Business context and reporting period
The Cooper Companies, Inc. (Nasdaq: COO) filed this Form 10-K for the fiscal year ended October 31, 2023. The filing reports annual results, not a standalone fiscal fourth-quarter income statement. Cooper operates CooperVision, a contact lens business, and CooperSurgical, focused on fertility and women’s health.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $3,593.2 million | $3,308.4 million | +9% |
| Gross profit / margin | $2,357.9 million / 66% | $2,139.6 million / 65% | Margin up about 1 percentage point |
| Operating income / margin | $533.1 million / 15% | $507.6 million / 15% | +5% |
| Net income | $294.2 million | $385.8 million | -24% |
| Diluted EPS | $5.91 | $7.76 | -24% |
| Operating cash flow | $607.5 million | $692.4 million | -12% |
| Capital expenditures | $392.5 million | $242.0 million | +62% |
| Cash and cash equivalents | $120.8 million | $138.2 million | Down $17.4 million |
| Total debt | $2,569.2 million | $2,763.4 million | Down $194.2 million |
| Working capital | $735.9 million | $253.4 million | Up $482.5 million |
CooperVision sales rose 8% to $2,423.7 million; operating income increased 19% to $587.7 million. CooperSurgical sales rose 10% to $1,169.5 million, while operating income fell 76% to $16.1 million. Consolidated sales growth was partly offset by unfavorable foreign exchange of approximately $76.1 million across the two segments.
Material changes and unusual items
- Net income fell despite higher sales and operating income. Interest expense increased 84% to $105.3 million, primarily due to higher interest rates; the effective tax rate rose to 28.7% from 18.8%.
- CooperSurgical expenses included a $45.0 million termination fee after regulatory closing conditions for the originally proposed $875 million Cook Medical reproductive health acquisition were no longer considered probable. On November 1, 2023, CooperSurgical closed a revised purchase of selected Cook assets for $300 million, with $200 million paid at closing and $100 million payable in installments.
- CooperVision released $31.8 million of contingent consideration after determining a SightGlass Vision regulatory milestone would not be achieved within the contractual timeline. It also recorded an immaterial impairment of certain discontinued-product intangibles.
- Cash used in investing was $449.0 million, versus $1,831.2 million in FY2022, when the Generate acquisition drove $1,641.3 million of net acquisition outflows. FY2023 capital expenditures increased to $392.5 million.
Liquidity, debt and capital allocation
At year-end, debt comprised $2.350 billion of term loans, $172.6 million drawn on a $1.290 billion revolving facility, and other borrowings and financing leases. The company reported $1,115.3 million available under the revolving facility and compliance with debt covenants. It stated that cash, expected operating cash flow and available credit were sufficient for anticipated needs for at least 12 months from issuance of the financial statements. Credit facilities transitioned from LIBOR to SOFR in February 2023.
Operating cash flow declined partly due to the Cook termination fee and changes in operating capital; inventory increased to $735.6 million from $628.7 million. The Board ended the semiannual dividend declaration in December 2023; the company had paid $3.0 million in dividends in FY2023. No FY2023 share repurchases were made.
Outlook, risks and other disclosures
Management expressed optimism about the long-term prospects of contact lens and health care markets but provided no numerical revenue, earnings or cash-flow guidance in the supplied filing text. It cited opportunities in silicone hydrogel and daily lenses, myopia management, specialty eye care, fertility and women’s health. Key risks include inflation and foreign exchange, interest-rate exposure and leverage, supply constraints (including sole-source materials), manufacturing or ERP disruption, acquisition integration, competition and pricing pressure, product liability, cybersecurity and privacy, and evolving FDA, EU MDR/IVDR and laboratory-developed-test requirements. Management also highlighted reimbursement uncertainty and regulatory risks for reproductive health and genetic testing.
The company reported no legal proceedings it believed would have a material adverse effect on financial condition or results. KPMG issued an unqualified audit opinion and concluded internal control over financial reporting was effective. The stock moved from the NYSE to Nasdaq on September 26, 2023; a four-for-one stock split was announced in December 2023 for expected effect in February 2024.
Important facts for investors to verify
- Whether CooperSurgical can restore operating profitability after the FY2023 expense increases and the Cook transaction’s termination fee.
- Progress integrating the selected Cook assets acquired after year-end, including final purchase accounting and expected business contribution.
- Whether operating cash flow, inventory levels and elevated capital expenditures improve, and how investment affects future liquidity.
- Debt maturity and refinancing plans, exposure to variable rates, and available revolving credit as facilities approach maturity.
- Effect of the discontinued dividend and announced stock split on shareholder returns and per-share comparisons.
- Regulatory, supply-chain, foreign-exchange and reimbursement developments that could affect sales, costs or product availability.