Business context and reporting period
The Cooper Companies, Inc. (NYSE: COO) filed this unaudited Form 10-Q for the three months ended January 31, 2023, its first quarter of fiscal 2023. The company operates through CooperVision, which sells contact lenses, and CooperSurgical, which serves women’s health, fertility and related markets. Comparisons below are with the three months ended January 31, 2022 unless otherwise noted.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $858.5 million | $787.2 million | Up 9% |
| Gross profit / gross margin | $558.5 million / 65% | $518.4 million / 66% | Margin down 1 percentage point |
| Operating income / margin | $149.5 million / 17% | $130.8 million / 17% | Up 14% |
| Net income | $84.6 million | $95.3 million | Down 11% |
| Diluted EPS | $1.70 | $1.91 | Down 11% |
| Operating cash flow | $166.6 million | $166.0 million | Approximately flat |
| Cash and cash equivalents | $118.2 million | $138.2 million at October 31, 2022 | Down $20.0 million |
| Total debt | $2,695.4 million | $2,763.4 million at October 31, 2022 | Down $68.0 million |
Interest expense rose to $26.1 million from $6.6 million, primarily due to higher average debt and interest rates. The effective tax rate increased to 30.7% from 21.8%, reflecting geographic earnings mix, the higher UK statutory rate and required capitalization of research and experimental expenditures. Working capital was $661.7 million, compared with $253.4 million at October 31, 2022; management attributed the increase primarily to repayment of the 364-day term loan.
Segment performance and changes
- CooperVision: Sales increased 4% to $581.3 million. Growth across product categories was partly offset by approximately $43.4 million of unfavorable foreign exchange effects. Segment operating income rose 26% to $160.1 million, including the benefit of a $31.8 million release of contingent consideration related to SightGlass Vision’s regulatory milestone.
- CooperSurgical: Sales increased 23% to $277.2 million, primarily reflecting the addition of Generate Life Sciences, partly offset by approximately $7.8 million of unfavorable foreign exchange effects. Segment operating income declined 63% to $5.8 million, mainly because of higher selling, general and administrative expenses and amortization, including acquisition-related costs and acquired-intangible amortization.
- Consolidated gross margin declined to 65% from 66%, primarily due to unfavorable currency. Revenue growth did not translate into higher net income, with increased interest expense and taxes among the factors affecting results.
Cash provided by operations was nearly unchanged. Investing cash outflow was $113.3 million, versus $1.669 billion a year earlier, when the company paid approximately $1.6 billion net of cash acquired for Generate. Financing cash outflow was $77.6 million, including repayment of the $338.0 million 364-day term loan; the company also drew $276.5 million on its revolving credit facility.
Outlook, risks and notable items
- Management expressed optimism about long-term prospects in contact lenses and health care but provided no quantitative revenue, earnings or cash-flow guidance in the supplied filing text.
- Management said cash, expected operating cash flow and available credit should be sufficient for anticipated needs for at least 12 months from issuance of the financial statements. The company reported $1.012 billion available under its revolving credit facility and compliance with debt covenants at January 31, 2023.
- The company reported $2.7 billion of debt and noted exposure to variable interest rates and foreign exchange. A 1 percentage-point change in interest rates was estimated to change quarterly interest expense by approximately $4.5 million, after swaps. Credit agreements transitioned from LIBOR to SOFR effective February 1, 2023; management did not expect a material financial-statement impact.
- On November 1, 2022, CooperVision acquired a privately held specialty contact-lens company for $33.0 million; its preliminary purchase-price allocation included $13.1 million of goodwill. The filing also describes the pending acquisition of Cook Medical’s Reproductive Health business for $875.0 million, subject to customary closing conditions and regulatory approvals. The stated consideration includes $675.0 million at closing and four annual $50.0 million installments.
- Other stated risks include inflation and inability to fully pass on cost increases, supply-chain and labor constraints, geopolitical and pandemic-related disruption, competition, regulatory and product-approval requirements, acquisition integration and leverage, cybersecurity, litigation, and currency and interest-rate changes. The company said there were no material changes to the risk factors in its fiscal 2022 Form 10-K.
- The filing says ordinary-course legal matters are not expected to have a material adverse effect, and reports no material changes in internal control over financial reporting. No impairment of intangible assets was recorded in the quarter.
Important facts for investors to verify
- How much reported sales growth reflects organic performance versus Generate and other acquisitions, and how results develop after the disclosed foreign-exchange headwinds.
- The sustainability of CooperVision’s operating-income improvement given the $31.8 million contingent-consideration release, and the drivers of CooperSurgical’s lower segment operating income.
- Whether higher interest costs and the elevated effective tax rate persist, and the company’s sensitivity to rates and foreign exchange.
- The final purchase-price allocation for the November 2022 acquisition and the closing status, funding and integration implications of the pending Cook Medical transaction.
- The filing gives inconsistent payment dates for the semiannual dividend: Note 9 states February 10, 2023, while the MD&A states February 9, 2023. Investors may wish to verify the correct date.