<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarterly Period Ended JULY 31, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
------------------- -------------------
Commission File Number 1-8597
THE COOPER COMPANIES, INC.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2657368
- --------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
6140 Stoneridge Mall Road, Suite 590, Pleasanton, CA 94588
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 460-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- ---
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date.
<TABLE>
<S> <C>
Common Stock, $.10 Par Value 14,023,794 Shares
- ------------------------------ ----------------------------------
Class Outstanding at August 31, 1999
</TABLE>
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three
and Nine Months Ended July 31, 1999 and 1998 3
Consolidated Condensed Balance Sheets - July 31, 1999
and October 31, 1998 4
Consolidated Condensed Statements of Cash Flows - Nine
Months Ended July 31, 1999 and 1998 5
Consolidated Condensed Statements of Comprehensive
Income - Three and Nine Months Ended
July 31, 1999 and 1998 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
Index of Exhibits 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(In thousands, except per share figures)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 43,404 $ 39,709 $120,106 $106,543
Cost of sales 15,116 14,873 43,706 39,177
--------- --------- -------- ---------
Gross profit 28,288 24,836 76,400 67,366
Selling, general and administrative expense 16,041 13,960 45,812 40,218
Research and development expense 398 512 1,301 1,511
Amortization of intangibles 954 932 2,866 2,544
--------- --------- -------- ---------
Operating income 10,895 9,432 26,421 23,093
--------- --------- -------- ---------
Settlement of disputes, net - 200 - 200
Interest expense 1,322 1,532 4,933 4,454
Other income (loss), net 54 (271) 125 757
--------- --------- -------- ---------
Income from continuing operations before
income taxes 9,627 7,429 21,613 19,196
Provision for (benefit of) income taxes 3,081 (910) 7,132 (1,864)
--------- --------- -------- ---------
Income from continuing operations 6,546 8,339 14,481 21,060
--------- --------- -------- ---------
Discontinued operations:
Net income - 1,835 129 3,590
Gain on disposal - - 2,970 -
--------- --------- -------- ---------
- 1,835 3,099 3,590
--------- --------- -------- ---------
Net income $ 6,546 $ 10,174 $ 17,580 $ 24,650
========= ========= ======== =========
Earnings per share:
Basic:
Continuing operations $ 0.47 $ 0.56 $ 1.03 $ 1.42
Discontinued operations - 0.12 0.22 0.24
--------- --------- -------- ---------
Earnings per share $ 0.47 $ 0.68 $ 1.25 $ 1.66
========= ========= ======== =========
Diluted:
Continuing operations $ 0.46 $ 0.54 $ 1.01 $ 1.37
Discontinued operations - 0.12 0.22 0.23
--------- --------- -------- ---------
Earnings per share $ 0.46 $ 0.66 $ 1.23 $ 1.60
========= ========= ======== =========
Number of shares used to compute earnings per share:
Basic 13,973 14,896 14,118 14,859
========= ========= ======== =========
Diluted 14,194 15,342 14,318 15,378
========= ========= ======== =========
</TABLE>
See accompanying notes.
3
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
-------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,726 $ 7,333
Trade receivables, net 26,572 24,426
Inventories 34,953 30,349
Deferred tax asset 15,094 15,057
Net assets of discontinued operations - 29,206
Other current assets 8,269 9,706
-------- --------
Total current assets 96,614 116,077
-------- --------
Property, plant and equipment, net 38,469 34,234
Goodwill and other intangibles, net 81,527 84,308
Deferred tax asset 57,224 52,754
Other assets 8,135 8,668
-------- --------
$281,969 $296,041
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 9,038 $ 13,005
Current portion of long-term debt 3,009 6,958
Accrued income taxes 13,878 8,987
Other current liabilities 20,676 17,751
-------- --------
Total current liabilities 46,601 46,701
Long-term debt 56,496 78,677
Other noncurrent liabilities 22,709 25,410
-------- --------
Total liabilities 125,806 150,788
-------- --------
Contingencies (see Note 7)
Stockholders' equity:
Common stock, $.10 par value 1,494 1,491
Additional paid-in capital 251,020 251,167
Accumulated other comprehensive loss (1,008) (829)
Accumulated deficit (81,283) (98,583)
Treasury stock at cost (14,060) (7,993)
--------- --------
Total stockholders' equity 156,163 145,253
--------- --------
$281,969 $296,041
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 15,289 $ 2,510
--------- ----------
Cash flows from investing activities:
Acquisitions of businesses - (33,836)
Disposition of discontinued operations, net 28,685 -
Costs of disposition (3,289) -
Purchases of property, plant and equipment (7,547) (14,599)
Sale of securities 5,419 -
Other (386) -
--------- ---------
Net cash provided (used) by investing activities 22,882 (48,435)
--------- ---------
Cash flows from financing activities -- proceeds from (payment of):
Long-term debt borrowings 8,532 42,691
Long-term debt payments (33,989) (5,155)
Purchase of treasury stock (7,345) -
Exercise of warrant 948 -
Dividends on common stock (280) -
Short-term debt payment (2,142) -
Other 186 383
--------- ---------
Net cash provided (used) by financing activities (34,090) 37,919
--------- ----------
Effect of exchange rate changes on cash and cash equivalents 312 (184)
Net increase (decrease) in cash and cash equivalents 4,393 (8,190)
Cash and cash equivalents - beginning of period 7,333 18,249
--------- ---------
Cash and cash equivalents - end of period $ 11,726 $ 10,059
========= =========
Supplemental disclosure of noncash investing and financing activities:
Acquisitions:
Fair value of assets acquired $ 93,044
Less, liabilities assumed and acquisition costs (29,707)
----------
$ 63,337
==========
Funded by:
Cash payments $ 33,836
Issuance of stock and debt 29,501
---------
$ 63,337
=========
</TABLE>
See accompanying notes.
5
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 6,546 $10,174 $17,580 $24,650
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 136 (410) (294) (649)
-------- -------- ------- -------
Comprehensive income $ 6,682 $ 9,764 $17,286 $24,001
======== ======== ======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The Cooper Companies, Inc. (the "Company," "Cooper" or "we" and similar
pronouns), through its principal subsidiaries, develops, manufactures and
markets healthcare products. CooperVision ("CVI") markets a range of contact
lenses to correct visual defects, specializing in toric lenses that correct
astigmatism. Its leading products are disposable-planned replacement toric and
spherical lenses. CVI also markets conventional toric and spherical lenses and
lenses for patients with more complex vision disorders. CooperSurgical ("CSI")
markets diagnostic products, surgical instruments and accessories to the women's
healthcare market.
During interim periods, we follow the accounting policies described in our most
recent Form 10-K. Please refer to this and to our Annual Report to Stockholders
for the fiscal year ended October 31, 1998, when reviewing this Form 10-Q. The
results in this report do not necessarily indicate future results.
The unaudited consolidated condensed financial statements presented in this
report contain all adjustments necessary to present fairly Cooper's consolidated
financial position as of July 31, 1999 and October 31, 1998, the consolidated
results of its operations for the three and nine months ended July 31, 1999 and
1998, and its consolidated cash flows for the nine months ended July 31, 1999
and 1998. Adjustments consist only of normal recurring items except for the $2.7
million reduction to the deferred tax asset valuation allowance recorded in the
first nine months of fiscal 1998, as Management believed that Cooper's future
results would continue to improve. Certain reclassifications have been applied
to the prior periods' financial statements so they will conform to the current
year's presentation. None of these reclassifications had any impact on net
income.
We adopted Statement of Financial Accounting Standards ("FAS") No. 130,
"Reporting Comprehensive Income" at the beginning of fiscal 1999. We also
adopted FAS No. 131 "Reporting for Segments of a Business Enterprise" in fiscal
1999. The Company will provide the comparative information for interim periods
required by FAS No. 131 beginning in its first quarter of fiscal 2000.
Note 2. Inventories
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
-------- -----------
(In thousands)
<S> <C> <C>
Raw materials $ 8,854 $ 7,038
Work-in-process 3,530 2,964
Finished goods 22,569 20,347
-------- --------
$34,953 $30,349
======= =======
</TABLE>
7
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 3. Long-Term Debt
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
-------- -----------
(In thousands)
<S> <C> <C>
Promissory notes - Aspect $23,117 $27,563
Midland Bank 17,444 17,444
KeyBank line of credit - 21,800
Aspect Vision bank loans 6,293 6,754
Promissory note - Wesley-Jessen
Corporation ("W-J") 100 574
County of Monroe Industrial
Development Agency ("COMIDA")
Bond 2,755 2,880
Capitalized leases 9,796 8,620
------- -------
59,505 85,635
Less current installments 3,009 6,958
------- -------
$56,496 $78,677
======= =======
</TABLE>
8
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 4. Earnings Per Share ("EPS")
(In thousands, except per share figures)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from continuing operations $ 6,546 $ 8,339 $14,481 $21,060
Discontinued operations - 1,835 3,099 3,590
-------- ------- ------- --------
Net income $ 6,546 $10,174 $17,580 $24,650
======== ======= ======= =======
Basic:
Weighted average common shares 13,973 14,896 14,118 14,859
======== ======= ======= =======
Basic earnings per share:
Continuing operations $ 0.47 $ 0.56 $ 1.03 $ 1.42
Discontinued operations - 0.12 0.22 0.24
-------- ------- ------- -------
Basic earnings per share $ 0.47 $ 0.68 $ 1.25 $ 1.66
======== ======= ======= =======
Diluted:
Weighted average common shares 13,973 14,896 14,118 14,859
Add dilutive securities:
Warrants 16 58 27 60
Options 205 388 173 459
-------- ------- ------- -------
Subtotal 221 446 200 519
-------- ------- ------- -------
Denominator for diluted earnings
per share 14,194 15,342 14,318 15,378
======== ======= ======= =======
Diluted earnings per share:
Continuing operations $ 0.46 $ 0.54 $ 1.01 $ 1.37
Discontinued operations - 0.12 0.22 0.23
-------- ------- ------- -------
Diluted earnings per share $ 0.46 $ 0.66 $ 1.23 $ 1.60
======== ======= ======= =======
</TABLE>
We excluded the following options to purchase Cooper's common stock from the
computation of diluted EPS because their exercise prices were above the average
market price.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------------- ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of shares excluded 1,142,500 231,250 1,245,833 20,100
=============== =============== =============== ===============
Range of exercise prices $23.44 - $62.21 $36.91 - $40.38 $20.00 - $62.21 $40.38
=============== =============== =============== ===============
</TABLE>
9
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
Note 5. Income Taxes
Substantially all of Cooper's valuation allowance against its net deferred tax
assets was reversed in fiscal 1998 based on Management's belief that the
Company's future results will enable it to utilize the deferred tax assets
recorded on its balance sheet.
As a result, the effective tax rate used to record the provision for income
taxes of $7.1 million for the nine months ended July 31, 1999 was approximately
33%. In the third quarter, updated projections indicated that the full year
effective tax rate ("ETR") would be about 33%, down one percentage point from
the second quarter's estimate. As a result, the ETR for the three-month period
ended July 31, 1999 was approximately 32%. The net tax benefit in the 1998
three- and nine-month periods of $910,000 and $1.9 million, respectively,
included benefits of $1 million and $2.7 million, respectively, from reducing
the valuation allowance against net deferred tax assets.
Note 6. Discontinued Operations
In the fourth quarter of 1998, Cooper declared Hospital Group of America
("HGA"), its psychiatric services business, a discontinued operation and
recorded a charge of $22.3 million reflecting Management's initial estimate of
the ultimate loss to be incurred upon disposition. Prior period financial
statements have been restated.
In January 1999, Cooper completed the sale of a portion of HGA for $5 million in
cash and trade receivables. On April 15, 1999, Cooper sold the remainder of HGA
to Universal Health Services, Inc. for $27 million at closing plus up to an
additional $3 million if certain contingent events occur. Cooper recorded gains
on disposal of $1.3 million in the first quarter and $1.7 million in the second
quarter, reflecting adjustments to the loss estimated in 1998.
HGA's patient revenue was $14.5 million for the three months ended July 31,
1998. For the nine-month period ended July 31, 1998, patient revenue was $42.2
million and for the same period in 1999, it was $20.8 million.
Note 7. Contingencies -- Environmental
In 1997, environmental consultants engaged by the Company identified a contained
area of groundwater contamination consisting of industrial solvents including
trichloroethane (also known as TCA) at one of CVI's sites. In the opinion of
counsel, the solvents were released into the ground before the Company acquired
the business at that site, and the area containing these chemicals is limited.
10
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
(Unaudited)
On April 6, 1999, the Company and the New York Department of Environmental
Conservation entered into a voluntary agreement covering the environmental
investigation of the site. The investigation is currently underway and will
ultimately result in a state-approved mediation. The Company has accrued
approximately $500,000 for that purpose. In the opinion of Management, the cost
of remediation will not be material when considering amounts previously accrued.
Note 8. Treasury Stock
In September 1998, Cooper's Board of Directors authorized the purchase of up to
one million shares of its common stock. All of these shares have been purchased.
<TABLE>
<CAPTION>
Purchase
Shares Price
------ --------
(In thousands)
<S> <C> <C>
Purchased and paid for in fiscal 1998 486 $ 7,993
Purchased in the first quarter of fiscal 1999, paid
for in the second quarter of fiscal 1999 125 1,836
Purchased and paid for in the second quarter of fiscal 1999 389 5,509
-------- ---------
1,000 15,338
Reissued in the third quarter of fiscal 1999* (83) (1,278)
-------- ---------
917 $14,060
======== =========
</TABLE>
* Cooper issued 83,333 shares of treasury stock for the exercise of a warrant
it issued related to a prior acquisition. Cooper received $948,000 for this
warrant. The balance of $330,000 was charged against additional paid in
capital.
Note 9. Generally Accepted Accounting Principles Issued But Not Adopted
In April 1998, The American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP"). The SOP broadly defines start-up activities and requires that they be
expensed as incurred. It is effective for financial statements for fiscal years
beginning after December 15, 1998. Any deferred start-up activities on the
balance sheet at the adoption of the SOP are to be expensed as a cumulative
effect of a change in accounting principle. Cooper will adopt the SOP as
required in the first quarter of fiscal year 2000 and believes that the impact
of such adoption on net income will not be materially in excess of $700,000. The
Company's current policy is to defer start-up activities as appropriate and
amortize them over 12 months on a straight-line basis.
Note 10. Authorized Shares of Common Stock
At their March 18, 1999 Annual Meeting, Cooper's shareholders approved an
increase in the number of authorized shares of its common stock to 40 million.
11
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Concluded
(Unaudited)
Note 11. Cash Dividends
On May 20, 1999, Cooper announced that it intends to pay an annual cash dividend
on its common stock of 8 cents per share, payable in quarterly installments of 2
cents per share. On July 5, 1999, we paid the first quarterly dividend, and on
August 26, 1999, we announced that we will pay the second quarterly installment
on October 5, 1999 to stockholders of record on September 15, 1999.
12
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Note numbers refer to "Notes to Consolidated Condensed Financial Statements"
beginning on page 7 of this report.
FORWARD-LOOKING STATEMENTS: This Form 10-Q contains "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995 including
statements about Cooper's capital resources, anticipated revenue growth,
operating results and market conditions. Since the outcome of forward-looking
statements is uncertain, risky and, indeed, may not occur, investors should not
rely on them to predict the future.
To identify forward-looking statements, look for words like "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "estimates" or "anticipates", and similar words or phrases. Discussions
of strategy, plans or intentions often contain forward-looking statements. These
necessarily depend on assumptions, data or methods that may be incorrect or
imprecise.
Events that could cause actual results and future actions to differ materially
from those described by or contemplated in the forward-looking statements
include, but are not limited to, major changes in business conditions and the
economy, loss of key senior management, major disruptions in the operations of
Cooper's manufacturing facilities, new competitors or technologies, significant
disruptions caused by third parties failing to address the year 2000 issue or by
unforeseen delays in completing our year 2000 compliance program, acquisition
integration costs, foreign currency exchange exposure including the potential
impact of the Euro, investments in research and development and other start-up
projects, dilution to earnings per share from acquisitions or issuing stock,
regulatory issues, significant environmental clean-up costs above those already
accrued, litigation costs, costs of business divestitures, and other factors
described in Cooper's Securities and Exchange Commission filings, including the
"Business" section in our Annual Report on Form 10-K for the year ended October
31, 1998.
Cooper cautions investors not to rely unduly on forward-looking statements. They
reflect our analysis only on their stated date.
RESULTS OF OPERATIONS
This section focuses on our income statement and compares our operating results
from continuing operations for the third fiscal quarter and nine months of 1999
with those for the same periods of 1998. You will find a discussion of our cash
flows and our current financial condition beginning on page 19 in the section
headed "Capital Resources and Liquidity."
13
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
REVENUE: All of Cooper's revenue is generated by our two business units,
CooperVision ("CVI") and CooperSurgical ("CSI"):
CVI markets a broad range of contact lenses primarily in North America and
Europe.
CSI markets diagnostic products, surgical instruments and accessories
to the women's healthcare market primarily in the United States.
Our consolidated revenue grew $3.7 million (9%) in the third quarter and $13.6
million (13%) in the nine-month period:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------------------- ---------------------------------------
1999 1998 % Incr. 1999 1998 % Incr.
------ ------ ------- ------ ------ -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
CVI $ 35.9 $ 32.5 11% $ 98.4 $ 85.8 15%
CSI 7.5 7.2 4% 21.7 20.7 5%
------- ------- ------- -------
$ 43.4 $ 39.7 9% $ 120.1 $ 106.5 13%
======= ======= ======= =======
</TABLE>
CVI REVENUE: CVI's worldwide core business, which we define as all revenue other
than original equipment manufacturer ("OEM") sales to other contact lens
suppliers, grew 15% in both the three- and nine-month periods:
<TABLE>
<CAPTION>
% Change % Change
Third from Third Nine from Nine
Quarter % Quarter Months % Months
Segment 1999 Total 1998 1999 Total of 1998
- ------- -------- ----- ----------- -------- ----- ----------
($ In millions)
<S> <C> <C> <C> <C> <C> <C>
U.S. $22.5 63% 22% $59.1 60% 16%
International 11.7 32% 3% 32.5 33% 12%
----- ----- ----- -----
Core Business 34.2 95% 15% 91.6 93% 15%
OEM 1.7 5% (36%) 6.8 7% 15%
----- ----- ----- -----
Total $35.9 100% 11% $98.4 100% 15%
===== ===== ===== =====
</TABLE>
CVI's core product sales in the U.S. grew 22% in the third quarter and 16%
through nine months. The market grew an estimated 1% during the first half of
the calendar year as indicated by a contact lens industry market research audit
for the second calendar quarter. CVI believes that through fiscal nine months,
it gained one market share point in the U.S. to 8 percent. International core
revenue--sales in countries outside the United States plus exports from the
U.S.--grew 3% during the quarter and 12% over the nine-month period a year ago.
14
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Strong sales of toric contact lenses to correct astigmatism, including new
products, grew 24% in both fiscal periods and continued to drive CVI's core
business sales in the U.S. This is more than three times the growth of that
market segment reported in the most recent market audit. We believe that CVI,
with a 27% share, is now the leader in this market segment.
CVI's International sales grew 3% in the third quarter and 12% year to date. Our
Canadian and Italian businesses both generated strong sales in the third
quarter, and the rollout of new products continued in Europe. These include
CVI's line of toric lenses, the Frequency Aspheric lens and Frequency 55 UV,
which contains an ultra violet light blocking agent. In Japan, CVI's partner,
Rohto Pharmaceuticals, Inc., launched CVI spherical and toric lenses under the
Rohto i.Q trade name. With the exception of the United Kingdom, CVI believes
that it is gaining market share in each of the world's top ten contact lens
markets.
OEM sales decreased 36% in the third quarter, reducing the nine-month increase
to 15%. We expect the current shift away from OEM and toward higher margin
branded products to continue.
CSI REVENUE: CSI's third quarter revenue grew 4% and is up 5% year to date. In
July, CSI announced that it had agreed with 3M (NYSE: MMM) and Matria Healthcare
Inc. (NASDAQ: MATR) to co-market its FemExam pH and Amines Test Card in the
United States, and that the American Medical Association had awarded the FemExam
Card an additional third party reimbursement code. The FemExam Card is an
accurate, convenient point of care diagnostic test used to help determine if a
vaginal infection is bacterial or fungal. In early August, CSI and BioStar,
Inc., a Thermo Electron Corporation (NYSE: TMO) subsidiary, agreed to co-market
three additional in-office tests for vaginitis. All four tests are being
developed under CSI's licensing agreement with Litmus Concepts, Inc., an
emerging in vitro diagnostic company. In the United States, vaginitis accounts
for about 13 million physician office visits and about 10 million clinic visits.
COST OF SALES/GROSS PROFIT: Gross profit as a percentage of sales ("margin") was
as follows:
<TABLE>
<CAPTION>
Margin % Margin %
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CVI 67 64 65 65
CSI 56 55 56 55
Consolidated 65 63 64 63
</TABLE>
CVI's margin continues to improve from the atypically low 60% reported in the
fourth quarter of 1998, when it spent about $1.7 million to improve efficiency,
rationalize manufacturing, expand capacity and fill back orders. The 67% margin
reported in the third quarter of 1999 is two percentage points higher than the
second quarter of 1999 and four points ahead of the first
15
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
quarter. Gross profit of $24.1 million was 15% above 1998's third quarter. The
gross profit improvement reflects cost reduction projects begun last year at our
U.K. manufacturing site. In addition, capacity constraints have been eliminated,
production yields have improved, customer service levels have improved and
staffing levels are returning to normal. We believe that continued cost
reductions will result in improving margins during the remainder of fiscal 1999
and beyond, aside from any major changes in product mix.
CSI's margins continue to improve, primarily reflecting continued manufacturing
efficiencies associated with Marlow and Unimar products. Unless we make a large
acquisition of lower-margin products, we anticipate that recently launched and
future proprietary products will, after an initial start-up period, drive
continued margin improvement at CSI.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSE:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------------------ --------------------------------------
1999 1998 % Incr. 1999 1998 % Incr.
-------- -------- ------- -------- -------- -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
CVI $11.9 $ 9.4 28% $34.2 $27.6 24%
CSI 2.3 3.0 (25%) 7.1 7.6 (6%)
HQ/Other 1.8 1.6 13% 4.5 5.0 (10%)
----- ------ ----- -----
$16.0 $14.0 15% $45.8 $40.2 14%
===== ====== ===== =====
</TABLE>
SG&A expense was up 15% and 14% in the three- and nine-month periods. At CVI, we
have been and continue to engage in investment spending in the sales and
marketing arena to launch new products worldwide. We expect that this level of
spending will decrease going forward, as we realize the benefit of the annuity
stream created by adding new astigmatic patients to our wearer base. Conversely,
SG&A at CSI has decreased by 25% and 6% in the three- and nine-month periods,
respectively, as CSI's investment spending program to launch its new products
occurred primarily in 1998's third quarter. Our headquarters costs are down 10%
on a year-to-date basis, although up by $200,000 in the third quarter. We
continue to anticipate that headquarters expenses for the full year will be
decreased from the fiscal 1998 levels.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSE: We expect that R&D spending will
remain at a low percentage of sales because we are focusing on acquiring
products that will not require large expenditures of time or money before
introduction.
16
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
OPERATING INCOME: Operating income improved by $1.5 million or 16% and $3.3
million or 14% in the three- and nine-month periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------------------------------- --------------------------------------
1999 1998 Incr. 1999 1998 Incr.
------ ------ ----- ------ ------ -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
CVI $11.4 $10.7 $ 0.7 $27.9 $26.2 $ 1.7
CSI 1.3 0.3 1.0 3.0 1.9 1.1
Headquarters (1.8) (1.6) (0.2) (4.5) (5.0) 0.5
----- ------ ------ ----- ----- ------
$10.9 $ 9.4 $ 1.5 $26.4 $23.1 $ 3.3
===== ====== ====== ===== ===== ======
</TABLE>
INTEREST EXPENSE: Interest expense in the third quarter of 1999 of $1.3 million
was down 14% from 1998's third quarter, reflecting debt payments we made at the
end of the second quarter with proceeds from the sale of HGA. (See "Risk
Management.") On a year-to-date basis, interest expense is up 11% primarily
reflecting debt we incurred to fund the acquisition of Aspect, our investment in
Litmus Concepts, Inc. and our stock repurchase program. In September 1998, our
Board of Directors authorized us to purchase up to one million of our common
shares. We have completed the purchase at an average price of $15.34 per share.
About half of the shares were purchased in each of fiscal 1998 and fiscal 1999.
OTHER INCOME, NET: 1998's nine-month period includes a net foreign exchange gain
of about $500,000, which was predominantly driven by a one-time gain of $850,000
reflecting weakness in the Pound Sterling occurring before we implemented our
hedging program. We do not expect transactions resulting in gains of this
magnitude to recur. Through July 31, 1999, we have incurred a net foreign
exchange loss of $284,000.
PROVISION FOR INCOME TAXES: In the fourth quarter of fiscal 1998, we recorded a
large tax benefit, reflecting the remaining anticipated value of our $184
million of net operating loss carryforwards ("NOLs"). As a result, in fiscal
1999, we are reporting our provision for income taxes as if we were a taxpayer
with no NOLs, based on our estimate of the effective tax rate ("ETR") for the
full fiscal year. In the third quarter, updated projections indicated that our
full year ETR would be about 33%, down one percentage point from the previous
quarter's estimate. As a result, our ETR for the three-month period ended July
31, 1999 was approximately 32%.
We have recently implemented a global tax plan to minimize both the taxes
reported in our income statement and the actual taxes we will have to pay once
the benefits of our NOLs are fully utilized. Based on a preliminary assessment,
we expect to reduce our ETR to approximately 30% over the next several years.
This plan could possibly extend the cash flow benefits of the NOLs through 2003,
assuming no major acquisitions or large stock issuances. We expect that actual
payments for taxes will be about 10% of pretax profits throughout this period.
17
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS: In the fourth quarter of fiscal
1998, we declared Hospital Group of America, Inc. ("HGA"), our psychiatric
services business, a discontinued operation and recorded a charge of $22.3
million reflecting our initial estimate of the ultimate loss we would incur upon
disposition.
In January 1999, we completed the sale of a portion of HGA for $5 million in
cash and trade receivables. On April 15, 1999, we sold the remainder of HGA to
Universal Health Services, Inc. for $27 million at closing plus up to $3 million
if certain contingent events occur. Through July 31, 1999, we have recorded
gains on the disposals of $3 million, reflecting adjustments to the loss
estimated in 1998.
EARNINGS PER SHARE: In fiscal 1998, we accounted for the remaining tax benefits
expected from using our NOLs. Beginning in fiscal 1999, therefore, we provide
for income taxes rather than reflect tax benefits. Our historical earnings per
share is as follows: (See Note 4 for calculations of these amounts.)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------- ----------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Basic:
Continuing operations $ 0.47 $ 0.56 $ 1.03 $ 1.42
Discontinued operations - 0.12 0.22 0.24
---------- -------- -------- --------
Earnings per share $ 0.47 $ 0.68 $ 1.25 $ 1.66
======= ======= ======= =======
Diluted:
Continuing operations $ 0.46 $ 0.54 $ 1.01 $ 1.37
Discontinued operations - 0.12 0.22 0.23
---------- -------- -------- --------
Earnings per share $ 0.46 $ 0.66 $ 1.23 $ 1.60
======= ======= ======= =======
</TABLE>
The change in reporting income taxes discussed above causes material
inconsistencies when comparing earnings per share for the fiscal 1999 and 1998
periods presented in this report. To present earnings per share on a consistent
basis, we have tax effected the 1998 per share amounts that follow on a pro
forma basis. Diluted earnings per share from continuing operations for 1999's
third quarter increased 59% to 46 cents from the comparable fully taxed pro
forma 29 cents for the same period in 1998. The comparable nine-month figures
were $1.01 and 75 cents, an increase of 35%. Results for the 1998 periods
reflect a 40% ETR on income from continuing operations before income taxes to
arrive at pro forma net income.
18
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
CAPITAL RESOURCES & LIQUIDITY
While we continue to grow our business, we are also strengthening our balance
sheet:
Cash and cash equivalents has increased 60% to $11.7 million since the end
of fiscal 1998.
Our ratio of debt to equity has decreased from 0.6:1 at the end of fiscal
1998 to 0.4:1 at July 31, 1999.
Debt now represents about 28% of our total capitalization, down from 38% at
October 31, 1998.
Our cash/debt picture has trended positively in fiscal 1999 from the end of
fiscal 1998:
<TABLE>
<CAPTION>
Net
Cash Debt Debt
---- ---- ----
(In millions)
<S> <C> <C> <C>
October 31, 1998 $ 7.3 $90.2 $82.9
July 31, 1999 $ 11.7 $62.0 $50.3
</TABLE>
Our diluted cash flow per share, which we define as pretax income from
continuing operations plus depreciation and amortization, increased 24
cents, to 81 cents in the third quarter and 36 cents, to $1.90 for the
nine-month period.
In fiscal 1998 and in the first half of 1999, we invested in the expansion of
both our U.K. and our U.S. manufacturing capacity, and we continue through the
third quarter of 1999 to invest significantly in sales and marketing costs to
launch new products. We expect that our sales will continue to grow and that the
rate of our build of new product inventory will level out and then decrease. We
also anticipate that our reduced level of investment in manufacturing capacity
will continue.
OPERATING CASH FLOWS: In the first nine months of fiscal 1999, we generated
$15.3 million in cash from operating activities, or six times the $2.5 million
generated in the comparable period last year. Each quarter has been solidly
ahead of last year:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In millions)
<S> <C> <C>
Q1 $ (3.4) $ (7.0)
Q2 9.2 3.2
Q3 9.5 6.3
----- ------
Nine months $15.3 $ 2.5
===== ======
</TABLE>
19
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
The increase primarily reflects improved operating results plus the fact that
our investment in inventory and receivables, while continuing to increase, is
doing so at a slower rate. Pending a large acquisition or similar transaction
that could temporarily skew our results, we expect to generate positive cash
flow from operating activities each quarter other than our first quarter.
Historically, we have experienced negative operating cash flow in our first
quarter due to the timing of payments to settle disputes, inventory builds and
bonus payments. Going forward, we expect that cash flows from operating
activities will be sufficient to fund both our operating needs and capital
expenditure requirements.
INVESTING CASH FLOWS: Our investing cash flows have swung dramatically from an
outflow of $48.4 million to an inflow of $22.9 million. In addition, we spent
approximately $7.3 million in fiscal 1999 to repurchase shares of our common
stock (see Note 8). Approximately $7 million of this change reflects reduced
capital spending on manufacturing capacity, as we have now balanced our supply
and demand for contact lenses and are no longer manufacturing constrained. As a
result, our capital expenditures have decreased to $7.5 million this year vs.
$14.6 million in the first nine months of 1998. The balance of the difference is
associated with one-time transactions: In 1998, we spent a total of $33.8
million to acquire Aspect and two smaller acquisitions. In the current year, we
received cash of $25.4 million net of costs from our disposition of HGA.
FINANCING CASH FLOWS: Whereas in 1998 we borrowed money to fund the Aspect
acquisition, in 1999 we paid a large portion back upon our disposition of HGA.
Accordingly, our cash flows from financing activities were a net reduction of
$34.1 million this year and a net increase of $37.9 million last year.
OUTLOOK: We believe that cash on hand of $11.7 million plus cash generated from
operating activities will fund future operations, including capital expenditures
and pay cash dividends (see Note 11). We may need additional funds for
acquisitions and other strategic alliances. At July 31, 1999, we had over $25
million available under the KeyBank line of credit, and we anticipate that
additional financing would be available as required.
RISK MANAGEMENT: We are exposed to risks caused by changes in foreign exchange,
principally Pound Sterling denominated debt and from operations in foreign
currencies. We have hedged most of this risk by entering into contracts to buy
Sterling forward. We are also exposed to risks associated with changes in
interest rates, as the interest rate on certain of our debt varies with the
London Interbank Offered Rate. We have protected ourselves against most of this
risk by entering into agreements to swap most of our variable rate debt for
fixed rate debt.
20
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Proceeds from the sale of HGA were used to pay down debt carrying an average
interest rate of approximately 7%. Total debt was reduced to $62 million at July
31, 1999 from $90.2 million at October 31, 1998:
<TABLE>
<CAPTION>
July 31, 1999 October 31, 1998
------------- ----------------
(In millions)
<S> <C> <C>
Short term $ 5.5 $ 11.5
Long term 56.5 78.7
------ ------
Total $ 62.0 $ 90.2
====== ======
</TABLE>
On an annualized basis the debt reduction would result in a decrease in interest
expense of approximately $2 million, assuming we do not raise debt for other
purposes.
YEAR 2000: The year 2000 ("Y2K") problem exists today because programmers who
developed computer systems and applications over the past few decades used two
digit date codes to designate the year. This creates a problem in the year 2000
in that many systems will recognize "00" as the year 1900 rather than 2000 and,
if not fixed, may abort or produce erroneous data once the year 2000 arrives.
We have completed an in-depth review of the financial and operational systems at
each of our business units and have implemented a Y2K compliance program to
confirm that all critical business systems, software and equipment that consider
and process date-related information will continue to function properly after
December 31, 1999. Final testing of critical systems has begun, and we
anticipate that our Y2K project will be substantially completed by September 30,
1999.
We initiated compliance programs in 1995 to modify our proprietary software, and
many of the required changes have been completed. Recently purchased software
requires only minimal modification, and we are endeavoring to ensure that any
new software purchased will be Y2K compliant. We have used both internal and
external resources to reprogram, or replace, and test our software for Y2K
modifications.
We have assigned a key employee at each of our major operations to be
responsible for Y2K compliance. We have also appointed a Y2K Compliance Officer
who reports to the Board of Directors on program status.
We have experienced significant growth in the past three years and are beginning
implementation of a broad-based Enterprise Resource Planning ("ERP") system
throughout major CVI operations in the U.S. and the U.K. The new ERP system will
be Y2K compliant. In any event, as part of our contingency plan, CVI will take
all necessary and reasonable steps to ensure that all of its existing systems
are Y2K compliant prior to the conversion to the new system. In addition, at
Aspect Vision plans are in place to build additional contact lens inventory
prior to 2000 to assure uninterrupted flow of products to customers.
21
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Concluded
We have or are currently working to ensure Y2K compliance of all business
systems and do not anticipate material Y2K problems. We also have or are
currently communicating with vendors to determine their Y2K compliance and to
date are not aware of any third party Y2K issues that could materially affect
operations.
We will continue to devote adequate resources to address Y2K issues. We cannot,
however, assure that systems and products do not contain undetected Y2K
problems, that we will not experience operating difficulties as a result of Y2K
issues or that new systems will be implemented in time to avoid the probability
of Y2K problems. Further, we cannot assure that our assessment of suppliers and
vendors will be accurate or that all suppliers and vendors will provide
sufficient information to enable us to make such assessment.
We have developed contingency plans to identify and mitigate potential Y2K
problems and assess their impact on operations. These plans are designed to
protect our assets, continue safe operations and allow any interrupted
operations to resume in a timely fashion. However, contingency planning for Y2K
issues is complicated by possible multiple and simultaneous incidents, which
could significantly delay our efforts to respond and resume normal business.
Such incidents may be outside our control, if, for example, third parties
providing goods and/or services critical to our operations do not successfully
address their own material Y2K problems.
Based on our Y2K assessment, we anticipate that the cost to upgrade or replace
our programs, systems and equipment will not materially affect our financial
position. We currently estimate that expenditures of approximately $500,000,
including capital, will be required for us to be Y2K compliant. Approximately
$380,000 has been expended to date.
TRADEMARKS: The following trademarks italicized in this report are owned by,
licensed to or distributed by The Cooper Companies, Inc., its subsidiaries or
affiliates: FemExam'r' TestCard System'TM', Hyskon'r', Marlow'TM' and Unimar'r'.
22
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See Capital Resources and Liquidity under "Risk Management" in Item 2 of this
report for a discussion of debt paid down in fiscal 1999.
23
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11* Calculation of Earnings Per Share.
27 Financial Data Schedule for the nine months ended July 31, 1999.
</TABLE>
* The information called for in this exhibit is provided in Footnote 4 to the
Consolidated Condensed Financial Statements in this report.
(b) The Company filed the following reports on Form 8-K during the period
May 1, 1999 to July 31, 1999.
<TABLE>
<CAPTION>
Date of Report Item Reported
-------------- -------------
<S> <C>
April 29, 1999 Item 5. Other Events.
May 27, 1999 Item 5. Other Events.
July 13, 1999 Item 5. Other Events.
</TABLE>
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Cooper Companies, Inc.
_________________________________________
(Registrant)
Date: September 13, 1999 /s/ Robert S. Weiss
_________________________________________
Executive Vice President, Treasurer and
Chief Financial Officer
25
<PAGE>
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Index of Exhibits
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
11* Calculation of Earnings Per Share.
27 Financial Data Schedule.
</TABLE>
* The information called for in this exhibit is provided in Footnote 4 to the
Consolidated Condensed Financial Statements in this report.
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 11,726
<SECURITIES> 0
<RECEIVABLES> 27,650
<ALLOWANCES> 1,078
<INVENTORY> 34,953
<CURRENT-ASSETS> 96,614
<PP&E> 51,444
<DEPRECIATION> 12,975
<TOTAL-ASSETS> 281,969
<CURRENT-LIABILITIES> 46,601
<BONDS> 56,496
<COMMON> 1,494
0
0
<OTHER-SE> 154,669
<TOTAL-LIABILITY-AND-EQUITY> 281,969
<SALES> 120,106
<TOTAL-REVENUES> 120,106
<CGS> 43,706
<TOTAL-COSTS> 43,706
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,933
<INCOME-PRETAX> 21,613
<INCOME-TAX> 7,132
<INCOME-CONTINUING> 14,481
<DISCONTINUED> 3,099
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,580
<EPS-BASIC> 1.25
<EPS-DILUTED> 1.23
