Business context and reporting period
The Cooper Companies, Inc. (NYSE: COO) filed this unaudited Form 10-Q for the quarter and nine months ended July 31, 2023, its fiscal third quarter. The company operates through CooperVision, which sells contact lenses, and CooperSurgical, which serves women’s and family health markets. Comparisons are with the corresponding 2022 periods unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $930.2 million | $843.4 million | $2,666.1 million | $2,460.3 million |
| Gross profit | $610.0 million | $552.1 million | $1,751.4 million | $1,603.0 million |
| Operating income | $151.6 million | $140.6 million | $397.4 million | $404.1 million |
| Net income | $85.3 million | $98.4 million | $209.7 million | $320.2 million |
| Diluted EPS | $1.71 | $1.98 | $4.21 | $6.44 |
- Q3 sales increased 10%; nine-month sales increased 8%. Gross margin was 66% for both Q3 and the nine-month period, compared with 65% in each 2022 comparable period. Operating margin was 16% versus 17% in Q3 and 15% versus 16% for nine months.
- CooperVision sales rose 11% in Q3 and 7% year to date, with growth led by toric, multifocal and single-use lenses. CooperSurgical sales rose 8% in Q3 and 11% year to date.
- Operating income rose 8% in Q3 but declined 2% year to date. CooperVision operating income increased in both periods; CooperSurgical operating income was $18.8 million in Q3 and $0.3 million year to date.
- Interest expense increased to $26.8 million in Q3 and $79.0 million year to date, mainly due to higher interest rates. Effective tax rates were 28.2% and 31.6%, respectively, versus 16.1% and 20.5% in 2022.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $433.3 million, down from $561.7 million, primarily due to changes in operating capital. Capital expenditures were $247.5 million, versus $147.1 million.
- Cash used in investing activities was $288.2 million, compared with $1.732 billion in 2022, when the company paid approximately $1.6 billion for the Generate acquisition. Cash used in financing was $167.4 million; cash and cash equivalents ended at $117.3 million.
- Total debt was $2.594 billion at July 31, 2023, versus $2.763 billion at October 31, 2022. Working capital was $717.4 million, up from $253.4 million, principally reflecting repayment of the 364-day term loan. The company had $1.124 billion available under its revolving credit facility and reported compliance with all debt covenants.
- Management said cash, expected operating cash flow and available credit should meet anticipated needs for at least 12 months from issuance of the financial statements. U.S. dollar credit agreements transitioned from LIBOR to SOFR effective February 1, 2023.
Material changes, outlook and risks
- Q3 earnings declined despite sales growth, while nine-month net income and EPS fell substantially. The prior-year nine-month comparison included a $56.9 million gain from deconsolidating SightGlass Vision; 2023 also had higher interest and tax expense.
- In the second quarter, the company accrued a $45.0 million termination fee after regulatory closing conditions for the planned Cook Medical Reproductive Health acquisition were no longer considered probable. The fee was paid August 9, 2023. The company also released a $31.8 million SightGlass Vision contingent-consideration liability when the regulatory approval milestone was not expected within the contractual timeline.
- No quantified financial guidance is provided in the supplied filing text. Management expressed optimism about long-term market prospects but cited uncertainty from inflation, foreign exchange, interest rates, geopolitical conditions, regulation and supply-chain disruptions. It warned that these factors could adversely affect sales, cash flow and performance.
- Other disclosed risks include variable-rate debt, currency exposure, acquisition execution, regulatory approvals, product liability and litigation, cybersecurity and operational disruptions, and raw-material supply. The company reported no material change to previously disclosed risk factors and did not expect pending ordinary-course legal matters to materially affect financial condition or results.
Investor facts to verify
- Underlying sales and margin trends by segment, including the impact of foreign exchange and growth in CooperVision’s higher-growth lens categories.
- CooperSurgical profitability after the $45.0 million termination-fee accrual and the $31.8 million contingent-liability release.
- Cash conversion, working-capital needs and capital expenditure levels, given lower operating cash flow and higher inventory.
- Debt refinancing and interest-rate exposure, including the SOFR transition, swap coverage and covenant headroom.
- Tax-rate drivers and the extent to which the higher effective tax rates persist.