscal 2004, deferred taxes of $4.4 million have been provided on
approximately $11 million of foreign earnings which are expected to be remitted
in the future. There are approximately $158.4 million of remaining cumulative
unremitted foreign earnings on which no deferred taxes have been provided, which
are expected to remain invested indefinitely. Applicable foreign taxes have been
provided on these earnings. Although it is not practical to estimate the amount
of additional tax which might be payable on these foreign unremitted earnings,
credits for foreign income taxes paid may be available to partially offset any
U.S. tax liability.
Note 9. Cash Dividends
We paid a semiannual dividend of 3 cents per share on January 5, 2004 and July
6, 2004 to stockholders of record on December 17, 2003 and June 14, 2004,
respectively.
Note 10. Business Segment Information
Cooper is organized by product line for management reporting with operating
income, as presented in our financial reports, the primary measure of segment
profitability. We do not allocate costs from corporate functions to the
segments' operating income. Items listed below operating income are not
considered when measuring segment profitability. We use the same accounting
policies to generate segment results as we do for our overall accounting
policies.
Identifiable assets are those used in continuing operations except cash and cash
equivalents, which we include as corporate assets. Long-lived assets are
property, plant and equipment, goodwill and other intangibles.
14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Segment information:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- ---------
(In thousands)
Net sales to external customers:
CVI $102,779 $ 87,773 $284,842 $238,638
CSI 26,300 20,669 74,523 60,186
-------- -------- -------- --------
$129,079 $108,442 $359,365 $298,824
======== ======== ======== ========
Operating income:
CVI $ 29,001 $ 23,948 $ 77,392 $ 62,468
CSI 5,192 4,793 15,203 12,636
Corporate (2,525) (3,415) (8,255) (8,807)
-------- -------- -------- --------
Total operating income 31,668 25,326 84,340 66,297
Interest expense (1,454) (1,655) (4,433) (5,167)
Other (expense) income, net (459) 375 1,203 1,671
-------- -------- -------- --------
Income before income taxes $ 29,755 $ 24,046 $ 81,110 $ 62,801
======== ======== ======== ========
July 31, October 31,
2004 2003
-------- -----------
Identifiable assets:
CVI $519,906 $462,581
CSI 186,853 154,199
Corporate 65,434 88,784
-------- --------
Total $772,193 $705,564
======== ========
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Geographic information:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands)
Net sales to external customers by
country of domicile:
United States $ 74,777 $ 62,913 $208,326 $178,635
Europe 39,458 33,700 109,152 90,150
Rest of world 14,844 11,829 41,887 30,039
-------- -------- -------- --------
Total $129,079 $108,442 $359,365 $298,824
======== ======== ======== ========
July 31, October 31,
2004 2003
-------- -----------
Long-lived assets by country of domicile:
United States $244,666 $205,410
Europe 221,693 202,613
Rest of world 16,083 6,776
-------- --------
Total $482,442 $414,799
======== ========
Note 11. Subsequent Events
In the third quarter of 2003, we issued $115 million of 2.625% contingently
convertible senior debentures (Debentures) due on July 1, 2023. The Debentures
are convertible into 22.5201 shares of our common stock per $1,000 principal
amount of Debentures or approximately 2.6 million shares. Through July 31, 2004,
no amounts have been included in diluted earnings per share for these shares.
Our diluted earnings per share will be affected in our fiscal fourth quarter
2004 as our share price has exceeded 120% of the conversion price for 20
consecutive trading days in the 30 consecutive trading day period ending on the
last trading day of the quarter ended July 31, 2004. However, prior to July 1,
2008, we may not redeem at our option nor may a holder require us to repurchase
any outstanding debentures. Because we have the option, and intention, to
redeem the principal amount of the Debentures for cash, under current
accounting standards the level of dilution would be equal to the amount
that might become due to security holders in excess of the principal amount.
However, the Financial Accounting Standards Board (FASB) has issued an Exposure
Draft, "Earnings Per Share - an amendment of FASB Statement No. 128" that
requires contracts that contain an option to settle in cash or stock be presumed
to settle in stock for diluted earnings per share computations. If this proposal
is enacted, we could be required to include additional shares in the computation
of diluted earnings per share using the if-converted method (under which net
income would also be adjusted to exclude interest charges applicable to the
convertible debt) beginning in our fiscal first quarter 2005 and subsequent
periods. In addition, in July 2004, the Emerging Issues Task Force (EITF) of the
FASB announced that it had reached a tentative consensus with respect to Issue
No. 04-8, "The Effect of Contingently
16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Convertible Debt on Diluted Earnings Per Share" stating that shares of common
stock contingently issuable pursuant to contingent convertible securities should
be included in diluted earnings per share computations (if dilutive) regardless
of whether their market price triggers have been met.
Depending on the final changes to accounting principles and their effect on
Cooper, we may be required to restate prior period diluted earnings per share
and amounts presented for comparative purposes.
17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Note numbers refer to "Notes to Consolidated Condensed Financial Statements"
beginning on page 7.
Forward-Looking Statements: This Form 10-Q contains "forward-looking statements"
as defined by the Private Securities Litigation Reform Act of 1995. These
include certain statements about the proposed merger with Ocular Sciences, Inc.,
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," "could," "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 and are subject to risks and uncertainties.
These include risks related to the inability to obtain, or meet conditions
imposed for governmental and other approvals of the proposed merger, including
approval by stockholders of both companies; the risk that the Cooper and Ocular
businesses will not be integrated successfully; risks related to any uncertainty
surrounding the merger, and the costs related to the merger; the risk that the
combined company may not continue to realize anticipated benefits from its
cost-cutting measures; the ultimate validity and enforceability of the
companies' patent applications and patents and the possible infringement of the
intellectual property of others.
Events, among others, that could cause our actual results and future actions of
the company (or following the completion of the proposed merger, of the combined
company) 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 or distribution 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, the potential impact of changes to FASB
Statement No. 128, 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.
18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Results of Operations
In this section we discuss the results of our operations for the third quarter
and first nine months of fiscal 2004 and compare them with the same periods of
fiscal 2003. We discuss our cash flows and current financial condition beginning
on page 25 under "Capital Resources and Liquidity."
Third Quarter Highlights:
o Net sales up 19% to $129.1 million.
o Gross profit up 21%; on margin of 64%, up one percentage point from last
year.
o Operating income up 25% to $31.7 million.
o Diluted earnings per share up 21% to 70 cents from 58 cents.
Nine-Month Highlights:
o Net sales up 20% to $359.4 million.
o Gross profit up 22% on margin of 64%.
o Operating income up 27% to $84.3 million.
o Diluted earnings per share up 27% to $1.89 from $1.49 cents.
Selected Statistical Information - Percentage of Sales and Growth
Percent of Net Sales Percent of Net Sales
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- % -------------------- %
2004 2003 Growth 2004 2003 Growth
---- ---- ------ ---- ---- ------
Net sales 100% 100% 19% 100% 100% 20%
Cost of sales 36% 37% 15% 36% 36% 18%
Gross profit 64% 63% 21% 64% 64% 22%
Selling, general and administrative 38% 38% 18% 39% 40% 19%
Research and development 1% 1% 30% 1% 1% 14%
Amortization -- 1% 62% 1% 1% 26%
Operating income 25% 23% 25% 23% 22% 27%
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.
19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Our consolidated net sales grew $20.6 million (19%) in the three-month period
and $60.5 million (20%) in the nine-month period:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------- -------------------------
2004 2003 % Incr. 2004 2003 % Incr.
------ ------ ------- ------ ------ -------
($ in millions)
CVI $102.8 $ 87.8 17% $284.9 $238.6 19%
CSI 26.3 20.6 27% 74.5 60.2 24%
------ ------ ------ ------
$129.1 $108.4 19% $359.4 $298.8 20%
====== ====== ====== ======
CVI Revenue:
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- ------------------------
2004 2003 Growth 2004 2003 Growth
------ ----- ------ ------ ------ ------
($ in millions)
Segment
U.S. $ 48.9 $42.5 15% $135.4 $118.3 14%
International 53.9 45.3 19% 149.5 120.3 24%
------ ----- ------ ------
$102.8 $87.8 17% $284.9 $238.6 19%
====== ===== ====== ======
CVI's worldwide revenue grew 17% and 19% in the three- and nine-month periods,
13% in constant currency for both periods. Total international revenue grew 19%
and 24%, 12% and 11% in constant currency, with European revenue up 19% and 25%,
respectively. Asia-Pacific revenue grew 43% and 29% and revenue in all other
markets outside the United States grew 9% and 18%. Revenue in the United States
grew 15% and 14% in the three- and nine-month periods.
Practitioner and patient preferences in the worldwide contact lens market
continue to change. The major shifts are from:
o Conventional lenses replaced annually to disposable and frequently replaced
lenses. Disposable lenses are designed for either daily, two-week or
monthly replacement; frequently replaced lenses are designed for
replacement after one to three months.
o Commodity lenses to specialty lenses including toric lenses, cosmetic
lenses, multifocal lenses and lenses for patients experiencing the symptoms
of dry eye syndrome.
o Commodity spherical lenses to value-added spherical lenses such as lenses
with aspherical optical properties.
These shifts favor CVI's line of specialty products, which comprised 62% and
60%, of CVI's revenue for the three-month periods ended July 31, 2004 and 2003,
respectively.
20
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
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.
The primary reasons for CVI's revenue growth include continued global market
share gains during the quarter with total toric product revenue up 23%,
disposable toric revenue up 40% and disposable sphere revenue up 15%. CVI's line
of specialty lenses grew 22% during the quarter. Sales growth is driven
primarily through increases in the volume of lenses sold as the market continues
to move to more frequent replacement including within rapidly growing specialty
lenses. Sales increases also resulted from the global rollout of Proclear toric
and multifocal lenses which, respectively, increased 100% and 78% to $11 million
and $7.3 million in the nine-month period. While unit growth and product mix
have influenced revenue growth, average realized prices by product have not
materially influenced revenue growth.
CSI Revenue: Women's healthcare products used primarily in obstetricians' and
gynecologists' practices generate about 90% of CSI's revenue. The balance are
sales of medical devices outside of women's healthcare where CSI does not
actively market. CSI's overall revenue increased 27% and 24% in the three- and
nine-month periods, respectively. The incremental revenue growth of $5.6 million
and $14.3 million was primarily from recent acquisitions. Organic growth of
existing products was about 6%. While unit growth and product mix have
influenced organic revenue growth, average realized prices by product have not
materially influenced organic revenue growth.
Cost of Sales/Gross Profit: Gross profit as a percentage of sales (margin) was
as follows:
Margin Margin
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
CVI 67% 66% 67% 67%
CSI 55% 54% 55% 52%
Consolidated 64% 63% 64% 64%
21
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CVI's margin for the third quarter of fiscal 2004 was 67% compared with 66% for
the third quarter last year as we continue to increase our sales of higher
margin specialty lenses. CVI manufactures about 65% of its lenses in the United
Kingdom. The favorable impact of the change in foreign currency exchange rates
on revenue is offset by the unfavorable impact on manufacturing costs and has
minimal impact on margins.
CSI's margin was 55% compared with 54% for the third quarter last year. Higher
gross margin reflects continuing efficiencies from the integration of
acquisitions. Last year's results include temporarily lower margins of then
recently acquired infertility products.
Selling, General and Administrative (SGA) Expense:
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------------------------- -----------------------------------------
% Net % Net % Net % Net
2004 Sales 2003 Sales % Incr. 2004 Sales 2003 Sales % Incr.
----- ----- ----- ----- ------- ------ ----- ------ ----- -------
($ in millions)
CVI $38.1 37% $32.4 37% 18% $109.4 38% $ 93.1 39% 18%
CSI 8.4 32% 5.7 28% 47% 23.4 31% 17.1 28% 37%
Corporate 2.5 -- 3.4 -- (26%) 8.3 -- 8.8 -- (6%)
----- ----- ------ ------
$49.0 38% $41.5 38% 18% $141.1 39% $119.0 40% 19%
===== ===== ====== ======
In the third quarter of 2004, consolidated SGA increased 18%, and as a
percentage of revenue, was the same as the prior year at 38% but for the
nine-month period decreased to 39% from 40% as costs grew 19%. About $1 million
and $5.3 million of the SGA increase in the three- and nine-month periods
reflected the relative weakness of the U.S. dollar against foreign currencies on
the $21.3 million and $59.9 million of SGA outside the U.S. in the three- and
nine-month periods. The CSI SGA increases of 47% and 37% for the three- and
nine-month periods reflects new programs designed to increase the organic growth
of CSI products in the incontinence, infertility and female sterilization
markets using its restructured sales force. Corporate headquarters' expenses
decreased 3% sequentially and 26% from last year's third quarter as expenses to
maintain, and to integrate acquired Biocompatible legal entities into, Cooper's
global trading arrangement declined.
Research and Development Expense: During the first three quarters of fiscal
2004, CVI research and development expenditures were $2.7 million, supporting
previously announced plans to develop both a new extended wear contact lens and
an improved contact lens technology. CSI's research and development expenditures
of $1.8 million were for upgrading and redesign of many of CSI's products in
osteoporoses, in-vitro fertilization, incontinence, assisted reproductive
technology and other obstetrical and gynecological product development
activities.
22
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Operating Income (Expense): Operating income improved by $6.3 million, or 25%,
and $18 million, or 27%, for the three- and nine-month periods, respectively:
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------------------------- -----------------------------------------
% Net % Net % Net % Net
2004 Sales 2003 Sales % Incr. 2004 Sales 2003 Sales % Incr.
----- ----- ----- ----- ------- ------ ----- ------ ----- -------
($ in millions)
CVI $29.0 28% $23.9 27% 21% $77.4 27% $62.5 26% 24%
CSI 5.2 20% 4.8 23% 8% 15.2 20% 12.6 21% 20%
Corporate (2.5) -- (3.4) -- 26% (8.3) -- (8.8) -- 6%
----- ----- ----- -----
$31.7 25% $25.3 23% 25% $84.3 23% $66.3 22% 27%
===== ===== ===== =====
Interest Expense: Interest expense decreased by $201,000, or 12%, in the
three-month period and $734,000, or 14%, in the nine-month period, due to a
general decrease in interest rates resulting from internal and external factors.
Other (Expense) Income, Net:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -----------------
2004 2003 2004 2003
----- ---- ------ ------
(In thousands)
Interest income $ 69 $ 59 $ 260 $ 148
Foreign exchange transactions (456) 282 (469) 1,903
Settlement of disputes (4) -- (369) (500)
Gain on sale of marketable securities -- -- 1,443 --
Other (68) 34 338 120
----- ---- ------ ------
$(459) $375 $1,203 $1,671
===== ==== ====== ======
In the first nine months of 2004, we sold 339,725 shares of marketable
securities, realizing a gain of approximately $1.4 million.
Provision for Income Taxes: We now estimate that Cooper's effective tax rate
(ETR) for fiscal 2004 (provision for taxes divided by income before taxes) will
be 21%, down from 24% in fiscal 2003. This is a result of a greater portion of
our income continuing to be earned in jurisdiction with tax rates lower than the
U.S. Beginning in fiscal 2004, deferred taxes have been provided on a portion of
these earnings, with the balance expected to remain invested
23
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
indefinitely. In addition, in the three-month period ended July 31, 2004, there
was a release of previously accrued amounts of about $700,000 related to the
resolution of certain tax contingencies. The combination of these factors
resulted in an ETR of 19% for the three-month period ended July 31, 2004.
With anticipated faster growth outside the U.S. and a favorable mix of products
manufactured outside the U.S., Cooper expects that its net operating loss
carryforwards in the U.S. will last through 2006.
24
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
Third Quarter Highlights:
o Operating cash flow $29.1 million vs. $18 million in last year's third
quarter.
o Cash payments for acquisitions totaled $4.3 million.
o Expenditures for purchases of property, plant and equipment (PP&E) $11.3
million vs. $9.3 million in 2003's third quarter.
Nine-Month Highlights:
o Operating cash flow $66 million vs. $48.1 million in the first nine months
of 2003.
o Cash payments for acquisitions totaled $55.1 million.
o Expenditures for purchases of PP&E $30.6 million vs. $22.8 million in the
first nine months of 2003.
Comparative Statistics ($ in millions):
July 31, 2004 October 31, 2003
------------- ----------------
Cash and cash equivalents $ 26.1 $ 47.4
Total assets $ 772.2 $ 705.6
Working capital $ 153.3 $ 145.9
Total debt $ 170.4 $ 185.9
Stockholders' equity $ 508.3 $ 422.0
Ratio of debt to equity 0.34:1 0.44:1
Debt as a percentage of total capitalization 25% 31%
Operating cash flow - twelve months ended $ 97.4 $ 79.6
Operating Cash Flow: Cash flow provided from operating activities continues as
Cooper's major source of liquidity, totaling $66 million in the first nine
months of fiscal 2004 and $97.4 million over the twelve-month period ended July
31, 2004.
Major uses of cash for operating activities in the first nine months included
the final payment of $3 million on a previously accrued dispute settlement, $3.1
million to fund entitlements under Cooper's bonus plans and $4.9 million in
interest payments.
Working capital increased $7.4 million in the first nine months of fiscal 2004,
as cash decreased $21.4 million, primarily to fund acquisitions, and marketable
securities decreased $4.6 million from sales of securities and the decline of
the market value of securities available for sale, partially offset by increases
of $15.4 million in inventory, $7.7 million in receivables, $6.1 million in
current deferred tax assets and other, and a $4.2 million decrease in current
accrued liabilities and accounts payable. The increase in inventory is due to
the growth in the overall business, planned inventory increases to improve
service levels, acquisitions and the effect of foreign exchange. The increase in
receivables is primarily due to the increase in sales.
25
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
At the end of the first nine months, Cooper's inventory months on hand was 6.9
versus 7.0 at fiscal year end 2003. Also, our days sales outstanding (DSO)
decreased to 62 days from 67 days at fiscal year end 2003. Future DSO's are
expected to generally be in the mid to upper 60's. Based on our experience and
knowledge of our customers and our analysis of inventoried products and product
levels, we believe that our accounts receivable and inventories are recoverable.
Investing Cash Flow: The cash outflow of $81.9 million from investing activities
was driven by capital expenditures of $30.6 million, used primarily to expand
manufacturing capacity and the continued rollout of new information systems, and
payments of $55.1 million for acquisitions. This was partially offset by the
sale of marketable securities of $3.8 million.
Financing Cash Flow: The cash outflow of $5.6 million from financing activities
was driven by net repayment of debt of about $15.9 million and dividends on our
common stock of $1.9 million paid in the first and third fiscal quarter of 2004,
offset by $12.2 million from the exercise of stock options.
Proposed Acquisition
On July 28, 2004, Cooper and Ocular Sciences, Inc. (Ocular) signed a definitive
agreement for Cooper to acquire Ocular in a merger in which each share of Ocular
common stock will be exchanged for 0.3879 of a share in Cooper common stock and
$22.00 in cash. Outstanding Ocular stock options will be redeemed in exchange
for a combination of cash and Cooper stock for the spread between their exercise
prices and the value of the merger consideration immediately prior to closing,
if not previously exercised. The total purchase price, based upon the number of
Ocular shares and options outstanding at July 27, 2004 and the average closing
share price of Cooper's common stock over the ten trading days ended July 27,
2004 of $56.72, will be approximately $1.2 billion. At closing, Cooper will pay
approximately $600 million in cash, to be funded with debt, and issue
approximately 10.5 million shares of its common stock to Ocular stockholders and
option holders.
Ocular is a global manufacturer and marketer of soft contact lenses, primarily
spherical and daily disposable contact lenses that are brand and product
differentiated by distribution channel. Completion of the transaction, which has
been unanimously approved by the boards of directors of both companies, is
subject to customary closing conditions, including approvals of each company's
stockholders and expiration of the requisite waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act (HSR Act). The initial submission
to the Federal Trade Commission (FTC) under the HSR ACT was made on August 6,
2004 and both Cooper and Ocular received a Second Request for Additional
Information from the FTC on September 8, 2004. Cooper and Ocular are preparing a
response to the request. No other regulatory approvals are required prior to
closing.
26
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Estimates and Critical Accounting Policies
Management estimates and judgments are an integral part of financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). We believe that the critical accounting
policies described in this section address the more significant estimates
required of Management when preparing our consolidated financial statements in
accordance with GAAP. We consider an accounting estimate critical if changes in
the estimate may have a material impact on our financial condition or results of
operations. We believe that the accounting estimates employed are appropriate
and resulting balances are reasonable; however, actual results could differ from
the original estimates, requiring adjustment to these balances in future
periods.
o Revenue recognition - We recognize revenue when it is realized or
realizable and earned, based on terms of sale with the customer, where
persuasive evidence of an agreement exists, delivery has occurred, the
seller's price is fixed and determinable and collectibility is reasonably
assured. For contact lenses as well as CooperSurgical medical devices,
diagnostic products and surgical instruments and accessories, this
primarily occurs upon product shipment, when risk of ownership transfers to
our customers. We believe our revenue recognition policies are appropriate
in all circumstances, and that our policies are reflective of our customer
arrangements. We record, based on historical statistics, estimated
reductions to revenue for customer incentive programs offered including
cash discounts, promotional and advertising allowances, volume discounts,
contractual pricing allowances, rebates and specifically established
customer product return programs. While estimates are involved,
historically, most of these programs have not been major factors
in our business, since a high percentage of our revenue is from
direct sales to doctors.
o Allowance for doubtful accounts - 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. However, if the financial
condition of our customers were to deteriorate, additional allowances may
be required. While estimates are involved, bad debts historically have not
been a significant factor given the diversity of our customer base, well
established historical payment patterns and the fact that patients require
satisfaction of healthcare needs in both strong and weak economics.
o Net realizable value of inventory - In assessing the value of inventories,
we must make estimates and judgments regarding aging of inventories
and other relevant issues potentially affecting the saleable
condition of products and estimated prices at which those products will
sell. 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. While estimates are involved, historically,
obsolescence has not been a significant factor due to long product dating
and lengthy product life cycles. We target to keep, on average, about seven
months of inventory on hand, to maintain high customer service levels.
27
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
o Valuation of goodwill - We account for goodwill and evaluate our goodwill
balances and test them for impairment in accordance with the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." We test goodwill for impairment annually during the
third fiscal quarter and when an event occurs or circumstances change such
that it is reasonably possible that impairment may exist. We performed an
impairment test in our third fiscal quarter 2004, and our analysis
indicated that we have no goodwill impairment.
The SFAS No. 142 goodwill impairment test is a two-step process. Initially,
we compare the book value of net assets to the fair value of each reporting
unit that has goodwill assigned to them. If the fair value is determined to
be less than the book value, a second step is performed to compute the
amount of the impairment. When available and as appropriate, we use
comparative market multiples to corroborate fair value results. A reporting
unit is the level of reporting at which goodwill is tested for impairment.
Our reporting units are the same as our business segments - CooperVision
and CooperSurgical - reflecting the way that we manage our business.
Our most recent estimate of fair value, at the time of our May 1, 2004
review and using several valuation techniques including assessing industry
multiples, for CooperVision ranged from $1,038 million to $1,625 million
compared to a carrying basis of $438 million and for CooperSurgical fair
value ranged from $317 million to $461 million compared to a carrying
basis of $167 million.
o Business combinations - We routinely consummate business combinations. We
allocate the purchase price of acquisitions based on our estimates and
judgments of the fair value of net assets purchased, acquisition costs
incurred and intangibles other than goodwill. On individually significant
acquisitions, we utilize independent valuation experts to provide a basis
in order to refine the purchase price allocation, if appropriate. Results
of operations for acquired companies are included in our consolidated
results of operations from the date of acquisition.
o Income taxes - As part of the process of preparing our consolidated
financial statements, we must estimate a portion of our income tax expense
for each of the jurisdictions in which we operate. This process requires
significant management judgments and 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. The Company currently
has $36.2 million of deferred tax assets that primarily represent the
future benefit of U.S. net operating loss carryforwards, which expire
between 2005 and 2019. To the extent these net operating losses are not
used timely by future profits, a valuation allowance or write-off could
result. Tax exposures can involve complex issues and may require an
extended period to resolve. Frequent changes in tax laws in each
jurisdiction complicate future estimates. 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, and such changes could be material.
28
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
Outlook
Excluding the effect of the proposed merger with Ocular, we believe that cash
and cash equivalents on hand of $26.1 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 $40 to $45 million as we double our U.K. manufacturing capacity. At July
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 our
pound sterling and euro denominated debt and receivables and from operations in
foreign currencies. We have taken steps to minimize our balance sheet exposure.
We are also exposed to risks associated with changes in interest rates, as the
interest rate on our revolver and term loan debt under the KeyBank credit
agreement varies with the London Interbank Offered Rate. A significant increase
in debt following the successful consummation of the Ocular proposed merger
could significantly increase this risk associated with changes in interest
rates.
Trademarks
Frequency'r', Proclear'r', AlphaCor'r' and AlphaSphere'r' are registered
trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries and
are italicized in this report.
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.
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 July 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.
30
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) Cooper filed the following reports on Form 8-K during the period from
May 1, 2004 to July 31, 2004.
Date of Report Item Reported
- -------------- -------------
July 29, 2004 Item 5. Other Events.
Also, the Company furnished on Form 8-K dated June 3, 2004 a report of Item
12 -- Results of Operations and Financial Condition.
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 14, 2004 /s/ Rodney E. Folden
----------------------------------------
Rodney E. Folden
Corporate Controller
(Principal Accounting Officer)
32
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.
33
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.................... 'r'
The section symbol shall be expressed as................................. 'SS'