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COO > SEC Filings for COO > Form 10-Q on 6-Sep-2013All Recent SEC Filings

Show all filings for COOPER COMPANIES INC

Form 10-Q for COOPER COMPANIES INC


6-Sep-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 third quarter of 2013 ended July 31, 2013, and the nine 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." Third Quarter Highlights
•Net sales of $412.0 million, up 9% from $378.2 million.
•Gross profit $268.3 million, up 12% from $240.1 million.
•Operating income $93.6 million, up 21% from $77.3 million.
•Diluted earnings per share of $1.79, up from $1.36 per share.
•Cash provided by operations $103.1 million, up from $78.1 million. Nine-Month Highlights
• Net sales of $1,175.9 million, up 12% from $1,048.8 million.

• Gross profit $763.0 million, up 14% from $671.2 million.

• Operating income $243.9 million, up 19% from $204.4 million.

• Diluted earnings per share of $4.81, up from $3.60 per share.

• Cash provided by operations $265.6 million, up from $200.3 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.

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, credit concerns and the Patient Protection and Affordable Care Act 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 technology (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.


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

We believe that the global market for single-use contact lenses is expanding and will continue to grow. We recently launched MyDayTM, our single-use spherical silicone hydrogel lens, in select European markets, and in fiscal 2012 we launched Proclear® 1 Day multifocal. We forecast increasing demand for our existing and future single-use products. To meet this anticipated demand, in fiscal 2013 and 2014, we plan to implement capital projects to invest in increased single-use manufacturing capacity. Competitive silicone hydrogel single-use lens products are gaining market share and represent a risk to our business.
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 an acquisition which included obtaining the rights to sell Biofinity in Japan. The potential divestiture is subject to numerous conditions to closing, some of which require third-party action, 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.
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 medical office and surgical procedures by obstetricians and gynecologists (ob/gyns) representing 66% of CooperSurgical's net sales. CooperSurgical's remaining sales represent products used in fertility clinics that now represent 34% of CooperSurgical's net sales up from 15% 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 July 31, 2013, we had $786.2 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                                   Nine Months
                                  Percentage of Sales        2013 vs 2012        Percentage of Sales        2013 vs 2012
Periods Ended July 31,            2013           2012          % Change          2013           2012          % Change
Net sales                          100 %           100 %          9 %             100 %           100 %         12 %
Cost of sales                       35 %            37 %          4 %              35 %            36 %          9 %
Gross profit                        65 %            63 %         12 %              65 %            64 %         14 %
Selling, general and
administrative expense              37 %            38 %          6 %              39 %            39 %         10 %
Research and development
expense                              3 %             3 %         13 %               4 %             4 %         14 %
Amortization of intangibles          2 %             2 %         31 %               2 %             2 %         35 %
Operating income                    23 %            20 %         21 %              20 %            19 %         19 %


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 $33.8 million or 9% and $127.1 million or 12% in the three and nine months ended July 31, 2013, respectively:

Periods Ended July 31,             Three Months                         Nine Months
($ in millions)            2013       2012      % Change       2013         2012       % Change
CooperVision             $ 330.5    $ 314.2         5 %     $   941.2    $   871.2         8 %
CooperSurgical              81.5       64.0        27 %         234.7        177.6        32 %
                         $ 412.0    $ 378.2         9 %     $ 1,175.9    $ 1,048.8        12 %

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 silicone hydrogel Biofinity brand spherical, toric and multifocal contact lenses, Avaira brand spherical and toric products and the MyDay brand single-use product are manufactured using proprietary Aquaform technology to increase oxygen transmissibility for longer wear. We believe that these products are well positioned in our markets to compete with 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 total sphere lenses up 2%, representing 56% of net sales and total toric lenses up 7%, representing 31% of net sales. Total multifocal lenses grew 33% to 10% of net sales up from 8% in the prior year period on increased sales of our Biofinity monthly and Proclear single-use multifocal products. Silicone hydrogel products grew 21% worldwide and represented 43% of net sales up from 38% in the prior year period. Proclear product sales grew 9% as compared to the prior year period and represented 26% of net sales up from 25% in the prior year period. Older conventional lens products declined 9% and represented 3% of net sales, the same as 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.


Table of Contents
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 July 31,            Three Months                       Nine Months
($ in millions)            2013       2012     % Change      2013       2012      % Change
Americas                 $ 143.0    $ 131.3       9  %     $ 404.5    $ 359.3        13 %
EMEA                       118.4      106.5      11  %       325.1      300.0         8 %
Asia Pacific                69.1       76.4      (9 )%       211.6      211.9         - %
                         $ 330.5    $ 314.2       5  %     $ 941.2    $ 871.2         8 %

CooperVision's worldwide net sales grew 5% in the three-month period and grew 8% in the nine-month period. Americas net sales grew 9% and 13% in the three- and nine-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 11% and 8% in the three- and nine-month periods driven by sales of silicone hydrogel lenses and single-use sphere and multifocal products. Net sales to the Asia Pacific region decreased 9% in the three-month period and were flat in the nine-month period due to the negative impact of 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 27% and 32% in the three- and nine-month periods as compared to the prior year periods with net sales excluding acquisitions up 4.5% and flat in the current year periods, respectively. Sales of products used in fertility clinics now represents 34% of net sales compared to 15% in the prior year period. Sales of products used in medical office and surgical procedures by ob/gyns were flat and declined 1% in the three- and nine-month periods and now represent 66% of CooperSurgical's net sales compared to 85% 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. Unit growth and product mix, primarily sales of fertility products, along with increased average realized prices on disposable products influenced organic sales growth.

Cost of Sales/Gross Profit
Gross Profit Percentage of Net Sales     Three Months        Nine Months
Periods Ended July 31,                  2013       2012     2013      2012
CooperVision                             65 %       63 %     65 %      63 %
CooperSurgical                           64 %       67 %     64 %      67 %
Consolidated                             65 %       63 %     65 %      64 %

The increase in CooperVision's gross margin is largely attributable to the lower royalty payment on our silicone hydrogel products beginning on January 1, 2013, increased manufacturing efficiencies and product mix. 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 unfavorably impacted by lower net sales on products sold in Japan due to the weakening of the Japanese yen as compared to the United States dollar in the current year periods.
The decrease in CooperSurgical's gross margin is largely attributable to product mix and increased sales of lower margin fertility products due to the acquisition of Origio in July 2012. Sales of lower margin fertility products now represent 34% of net sales compared to 15% in the prior year period.


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




Selling, General and Administrative Expense (SGA)
Three Months Ended July 31,              % Net               % Net       %
($ in millions)                 2013     Sales      2012     Sales    Change
CooperVision                  $ 112.0      34 %   $ 107.6      34 %      4 %
CooperSurgical                   29.3      36 %      26.3      41 %     12 %
Headquarters                     10.8     N/A         9.9     N/A        8 %
                              $ 152.1      37 %   $ 143.8      38 %      6 %

Nine Months Ended July 31,               % Net               % Net       %
($ in millions)                 2013     Sales      2012     Sales    Change
CooperVision                  $ 331.7      35 %   $ 319.6      37 %      4 %
CooperSurgical                   88.5      38 %      64.0      36 %     38 %
Headquarters                     33.3     N/A        28.9     N/A       15 %
                              $ 453.5      39 %   $ 412.5      39 %     10 %

The 4% increase in CooperVision's SGA in absolute dollars in the fiscal 2013 periods as compared to the fiscal 2012 periods is primarily due to our investment in sales and marketing, including increased headcount, to reach new customers and support geographic expansion as well as to promote our silicone hydrogel 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 12% and 38% in the three- and nine-month periods for CooperSurgical's SGA in absolute dollars and as a percentage of net sales in the nine-month period 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 $1.6 million to SGA expense in the three- and nine-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 July 31,              % Net               % Net       %
($ in millions)                2013      Sales     2012      Sales    Change
CooperVision                  $ 11.9      4 %     $ 10.7      3 %       12 %
CooperSurgical                   3.0      4 %        2.5      4 %       18 %
                              $ 14.9      3 %     $ 13.2      3 %       13 %

Nine Months Ended July 31,               % Net               % Net       %
($ in millions)                2013      Sales     2012      Sales    Change
CooperVision                  $ 33.8      4 %     $ 31.3      4 %        8 %
CooperSurgical                   9.2      4 %        6.3      4 %       46 %
                              $ 43.0      4 %     $ 37.6      4 %       14 %

CooperVision's research and development expense increased in absolute dollars in the fiscal 2013 periods and as a percentage of net sales in the three-month period primarily due to investments in new technologies, clinical trials and increased headcount. CooperVision's research and development activities include programs to develop new contact lens designs.


Table of Contents
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 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 31% to $7.7 million in the three-month period and 35% to $22.6 million in the nine-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 July 31,               % Net                % Net       %
($ in millions)                 2013      Sales      2012      Sales    Change
CooperVision                  $  88.0       27 %   $  75.1       24 %     17  %
CooperSurgical                   16.4       20 %      12.1       19 %     35  %
Headquarters                    (10.8 )    N/A        (9.9 )    N/A       (8 )%
                              $  93.6       23 %   $  77.3       20 %     21  %

Nine Months Ended July 31,                % Net                % Net       %
($ in millions)                 2013      Sales      2012      Sales    Change
CooperVision                  $ 234.3       25 %   $ 189.0       22 %     24  %
CooperSurgical                   42.9       18 %      44.3       25 %     (3 )%
Headquarters                    (33.3 )    N/A       (28.9 )    N/A      (15 )%
                              $ 243.9       20 %   $ 204.4       19 %     19  %

The increase in consolidated operating income in the fiscal 2013 periods in absolute dollars and as a percentage of net sales was primarily due to the increases in gross profit of 12% in the three-month period and 14% in the nine-month period, partially offset by the increase in operating expenses of 7% and 11% in the same periods, respectively. The decrease in CooperSurgical's operating income in the current year nine-month period in absolute dollars and as a percentage of net sales was due to operating expenses related to the acquisition of Origio in July 2012. This decrease was primarily due to increases in amortization expense and research and development expense for in-vitro fertilization product development.
Interest Expense
Interest expense in the fiscal third quarter of 2013 was $2.3 million representing a 2% decrease from the prior year period. Interest expense for the first nine months of fiscal 2013 was $7.3 million representing a decrease of 20% from the first nine months of fiscal 2012. These decreases were primarily driven . . .

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