Cooper Companies, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended April 30, 2023. Unaudited results; amounts in U.S. dollars, millions except per-share data. The company operates CooperVision (contact lenses) and CooperSurgical (women’s and family health care).
Financial highlights
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $877.4 | $829.8 | $1,735.9 | $1,616.9 |
| Gross profit | $582.9 | $532.5 | $1,141.4 | $1,050.9 |
| Operating income | $96.3 | $132.7 | $245.8 | $263.6 |
| Net income | $39.8 | $126.6 | $124.4 | $221.8 |
| Diluted EPS | $0.80 | $2.55 | $2.50 | $4.45 |
| Operating cash flow | Not separately provided | Not separately provided | $290.8 | $297.8 |
- Q2 sales grew 6% year over year; six-month sales grew 7%. Gross margin was reported at 66% for both periods, versus 64% and 65%, respectively, a benefit management attributed primarily to product mix.
- Q2 operating income fell 27% and net income fell 69%; six-month operating income declined 7% and net income declined 44%. Q2 operating margin was approximately 11%, versus 16% a year earlier.
- Six-month investing cash outflow was $195.3, primarily including $156.6 of capital expenditures; financing cash outflow was $124.4. Cash and cash equivalents were $111.9 at April 30, 2023, versus $138.2 at October 31, 2022.
- Total debt was $2,640.2, down from $2,763.4 at October 31, 2022. Current assets were $1,599.3 and current liabilities $949.1; reported working capital was $650.2. The company had $1,073.6 available on its revolving facility and reported compliance with debt covenants.
Business trends and changes
- CooperVision Q2 sales rose 6% to $589.3, led by toric lenses (+11%) and multifocal lenses (+12%). Growth was partially offset by unfavorable foreign exchange of approximately $21.2. Management cited market gains in silicone hydrogel lenses.
- CooperSurgical Q2 sales rose 4% to $288.1, with fertility sales up 9%; office and surgical sales increased 1%. Its six-month sales rose 13%, partly reflecting the prior-year addition of Generate Life Sciences.
- CooperSurgical reported an operating loss of $24.3 in Q2 versus income of $10.9 a year earlier, and a six-month operating loss of $18.5 versus income of $26.6. Higher selling, general and administrative expense was a key driver.
- Q2 selling, general and administrative expense increased 26% to $407.5; R&D expense increased 24% to $32.6. Interest expense rose to $26.1 from $10.8, primarily due to higher interest rates. Effective tax rates were 39.3% for Q2 and 33.7% for the six-month period, versus 22.7% and 22.3% a year earlier.
Outlook, risks and unusual items
- Management expressed optimism about long-term contact lens and health care market prospects but provided no numerical financial guidance in the supplied filing text. It cautioned that inflation, foreign exchange, geopolitical conditions, regulation, supply-chain disruption and other global uncertainties may adversely affect sales, cash flow and performance.
- The company recorded a $45.0 expense in Q2 for a probable termination fee, expected to be paid in August 2023, after regulatory closing conditions for the planned Cook Medical Reproductive Health acquisition were no longer considered probable. This weighed materially on CooperSurgical results.
- For the six months, the company released a $31.8 contingent-consideration liability after determining a SightGlass Vision regulatory approval payment would not be achieved within the contractual timeline. The prior-year comparison included a $48.4 investment gain, primarily from remeasuring the retained SightGlass Vision investment; these items affect year-over-year earnings comparisons.
- The company states existing cash, future operating cash flow and available credit should meet anticipated needs for at least 12 months from issuance of the statements. Debt is exposed to variable rates; management estimated a 100-basis-point rate change would affect quarterly interest expense by approximately $4.0 after swaps. Credit agreements transitioned from LIBOR to SOFR effective February 1, 2023.
- Management reported no material change to previously disclosed risk factors, no material adverse effect expected from ordinary-course legal matters, and effective disclosure controls.
Investor facts to verify
- Whether and when the $45.0 Cook Medical termination fee is paid, and the final outcome of the transaction and related regulatory conditions.
- Underlying CooperSurgical profitability excluding the termination accrual, and the extent to which operating expenses continue to outpace sales.
- Revenue growth and margins by segment, including the impact of foreign exchange and product mix.
- Debt costs, interest-rate exposure and use of the $1,073.6 available revolving credit capacity.
- Cash conversion and inventory growth: inventory was $699.0, up from $628.7 at October 31, 2022.