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COO > SEC Filings for COO > Form 10-Q on 7-Jun-2013All Recent SEC Filings

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Form 10-Q for COOPER COMPANIES INC


7-Jun-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 effects of any product recalls, 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 certain European Union countries which could adversely affect our global markets.

• Foreign currency exchange rate and interest rate fluctuations including the risk of declines in the value of the yen and the euro that would decrease our revenues and earnings.

• The impact of acquisitions or divestitures on revenues, earnings or margins.

• Acquisition integration delays or costs or the requirement to record significant adjustments to the preliminary fair value of assets acquired and liabilities assumed within the measurement period.

• 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 product liability, patent protection or other litigation.

• Changes in tax laws or their interpretation and changes in effective tax rates.

• Limitations on sales following new product introductions due to poor market acceptance.

• New competitors, product innovations or technologies.

• The requirement to provide for a significant liability or to write off, or accelerate depreciation on, a significant asset, including goodwill.

• Changes in U.S. and foreign government regulation of the retail optical industry and of the healthcare industry generally.

• Failures to receive, or delays in receiving, U.S. or foreign regulatory approvals for products.

• Failure to obtain adequate coverage and reimbursement from third party payors for our products.

• 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 the Company's research and development activities and other start-up projects.


Table of Contents
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

• Dilution to earnings per share from acquisitions or issuing stock.

• Changes in accounting principles or estimates.

• Environmental risks.

• Other events described in our Securities and Exchange Commission filings, including the "Business" and "Risk Factors" sections in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012, 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.


Table of Contents
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations
In this section, we discuss the results of our operations for the fiscal second quarter of 2013 ended April 30, 2013, and the six months then ended and compare them with the same periods of fiscal 2012. We discuss our cash flows and current financial condition under "Capital Resources and Liquidity". Second Quarter Highlights
•Net sales of $384.0 million, up 11% from $344.6 million.
•Gross profit $254.2 million, up 15% from $220.7 million.
•Operating income $81.5 million, up 25% from $65.4 million.
•Diluted earnings per share of $1.52, up from $1.12 per share.
•Cash provided by operations $114.9 million, up from $80.6 million. Six-Month Highlights
• Net sales of $763.9 million, up 14% from $670.6 million.

• Gross profit $494.7 million, up 15% from $431.1 million.

• Operating income $150.3 million, up 18% from $127.2 million.

• Diluted earnings per share of $3.02, up from $2.24 per share.

• Cash provided by operations $162.5 million, up from $122.2 million.

• Results in our fiscal first quarter include $14.1 million of insurance proceeds related to a business interruption claim and costs related to the acquisition of Origio of $0.6 million. This resulted in a $0.9 million income tax benefit in the fiscal second quarter.

Outlook
Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and women's healthcare markets. However, events affecting the economy as a whole, including the uncertainty and instability of global markets driven by United States debt and uncertainty surrounding employment, housing and credit concerns together with the European debt crisis and related foreign currency volatility, particularly the yen and the euro, impact our current performance and continue to represent a risk to our performance for fiscal year 2013 and beyond.
We compete in the worldwide contact lens market with our spherical, toric and multifocal contact lenses offered in a variety of materials including using silicone hydrogel Aquaform® technology and phosphorylcholine (PC) Technology™. We believe that there will be lower contact lens wearer dropout rates as technology improves and enhances the wearing experience through a combination of improved designs and materials and the growth of preferred modalities such as single-use and monthly wearing options. CooperVision is focused on greater worldwide market penetration as we introduce new products and continue to expand our presence in existing and emerging markets, including through acquisitions. Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our projected future levels of sales growth and profitability. CooperVision markets monthly and two-week silicone hydrogel spherical and toric lens products under our Biofinity® and Avaira® brands and a multifocal lens under Biofinity.
We believe that the global market for single-use contact lenses is expanding and will continue to grow. We forecast increasing demand for our existing and future single-use products. To meet this anticipated demand, in fiscal 2013


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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

and 2014, we plan to implement capital projects to invest in increased single-use manufacturing capacity. We recently launched MyDayTM, our branded single-use spherical silicone hydrogel lens, in selected European markets, and in fiscal 2012 we launched Proclear® 1 Day multifocal. Competitive silicone hydrogel single-use lens products are gaining market share and represent a risk to our business.
We are also in the process of developing a number of new contact lens products to enhance CooperVision's worldwide product lines. New products planned for introduction over the next two years include new lens designs including single-use lenses and additional lenses utilizing silicone hydrogel materials. In May 2013, CooperVision reached an agreement to sell Aime, its rigid gas permeable contact lens and solutions business in Japan, to Nippon Contact Lens Inc. The decision to divest Aime is consistent with CooperVision's strategy to focus on its core soft contact lens business. Additionally, Aime has declining revenue and lower than average company margins. The business was obtained in 2010 as part of a very successful acquisition which included obtaining the rights to sell Biofinity in Japan. The potential divestiture is subject to numerous conditions to closing and is expected to close during Cooper's fiscal fourth quarter of 2013. Cooper expects the related charge to negatively impact its fiscal 2013 GAAP earnings per share by $0.25-$0.35. Post divestiture, Cooper expects the transaction to be neutral to earnings per share. Aime revenues for fiscal 2012 and the first quarter of fiscal 2013 were $32.9 million and $7.2 million, respectively.
The medical device segment of the women's healthcare market is highly fragmented. CooperSurgical has steadily grown its market presence and distribution system by developing products and acquiring companies and products that complement its business model. We intend to continue to invest in CooperSurgical's business through acquisitions of companies and product lines. CooperSurgical product sales are categorized based on the point of healthcare delivery including products used in surgical procedures, representing 29% of CooperSurgical's revenue, and products used in medical office procedures by obstetricians and gynecologists (ob/gyns) representing 38%. CooperSurgical's remaining sales represent products used in fertility clinics that now represent 33% of CooperSurgical's revenue up from 7% in the prior year period due to the July 2012 acquisition of Origio, a global in-vitro fertilization medical device company.
As part of the new health care reform law, a 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, became effective January 1, 2013. CooperVision's products are not subject to this new tax because contact lenses are excluded from the tax. However, United States sales of CooperSurgical's products are subject to this new tax which is primarily recorded in selling, general and administrative expense on the Statement of Income.
At April 30, 2013, we had $710.0 million available under the amended Credit Agreement. We believe that our cash and cash equivalents, cash flow from operating activities and borrowing capacity under existing credit facilities will fund operations both in the next 12 months and in the longer term as well as current and long-term cash requirements for capital expenditures, acquisitions, share repurchases and cash dividends.
Selected Statistical Information - Percentage of Sales and Growth

                                               Three Months                                    Six Months
                                  Percentage of Sales        2013 vs 2012        Percentage of Sales        2013 vs 2012
Periods Ended April 30,           2013           2012          % Change          2013           2012          % Change
Net sales                          100 %           100 %         11 %             100 %           100 %         14 %
Cost of sales                       34 %            36 %          5 %              35 %            36 %         12 %
Gross profit                        66 %            64 %         15 %              65 %            64 %         15 %
Selling, general and
administrative expense              39 %            40 %         10 %              39 %            40 %         12 %
Research and development
expense                              4 %             4 %         11 %               4 %             4 %         15 %
Amortization of intangibles          2 %             1 %         43 %               2 %             1 %         38 %
Operating income                    21 %            19 %         25 %              20 %            19 %         18 %


Table of Contents
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Net Sales
Cooper's two business units, CooperVision and CooperSurgical, generate all of its sales.
• CooperVision develops, manufactures and markets a broad range of soft contact lenses for the worldwide vision correction market.

• CooperSurgical develops, manufactures and markets medical devices and procedure solutions to improve healthcare delivery to women.

Our consolidated net sales grew by $39.5 million or 11% and $93.2 million or 14% in the three and six months ended April 30, 2013, respectively:

Periods Ended April 30,             Three Months                        Six Months
($ in millions)             2013       2012      % Change      2013       2012      % Change
CooperVision              $ 309.3    $ 288.0         7 %     $ 610.7    $ 556.9        10 %
CooperSurgical               74.7       56.6        32 %       153.2      113.7        35 %
                          $ 384.0    $ 344.6        11 %     $ 763.9    $ 670.6        14 %

CooperVision Net Sales
The contact lens market has two major product categories:
• Spherical lenses including lenses that correct near- and farsightedness uncomplicated by more complex visual defects.

• Toric and multifocal lenses including lenses that, in addition to correcting near- and farsightedness, address more complex visual defects such as astigmatism and presbyopia by adding optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea.

In order to achieve comfortable and healthy contact lens wear, products are sold with recommended replacement schedules, often defined as modalities, with the primary modalities being single-use, two-week and monthly. CooperVision offers spherical, aspherical, toric, multifocal and toric multifocal lens products in most modalities.
Significantly, the market for spherical lenses is growing with value-added spherical lenses to alleviate dry eye symptoms as well as lenses with aspherical optical properties or higher oxygen permeable lenses such as silicone hydrogels. CooperVision's Biofinity brand silicone hydrogel spherical, toric and multifocal contact lenses, Avaira brand spherical and toric products and our silicone hydrogel single-use product are manufactured using proprietary Aquaform technology to increase oxygen transmissibility for longer wear. We believe that it is important to develop a full range of multifocal and single-use silicone hydrogel products due to increased pressure from silicone hydrogel products offered by our major competitors.

CooperVision's Proclear brand aspheric, toric and multifocal contact lenses, manufactured using PC Technology, help enhance tissue/device compatibility and offer improved lens comfort.

CooperVision net sales growth included increases in single-use spheres up 2%, representing 21% of net sales. Total toric lenses grew 8% and were 31% of net sales, and multifocal lenses grew 33% to 10% of net sales up from 8% in the prior year period. Silicone hydrogel products grew 29% worldwide and represented 43% of net sales up from 36% in the prior year period. Proclear product sales grew 8% as compared to the prior year period and represented 25% of net sales, the same as in the prior year period. Older conventional lens products declined 13% and represented 3% of net sales, down from 4% in the prior year period.

CooperVision competes in the worldwide soft contact lens market and services three primary regions: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific.


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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CooperVision Net Sales by Geography
Periods Ended April 30,             Three Months                        Six Months
($ in millions)             2013       2012      % Change      2013       2012      % Change
Americas                  $ 136.5    $ 122.0        12 %     $ 261.5    $ 228.0        15 %
EMEA                        104.8       98.0         7 %       206.8      193.4         7 %
Asia Pacific                 68.0       68.0         - %       142.4      135.5         5 %
                          $ 309.3    $ 288.0         7 %     $ 610.7    $ 556.9        10 %

CooperVision's worldwide net sales grew 7% in the three-month period and grew 10% in the six-month period. Americas net sales grew 12% and 15% in the three- and six-month periods, respectively, primarily due to market gains of CooperVision's silicone hydrogel contact lenses along with single-use sphere and multifocal products. EMEA net sales increased 7% in both the three- and six-month periods driven by sales of silicone hydrogel lenses and single-use sphere and multifocal products. Net sales to the Asia Pacific region were flat in the three-month period and grew 5% in the six-month period primarily due to sales growth of silicone hydrogel lenses and single-use lenses. Sales in both fiscal periods were negatively impacted due to the weakening of the Japanese yen compared to the United States dollar.
CooperVision's net sales growth was driven primarily by increases in the volume of lenses sold and introduction of new products, primarily silicone hydrogel lenses. While unit growth and product mix have influenced CooperVision's sales growth, average realized prices by product have not materially influenced sales growth.
CooperSurgical Net Sales
CooperSurgical's net sales increased 32% in the period-to-period comparison to $74.7 million with net sales excluding acquisitions declining 4%. Origio net sales of $20.5 million are included in the current year period and sales of products used in fertility clinics now represents 33% of net sales compared to 7% in the prior year period. Sales of products used in surgical procedures declined 3% and now represent 29% of CooperSurgical's net sales compared to 39% in the prior year period. CooperSurgical's sales primarily comprise women's healthcare products used in fertility procedures and by gynecologists and obstetricians in surgical procedures and in the medical office. The balance consists of sales of medical devices outside of women's healthcare which CooperSurgical does not actively market.

Cost of Sales/Gross Profit
Gross Profit Percentage of Net Sales     Three Months        Six Months
Periods Ended April 30,                 2013       2012     2013     2012
CooperVision                             67 %       63 %    65 %      64 %
CooperSurgical                           65 %       68 %    64 %      68 %
Consolidated                             66 %       64 %    65 %      64 %

The increase in CooperVision's gross margin is largely attributable to product mix, manufacturing efficiencies and the lower royalty payments on our silicone hydrogel products beginning on January 1, 2013. Sales of higher margin Biofinity products increased as compared to the prior year period. Sales of our lower margin Avaira family of products also grew in the current year period as we continued the relaunch of these products that compete in the two-week modality market. Gross margin was also impacted by the weakening of the Japanese yen as compared to the United States dollar in the current year periods resulting in lower revenue on products sold in Japan.
The decrease in CooperSurgical's gross margin is largely attributable to product mix and sales of lower margin fertility products that were not in the prior year period. Sales of higher margin products used in surgical procedures represented 29% of net sales in the current year period compared to 39% in the prior year period as sales of lower margin fertility products now represent 33% of net sales compared to 7% in the prior year period. CooperSurgical's


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                  THE COOPER COMPANIES, INC. AND SUBSIDIARIES
      Item 2. Management's Discussion and Analysis of Financial Condition
                           and Results of Operations




gross margin increased from 64% in our fiscal first quarter of 2013 and with the
integration of Origio, we expect gross margin to remain in the current range for
the remainder of fiscal 2013.
Selling, General and Administrative Expense (SGA)
Three Months Ended April 30,              % Net               % Net       %
($ in millions)                  2013     Sales      2012     Sales    Change
CooperVision                   $ 111.0      36 %   $ 109.6      38 %      1 %
CooperSurgical                    29.5      39 %      18.5      33 %     59 %
Headquarters                      10.2     N/A         8.9     N/A       15 %
                               $ 150.7      39 %   $ 137.0      40 %     10 %
Six Months Ended April 30,                % Net               % Net       %
($ in millions)                  2013     Sales      2012     Sales    Change
CooperVision                   $ 219.7      36 %   $ 212.0      38 %      4 %
CooperSurgical                    59.0      39 %      37.8      33 %     56 %
Headquarters                      22.6     N/A        18.9     N/A       19 %
                               $ 301.3      39 %   $ 268.7      40 %     12 %

The 1% increase in CooperVision's SGA in absolute dollars in the fiscal 2013 period as compared to the fiscal 2012 period is primarily due to our investment in sales and marketing, including increased headcount, to reach new customers and to promote our silicone hydrogel products as well as costs related to the relaunch of our Avaira family of products. The increase in SGA is partially offset by reduced legal costs in the current year period as compared to the prior year.
The increases of 59% and 56% in the three- and six-month periods for CooperSurgical's SGA in absolute dollars as well as the increase as a percentage of net sales as compared to the prior year periods are primarily due to operating expenses related to Origio including approximately $0.6 million of acquisition costs in the year-to-date period. Along with the acquisition and integration activities related to Origio, CooperSurgical continues to invest in sales activities to promote our products, with emphasis on products used in surgical procedures, and to reach new customers. On January 1, 2013, the new medical device excise tax became effective on sales of CooperSurgical's products in the United States and added $0.7 million and $0.9 million to SGA expense in the three- and six-months periods, respectively.
Corporate headquarters' SGA increased in the fiscal 2013 periods in absolute dollars primarily due to share-based compensation costs, bonus accruals and consultant costs.
Research and Development Expense

Three Months Ended April 30,              % Net               % Net       %
($ in millions)                 2013      Sales     2012      Sales    Change
CooperVision                   $ 11.4      4 %     $ 11.0      4 %        4 %
CooperSurgical                    3.1      4 %        2.0      4 %       52 %
                               $ 14.5      4 %     $ 13.0      4 %       11 %
Six Months Ended April 30,                % Net               % Net       %
($ in millions)                 2013      Sales     2012      Sales    Change
CooperVision                   $ 21.9      4 %     $ 20.7      4 %        6 %
CooperSurgical                    6.2      4 %        3.8      3 %       65 %
                               $ 28.1      4 %     $ 24.5      4 %       15 %

The increase in CooperVision's research and development expense in absolute dollars in the fiscal 2013 periods is primarily due to investments in new technologies, clinical trials and increased headcount. CooperVision's research and development activities primarily include programs to develop new single-use lenses and additional lenses utilizing silicone hydrogel materials.


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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CooperSurgical research and development expense increased in absolute dollars in both of the fiscal 2013 periods and as a percentage of net sales in the six-month period as compared to prior year periods primarily due to the addition of Origio's in-vitro fertilization product development and investments in the design and upgrade of surgical procedure devices. Amortization Expense
Consolidated amortization expense increased 43% to $7.5 million in the three-month period and 38% to $14.9 million in the six-month period as compared to the prior year periods primarily due to intangible assets from acquisitions including the acquisition of Origio in July 2012.

Operating Income
Three Months Ended April 30,               % Net                % Net       %
($ in millions)                  2013      Sales      2012      Sales    Change
CooperVision                   $  79.3       26 %   $  57.8       20 %     37  %
CooperSurgical                    12.4       17 %      16.5       29 %    (25 )%
Headquarters                     (10.2 )    N/A        (8.9 )    N/A      (15 )%
                               $  81.5       21 %   $  65.4       19 %     25  %
Six Months Ended April 30,                 % Net                % Net       %
($ in millions)                  2013      Sales      2012      Sales    Change
CooperVision                   $ 146.4       24 %   $ 113.9       20 %     28  %
CooperSurgical                    26.5       17 %      32.2       28 %    (18 )%
Headquarters                     (22.6 )    N/A       (18.9 )    N/A      (19 )%
                               $ 150.3       20 %   $ 127.2       19 %     18  %

The increase in consolidated operating income in the fiscal 2013 periods in absolute dollars and as a percentage of sales was primarily due to the increases in gross profit of 15% for both the three- and six-month periods, partially offset by the increase in operating expenses of 11% and 13% in the same periods, . . .

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