Note numbers refer to "Notes to Consolidated Condensed Financial Statements" in Item 1. Unaudited Financial Statements. Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and 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, including all statements regarding the expected impact of the ongoing COVID-19 pandemic on our business; and statements regarding acquisitions including the acquired companies' financial position, market position, product development and business strategy, expected cost synergies, expected timing and benefits of the transaction, difficulties in integrating entities or operations, as well as estimates of our and the acquired entities' future expenses, sales and earnings per share are forward-looking. In addition, all statements regarding anticipated growth in our net sales, 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," "outlook," "probable," "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: •The effects of the ongoing COVID-19 pandemic and related economic disruptions and new governmental regulations on our business, results of operations, cash flow and financial condition, including but not limited to the potential impact on our sales, operations and supply chain. •Adverse changes in the global or regional general business, political and economic conditions, including the impact of continuing uncertainty and instability of certain countries, that could adversely affect our global markets, and the potential adverse economic impact and related uncertainty caused by these items, including but not limited to, the ongoing COVID-19 pandemic, and escalating global trade barriers, including additional tariffs, by countries such asChina . •Adverse changes in global political and economic conditions, and related uncertainty caused by theUnited Kingdom's withdrawal from theEuropean Union (EU) and its potential impact on, among other things, the movement of goods and materials in our supply chain, additional regulatory approvals and requirements, and increased tariffs and duties. •Changes in tax laws or their interpretation, changes in statutory tax rates, and adverse outcomes in tax disputes including but not limited to, theU.S. , theUnited Kingdom and other countries may affect our taxation of earnings recognized in foreign jurisdictions, result in unexpected tax liabilities, and/or negatively impact our effective tax rate. •Foreign currency exchange rate and interest rate fluctuations including the risk of fluctuations in the value of foreign currencies or interest rates that would decrease our net sales and earnings. •Our existing and future variable rate indebtedness and associated interest expense is impacted by rate increases, which could adversely affect our financial health or limit our ability to borrow additional funds. •Acquisition-related adverse effects including the failure to successfully obtain the anticipated net sales, 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, required regulatory approvals for an acquisition not being obtained or being delayed or subject to conditions that are not anticipated, adverse impacts of changes to accounting controls and reporting procedures, contingent liabilities or indemnification obligations, increased leverage and lack of access to available financing (including financing for the acquisition or refinancing of debt owed by us on a timely basis and on reasonable terms). •Compliance costs and potential liability in connection withU.S. and foreign laws and health care regulations pertaining to privacy and security of personal information, such as HIPAA and the California Consumer Privacy 20 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Act (CCPA) in theU.S. and the General Data Protection Regulation requirements inEurope , including but not limited to those resulting from data security breaches. •A major disruption in the operations of our manufacturing, accounting and financial reporting, research and development, distribution facilities or raw material supply chain due to the ongoing COVID-19 pandemic, integration of acquisitions, man-made or natural disasters, cybersecurity incidents or other causes. •A major disruption in the operations of our manufacturing, accounting and financial reporting, research and development or distribution facilities due to technological problems, including any related to our information systems maintenance, enhancements or new system deployments, integrations or upgrades. •Market consolidation of large customers globally through mergers or acquisitions resulting in a larger proportion or concentration of our business being derived from fewer customers. •Disruptions in supplies of raw materials, particularly components used to manufacture our silicone hydrogel lenses. •NewU.S. and foreign government laws and regulations, and changes in existing laws, regulations and enforcement guidance, which affect areas of our operations including, but not limited to, those affecting the health care industry, including the contact lens industry specifically and the medical device or pharmaceutical industries generally, including but not limited to the EU Medical Devices Regulation, and the EU In Vitro Diagnostic Medical Devices Regulation. •Legal costs, insurance expenses, settlement costs and the risk of an adverse decision, prohibitive injunction or settlement related to product liability, patent infringement or other litigation. •Limitations on sales following product introductions due to poor market acceptance. •New competitors, product innovations or technologies, including but not limited to, technological advances by competitors, new products and patents attained by competitors, and competitors' expansion through acquisitions. •Reduced sales, loss of customers and costs and expenses related to product recalls and warning letters. •Failure to receive, or delays in receiving, regulatory approvals for products. •Failure of our customers and end users to obtain adequate coverage and reimbursement from third-party payors for our products and services. •The requirement to provide for a significant liability or to write off, or accelerate depreciation on, a significant asset, including goodwill, other intangible assets and idle manufacturing facilities and equipment. •The success of our research and development activities and other start-up projects. •Dilution to earnings per share from acquisitions or issuing stock. •Impact and costs incurred from changes in accounting standards and policies. •Environmental risks, including increasing environmental legislation and the broader impacts of climate change. •Other events described in ourSecurities and Exchange Commission filings, including the "Business" and "Risk Factors" sections in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2020 , as such Risk Factors may be updated in quarterly filings including updates made in this filing. 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. 21
--------------------------------------------------------------------------------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 first quarter of fiscal 2021 endedJanuary 31, 2021 and compare them with the same period of fiscal 2020. We discuss our cash flows and current financial condition under "Capital Resources and Liquidity." Within the tables presented, percentages are calculated based on the underlying whole-dollar amounts and, therefore, may not recalculate exactly from the rounded numbers used for disclosure purposes.
Non-GAAP Financial Measures
The succeeding sections of Management's Discussion and Analysis (MD&A) may include certain financial measures that are not defined by accounting principles generally accepted inthe United States (GAAP). These measures, which are referred to as non-GAAP measures, are listed below: •Free Cash Flow - Free cash flow is calculated as net cash provided by operating activities less capital expenditures. •Constant currency - Constant currency is defined as excluding the effect of foreign currency fluctuations. For a discussion of these measures and the reasons management believes they are useful to investors, refer to "Summary of Non-GAAP Financial Measures" below. To the extent applicable, this MD&A includes reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. The presentation of these non-GAAP financial measures is not intended to be a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP and may be different from non-GAAP financial measures used by other companies, and therefore, may not be comparable among companies.
COVID-19 Considerations
TheWorld Health Organization categorized the Coronavirus disease 2019 (COVID-19) as a pandemic. The COVID-19 pandemic has caused a severe global health crisis, along with economic and societal disruptions and uncertainties, which have negatively impacted business and healthcare activity globally. As a result of healthcare systems responding to the demands of managing the pandemic, governments around the world imposing measures designed to reduce the transmission of the COVID-19 virus, and individuals responding to the concerns of contracting the COVID-19 virus, many optical practitioners and retailers, hospitals, medical offices and fertility clinics closed their facilities, restricted access, or delayed or canceled patient visits, exams and elective medical procedures, and many customers that have reopened are experiencing reduced patient visits. This has had, and we believe will continue to have, an adverse effect on our sales, operating results and cash flows. We have taken an active role in addressing the ongoing pandemic's impact on our employees, suppliers, distribution channels, operations and customers, including taking precautionary measures, such as implementing contingency plans, and making operational adjustments as necessary. We have taken measures to help ensure the safety of our personnel in all our facilities, and we have endeavored and continue to follow recommended actions of government and health authorities to protect our employees worldwide. As of the date of this filing, we have not experienced any significant disruption at our manufacturing facilities. We have had no significant disruption in our access to necessary raw materials and other supplies or with our distribution network; however, we have experienced higher unabsorbed fixed overhead costs, labor inefficiencies, higher cost of production and higher freight charges as a result of the COVID-19 pandemic. As a result, we instituted an inventory control project to reduce buildup of excess inventory. Our manufacturing and distribution operations have responded to the impacts related to the COVID-19 pandemic, and we have been able to continue to supply our products around the world without interruption. In the future, we may decide or need to implement additional precautionary measures or operational adjustments as we deem prudent to meet consumer demand or to help further ensure employee safety. We believe that the actions we are taking have enabled us to keep our employees safe and our supply chain intact and will help us emerge from this global pandemic operationally sound and well positioned for long-term growth. The extent to which the global COVID-19 pandemic and related economic disruptions impact our business, results of operations, cash flow and financial condition will depend on future developments. At this time, future developments are highly uncertain, difficult to predict and largely outside of our control. These include, but are not limited to, the spread, 22 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
duration and severity of the pandemic outbreak and any subsequent waves of additional outbreaks, actions taken by governments to contain the pandemic, address its impact or respond to the reduction in global and local economic activity, and how quickly and to what extent normal economic and operating conditions can resume. We will continue to closely monitor the developments relating to the COVID-19 pandemic and the responses from governments and private sector participants and their respective impact on our Company and on our customers, suppliers, vendors and business partners.
For more information on the risks associated with the COVID-19 pandemic, refer to Part II, Item 1A, "Risk Factors" herein.
[[Image Removed: coo-20210131_g1.jpg]] First Quarter Highlights •Gross profit of$450.7 million , up 6% from$426.5 million in the prior year period •Operating income of$133.4 million , up 20% from$111.1 million in the prior year period •Diluted earnings per share of$42.31 , up 2225% from$1.82 per share in the prior year period, primarily due to income tax benefit related to intra-group transfer of intellectual property. Refer to Note 6. Income Taxes for further information •Cash provided by operations of$147.7 million , compared to$129.7 million in the prior year period Outlook Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and general health care markets. However, the impact, risks and uncertainty relating to the global COVID-19 pandemic and related economic disruptions, as further described in the "COVID-19 Considerations" section above and in the "Risk Factors" section in Part II, Item 1A of this filing, have adversely affected our sales, cash flow and current performance and are likely to further adversely affect our future sales, cash flow and performance. Additionally, other events affecting the economy as a whole, including but not limited to the uncertainty and instability of global markets driven by foreign currency volatility, changes in tax legislation, debt concerns, the uncertainty following theUnited Kingdom's withdrawal from the EU, changes to existing regulations and new regulations, global trade barriers including additional tariffs and the trend of consolidations within the health care industry could impact our current performance and continue to represent a risk to our future performance. CooperVision - We compete in the worldwide contact lens market with our spherical, toric, multifocal, toric multifocal and myopia management contact lenses offered in a variety of materials including using silicone hydrogel Aquaform® technology, PC Technology™ and ActivControl® 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 also competes in the myopia management and specialty eye care markets with products such as ortho-k and scleral lenses. InNovember 2019 , CooperVision receivedUnited States Food and Drug Administration (FDA) approval for its MiSight® 1 day lens, which is the first and only FDA-approved product indicated to slow the progression of myopia in children with 23 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations treatment initiated between the ages of 8-12 and became available inthe United States during fiscal 2020. CooperVision is focused on greater worldwide market penetration using recently introduced products, and we continue to expand our presence in existing and emerging markets, including through acquisitions. CooperVision acquired the following entity during the three months endedJanuary 31, 2021 : •A privately-held medical device company onJanuary 19, 2021 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 manufactures and markets a wide variety of silicone hydrogel contact lenses. Our single-use silicone hydrogel product franchises, clariti® and MyDay®, remain a focus as we expect increasing demand for these products as well as future single-use products as the global contact lens market continues to shift to this modality. Outside of single-use, the Biofinity® and Avaira Vitality® product families comprise our focus in the FRP, or frequent replacement product, market which encompasses the 2-week and monthly modalities. Included in this segment are unique products such as Biofinity Energys®, which helps individuals with digital eye fatigue. CooperSurgical - Our CooperSurgical business competes in the general health care market with a commitment to advancing the health of women, babies and families through its diversified portfolio of products and services focusing on women's health and fertility. CooperSurgical has established its market presence and distribution system by developing products and acquiring companies, products and services that complement its business model. CooperSurgical acquired the following entity during the three months endedJanuary 31, 2021 : •A privately-held in vitro fertilization (IVF) cryo-storage software solutions company onDecember 31, 2020 CooperSurgical acquired the following entity during the three months endedJanuary 31, 2020 : •A privately-held distributor of IVF medical devices and systems onDecember 13, 2019 Capital Resources - AtJanuary 31, 2021 , we had$119.1 million in unrestricted cash, primarily held outsidethe United States , and$724.6 million available under our 2020 Credit Agreement. The$850.0 million term loan entered into onApril 1, 2020 , and the$350.0 million term loan entered into onOctober 16, 2020 , remain outstanding as ofJanuary 31, 2021 . See Note 5. Debt of the Consolidated Condensed Financial Statements for additional information.
Transition from LIBOR
TheUnited Kingdom's Financial Conduct Authority , which regulates theLondon Interbank Offered Rate (LIBOR), announced inJuly 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. Further, inMarch 2020 , theFinancial Accounting Standards Board (FASB) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company has material contracts that are indexed to LIBOR and is continuing to monitor this activity and evaluate the related risk. We are continuing to evaluate the scope of impacted contracts and the potential impact. We are also monitoring the developments regarding alternative rates and may amend certain contracts to accommodate those rates if the contract does not already specify a replacement rate. While the notional value of agreements potentially indexed to LIBOR is material, we are not yet able to reasonably estimate the expected impact. 24 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected Statistical Information - Percentage of
Percentage of Net Sales 2021 vs 2020 % Change Periods Ended January 31, 2021 2020 in Absolute Values Net sales 100 % 100 % 5 % Cost of sales 34 % 34 % 5 % Gross profit 66 % 66 % 6 % Selling, general and administrative expense 38 % 40 % 1 % Research and development expense 3 % 3 % (4) % Amortization of intangibles 5 % 5 % (1) % Operating income 20 % 17 % 20 % Net Sales Growth by Business Unit Periods EndedJanuary 31 , ($ in millions) 2021 2020 Increase 2021 vs 2020 % Change CooperVision$ 507.0 $ 485.2 $ 21.8 4 % CooperSurgical 173.5 161.0 12.5 8 % Net sales$ 680.5 $ 646.2 $ 34.3 5 % 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; and •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. CooperVision Net Sales by Category
[[Image Removed: coo-20210131_g2.jpg]][[Image Removed: coo-20210131_g3.jpg]]
25 -------------------------------------------------------------------------------- THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months EndedJanuary 31 , ($ in millions) 2021 2020 2021 vs 2020 % Change Toric$ 162.3 $ 155.1 5 % Multifocal 57.7 51.8 11 % Single-use spheres 146.0 138.1 6 % Non single-use sphere, other 141.0 140.2 1 %$ 507.0 $ 485.2 4 % In the three months endedJanuary 31, 2021 : •Toric and multifocal lenses grew primarily through the success of Biofinity and MyDay. •Single-use sphere lenses growth was primarily attributed to MyDay lenses. •"Other" products primarily include lens care which represented approximately 2% of net sales in the first quarter of both fiscal 2021 and 2020. •Total silicone hydrogel products increased by 9%, representing 77% of net sales in the three months endedJanuary 31, 2021 compared to 73% in the three months endedJanuary 31, 2020 , partially offset by declines in legacy hydrogel products. •Foreign exchange rates positively impacted sales by approximately$14.8 million in the first quarter of fiscal 2021 and had a negative impact of$2.1 million in the prior year period. In the first quarter of fiscal 2021, net sales increased 1% in constant currency over the prior year period. •Sales growth was primarily driven by an increase in the volume of lenses sold. Average realized prices by product did not materially influence sales. •We expect to continue seeing downward pressure and volatility in certain markets related to net sales if the COVID-19 pandemic continues, as optical retailers and healthcare centers continue to restrict access, and social distancing measures continue. CooperVision Net Sales by Geography CooperVision competes in the worldwide soft contact lens market and services in three primary regions: theAmericas , EMEA (Europe ,Middle East andAfrica ) andAsia Pacific . Three Months EndedJanuary 31 , ($ in millions) 2021 2020 2021 vs 2020 % Change Americas$ 200.4 $ 189.4 6 % EMEA 188.8 187.0 1 % Asia Pacific 117.8 108.8 8 %$ 507.0 $ 485.2 4 % CooperVision's growth in net sales across all regions was primarily attributable to market gains of silicone hydrogel contact lenses and favorable foreign currency impacts, partially offset by declines in legacy hydrogel products. Refer to CooperVision Net Sales by Category above for further discussion. CooperSurgical Net Sales by Category CooperSurgical supplies the family health care market with a diversified portfolio of products and services. Our office and surgical offerings include products that facilitate surgical and non-surgical procedures that are commonly performed primarily by obstetricians and gynecologists in hospitals, surgical centers, fertility clinics and medical offices. Fertility offerings include highly specialized products and services that target the IVF process, including diagnostics testing with a goal to make fertility treatment safer, more efficient and convenient. 26 -------------------------------------------------------------------------------- THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The chart below shows the percentage of net sales of office and surgical products and fertility.
[[Image Removed: coo-20210131_g4.jpg]][[Image Removed: coo-20210131_g5.jpg]]
Three Months Ended
($ in millions) 2021 2020 2021
vs 2020 % Change
Office and surgical products$ 103.5 $ 98.5 5 % Fertility 70.0 62.5 12 %$ 173.5 $ 161.0 8 % In the three months endedJanuary 31, 2021 : •Office and surgical products increased compared to the prior year period mainly due to an increase in PARAGARD® sales compared to the prior year period. Further, there was an increase from other surgical products such as Uterine Manipulators, Point-of-Care products and INSORB® surgical stapler. This was partially offset by a reduction in revenue from Surgical Retractors and Closure products. •Fertility net sales increased compared to the prior year period mainly due to an increase in revenue from IVF consumables, preimplantation genetic testing and acquired product Embryo Options. •Foreign exchange rates positively impacted sales by approximately$1.0 million in the first quarter of fiscal 2021, compared to a negative impact of$0.7 million in the prior year period. In the first quarter of fiscal 2021, net sales increased 7% in constant currency over the prior year period. •We expect to continue seeing downward pressure and volatility in certain markets related to net sales if the COVID-19 pandemic continues, as hospitals and healthcare centers continue to restrict access, and social distancing measures continue.
Gross Margin
Consolidated gross margin remained relatively flat at 66% in both the first quarter of fiscal 2021 and fiscal 2020.
27 -------------------------------------------------------------------------------- THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Selling, General and Administrative Expense (SGA) Three Months EndedJanuary 31 , ($ in millions) 2021 % Net Sales 2020 % Net Sales 2021 vs 2020 % Change CooperVision$ 179.1 35 %$ 172.4 36 % 4 % CooperSurgical 70.6 41 % 72.4 45 % (3) % Corporate 11.5 - 13.5 - (15) %$ 261.2 38 %$ 258.3 40 % 1 % CooperVision's SGA increased in the first quarter of fiscal 2021 compared to fiscal 2020 due to increases in distribution costs, general and administrative costs and advertising and marketing activities primarily related to MiSight, partially offset by lower travel expenses due to the COVID-19 pandemic. CooperVision's SGA in the first quarter of fiscal 2021 included$1.8 million of costs primarily related to acquisition and integration activities. CooperVision's SGA in the first quarter of fiscal 2020 included$0.7 million of costs primarily related to integration activities. The decrease in CooperSurgical's SGA in the first quarter of fiscal 2021 compared to fiscal 2020 was primarily due to lower advertising & marketing costs and lower travel expenses due to the COVID-19 pandemic, partially offset by an increase in general and administrative costs. CooperSurgical's SGA in the first quarter of fiscal 2021 included$1.8 million of acquisition and integration expenses. CooperSurgical's SGA in the first quarter of fiscal 2020 included$6.1 million of integration expenses and European Medical Devices Regulation costs. Corporate SGA decreased in the first quarter of fiscal 2021 compared to fiscal 2020 primarily due to savings from lower travel expenses due to the COVID-19 pandemic and timing of corporate projects. Research and Development Expense (R&D) Three Months Ended January 31, 2021 vs 2020 % ($ in millions) 2021 % Net Sales 2020 % Net Sales Change CooperVision$ 14.1 3 %$ 13.1 3 % 8 % CooperSurgical 7.3 4 % 9.1 6 % (21) %$ 21.4 3 %$ 22.2 3 % (4) % In the three months endedJanuary 31, 2021 : •CooperVision's R&D expense increased in the three months endedJanuary 31, 2021 compared to fiscal 2020, mainly due to MiSight and timing of R&D projects. As a percentage of sales, CooperVision's R&D expense remained relatively flat. CooperVision's R&D activities are primarily focused on the development of contact lenses, manufacturing technology and process enhancements. •CooperSurgical's R&D expense decreased in the three months endedJanuary 31, 2021 compared to fiscal 2020, mainly due to timing of R&D projects and changes in headcount. CooperSurgical has not paused research programs during the COVID-19 pandemic and has maintained its spend on innovations and increased its spend on key regulatory investment areas to support our long-term objectives. As a percentage of sales, CooperSurgical's R&D expense remained relatively flat. CooperSurgical's R&D activities include diagnostics, IVF product development and the design and upgrade of surgical procedure devices. Amortization Expense Three Months Ended January 31, 2021 vs 2020 % ($ in millions) 2021 % Net Sales 2020 % Net Sales Change CooperVision$ 8.4 2 %$ 8.7 2 % (3) % CooperSurgical 26.3 15 % 26.2 16 % - %$ 34.7 5 %$ 34.9 5 % (1) %
CooperVision's and CooperSurgical's amortization expense remained relatively flat in the first quarter of fiscal 2021 compared to fiscal 2020.
28 -------------------------------------------------------------------------------- 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, 2021 vs 2020 % ($ in millions) 2021 % Net Sales 2020 % Net Sales Change CooperVision$ 127.5 25 %$ 122.9 25 % 4 % CooperSurgical 17.5 10 % 1.7 1 % 918 % Corporate (11.6) - (13.5) - 15 %$ 133.4 20 %$ 111.1 17 % 20 %
CooperVision's operating income remained relatively flat as a percentage of net
sales and in absolute dollars in the three months ended
CooperSurgical's operating income increased as a percentage of net sales and in absolute dollars in the first quarter of fiscal 2021 compared to the prior year period primarily due to an increase in net sales and a decrease in SGA and lower R&D expenses. Corporate operating loss decreased in the three months endedJanuary 31, 2021 compared to the prior year period, primarily due to lower professional fees and travel expenses as a result of the COVID-19 pandemic. On a consolidated basis, operating income increased in absolute dollars and as a percentage of net sales primarily due to the increase in consolidated net sales. Interest Expense Three Months Ended January 31, 2021 vs 2020 % ($ in millions) 2021 % Net Sales 2020 % Net Sales Change Interest expense$ 6.4 1 %$ 11.6 2 % (45) % Interest expense decreased as a percentage of net sales and in absolute dollars during the three months endedJanuary 31, 2021 primarily due to lower interest rates and lower average debt balances compared to the prior year period. Other (Income) Expense, Net Three Months EndedJanuary 31 , ($ in millions) 2021 2020 Investment gain$ (11.5) $ - Foreign exchange (gain) loss (0.1) 1.4 Other (income) expense, net (0.9) 0.7$ (12.5) $ 2.1 OnJanuary 19, 2021 , CooperVision acquired all of the remaining equity interests of a privately-held medical device company that develops spectacle lenses for myopia management. The fair value remeasurement of our previous equity investment immediately before the acquisition resulted in a gain of$11.5 million . Foreign exchange (gain) loss primarily resulted from the revaluation and settlement of foreign currency-denominated balances. Other income increased in the three months endedJanuary 31, 2021 , primarily due to an increase in defined benefit plan related income during the period. (Benefit) Provision for Income Taxes Our effective tax rates for the three months endedJanuary 31, 2021 andJanuary 31, 2020 were (1,406.3)% and 7.1%, respectively. The decrease was primarily due to an intra-group transfer of intellectual property during the three months endedJanuary 31, 2021 , as discussed below. Our effective tax rate for the three months endedJanuary 31, 2021 was lower than theU.S. federal statutory tax rate primarily due to the intra-group transfer. Our effective tax rates for the three months 29 -------------------------------------------------------------------------------- THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations endedJanuary 31, 2021 andJanuary 31, 2020 were otherwise lower than theU.S. federal statutory tax rate primarily due to earnings in foreign jurisdictions with lower tax rates and excess tax benefits from share-based compensation. InNovember 2020 , we completed an intra-group transfer of certain intellectual property and related assets to aUK subsidiary as part of a group restructuring to establish headquarters operations in theUK . Income before income taxes resulting from this transfer is eliminated upon consolidation. The transfer resulted in a step-up of theUK tax-deductible basis in the intellectual property and goodwill, creating a temporary difference between the book basis and the tax basis of these assets. As a result, we recognized a deferred tax asset of$1,987.9 million , with a corresponding income tax benefit, during the three months endedJanuary 31, 2021 . Share-Based Compensation Plans We have several share-based compensation plans that are described in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2020 . The compensation expense and related income tax benefit recognized in our Consolidated Statements of Income and Comprehensive Income for share-based awards were as follows: Three Months EndedJanuary 31 , ($ in millions) 2021 2020
Selling, general and administrative expense
1.1 1.0 Research and development expense 0.6 0.6 Total share-based compensation expense$ 10.8 $ 10.3 Related income tax benefit$ 1.2 $ 1.4 Capital Resources and Liquidity First Quarter Highlights •Operating cash flow of$147.7 million compared to$129.7 million in the prior year period •Expenditures for purchases of property, plant and equipment of$55.9 million compared to$69.0 million in the prior year period •Cash payments for acquisitions and others of$79.8 million compared to$9.4 million in the prior year period •Cash provided by operations of$147.7 million offset by capital expenditures of$55.9 million resulted in positive free cash flow of$91.8 million , up 51% compared to the prior year period Comparative Statistics ($ in millions) January 31, 2021 October 31, 2020 Cash and cash equivalents $ 119.1 $ 115.9 Total assets$ 8,921.9 $ 6,737.5 Working capital $ 336.3 $ 269.8 Total debt$ 1,814.6 $ 1,793.2 Stockholders' equity$ 5,989.9 $ 3,824.8 Ratio of debt to equity 0.30:1 0.47:1 Debt as a percentage of total capitalization 23 %
32 %
Working Capital The increase in working capital atJanuary 31, 2021 from the end of fiscal 2020 was primarily due to: •decrease in accounts payable of$38.6 million due to timing of payments; 30 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations •increase in trade accounts receivable of$25.8 million primarily due to timing of collections and higher sales; •decrease in employee compensation and benefits of$9.0 million ; •decrease in short-term debt of$8.6 million due to payment of overdraft and other credit facilities; and •increase in cash and cash equivalents of$3.2 million , partially offset by: •increase in other current liabilities of$11.6 million ; and •decrease in prepaid expense and other current assets of$5.9 million . AtJanuary 31, 2021 , our inventory months on hand was 7.4 compared to 6.6 atOctober 31, 2020 . Inventory remained relatively flat. Our days sales outstanding (DSO) were relatively consistent at 61 days atJanuary 31, 2021 , compared to 60 days atOctober 31, 2020 . Operating Cash Flow Cash provided by operating activities increased by$18.0 million from$129.7 million in the first quarter of fiscal 2020 to$147.7 million in the first quarter of fiscal 2021. This increase in cash flow provided by operating activities primarily consists of: •increase in net income of$2,010.6 million from a net income of$90.5 million in the first quarter of fiscal 2020 to$2,101.1 million in the first quarter of fiscal 2021; •increase of$4.9 million in net changes in depreciation and amortization, from$70.6 million during the first quarter of fiscal 2020 to$75.5 million during the first quarter of fiscal 2021; •increase of$0.7 million in net cash outflow from changes in operating capital, from$50.6 million outflow in the first quarter of fiscal 2020 to$49.9 million outflow in the first quarter of fiscal 2021, partially offset by: •decrease of$1,978.8 million in the net changes in deferred income taxes. Refer to Note 6. Income Taxes for further information; and •decrease from other non-cash items of$19.4 million , from$21.7 million during the first quarter of fiscal 2020 to$2.3 million during the first quarter of fiscal 2021, primarily due to an investment gain of$11.5 million . Refer to Note 2. Acquisitions for further information. The increase in net income of$2,010.6 million was primarily due to: •recognized income tax benefit of$1,987.9 million . Refer to Note 6. Income Taxes for further information; •increase of$22.3 million in operating income from$111.1 in the first quarter of fiscal 2020 to$133.4 million in the first quarter of fiscal 2021 primarily due to the increase in consolidated net sales and decrease in certain costs; and •an investment gain of$11.5 million . Refer to Note 2. Acquisitions for further information. The$0.7 million increase in the net cash flow from changes in operating capital compared to the prior year period is primarily due to: •$36.3 million increase in the net changes in accrued liabilities and other primarily due to impact from adoption of ASC 842, Leases in prior year period and higher customer rebate accruals in current period as a result of higher sales; •$19.0 million increase in the net changes in inventories; •$14.5 million increase in the net changes in income tax payable, partially offset by: 31 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations •$44.6 million decrease in the net changes in trade and other receivables primarily due to timing of collections and higher sales; and •$22.6 million decrease in the net changes in accounts payable primarily due to timing of payments. Investing Cash Flow Cash used in investing activities increased by$57.3 million to$135.7 million in the first quarter of fiscal 2021 from$78.4 million in the first quarter of fiscal 2020 due to:
•$72.1 million increase in payments made for acquisitions in the first quarter of fiscal 2021 compared to the prior year period, partially offset by:
•$13.1 million decrease in capital expenditures. Financing Cash Flow Cash flows from financing activities decreased by$49.6 million to$13.6 million cash outflow in the first quarter of fiscal 2021 compared to$63.2 million outflow in the first quarter of fiscal 2020, primarily due to: •$39.9 million decrease in repayments of long-term debt, primarily due to repayments of funds from the 2020 Credit Agreement in first three months of fiscal 2021 compared to repayment of funds from the 2016 Credit Agreement in the prior year period; •$19.0 million increase in proceeds from long-term debt, primarily due to funds received from the 2020 Credit Agreement; and •$12.0 million decrease in net repayments from short-term debt, primarily due to movements in short term loans. OnApril 1, 2020 , the Company entered into a Revolving Credit and Term Loan Agreement (the 2020 Credit Agreement), among the Company andKeyBank National Association , as administrative agent. The 2020 Credit Agreement provides for (a) a multicurrency revolving credit facility (the 2020 Revolving Credit Facility) in an aggregate principal amount of$1.29 billion and (b) a term loan facility (the 2020 Term Loan Facility) in an aggregate principal amount of$850.0 million , each of which, unless terminated earlier, mature onApril 1, 2025 . In addition, the Company has the ability from time to time to request an increase to the size of the revolving credit facility or establish one or more new term loans under the term loan facility in an aggregate amount up to$1.605 billion , subject to the discretionary participation of the lenders. OnOctober 16, 2020 , the Company entered into a 364-day,$350.0 million , term loan agreement (the 2020 Term Loan Agreement) by and among the Company, the lenders party thereto and The Bank of Nova Scotia, as administrative agent which matures onOctober 15, 2021 .
The following is a summary of the maximum commitments and the net amounts
available to us under different credit facilities as of
Facility Limit Outstanding Outstanding Total Amount Maturity Date (In millions) Borrowings Letters of Credit Available 2020 Revolving Credit Facility$ 1,290.0 $ 564.0 $ 1.4$ 724.6 April 1, 2025 2020 Term Loan Facility 850.0 850.0 n/a - April 1, 2025 2020 Term Loan 350.0 350.0 n/a - October 15, 2021 Total $ 2,490$ 1,764 $ 1.4$ 724.6 The 2020 Credit Agreement contains customary restrictive covenants, as well as financial covenants that require us to maintain a certain Total Leverage Ratio and Interest Coverage Ratio. As defined, in the 2020 Credit Agreement, we are required to maintain an Interest Coverage Ratio of at least 3.00 to 1.00, and a Total Leverage Ratio of no higher than 3.75 to 1.00. AtJanuary 31, 2021 , we were in compliance with the Interest Coverage Ratio at 25.53 to 1.00 and the Total Leverage Ratio at 2.10 to 1.00. The Company, after considering the potential impacts of the COVID-19 pandemic, expects to remain 32 -------------------------------------------------------------------------------- THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in compliance with its financial maintenance covenant and meet its debt service obligations for at least the twelve months following the date of issuance of these financial statements. See Note 5. Debt of the Consolidated Condensed Financial Statements for additional information. Considering recent market conditions and the ongoing COVID-19 pandemic crisis, we have re-evaluated our operating cash flows and cash requirements and continue to believe that current cash, cash equivalents, future cash flow from operating activities and cash available under our 2020 Credit Agreement will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the Consolidated Condensed Financial Statements included in this quarterly report. To the extent additional funds are necessary to meet our liquidity needs such as that for acquisitions, share repurchases, cash dividends or other activities as we execute our business strategy, we anticipate that additional funds will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Share Repurchase InDecember 2011 , our Board of Directors authorized the 2012 Share Repurchase Program and through subsequent amendments, the most recent inMarch 2017 , the total repurchase authorization was increased from$500.0 million to$1.0 billion of the Company's common stock. This program has no expiration date and may be discontinued at any time. Purchases under the 2012 Share Repurchase Program are subject to a review of the circumstances in place at the time and may be made from time to time as permitted by securities laws and other legal requirements. AtJanuary 31, 2021 ,$334.8 million remained authorized for repurchase under the program. The Company's share repurchases during the three months endedJanuary 31, 2021 were as follows: Periods Ended January 31, 2021 Number of shares 69,622 Average repurchase price per share$ 356.61 Total costs of shares repurchased (in millions)$ 24.8 There were no share repurchases under the program during the three months endedJanuary 31, 2020 . Dividends We paid a semiannual dividend of approximately$1.5 million or3 cents per share, onFebruary 9, 2021 , to stockholders of record onJanuary 22, 2021 .
Summary of Non-GAAP Financial Measures
The non-GAAP financial measures that may be included in Management's Discussion and Analysis and the reasons management believes they are useful to investors are described below. These measures should be considered supplemental in nature and are not intended to be a substitute for the related financial information prepared in accordance with GAAP. In addition, these measures may not be the same as similarly named measures presented by other companies. Free cash flow is defined as cash provided by operating activities less capital expenditures. Management believes free cash flow is useful for investors as an additional measure of liquidity because it represents cash that is available to grow the business, make strategic acquisitions, repay debt, buyback common stock or fund the dividend. We use free cash flow internally to understand, manage, make operating decisions and evaluate our business. In addition, we use free cash flow to help plan and forecast future periods. Constant currency is defined as excluding the effect of foreign currency rate fluctuations. In order to assist with the assessment of how our underlying businesses performed, we compare the percentage change in net sales from one period to another, excluding the effect of foreign currency fluctuations. To present this information, current period revenue for entities reporting in currencies other thanthe United States dollar are converted intoUnited States dollars at the average foreign exchange rates for the corresponding period in the prior year. 33 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Estimates and Critical Accounting Policies
Information regarding estimates and critical accounting policies is included in Management's Discussion and Analysis on Form 10-K for the fiscal year endedOctober 31, 2020 . There have been no material changes in our policies from those previously discussed in our Form 10-K for the fiscal yearOctober 31, 2020 . Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1. General of the Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q. Trademarks ActivControl®, Aquaform®, Avaira Vitality®, Biofinity®, Biofinity Energys®, MyDay® and MiSight® are registered trademarks ofThe Cooper Companies, Inc. , its affiliates and/or subsidiaries. PC Technology™ is a trademark ofThe Cooper Companies, Inc. , its affiliates and/or subsidiaries. The clariti® mark is a registered trademark ofThe Cooper Companies, Inc. , its affiliates and/or subsidiaries worldwide except inthe United States where the use of clariti® is licensed. INSORB® and PARAGARD® are registered trademarks ofCooperSurgical, Inc. 34 --------------------------------------------------------------------------------THE COOPER COMPANIES, INC. AND SUBSIDIARIES
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