The Cooper Companies, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended July 31, 2022. Unaudited results; fiscal year ends October 31. The company operates CooperVision, a contact-lens business, and CooperSurgical, focused on women’s health and fertility.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $843.4 million | $763.4 million | $2,460.3 million | $2,163.4 million |
| Gross profit | $552.1 million | $516.1 million | $1,603.0 million | $1,453.9 million |
| Operating income | $140.6 million | $100.6 million | $404.1 million | $377.3 million |
| Net income | $98.4 million | $615.8 million | $320.2 million | $2,834.4 million |
| Diluted EPS | $1.98 | $12.37 | $6.44 | $57.01 |
| Operating cash flow | $263.9 million | $223.8 million | $561.7 million | $564.1 million |
- Sales increased 10% in Q3 and 14% year to date. CooperVision sales rose 2% and 6%, respectively; CooperSurgical sales rose 35% in both periods, mainly reflecting the Generate Life Sciences acquisition.
- Gross margin was 65% in both Q3 and the nine-month period, versus 68% and 67% in the comparable periods. Management cited unfavorable foreign exchange and costs of exiting contact lens care.
- Operating margin was 17% in Q3 versus 13% a year earlier; year-to-date it was 16% versus 17%. CooperVision drove much of the Q3 operating-income increase; CooperSurgical year-to-date operating income declined 15% to $56.9 million, with higher SG&A and amortization cited.
- Interest expense rose to $17.1 million in Q3 and $34.5 million year to date, reflecting higher average debt and rates. Year-to-date other income included a $56.9 million gain from remeasurement of the retained SightGlass Vision joint-venture investment.
- Cash and equivalents were $246.3 million at July 31, 2022, compared with $95.9 million at October 31, 2021. Working capital was $222.0 million, down from $733.2 million.
- Total debt was $2,881.5 million, up from $1,479.0 million; debt-to-equity was 0.40:1 versus 0.21:1. Nine-month investing cash outflow was $1,731.5 million, including $1,636.5 million for acquisitions; financing provided $1,327.8 million. Capital expenditures were $147.1 million. Operating cash flow less capital expenditures was approximately $414.6 million.
Material changes and notable items
- The sharp year-over-year decline in net income and EPS is not representative of underlying operating performance: FY2021 included a $1,987.9 million tax benefit from an intra-group intellectual-property transfer and a $534.9 million benefit from UK deferred-tax-asset remeasurement. FY2022 reported a 20.5% effective tax rate for the nine-month period.
- Generate Life Sciences was acquired in December 2021 for approximately $1.663 billion. It contributed $177.3 million in revenue and $20.9 million in net income from acquisition through July 31, 2022. Purchase accounting remains preliminary.
- CooperSurgical agreed to acquire Cook Medical’s Reproductive Health business for $875 million cash: $675 million at closing and four annual $50 million installments thereafter. The transaction remained subject to regulatory approvals, customary closing conditions and local consultation requirements.
- The company is exiting its non-core contact lens care business, with completion expected in the first half of FY2023. It recorded $24.0 million in exit charges year to date and expects total charges of $30–$40 million.
- CooperVision and Essilor formed a 50%-owned SightGlass Vision joint venture. CooperVision received $52.1 million for a 50% interest and recognized a $56.9 million remeasurement gain.
Liquidity, outlook and risks
- At July 31, the company had $1,288.7 million available under its revolving facility. The $460.0 million balance on a 364-day term loan was due November 1, 2022. Management said cash, expected operating cash flows and available credit were expected to cover anticipated needs for at least 12 months after issuance of the statements.
- The company was in compliance with debt covenants: total leverage ratio of 2.44:1 against a maximum of 3.75:1, and interest coverage of 27.33:1 against a minimum of 3.00:1. A 1-percentage-point rate change was estimated to change quarterly interest expense by approximately $5.1 million after swaps.
- Management remained optimistic about long-term market prospects but provided no specific numerical sales or earnings guidance. It cited COVID-19 effects, inflation, foreign-exchange volatility, supply-chain and production costs, Russia’s invasion of Ukraine, regulation and acquisition integration as sources of uncertainty. It reported no significant manufacturing, raw-material or distribution disruption to date, while noting higher production and freight costs and labor inefficiencies.
- Three interest-rate swaps had $1.0 billion notional value at quarter end. Foreign-exchange movements reduced CooperVision sales by approximately $48.4 million in Q3 and $91.1 million year to date, and CooperSurgical sales by approximately $9.1 million and $22.1 million, respectively.
- The company reported no goodwill or other intangible-asset impairment at July 31. It said ordinary-course legal matters were not expected to materially adversely affect financial condition or results. Management judged disclosure controls effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track Cook Medical transaction approvals, closing, purchase funding and installment obligations.
- Confirm repayment or refinancing of the $460 million 364-day term loan due November 1, 2022, and monitor debt, rates and covenant headroom.
- Assess whether CooperSurgical’s acquisition-driven growth translates into improved operating margins as integration and amortization costs continue.
- Monitor contact lens care exit charges against the $30–$40 million estimate and the expected FY2023 completion timing.
- Separate recurring operating trends from prior-year tax benefits and current-period investment gains when comparing earnings.