UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended January 31, 2002 ---------------- ( ) 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 the number of shares outstanding of each of issuer's classes of common stock, as of the latest practicable date. Common Stock, $.10 par value 15,225,224 - ------------------------------ -------------------------------- Class Outstanding at February 28, 2002
THE COOPER COMPANIES, INC. AND SUBSIDIARIES INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page No. -------- <S> <C> <C> Item 1. Financial Statements Consolidated Condensed Statements of Income - Three Months Ended January 31, 2002 and 2001 3 Consolidated Condensed Balance Sheets - January 31, 2002 and October 31, 2001 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended January 31, 2002 and 2001 5 Consolidated Condensed Statements of Comprehensive Income - Three Months Ended January 31, 2002 and 2001 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosure About Market Risk 27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 28 Signature 30 Index of Exhibits 31 </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 January 31, ---------------------- 2002 2001 ------- ------- <S> <C> <C> Net sales $58,112 $49,976 Cost of sales 20,625 16,790 ------- ------- Gross profit 37,487 33,186 Selling, general and administrative expense 23,215 21,415 Research and development expense 857 884 Amortization of intangibles 308 1,222 ------- ------- Operating income 13,107 9,665 Interest expense 893 999 Other income, net 1,036 826 ------- ------- Income before income taxes 13,250 9,492 Provision for income taxes 3,845 3,183 ------- ------- Net income $ 9,405 $ 6,309 ======= ======= Earnings per share: Basic $ 0.62 $ 0.44 ======= ======= Diluted $ 0.61 $ 0.43 ======= ======= Number of shares used to compute earnings per share: Basic 15,220 14,493 ======= ======= Diluted 15,538 14,818 ======= ======= </TABLE> See accompanying notes. 3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets (Unaudited) <TABLE> <CAPTION> January 31, October 31, 2002 2001 -------- -------- <S> <C> <C> ASSETS (In thousands) Current assets: Cash and cash equivalents $ 4,867 $ 12,928 Trade receivables, net 56,016 55,318 Marketable securities 5,006 7,982 Inventories 54,176 51,153 Deferred tax asset 17,689 17,308 Other current assets 11,227 10,516 -------- -------- Total current assets 148,981 155,205 -------- -------- Property, plant and equipment, net 64,519 61,028 Goodwill, net 130,112 131,732 Other intangibles, net 13,690 13,890 Deferred tax asset 28,830 31,246 Other assets 3,808 3,748 -------- -------- $389,940 $396,849 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 27,103 $ 8,249 Accounts payable 10,537 11,149 Accrued acquisition costs 16,605 16,378 Accrued income taxes 8,162 7,688 Other current liabilities 25,058 24,509 -------- -------- Total current liabilities 87,465 67,973 Long-term debt 36,813 60,553 Other noncurrent liabilities 2,978 12,039 -------- -------- Total liabilities 127,256 140,565 -------- -------- Commitments and Contingencies (Note 8) Stockholders' equity: Common stock, $.10 par value 1,589 1,588 Additional paid-in capital 278,835 278,459 Accumulated other comprehensive loss (5,915) (3,305) Accumulated deficit (1,468) (10,112) Other (156) (145) Treasury stock at cost (10,201) (10,201) -------- -------- Total stockholders' equity 262,684 256,284 -------- -------- $389,940 $396,849 ======== ======== </TABLE> See accompanying notes. 4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended January 31, -------------------------- 2002 2001 ------- ------- <S> <C> <C> Cash flows from operating activities: Net income $ 9,405 $ 6,309 Depreciation and amortization 2,093 2,536 Net increase in operating working capital (4,361) (5,563) Net decrease in non-current liabilities (6,111) (4,252) Net decrease in non-current assets 3,142 3,420 ------- ------- Net cash provided by operating activities 4,168 2,450 ------- ------- Cash flows from investing activities: Purchases of property, plant and equipment (6,273) (3,269) Acquisitions of assets and businesses (5,403) (3,402) Sale of marketable securities 3,622 - Other (12) (18) ------- ------- Net cash used by investing activities (8,066) (6,689) ------- ------- Cash flows from financing activities: Net (repayments) proceeds under short-term agreements (1,330) 62 Repayments of long-term debt (4,228) (576) Proceeds from long-term debt 1,847 634 Dividends on common stock (761) (289) Exercise of stock options 330 1,728 ------- ------- Net cash (used) provided by financing activities (4,142) 1,559 ------- ------- Effect of exchange rate changes on cash and cash equivalents (21) 52 ------- ------- Net decrease in cash and cash equivalents (8,061) (2,628) Cash and cash equivalents - beginning of period 12,928 14,608 ------- ------- Cash and cash equivalents - end of period $ 4,867 $11,980 ======= ======= </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 January 31, -------------------------- 2002 2001 ------- ------- <S> <C> <C> Net income $ 9,405 $ 6,309 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (2,389) 341 Change in value of derivative instruments 27 (715) Unrealized loss on marketable securities - (177) Gain arising during the period 437 - Reclassification adjustment (685) - ------- ------- Unrealized loss on marketable securities (248) (177) ------- ------- (2,610) (551) ------- ------- Comprehensive income $ 6,795 $ 5,758 ======= ======= </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 business units, 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, aspheric lenses that improve vision in low light conditions and multifocal lenses that are designed to correct presbyopia, an age-related vision defect. Its leading products are disposable-planned replacement toric and spherical lenses. CooperSurgical ("CSI") markets diagnostic products and surgical instruments and accessories used primarily by gynecologists and obstetricians. During interim periods, we have followed the accounting policies described in our Form 10-K for the fiscal year ended October 31, 2001. Please refer to this and to our Annual Report to Stockholders for the same period when reviewing this Form 10-Q. Certain prior period amounts have been reclassified to conform to current period presentation. Current results are not a guarantee of future performance. The unaudited consolidated condensed financial statements presented in this report contain all adjustments necessary to present fairly Cooper's consolidated financial position as of January 31, 2002 and October 31, 2001, and the consolidated results of its operations and its cash flows for the three months ended January 31, 2002 and 2001. Unless otherwise disclosed herein, adjustments are normal and recurring. Note 2. Inventories, at the Lower of Average Cost or Market <TABLE> <CAPTION> January 31, October 31, 2002 2001 ------------- ------------- (In thousands) <S> <C> <C> Raw materials $10,846 $ 9,889 Work-in-process 9,287 8,491 Finished goods 34,043 32,773 ------- ------- $54,176 $51,153 ======= ======= </TABLE> 7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 3. New Accounting Pronouncements We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in the first quarter of fiscal 2002. In accordance with the requirements of SFAS 142, during the three months ended January 31, 2002, we: o Evaluated the balance of goodwill and other intangible assets recorded on our balance sheet as of October 31, 2001. No reclassifications were required to conform to the new criteria for recognition apart from goodwill. o Reassessed the useful lives and residual values of all acquired intangibles assets. No amortization period adjustments were required, and we had no intangible assets (other than goodwill) with indefinite useful lives. We will test goodwill for impairment under SFAS 142 at the reporting unit level. By April 30, 2002, we will complete our analysis to determine which reporting units are to be used for goodwill impairment testing. We will then have up to six months to determine the fair value of each reporting unit and compare it to the carrying amount. If a reporting unit's carrying amount exceeds its fair value, we will then perform the second step of the transitional impairment test by comparing the implied fair value of the reporting unit's goodwill against the recorded amount. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle. Based on preliminary assessments, Management believes that when these steps are completed, the fair value of each reporting unit will exceed its carrying value. 8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 4. Intangible Assets <TABLE> <CAPTION> As of January 31, 2002 -------------------------------------- Gross Carrying Accumulated Amount Amortization ----------------- ------------ (In thousands) <S> <C> <C> Other Intangible Assets Trademarks $ 578 $ 125 Patents 12,710 3,843 License and distribution rights 5,354 1,121 Other 150 13 ----------- ----------- $ 18,792 $ 5,102 =========== =========== Estimated annual amortization expense is about $1.3 million for each of the years in the five-year period ended October 31, 2006. (In thousands) Goodwill Balance as of November 1, 2001 $131,732 Goodwill acquired in first quarter 477 Other adjustments* (2,097) -------- $130,112 ======== </TABLE> * Primarily translation differences in goodwill denominated in foreign currency. 9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 5. Debt <TABLE> <CAPTION> January 31, October 31, 2002 2001 ----------- ------------ (In thousands) <S> <C> <C> Short-term: Notes payable to banks $ 4,984 $ 6,312 Current portion of long-term debt 22,119 1,937 ---------- --------- $ 27,103 $ 8,249 ========== ========= Long-term: Promissory notes - Aspect $ 20,100 $ 20,714 KeyBank line of credit 26,842 28,955 Aspect Vision bank loans 4,791 5,019 County of Monroe Industrial Development Agency ("COMIDA") bond 2,135 2,175 Other 197 289 Capitalized leases 4,867 5,338 ----------- --------- 58,932 62,490 Less current portion 22,119 1,937 ---------- --------- $ 36,813 $ 60,553 ========== ========= </TABLE> KeyBank Line of Credit: On January 31, 2002, we had $41 million available for further borrowings (see Note 11): <TABLE> <S> <C> (In millions) Amount of line $75.0 Outstanding loans (34.0)* ----- Available $41.0 ===== </TABLE> * Includes $7.2 million in letters of credit backing other debt. 10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 6. Earnings Per Share ("EPS") <TABLE> <CAPTION> Three Months Ended January 31, --------------------------- 2002 2001 ----- ---- (In thousands, except for earnings per share) <S> <C> <C> Net income $ 9,405 $ 6,309 ======== ======== Basic: - ----- Weighted average common shares 15,220 14,493 ======== ======== Basic earnings per share $ 0.62 $ 0.44 ======== ======== Diluted: - ------- Weighted average common shares 15,220 14,493 Add dilutive securities: - ----------------------- Stock options 318 325 -------- -------- Denominator for diluted earnings per share 15,538 14,818 ======== ======== Diluted earnings per share $ 0.61 $ 0.43 ======== ======== </TABLE> 11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Pro forma EPS: We adopted SFAS 142 November 1, 2001. Accordingly, we no longer amortize goodwill. Actual information for the 2002 period and pro forma EPS for the 2001 period is shown below: <TABLE> <CAPTION> Three Months Ended January 31, --------------------------- 2002 2001 -------- ------- (In thousands, except for earnings per share) <S> <C> <C> Net income $ 9,405 $ 6,309 Add back goodwill amortization(1) - 666 -------- -------- Pro forma net income $ 9,405 $ 6,975 ======== ======== Basic earnings per share $ 0.62 $ 0.48 ======== ======== Diluted earnings per share $ 0.61 $ 0.47 ======== ======== Weighted average common shares 15,220 14,493 ======== ======== Denominator for diluted earnings per share 15,538 14,818 ======== ======== </TABLE> (1) net of tax, assuming an effective tax rate of 29%. 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 January 31, ------------------------------------------- 2002 2001 --------------- --------------- <S> <C> <C> Number of shares excluded 530,750 503,150 =============== =============== Range of exercise prices $47.31 - $62.21 $36.00 - $62.21 =============== =============== </TABLE> 12
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) Note 7. Income Taxes The effective tax rate ("ETR") for the provision for income taxes of $3.8 million for the three months ended January 31, 2002 was 29%. The ETR is based on full fiscal year projections for income from continuing operations. The ETR used to record the provision for income taxes of $3.2 million for the three months ended January 31, 2001 was 33.5%. Note 8. Commitments and 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 Colors opaque contact lenses (sold under the name Expressions in the United States) infringe on WJ's United States Patent No. 5,414,477 ("477 Patent") and seeks an injunction and damages of an unspecified amount. 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 and subsequently denied it. On September 26, 2001, WJ amended its complaint to also allege infringement of U.S. Patent No. 4,668,240 ("240 Patent") by the same CooperVision contact lenses, seeking an injunction and damages in an unspecified amount. WJ has also filed suit against the Company in England alleging that the Company's Frequency Colors opaque lenses infringe on the 240 Patent and one other patent, and in France alleging that Frequency Colors opaque lenses infringe on yet another patent. Each of the lawsuits seeks an injunction and damages in an unspecified amount. 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. Revenue derived from products that include the disputed technology was $2.3 million in 2001, and was approximately $1.2 million in the first quarter of 2002. Aspect Earn Out Payments: When we acquired Aspect Vision Care, Ltd. ("Aspect") in 1997, we agreed to make contingent payments to its former shareholders based upon Aspect's performance over the three-year period ended October 31, 2000. The parties agreed to an additional amount payable of (pound)13.5 million (about $20.5 million). Of this amount, (pound)11.1 was paid in fiscal 2001, and the balance of (pound)2.4 million was paid in December 2001. 13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Concluded (Unaudited) Note 9. Cash Dividends We paid a semiannual dividend of 5 cents per share on January 4, 2002 to holders of record on December 14, 2001. Note 10. Business Segment Information Cooper is organized by operating business segment for management reporting with operating income the primary measure of segment profitability. Corporate expenses are not allocated to segment operating income. Items accounted for below operating income are not considered when measuring segment profitability. The accounting policies used to generate segment results are the same as our overall accounting policies. Identifiable assets are those assets used in continuing operations excluding cash and cash equivalents, which we deem to be corporate assets. Long-lived assets are primarily property, plant and equipment and goodwill and other intangibles. Segment information: <TABLE> <CAPTION> Three Months Ended January 31, ------------------------------ 2002 2001 -------- --------- (In thousands) <S> <C> <C> Sales to external customers: CVI $ 42,139 $ 36,394 CSI 15,973 13,582 -------- -------- $ 58,112 $ 49,976 ======== ======== Operating income: CVI $ 11,319 $ 9,428 CSI 3,533 1,837 Corporate (1,745) (1,600) -------- -------- Total operating income 13,107 9,665 Interest expense (893) (999) Other income, net 1,036 826 -------- -------- Income before income taxes $ 13,250 $ 9,492 ======== ======== </TABLE> 14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Continued (Unaudited) <TABLE> <CAPTION> January 31, October 31, 2002 2001 -------- -------- (in thousands) <S> <C> <C> Identifiable assets: CVI $250,651 $246,563 CSI 86,178 87,056 Corporate 53,111 63,230 -------- -------- Total $389,940 $396,849 ======== ======== Goodwill: CVI $ 84,124 $ 85,107 CSI 45,988 46,625 -------- -------- Total $130,112 $131,732 ======== ======== Geographic information: <CAPTION> Three Months Ended January 31, ------------------------------ 2002 2001 -------- --------- (in thousands) <S> <C> <C> Sales to external customers by country of domicile: United States $ 42,163 $ 37,666 Europe 12,398 8,970 Canada 3,551 3,340 -------- -------- Total $ 58,112 $ 49,976 ======== ======== <CAPTION> January 31, October 31, 2002 2001 ---------- --------- (in thousands) <S> <C> <C> Long-lived assets by country of domicile: United States $ 82,772 $ 80,735 Europe 123,405 123,742 Canada 2,144 2,173 -------- -------- Total $208,321 $206,650 ======== ======== </TABLE> Note 11. Subsequent Events Biocompatibles: On February 28, 2002, we completed the acquisition of the contact lens business of Biocompatibles International plc. ("Biocompatibles"), comprised of its wholly owned subsidiaries Hydron Limited ("Hydron"), Biocompatibles Eyecare Inc. ("BE Inc.") and Biocompatibles Canada Inc. ("BE Canada"). Pursuant to an International Share Sale Agreement (the "Sale Agreement") dated January 15, 2002, among Biocompatibles, Cooper and Cooper's wholly owned subsidiary Aspect Vision Holdings Limited ("AVH"), 15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements, Concluded (Unaudited) Biocompatibles sold all of the outstanding shares of Hydron to AVH and all of the outstanding shares of BE Inc. and BE Canada to Cooper. The aggregate consideration paid for the shares and to repay outstanding indebtedness of the acquired business was (pound)68 million (about $97 million) plus transaction costs. Cooper paid (pound)24 million of such amount in cash at closing, which funds were obtained from its existing line of credit, and it and AVH issued promissory notes in an aggregate principal amount of (pound)44 million to Biocompatibles, maturing on November 15, 2002 and bearing interest at 5% per annum. The notes are secured by the shares of BE Inc., the production facility of BE Inc. in Norfolk, Virginia, and BE Inc.'s inventory and receivables. The AVH note is also secured by the shares of Hydron. The notes may be prepaid at the option of Cooper and AVH without penalty at any time. We are currently negotiating an expanded bank credit facility which we expect to complete in early May, part of the proceeds of which will be used to repay the notes. An Arrangement and Administration Agreement dated February 28, 2002 among Biocompatibles, Cooper and AVH (the "Administration Agreement") provides for certain payments to Biocompatibles by Cooper if payment of the principal amount of the notes, together with accrued interest, is not made by May 15, 2002, until such time as such payment is made. Norland Medical Systems: On February 28, 2002, CSI signed an agreement to acquire the bone densitometry business of Norland Medical Systems ("Norland"). The acquisition is subject to the approval of Norland's shareholders, customary closing conditions and satisfactory completion of due diligence by CSI. The transaction is expected to close before the end of April 2002. Norland's densitometry products, which are used in the evaluation of osteoporosis, had sales of $8.5 million in 2001. CSI has been a distributor of these products since November 2000. Cooper will pay $5 million for the business at closing and may pay additional amounts not to exceed a maximum purchase price of $12 million based on performance over three years. Cooper expects that the acquisition will be neutral to earnings per share in fiscal 2002 and will be accretive thereafter. Patent License Agreement: On February 13, 2002, we renegotiated the terms of a license agreement between CVI and certain former shareholders of Aspect. The renegotiated agreement calls for a fixed license fee of (pound)21.4 million (about $31 million) including interest, due in quarterly installments, which escalate at 5% annually, over an eight-year term. Previously, payments were based on levels of revenue. 16
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. The forward-looking statements include certain statements pertaining to our capital resources, performance and results of operations. In addition, all statements regarding anticipated growth in our revenue, and anticipated market conditions and results of operations are forward-looking statements. To identify forward-looking statements look for words like "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "estimates" or "anticipates" and similar words or phrases. Discussions of strategy, plans or intentions often contain forward-looking statements. These, and all forward-looking statements, necessarily depend on assumptions, data or methods that may be incorrect or imprecise. Events, among others, that could cause actual results and future actions to differ materially from those described by or contemplated in forward-looking statements include major changes in business conditions, a major disruption in the operations of our manufacturing facilities, new competitors or technologies, the impact of an undetected virus on our computer systems, acquisition integration delays or costs, foreign currency exchange exposure, investments in research and development and other start-up projects, dilution to earnings per share from acquisitions or issuing stock, regulatory issues, changes in tax laws, significant environmental cleanup costs above those already accrued, litigation costs including any related settlements, cost of business divestitures, the requirement to provide for a significant liability or to write off a significant asset, changes in accounting principles or estimates, and other factors described in our Securities and Exchange Commission filings, including the "Business" section in our Annual Report on Form 10-K for the year ended October 31, 2001. We caution investors that forward-looking statements reflect our analysis only on their stated date or the date of this Form 10-Q. We disclaim any intent to update them except as required by law. Results of Operations In this section we discuss the results of our operations for the first quarter of fiscal 2002 and compare them with the same period of fiscal 2001. We discuss our cash flows and current financial condition beginning on page 24 in the "Capital Resources and Liquidity" section. First Quarter Highlights vs. 2001's First Quarter: o Net sales up 16% to $58.1 million. o Gross profit up 13%; margin 65% of sales in fiscal 2002 and 66% in fiscal 2001. o Operating income up 36% to $13.1 million. o Diluted earnings per share up 42% to 61 cents from 43 cents. 17
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Selected Statistical Information - Percentage of Sales and Growth <TABLE> <CAPTION> Percent of Sales Three Months Ended January 31, ------------------------ % 2002 2001 Growth ---- ---- ------ <S> <C> <C> <C> Net sales 100% 100% 16% Cost of sales 35% 34% 23% Gross profit 65% 66% 13% Selling, general and administrative 40% 43% 8% Research and development 1% 2% (3%) Amortization 1% 2% (75%) Operating income 23% 19% 36% </TABLE> Net Sales: Cooper's two business units, CooperVision ("CVI") and CooperSurgical ("CSI") generate all its revenue: o CVI markets a broad range of soft contact lenses for the vision care market worldwide. o CSI markets diagnostic products, surgical instruments and accessories for the gynecological market, primarily in the U.S. 18
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 $8.1 million, or 16%: <TABLE> <CAPTION> Three Months Ended January 31, ------------------------ % 2002 2001 Increase ------ ------ -------- (In millions) <S> <C> <C> <C> CVI $42.1 $36.4 16% CSI 16.0 13.6 18% ----- ----- $58.1 $50.0 16% ===== ===== </TABLE> CVI Revenue: The contact lens market continues to undergo a shift in modality away from conventional lenses, designed for replacement annually, toward disposable lenses designed for replacement daily, and frequently replaced lenses, designed for replacement biweekly, monthly or quarterly. We refer to the combination of disposable and frequently replaced lenses as "DPR" lenses in this report. CVI's revenue growth is driven by volume rather than by price. Our average selling price on a per lens basis is decreasing, reflective of increased sales of DPR lenses, which are marketed in multiple lens packaging. This is an industry trend. Worldwide sales of Cooper's DPR products grew 20% in the three-month period. Soft Lens Revenue: CVI's worldwide soft contact lens revenue -- all revenue except royalty revenue and miscellaneous items -- grew 19% for the three-month period. Soft lens revenue includes sales of spherical lenses and our specialty products -- toric, aspheric, cosmetic and multifocal lenses. Toric lenses are prescribed to correct astigmatism; aspheric lenses help improve visual acuity in lowlight conditions and correct low levels of astigmatism; cosmetic lenses are opaque and color enhancing lenses that change eye appearance and multifocal lenses are designed to correct presbyopia, an age-related vision defect. Total CVI Revenue (Including Royalty, Freight and Miscellaneous): <TABLE> <CAPTION> Segment First Quarter 2002 % Total Growth - ------- ------------------ ------- ------ ($ in millions) <S> <C> <C> <C> U.S. $24.8 59% 9% International 15.1 36% 41% ----- --- Soft lens revenue 39.9 95% 19% Miscellaneous revenue 2.2 5% (22%) ----- --- $42.1 100% 16% ===== === </TABLE> The 41% growth in international revenue, from 10.7 million to $15.1 million, was driven by sales of total DPR lenses that grew by 32% to $11.8 million, and recently introduced cosmetic and multifocal lenses that generated revenue of about $1.3 million vs. virtually none in the prior period. 19
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Revenue in the United States was strong, growing 9% in a market, per independent market research data, that declined 1%. Our specialty lenses grew 12%. The DPR lenses (the majority of which are specialty lenses) grew 14% and now account for over 80% of CVI's U.S. business. CSI Revenue: CSI revenue grew 18% in the first quarter to $16 million, with revenue generated by internal or organic growth 10% ahead for the quarter. The acquisitions in the second and fourth quarters of last year accounted for the balance of the growth. Cost of Sales/Gross Profit: Gross profit as a percentage of sales ("margin" or "gross margin") was as follows: <TABLE> <CAPTION> First Quarter Margin -------------------- 2002 2001 ---- ---- <S> <C> <C> CVI 69% 71% CSI 53% 54% Consolidated 65% 66% </TABLE> CVI's margin for the first quarter of fiscal 2002 was 69% compared with 71% for the first quarter last year. The decline was primarily due to a higher percentage of our sales being generated by our international operations. International operations typically have lower margin because, as compared with our sales in the U.S. market, a higher percentage is to distributors. Sales to distributors typically generate gross margins below those generated by sales to optometrists, ophthalmologists and retail chains. Corresponding lower operating expenses typically offset these gross margin reductions, since we leverage our distributors' infrastructure. Accordingly, we expect that operating income as a percentage of revenue would not change substantially. Gross margin is expected to decline longer term, assuming the successful implementation of the following business initiatives currently in progress: o A substantial increase in sales to our Japanese marketing partner. Sales to our Japanese marketing partner are priced on a distributor basis. o A significant increase in sales into retail channels of distribution which, although potentially generating lower gross margins, would provide attractive operating margins due to lower operating expenses associated with sales in this channel. At CSI, the effect of the Medscand and other acquisitions decreased our margin. We expect that, as acquisitions become fully integrated, we will gain additional efficiencies and CSI's margin will increase. 20
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 January 31, -------------------------------------- 2002 2001 --------------- ----------------- ($ in millions) % Rev. % Rev. % Increase ------ ------ ---------- <S> <C> <C> <C> <C> <C> CVI $16.8 40% $15.3 42% 10% CSI 4.6 29% 4.5 33% 3% Headquarters 1.8 N/A 1.6 N/A 9% ----- ----- $23.2 40% $21.4 43% 8% ===== ===== </TABLE> Consolidated SGA increased 8% but decreased as a percentage of revenue to 40% in 2002 from 43% in 2001. Results for the three-month period of fiscal 2001 include nonrecurring SGA charges of about $700,000 to substantially complete the integration of Leisegang and MedaSonic acquisitions. Without these one-time costs, SG&A in the first quarter last year would have been 41% of revenue. Research and Development ("R&D") Expense: We expect R&D spending to remain a low percentage of revenue, as Cooper is focusing on acquiring products that will not require large expenditures of time or money before introduction. Most of our R&D expense relates to costs of clinical and regulatory and other development activities rather than basic research. Amortization of intangibles: Amortization expense decreased to $308,000 in the first quarter of fiscal 2002 from $1.2 million in last year's first quarter, primarily because we adopted SFAS 142 (see Notes 3 and 4). Goodwill is no longer amortized. Goodwill amortization included in the first quarter of 2001 was $938,000. Operating Income: Operating income improved by $3.4 million, or 36%, in the fiscal first quarter. <TABLE> <CAPTION> Three Months Ended January 31, -------------------------------------- 2002 2001 --------------- ----------------- ($ in millions) % Rev. % Rev. % Increase ------ ------ ---------- <S> <C> <C> <C> <C> <C> CVI $11.3 27% $ 9.4 26% 20% CSI 3.6 22% 1.9 14% 92% Headquarters (1.8) N/A (1.6) N/A N/A ----- ----- $13.1 23% $ 9.7 19% 36% ===== ===== </TABLE> 21
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Interest Expense: Interest expense decreased $106,000 or 11%, primarily due to lower interest rates and favorable currency translation, which reduced interest expense on our pound sterling denominated debt. Other Income (Expense), Net: <TABLE> <CAPTION> Three Months Ended January 31, --------------------- 2002 2001 ------ ----- (In thousands) <S> <C> <C> Interest income $ 35 $162 Foreign exchange (20) (49) Gain on Litmus/Quidel transaction - 719 Gain on sale of Quidel stock 1,028 - Other (7) (6) ------ ---- $1,036 $826 ====== ==== </TABLE> In last year's first quarter, Quidel Corporation ("Quidel") 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 received common shares of Quidel, and we recorded a gain of $719,000, as the market value of the Quidel shares received exceeded the carrying value of our investment in Litmus. In the first quarter of 2002, we sold 480,000 shares of Quidel stock (about 40% of our holding), realizing a gain of approximately $1 million. Interest income in the first quarter of 2002 was $127,000, or 78%, lower than the prior year, as we have made substantial payments to reduce debt and fund acquisitions. Additionally, interest rates available on our invested funds were substantially lower, reflective of reductions effected by the Federal Reserve over the past year. Provision for Income Taxes: We estimate that our effective tax rate ("ETR") for fiscal year 2002 will be 29%, down from 33.5% used for the first quarter of 2001. We implemented a global tax plan in fiscal 1999 to minimize both the taxes reported in our statement of income and the actual taxes we will have to pay once we use all the benefits of our net operating loss carryforwards ("NOLs"). The global tax plan consists of a restructuring of the legal ownership structure for the CooperVision foreign sales and manufacturing subsidiaries. 22
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued The stock of those subsidiaries is now owned by a single foreign holding company, which centrally directs much of the activities of those subsidiaries. The foreign holding company has applied for and received the benefits of a reduced tax rate under a special tax regime available in its country of residence. On February 28, 2002, the Company acquired BE Inc. Assuming no other major acquisitions or large stock issuances, we currently expect that this plan will extend the cash flow benefits of the NOLs through 2004, and that actual cash payments of taxes will average less than 5% of pretax profits over this period. After 2004, actual cash payments of taxes are expected to average less than 25% of pretax profits. 23
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Capital Resources & Liquidity First Quarter Highlights: o Operating cash flow $4.2 million vs. $2.5 million in 2001's first quarter. o Cash flow (pretax income from continuing operations plus depreciation and amortization) per diluted share 99 cents vs. 81 cents in 2001's first quarter. Comparative Statistics (Dollars in millions, except per share amounts): <TABLE> <CAPTION> January 31, 2002 October 31, 2001 <S> <C> <C> Cash and cash equivalents $4.9 $12.9 Total assets $389.9 $396.8 Working capital $61.5 $87.2 Total debt $63.9 $68.8 Stockholders' equity $262.7 $256.3 Ratio of debt to equity 0.24:1 0.27:1 Debt as a percentage of total capitalization 20% 21% Operating cash flow - twelve months ended $27.4 $25.6 Cash flow per diluted share - twelve months ended $4.32 $4.14 </TABLE> Operating Cash Flows: Our major source of liquidity continues to be cash flow provided by operating activities, which totaled $4.2 million in the first quarter of fiscal 2002 and $27.4 million over the twelve-month period ended January 31, 2002. Major uses of cash for operating activities in the first quarter included payments of $4 million to settle the dispute with Medical Engineering Corporation, $1.8 million to fund entitlements under Cooper's bonus plans and $464,000 in interest payments. Investing Cash Flows: The cash outflow of $8.1 million from investing activities was driven by capital expenditures of $6.3 million and payments of $5.4 million on acquisitions including $3.9 million paid to former Aspect Vision Care shareholders to finalize required earn out payments. The cash outflow was partially offset by $3.6 million cash received from the sale of Quidel shares. Financing Cash Flows: Financing activities used $4.1 million of cash, driven primarily by $3.7 million of net payment of debt. We also paid dividends on our common stock of $761,000 in the first fiscal quarter of 2002. These cash outflows were partially offset by $330,000 received from stock option exercises. 24
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Estimates and Critical Accounting Policies: Estimates and judgments made by Management are an integral part of financial statements prepared in accordance with accounting principle generally accepted in the United States of America ("GAAP"). Actual results may be different from amounts reported for or at the end of any period. We believe that the following critical accounting policies address the more significant estimates required of Management when preparing our consolidated financial statements in accordance with GAAP: o Revenue recognition -- In general, we recognize revenue upon shipment of our products, when risk of ownership transfers to our customers. We record, based on historical statistics, appropriate provisions for shipments to customers who have the right of return. o Adequacy of allowance for doubtful accounts -- In accordance with GAAP, our reported balance of accounts receivable, net of the allowance for doubtful accounts, represents our estimate of the amount that ultimately will be realized in cash. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical payment trends and the age of the receivables, complemented by individual knowledge of our customers. If and when our analyses indicate, we increase or decrease our allowance accordingly. o Net realizable value of inventory -- GAAP states that inventories be stated at the lower of cost or market value, or "net realizable value." On an ongoing basis, we review the carrying value of our inventories, measuring number of months on hand and other indications of salability and, when indicated, reduce the value of inventory if there are indications that the carrying value is greater than market. o Valuation of goodwill -- In accordance with the provisions of Statements of Financial Accounting Standards 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets" we will evaluate, by the end of our second fiscal quarter, the reporting units to be used to test for impairment of goodwill (see Note 3). Outlook: We believe that cash and cash equivalents on hand of $4.9 million plus cash from operating activities will fund future operations, capital expenditures, cash dividends and smaller acquisitions. We are currently negotiating an expanded bank credit facility, which we expect to complete in early May. Part of the proceeds will be used to repay notes issued to Biocompatiles shareholders (see Note 11). At January 31, 2002, we had $41 million available under the KeyBank line of credit. We funded the cash required for the Biocompatibles acquisition (see Note 11) via cash on hand and borrowings under our current line of credit. 25
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Concluded 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' and Proclear'r' are registered trademarks of The Cooper Companies, Inc., its affiliates and subsidiaries or both. Expressions'TM' is a trademark of The Cooper Companies, Inc., its affiliates and subsidiaries or both. 26
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 3. Quantitative and Qualitative Disclosure About Market Risk See Capital Resources and Liquidity under "Risk Management" in Item 2 of this report. 27
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. <TABLE> <CAPTION> Exhibit Number Description ------ ----------- <S> <C> 2.1 International Share Sale Agreement among Biocompatibles International plc, Aspect Vision Holdings Limited and The Cooper Companies, Inc. incorporated by reference to Exhibit 2.1 to the Company's current report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on March 13, 2002. 2.2 Arrangement and Administration Agreement among Biocompatibles International plc, The Cooper Companies, Inc. and Aspect Vision Holdings Limited, incorporated by reference to Exhibit 2.2 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. 10.11* Patent License Agreement dated 13 February 2002 between Geoffrey H. Galley & Others and CooperVision, Inc. 11** Calculation of Earnings Per Share. 99.4 Note A between Aspect Vision Holdings Limited and Biocompatibles International plc dated 28 February 2002 incorporated by reference to Exhibit 99.4 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. 99.5 Note B between The Cooper Companies, Inc. and Biocompatibles International plc dated 28 February 2002 incorporated by reference to Exhibit 99.5 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. 99.6 Note C between The Cooper Companies, Inc. and Biocompatibles International plc dated 28 February 2002 incorporated by reference to Exhibit 99.6 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. </TABLE> 28
PART II - OTHER INFORMATION (Continued) * Confidential treatment has been requested from the Securities and Exchange Commission with respect to certain portions of this exhibit. Omitted potions 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 November 1, 2001 to January 31, 2002. Date of Report Item Reported -------------- ------------- November 14, 2001 Item 5. Other Events December 11, 2001 Item 5. Other Events January 15, 2002 Item 5. Other Events 29
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Cooper Companies, Inc. --------------------------------------------- (Registrant) Date: March 13, 2002 /s/ Stephen C. Whiteford --------------------------------------------- Vice President and Corporate Controller (Principal Accounting Officer) 30
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Index of Exhibits <TABLE> <CAPTION> Exhibit No. Page No. - ----------- -------- <S> <C> <C> 2.1 International Share Sale Agreement among Biocompatibles International plc, Aspect Vision Holdings Limited and The Cooper Companies, Inc. incorporated by reference to Exhibit 2.1 to the Company's current report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on March 13, 2002. 2.2 Arrangement and Administration Agreement among Biocompatibles International plc, The Cooper Companies, Inc. and Aspect Vision Holdings Limited, incorporated by reference to Exhibit 2.2 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. 10.11* Patent License Agreement dated 13 February 2002 between Geoffrey H. Galley & Others and CooperVision, Inc. 11** Calculation of Earnings Per Share. 99.4 Note A between Aspect Vision Holdings Limited and Biocompatibles International plc dated 28 February 2002 incorporated by reference to Exhibit 99.4 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. 99.5 Note B between The Cooper Companies, Inc. and Biocompatibles International plc dated 28 February 2002 incorporated by reference to Exhibit 99.5 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. 99.6 Note C between The Cooper Companies, Inc. and Biocompatibles International plc dated 28 February 2002 incorporated by reference to Exhibit 99.6 to the Company's current report on Form 8-K filed with the SEC on March 13, 2002. </TABLE> 31
THE COOPER COMPANIES, INC. AND SUBSIDIARIES Index of Exhibits (Continued) * Confidential treatment has been requested from the Securities and Exchange Commission with respect to certain portions of this exhibit. Omitted potions 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. 32 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'