UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended April 30, 2001 ---------------------------------- ( ) 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) <TABLE> <S> <C> Delaware 94-2657368 - ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) </TABLE> 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 the number of shares outstanding of each of issuer's classes of common stock, as of the latest practicable date. <TABLE> <S> <C> Common Stock, $.10 Par Value 14,946,132 Shares - ------------------------------ --------------------------------- Class Outstanding at May 31, 2001 </TABLE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Statements of Income - Three and Six Months Ended April 30, 2001 and 2000 3 Consolidated Condensed Balance Sheets -- April 30, 2001 and October 31, 2000 4 Consolidated Condensed Statements of Cash Flows - Six Months Ended April 30, 2001 and 2000 5 Consolidated Condensed Statements of Comprehensive Income - Three and Six Months Ended April 30, 2001 and 2000 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosure About Market Risk 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 24 Signature 25 </TABLE> 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) <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, ------------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $ 56,027 $ 50,769 $104,926 $ 91,173 Cost of sales 19,713 18,285 36,503 32,057 -------- -------- -------- -------- Gross profit 36,314 32,484 68,423 59,116 Selling, general and administrative expense 20,600 19,320 40,938 36,084 Research and development expense 897 676 1,781 1,324 Amortization of intangibles 1,187 1,111 2,409 2,091 -------- -------- -------- -------- Operating income 13,630 11,377 23,295 19,617 -------- -------- -------- -------- Interest expense 901 1,268 1,900 2,649 Other income (expense), net (49) 60 777 460 -------- -------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle 12,680 10,169 22,172 17,428 Provision for income taxes 3,970 3,406 7,153 5,838 -------- -------- -------- -------- Income before cumulative effect of change in accounting principle 8,710 6,763 15,019 11,590 Cumulative effect of change in accounting principle - - - (432) -------- -------- -------- -------- Net income $ 8,710 $ 6,763 $ 15,019 $ 11,158 ======== ======== ======== ======== Earnings per share: Basic: Income before cumulative effect of change in accounting principle $ 0.59 $ 0.48 $ 1.03 $ 0.82 Cumulative effect of change in accounting principle - - - (0.03) -------- -------- -------- -------- Earnings per share $ 0.59 $ 0.48 $ 1.03 $ 0.79 ======== ======== ======== ======== Diluted: Income before cumulative effect of change in accounting principle $ 0.58 $ 0.47 $ 1.00 $ 0.80 Cumulative effect of change in accounting principle - - - (0.03) -------- -------- -------- -------- Earnings per share $ 0.58 $ 0.47 $ 1.00 $ 0.77 ======== ======== ======== ======== Number of shares used to compute earnings per share: Basic 14,717 14,130 14,603 14,099 ======== ======== ======== ======== Diluted 15,124 14,438 14,976 14,399 ======== ======== ======== ======== </TABLE> See accompanying notes. 3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets (Unaudited) <TABLE> <CAPTION> April 30, October 31, 2001 2000 --------- --------- ASSETS (In thousands) <S> <C> <C> Current assets: Cash and cash equivalents $ 11,897 $ 14,608 Trade receivables, net 40,417 33,058 Marketable securities 4,338 - Inventories 44,008 38,219 Deferred tax assets 17,737 17,800 Other current assets 9,648 9,000 --------- --------- Total current assets 128,045 112,685 --------- --------- Property, plant and equipment, net 51,606 47,933 Goodwill and other intangibles, net 111,946 110,854 Deferred tax assets 37,105 42,979 Other assets 2,389 8,114 --------- --------- $ 331,091 $ 322,565 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 9,886 $ 8,094 Accounts payable 9,668 7,733 Accrued acquisition costs 5,666 18,900 Accrued income taxes 7,359 8,033 Other current liabilities 21,841 22,515 --------- --------- Total current liabilities 54,420 65,275 Long-term debt 41,956 40,257 Other noncurrent liabilities 12,645 18,595 --------- --------- Total liabilities 109,021 124,127 --------- --------- Contingencies (Note 8) Stockholders' equity: Common stock, $.10 par value 1,561 1,519 Additional paid-in capital 268,507 257,994 Accumulated other comprehensive loss (5,816) (3,558) Accumulated deficit (31,480) (46,210) Other (219) (129) Treasury stock at cost (10,483) (11,178) --------- --------- Total stockholders' equity 222,070 198,438 --------- --------- $ 331,091 $ 322,565 ========= ========= </TABLE> See accompanying notes. 4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended April 30, ------------------------- 2001 2000 ---------- ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 15,019 $ 11,158 Depreciation and amortization 5,068 4,200 Deferred income taxes 6,303 4,750 Net (increase) decrease in working capital (11,862) 279 Net decrease in non-current liabilities and other comprehensive income (5,169) (5,163) Net decrease in non-current assets 737 691 -------- -------- Net cash provided by operating activities 10,096 15,915 -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment (7,179) (6,194) Acquisitions of businesses (19,793) (23,477) Other (61) (69) -------- -------- Net cash used by investing activities (27,033) (29,740) -------- -------- Cash flows from financing activities: Net proceeds from short-term line of credit 3,148 16,000 Repayments of long-term debt (1,177) (18,830) Proceeds from long-term debt 1,564 - Dividends on common stock (289) (564) Exercise of stock options 10,839 - Other - 944 -------- -------- Net cash provided (used) by financing activities 14,085 (2,450) -------- -------- Effect of exchange rate changes on cash and cash equivalents 141 100 Net decrease in cash and cash equivalents (2,711) (16,175) Cash and cash equivalents - beginning of period 14,608 20,922 -------- -------- Cash and cash equivalents - end of period $ 11,897 $ 4,747 ======== ======== </TABLE> See accompanying notes. 5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Comprehensive Income (In thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, --------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income $ 8,710 $ 6,763 $ 15,019 $ 11,158 Other comprehensive income (loss): Foreign currency translation adjustment (677) (939) (336) (1,332) Change in value of derivative instruments (26) - (741) - Unrealized loss on marketable securities, net of tax benefit of $635 (1,004) - (1,181) - -------- -------- -------- -------- (1,707) (939) (2,258) (1,332) -------- -------- -------- -------- Comprehensive income $ 7,003 $ 5,824 $ 12,761 $ 9,826 ======== ======== ======== ======== </TABLE> See accompanying notes. 6
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements (Unaudited) Note 1. General The Cooper Companies, Inc. ("Cooper" or "we" and similar pronouns), through its principal subsidiaries, develops, manufactures and markets healthcare products. CooperVision ("CVI") markets a range of specialty contact lenses to correct visual defects, including toric lenses that correct astigmatism, cosmetic lenses that change or enhance the appearance of the eyes' natural color and aspheric lenses that improve vision in low light conditions. Its leading products are disposable-planned replacement toric and spherical lenses. CooperSurgical ("CSI") markets diagnostic products and surgical instruments and accessories to the women's healthcare market. During interim periods, we have followed the accounting policies described in our Form 10-K for the fiscal year ended October 31, 2000. Please refer to this and to our Annual Report to Stockholders for the same period when reviewing this Form 10-Q. Current results are not a guarantee of future performance. The unaudited consolidated condensed financial statements presented in this report contain all adjustments necessary to present fairly Cooper's consolidated financial position as of April 30, 2001 and October 31, 2000, the consolidated results of its operations for the three and six months ended April 30, 2001 and 2000 and its consolidated cash flows for the six months ended April 30, 2001 and 2000. Adjustments consist only of normal recurring items except for: o In the first quarter of 2000, an adjustment recorded for the adoption of the American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting on the Cost of Start-up Activities," which resulted in an after tax loss of $432,000 from cumulative effect of change in accounting principle. o In the first quarter of 2001, a transaction between Quidel and Litmus, affecting our investment in Litmus, resulted in $719,000 of other income. o In the first quarter of 2001, we incurred about $700,000 of additional SGA costs related to integration of acquisitions at CSI. Note 2. Inventories, at the Lower of Average Cost or Market <TABLE> <CAPTION> April 30, October 31, 2001 2000 ---------- ----------- (In thousands) <S> <C> <C> Raw materials $ 9,737 $ 9,740 Work-in-process 6,230 6,056 Finished goods 28,041 22,423 ------- ------- $44,008 $38,219 ======= ======= </TABLE> 7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 3. Acquisitions Aspect Acquisition: In December 1997, we acquired Aspect Vision Care Ltd. ("Aspect"), a privately held manufacturer of high quality contact lenses sold primarily in the United Kingdom and other European countries. Aspect is an English company with the pound sterling as its functional currency. The acquisition agreement provided for additional earn-out payments based on Aspect's performance over the three years prior to November 2000. The earn-out calculation resulted in a total earn-out amount of 'L'13.5 million (about $20.5 million). One payment of 'L'2.3 million was made December 11, 2000. Future payments of (pound)8.8 million and (pound)2.4 million will be made on June 11, 2001 and December 11, 2001, respectively. On December 11, 2000, 'L'8.8 million was converted into a note payable ($12.1 million, net of certain contractual amounts) to a selling shareholder of Aspect who was an employee of the Company at that time, but not an officer. Acquisition of LuMax Product Line from MedAmicus: On April 25, Cooper's CooperSurgical (CSI) unit completed the purchase of the LuMax System from MedAmicus, Inc. Cooper paid approximately $4 million in cash at closing, with $700,000 due at a later date, for the LuMax System that had revenue of about $4 million in 2000. Of the $4.7 million purchase price, $3.6 million has initially been ascribed to goodwill pending the final purchase price allocation. The LuMax System - a monitor and disposable catheters - helps to diagnose the cause of female incontinence, the accidental loss of urine resulting in a medical or hygienic problem. It uses patented fiber optic transducer technology to measure and monitor the physiological factors associated with female urinary function. These urodynamic studies are performed in a variety of settings including hospitals, clinics and physicians' offices, and the resulting data is used to develop treatment strategies. Gynecologists purchase over 80 percent of LuMax Systems, with revenue split about equally between monitors and disposable catheters. Note 4. Adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" We adopted SFAS 133 in the first quarter of 2001. In accordance with SFAS 133, we have recorded all derivative instruments at fair value on our consolidated condensed balance sheet. Because all of our transactions that included derivatives met the specific hedging criteria set out in SFAS 133, the $741,000 reduction in fair value, for the six-month period, was recorded as a charge against other comprehensive income and did not reduce net income for the period. 8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 5. Debt <TABLE> <CAPTION> April 30, October 31, 2001 2000 ---------- ----------- (In thousands) <S> <C> <C> Short-Term: Notes payable to banks $ 8,006 $ 6,062 Current portion of long-term debt 1,880 2,032 ------- ------- $ 9,886 $ 8,094 ======= ======= Long-Term: Promissory notes - Aspect $20,385 $20,653 KeyBank line of credit 10,155 7,059 Aspect Vision bank loans 5,001 5,264 County of Monroe Industrial Development Agency ("COMIDA") bond 2,330 2,455 Other - 26 Capitalized leases 5,965 6,832 ------- ------- 43,836 42,289 Less current installments 1,880 2,032 ------- ------- $41,956 $40,257 ======= ======= </TABLE> KeyBank Line of Credit: At April 30, 2001, we had $32.6 million available under the KeyBank line of credit. <TABLE> <S> <C> Line of credit summary: (in millions) Amount of line $50.0 Loans (10.2) Letters of credit backing other debt (7.2) ----- Available credit $32.6 ===== </TABLE> 9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 6. Earnings Per Share ("EPS") (In thousands, except for per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, ------------------------- -------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Income before cumulative effect of change in accounting principle $ 8,710 $ 6,763 $15,019 $11,590 Cumulative effect of change in accounting principle - - - (432) ------- ------- ------- ------- Net income $ 8,710 $ 6,763 $15,019 $11,158 ======= ======= ======= ======= Basic: Weighted average common shares 14,717 14,130 14,603 14,099 ======= ======= ======= ======= Basic earnings per share: Continuing operations $ 0.59 $ 0.48 $ 1.03 $ 0.82 Cumulative effect of change in accounting principle - - - (0.03) ------- ------- ------- ------- Basic earnings per share $ 0.59 $ 0.48 $ 1.03 $ 0.79 ======= ======= ======= ======= Diluted: Weighted average common shares 14,717 14,130 14,603 14,099 Add dilutive securities: Options 407 308 373 300 ------- ------- ------- ------- Denominator for diluted earnings per share 15,124 14,438 14,976 14,399 ======= ======= ======= ======= Diluted earnings per share: Continuing operations $ 0.58 $ 0.47 $ 1.00 $ 0.80 Cumulative effect of change in accounting principle - - - (0.03) ------- ------- ------- ------- Diluted earnings per share $ 0.58 $ 0.47 $ 1.00 $ 0.77 ======= ======= ======= ======= </TABLE> 10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) We excluded the following options to purchase Cooper's common stock from the computation of diluted EPS because their exercise prices were above the average market price. <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 ---------------- ------------------ ------------- ------------- <S> <C> <C> <C> <C> Number of shares excluded 238,000 784,250 299,580 784,250 ============= ============= ============= ============= Range of exercise prices $43.20-$62.21 $30.69-$62.21 $39.25-$62.21 $30.69-$62.21 ============= ============= ============= ============= </TABLE> Note 7. Income Taxes The effective tax rate ("ETR") used to record the provision for income taxes of $4 million and $7.2 million for the three and six months ended April 30, 2001 was 31.3% and 32.3%, respectively. Based on updated full year projections, we revised our ETR for continuing operations from 33% to 32% in the second quarter of 2001. This change, along with the taxes related to the Quidel and Litmus transaction (see Note 1), resulted in the reported ETRs for the three and six months ended April 30, 2001. The ETR used to record the provision for income taxes of $3.4 million and $5.8 million for the three and six months ended April 30, 2000 was 33.5%. Note 8. Contingencies - Pending Litigation On April 20, 2001, Wesley Jessen Corporation ("WJ") filed a lawsuit against CooperVision, Inc. in the United States District Court for the Central District of California, CV-01-03678. The lawsuit alleges that CooperVision's Frequency'r' Colors opaque contact lenses infringe on WJ's United States Patent No. 5,414,477 and seeks an injunction and damages. On May 3, 2001, WJ also filed a Motion for a Preliminary Injunction to stop sales of these lenses in the United States. CooperVision responded that the asserted patent is invalid and not infringed, and that WJ is otherwise not entitled to an injunction. The Court heard WJ's Motion for a Preliminary Injunction on June 11, 2001, but did not rule on it. WJ has also filed suit against the Company in England alleging that the Company's Frequency'r' Colors opaque lenses infringe on this and one other patent, and in France alleging that Frequency'r' Colors opaque lenses infringe on a third patent. Each of the lawsuits seeks an injunction and damages. The Company believes it does not infringe on WJ's valid patent rights used in the development and manufacture of opaque lenses, and will vigorously defend these actions. Note 9. Cash Dividends In the first quarter of fiscal 2001, Cooper announced that its Board of Directors approved an increase in the annual dividend from 8 cents to 10 cents per share, payable in semiannual installments of 5 cents per share. The first semiannual dividend payment will be made on July 5, 2001 to holders of record on June 15, 2001. 11
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 the primary measure of segment profitability. Corporate expenses are not allocated to the segments' operating income. Items accounted for below operating income are not considered when measuring segment profitability. The accounting policies used to generate segment results are the same as our overall accounting policies. Identifiable assets are those assets used in continuing operations excluding cash and cash equivalents, which we deem to be corporate assets. Long-lived assets are property, plant and equipment and goodwill and other intangibles. Segment information (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, --------------------------------- ---------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ----------- <S> <C> <C> <C> <C> Sales to external customers: CVI $43,212 $38,259 $ 78,837 $ 70,228 CSI 12,815 12,510 26,089 20,945 ------- ------- -------- -------- $56,027 $50,769 $104,926 $ 91,173 ======= ======= ======== ========= Operating income: CVI $12,946 $11,434 $ 22,374 $ 19,766 CSI 2,277 1,674 4,114 3,091 Corporate (1,593) (1,731) (3,193) (3,240) ------- ------- -------- -------- Total operating income 13,630 11,377 23,295 19,617 Interest expense (901) (1,268) (1,900) (2,649) Other income, net (49) 60 777 460 ------- ------- -------- --------- Income before income taxes and cumulative effect of change in accounting principle $12,680 $10,169 $ 22,172 $ 17,428 ======= ======= ======== ======== </TABLE> <TABLE> <CAPTION> April 30, October 31, 2001 2000 ---------- ------------ <S> <C> <C> Identifiable assets: CVI $192,613 $180,433 CSI 71,034 66,428 Corporate 67,444 75,704 -------- -------- Total $331,091 $322,565 ======== ======== </TABLE> 12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Concluded (Unaudited) Geographic information (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, --------------------------------- ------------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Sales to external customers by country of domicile: United States $ 42,830 $ 37,749 $ 79,419 $ 67,345 Europe 9,483 9,052 18,453 17,026 Canada 3,714 3,968 7,054 6,802 --------- --------- -------- -------- $ 56,027 $ 50,769 $104,926 $ 91,173 ========= ========= ======== ======== </TABLE> <TABLE> <CAPTION> April 30, October 31, 2001 2000 ---------- ---------- <S> <C> <C> Long-lived assets by country of domicile: United States $ 72,924 $ 67,866 Europe 88,367 88,527 Canada 2,261 2,394 -------- -------- Total $163,552 $158,787 ======== ======== </TABLE> Note 11. Subsequent Event On May 25, 2001, CVI completed the acquisition of privately held CL-Tinters Oy (CLT), a manufacturer of cosmetic contact lenses. CLT applies the color tints to CVI's aspheric cosmetic contact lenses. Cooper paid approximately $14 million in cash at closing and will pay up to $7 million more if certain performance milestones are met subject to certain indemnifications. 13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Note numbers refer to "Notes to Consolidated Condensed Financial Statements" beginning on page 7 of this report. Forward-Looking Statements: Some of the information included in this Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements regarding anticipated growth in our revenue, anticipated market conditions and results of operations. To identify forward-looking statements look for words like "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "estimates" or "anticipates" and similar words or phrases. Discussions of strategy, plans or intentions often contain forward-looking statements. These, and all forward-looking statements, necessarily depend on assumptions, data or methods that may be incorrect or imprecise. Events, among others, that could cause actual results and future actions to differ materially from those described in forward-looking statements include major changes in business conditions, a major disruption in the operations of our manufacturing facilities, new competitors or technologies, the impact of an undetected virus on our computer systems, acquisition integration delays or costs, foreign currency exchange exposure, investments in research and development and other start-up projects, dilution to earnings per share from acquisitions or issuing stock, regulatory issues, significant environmental cleanup costs above those already accrued, litigation costs including any related settlements, cost of business divestitures, the requirement to provide for a significant liability or to write off a significant asset, changes in accounting principles or estimates, and other factors described in our Securities and Exchange Commission filings, including the "Business" section in our Annual Report on Form 10-K for the year ended October 31, 2000. We caution investors that forward-looking statements reflect our analysis only on their stated date or the date of this Form 10-Q. We disclaim any intent to update them except as required by law. Results of Operations In this section we discuss the results of our operations for the second quarter and six months of fiscal 2001 and compare them with the same periods of fiscal 2000. We discuss our cash flows and current financial condition beginning on page 20 under "Capital Resources and Liquidity." Second Quarter Highlights vs. 2000's Second Quarter: o Sales up 10% to $56 million. o Gross profit up 12%; margin improved 1 percentage point to 65% of revenue. o Operating income up 20% to $13.6 million. o Diluted earnings per share from continuing operations up 23% to 58 cents from 47 cents. 14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Six-Month Highlights: o Sales up 15% to $104.9 million. o Gross profit up 16% on constant margin of 65%. o Operating income up 19% to $23.3 million. o Diluted earnings per share from continuing operations up 25% to $1.00 from 80 cents. Selected Statistical Information - Percentage of Sales and Growth <TABLE> <CAPTION> Percent of Sales Percent of Sales Three Months Ended Six Months Ended April 30, April 30, ------------------- % ----------------- % 2001 2000 Growth 2001 2000 Growth ------ ------ ------ ----- ----- ------ <S> <C> <C> <C> <C> <C> <C> Net sales 100% 100% 10% 100% 100% 15% Cost of sales 35% 36% 8% 35% 35% 14% Gross profit 65% 64% 12% 65% 65% 16% Selling, general and administrative 37% 38% 7% 39% 40% 13% Research and development 2% 1% 33% 2% 1% 35% Amortization 2% 2% 7% 2% 2% 15% Operating income 24% 22% 20% 22% 22% 19% </TABLE> Net Sales: All of Cooper's revenue is generated by its two business units, CooperVision ("CVI") and CooperSurgical ("CSI"): o CVI markets a broad range of contact lenses for the vision care market. o CSI markets diagnostic products, surgical instruments and accessories for the gynecological market. Our consolidated revenue grew $5.3 million (10%) and $13.8 million (15%), respectively, in the three- and six-month periods: <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, -------------------------------- --------------------------------- 2001 2000 % Incr. 2001 2000 % Incr. ------- ------- ------- ------- ------- ------- ($ in millions) <S> <C> <C> <C> <C> <C> <C> CVI $ 43.2 $ 38.3 13% $ 78.8 $ 70.2 12% CSI 12.8 12.5 2% 26.1 21.0 25% ------- ------- ------- ------- $ 56.0 $ 50.8 10% $ 104.9 $ 91.2 15% ======= ======= ======= ======= </TABLE> 15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued CVI Revenue: CVI's worldwide core business, which we define as all revenue except our lower margin original equipment manufacturer ("OEM") sales to other contact lens manufacturers, grew 17% and 16% for the three- and six-month periods, respectively. <TABLE> <CAPTION> Second % Change % Change Quarter % from Second Six Months % from Six 2001 Total Quarter 2000 2001 Total Months 2000 -------- ----- ------------ ---------- ----- ----------- <S> <C> <C> <C> <C> <C> <C> Core business: U.S. $26.4 61% 6% $49.3 63% 10% International 16.2 38% 39% 28.5 36% 29% ----- ---- ----- ---- Worldwide 42.6 99% 17% 77.8 99% 16% OEM 0.6 1% (63%) 1.0 1% (67%) ----- ---- ----- ---- Total CVI $43.2 100% 13% $78.8 100% 12% ===== ==== ===== ==== </TABLE> Core Business: CVI's revenue growth is driven by volume rather than by price. Our average selling price on a per lens basis is decreasing, reflective of increased sales of disposable-planned replacement (DPR) lenses, which are marketed in multiple lens packaging. This is an industry trend. Worldwide sales of all DPR products grew 25% and 23% in the three- and six-month periods, respectively. The growth in international markets of 39% in the second quarter and 29% for the six-month period includes the negative effect on reported revenue of weakness in the pound sterling, the euro and the Canadian dollar, which decreased in value against the U.S. dollar as follows: <TABLE> <CAPTION> Percentage Decrease Against U.S. Dollar --------------------------------------- Second Quarter 6 Months -------------- -------- <S> <C> <C> Pound Sterling 9% 10% Euro 6% 9% Canadian Dollar 6% 5% </TABLE> In constant currency, our international core business grew 46% in the second quarter and 37% in the 6-month period. International revenue for the second quarter of this year includes an initial shipment of $2.2 million to Rohto, our distributor in Japan. Revenue in the United States grew 6% and 10%, respectively, in the three- and six-month periods. Sales of soft contact lenses grew 8% and 11%, respectively, in the same periods. In the second quarter of last year CVI stocked two new products and, in the fourth quarter of that same fiscal year sold its rigid gas permeable contact lens business. Excluding these events, CVI's overall second quarter domestic revenue grew 10%. 16
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued OEM Business: Our OEM business continued to decline, in line with our strategy to shift our sales mix toward more profitable branded products and away from making contact lenses for our competitors at much lower margins. CSI Revenue: CSI's second quarter revenue increased 2% to $12.8 million and is up 25% year to date. When adjusted for a back order of about $600,000, which was due to a problem with a supplier and has been shipped in the third quarter, revenue grew 7% for the quarter and 28% for the six-month period. Revenue from CSI's existing products, including the backorder, grew 11%. Sales this year were increased by about $800,000 from recent acquisitions and sales in 2000's second quarter included about $1.2 million from products inherited with the Leisegang acquisition, which have since been discontinued. Using this same metric, CSI's growth in its ongoing, organic business year-to-date is 8%. Cost of Sales/Gross Profit: Gross profit as a percentage of sales ("margin") was as follows: <TABLE> <CAPTION> Margin % Margin % Three Months Ended Six Months Ended April 30, April 30, ------------------ ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> CVI 68% 68% 69% 68% CSI 54% 53% 53% 54% Consolidated 65% 64% 65% 65% </TABLE> We believe that CVI's margins can continue to approach 70% of revenue going forward, excluding the effect of a major change in product or geographic mix, which could result from substantial increases in sales to our Japanese distributor, which generate lower margins. A firming of the pound sterling would also tend to decrease margins, as we manufacture a significant portion of our inventory in the U.K. At CSI, subject to the effect of future acquisitions and/or strategic alliances, we expect that, as recent acquisitions become fully integrated, our margins will return to, and perhaps surpass 56%, the level reported for the first quarter of 2000. 17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Selling, General and Administrative ("SGA") Expense: <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, -------------------------------- -------------------------------- 2001 2000 % Incr. 2001 2000 % Incr. ------ ------ ------- ------ ------ ------- ($ in millions) <S> <C> <C> <C> <C> <C> <C> CVI $15.3 $13.5 13% $29.8 $26.2 14% CSI 3.7 4.1 (10%) 7.9 6.7 18% Headquarters 1.6 1.7 (6%) 3.2 3.2 - ----- ----- ----- ----- $20.6 $19.3 7% $40.9 $36.1 13% ===== ===== ===== ===== </TABLE> As a percentage of sales, SGA decreased from 38% to 37% for the three-month periods and from 40% to 39% for the six-month periods. SGA at CSI included about $700,000 of costs incurred in the first quarter to complete the integration of Leisegang and MedaSonics, two recently acquired businesses. Without these one-time costs, CSI's SGA as a percentage of sales decreased from 32% in the 2001 six-month period to 28%, and total SGA decreased from 40% of sales in the 2001 six-month period to 38%. CVI's 14% increase in SGA primarily resulted from marketing costs associated with new product launches. Research and Development ("R&D") Expense: We expect R&D spending to remain a low percentage of sales as Cooper is focusing on acquiring or licensing products that will not require large expenditures of time or money before introduction. Operating Income: Income from operations improved by $2.2 million, or 20%, and $3.7 million, or 19%, for the three- and six-month periods: <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, ------------------------------ ------------------------------ 2001 2000 Incr. 2001 2000 Incr. ------ ------ ----- ------ ------ ----- ($ in millions) <S> <C> <C> <C> <C> <C> <C> CVI $12.9 $11.4 $1.5 $22.4 $19.8 $2.6 CSI 2.3 1.7 0.6 4.1 3.1 1.0 Headquarters (1.6) (1.7) 0.1 (3.2) (3.3) 0.1 ----- ----- ---- ----- ----- ---- $13.6 $11.4 $2.2 $23.3 $19.6 $3.7 ===== ===== ==== ===== ===== ==== </TABLE> Interest Expense: Reductions of 29% and 28% in the three- and six-month periods, respectively, relate to lowered interest rates and a net repayment of long-term debt of $17.4 million late in the first quarter of 2000. Also, favorable currency translation reduced interest expense on our pound sterling denominated debt, as did a lower outstanding balance in Q2 2001 vs. Q2 2000 on our KeyBank debt. 18
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Other Income (Expense), Net: <TABLE> <CAPTION> Three Months Ended Six Months Ended April 30, April 30, ------------------ ------------------ 2001 2000 2001 2000 ------ ------ ------ ------ (In thousands) <S> <C> <C> <C> <C> Interest income $ 111 $ 67 $ 273 $ 278 Foreign exchange (134) (138) (183) (239) Gain on Litmus/Quidel transaction - - 719 - Gain on swap contract - - 240 Other (26) 131 (32) 181 ----- ----- ----- ----- $ (49) $ 60 $ 777 $ 460 ===== ===== ===== ===== </TABLE> In this year's first quarter, Quidel Corporation acquired Litmus Concepts, Inc. through an exchange of common stock. We held a preferred equity position in Litmus, which equated to approximately a 10 percent ownership. As a result of this transaction, we recorded a gain below the operating income line of approximately $700,000, as the market value of the Quidel shares received exceeded the carrying value of our investment in Litmus. In the first quarter of 2000, we repaid our Midland Bank debt on which we had entered into an interest rate swap to convert it from variable interest rate debt to fixed rate. As the swap was then no longer required, and our policy is only to enter into derivative instrument transactions to manage specific risks, we canceled the swap, realizing a gain of $240,000. Provision for Income Taxes: We estimate that our effective tax rate ("ETR") for the full fiscal year 2001 will be 32%, down from the 33.5% estimated as of January 31, 2001. In consequence, our ETR for the second quarter of 2001 was 31.3%. We implemented a global tax plan in fiscal 1999 to minimize both the taxes reported in our statement of income and the actual taxes we will have to pay once we use all the benefits of our net operating loss carryforwards ("NOLs"). Assuming no major acquisitions or large stock issuances, we currently expect to reduce our ETR to below 30% over the next several years. This plan could possibly extend the cash flow benefits of the NOLs through 2003. We expect that actual cash payments of taxes will average below 7% of pretax profits over this period. Cumulative Effect of Change in Accounting Principle: In the first quarter of 2000, we recorded a charge of $432,000 net of taxes to implement a new accounting principle regarding the accounting for start up costs. Our implementation in the first quarter of this year of SFAS 133 regarding accounting for derivatives in the first quarter of 2001 did not result in a requirement to record a cumulative change due to immateriality. 19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Capital Resources & Liquidity Second Quarter Highlights: o Operating cash flow $7.6 million vs. $10.6 million in 2000's second quarter. o "Cash flow" (pretax income from continuing operations plus depreciation and amortization) per diluted share $1.01 vs. 86 cents in 2000's second quarter. o Expenditures for purchases of property, plant and equipment (PP&E) $3.9 million vs. $2.9 million in 2000's second quarter. Six-Month Highlights: o Operating cash flow $10.1 million vs. $15.9 million in the first half of 2000. o Cash flow per diluted share $1.82 vs. $1.50 in the first half of 2000. o Cash payments for acquisitions totaled $19.8 million. o Expenditures for purchases of PP&E $7.2 million vs. $6.2 million in the first half of 2000. Comparative Statistics (Dollars in millions, except per share amounts): <TABLE> <CAPTION> April 30, 2001 October 31, 2000 <S> <C> <C> Cash and cash equivalents $11.9 $14.6 Total assets $331.1 $322.6 Working capital $73.6 $47.4 Total debt $51.8 $48.4 Ratio of debt to equity 0.23:1 0.24:1 Debt as a percentage of total capitalization 19% 20% Operating cash flow - twelve months ended $35.2 $41.0 Cash flow per diluted share - twelve months ended $3.82 $3.51 </TABLE> Operating Cash Flows: Our major source of liquidity continues to be cash flow provided by operating activities, which totaled $10.1 million in the first half of fiscal 2001 and $35.2 million over the twelve-month period ended April 30, 2001. Major uses of cash for operating activities in the first half of fiscal 2001 included payments of $3.5 million to settle disputes, $1.7 million to fund entitlements under Cooper's bonus plans and $579,000 in interest payments. The first two items have historically led to Q1 being our weakest operational cash flow quarter. 20
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Concluded Investing Cash Flows: The cash outflow of $27 million from investing activities resulted from acquisitions of businesses including $15.3 million paid to former Aspect Vision Care shareholders to partially fund required earn-out payments and $4 million paid for the acquisition of the LuMax product line (see note 3) and capital expenditures of $7.2 million. Financing Cash Flows: Financing activities provided $14.1 million in cash, driven primarily by stock option exercises, which provided $10.8 million. We also paid dividends on our common stock of $289,000 in the half of fiscal 2001. Outlook: We believe that cash and cash equivalents on hand of $11.9 million plus cash from operating activities will fund future operations, capital expenditures, cash dividends and smaller acquisitions. We may need additional funds for larger acquisitions and other strategic alliances. At April 30, 2001, we had over $32 million available under the KeyBank line of credit and, based on conversations with KeyBank, anticipate that additional financing would be available as required. Risk Management: We are exposed to risks caused by changes in foreign exchange, principally pound sterling denominated debt and from operations in foreign currencies. We have hedged most of the debt by entering into contracts to buy sterling forward. We are also exposed to risks associated with changes in interest rates, as the interest rate on certain of our debt varies with the London Interbank Offered Rate. Trademarks: Frequency'r' is a registered trademark and LuMax'TM'is a trademark of the Cooper Companies, Inc., its affiliates and subsidiaries or both. 21
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. 22
PART II - OTHER INFORMATION Item 1. Legal Proceedings The information required by this item is incorporated herein by reference to "Contingencies - Pending Litigation" under Note 8 of Notes to Consolidated Condensed Financial Statements in Part I, Item I of this report. Item 4. Submission of Matters to a Vote of Security Holders The 2001 Annual Meeting of Stockholders was held on March 28, 2001. Each of the eight individuals nominated to serve as directors of the Company was elected: <TABLE> <CAPTION> Director Shares For Shares Against -------- ---------- -------------- <S> <C> <C> A. Thomas Bender 9,938,250 3,314,669 Michael H. Kalkstein 12,970,459 282,460 Moses Marx 12,970,459 282,460 Donald Press 12,969,596 283,323 Steven Rosenberg 12,972,459 280,460 Allan E. Rubenstein, M.D. 12,972,457 280,462 Robert S. Weiss 12,972,182 280,737 Stanley Zinberg, M.D. 12,972,107 280,812 </TABLE> Stockholders approved the 2001 Long-Term Incentive Plan. A total of 10,075,425 shares were voted in favor of such approval, 3,154,099 shares were voted against it and 23,393 shares abstained. Stockholders ratified the appointment of KPMG LLP as Cooper's independent certified public accountants for the fiscal year ending October 31, 2001. A total of 13,222,119 shares were voted in favor of the ratification, 24,015 shares were voted against it and 6,784 shares abstained. 23
PART II - OTHER INFORMATION -- Continued Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. <TABLE> <CAPTION> Exhibit Number Description ------ ----------- <S> <C> 10.11* Patent License Agreement dated December 2, 1997 among Anthony David Galley and Others and CooperVision, Inc. 11** Calculation of Earnings Per Share. </TABLE> * Confidential treatment has been requested from the Securities and Exchange Commission with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Commission. ** The information called for in this exhibit is provided in Footnote 6 to the Consolidated Condensed Financial Statements in this report. (b) Cooper filed the following reports on Form 8-K during the period from February 1, 2001 to April 30, 2001. <TABLE> <CAPTION> Date of Report Item Reported -------------- ------------- <S> <C> February 28, 2001 Item 5. Other Events March 14, 2001 Item 5. Other Events March 29, 2001 Item 5. Other Events April 10, 2001 Item 5. Other Events April 24, 2001 Item 5. Other Events </TABLE> 24
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Cooper Companies, Inc. ----------------------------------------------- (Registrant) Date: June 13, 2001 /s/ Stephen C. Whiteford ----------------------------------------------- Vice President and Corporate Controller (Principal Accounting Officer) 25 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as.......................... 'TM' The registered trademark symbol shall be expressed as............... 'r' The British pound sterling sign shall be expressed as............... 'L'
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description of Document - ------ ----------------------- <C> <S> 10.11* Patent License Agreement dated December 2, 1997 among Anthony David Galley and Others and CooperVision, Inc. 11** Calculation of Earnings Per Share. </TABLE> - --------- * Confidential treatment has been requested from the Securities and Exchange Commission with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Commission. ** The information called for in this exhibit is provided in Footnote 6 to the Consolidated Condensed Financial Statements in this report.