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| COO > SEC Filings for COO > Form 10-Q on 5-Jun-2009 | All Recent SEC Filings |
5-Jun-2009
Quarterly Report
Note numbers refer to "Notes to Consolidated Condensed Financial Statements" in Item 1. Financial Statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. These include statements relating to plans, prospects, goals, strategies, future actions, events or performance and other statements which are other than statements of historical fact. In addition, all statements regarding anticipated growth in our revenue, anticipated market conditions, planned product launches and expected results of operations and integration of any acquisition are forward-looking. To identify these statements look for words like "believes," "expects," "may," "will," "should," "could," "seeks," "intends," "plans," "estimates" or "anticipates" and similar words or phrases. Forward-looking statements necessarily depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Among the factors that could cause our actual results and future actions to differ materially from those described in forward-looking statements are:
Adverse changes in global or regional general business, political and economic conditions due to the current global economic downturn, including the impact of continuing uncertainty and instability of U.S. and international credit markets that may adversely affect the Company's or its customers' ability to meet future liquidity needs.
Limitations on sales following new product introductions due to poor market acceptance.
Compliance costs and potential liability in connection with U.S. and foreign healthcare regulations, including product recalls, and potential losses resulting from sales of counterfeit and other infringing products.
The success of research and development activities and other start-up projects.
New competitors, product innovations or technologies.
A major disruption in the operations of our manufacturing, research and development or distribution facilities, due to technological problems, natural disasters or other causes.
Disruptions in supplies of raw materials, particularly components used to manufacture our silicone hydrogel lenses.
Legal costs, insurance expenses, settlement costs and the risk of an adverse decision or settlement related to claims involving product liability or patent protection (including risks with respect to the ultimate validity and enforceability of the Company's patent applications and patents and the possible infringement of the intellectual property of others).
Item 2. Management's Discussion and Analysis of Financial Condition
The impact of acquisitions or divestitures on revenues, earnings and margins.
Interest rate and foreign currency exchange rate fluctuations.
Changes in U.S. and foreign government regulation of the retail optical industry and of the healthcare industry generally.
The requirement to provide for a significant liability or to write off, or accelerate depreciation on, a significant asset, including goodwill.
Dilution to earnings per share from acquisitions or issuing stock.
Changes in tax laws or their interpretation and changes in effective tax rates, including changes that result from shifts in the Company's geographic profit mix.
Changes in the Company's expected utilization of recognized net operating loss carryforwards.
Changes in accounting principles or estimates.
Delays related to implementation or disruptions of information technology systems covering the Company's businesses, or other events which could result in management having to report a material weakness in the effectiveness of the Company's internal control over financial reporting in its Quarterly Report on Form 10-Q and Annual Report on Form 10-K filings.
Environmental risks, including significant environmental cleanup costs.
Other events described in our Securities and Exchange Commission filings, including the "Business" and "Risk Factors" sections in the Annual Report on Form 10-K for the fiscal year ended October 31, 2008, as such Risk Factors may be updated in quarterly filings.
We caution investors that forward-looking statements reflect our analysis only on their stated date. We disclaim any intent to update them except as required by law.
Item 2. Management's Discussion and Analysis of Financial Condition
In this section we discuss the results of our operations for the fiscal second quarter of 2009 and compare them with the same period of fiscal 2008. We discuss our cash flows and current financial condition under "Capital Resources and Liquidity."
Second Quarter Highlights
Net sales of $260.6 million, up 1%, 4% in constant currency.
Gross margin 57% of revenue down from 58%.
Operating income up 45% to $41.2 million.
Diluted earnings per share of 54 cents, up from 25 cents per share.
Six-Month Highlights
Net sales of $511.7 million, up 2%, 4% in constant currency.
Gross margin 57% of revenue down from 58%.
Operating income up 53% to $74.0 million.
Diluted earnings per share of $1.07, up from 40 cents per share.
Outlook
We believe that CVI will continue to compete successfully in the worldwide contact lens market with its disposable spherical, toric and multifocal contact lenses offered in a variety of materials including using phosphorylcholine (PC) Technology and silicone hydrogel Aquaform technology. We believe that market demographics are favorable with the reported incidence of myopia continuing to increase worldwide and with the teenage population in the United States, the age when most contact lens wear begins, projected to grow over the next two decades. CVI expects greater market penetration in Europe and Asia as we roll out new products and expand our presence in those regions.
Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. The Company launched Biofinityฎ sphere in 2007 and Avairaฎsphere in 2008, both silicone hydrogel contact lens products. While initial customer reaction for these products has been favorable, our future growth may be limited by our late entry into the silicone hydrogel market. In addition to spheres, competitive silicone hydrogel toric products are making substantial gains in market share and represent a risk to our toric business. We launched a monthly silicone hydrogel toric lens, under the Biofinity label, in the first calendar quarter of 2009 and plan to launch a two-week silicone hydrogel toric, under the Avaira label, in fiscal year 2010 that will allow us to compete in this market shift to silicone hydrogel torics. Our ability to succeed with silicone hydrogel products is an important factor to achieving our projected future levels of sales growth and profitability.
Item 2. Management's Discussion and Analysis of Financial Condition
We launched Proclear ฎ 1 Day in Japan in the first calendar quarter of 2009. We are also in the process of developing a number of new contact lens products to enhance CVI's broad and competitive worldwide product lines. New products planned for introduction over the next two years include additional lenses utilizing silicone hydrogel and PC Technology materials and new lens designs, including toric and multifocal lenses.
As to the Company overall, we remain optimistic about the long-term prospects for the worldwide contact lens and women's healthcare markets. Recent events affecting the economy as a whole, including the uncertainty and instability of the United States and international credit markets and ongoing recessionary pressures in the United States and globally, continue to represent a risk to our forecasted performance for fiscal year 2009 and beyond.
Regarding capital resources, we believe that cash and cash equivalents on hand of $4.5 million plus cash from operating activities and existing credit facilities will fund future operations, capital expenditures, cash dividends and small acquisitions.
Selected Statistical Information - Percentage of Sales and Growth
Percent of Sales Percent of Sales
Three Months Ended Six Months Ended
April 30, April 30,
% %
2009 2008 Change 2009 2008 Change
Net sales 100 % 100 % 1 % 100 % 100 % 2 %
Cost of sales 43 % 42 % 2 % 43 % 42 % 5 %
Gross profit 57 % 58 % (1 %) 57 % 58 % (1 %)
Selling, general and administrative expense 36 % 41 % (13 %) 37 % 43 % (13 %)
Research and development expense 3 % 4 % 10 % 3 % 3 % - %
Restructuring costs - % - % - % 1 % - % 119 %
Amortization of intangibles 2 % 2 % (7 %) 2 % 2 % (2 %)
Operating income 16 % 11 % 45 % 14 % 10 % 53 %
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Item 2. Management's Discussion and Analysis of Financial Condition
Net Sales
Cooper's two business units, CVI and CSI generate all of its sales.
CVI develops, manufactures and markets a broad range of soft contact lenses for the worldwide vision care market.
CSI develops, manufactures and markets medical devices, diagnostic products and surgical instruments and accessories used primarily by gynecologists and obstetricians.
Our consolidated net sales grew $1.4 million or 1% and $9.7 million or 2% in the three and six months ended April 30, 2009:
Three Months Ended Six Months Ended
April 30, April 30,
% %
2009 2008 Change 2009 2008 Change
($ in millions)
CVI $ 217.8 $ 217.8 - % $ 429.0 $ 421.1 2 %
CSI 42.8 41.4 3 % 82.7 80.9 2 %
$ 260.6 $ 259.2 1 % $ 511.7 $ 502.0 2 %
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CVI Net Sales
Practitioner and patient preferences in the worldwide contact lens market continue to change. The major shifts are from:
Commodity spherical lenses to value-added spherical lenses such as continuous wear lenses and lenses to alleviate dry eye symptoms as well as lenses with aspherical optical properties or higher oxygen permeable lenses such as silicone hydrogels.
Commodity lenses to toric and multifocal.
Conventional lenses replaced annually to disposable and frequently replaced lenses. Disposable lenses are designed for either daily, two-week or monthly replacement; frequently replaced lenses are designed for replacement after one to three months.
Item 2. Management's Discussion and Analysis of Financial Condition
These shifts generally favor CVI's product lines of toric and multifocal lenses, PC Technology brand spherical lenses, silicone hydrogel spherical lenses and single-use spherical lenses. CVI's silicone hydrogel spherical lens products, Biofinity and Avaira are marketed in the United States, Europe and Asia Pacific, excluding Japan. However, it is important that CVI develop a full range of toric and multifocal silicone hydrogel products due to increased pressure from the launch of silicone hydrogel toric products by its major competitors. CVI launched Biofinity toric, a silicone hydrogel toric lens in the first calendar quarter of 2009. CVI also plans to launch a second silicone hydrogel toric lens, Avaira toric, in fiscal year 2010.
Contact lens revenue includes sales of conventional, disposable, long-term extended wear lenses and single-use lenses, some of which are aspherically designed, and toric, multifocal and cosmetic lenses.
Proclear aspheric, toric and multifocal lenses, manufactured using proprietary phosphorylcholine (PC) Technology, help enhance tissue/device compatibility and offer improved lens comfort.
Aspheric lenses correct for near- and farsightedness and have additional optical properties that help improve visual acuity in low light conditions and can correct low levels of astigmatism and low levels of presbyopia, an age-related vision defect.
Toric lenses correct astigmatism by adding the additional optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea.
Multifocal lens designs correct presbyopia.
Cosmetic lenses are opaque and color enhancing lenses that alter the natural appearance of the eye.
CVI Net Sales by Market
Three Months Ended Six Months Ended
April 30, April 30,
% %
2009 2008 Change 2009 2008 Change
($ in millions)
Americas $ 97.8 $ 95.2 3 % $ 183.9 $ 181.9 1 %
Europe 81.5 84.4 (4 %) 163.8 164.9 (1 %)
Asia Pacific 38.5 38.2 1 % 81.3 74.3 9 %
$ 217.8 $ 217.8 - % $ 429.0 $ 421.1 2 %
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Item 2. Management's Discussion and Analysis of Financial Condition
CVI's worldwide net sales were flat in the three-month period and grew 2% in the six-month period, with 4% growth in constant currency for both periods. Americas net sales grew 3% and 1% in the three- and six-months periods, 4% and 3% in constant currency, primarily due to market gains of CVI's silicone hydrogel lenses, Biofinity and Avaira, PC Technology lenses and single-use lenses. Europe net sales declined 4% and 1% in the three- and six-month periods, but grew 4% and 5% in constant currency, driven by increases in sales of Biofinity and Proclear 1 Day lenses. Net sales to the Asia Pacific region grew 1% and 9% in the three- and six-month periods, 5% and 7% in constant currency, primarily due to significant sales growth of single-use and other disposable sphere products, disposable toric products and Biofinity lenses.
Net sales growth includes increases in single-use spheres up 11%, at $43.9 million, all disposable spheres down 2% and total spheres down 3%. Silicone hydrogel spheres had sales of $23.3 million primarily in Europe and the United States. Single-use torics grew 69% to $2.7 million but total toric sales declined 11% due primarily to a continuing trend in the market toward silicone hydrogel toric lenses. Disposable multifocal sales grew 8% to $14.4 million. Older conventional lens products declined 19%, and cosmetic lenses declined 8%. Proclear products continued global market share gains as Proclear toric sales increased 4% to $18.3 million, Proclear 1 Day spheres increased 53% to $10.7 million and Proclear multifocal lenses, including Biomedics XC, increased 15% to $12.2 million.
CVI's net sales growth is driven primarily through increases in the volume of lenses sold as the market continues to move toward more frequent replacement. While unit growth and product mix have influenced CVI's net sales growth, average realized prices by product have not materially influenced net sales growth.
CSI Net Sales
CSI's net sales increased 3% and 2% in the three- and six-month periods to $42.8 million and $82.7 million, respectively. Sales of products marketed directly to hospitals grew 18% and now represent 34% of CSI's net sales. Women's healthcare products used primarily by obstetricians and gynecologists generate 96% of CSI's net sales. The balance are sales of medical devices outside of women's healthcare, which CSI does not actively market. While unit growth and product mix have influenced net sales growth, average realized prices by product have not materially influenced net sales growth.
Item 2. Management's Discussion and Analysis of Financial Condition
Cost of Sales/Gross Profit
Gross profit as a percentage of net sales (margin) was:
Margin Margin
Three Months Ended Six Months Ended
April 30, April 30,
2009 2008 2009 2008
CVI 56 % 58 % 56 % 58 %
CSI 61 % 59 % 61 % 59 %
Consolidated 57 % 58 % 57 % 58 %
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CVI's margin was 56% for both the three- and six-month periods of fiscal 2009 compared with 58% for the same periods last year. The decline resulted from changing product mix and accelerated depreciation for manufacturing equipment associated with equipment upgrades offset by improvements in manufacturing efficiencies. The changing product mix included a shift to lower margin sphere products, including single-use spheres that represented 21% of lens sales in the current period compared to 18% in the second quarter of 2008.
CSI's margin was 61% for the three- and six-month periods of fiscal 2009 compared with 59% for the same periods last year. The increase is a result of manufacturing efficiencies and a changing product mix including higher margin products marketed directly to hospitals that represent 34% of net sales in the current period compared to 29% in the same period of 2008.
Selling, General and Administrative Expense (SGA)
Three Months Ended Six Months Ended
April 30, April 30,
% Net % Net % % Net % Net %
2009 Sales 2008 Sales Change 2009 Sales 2008 Sales Change
($ in millions)
CVI $ 75.3 35 % $ 87.5 40 % (14 %) $ 149.0 35 % $ 173.7 41 % (14 %)
CSI 13.2 31 % 14.2 34 % (7 %) 26.3 32 % 28.6 35 % (8 %)
Headquarters 5.2 - 5.8 - (11 %) 13.4 - 15.1 - (12 %)
$ 93.7 36 % $ 107.5 41 % (13 %) $ 188.7 37 % $ 217.4 43 % (13 %)
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In the fiscal second quarter of 2009, consolidated SGA decreased by 13% and as a percentage of net sales, decreased to 36% from 41% in the second quarter of 2008 and decreased to 37% from 43% for the six-month period.
Item 2. Management's Discussion and Analysis of Financial Condition
CVI's SGA decreased 14% in the fiscal second quarter, primarily due to increased efficiencies as a result of the rationalization of distribution centers completed in fiscal 2008 and decreased marketing expenses from the prior year that included several new product launches. SGA costs also decreased as a result of the Critical Activity restructuring plan, discussed below, initiated in the fiscal first quarter of 2009. SGA as a percentage of net sales decreased to 35% in the period from 40% in 2008.
CSI's SGA decreased 7% at 31% of net sales and 8% at 32% of net sales in the three- and six-month periods of fiscal 2009, respectively, from 34% of net sales and 35% of net sales in the same periods last year. Marketing, distribution and other general and administration costs decreased primarily due to improved efficiencies from a recent acquisition and decreased legal and stock-based compensation expenses.
Corporate headquarters' expenses decreased 11% to $5.2 million and 12% to $13.4 million in the three- and six-month period of fiscal 2009, primarily due to the $1.9 million reduction of accrued legal costs related to our acquisition of Ocular Sciences, Inc. based on a settlement agreement reached in our fiscal second quarter of 2009.
Research and Development Expense
In the fiscal second quarter of 2009, CVI recorded a $3.0 million in-process research and development charge related to the acquisition of certain distribution rights. During the three- and six-month periods ended April 30, 2009, excluding the charge, CVI's research and development expenditures were 3% of net sales at $6.1 million, down 24% and $12.3 million, down 16% over the same periods of fiscal 2008. CVI's research and development activities include programs to develop disposable silicone hydrogel products and product lines utilizing PC Technology.
CSI's research and development expenditures were 2% of net sales for the three- and six-month periods, at $1.0 million and $2.0 million, respectively, compared to 3% of net sales in both periods of fiscal 2008. CSI's research and development activities include the upgrade and redesign of many CSI in-vitro fertilization, incontinence and assisted reproductive technology products and other obstetrical and gynecological product development activities.
Restructuring Costs
In the fiscal first quarter of 2009, CooperVision began a global restructuring plan to focus the organization on our most critical activities, refine our work processes and align costs with prevailing market conditions (Critical Activity restructuring plan). The restructuring plan involves the assessment of all locations' activities, exclusive of direct manufacturing, and changes to streamline work processes. As a result of the Critical Activity restructuring plan, a number of positions are being eliminated across certain business functions and geographic regions. The Company anticipates the Critical Activity restructuring plan will be completed in our fiscal third quarter of 2009.
Item 2. Management's Discussion and Analysis of Financial Condition
We estimate that the total restructuring costs under this plan will be approximately $3.8 million, primarily severance and benefit costs, and will be reported as cost of sales or restructuring costs in our Consolidated Statements of Income. In the six-month period ended April 30, 2009, we reported $0.6 million in cost of sales and $3.0 million in restructuring costs and the total accrued restructuring liability as of April 30, 2009, was $2.6 million.
Operating Income
Operating income increased by $12.7 million or 45% and $25.6 or 53% in the
three- and six-month periods, respectively:
Three Months Ended Six Months Ended
April 30, April 30,
% Net % Net % % Net % Net %
2009 Sales 2008 Sales Change 2009 Sales 2008 Sales Change
($ in millions)
CVI $ 35.3 16 % $ 26.3 12 % 34 % $ 67.0 16 % $ 49.0 12 % 37 %
CSI 11.1 26 % 8.0 19 % 39 % 20.4 25 % 14.5 18 % 40 %
Headquarters (5.2 ) - (5.8 ) - 11 % (13.4 ) - (15.1 ) - 12 %
$ 41.2 16 % $ 28.5 11 % 45 % $ 74.0 14 % $ 48.4 10 % 53 %
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Interest Expense
Interest expense in the fiscal second quarter decreased by $1.2 million or 10% to 4% of net sales from 5% in the prior year, primarily reflecting a decrease in our long-term borrowings used for capital expenditures and lower interest rates.
Other Income (Expense), Net . . . |
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