Business context and reporting period
The Cooper Companies, Inc. (NYSE: COO) filed its Form 10-K for the fiscal year ended October 31, 2022. The company operates CooperVision, a contact lens business, and CooperSurgical, focused on women’s health, fertility and family health. This is an annual filing; the supplied text does not provide standalone fourth-quarter results.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $3,308.4 million | $2,922.5 million | +13% |
| Gross profit / margin | $2,139.6 million / 65% | $1,955.8 million / 67% | Margin down 2 percentage points |
| Operating income / margin | $507.6 million / 15% | $505.8 million / 17% | Income essentially flat |
| Net income | $385.8 million | $2,944.7 million | Down sharply |
| Diluted EPS | $7.76 | $59.16 | Down sharply |
| Cash from operations | $692.4 million | $738.6 million | Down $46.2 million |
| Capital expenditures | $242.0 million | $214.4 million | Up $27.6 million |
| Total debt at year-end | $2,763.4 million | $1,481.0 million | Up $1,282.4 million |
FY2021 net income and EPS were unusually high because of a $2.45 billion income tax benefit, primarily related to an intra-group intellectual-property transfer and a UK tax-rate change. FY2022’s effective tax rate was 18.8%, versus negative 499.1% in FY2021; the year-over-year decline in reported earnings is therefore not a like-for-like measure of operating performance.
CooperVision sales were $2,243.3 million, up 4%; CooperSurgical sales were $1,065.1 million, up 38%, mainly reflecting the Generate acquisition. Foreign exchange reduced CooperVision sales by approximately $149.5 million and CooperSurgical sales by approximately $33.4 million. Consolidated gross margin fell primarily due to currency effects and costs to exit the contact lens care business. Interest expense increased to $57.3 million from $23.1 million, reflecting higher average debt and interest rates.
Cash and cash equivalents were $138.2 million; working capital was $253.4 million, down from $733.2 million. The company reported $1,288.7 million available under its revolving credit facility and compliance with debt covenants at year-end. Operating cash flow less capital expenditures was approximately $450.4 million, calculated from reported figures.
Material changes and unusual items
- Generate Life Sciences was acquired in December 2021 for approximately $1.663 billion, funded principally with a $1.5 billion term loan. It contributed $249.5 million of revenue and $27.8 million of net income from acquisition through year-end. The acquisition added substantial goodwill and intangible assets; purchase accounting remained preliminary.
- CooperSurgical also acquired a cryopreservation services company. In March 2022, CooperVision formed a 50/50 joint venture with Essilor around SightGlass Vision; the transaction generated a $56.9 million remeasurement gain.
- CooperVision recorded $33.2 million of costs to exit its contact lens care business and expected total exit costs of $30–$40 million, with completion expected in the first half of fiscal 2023.
- On April 6, 2022, CooperSurgical agreed to acquire Cook Medical’s Reproductive Health business for $875 million, subject to customary closing conditions. Separately, CooperVision closed an acquisition of a specialty contact lens company on November 1, 2022, after the fiscal year-end.
- Investing cash outflow was $1,831.2 million, largely reflecting $1.6 billion paid, net of cash acquired, for Generate. Financing cash inflow was $1,193.7 million, including borrowing activity.
Outlook, risks and contingencies
Management expressed optimism about the long-term prospects of contact lenses and general health care but gave no quantified fiscal 2023 revenue or earnings guidance in the supplied filing text. It expects available cash, operating cash flow and revolving-credit availability to meet anticipated needs for at least 12 months from issuance of the financial statements. Additional funding for acquisitions or other strategic needs could require more debt or equity and may not be available on favorable terms.
Management cited inflation, higher labor and freight costs, supply-chain constraints, currency movements, interest-rate increases, COVID-19-related disruption and the Russia-Ukraine conflict as risks to results and cash flow. Other material risks include sole- or limited-source suppliers, customer consolidation, competition and pricing pressure, acquisition integration and leverage, regulatory approvals and evolving device rules (including EU MDR/IVDR), reimbursement changes, product liability, privacy and cybersecurity incidents, and ERP-system implementation. The company reported no material Russia-Ukraine-related infrastructure or supply interruption to date. It did not believe ordinary-course legal proceedings would materially adversely affect financial condition or results.
Investor verification points
- Assess underlying growth apart from Generate’s acquired revenue and the adverse foreign-exchange impact; review organic and constant-currency trends.
- Reconcile reported earnings with the exceptional FY2021 tax benefit, and examine the assumptions and realizability of the large deferred tax asset.
- Review debt repayment or refinancing after the $338 million 364-day term loan matured on November 1, 2022, and the impact of higher rates on interest expense and covenant headroom.
- Track Generate integration, final purchase accounting, acquired customer-relationship valuations, and whether expected benefits justify added debt and amortization.
- Confirm the status, timing, funding and regulatory conditions of the $875 million Cook transaction, plus integration of the November 1 specialty-lens acquisition.
- Monitor contact lens care exit costs, margin recovery, supply availability, and progress on CooperVision and CooperSurgical ERP implementations.