Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Note numbers refer to “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Results of Operations
In this section, we discuss the results of our operations for fiscal 2023 compared with fiscal 2022. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.” For a discussion related to fiscal 2022 compared with fiscal 2021, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended October 31, 2022, which was filed with the United States Securities and Exchange Commission (SEC) on December 9, 2022, and is available on the SEC's website at www.sec.gov and our Investor Relations website at investor.coopercos.com.
Within the tables presented, percentages are calculated based on the underlying whole-dollar amounts and, therefore, may not recalculate exactly from the rounded numbers used for disclosure purposes.
Outlook
We are optimistic about the long-term prospects for the worldwide contact lens and general health care markets, and the resilience of and growth prospects for our businesses and products. However, we face significant risks and uncertainties in our global operating environment as further described in the “Risk Factors” section in Part I, Item 1A of this filing. These risks include uncertain global and regional business, political and economic conditions, including but not limited to those associated with man-made or natural disasters, pandemic conditions, inflation, foreign exchange rate fluctuations, regulatory developments, supply chain disruptions, and escalating global trade barriers. These risks and uncertainties have adversely affected our sales, cash flow and performance in the past and could further adversely affect our future sales, cash flow and performance.
CooperVision - We compete in the worldwide contact lens market with our spherical, toric, multifocal and toric multifocal contact lenses offered in materials like silicone hydrogel Aquaform technology. We believe that there will be lower contact lens wearer dropout rates as technology improves and enhances the wearing experience through a combination of improved designs and materials and the growth of preferred modalities such as single-use and monthly wearing options. CooperVision also competes in the myopia management and specialty eye care contact lens markets with myopia management contact lenses using its ActivControl technology and with products such as orthokeratology (ortho-k) and scleral lenses. CooperVision has FDA approval for its MiSight 1 day lens, which is the first and only FDA-approved product indicated to slow the progression of myopia in children with treatment initiated between the ages of 8-12. Further, CooperVision has Chinese NMPA approval for its MiSight 1 day lens for use in China. CooperVision is focused on greater worldwide market penetration using recently introduced products, and we continue to expand our presence in existing and emerging markets, including through acquisitions.
Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our desired future levels of sales growth and profitability. CooperVision manufactures and markets a wide variety of silicone hydrogel contact lenses. Our single-use silicone hydrogel product franchises, clariti, MyDay and MyDay Energys remain a focus as we expect increasing demand for these products, as well as future single-use products, as the global contact lens market continues to shift to this modality. Outside of single-use, the Biofinity and Avaira Vitality product families comprise our focus in the FRP, or frequent replacement product, market which encompasses the monthly and two-week modalities. Included in this segment are unique products such as Biofinity Energys, which helps individuals with digital eye fatigue.
CooperSurgical - Our CooperSurgical business competes in the fertility and women's health care market through its diversified portfolio of products and services, including fertility products and services, medical devices, cryostorage (such as cord blood and cord tissue storage) and contraception. CooperSurgical has established its market presence and distribution system by developing products and acquiring companies, products and services that complement its business model.
Competitive factors in the segments in which CooperSurgical competes include technological and scientific advances, product quality and availability, price and customer service (including response time and effective communication of product information to physicians, consumers, fertility clinics and hospitals).
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Sales
CooperVision Net Sales
The contact lens market has two major product categories:
• Spherical lenses including lenses that correct near- and farsightedness uncomplicated by more complex visual defects; and
• Toric and multifocal lenses including lenses that, in addition to correcting near- and farsightedness, address more complex visual defects such as astigmatism and presbyopia by adding optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea.
CooperVision Net Sales by Category
Single-use spheres – This includes Biomedics 1 day, clariti 1 day, MiSight, MyDay, and Proclear 1 day
Toric – This includes Avaira Vitality toric, Biofinity toric, Biomedics toric, clariti 1 day toric, MyDay toric and Proclear toric
Multifocal – This includes Biofinity multifocal, Biofinity toric multifocal, clariti 1 day multifocal, MyDay multifocal and Proclear 1 day multifocal
Non single-use sphere, other – This includes our frequent replacement product (FRP) lens portfolio (Avaira Vitality spheres, Biofinity spheres, Biofinity Energys spheres, Biomedics spheres, clariti spheres, Proclear spheres), specialty lenses (custom, ortho-k, and scleral lenses) and other.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ in millions) 2023 2022 2023 vs. 2022 % Change
Toric $ 828.7 $ 737.4 12 %
Multifocal 305.7 264.4 16 %
Single-use spheres 705.4 661.6 7 %
Non single-use sphere, other 583.9 579.9 1 %
$ 2,423.7 $ 2,243.3 8 %
In the fiscal year ended October 31, 2023, the growth experienced across all categories was partially offset by unfavorable foreign exchange rate fluctuations, which approximated $61.0 million.
• Toric and multifocal lenses grew primarily through the success of MyDay and Biofinity.
• Single-use sphere lenses grew primarily through MyDay, MiSight, and clariti lenses.
• Non single-use sphere lenses grew primarily through specialty lenses.
• "Other" products represented approximately 1% of net sales in fiscal 2023 and 2022.
CooperVision Net Sales by Geography
CooperVision competes in the worldwide soft contact lens market and services in three primary regions: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific.
($ in millions) 2023 2022 2023 vs. 2022 % Change
Americas $ 991.3 $ 887.2 12 %
EMEA 891.6 843.7 6 %
Asia Pacific 540.8 512.4 6 %
$ 2,423.7 $ 2,243.3 8 %
CooperVision's growth in net sales across all regions was primarily attributable to market gains of silicone hydrogel contact lenses. Refer to CooperVision Net Sales by Category above for further discussion.
CooperSurgical Net Sales by Category
CooperSurgical supplies the fertility and women's health care market with a diversified portfolio of products and services. Our office and surgical offerings include products that facilitate surgical and non-surgical procedures that are commonly performed primarily by obstetricians and gynecologists in hospitals, surgical centers, fertility clinics and medical offices. Fertility offerings include highly specialized products and services that target the IVF process, including diagnostics testing with a goal to make fertility treatment safer, more efficient and convenient.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The chart below shows the percentage of net sales of office and surgical and fertility.
Office/Surgical – This includes Endosee endometrial imaging products, Fetal Pillow cephalic elevation devices for use in Cesarean sections, illuminated speculum products, Lone Star retractor systems, loop electrosurgical excision procedure (LEEP) products, Mara water ablation systems, cryostorage (such as cord blood and cord tissue storage), Paragard contraceptive IUDs, point-of-care products and uterine positioning products.
Fertility – This includes fertility consumables and equipment, donor gamete services, and genomic services (including genetic testing).
($ in millions) 2023 2022 2023 vs. 2022 % Change
Office and surgical
$ 689.5 $ 633.6 9 %
Fertility 480.0 431.5 11 %
$ 1,169.5 $ 1,065.1 10 %
In th e fiscal year ended October 31, 2023, the net sales increase in both categories was partially due to the addition of Generate Life Sciences (Generate) on December 17, 2021. Additionally, office and surgical net sales increased due to an increase in sales from products such as Uterine Manipulators, Fetal Pillow and Surgical Retractors, and fertility net sales increased due to an increase in revenue from consumable products and genomic services. The increase was partially offset by unfavorable foreign exchange rate fluctuations, which approximated $15.1 million.
Gross Margin
Consolidated Gross Margin was relatively flat at 66% in fiscal 2023 compared to 65% in fiscal 2022.
Selling, General and Administrative (SGA) Expenses
($ in millions) 2023 % Net
Sales 2022 % Net
Sales 2023 vs. 2022
% Change
CooperVision $ 871.1 36 % $ 826.7 37 % 5 %
CooperSurgical 559.4 48 % 461.7 43 % 21 %
Corporate 70.7 — 53.8 — 31 %
$ 1,501.2 42 % $ 1,342.2 41 % 12 %
CooperVision's SGA expenses increased in fiscal 2023 compared to fiscal 2022 primarily due to an increase in selling and marketing activities, distribution costs, and an intangible assets impairment charge associated with the discontinuation of
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
certain products, partially offset by $31.8 million release of contingent consideration liability associated with SightGlass Vision's regulatory approval milestone.
CooperSurgical's SGA expenses increased in fiscal 2023 compared to fiscal 2022 primarily due to an increase in selling and marketing activities and the payment of a $45.0 million termination fee under an asset purchase agreement related to Cook Medical’s reproductive health business. See Note 3. Acquisitions and Joint Venture for further information on the termination fee.
Corporate SGA expenses increased in fiscal 2023 compared to fiscal 2022 primarily due to share-based compensation related expenses.
Research and Development (R&D) Expenses
($ in millions) 2023 % Net
Sales 2022 % Net
Sales 2023 vs. 2022
% Change
CooperVision $ 73.4 3 % $ 62.4 3 % 18 %
CooperSurgical 64.0 5 % 47.9 4 % 34 %
$ 137.4 4 % $ 110.3 3 % 25 %
CooperVision's R&D expenses increased in fiscal 2023 compared to fiscal 2022 primarily due to European Medical Device Regulation costs and myopia management programs, and timing of R&D projects. CooperVision's R&D activities are primarily focused on the development of contact lenses, manufacturing technology and process enhancements.
CooperSurgical's R&D expenses increased in fiscal 2023 compared to fiscal 2022 mainly due to European Medical Device Regulation costs. CooperSurgical's R&D activities are focused on developing and refining diagnostic and therapeutic products including medical interventions, surgical devices and fertility solutions.
Amortization Expense
($ in millions) 2023 % Net
Sales 2022 % Net
Sales 2023 vs. 2022
% Change
CooperVision $ 32.9 1 % $ 32.3 1 % 2 %
CooperSurgical 153.3 13 % 147.2 14 % 4 %
$ 186.2 5 % $ 179.5 5 % 4 %
CooperVision's amortization expense for fiscal 2023 compared to fiscal 2022 remained relatively flat year over year.
CooperSurgical's amortization expense increased in fiscal 2023 compared to fiscal 2022, primarily due to the amortization of intangible assets recently acquired through acquisitions.
Operating Income
($ in millions) 2023 % Net
Sales 2022 % Net
Sales 2023 vs. 2022
% Change
CooperVision $ 587.7 24 % $ 494.3 22 % 19 %
CooperSurgical 16.1 1 % 67.1 6 % (76) %
Corporate (70.7) — (53.8) — (31) %
$ 533.1 15 % $ 507.6 15 % 5 %
CooperVision's operating income increased in fiscal 2023 compared to fiscal 2022, primarily due to an increase in net sales partially offset by net changes in operating expenses.
CooperSurgical's operating income decreased in fiscal 2023 compared to fiscal 2022, primarily due to an increase in SGA and R&D expenses, partially offset by an increase in net sales.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Corporate operating loss increased in fiscal 2023 compared to fiscal 2022, primarily due to higher share-based compensation expenses.
Interest Expense
($ in millions) 2023 % Net
Sales 2022 % Net
Sales 2023 vs. 2022
% Change
Interest expense $ 105.3 3 % $ 57.3 2 % 84 %
Interest expense increased during fiscal 2023 compared to the prior year, primarily due to higher interest rates.
Other Expense (Income), Net
($ in millions) 2023 2022
Investment gain $ — $ (47.7)
Foreign exchange loss 7.0 22.0
Other expense (income), net 7.9 0.7
$ 14.9 $ (25.0)
Investment gain in fiscal 2022 primarily consists of a gain on remeasurement of the fair value of retained equity investment in SGV as a result of deconsolidation.
Foreign exchange loss is primarily associated with the weakening of the U.S. dollar against foreign currencies and the effect on intercompany receivables.
Other expenses (income), net increased in fiscal 2023, primarily due to a loss on minority investments, partially offset by defined benefit plan related income.
Provision for Income Taxes
The effective tax rates for fiscal 2023 and 2022 were 28.7% and 18.8%, respectively. The increase was primarily due to changes in the geographic composition of pre-tax earnings, an increase in the UK statutory tax rate from 19% to 25%, capitalization of research and experimental expenditures for fiscal 2023 as required by the 2017 Tax Cuts and Jobs Act, and changes in unrecognized tax benefits.
The effective tax rate for fiscal 2023 was higher than the US federal statutory rate primarily due to foreign earnings subject to US tax. The effective tax rate for fiscal 2022 was lower than the US federal statutory rate primarily due to foreign earnings in jurisdictions with lower tax rates and changes in unrecognized tax benefits, partially offset by foreign earnings subject to US tax.
See Note 6. Income Taxes for further information.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAPITAL RESOURCES AND LIQUIDITY
Working capital at October 31, 2023 and October 31, 2022, was $735.9 million and $253.4 million, respectively. The increase in working capital was primarily due to repayment of the 364-day term loan during fiscal 2023 and an increase in inventories. See Note 5. Financing Arrangements for further information.
Cash Flow
($ in millions) 2023 2022 2021
Operating activities $ 607.5 $ 692.4 $ 738.6
Investing activities (449.0) (1,831.2) (450.3)
Financing activities (173.9) 1,193.7 (311.4)
Effect of exchange rate changes on cash, cash equivalents, restricted
cash and restricted cash equivalents (2.3) (12.9) 2.9
(Decrease) increase in cash, cash equivalents, restricted cash and
restricted cash equivalents
$ (17.7) $ 42.0 $ (20.2)
Operating Cash Flow
Cash provided by operating activities in fiscal 2023 decreased compared to fiscal 2022, primarily due to the payment of a $45 million termination fee under an asset purchase agreement and net changes in operating capital, partially offset by net changes in other non-cash items.
The $45.0 million termination fee under an asset purchase agreement related to Cook Medical’s reproductive health business was accrued for during the second quarter of fiscal 2023 and paid on August 9, 2023. See Note 3. Acquisitions and Joint Venture for further information on the termination fee.
Investing Cash Flow
Cash used in investing activities in fiscal 2023 was lower than cash used in investing activities in fiscal 2022, primarily attributable to $1.6 billion cash paid, net of cash acquired, for the Generate acquisition in fiscal 2022. The decrease in cash used for acquisitions was partially offset by an increase in purchases of property, plant and equipment.
Financing Cash Flow
Cash used in financing activities in fiscal 2023 was primarily due to repayments of $338.0 million on the 2021 364-day term loan, partially offset by $172.6 million of funds drawn on the 2020 Revolving Credit.
Cash provided by financing activities in fiscal 2022 was primarily due to funds received from the 2021 term loan facility ($1.5 billion) and the 2021 364-day term loan facility ($840.0 million), partially offset by $561.5 million repayments of the 2020 Revolving Credit, $502.0 million repayments of the 2021 364-day term loan facility, and $78.5 million repurchases of common stock.
The following is a summary of the maximum commitments and the net amounts available to us under different credit facilities as of October 31, 2023:
(In millions) Facility Limit Outstanding Borrowings Outstanding Letters of Credit Total Amount Available Maturity Date
Revolving Credit:
2020 Revolving Credit $ 1,290.0 $ 172.6 $ 2.1 $ 1,115.3 April 1, 2025
Term Loan:
2020 Term Loan 850.0 850.0 n/a — April 1, 2025
2021 Term Loan 1,500.0 1,500.0 n/a — December 17, 2026
Total $ 3,640.0 $ 2,522.6 $ 2.1 $ 1,115.3
As of October 31, 2023, the Company was in compliance with all debt covenants. See Note 5. Financing Arrangements for further information.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Considering recent market conditions, we have re-evaluated our operating cash flows and cash requirements and continue to believe that current cash, cash equivalents, future cash flow from operating activities and cash available under our 2020 Credit Agreement will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the Consolidated Financial Statements included in this annual report. To the extent additional funds are necessary to meet our liquidity needs such as that for acquisitions, share repurchases, cash dividends or other activities as we execute our business strategy, we anticipate that additional funds could be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all.
Share Repurchases
In December 2011, the Company's Board of Directors authorized the 2012 Share Repurchase Program ("2012 Program") and through subsequent amendments, the most recent in March 2017, the total repurchase authorization was increased from $500.0 million to $1.0 billion of the Company's common stock. The program has no expiration date and may be discontinued at any time. Purchases under the 2012 Program are subject to a review of the circumstances in place at the time and may be made from time to time as permitted by securities laws and other legal requirements.
In fiscal 2023, there were no share repurchases under the 2012 Program. At October 31, 2023, $256.4 million remained authorized for repurchase under the program. See Note 8. Stockholders’ Equity for additional information.
Dividends
In fiscal 2023 and 2022, the Company declared regular dividends of 6 cents per share (a semiannual dividend of 3 cents per share) and paid a total of $3.0 million in each fiscal year. In December 2023, our Board of Directors decided to end the declaration of the semiannual dividend.
Contractual Obligations
As of October 31, 2023, we had the following contractual obligations:
Payments Due by Fiscal Year
(In millions)
Total 2024 2025 & 2026 2027 & 2028 2029 & Beyond
Interest payments $ 249.0 $ 113.3 $ 135.7 $ — $ —
Transition tax on unremitted foreign earnings and profits (1)
88.6 22.1 66.5 — —
Purchase obligations (2)
408.5 201.7 139.7 62.0 5.1
Total contractual obligations $ 746.1 $ 337.1 $ 341.9 $ 62.0 $ 5.1
(1) As of October 31, 2023, we had $88.6 million of income tax liabilities related to the one-time transition tax that resulted from the enactment of the 2017 US Tax Act, which is payable in annual installments through fiscal 2026. The installment for fiscal 2023 is classified in " Other current liabilities" i n our Consolidated Balance Sheet.
We are unable to reliably estimate the timing of future payments related to uncertain tax positions and have excluded $24.0 million of long-term income taxes payable from the table above. See Note 6. Income Taxes for additional information.
(2) Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding and includes obligations for inventory, capital expenditures and other operating expense commitments.
The table above excludes future payments for operating leases, long-term debt, and our defined benefit plan. The minimum future payments for operating leases are disclosed in Note 2. Operating Leases and future maturities of long-term debt are disclosed in Note 5. Financing Arrangements. The expected future benefit payments for our Retirement Income Plan through 2033 are disclosed in Note 10. Employee Benefits.
Transition from LIBOR
The UK’s Financial Conduct Authority (FCA), which regulates the London Interbank Offered Rate (LIBOR), announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. In March 2021, the FCA confirmed its intention to stop requiring banks to submit rates required to calculate LIBOR after 2021. However, for U.S. dollar-denominated (USD) LIBOR, only one-week and two-month USD LIBOR will cease to be published after 2021, and all remaining USD LIBOR tenors will continue being published until June 2023. Further, in March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
of Reference Rate Reform on Financial Reporting . This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Effective February 1, 2023, the Company transitioned its credit agreements from LIBOR to the Secured Overnight Financing Rate ("SOFR").
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
Management estimates and judgments are an integral part of financial statements prepared in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable, however, actual results could differ from the original estimates, requiring adjustment to these balances in future period. The critical accounting policies described in this section address the more significant estimates required of management when preparing the Consolidated Financial Statements in accordance with GAAP.
• Revenue recognition - We recognize revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers and/or when services are rendered. Our payment terms are typically between 30 to 120 days. Provisions for certain rebates, sales incentives, volume discounts, contractual pricing allowances and product returns are accounted for as variable consideration and recorded as a reduction in sales.
Product discounts, including certain rebates, sales incentives, and volume discounts are granted based on terms of the arrangement with direct distribution customers and at times the indirect end consumer. We evaluate contractual terms, historical experience, and perform internal analysis to estimate total product discounts at the time revenue is recognized. CooperSurgical rebates are predominately related to the Medicaid rebate provision that is estimated based upon contractual terms, historical experience, and trend analysis.
Sales returns are estimated and recorded based on historical sales return data. Promotional programs, such as cooperative advertising arrangements, are recorded in the same period as related sales. Reasonably likely changes to assumptions used to calculate the accruals for rebates, sales incentives, volume discounts, contractual pricing allowances and product returns are not anticipated to have a material effect on the financial statements. We currently disclose the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.
• Business combinations - We routinely consummate business combinations. Results of operations for acquired companies are included in our consolidated results of operations from the date of acquisition. We recognize separately from goodwill, the identifiable assets acquired, including acquired in-process research and development, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date fair values as defined by accounting standards related to fair value measurements. Key assumptions routinely utilized the allocation of purchase price to intangible assets include discount rates, and projected financial information such as revenue projections for companies acquired. As of the acquisition date, goodwill is measured as the excess of consideration given, over the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are expensed as incurred.
• Income taxes - Income taxes are estimated based on enacted income tax laws and the results of operations in each jurisdiction. Deferred tax assets and liabilities are estimated based on temporary differences between the financial reporting basis and income tax basis of assets and liabilities. Deferred tax assets are reduced by a valuation allowance to the extent it is more likely than not they are not expected to be realized. Long-term tax payable is estimated income tax to be paid for unrecognized tax benefits. A tax benefit is recognized if it is more likely than not a tax position will be sustained based on its technical merits in a tax authority examination, based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority.
Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 1. Organization and Significant Accounting Policies.
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES