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COO > SEC Filings for COO > Form 10-Q on 7-Mar-2014All Recent SEC Filings

Show all filings for COOPER COMPANIES INC

Form 10-Q for COOPER COMPANIES INC


7-Mar-2014

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 that could adversely affect our global markets.

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

• Acquisition-related adverse effects including the failure to successfully obtain the anticipated revenues, margins and earnings benefits of acquisitions; integration delays or costs and 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.

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

• New competitors, product innovations or technologies.

• Reduced sales, loss of customers and costs and expenses related to recalls.

• New U.S. and foreign government laws and regulations, and changes in existing laws, regulations and enforcement guidance, which affect the medical device industry and the healthcare industry generally.

• Failure 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.

• 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 statutory tax rates.

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


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

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

• 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, 2013, 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 first quarter of 2014 ended January 31, 2014, and compare them with the same period of fiscal 2013. We discuss our cash flows and current financial condition under "Capital Resources and Liquidity."
First Quarter Highlights
•Net sales of $405.0 million, up 7% from $379.8 million
•Gross profit $262.9 million, up 9% from $240.5 million
•Operating income $81.6 million, up 19% from $68.8 million
•Diluted earnings per share of $1.47, down from $1.50 per share
•Cash provided by operations $68.6 million, up from $47.6 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 Affordable Care Act together with the European debt crisis and related foreign currency volatility, particularly the yen, euro and the pound, impact our current performance and continue to represent a risk to our performance for fiscal year 2014 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 desired 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, a multifocal lens under Biofinity and a single-use spherical lens under MyDayTM. We believe that the global market for single-use contact lenses is expanding and will continue to grow. In fiscal 2013, we launched MyDay, our single-use spherical silicone hydrogel lens, in Europe, 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 2014 we plan to continue the implementation of 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. Consistent with CooperVision's strategy to focus on our core soft contact lens business, on October 31, 2013, we completed a transaction to sell Aime, our rigid gas permeable contact lens and solutions business in Japan. The business was originally obtained as part of the December 1, 2010, acquisition which included obtaining the rights to market Biofinity in Japan. Aime revenue had declined in recent periods, and the products had lower than average company margins. Results from operations of Aime are included in our Consolidated Statements of Income for fiscal 2013 and the divestiture was neutral to earnings per share in the first fiscal quarter of 2014. We also compete in the highly fragmented medical device segment of the women's healthcare market. 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


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

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 65% of CooperSurgical's net sales. CooperSurgical's remaining sales represent products used in fertility clinics that now represent 35% of CooperSurgical's net sales up from 31% in the prior year period. 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 January 31, 2014, we had $999.8 million available under our existing revolving 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. However, depending on the size or timing of these business activities, we may seek to raise additional debt financing.
Selected Statistical Information - Percentage of Sales and Growth

                                                            Percentage of Sales        2014 vs 2013
Three Months Ended January 31,                              2014           2013          % Change
Net sales                                                    100 %           100 %          7 %
Cost of sales                                                 35 %            37 %          2 %
Gross profit                                                  65 %            63 %          9 %
Selling, general and administrative expense                   39 %            40 %          5 %
Research and development expense                               4 %             4 %         15 %
Amortization of intangibles                                    2 %             1 %          2 %
Operating income                                              20 %            18 %         19 %

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.


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




Our consolidated net sales grew by $25.1 million or 7% in the three months ended
January 31, 2014:
Three Months Ended January 31,
($ in millions)                    2014       2013     % Change
CooperVision                     $ 326.3    $ 301.4       8 %
CooperSurgical                      78.7       78.4       -
                                 $ 405.0    $ 379.8       7 %

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.
The contact lens market consists primarily of 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. The market for spherical, toric and multifocal lenses is growing with value-added lenses to alleviate dry eye symptoms as well as higher oxygen permeable lenses such as silicone hydrogels.

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's silicone hydrogel Biofinity brand spherical, toric and multifocal contact lenses, Avaira brand spherical and toric lenses and MyDay, our spherical single-use lens, 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 net sales growth included increases in total sphere lenses up 8%, representing 57% of net sales and total toric lenses up 10%, representing 31% of net sales. Total multifocal lenses grew 24%, representing 10% of net sales up from 9% in the prior year period on increased sales of Biofinity monthly and Proclear single-use multifocal products. Silicone hydrogel products, including MyDay, our single-use silicone hydrogel lens, grew 29% worldwide and represented 47% of net sales up from 40% in the prior year period. Proclear product sales grew 9% 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 8% and represented 2% of net sales, down from 3% 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
Three Months Ended January 31,
($ in millions)                    2014       2013     % Change
Americas                         $ 140.7    $ 125.0      13  %
EMEA                               117.9      101.9      16  %
Asia Pacific                        67.7       74.5      (9 )%
                                 $ 326.3    $ 301.4       8  %

The growth in Americas net sales was primarily due to market gains of CooperVision's silicone hydrogel contact lenses and single-use sphere and multifocal products. The growth in EMEA net sales arose from market gains of silicone hydrogel lenses along with single-use sphere and multifocal products. EMEA net sales were favorably impacted due to weakening of the United States dollar compared to the euro. The decrease in net sales to the Asia Pacific region was due to the negative impact of the weakening of the Japanese yen compared to the United States dollar. Excluding the impact of currency, sales in the Asia Pacific region grew on market gains of silicone hydrogel lenses and single-use products.
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 of $78.7 million were flat compared to the prior year period. Sales of products used in fertility clinics grew 15% and now represent 35% of net sales compared to 31% in the prior year period. Sales of products used in medical office and surgical procedures declined 6% as compared to the prior year period and now represent 65% of CooperSurgical's net sales compared to 69% 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 average realized prices on disposable products influenced sales growth.
Cost of Sales/Gross Profit
Gross Profit Percentage of Net Sales

Three Months Ended January 31,         2014    2013
CooperVision                            65 %    63 %
CooperSurgical                          63 %    64 %
Consolidated                            65 %    63 %

The increase in CooperVision's gross margin is attributable to the lower royalty payment on our silicone hydrogel products beginning on January 1, 2013, along with product mix. Gross margin was favorably impacted by the growth in sales of our higher margin Biofinity products as compared to the prior year period and by the fiscal 2013 divestiture of Aime with products that had lower than average company gross margin. Gross margin was unfavorably impacted by growth in sales of MyDay, our single-use spherical silicone hydrogel lens launched in fiscal 2013 as well as 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 period.
The decrease in CooperSurgical's gross margin is largely attributable to product mix and increased sales of lower margin fertility products. Sales of lower margin fertility products now represent 35% of net sales compared to 31% in the prior year period.


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                  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 January 31,              % Net               % Net       %
($ in millions)                    2014     Sales      2013     Sales    Change
CooperVision                     $ 112.0      34 %   $ 108.6      36 %     3  %
CooperSurgical                      29.4      37 %      29.8      38 %    (1 )%
Corporate                           16.7       -        12.3       -      36  %
                                 $ 158.1      39 %   $ 150.7      40 %     5  %

The 3% increase in CooperVision's SGA in absolute dollars in the fiscal 2014 period as compared to the fiscal 2013 period is primarily due to our investment in sales and marketing, including increased headcount, to reach new customers and support geographic expansion. Marketing programs included the promotion of our silicone hydrogel products, including MyDay, our single-use spherical silicone hydrogel lens. The decrease in SGA as a percentage of sales as compared to the prior year period is primarily due to revenue growth and cost controls measures.
The 1% decrease in CooperSurgical's SGA both in absolute dollars and as a percentage of net sales is primarily due to reduced selling costs related to the 6% decline in sales for office and surgical procedures and the timing of marketing initiatives. CooperSurgical continues to invest in sales activities to promote our products, with emphasis on products used in surgical procedures, and to reach new customers. The medical device excise tax, that became effective on January 1, 2013, on sales of CooperSurgical's products in the United States was $0.7 million in the current year period as compared to $0.2 million in the prior year period.
The increase in Corporate SGA in the fiscal 2014 period in absolute dollars is primarily due to share-based compensation costs.

Research and Development Expense
Three Months Ended January 31,              % Net               % Net       %
($ in millions)                   2014      Sales     2013      Sales    Change
CooperVision                     $ 12.8      4 %     $ 10.5      3 %       23  %
CooperSurgical                      2.9      4 %        3.2      4 %      (10 )%
                                 $ 15.7      4 %     $ 13.7      4 %       15  %

The increase in CooperVision's research and development expense in absolute dollars and as a percentage of net sales in the fiscal 2014 period as compared to the fiscal 2013 period are primarily due to investments in new technologies, clinical trials and increased headcount. CooperVision's research and development activities are primarily focused on the development of new contact lens designs. CooperSurgical research and development expense decreased in absolute dollars primarily due to the completion of projects in fiscal 2013 for the design and upgrade of several surgical procedure devices. CooperSurgical's research and development activities include in-vitro fertilization product development and the design and upgrade of surgical procedure devices. Amortization Expense
Consolidated amortization expense increased 2% to $7.5 million in the current year period as compared to 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




Operating Income
Three Months Ended January 31,              % Net               % Net       %
($ in millions)                    2014     Sales      2013     Sales    Change
CooperVision                     $ 84.1       26 %   $ 67.1       22 %     25  %
CooperSurgical                     14.2       18 %     14.0       18 %      1  %
Corporate                         (16.7 )      -      (12.3 )      -      (36 )%
                                 $ 81.6       20 %   $ 68.8       18 %     19  %

The increase in consolidated operating income in the fiscal 2014 period in absolute dollars and as a percentage of net sales was primarily due to the increase in gross profit of 9% partially offset by the increase in operating expenses of 6%.
Interest Expense
Interest expense in the fiscal first quarter of 2014 was $1.7 million representing a 35% decrease from the prior year period. This decrease reflects lower average debt balances and lower average interest rates in the current year period.
Insurance Proceeds
On October 28, 2011, a manufacturing building in the UK experienced an incident in which a pipe broke in our fire suppression system, causing water and fire retardant foam damage to the facility. While this incident did not substantially impact our existing customers, the repairs to the facility and resultant decrease in manufacturing capacity impacted the timing of marketing initiatives to generate additional sales. In January 2013, we resolved our business interruption claim with our insurer for a total of $19.1 million. We received a payment of $5.0 million in our fiscal fourth quarter of 2012. In our fiscal first quarter of 2013, we recorded the remaining $14.1 million in our Consolidated Statement of Income of which we received payment of $2.9 million during the fiscal first quarter and payment of the remaining $11.2 million in the fiscal second quarter.
Share Repurchase
In December 2011, our Board of Directors authorized a share repurchase program and subsequently amended the total repurchase authorization to $500.0 million. During the fiscal first quarter of 2014, we repurchased 396 thousand shares of our common stock for $50.0 million at an average purchase price of $126.21 per share. During the fiscal first quarter of 2013, we repurchased 460 thousand shares of our common stock for $44.4 million at an average purchase price of $96.34. At January 31, 2014, we had remaining authorization to repurchase about $211.5 million of our common stock. See Note 8 for additional information.

Other (Loss) Income, Net
Periods Ended January 31,
($ in millions)                2014      2013
Foreign exchange (loss) gain $ (0.9 )   $ 0.5
Other, net                      0.4       0.1
                             $ (0.5 )   $ 0.6


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

Provision for Income Taxes
We recorded income tax expense of $7.2 million in the fiscal first quarter of 2014 compared to $6.0 million in the prior year period. Our effective tax rate (ETR) (provision for income taxes divided by pretax income) for the fiscal first quarter of 2014 was 9.1%. Our year-to-date results include the projected fiscal year ETR, plus any discrete items. The ETR used to record the provision for income taxes for the fiscal first quarter of 2013 was 7.5%.

The ETR is below the United States statutory rate as a majority of our taxable income is earned in foreign jurisdictions with lower tax rates reflecting the shift in the geographic mix of taxable income during recent periods as taxable income earned in foreign jurisdictions increased as compared to taxable income earned in the United States. As a result, the ratio of domestic taxable income to worldwide taxable income, primarily within CooperVision but augmented by . . .

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