10-K 1 d238160d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2011

COMMISSION FILE NO. 1-8597

 

 

 

THE COOPER COMPANIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-2657368
(State or other jurisdiction of incorporation)   (I.R.S. Employer Identification No.)

6140 Stoneridge Mall Road, Suite 590

Pleasanton, California

  94588
(Address of principal executive offices)   (Zip Code)

925-460-3600

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.10 par value, and

associated rights

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

On November 30, 2011, there were 47,499,924 shares of the registrant’s common stock held by non-affiliates with aggregate market value of $3.5 billion on April 30, 2011, the last day of the registrant’s most recently completed fiscal second quarter.

 

Number of shares outstanding of the registrant’s common stock, as of November 30, 2011: 47,846,592

 

Documents Incorporated by Reference:

 

Document

  

Part of Form 10-K

Portions of the Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held in March 2012
   Part III

 

 


Table of Contents

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Annual Report on Form 10-K

for the Fiscal Year Ended October 31, 2011

 

Table of Contents

 

PART I

     

Item 1.

  

Business

     5   

Item 1A.

  

Risk Factors

     17   

Item 1B.

  

Unresolved Staff Comments

     32   

Item 2.

  

Properties

     33   

Item 3.

  

Legal Proceedings

     34   

Item 4.

  

Submission of Matters to a Vote of Security Holders

     35   

PART II

     

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

     36   

Item 6.

  

Selected Financial Data

     39   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   

Item 7A.

  

Quantitative and Qualitative Disclosure about Market Risk

     62   

Item 8.

  

Financial Statements and Supplementary Data

     64   

Item 9.

  

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

     115   

Item 9A.

  

Controls and Procedures

     115   

Item 9B.

  

Other Information

     116   

PART III

     

Item 10.

  

Directors, Executive Officers and Corporate Governance

     117   

Item 11.

  

Executive Compensation

     117   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     117   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     117   

Item 14.

  

Principal Accounting Fees and Services

     117   

PART IV

     

Item 15.

  

Exhibits and Financial Statement Schedules

     118   

 

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PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1934 and Section 21E of the Securities Exchange Act of 1934. These include statements relating to plans, prospects, goals, strategies, future actions, events or performance and other statements which are other than statements of historical fact. In addition, all statements regarding anticipated growth in our revenue, anticipated effects of any product recalls, anticipated market conditions, planned product launches and expected results of operations and integration of any acquisition are forward-looking. To identify these statements look for words like “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates” or “anticipates” and similar words or phrases. Forward-looking statements necessarily depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Among the factors that could cause our actual results and future actions to differ materially from those described in forward-looking statements are:

 

 

Adverse changes in global or regional general business, political and economic conditions due to the current global economic downturn, including the impact of continuing uncertainty and instability of U.S. and international credit markets that may adversely affect the Company’s or its customers’ ability to meet future liquidity needs.

 

 

Reduced sales, loss of customers, and costs and expenses related to the recall of certain lots of the Avaira® Toric and Avaira Sphere contact lenses and any additional adverse impacts if this recall is expanded in the future.

 

 

A major disruption in the operations of our manufacturing, research and development or distribution facilities, due to technological problems, natural disasters or other causes.

 

 

Disruptions in supplies of raw materials, particularly components used to manufacture our silicone hydrogel lenses and other hydrogel lenses.

 

 

Legal costs, insurance expenses, settlement costs and the risk of an adverse decision or settlement related to claims involving litigation, product liability or patent protection.

 

 

Changes in tax laws or their interpretation and changes in effective tax rates and adverse tax interpretations by taxing agencies or courts.

 

 

Limitations on sales following new product introductions due to poor market acceptance.

 

 

New competitors or product innovations or technologies from competitors.

 

 

The impact of acquisitions or divestitures on revenues, earnings or margins.

 

 

Interest rate and foreign currency exchange rate fluctuations.

 

 

The requirement to provide for a significant liability or to write off, or accelerate depreciation on, a significant asset, including impaired goodwill as a result of declines in the price of the Company’s common stock or other events.

 

 

Changes in U.S. and foreign government regulation of the retail optical industry and of the healthcare industry generally.

 

 

Failures to receive, or delays in receiving, U.S. or foreign regulatory approvals for products.

 

 

Failure to obtain adequate coverage and reimbursement from third party payors for our products.

 

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Compliance costs and potential liability in connection with U.S. and foreign healthcare regulations, including product recalls, and potential losses resulting from sales of counterfeit and other infringing products.

 

 

The success of the Company’s research and development activities and other start-up projects.

 

 

Dilution to earnings per share from acquisitions or issuing stock.

 

 

Changes in accounting principles or estimates.

 

 

Environmental risks.

 

 

Other events described in our Securities and Exchange Commission filings, including the “Business” and “Risk Factors” sections in this Annual Report on Form 10-K for the fiscal year ended October 31, 2011, as such Risk Factors may be updated in quarterly filings.

 

We caution investors that forward-looking statements reflect our analysis only on their stated date. We disclaim any intent to update them except as required by law.

 

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Item 1. Business.

 

The Cooper Companies, Inc. (Cooper or the Company), a Delaware corporation organized in 1980, is a global medical device company publicly traded on the NYSE Euronext (NYSE: COO). Cooper is dedicated to serving the needs of the healthcare professional and improving the quality of life for its employees and customers through its two business units, CooperVision, Inc. and CooperSurgical, Inc.

 

CooperVision is a leading manufacturer of soft contact lenses for the worldwide vision correction market. CooperVision produces a broad range of monthly, two-week and single-use contact lenses, featuring advanced materials and optics. CooperVision brings a commitment to solving the toughest vision challenges such as astigmatism, presbyopia and ocular dryness; with a broad collection of spherical, toric and multifocal contact lenses. Through a combination of innovative products and focused practitioner support, CooperVision brings a refreshing perspective to the marketplace. CooperVision’s products are primarily manufactured at its facilities located in the United Kingdom, Puerto Rico and New York. CooperVision distributes products from Rochester, New York, Fareham, United Kingdom, Liege, Belgium, and various smaller international distribution facilities.

 

CooperSurgical is dedicated to providing medical devices and procedure solutions that improve healthcare delivery to women in any clinical setting. CooperSurgical focuses on expansion of its core businesses and the introduction of advanced technology-based products to aid clinicians in the management and treatment of commonly seen conditions. CooperSurgical customers are healthcare professionals and institutions providing care to and for women. CooperSurgical products support the point of healthcare delivery in the hospital, clinicians office and fertility clinics. CooperSurgical’s major manufacturing and distribution facilities are located in Trumbull, Connecticut, Pasadena, California, Stafford, Texas, Golden, Colorado, and Berlin, Germany.

 

CooperVision and CooperSurgical each operate in highly competitive environments. Competition in the medical device industry involves the search for technological and therapeutic innovations. Both of Cooper’s businesses compete primarily on the basis of product quality and differentiation, technological benefit, service and reliability.

 

COOPERVISION

 

CooperVision competes in the worldwide soft contact lens market and services three primary regions: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific. The contact lens market has two major product categories:

 

 

Spherical lenses including lenses that correct near- and farsightedness uncomplicated by more complex visual defects.

 

 

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.

 

In order to achieve comfortable and healthy contact lens wear, products are sold with recommended replacement schedules, often defined as modalities, with the primary modalities being single-use, two-week and monthly.

 

CooperVision offers spherical, aspherical, toric, multifocal and toric multifocal lens products in most modalities. We believe that in order to compete successfully in the numerous niches of the contact lens

 

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market, companies must offer differentiated products that are priced competitively and manufactured efficiently. CooperVision believes that it is the only contact lens manufacturer to use three different manufacturing processes to produce its lenses: lathing, cast molding and FIPS, a cost-effective combination of lathing and molding. This manufacturing flexibility allows CooperVision to compete in its markets by:

 

 

Producing high, medium and low volumes of lenses made with a variety of materials for a broader range of market niches: single-use, two-week, monthly and quarterly disposable sphere and toric lenses and custom toric lenses for patients with a high degree of astigmatism.

 

 

Offering a wide range of lens parameters, leading to a higher successful fitting rate for practitioners and better visual acuity for patients.

 

In addition, CooperVision lenses compete based on providing superior comfort through the use of lens edge technology. CooperVision lenses have a round to partial round edge which we believe increases comfort. CooperVision’s Proclear® line of spherical, toric and multifocal lenses are manufactured with omafilcon A, a material that incorporates Phosphorylcholine (PC) Technology that helps enhance tissue-device compatibility. Proclear lenses are the only lenses with FDA clearance for the claim “… may provide improved comfort for contact lens wearers who experience mild discomfort or symptoms relating to dryness during lens wear.” Mild discomfort relating to dryness during lens wear is a condition that often causes patients to discontinue contact lens wear.

 

Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. Silicone hydrogel materials supply a higher level of oxygen to the cornea, as measured by the transmissibility of oxygen through a given thickness of material, or “dk/t,” than traditional hydrogel lenses. In the past three years, CooperVision launched monthly silicone hydrogel spherical, toric and multifocal lens products under our Biofinity® brand and two-week silicone hydrogel spherical and toric lens products under our Avaira® brand. In fiscal 2011, we launched our Biofinity spherical silicone hydrogel lens in Japan and our Biofinity multifocal lens globally.

 

In addition to its PC Technology and silicone hydrogel product offerings, CooperVision competes in the contact lens market with its traditional hydrogel products.

 

Contact Lens Product Sales

 

Spheres: Net sales of CooperVision’s spherical lenses, representing 61 percent of CooperVision’s soft lens net sales, grew 12 percent in fiscal 2011, as compared to fiscal 2010. Single-use spherical lens net sales, representing 23 percent of soft lens sales, grew 18 percent.

 

Toric and Multifocal: Net sales of CooperVision’s toric lenses, representing 31 percent of CooperVision’s soft lens net sales, grew 16 percent in fiscal 2011, as compared to fiscal 2010. Multifocal lens net sales, representing 7 percent of soft lens net sales, grew 4 percent in fiscal 2011.

 

Proclear: Net sales of CooperVision’s PC Technology products – which consist of spherical, toric and multifocal products, including Biomedics® XC and Proclear® 1 Day – increased 10 percent in fiscal 2011 as compared to fiscal 2010 and represented 28 percent of CooperVision’s soft lens net sales.

 

Silicone Hydrogel: CooperVision’s silicone hydrogel spherical, toric and multifocal lens products grew 49 percent in fiscal 2011 as compared to fiscal 2010 and represented 31 percent of CooperVision’s soft lens net sales as compared to 24 percent in fiscal 2010.

 

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Contact Lens Product Sales by Geographic Region

 

Based on our knowledge of the contact lens market and our review of available independent market data for calendar year 2010, we estimate the worldwide market for contact lenses by modality is 34 percent single-use, 36 percent two-week and 30 percent monthly. We estimate that the Americas market, representing about 38 percent of the worldwide soft contact lens market, by modality is 13 percent single-use, 58 percent two-week and 29 percent monthly; EMEA, representing about 29 percent of the worldwide market, is 38 percent single-use, 12 percent two-week and 50 percent monthly; and Asia Pacific, representing about 33 percent of the worldwide market, is 55 percent single-use, 33 percent two-week and 12 percent monthly.

 

CooperVision Competition

 

The contact lens market is highly competitive. CooperVision’s three largest competitors in the worldwide market and its primary competitors in the spherical, toric and multifocal lens categories of that market are Johnson & Johnson Vision Care, Inc., CIBA Vision (owned by Novartis AG) and Bausch & Lomb Incorporated.

 

Recent trends in marketing spherical lenses include a global shift toward silicone hydrogel lenses and toward single-use lenses. CooperVision’s primary competitors currently control the majority of the silicone hydrogel segment of the market. CooperVision was late in entering the silicone hydrogel segment of the market but has increased sales of its monthly and two-week toric and spherical lens offerings as well as the recently introduced monthly multifocal lens. In Japan, CooperVision recently launched Biofinity sphere, our monthly spherical silicone hydrogel lens.

 

In the toric lens market, we believe that lens manufacturers compete to provide the highest possible level of visual acuity and patient satisfaction by offering a wide range of lens parameters, superior wearing comfort and a high level of customer service, both for patients and contact lens practitioners. CooperVision competes based on its three manufacturing processes yielding wider ranges of toric lens parameters, providing wide choices for patient and practitioner and superior visual acuity, as well as by offering excellent customer service, including high standards of on-time product delivery.

 

CooperVision’s major competitors have greater financial resources and larger research and development budgets and sales forces. CooperVision seeks to offer a high level of customer service through its direct sales organizations around the world and through telephone sales and technical service representatives who consult with eye care professionals about the use of the Company’s lens products.

 

CooperVision also competes with manufacturers of eyeglasses and with refractive surgical procedures that correct visual defects. CooperVision believes that its contact lenses will continue to compete favorably against eyeglasses, particularly in markets where the penetration of contact lenses in the vision correction market is low, offering lens manufacturers an opportunity to gain market share. CooperVision also believes that laser vision correction is not a significant threat to its sales of contact lenses.

 

CooperVision Developments with the U.S. Food and Drug Administration

 

In August 2011, CooperVision initiated a recall on limited lots of Avaira® Toric contact lenses. In November 2011, this recall was expanded to cover limited lots of Avaira Sphere contact lenses. The

 

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recall was initiated because of the level of a residue (silicone oil) on certain lenses. The residue may cause hazy vision, severe eye pain or an eye injury. The manufacturing issue has been identified and process changes have been implemented. These process changes are subject to review by the United States Food and Drug Administration (FDA). Avaira Toric and Avaira Sphere lenses that are subject to the recall represent less than 2% of the Company’s fiscal 2011 net sales. Avaira Sphere lenses remain on the market, while Avaira Toric lenses are awaiting FDA authorization to return to the market. This recall is limited solely to specific lots of Avaira Toric and Avaira Sphere contact lenses and no other CooperVision products are involved in this recall.

 

Separately, CooperVision’s distribution center in West Henrietta, New York, was recently inspected by the FDA and on December 7, 2011, we received a Warning Letter, dated December 5, 2011, stating that certain labeling and packaging operations conducted at the facility deviate from applicable current Good Manufacturing Practices (cGMP) requirements. We are working with the FDA to address the observations cited in the Warning Letter. The Warning Letter does not restrict or prohibit the sale or marketing of our products, nor does it require us to recall any products distributed from the center. However, if we fail to correct the observations to FDA’s satisfaction, we could be subject to an enforcement action, such as a seizure, FDA-mandated recall, or other operating restrictions on the CooperVision facility.

 

COOPERSURGICAL

 

CooperSurgical offers a broad array of products used in the care and treatment of women’s health. The Company participates in the women’s healthcare market through offering quality products, innovative technologies and superior service to clinicians worldwide. CooperSurgical collaborates with clinicians to identify products and new technologies from disposable products to sophisticated instruments and equipment. The result is a broad portfolio of proven products that aid in the delivery of improved clinical outcomes that healthcare professionals use routinely in the diagnosis and treatment of a wide spectrum of women’s health issues.

 

Since its inception in 1990, CooperSurgical has steadily grown its market presence and distribution system by developing products and acquiring products and companies that complement its business model.

 

Market for Women’s Healthcare

 

CooperSurgical participates in the market for women’s healthcare with its diversified product lines of over 600 products. CooperSurgical products are in three major categories based on the point of healthcare delivery: hospitals, obstetricians and gynecologists (ob/gyns) medical offices and fertility clinics.

 

Based on United States Census estimates, CooperSurgical expects patient visits to United States ob/gyns to increase over the next decade. Driving this growth is an increasing base of reproductive age women, a large and stable middle-aged population and a rapidly growing population of women over the age of 65. CooperSurgical believes that the resurgence of population growth in the reproductive age group will result in increased office visits related to birth control and childbearing. CooperSurgical expects growth in fertility treatments as more women choose to delay childbearing to the mid-thirties and beyond. Office visit activity related to menopausal problems, including abnormal bleeding, incontinence and osteoporosis, are also expected to increase slightly over the next decade.

 

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CooperSurgical believes that in the past clinicians primarily saw women only during their reproductive years. Now, with new treatment options available and a more educated population, CooperSurgical expects the relationship between the patient and clinician will continue into the middle years and later.

 

Another trend in the market for women’s healthcare includes the migration of ob/gyn clinicians away from private practice ownership and towards aligning with group practices or employment with hospitals and health systems. CooperSurgical believes that the market factors that are driving this trend will continue in the near-term.

 

While general medical practitioners play an important role in women’s primary care, the ob/gyn specialist is the primary market for associated medical devices.

 

Some significant features of this market are:

 

 

Patient visits are for annual checkups, cancer screening, menstrual disorders, vaginitis (inflammation of vaginal tissue), treatment of abnormal Pap smears, osteoporosis (reduction in bone mass) and the management of menopause, pregnancy and reproductive management.

 

 

Ob/gyns traditionally provide the initial evaluation for women and their partners who seek infertility assistance. Ovulatory drugs and intrauterine insemination (IUI) are common treatments of these cases along with embryo transfer procedures.

 

 

Osteoporosis and incontinence have become frequent diagnoses as the female population ages. Early identification and treatment of these conditions will both improve women’s health and help reduce overall costs of treatment.

 

 

Sterilization is a frequently performed surgical procedure.

 

 

Hysterectomy, one of the most commonly performed surgical procedures, is increasingly performed using a laparoscopic approach.

 

 

The trend to move hospital-based procedures to an office or clinical setting is continuing as seen with the global endometrial ablation procedure.

 

CooperSurgical’s Fiscal 2011 Net Sales Growth

 

During fiscal 2011, CooperSurgical’s net sales grew 12 percent to $209.7 million from $188.0 million in fiscal 2010, representing 16 percent of Cooper’s net sales in both periods. Net sales growth excluding acquisitions was 8 percent. Sales of products used in surgical procedures grew 23 percent and represented 37 percent of CooperSurgical’s total net sales as compared to 33 percent in fiscal 2010.

 

CooperSurgical Competition

 

CooperSurgical focuses on selected segments of the women’s healthcare market, supplying diagnostic products and surgical instruments and accessories. In some instances, CooperSurgical offers all of the items needed for a complete procedure. CooperSurgical believes that opportunities exist for continued market consolidation of smaller technology-driven firms that generally offer only one or two product lines. Most are privately owned or divisions of public companies including some owned by companies with greater financial resources than Cooper.

 

Competitive factors in these segments include technological and scientific advances, product quality, price, customer service and effective communication of product information to physicians and

 

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hospitals. CooperSurgical competes based on its sales and marketing expertise and the technological advantages of its products. CooperSurgical’s strategy includes developing and acquiring new products, including those used in new medical procedures. As CooperSurgical expands its product line, it also offers training for medical professionals in the appropriate use of its products.

 

CooperSurgical is seeking to expand its presence in the significantly larger hospital and outpatient surgical procedure segment of the market that is at present dominated by bigger competitors such as Johnson & Johnson’s Ethicon Endo-Surgery and Ethicon Women’s Health and Urology companies, Boston Scientific, Gyrus ACMI and Covidien. These competitors have well established positions within the operating room environment. CooperSurgical intends to leverage its relationship with gynecologic surgeons and focus on devices specific to gynecologic surgery to facilitate its expansion within the surgical segment of the market.

 

RESEARCH AND DEVELOPMENT

 

Cooper employs 194 people in its research and development and manufacturing engineering departments. Most of these employees are in CooperVision. CooperVision product development and clinical research is supported by internal and external specialists in lens design, formulation science, polymer chemistry, clinical trials, microbiology and biochemistry. CooperVision’s research and development activities include programs to develop disposable silicone hydrogel products and product lines utilizing PC Technology.

 

CooperSurgical conducts research and development in-house and also has consulting agreements with external surgical specialists. CooperSurgical’s research and development activities include the design of the next generation product line of uterine manipulators, the upgrade and expansion of CooperSurgical’s portfolio of assisted reproductive technology products as well as products within the general obstetrics and gynecology offerings.

 

Cooper-sponsored research and development expenditures during fiscal 2011, 2010 and 2009 were $43.6 million, $35.3 million and $30.3 million, respectively, net of acquired in-process research and development of $3.0 million in 2009. Net research and development expenditures represented 3 percent of net sales each fiscal year. During fiscal 2011, CooperVision represented 85 percent and CooperSurgical represented 15 percent of the total research and development expenses. We did not participate in any customer-sponsored research and development programs during fiscal 2009 – 2011.

 

GOVERNMENT REGULATION

 

Medical Device Regulation

 

Our products are medical devices subject to extensive regulation by the United States Food and Drug Administration (FDA) in the United States and other regulatory bodies abroad. FDA regulations govern, among other things, medical device design and development, testing, manufacturing, labeling, storage, recordkeeping, premarket clearance or approval, advertising and promotion, and sales and distribution. Unless an exemption applies, each medical device we wish to distribute commercially in the United States will require either prior 510(k) clearance or prior premarket approval (PMA) from the FDA. A majority of the medical devices we currently market have received FDA clearance through the 510(k) process or approval through the PMA process. Because we cannot be assured that any new products we develop, or any product enhancements, will be subject to the shorter 510(k) clearance process, significant delays in the introduction of any new products or product enhancements may occur.

 

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Device Classification

 

The FDA classifies medical devices into one of three classes – Class I, II or III – depending on the degree of risk associated with each medical device and the extent of control needed to ensure its safety and effectiveness. Both CooperVision and CooperSurgical develop and market medical devices under different levels of FDA regulation depending on the classification of the device. Class III devices, such as flexible and extended wear contact lenses, require extensive premarket testing and approval, while Class I and II devices require lower levels of regulation. The majority of CooperSurgical’s products are Class II devices.

 

Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials (General Controls). Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below.

 

Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification procedure. Pursuant to the Medical Device User Fee and Modernization Act of 2002 (MDUFMA), unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees. Certain Class II devices are exempt from this premarket review process.

 

Class III devices are those devices which have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by the General Controls and the other requirements described above. These devices almost always require formal clinical studies to demonstrate safety and effectiveness and must be approved through the premarket approval process described below. Premarket approval applications (and supplemental premarket approval applications) are subject to significantly higher user fees under MDUFMA than are 510(k) premarket notifications.

 

510(k) Clearance Pathway

 

When we are required to obtain a 510(k) clearance for a device that we wish to market, we must submit a premarket notification to the FDA demonstrating that the device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for the submission of premarket approval applications. By regulation, the FDA is required to respond to a 510(k) premarket notification within 90 days of submission of the notification. As a practical matter, clearance can take significantly longer. If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously-cleared device or use, the FDA will place the device, or the particular use of the device, into Class III.

 

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that changes its intended use, will require a new 510(k) clearance or could require premarket approval. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination that a new clearance or approval is not required for a particular modification, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. In these circumstances, a

 

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manufacturer also may be subject to significant regulatory fines or penalties. We have made and plan to continue to make additional product enhancements and modifications to our devices that we believe do not require new 510(k) clearances.

 

Premarket Approval Pathway

 

A PMA application must be submitted if the device cannot be cleared through the 510(k) premarket notification procedures. The PMA process is much more demanding than the 510(k) premarket notification process. A PMA application must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use.

 

After a PMA application is complete, the FDA begins an in-depth review of the submitted information. The FDA, by statute and regulation, has 180 days to review an accepted PMA application, although the review generally occurs over a significantly longer period of time, and can take up to several years. During this review period, the FDA may request additional information, including clinical data, or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with the Quality System Regulation (QSR). New PMA applications or PMA application supplements are required for significant modifications to the manufacturing process, labeling and design of a device that is approved through the premarket approval process. Premarket approval supplements often require submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and may not require as extensive clinical data or the convening of an advisory panel.

 

Clinical Trials

 

A clinical trial is almost always required to support a PMA application and is sometimes required for a 510(k) premarket notification. These trials generally require submission of an application for an investigational device exemption (IDE) to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that the potential benefits of testing the device in humans outweighs the risks and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated investigational device exemption requirements. Clinical trials for a significant risk device may begin once the IDE application is approved by both the FDA and the appropriate institutional review boards at the clinical trial sites. All of Cooper’s currently marketed products have been cleared by all appropriate regulatory agencies, and Cooper has no product currently being marketed under an IDE.

 

Continuing FDA Regulation

 

After a device is placed on the market, numerous regulatory requirements apply. These include: the QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and medical device reporting regulations, which require that manufacturers report to the FDA if their

 

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device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations.

 

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions: fines, injunctions and civil penalties; recall, seizure or import holds of our products; operating restrictions, suspension of production; refusing our request for 510(k) clearance or premarket approval of new products; withdrawing 510(k) clearance or premarket approvals that are already granted and criminal prosecution.

 

Even if regulatory approval or clearance of a medical device is granted, the FDA may impose limitations or restrictions on the uses and indications for which the device may be labeled and promoted. Medical devices may be marketed only for the uses and indications for which they are cleared or approved. FDA regulations prohibit a manufacturer from promoting a device for an unapproved or “off-label” use. Failure to comply with this prohibition on “off-label” promotion can result in enforcement action by the FDA, including, among other things, warning letters, fines, injunctions, consent decrees and civil or criminal penalties.

 

Foreign Regulation

 

Health authorities in foreign countries regulate Cooper’s clinical trials and medical device sales. The regulations vary widely from country to country. Even if the FDA has approved a product, the regulatory agencies in each country must approve new products before they may be marketed there. The worldwide Medical Device regulations are increasing, with many countries becoming regulated for the first time. For example Hong Kong, Singapore and Malaysia are becoming regulated and follow the Global Harmonization Task Force model for regulating medical devices. These emerging regulated countries require the same rigorous safety data compiled in pre-clinical and clinical studies for the rest of the world. Japan has one of the most rigorous regulatory systems in the world and requires in-country clinical trials. The Japanese quality and regulatory standards remain stringent even with the more recent harmonization efforts and updated Japanese regulations.

 

These regulatory procedures require a considerable investment in time and resources and usually result in a substantial delay between new product development and marketing. If the Company does not maintain compliance with regulatory standards or if problems occur after marketing, product approval may be withdrawn.

 

In addition to FDA regulatory requirements, the Company also maintains ISO 13485 certification and CE mark approvals for its products. A CE mark is an international symbol of adherence to certain standards and compliance with applicable European medical device requirements. These quality programs and approvals are required by the European Medical Device Directive and must be maintained for all products intended to be sold in the European market. The ISO 13485 Quality Measurement System registration is now also required for registration of products in Asia Pacific and Latin American countries. In order to maintain these quality benchmarks, the Company is subjected to rigorous biannual reassessment audits of its quality systems and procedures.

 

Other Health Care Regulation

 

We may be subject to various federal, state and foreign laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws, and laws pertaining to healthcare privacy

 

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and security. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE. Similarly if the physicians or other providers or entities with whom we do business are found to be noncompliant with applicable laws, they may be subject to sanctions, which could indirectly have a negative impact on our business, financial conditions and results of operations. While we believe that our operations are in material compliance with such laws, as applicable to us, because of the complex and far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws.

 

RAW MATERIALS

 

CooperVision’s raw materials primarily consist of various chemicals and packaging materials and are generally available from more than one source. However, CooperVision relies on sole suppliers for certain raw materials used to make our silicone hydrogel contact lens products. In fiscal 2011, CooperVision purchased certain assets of Asahikasei Aime Co., Ltd. (Aime), our current sole supplier of the primary material used to make our silicone hydrogel contact lens products, from Asahi Kasei Pharma Corporation. While this acquisition has increased CooperVision’s control over the sourcing of certain raw materials, if current raw material suppliers fail to supply sufficient materials on a timely basis or at all for any reason, we may suffer a disruption in the supply of our silicone hydrogel contact lens products.

 

Raw materials used by CooperSurgical are generally available from more than one source. However, because some products require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative supplier on short notice.

 

MARKETING AND DISTRIBUTION

 

CooperVision markets its products in the United States through its field sales representatives, who call on optometrists, ophthalmologists, opticians, optical chains and distributors. CooperVision augments its United States sales and marketing efforts with e-commerce, telemarketing, social media and advertising in professional journals. In the EMEA and Asia Pacific regions, CooperVision primarily markets its products through its field sales representatives. In other countries, CooperVision uses distributors and has given some of them the exclusive right to market its products within specific geographic areas.

 

CooperSurgical’s products are marketed by a network of dedicated field sales representatives, independent agents and distributors. In the United States, CooperSurgical augments its sales and marketing activities by participating in national and regional industry tradeshows, professional educational programs and internet promotions including e-commerce, social media and collaborative efforts with professional organizations, telemarketing, direct mail and advertising in professional journals.

 

PATENTS, TRADEMARKS AND LICENSING AGREEMENTS

 

Cooper owns or licenses a variety of domestic and foreign patents, which, in total, are material to its overall business. The names of certain of Cooper’s products are protected by trademark registrations in the United States Patent and Trademark Office and, in some cases, also in foreign trademark offices. Applications are pending for additional trademark and patent registrations. Cooper intends to protect its intellectual property rights aggressively.

 

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No individual patent or license is material to the Company or either of its principal business units other than our License Agreement effective as of November 19, 2007, between CooperVision and CIBA Vision AG and CIBA Vision Corporation. This license relates to patents covering CooperVision’s silicone hydrogel contact lens products, Biofinity® and Avaira®. This license extends until the patents expire in 2014 in the United States and in 2016 outside of the United States.

 

In addition to trademarks and patent licenses, the Company owns certain trade secrets, copyrights, know-how and other intellectual property.

 

DEPENDENCE ON CUSTOMERS

 

Neither of our business units depends to any material extent on any one customer or any one affiliated group of customers.

 

GOVERNMENT CONTRACTS

 

Neither of our business units is materially subject to profit renegotiation or termination of contracts or subcontracts at the election of the United States government.

 

BACKLOG

 

Backlog is not a material factor in either of Cooper’s business units.

 

SEASONALITY

 

CooperVision’s contact lens sales in its fiscal first quarter, which runs from November 1 through January 31, are typically lower than subsequent quarters, as patient traffic to practitioners’ offices is relatively light during the holiday season.

 

COMPLIANCE WITH ENVIRONMENTAL LAWS

 

Federal, state and local provisions that regulate the discharge of materials into the environment, or relate to the protection of the environment, do not currently materially affect Cooper’s capital expenditures, earnings or competitive position.

 

FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS, GEOGRAPHIC AREAS, FOREIGN OPERATIONS AND EXPORT SALES

 

The information required by this item is included in Note 13. Business Segment Information of our Financial Statements and Supplementary Data and Item 1A. Risk Factors – Risks Relating to Our Business, included in this report.

 

EMPLOYEES

 

On October 31, 2011, the Company had about 7,400 employees. The Company believes that its relations with its employees are good.

 

NEW YORK STOCK EXCHANGE CERTIFICATION

 

We submitted our 2011 annual Section 12(a) CEO certification with the New York Stock Exchange. The certification was not qualified in any respect. Additionally, we filed with the Securities and Exchange Commission as exhibits to this Annual Report on Form 10-K for the year ended October 31, 2011, the CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.

 

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AVAILABLE INFORMATION

 

The Cooper Companies, Inc. Internet address is http://www.coopercos.com. The information on the Company’s Web site is not part of this or any other report we file with, or furnish to, the SEC. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and amendments filed with or furnished to the Securities and Exchange Commission (SEC), are publicly available free of charge on our Web site as soon as reasonably practicable. The public may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains such reports, proxy and information statements and other information whose Internet address is http://www.sec.gov. The Company’s Corporate Governance Principles, Ethics and Business Conduct Policy and charters of each standing committee of the Board of Directors are also posted on the Company’s Web site.

 

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Item 1A. Risk Factors.

 

Our business faces significant risks. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial. Our business, financial condition and results of operations could be materially adversely affected by any of these risks, and the trading prices of our common stock could decline by virtue of these risks. These risks should be read in conjunction with the other information in this report.

 

Risks Relating to Our Business

 

We operate in the highly competitive healthcare industry and there can be no assurance that we will be able to compete successfully.

 

Each of our businesses operates within a highly competitive environment. In our soft contact lens business, CooperVision faces intense competition from competitors’ products, in particular silicone hydrogel contact lenses, and may face increasing competition as other new products enter the market. Our major competitors in the contact lens business, Johnson & Johnson Vision Care, Inc., CIBA Vision (owned by Novartis AG) and Bausch & Lomb, Inc., have substantially greater financial resources, larger research and development budgets, larger sales forces, greater market penetration and larger manufacturing volumes than CooperVision. They also offer competitive products and differentiated materials, plus a variety of other eye care products including lens care products and ophthalmic pharmaceuticals, which may give them a competitive advantage in marketing their lenses. The market for contact lenses is intensely competitive and is characterized by declining sales volumes for older product lines and growing demand for silicone hydrogel based products. Our ability to respond to these competitive pressures will depend on our ability to decrease our costs and maintain gross margins and operating results and to introduce new products successfully, on a timely basis in the Americas, EMEA and Asia Pacific, and to achieve manufacturing efficiencies and sufficient manufacturing capacity and capabilities for such products. Any significant decrease in our costs per lens will depend, in part, on our ability to increase sales volume and production capabilities. Our failure to respond to competitive pressures in a timely manner could have a material adverse effect on our business, financial condition and results of operations.

 

To a lesser extent, CooperVision also competes with manufacturers of eyeglasses and providers of other forms of vision correction including ophthalmic surgery.

 

There can be no assurance that we will not encounter increased competition in the future, or that our competitors’ newer contact lens products will not successfully erode CooperVision’s contact lens business, which could have a material adverse effect on our business, financial condition and results of operations.

 

In the women’s healthcare market, competitive factors include technological and scientific advances, product quality, price and effective communication of product information to physicians and hospitals. CooperSurgical competes with a number of manufacturers in each of its niche areas, some of which have substantially greater financial and personnel resources and sell a much broader range of products, which may give them an advantage in marketing competitive products.

 

Acquisitions that we have made and may make in the future involve numerous risks.

 

We have a history of acquiring businesses and products that have significantly contributed to our growth in recent years. As part of our growth strategy, particularly at CooperSurgical, we intend to

 

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continue to consider acquiring complementary technologies, products and businesses. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and an increase in amortization and/or write-offs of goodwill and other intangible assets, which could have a material adverse effect upon our business, financial condition and results of operations. Risks we could face with respect to acquisitions include:

 

 

difficulties in the integration of the operations, technologies, products and personnel of the acquired company and establishment of appropriate accounting controls and reporting procedures and other regulatory compliance procedures;

 

 

risks of entering markets in which we have no or limited prior experience;

 

 

potential loss of employees;

 

 

an inability to identify and consummate future acquisitions on favorable terms or at all;

 

 

diversion of management’s attention away from other business concerns;

 

 

expenses of any undisclosed or potential liabilities of the acquired company;

 

 

expenses, including restructuring expenses, to shut-down our own locations or terminate our employees;

 

 

a dilution of earnings per share; and

 

 

risks inherent in accounting allocations.

 

Product innovations are important in the industry in which we operate, and we face the risk of product obsolescence.

 

Product innovations are important in the contact lens market in which CooperVision competes and in the niche areas of the healthcare industry in which CooperSurgical competes. Historically, we did not allocate substantial resources to new product development, but rather purchased, leveraged or licensed the technology developments of others. However, since 2005, we have been investing more in new product development, including the development of silicone hydrogel-based contact lenses. Although our focus is on products that will be marketable immediately or in the short to medium term rather than on funding longer-term, higher risk research and development projects, time commitments, the cost of obtaining necessary regulatory approval and other costs related to product innovations can be substantial. There can be no assurance that we will successfully obtain necessary regulatory approvals or clearances for our new products or that our new products will successfully compete in the marketplace and, as a result, justify the expense involved in their development and regulatory approval. In addition, our competitors may have developed or may in the future develop new products or technologies, such as contact lenses with anti-microbial or anti-allergenic features, that could lead to the obsolescence of one or more of our products. Competitors may also introduce new uses for contact lenses, such as for drug delivery or the control of myopia. Failure to develop new product offerings and technological changes and to offer products that provide performance that is at least comparable to competing products could have a material adverse effect on our business, financial condition, or results of operations.

 

If our products are not accepted by the market, we will not be able to sustain or expand our business.

 

Certain of our proposed products have not yet been clinically tested or commercially introduced, and we cannot assure that any of them, assuming they receive necessary regulatory approvals, will achieve

 

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market acceptance or generate operating profits. In addition, we have been slower to introduce new silicone hydrogel contact lens products than our competitors which put these products at a competitive disadvantage. Market acceptance and customer demand for these products are uncertain. The development of a market for our products may be influenced by many factors, some of which are out of our control, including:

 

 

acceptance of our products by eye care and women’s healthcare practitioners;

 

 

the cost competitiveness of our products;

 

 

consumer reluctance to try and use a new product;

 

 

regulatory requirements;

 

 

adequate coverage and reimbursement by third party payors;

 

 

the earlier release of competitive products, such as silicone hydrogel products, into the market by our competitors; and

 

 

the emergence of newer and more competitive products.

 

New medical and technological developments may reduce the need for our products.

 

Technological developments in the eye care and women’s healthcare industries, such as new surgical procedures or medical devices, may limit demand for our products. Corneal refractive surgical procedures such as Lasik surgery and the development of new pharmaceutical products may decrease the demand for our optical products. If these new advances provide a practical alternative to traditional vision correction, the demand for contact lenses and eyeglasses may materially decrease. We cannot assure that medical advances and technological developments will not have a material adverse effect on our businesses.

 

Our substantial and expanding international operations are subject to uncertainties which could affect our operating results.

 

A significant portion of our current operations for CooperVision are conducted and located outside the United States, and our growth strategy involves expanding our existing foreign operations and entering into new foreign jurisdictions. We have significant manufacturing and distribution sites in North America and Europe. Approximately two-thirds of our net sales for CooperVision for the fiscal years ended October 31, 2011 and 2010, respectively, were derived from the sale of products outside the United States. We believe that sales outside the United States will continue to account for a material portion of our total net sales for the foreseeable future. International operations and business expansion plans are subject to numerous additional risks, including:

 

 

we may have difficulty enforcing intellectual property rights in some foreign countries;

 

 

we may have difficulty gaining market share in countries such as Japan because of regulatory restrictions and customer preferences;

 

 

we may find it difficult to grow in emerging markets such as China, India and other developing nations due to, among other things, customer acceptance, undeveloped distribution channels, regulatory restrictions and business knowledge of these new markets;

 

 

tax rates in some foreign countries may exceed those of the United States, and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;

 

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we may find it difficult to comply with a variety of United States and foreign compliance and regulatory requirements such as the Foreign Corrupt Practices Act, the Dodd-Frank Act and the U.K. Bribery Act;

 

 

we may find it difficult to manage a large organization spread throughout various countries;

 

 

fluctuations in currency exchange rates could adversely affect our results;

 

 

foreign customers may have longer payment cycles than customers in the United States;

 

 

failure to comply with United States Department of Commerce export controls may result in fines and/or penalties;

 

 

general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries or not be favorable to our growth strategy;

 

 

foreign governments may adopt regulations or take other actions that would have a direct or indirect adverse impact on our business and market opportunities; and

 

 

we may have difficulty enforcing agreements and collecting receivables through some foreign legal systems.

 

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could adversely affect our international operations and, consequently, our operating results.

 

Current market conditions and recessionary pressures in one or more of our markets could impact our ability to grow our business.

 

In the United States and globally, market and economic conditions have been unprecedented over the past few years and challenging with tighter credit conditions and slower economic growth. The U.S. economy has experienced a recession and faces continued concerns about the systemic impacts of adverse economic conditions such as high energy costs, geopolitical issues, the availability and cost of credit, and an unstable real estate market. Foreign countries, in particular the Euro zone, are affected by similar systemic impacts. As a result, we continue to have lower than historical expectations for market growth in fiscal 2012.

 

Continued turbulence in the United States and international market and economic conditions may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers. If these market conditions continue, they may limit our ability, and the ability of our customers, to replace maturing liabilities and to access the capital markets to meet liquidity needs, which could have a material adverse effect on our financial condition and results of operations.

 

We face risks associated with disruption of manufacturing and distribution operations and failure to develop new manufacturing processes that could adversely affect our profitability or competitive position.

 

We manufacture a significant portion of the medical device products we sell. Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events), enforcement action by the FDA or other regulatory body if we are found to

 

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be in non-compliance with current Good Manufacturing Practices (cGMP) or other reasons, could have a material adverse effect on our business, financial condition and results of operations. In addition, materials such as silicone hydrogel require improvements to our manufacturing processes to make them cost effective. While we have improved our manufacturing capabilities for our silicone hydrogel products, our failure to continue to develop improvements to our manufacturing processes and reduce our cost of goods could significantly impact our ability to compete.

 

CooperVision manufactures molded contact lenses, which represent the majority of our contact lens revenues, primarily at our facilities in the United Kingdom and Puerto Rico. CooperSurgical manufactures the majority of its products in Trumbull, Connecticut, Stafford, Texas, and Pasadena, California. We manufacture certain products at only one manufacturing site for certain markets, and certain of our products are approved for manufacturing only at one site. Before we can use a second manufacturing site, we must obtain the approval of regulatory authorities, and because this process is expensive, we have generally not sought approvals needed to manufacture at an additional site. If there were any prolonged disruption in the operations of the approved facility, it could take a significant amount of time to validate a second site and replace lost product, which could result in lost customers and thereby reduce sales, profitability and market share.

 

CooperVision distributes products out of West Henrietta, New York, the United Kingdom, Belgium and various smaller international distribution facilities. Our distribution center in West Henrietta, New York, was recently inspected by FDA and, on December 7, 2011, we received a Warning Letter dated December 5, 2011, stating that certain labeling and packaging operations conducted at the facility deviate from applicable cGMP requirements. We are working with the FDA to address the observations cited in the Warning Letter. The Warning Letter does not restrict or prohibit the sale or marketing of our products, nor does it require us to recall any products distributed from the center. However, if we fail to correct the observations to the FDA’s satisfaction, we could be subject to an enforcement action, such as a seizure, FDA-mandated recall, or other operating restrictions on the facility, that could have a material adverse effect on our business. CooperSurgical’s products are primarily distributed out of its facility in Trumbull, Connecticut. Any prolonged disruption in the operations of our existing distribution facilities, whether due to technical or labor difficulties, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events) or other reasons, could have a material adverse effect on our business, financial condition and results of operations.

 

If our manufacturing operations fail to comply with applicable regulations, our manufacturing could be delayed or disrupted, and our product sales and profitability could suffer.

 

Our manufacturing operations and processes are required to comply with numerous federal, state and foreign regulatory requirements, including the FDA’s cGMP for medical devices, known as the QSR regulations, which govern the procedures related to the design, testing, production processes, controls, quality assurance, labeling, packaging, storage, importing, exporting and shipping of our products. We also are subject to state requirements and licenses applicable to manufacturers of medical devices. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic unscheduled inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. Failure to pass a cGMP, QSR or similar foreign inspection or to comply with these and other applicable regulatory requirements could result in disruption of our operations and manufacturing delays in addition to, among other things, significant fines, suspension of approvals, seizures, recalls or import holds of

 

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products, operating restrictions and criminal prosecutions. As a result, any failure to comply with applicable requirements could adversely affect our product sales and profitability. We are currently working with the FDA to address a Warning Letter dated December 5, 2011, which was issued by the FDA following an inspection of the labeling and packaging operations performed at our distribution center in West Henrietta, New York. If we fail to resolve the observations cited in the Warning Letter to the FDA’s satisfaction, we would be subject to the foregoing regulatory enforcement actions, any of which could have a material adverse effect on our business.

 

We rely on independent suppliers for raw materials and we could experience inventory shortages if we were required to use an alternative supplier on short notice.

 

We rely on independent suppliers for key raw materials, consisting primarily of various chemicals and packaging materials. Raw materials used in our operations are generally available from more than one source. However, because some products require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice. We have purchased Asahikasei Aime Co. Ltd. to achieve greater control over certain of the raw materials used in our silicone hydrogel contact lenses. However, Asahikasei Finechem (Asahi) remains our sole supplier of the primary material used to make our silicone hydrogel contact lens products, Biofinity and Avaira. We may suffer a disruption in the supply of our silicone hydrogel contact lens products if Asahi or other suppliers fail to supply sufficient material on a timely basis or at all for any reason and/or we need to switch to an alternative supplier. A disruption in the supply of raw materials could disrupt production of our silicone hydrogel contact lens products thereby adversely impacting our ability to market and sell such products and our ability to compete in this important segment of the contact lens market.

 

If we fail to protect our intellectual property adequately, our business could suffer.

 

We consider our intellectual property rights, including patents, trademarks and licensing agreements, to be an integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.

 

We may also seek to enforce our intellectual property rights on others through litigation. Our claims, even if meritorious, may be found invalid or inapplicable to a party we believe infringes or has misappropriated our intellectual property rights. In addition, litigation can:

 

 

be expensive and time consuming to prosecute or defend;

 

 

result in a finding that we do not have certain intellectual property rights or that such rights lack sufficient scope or strength;

 

 

divert management’s attention and resources; or

 

 

require us to license our intellectual property.

 

We have applied for patent protection in the United States and other foreign jurisdictions relating to certain existing and proposed processes and products. We cannot assure that any of our patent applications will be approved. Patent applications in the United States and other foreign jurisdictions are maintained in secrecy for a period of time, which may last until patents are issued, and since

 

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publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we will be the first creator of inventions covered by any patent application we make or the first to file patent applications on such inventions. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. We also cannot assure that we will have adequate resources to enforce our patents.

 

We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements and assignment agreements, which generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, we cannot assure that these confidentiality agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming and the outcome is unpredictable. Certain patents protecting our Proclear line of products expired in fiscal year 2011, which allows competitors to market and sell products with similar attributes.

 

We rely on trademarks to establish a market identity for our products. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. We also might not obtain registrations for our pending or future trademark applications, and might have to defend our registered trademark and pending applications from challenge by third parties. Enforcing or defending our registered and unregistered trademarks might result in significant litigation costs and damages, including the inability to continue using certain trademarks.

 

The laws of foreign countries in which we do business or contemplate doing business in the future do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products, and thereby have a material adverse affect on our business, financial condition and results of operations.

 

Our products or processes could be subject to claims of infringement of the intellectual property of others.

 

Our competitors in both the United States and foreign countries, many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our existing and planned products. Claims that our products, business methods or processes infringe upon the proprietary rights of others often are not asserted until after commencement of commercial sales of products incorporating our technology.

 

Significant litigation regarding intellectual property rights exists in our industry. Third parties have made, and may make in the future, claims of infringement against us or our contract manufacturers in connection with the use of our technology. Any claims, even those without merit, could:

 

 

be expensive and time consuming to defend;

 

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cause us to cease making, licensing or using products that incorporate the challenged intellectual property;

 

 

require us to redesign or reengineer our products, if feasible;

 

 

divert management’s attention and resources; or

 

 

require us to enter into royalty or licensing agreements in order to obtain the right to use a necessary product, component or process.

 

We cannot be certain of the outcome of any litigation. Any royalty or licensing agreement, if required, may not be available to us on acceptable terms or at all. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture, or distribution of some of our products and, therefore, could have a material adverse effect on our business.

 

A successful claim of infringement against us or our contract manufacturers in connection with the use of our technology, in particular if we are unable to manufacture or sell any of our planned products in any major market, could adversely affect our business.

 

We could experience losses from product liability claims, including such claims and other losses resulting from sales of counterfeit and other infringing products.

 

We face an inherent risk of exposure to product liability claims in the event that the use of our products results in personal injury. We also face the risk that defects in the design or manufacture of our products or sales of counterfeit or other infringing products might necessitate a product recall and other actions by manufacturers, distributors or retailers in order to safeguard the health of consumers and protect the integrity of the subject brand. Consumers may halt or delay purchases of a product that is the subject of a claim or recall, or has been counterfeited. We handle some risk with third-party carrier policies that are subject to deductibles and limitations. There can be no assurance that we will not experience material losses due to product liability claims or recalls, or a decline in sales resulting from sales of counterfeit or other infringing products, in the future.

 

We face risks related to environmental matters.

 

Our facilities are subject to a broad range of United States federal, state, local and foreign environmental laws and requirements, including those governing discharges to the air and water, the handling or disposal of solid and hazardous substances and wastes, remediation of contamination associated with the release of hazardous substances at our facilities and offsite disposal locations and occupational safety and health. We have made, and will continue to make, expenditures to comply with such laws and requirements. Future events, such as changes in existing laws and regulations, or the enforcement thereof, or the discovery of contamination at our facilities, may give rise to additional compliance or remediation costs that could have a material adverse effect on our business, financial condition and results of operations. Such laws and requirements are constantly changing, are different in every jurisdiction and can impose substantial fines and sanctions for violations. As a manufacturer of various products, we are exposed to some risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with any such claims.

 

Our indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations.

 

We have now and expect to continue to have a significant amount of indebtedness.

 

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Our indebtedness could:

 

 

increase our vulnerability to general adverse economic and industry conditions;

 

 

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development efforts and other general corporate purposes;

 

 

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

 

place us at a competitive disadvantage compared to our competitors that have less debt;

 

 

limit our ability to borrow additional funds; and

 

 

make it more difficult for us to satisfy our obligations with respect to our debt, including our obligation to repay our credit facility under certain circumstances.

 

Our credit facility contains financial and other restrictive covenants that could limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt, which could adversely affect our business, earnings and financial condition.

 

We are vulnerable to interest rate risk with respect to our debt.

 

We are subject to interest rate risk in connection with the issuance of variable and fixed-rate debt. In order to maintain our desired mix of fixed-rate and variable-rate debt, we currently use, and may continue to use, interest rate swap agreements and exchange fixed and variable-rate interest payment obligations over the life of the arrangements, without exchange of the underlying principal amounts. We may not be successful in structuring such swap agreements to manage our risks effectively, which could adversely affect our business, earnings and financial condition.

 

Exchange rate fluctuations and our foreign currency hedges could adversely affect our financial results.

 

As a result of our international operations, currency exchange rate fluctuations may affect our results of operations and financial position. Our most significant currency exposures are the British pound sterling, euro, Japanese yen and Canadian dollar. We expect to generate an increasing portion of our revenue and incur a significant portion of our expenses in currencies other than U.S. dollars. Although from time to time we enter into foreign exchange agreements with financial institutions to reduce our exposure to fluctuations in foreign currency values relative to our debt or receivables obligations, these hedging transactions do not eliminate that risk entirely. These hedges may also serve to reduce any gain that we may have made based on favorable foreign currency fluctuations. In addition, to the extent we are unable to match revenue received in foreign currencies with costs paid in the same currency, exchange rate fluctuations could have a negative impact on our financial condition and results of operations. Because our consolidated financial results are reported in dollars, if we generate sales or earnings in other currencies the translation of those results into dollars can result in a significant increase or decrease in the amount of those sales or earnings and can make it more difficult for our shareholders to understand the relative strengths or weaknesses of the underlying business on a period-over-period comparative basis.

 

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Increases in our effective tax rates or adverse outcomes resulting from examination of income tax returns could adversely affect our results.

 

Our future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations of those laws. In addition, the Internal Revenue Service (IRS) issued a Notice of Deficiency in connection with its audit of the Company’s income tax returns for the years 2005 and 2006. The Notice asserts that the Company is subject to additional taxes due to a proposed adjustment under the anti-deferral provisions of Subpart F of the Internal Revenue Code. If sustained, such taxes should be offset by the Company’s existing federal net operating loss carryforwards leaving a $1.2 million balance of proposed taxes owed. The Company intends to defend its positions taken in its income tax returns vigorously. However, if the IRS’s contentions were sustained, the Company’s existing federal net operating loss carryforwards could be materially reduced, which could result in a material adverse effect on the Company’s future net income. We are also subject to the examination of our income tax returns by other tax authorities and the outcome of these examinations could have a material adverse effect on our operating results and financial condition.

 

We operate globally and changes in tax laws could adversely affect our results.

 

We operate globally and changes in tax laws could adversely affect our results. We have overseas manufacturing, administrative and sales offices and generate substantial revenues and profits in foreign jurisdictions. Recently, a number of countries, including the United States, have proposed changes to their tax laws, some of which affect taxation of earnings recognized in foreign jurisdictions. Such changes in tax laws or their interpretation, if adopted, could adversely affect our effective tax rates and our results. For example, the recently enacted Health Care and Education Reconciliation Act of 2010 imposes a new excise tax of 2-3 percent of the price for which certain medical devices are sold. CooperVision is not affected by this new tax. Almost all of CooperSurgical’s sales will be subject to this new tax that takes effect January 1, 2013. We cannot at this time anticipate the magnitude of this new tax that would be imposed on us as there are significant uncertainties concerning key definitions and terms within the law.

 

Volatility in the securities markets, interest rates, and other factors could substantially increase our defined benefit pension costs.

 

We sponsor a defined benefit pension plan for employees in the United States. This defined benefit pension plan is funded with trust assets invested in a diversified portfolio of securities and other investments. Changes in interest rates, mortality rates, early retirement rates, investment returns, discount rates and the market value of plan assets can affect the funded status of our defined benefit pension plan and cause volatility in the net periodic benefit cost and future funding requirements of the plan. A significant increase in our obligations or future funding requirements could have a negative impact on our results of operations and cash flows from operations.

 

We manage our businesses utilizing complex computer systems that are regularly maintained and upgraded, an interruption to these systems could disrupt our business or force us to expend excessive costs.

 

We utilize complex computer systems, including enterprise resource planning and warehouse management systems, to support our business units and we have a continuous improvement strategy in

 

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place that keep our systems and overarching technology stable and in line with business needs and growth. Regular upgrades of our computer hardware and software revisions are typical and expected. We employ controlled change management methodologies to plan, test and execute all such system upgrades and improvements, and we believe that we assign adequate staffing and other resources to projects to ensure successful implementation. However, we cannot assure that our systems will meet our future business needs or that upgrades will operate as designed. We cannot assure that there will not be associated excessive costs or disruptions in portions of our business in the course of our maintenance, support and/or upgrade of these systems.

 

If we do not retain our key personnel and attract and retain other highly skilled employees, our business could suffer.

 

If we fail to recruit and retain the necessary personnel, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could suffer. The success of our business is heavily dependent on the leadership of our key management personnel. Our success also depends on our ability to recruit, retain and motivate highly skilled sales, marketing, engineering and scientific personnel. Competition for these persons in our industry is intense, and we may not be able to successfully recruit, train or retain qualified personnel.

 

Provisions of our governing documents and Delaware law, and our rights plan, may have anti-takeover effects.

 

Certain provisions of our Second Restated Certificate of Incorporation and Amended and Restated By-laws may inhibit changes in control of the Company not approved by our board of directors. These provisions include: (i) advance notice requirements for stockholder proposals and nominations and (ii) the authority of our board to issue without stockholder approval preferred stock with such terms as our board may determine. We also have the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects. Our board of directors extended our preferred stock purchase rights plan, commonly known as a “poison pill,” pursuant to an amended rights agreement dated as of October 29, 2007 that expires on October 29, 2017. The rights agreement is intended to prevent abusive hostile takeover attempts by requiring a potential acquirer to negotiate the terms of an acquisition with our board of directors. However, it could have the effect of deterring or preventing an acquisition of our Company, even if a majority of our stockholders would be in favor of such acquisition, and could also have the effect of making it more difficult for a person or group to gain control of the Company or to change existing management.

 

Risks Relating to Government Regulation of Manufacture and Sale of Our Products

 

Our failure to comply with regulatory requirements or to receive regulatory clearance or approval for our products or operations could adversely affect our business.

 

Our products and operations are subject to rigorous regulation by the FDA, and numerous other federal, state and foreign governmental authorities. In the United States, the FDA regulates virtually all aspects of a medical device’s design, development, testing, manufacture, safety, labeling, storage, recordkeeping, reporting, marketing, promotion and distribution, as well as the export of medical devices manufactured in the United States to foreign markets. Our failure to comply with FDA regulations could lead to the imposition of administrative or judicial sanctions, including injunctions, suspensions or the loss of regulatory approvals, product recalls, termination of distribution or product seizures. In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible.

 

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Our medical devices require clearance or approval by the FDA before they can be commercially distributed in the United States and may require similar approvals by foreign regulatory agencies before distribution in foreign jurisdictions. Medical devices may only be marketed for the indications for which they are approved or cleared. The process of obtaining regulatory clearances and approvals to market a medical device, particularly from the FDA, can be costly and time consuming. There can be no assurance that such clearances and approvals will be granted on a timely basis, if at all, or that significant delays in the introduction of any new products or product enhancements will not occur, which could adversely affect our competitive position and results of operations. In addition, the FDA may change its policies, adopt additional regulations or revise existing regulations, each of which could prevent or delay premarket approval or clearance of our products or could impact our ability to market our currently approved or cleared products. For example, the FDA has recently been reviewing the premarket clearance process in response to internal and external concerns regarding the 510(k) program. In January 2011, the FDA announced a plan of action that included twenty-five action items designed to make the process more rigorous and transparent. Since then the FDA has implemented some changes intended to improve its premarket programs. Some of these changes and proposals under consideration could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances for our products, increase the cost of compliance, or restrict our ability to maintain our current clearances.

 

Modifications and enhancements to a medical device also require a new FDA clearance or approval if they could significantly affect its safety or effectiveness or would constitute a major change in its intended use, design or manufacture. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. We have made modifications and enhancements to our medical devices that we do not believe require a new clearance or application, but we cannot confirm that the FDA will agree with our decisions. If the FDA requires us to seek clearance or approval for modification of a previously cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties, which could have a material adverse effect on our financial results and competitive position. We also cannot assure that we will be successful in obtaining clearances or approvals for our modifications, if required.

 

Even if regulatory approval or clearance of a medical device is granted, the FDA may impose limitations or restrictions on the uses and indications for which the device may be labeled and promoted, and failure to comply with FDA regulations prohibiting a manufacturer from promoting a device for an unapproved, or “off-label” use could result in enforcement action by the FDA, including, among other things, warning letters, fines, injunctions, consent decrees, and civil or criminal penalties.

 

Development and marketing of our products are subject to strict governmental regulation by foreign regulatory agencies, and failure to receive, or delay in receiving, foreign qualifications could have a material adverse effect on our business.

 

In many of the foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable to our devices and products in such countries are similar to those of the FDA.

 

In the European Economic Area, a medical device can only be placed on the market if it is in conformity with the essential requirements set out in the European Directives and implementing

 

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regulations that govern medical devices. These Directives prescribe quality programs and standards which must be maintained in order to achieve required ISO certification and to approve the use of CE marking. In order to maintain ISO certification and CE marking quality benchmarks, firms’ quality systems and procedures are subjected to rigorous periodic inspections and reassessment audits.

 

In many countries, the national health or social security organizations require our products to be qualified before they can be marketed with the benefit of reimbursement eligibility. To date, we have not experienced difficulty in complying with these regulations. However, our failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations.

 

Our products are subject to reporting requirements and recalls, even after receiving regulatory clearance or approval, which could harm our reputation, business and financial results.

 

After a device is placed on the market, numerous regulatory requirements apply, including the FDA’s QSR regulations, which require manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and medical device reporting regulations that require us to report to FDA or similar governmental bodies in other countries if our products malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental bodies in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Medical device manufacturers, such as CooperVision and CooperSurgical, may under their own initiative recall a product if a reasonable possibility of serious injury or any material deficiency in a device is found. For example, in August of 2011, CooperVision in collaboration with the FDA initiated a recall of limited lots of Avaira Toric contact lenses which in November of 2011 was expanded to include limited lots of Avaira Sphere contact lenses. This recall is ongoing and requires authorization of the FDA to return the Avaira Toric product to market. Recalls of any of our products, including any expansion of the ongoing Avaira recall, may divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. A recall, including the ongoing Avaira recall, could harm our reputation with customers and consumers which could reduce the sales of our products. In addition, the FDA or other foreign governmental agencies may implement enforcement actions in connection with a recall which could impair our product offerings and be harmful to our business and financial results.

 

Changes in legislation and government regulation of the healthcare industry as well as third-party payors’ efforts to control the costs of healthcare could materially adversely affect our business.

 

In recent years, an increasing number of healthcare reform proposals have been formulated by the legislative and executive branches of the United States federal and state governments. In March 2010, the President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, which we refer to collectively as the Health Care Reform Law. The Health Care Reform Law makes extensive changes to the delivery of health care in the United States. Among the provisions of the Health Care Reform Law of greatest importance to the medical device industry are the following:

 

 

A deductible 2.3 percent excise tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, effective January 1, 2013;

 

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A new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;

 

 

New reporting and disclosure requirements on medical device manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers, effective March 30, 2013;

 

 

Payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models, beginning on or before January 1, 2013;

 

 

Creation of the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to reduce Medicare spending and those recommendations could have the effect of law even if Congress doesn’t act on the recommendations; and

 

 

Establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services to test innovative payment and service delivery models to lower Medicare and Medicaid spending, beginning by January 1, 2011.

 

These measures could result in decreased net revenues from our medical device products and decrease potential returns from our development efforts. Many of the details regarding the implementation of the Health Care Reform Law are yet to be determined, and at this time, it remains unclear the full effect that the Health Care Reform Law would have on our business.

 

Also, any adoption of healthcare reform proposals on a state-by-state basis could require us to develop state-specific marketing and sales approaches. In addition, we may experience pricing pressures in connection with the sale of our products due to additional legislative proposals or healthcare reform initiatives, including those initiatives affecting coverage and reimbursement for our products. Future legislation and regulations may adversely affect the growth of the market for our products or demand for our products. We cannot predict the effect such reforms or the prospect of their enactment may have on our business.

 

In addition, third-party payors, whether governmental or commercial, whether inside the United States or abroad, increasingly attempt to contain or reduce the costs of healthcare. These cost-control methods include prospective payment systems, capitated rates, group purchasing, redesign of benefits, requiring pre-authorizations or second opinions prior to certain medical procedures, encouragement of healthier lifestyles and exploration of more cost-effective methods of delivering healthcare. Although cost controls or other requirements imposed by third-party payors have not historically had a significant effect on contact lens prices or distribution practices, this could change in the future and could adversely affect our business, financial condition and results of operations.

 

The costs of complying with the requirements of federal laws pertaining to the privacy and security of health information and the potential liability associated with failure to do so could materially adversely affect our business and results of operations.

 

Other federal legislation affects the manner in which we use and disclose health information. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, mandates, among other things, the adoption of standards for the electronic exchange of health information that may require significant and costly changes to current practices. The United States Department of Health and Human Services (HHS) has released several rules mandating the use of specified standards with respect to certain healthcare transactions and health information. The electronic transactions rule

 

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requires the use of uniform standards for common healthcare transactions, including healthcare claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits. The privacy rule imposes standards governing the use and disclosure of individually identifiable health information. The security rule released by HHS establishes minimum standards for the security of electronic health information, and requires the adoption of administrative, physical and technical safeguards.

 

Additionally, the Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009 was signed into law as part of the America’s Recovery and Reinvestment Act in February 2009. Previously, HIPAA directly regulated only certain covered entities, such as health care providers and health plans. Under the HITECH Act, certain of HIPAA’s privacy and security standards are now also directly applicable to covered entities’ business associates. As a result, business associates are now subject to civil and criminal penalties for failure to comply with applicable privacy and security rule requirements. Moreover, the HITECH Act set forth new notification requirements for health data security breaches, increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal actions.

 

While we do not believe that we are a covered entity or a business associate under HIPAA, many of our customers may be covered entities or business associates subject to HIPAA. Some customers as an expectation of transacting business with us may require us to enter into business associate agreements, which would obligate us to safeguard and restrict the manner in which we use certain protected health information (as defined by HIPAA) we obtain in the course of our commercial relationship with them, triggering potential liability on us for failure to meet our contractual obligations. Alternatively, some customers may limit the scope of our commercial relationship with them with regard to our access to certain protected health information. Pursuant to the HITECH Act, if the government determines that we are a business associate, we could be additionally subject to direct governmental enforcement for failure to comply with certain privacy and security requirements. The costs of complying with these contractual obligations and new legal and regulatory requirements, and the potential liability associated with failure to do so could have a material adverse effect on our business, financial condition and results of operations.

 

Laws pertaining to healthcare fraud and abuse could materially adversely affect our business, financial condition and results of operations.

 

We may be subject to various federal, state and foreign laws pertaining to healthcare fraud and abuse, including anti-kickback laws, physician self-referral laws and false claims laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE. Similarly, if the physicians or other providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could indirectly have a negative impact on our business, financial condition and results of operations. While we believe that our operations are in material compliance with such laws, because of the complex and far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws. Indeed, recent changes in state laws and model codes of ethics have already required us to alter certain of our

 

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compliance efforts. For example, in April of 2009, Massachusetts issued regulations governing the conduct of pharmaceutical and medical device manufacturers with respect to healthcare practitioners. This regulation became effective on July 1, 2009 and sets forth what medical device manufacturers may and may not permissibly do with respect to providing meals, sponsoring continuing medical education and otherwise providing payments or items of economic benefit to healthcare practitioners located within the state. Additionally, the regulation requires medical device manufacturers to have in place robust fraud and abuse compliance programs. Other states (e.g., California, Vermont and Nevada) have adopted similar laws. The Advanced Medical Technology Association (AdvaMed), a trade association representing the interests of medical device manufacturers, has also recently released a revised code of ethics outlining permissible interactions with health care professionals. This code became effective July 1, 2009. These laws, regulations and guidance documents act to limit our marketing practices, require the dedication of resources to ensure compliance, and expose us to additional liabilities.

 

In addition, the recent Health Care Reform Law, among other things, amends the intent requirement of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. The Health Care Reform Law also provides that the government may assert that a claim including items or services resulting from a violation of these statutes constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute.

 

Any violations of these laws or regulations could result in a material adverse effect on our business, financial condition and results of operations. In addition, changes in these laws, regulations, or administrative or judicial interpretations, may require us to further change our business practices or subject our existing business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

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Item 2. Properties.

 

The following is a summary of Cooper’s principal facilities as of October 31, 2011. Cooper generally leases its office and operations facilities but owns several manufacturing and research and development facilities, including 205,850 square feet in Hamble, United Kingdom, 49,500 square feet in Scottsville, New York, and 33,630 square feet in Stafford, Texas. Our lease agreements expire at various dates through the year 2030. The Company believes its properties are suitable and adequate for its businesses.

 

Location

   Approximate
Square Feet
    

Operations

AMERICAS

     

United States

     

California

     94,804       Executive offices; CooperVision research & development and CooperVision administrative offices; CooperSurgical manufacturing and distribution

New York

     390,277       CooperVision manufacturing, marketing, distribution and administrative offices

Connecticut

     210,837       CooperSurgical manufacturing, marketing, distribution, research & development and administrative offices

Texas

     33,630       CooperSurgical manufacturing

Puerto Rico

     

Juana Diaz

     333,124       CooperVision manufacturing and distribution

Canada

     

Ontario

     10,962       CooperVision marketing

Brazil

     

Sao Paulo

     16,576       CooperVision marketing and distribution

EMEA

     

United Kingdom

     

Hampshire

     460,027       CooperVision manufacturing, marketing, distribution, research & development and administrative offices

Belgium

     

Liege

     119,146       CooperVision distribution

Germany

     

Berlin

     12,916       CooperSurgical manufacturing and distribution

Frankfurt

     9,964       CooperVision marketing and distribution

Italy

     

Milan

     29,150       CooperVision marketing and distribution

Spain

     

Madrid

     28,837       CooperVision marketing and distribution

South Africa

     

Johannesburg

     12,378       CooperVision marketing and distribution

France

     

Nice

     12,184       CooperVision marketing and distribution

ASIA PACIFIC

     

Japan

     72,971       CooperVision manufacturing, marketing, distribution and administrative offices

Australia

     29,863       CooperVision manufacturing, marketing, distribution and administrative offices

Other Pacific Rim

     30,201       CooperVision marketing and distribution

 

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Item 3. Legal Proceedings.

 

Tax Matter

 

On April 1, 2011, the Internal Revenue Service (IRS) issued a Notice of Deficiency to the Company in connection with its audit of the Company’s income tax returns for the years 2005 and 2006. The Notice asserts that the Company is subject to additional taxes due to a proposed adjustment under the anti-deferral provisions of Subpart F of the Internal Revenue Code. If sustained, such taxes should be offset by the Company’s existing federal net operating loss carryforwards leaving a $1.2 million balance of proposed taxes owed. The Company intends to defend its positions taken in its income tax returns vigorously. However, if the IRS’s contentions were sustained, the Company’s existing federal net operating loss carryforwards could be materially reduced, which could result in a material adverse effect on the Company’s future net income.

 

Patent Litigation

 

On April 28, 2011, Rembrandt Vision Technologies, L.P. filed a lawsuit against CooperVision, Inc. in the United States District Court for the Eastern District of Texas alleging that CooperVision infringes U.S. Patent No. 5,712,327 entitled “Soft Gas Permeable Contact Lens Having Improved Clinical Performance,” which was issued on January 28, 1998, to Sing-Hsiung Chang and Mei-Zyh Chang. The complaint alleged that CooperVision’s infringing conduct includes, but is not limited to, making, using, selling or offering to sell silicone hydrogel contact lenses. The complaint sought an unspecified amount of damages, including treble damages, attorneys’ fees and costs and an injunction preventing any alleged infringement. On October 27, 2011, Rembrandt dismissed its complaint in Texas and filed a complaint with the same allegations in the Middle District of Florida. On December 2, 2011, CooperVision and Rembrandt entered into a settlement of the litigation. Pursuant to the settlement agreement, CooperVision agreed to make a single lump-sum payment of $10.0 million to Rembrandt, and Rembrandt granted a covenant not to sue under the ‘327 patent (and related domestic and foreign patents) to CooperVision and its suppliers, resellers, marketing partners and certain related individuals and entities. The parties also exchanged releases relating to the claims asserted in the litigation. The case will be dismissed with prejudice as part of the settlement.

 

Securities Litigation

 

On November 28, 2011, Harold Greenberg filed a lawsuit in the United States District Court for the Northern District of California, Case No. C11-05697 PJH, against the following defendants: the Company; Robert S. Weiss, its President, Chief Executive Officer and a director; Eugene J. Midlock, its Senior Vice President and Chief Financial Officer; and Albert G. White, III, its Vice President of Investor Relations, Treasurer and Chief Strategic Officer. Mr. Greenberg seeks to represent a class of persons who purchased the Company’s common stock between March 4, 2011 and November 15, 2011.

 

The lawsuit alleges that the defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 by, among other things, failing to disclose alleged problems at the Company’s manufacturing plants in Puerto Rico and the United Kingdom, allegedly making material misstatements with an intent to deceive investors concerning the recall of the Company’s Avaira Toric and Avaira Sphere contact lenses and the expected financial impact of the recalls, and allegedly making false projections of future financial results. The lawsuit seeks unspecified damages.

 

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The lawsuit has only recently been filed and there has been no discovery or other proceedings in the case. Accordingly, the Company is not in a position to assess whether any loss or adverse effect on the Company’s financial condition is probable or remote or to estimate the range of potential loss, if any.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

During the fiscal fourth quarter of 2011, the Company did not submit any matters to a vote of the Company’s security holders.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

 

Cooper’s common stock, par value $0.10 per share, is traded on the New York Stock Exchange under the symbol “COO.” In the table that follows, we indicate the high and low selling prices of our common stock for each three-month period of 2011 and 2010:

 

Quarterly Common Stock Price Range

Years Ended October 31,

   2011      2010  
   High      Low      High      Low  

Fiscal Quarter Ended

           

January 31

   $ 59.11       $ 48.90       $ 38.99       $ 28.12   

April 30

   $ 75.39       $ 57.15       $ 41.55       $ 34.85   

July 31

   $ 82.24       $ 71.42       $ 41.83       $ 34.28   

October 31

   $ 84.20       $ 62.77       $ 51.32       $ 39.00   

 

At November 30, 2011, there were 726 common stockholders of record.

 

Dividend Policy

 

Our current policy is to pay annual cash dividends on our common stock of $0.06 per share, in two semiannual payments of $0.03 per share each. In dollar terms, we paid cash for dividends of about $2.8 million in fiscal 2011 and $2.7 million in fiscal 2010. Dividends are paid when, as and if declared at the discretion of our board of directors from funds legally available for that purpose. Our board of directors periodically reviews our dividend policy and considers the Company’s earnings, financial condition, liquidity needs, business plans and opportunities and other factors in making and setting dividend policy.

 

Performance Graph

 

The following graph compares the cumulative total return on the Company’s common stock with the cumulative total return of the Standard & Poor’s Smallcap 600 Stock Index (which includes the Company) and the Standard & Poor’s Health Care Equipment Index for the five-year period ended October 31, 2011. The graph assumes that the value of the investment in the Company and in each index was $100 on October 31, 2006, and assumes that all dividends were reinvested.

 

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LOGO

 

* $100 invested on 10/31/06 in stock or index, including reinvestment of dividends. Fiscal year ending October 31.

 

  

Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 

      10/06      10/07      10/08      10/09      10/10      10/11  

The Cooper Companies, Inc.

   $ 100.00       $ 72.97       $ 28.68       $ 48.87       $ 86.22       $ 121.20   

S&P Smallcap 600

   $ 100.00       $ 111.55       $ 75.36       $ 79.55       $ 100.45       $ 111.03   

S&P Health Care Equipment

   $ 100.00       $ 110.26       $ 95.10       $ 90.85       $ 94.49       $ 100.72   

 

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Equity Compensation Plan Information

 

Plan Category

   Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(1)
(A)
     Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(B)
     Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column A)

(C)
 

Equity compensation plans approved by shareholders(2)

     3,523,842       $ 47.10         2,655,851   

Equity compensation plans not approved by shareholders

           $           
  

 

 

    

 

 

    

 

 

 

Total

     3,523,842       $ 47.10         2,655,851   
  

 

 

    

 

 

    

 

 

 

 

(1) 

The amount of total securities to be issued under Company equity plans shown in Column A includes 575,145 restricted stock units granted pursuant to the Company’s equity plans. These awards allow for the distribution of shares to the grant recipient upon the completion of time-based holding periods and do not have an associated exercise price. Accordingly, these awards are not reflected in the weighted-average exercise price disclosed in Column B. Amounts in Column A do not reflect performance share awards without a final payout.

 

(2) 

Includes information with respect to the Second Amended and Restated 2007 Long-Term Incentive Plan for Employees of The Cooper Companies, Inc. (“2007 Plan”), which was approved by stockholders on March 16, 2011, and provides for the issuance of up to 5,320,000 shares of common stock; and the Second Amended and Restated 2006 Long Term Incentive Plan for Non-Employee Directors of The Cooper Companies, Inc. (the “2006 Directors’ Plan”), which was approved by stockholders on March 16, 2011 and provides for the issuance of up to 950,000 shares of common stock.

 

As of October 31, 2011, up to 2,300,285 shares of common stock may be issued pursuant to the 2007 Plan and 355,566 shares of common stock may be issued pursuant to the 2006 Directors’ Plan. The 1996 Long Term Incentive Plan for Non-Employee Directors and the Second Amended and Restated 2001 Long Term Incentive Plan of The Cooper Companies, Inc., were originally approved by stockholders on March 21, 1996 and March 28, 2001, respectively. Both plans have expired by their terms, but up to 1,626,612 shares of common stock may be issued pursuant to awards that remain outstanding under these plans.

 

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Table of Contents

Item 6. Selected Financial Data.

 

Five Year Financial Highlights

 

Years Ended October 31,

(In thousands, except per share amounts)

  2011     2010     2009
    2008(1)
(As  Adjusted)
    2007(1)
(As  Adjusted)
 

Consolidated Operations

         

Net sales

  $ 1,330,835      $ 1,158,517      $ 1,080,421      $ 1,047,375      $ 945,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 804,804      $ 676,723      $ 596,494      $ 610,030      $ 519,531   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ 192,764      $ 124,426      $ 114,828      $ 73,962      $ (2,543

Provision for income taxes

    17,334        11,623        14,280        10,006        10,826   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 175,430      $ 112,803      $ 100,548      $ 63,956      $ (13,369
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

  $ 3.63      $ 2.43      $ 2.21      $ 1.42      $ (0.30
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of shares used to compute diluted earnings per share

    48,309        46,505        45,478        45,117        44,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid per share

  $ 0.06      $ 0.06      $ 0.06      $ 0.06      $ 0.06   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Financial Position

         

Current assets

  $ 540,347      $ 491,340      $ 503,878      $ 526,032      $ 519,767   

Property, plant and equipment, net

    609,205        593,887        602,568        602,654        604,530   

Goodwill

    1,276,567        1,261,976        1,257,029        1,251,699        1,289,584   

Other intangible assets, net

    128,341        114,177        114,700        130,587        145,833   

Other assets

    70,058        63,638        73,732        76,644        38,700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,624,518      $ 2,525,018      $ 2,551,907      $ 2,587,616      $ 2,598,414   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Short-term debt

  $ 52,979      $ 19,159      $ 9,844      $ 43,013      $ 46,514   

Other current liabilities

    214,227        180,361        165,570        212,394        240,691   

Long-term debt

    327,453        591,977        771,630        861,781        830,116   

Other liabilities

    92,371        66,745        64,521        53,352        20,086   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    687,030        858,242        1,011,565        1,170,540        1,137,407   

Stockholders’ equity

    1,937,488        1,666,776        1,540,342        1,417,076        1,461,007   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,624,518      $ 2,525,018      $ 2,551,907      $ 2,587,616      $ 2,598,414   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

On November 1, 2009, the Company adopted and retrospectively applied Financial Accounting Standards Board Accounting Standards Codification 470-20, Debt With Conversion and Other Options (ASC 470-20), in connection with the Company’s $115.0 million 2.625% Convertible Senior Debentures that were repurchased on July 1, 2008. The retrospective application of ASC 470-20 resulted in a $1.5 million decrease in net income for the year ended October 31, 2008 and a $2.2 million increase in the net loss for the year ended October 31, 2007. With the adoption of ASC 470-20, there was no adjustment to the Company’s financial position at October 31, 2008; at October 31, 2007 the Company’s financial position was adjusted to increase total assets by $2.2 million, total liabilities by $0.7 million and stockholders’ equity by $1.5 million.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Note numbers refer to the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

 

RESULTS OF OPERATIONS

 

We discuss below the results of our operations for fiscal 2011 compared with fiscal 2010 and the results of our operations for fiscal 2010 compared with fiscal 2009. Certain prior period amounts have been reclassified to conform to the current period’s presentation. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.”

 

Outlook

 

Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and women’s healthcare markets. However, events affecting the economy as a whole, including the uncertainty and instability of global markets driven by employment, housing and credit concerns, the European debt crisis and the recent downgrade of long-term U.S. sovereign debt continue to represent a risk to our forecasted performance for fiscal year 2012 and beyond.

 

We compete in the worldwide contact lens market with our spherical, toric and multifocal contact lenses offered in a variety of materials including using phosphorylcholine (PC) Technology and 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 is focused on greater worldwide market penetration as we roll out new products and continue to expand our presence in existing and emerging markets.

 

Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. In the past three years, CooperVision launched monthly silicone hydrogel spherical, toric and multifocal lens products under our Biofinity® brand and two-week silicone hydrogel spherical and toric lens products under our Avaira brand. In fiscal 2011, we launched our Biofinity spherical silicone hydrogel lens in Japan and our Biofinity multifocal lens globally. While we believe that we have high quality silicone hydrogel contact lens products, our future growth may be limited by our late entry into the silicone hydrogel segment of the market. For example, competitive silicone hydrogel single-use and multifocal lens products are gaining market share and represent a risk to our business. We have not yet marketed a silicone hydrogel single-use product. Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our projected future levels of sales growth and profitability.

 

In August 2011, CooperVision initiated a recall on limited lots of Avaira Toric contact lenses. In November 2011, this recall was expanded to cover limited lots of Avaira Sphere contact lenses. The recall was initiated because of the level of a residue (silicone oil) on certain lenses. The residue may cause hazy vision, severe eye pain or an eye injury. The manufacturing issue has been identified and process changes have been implemented. These process changes are subject to review by the United States Food and Drug Administration. Avaira Toric and Avaira Sphere lenses that are subject to the

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

recall represent less than 2% of the Company’s fiscal 2011 net sales. Avaira Sphere lenses remain on the market, while Avaira Toric lenses are awaiting FDA authorization to return to the market. This recall is limited solely to specific lots of Avaira Toric and Avaira Sphere contact lenses and no other CooperVision products are involved in this recall.

 

We are also in the process of developing a number of new contact lens products to enhance CooperVision’s worldwide product lines. New products planned for introduction over the next two years include additional lenses utilizing silicone hydrogel and PC Technology materials and new lens designs, including multifocal and single-use silicone hydrogel lenses.

 

The medical device segment of the women’s healthcare market is highly fragmented. CooperSurgical has steadily grown its market presence and distribution system by developing products and acquiring products and companies that complement its business model. In fiscal 2011, CooperSurgical acquired Apple Medical, gaining its products including the OB/Mobius® Elastic Retractor used in cesarean sections, the Fischer Cone Biopsy Excisor used for cervical biopsies and the Apple-Hunt Secondary Trocar used in laparoscopic surgical procedures. CooperSurgical also acquired Summit Doppler Systems, Inc., gaining its hand-held obstetrical and vascular ultrasound doppler systems used for peripheral vascular testing and fetal monitoring applications. We intend to continue to invest in CooperSurgical’s business through acquisitions of companies and product lines.

 

In the fiscal first quarter of 2011, we refinanced our syndicated Senior Unsecured Revolving Line of Credit due to mature on January 31, 2012, with a new Credit Agreement that provides for a multicurrency revolving credit facility in an aggregate principal amount of $750.0 million and an amortizing term loan facility in an aggregate principal amount of $250.0 million, each of which, mature on January 12, 2016. On February 15, 2011, we redeemed all $339.0 million aggregate principal amount outstanding of our Senior Notes, in accordance with the terms of the Indenture, from borrowings under the new Credit Agreement, including $250.0 million from the term loan facility. At October 31, 2011, we had $650.7 million available under the Credit Agreement. We believe that our cash and cash equivalents, cash flow from operating activities and borrowing capacity under existing credit facilities will fund operations both in the next 12 months and in the longer term as well as current and long-term cash requirements for capital expenditures, acquisitions and cash dividends.

 

2011 Compared with 2010

 

Highlights: 2011 vs. 2010

 

 

Net sales up 15% to $1.3 billion from $1.2 billion in fiscal year 2010.

 

 

Gross margin 60% of net sales up from 58%.

 

 

Operating income up 20% to $227.6 million from $189.9 million.

 

 

Interest expense down 53% to $17.3 million from $36.7 million.

 

 

Diluted earnings per share up 49% to $3.63 from $2.43.

 

 

Operating cash flow $336.3 million up 26% from $267.7 million.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

Pre-tax results include in the current year a reserve of $20.4 million related to the limited recall of Avaira contact lenses, costs of $16.5 million related to the redemption of our Senior Notes, a $10.0 million charge related to the settlement of all claims in a patent infringement lawsuit and restructuring costs of $1.9 million related to the CooperVision manufacturing restructuring plan that was completed in fiscal 2011. In the prior year, pre-tax results included settlement charges of $27.8 million related to the securities class action litigation and the derivative litigation and $16.1 million related to the CooperVision manufacturing restructuring plan.

 

Selected Statistical Information – Percentage of Net Sales and Growth

 

Years Ended October 31,

       2011         % Change         2010         % Change         2009      

Net sales

     100     15     100     7     100

Cost of sales

     40     9     42            45
  

 

 

     

 

 

     

 

 

 

Gross profit

     60     19     58     13     55

Selling, general and administrative expense

     38     18     37     11     36

Research and development expense

     3     24     3     6     3

Amortization of intangibles

     2     14     2     1     2
  

 

 

     

 

 

     

 

 

 

Operating income

     17     20     16     27     14
  

 

 

     

 

 

     

 

 

 

 

Net Sales

 

Cooper’s two business units, CooperVision and CooperSurgical, generate all of its sales.

 

 

CooperVision produces a broad range of monthly, two-week and single-use contact lenses, featuring advanced materials and optics. CooperVision brings a commitment to solving the toughest vision challenges such as astigmatism, presbyopia and ocular dryness; with a broad collection of spherical, toric and multifocal contact lenses.

 

 

CooperSurgical develops, manufactures and markets medical devices and procedure solutions to improve healthcare delivery to women regardless of the clinical setting.

 

Net Sales Growth by Business Unit

 

Our consolidated net sales grew by $172.3 million in fiscal 2011 and $78.1 million in 2010:

 

($ in millions)

   2011 vs. 2010      % Change     2010 vs. 2009      % Change  

CooperVision

   $ 150.6         16   $ 61.0         7

CooperSurgical

     21.7         12     17.1         10
  

 

 

      

 

 

    
   $ 172.3         15   $ 78.1         7
  

 

 

      

 

 

    

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

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.

 

 

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.

 

In order to achieve comfortable and healthy contact lens wear, products are sold with recommended replacement schedules, often defined as modalities, with the primary modalities being single-use, two-week and monthly. CooperVision offers spherical, aspherical, toric, multifocal and toric multifocal lens products in most modalities.

 

The contact lens market consists primarily of disposable and frequently replaced lenses. Disposable lenses are designed for either daily, two-week or monthly replacement; frequently replaced lenses are designed for replacement after one to three months. Significantly, the market for spherical lenses is growing with value-added spherical lenses to alleviate dry eye symptoms as well as lenses with aspherical optical properties or higher oxygen permeable lenses such as silicone hydrogels.

 

CooperVision’s Proclear® brand aspheric, toric and multifocal contact lenses, manufactured using proprietary phosphorylcholine (PC) Technology, help enhance tissue/device compatibility and offer improved lens comfort.

 

CooperVision’s Biofinity brand silicone hydrogel spherical, toric and multifocal contact lenses and Avaira brand spherical and toric products are manufactured using proprietary Aquaform technology to increase oxygen transmissibility for longer wear. We believe that it is important to develop a full range of multifocal and single-use silicone hydrogel products due to increased pressure from silicone hydrogel products offered by our major competitors.

 

Net sales growth includes increases in single-use spheres up 18% and total spheres up 12%. Total toric lenses grew 16%, including 26% growth of single-use toric lenses, and multifocal lenses grew 4%. Silicone hydrogel products grew 49% worldwide. Proclear products increased 10% driven by growth of single-use lenses. Older conventional lens products and cosmetic lenses declined 13% and 17%, respectively.

 

CooperVision competes in the worldwide soft contact lens market and services three primary regions: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

CooperVision Net Sales by Region

 

($ in millions)

   2011      2010      Growth  

Americas

   $ 469.7       $ 432.8         9

EMEA

     398.5         351.8         13

Asia Pacific

     252.9         185.9         36
  

 

 

    

 

 

    
   $ 1,121.1       $ 970.5         16
  

 

 

    

 

 

    

 

CooperVision’s worldwide net sales grew 16% in the period-to-period comparison. Americas net sales grew 9%, primarily due to market gains of CooperVision’s silicone hydrogel contact lenses and single-use lenses. In our fiscal first quarter of 2010, we recorded $10.1 million of reductions to Americas net sales due to out-of-period adjustments to increase accruals for rebates that were under-accrued in fiscal 2009. EMEA net sales grew 13% driven by increases in sales of silicone hydrogel lenses and single-use lenses. Net sales to the Asia Pacific region grew 36%, primarily due to sales growth of single-use spherical and toric products and silicone hydrogel lenses; these results include sales of $31.3 million related to product lines acquired on December 1, 2010 from Asahikasei Aime Co., Ltd.

 

CooperVision’s net sales growth is driven primarily by increases in the volume of lenses sold and introduction of new products, primarily silicone hydrogel lenses, along with acquisitions and the favorable effect of foreign currency exchange rate fluctuations. While unit growth and product mix have influenced CooperVision’s sales growth, average realized prices by product have not materially influenced sales growth.

 

CooperSurgical Net Sales

 

CooperSurgical’s fiscal 2011 net sales increased 12% from fiscal 2010 to $209.7 million with net sales growth excluding acquisitions of 8%. Sales of products used in surgical procedures grew 23% and represented 37% of CooperSurgical’s fiscal 2011 net sales compared to 33% in the prior fiscal year. CooperSurgical sales are primarily comprised of women’s healthcare products used by gynecologists and obstetricians in both office and surgical procedures. The balance consists of sales of medical devices outside of women’s healthcare which CooperSurgical does not actively market. Unit growth and product mix along with increased average realized prices on disposable products influenced organic sales growth.

 

2010 Compared with 2009

 

Highlights: 2010 vs. 2009

 

 

Net sales up 7% to $1.2 billion from $1.08 billion in fiscal year 2009.

 

 

Gross margin 58% of net sales up from 55%.

 

 

Operating income up 27% to $189.9 million from $149.9 million.

 

 

Interest expense down 17% to $36.7 million from $44.1 million.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

 

Diluted earnings per share up 10% to $2.43 from $2.21.

 

 

Operating cash flow $267.7 million up 20% from $223.1 million.

 

Selected Statistical Information – Percentage of Net Sales and Growth

 

Years Ended October 31,

       2010         % Change         2009         % Change         2008      

Net sales

     100     7     100     3     100

Cost of sales

     42            45     11     42
  

 

 

     

 

 

     

 

 

 

Gross profit

     58     13     55     (2 %)      58

Selling, general and administrative expense

     37     11     36     (9 %)      41

Research and development expense

     3     6     3     (6 %)      3

Amortization of intangibles

     2     1     2     6     2
  

 

 

     

 

 

     

 

 

 

Operating income

     16     27     14     18     12
  

 

 

     

 

 

     

 

 

 

 

Net Sales Growth by Business Unit

 

Our consolidated net sales grew by $78.1 million in fiscal 2010 and $33.1 million in 2009:

 

($ in millions)

   2010 vs. 2009      % Change     2009 vs. 2008      % Change  

CooperVision

   $ 61.0         7   $ 30.5         3

CooperSurgical

     17.1         10     2.6         2
  

 

 

      

 

 

    
   $ 78.1         7   $ 33.1         3
  

 

 

      

 

 

    

 

CooperVision Net Sales

 

Net sales growth includes increases in single-use spheres up 12% and total spheres up 9%. Total toric lenses grew 13%, including 24% growth of single-use toric lenses, and multifocal lenses grew 1%. Silicone hydrogel spherical and toric lenses grew 108% worldwide. Proclear products increased 9% driven by growth of single-use lenses. Older conventional lens products and cosmetic lenses declined 14% and 12%, respectively.

 

CooperVision Net Sales by Region

 

($ in millions)

   2010      2009      Growth  

Americas

   $ 432.8       $ 392.8         10

EMEA

     351.8         345.1         2

Asia Pacific

     185.9         171.6         8
  

 

 

    

 

 

    
   $ 970.5       $ 909.5         7
  

 

 

    

 

 

    

 

CooperVision’s worldwide net sales grew 7% in the period-to-period comparison. Americas net sales grew 10%, primarily due to market gains of CooperVision’s silicone hydrogel spherical and toric

 

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Table of Contents

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

lenses and single-use lenses. In our fiscal first quarter of 2010, we recorded $10.1 million of reductions to Americas net sales due to out-of-period adjustments to increase accruals for rebates that were under-accrued in fiscal 2009. EMEA net sales grew 2% in the period driven by increases in sales of silicone hydrogel lenses and single-use lenses. Net sales to the Asia Pacific region grew 8%, primarily due to sales growth of single-use spherical and toric products and silicone hydrogel lenses.

 

CooperVision’s net sales growth is driven primarily through increases in the volume of lenses sold and introduction of new products, primarily silicone hydrogel lenses. While unit growth and product mix have influenced CooperVision’s sales growth, average realized prices by product have not materially influenced sales growth.

 

CooperSurgical Net Sales

 

CooperSurgical’s fiscal 2010 net sales increased 10% from fiscal 2009 to $188.0 million with net sales growth excluding acquisitions of 6%. Sales of products used in surgical procedures grew 18% and represented 33% of CooperSurgical’s fiscal 2010 net sales compared to 31% in fiscal 2009. CooperSurgical sales are primarily comprised of women’s healthcare products used by gynecologists and obstetricians in both office and surgical procedures. The balance consists of sales of medical devices outside of women’s healthcare which CooperSurgical does not actively market. Unit growth and product mix along with increased average realized prices on disposable products influenced organic sales growth.

 

2011 Compared to 2010 and 2010 Compared to 2009

 

Cost of Sales/Gross Profit

 

Gross Profit Percentage of Net Sales

   2011     2010     2009  

CooperVision

     60     57     54

CooperSurgical

     65     64     60

Consolidated

     60     58     55

 

The increases in CooperVision’s gross margin are largely attributable to improvements in manufacturing efficiencies and product mix, primarily the shift to higher margin silicone hydrogel products. CooperVision’s gross margin in the current year was negatively impacted by the $20.2 million reserve for inventory and return provisions related to the recall of certain lots of Avaira contact lenses discussed above. Gross margin also reflects efficiencies associated with the 2009 CooperVision Manufacturing restructuring plan. Costs associated with the plan, recorded as cost of sales, were $1.9 million for fiscal 2011, $16.0 million for fiscal 2010 and $5.0 million for fiscal 2009. As discussed below, these costs are primarily severance charges and accelerated depreciation, and we do not expect to incur similar costs related to this manufacturing restructuring plan in future periods. Gross margin for fiscal 2010 reflects the increase in accruals for rebates discussed above. Gross margin in fiscal 2009 included costs associated with fixed asset write offs; such costs were not significant in fiscal 2011 or 2010.

 

The increase in CooperSurgical’s gross margin for fiscal 2011 is largely attributable to manufacturing efficiency improvements and product mix including higher margins on products used in surgical

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

procedures that represented 37% of net sales in fiscal 2011 compared to 33% in fiscal 2010 and 31% in fiscal 2009. CooperSurgical’s gross margin in fiscal 2010 includes the recognition of a one-time $1.5 million favorable settlement resolving a vendor dispute.

 

Selling, General and Administrative Expense (SGA)

 

($ in millions)

   2011      % Net
Sales
    2010      % Net
Sales
    2009      % Net
Sales
 

CooperVision

   $ 410.2         37   $ 343.0         35   $ 309.9         34

CooperSurgical

     70.6         34     61.6         33     53.7         31

Headquarters

     32.3                28.5                28.0           
  

 

 

      

 

 

      

 

 

    
   $ 513.1         38   $ 433.1         37   $ 391.6         36
  

 

 

      

 

 

      

 

 

    

 

Consolidated SGA increased 18% in fiscal 2011 and 11% in fiscal 2010.

 

The 20% increase in CooperVision’s SGA in fiscal 2011 in absolute dollars as well as the increase as a percentage of net sales are primarily due to our increased investment in sales and marketing to reach new customers and to promote our silicone hydrogel products as well as the patent infringement settlement discussed below.

 

The 15% increase in CooperSurgical’s SGA in fiscal 2011 in absolute dollars as well as the increase as a percentage of sales are primarily due to increased selling and marketing costs to support higher sales and anticipated further growth along with legal expenses related to business acquisitions during the period.

 

Corporate headquarters’ SGA increased 14% in fiscal 2011 primarily due to increased legal costs and share-based compensation expense partially offset by reduced consulting fees.

 

Research and Development Expense

 

($ in millions)

   2011      % Net
Sales
    2010      % Net
Sales
    2009      % Net
Sales
 

CooperVision

   $ 37.0         3   $ 29.9         3   $ 28.9         3

CooperSurgical

     6.6         3     5.4         3     4.4         3
  

 

 

      

 

 

      

 

 

    
   $ 43.6         3   $ 35.3         3   $ 33.3         3
  

 

 

      

 

 

      

 

 

    

 

CooperVision research and development expense increased 24% in fiscal 2011 as compared to fiscal 2010 primarily due to investments in new technologies, clinical trials and increased headcount. CooperVision’s research and development activities include programs to develop disposable silicone hydrogel products and product lines utilizing PC Technology. In fiscal 2009, CooperVision recorded a $3.0 million in-process research and development charge related to the acquisition of certain distribution rights.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

CooperSurgical research and development expense increased 23% in fiscal 2011 as compared to fiscal 2010, primarily due to investments in the design of the next generation product line of uterine manipulators. Other research and development activities include the upgrade and expansion of CooperSurgical’s portfolio of assisted reproductive technology products as well as products within the general obstetrics and gynecology offerings.

 

Restructuring Costs

 

2009 CooperVision Manufacturing Restructuring Plan

 

In the fiscal third quarter of 2009, CooperVision initiated a restructuring plan to relocate contact lens manufacturing from Norfolk, Virginia, and transfer part of its contact lens manufacturing from Adelaide, Australia, to existing manufacturing operations in Juana Diaz, Puerto Rico, and Hamble, UK (2009 CooperVision Manufacturing restructuring plan). This plan is intended to better utilize CooperVision’s manufacturing efficiencies and reduce its manufacturing expenses through a reduction in workforce of approximately 480 employees.

 

CooperVision completed restructuring activities in Adelaide in our fiscal third quarter of 2010 and in Norfolk in our fiscal first quarter of 2011.

 

The total restructuring costs under this plan were approximately $23.1 million, with $15.4 million associated with assets, including accelerated depreciation and facility lease and contract termination costs, and $7.7 million associated with employee benefit costs, including severance payments, termination benefit costs, retention bonus payouts and other similar costs. These costs were reported as cost of sales or restructuring costs in our Consolidated Statements of Income.

 

In fiscal 2011, $1.9 million, including $0.8 million of employee benefit costs and $1.1 million of costs associated with assets, primarily non-cash, were reported in cost of sales. In fiscal 2010, $16.1 million, including $3.3 million of employee benefit costs and $12.8 million of costs associated with assets, primarily non-cash, were reported as $16.0 million in cost of sales and $0.1 million in restructuring costs. In fiscal 2009, $5.1 million including $3.6 million of employee benefit costs and $1.5 million of non-cash costs associated with assets were reported as $5.0 million in cost of sales and $0.1 million in restructuring costs.

 

The Company may, from time to time, decide to pursue additional restructuring activities that involve charges in future periods.

 

Amortization of Intangibles

 

Amortization of intangibles was $20.5 million in fiscal 2011, $18.1 million in fiscal 2010 and $17.9 million in fiscal 2009. Amortization expense in fiscal 2009 includes a $1.5 million charge for a CooperSurgical license that no longer had value.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

Operating Income

 

Operating income grew $77.7 million, or 52%, between fiscal 2009 and fiscal 2011, increasing $37.7 million or 20% in fiscal 2011 from fiscal 2010 and $40.0 million or 27% in fiscal 2010 from fiscal 2009.

 

($ in millions)

   2011     % Net
Sales
    2010     % Net
Sales
    2009     % Net
Sales
 

CooperVision

   $ 207.5        19   $ 171.3        18   $ 138.3        15

CooperSurgical

     52.4        25     47.1        25     39.6        23

Headquarters

     (32.3            (28.5            (28.0       
  

 

 

     

 

 

     

 

 

   
   $ 227.6        17   $ 189.9        16   $ 149.9        14
  

 

 

     

 

 

     

 

 

   

Percent growth

     20       27       18  

 

The increase in consolidated operating income in fiscal 2011 both in absolute dollars and as a percentage of net sales was primarily due to the increase in gross profit of 19%, partially offset by increases in operating expenses of 19%, the Avaira recall discussed above and the settlement with Rembrandt discussed below.

 

Interest Expense

 

Interest expense decreased 53% to $17.3 million in 2011 constituting 1% of net sales in fiscal 2011 as compared to 3% of net sales in the fiscal 2010. The fiscal 2011 decrease reflects lower interest rates primarily as a result of the redemption of our Senior Notes in February 2011 and lower average debt in the current period. Interest expense decreased 17% to $36.7 million in fiscal 2010 and decreased 17% to $44.1 million in 2009. The fiscal 2010 and 2009 decreases primarily reflect reduced long-term borrowings used for capital expenditures and lower interest rates. We had $339.7 million in loans on our Credit Agreement at October 31, 2011, compared to $591.8 million at October 31, 2010.

 

Extinguishment of Debt

 

In February 2011, we redeemed all $339.0 million aggregate principal amount outstanding of our Senior Notes issued on January 31, 2007. In accordance with the Indenture, the redemption price for the Notes was 103.563% of their principal amount plus accrued and unpaid interest to February 15, 2011, the redemption date. In our fiscal second quarter of 2011, we recorded a $16.5 million loss on the repurchase that includes the write-off of approximately $4.4 million of unamortized costs and the redemption premium of $12.1 million related to the Senior Notes in our Consolidated Statement of Income. The Company paid the aggregate purchase price from borrowings under its new Credit Agreement, including $250.0 million from the term loan facility.

 

In December 2008, we purchased through the open market, in a privately negotiated transaction, $11.0 million in aggregate principal amount of our 7.125% Senior Notes at a discounted price of approximately $9.0 million plus accrued and unpaid interest. We also wrote off approximately $0.2 million of unamortized costs related to the Senior Notes and recorded the $1.8 million gain on the repurchase in other income in our Consolidated Statement of Income.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

Settlements

 

On December 2, 2011, CooperVision and Rembrandt Vision Technologies, L.P. entered into a settlement agreement whereby CooperVision agreed to make a lump sum payment of $10.0 million to Rembrandt, and Rembrandt granted a covenant not to sue regarding patent infringement claims. The Company recorded a charge for the settlement in our fiscal fourth quarter of 2011.

 

The Company and several of its directors and officers had been named in a consolidated securities class action lawsuit, the nature and status of which is described in Note 12. Commitments and Contingencies. The Company announced on May 4, 2010, that it reached an agreement in principle and recorded a charge in our fiscal second quarter of 2010 to settle the consolidated class action lawsuit for $27.0 million, which we funded into escrow in our fiscal fourth quarter of 2010. The Court granted final approval of the proposed settlement on December 13, 2010.

 

The Company also was a nominal defendant in shareholder derivative litigation against several current and former officers and directors of the Company. The Company reached a settlement agreement to pay attorney’s fees of counsel to the plaintiff’s in the amount of $750 thousand. The Company recorded a charge for the settlement amount in our fiscal fourth quarter of 2010.

 

Other (Loss) Income, Net

 

Years Ended October 31,
(In millions)

   2011     2010     2009  

Foreign exchange (loss) gain

   $ (1.0   $ (1.2   $ 7.0   

Other, net

     0.0        0.1        0.3   
  

 

 

   

 

 

   

 

 

 
   $ (1.0   $ (1.1   $ 7.3   
  

 

 

   

 

 

   

 

 

 

 

The fiscal 2009 foreign exchange net gain is primarily due to the U.S. dollar strengthening against other currencies and an initiative we completed in the quarter related to intercompany transactions.

 

Provision for Income Taxes

 

We recorded income tax expense of $17.3 million in fiscal 2011 compared to $11.6 million in fiscal 2010. Cooper’s effective tax rate (ETR) (provision for income taxes divided by pretax income) for both fiscal 2011 and 2010 was about 9%.

 

The ETR is below the United States statutory rate as a majority of our income is earned in foreign jurisdictions with lower tax rates reflecting the shift in the geographic mix of income during recent periods with income earned in foreign jurisdictions increasing as compared to income earned in the United States. As a result, the ratio of domestic income to worldwide income primarily within CooperVision has decreased over recent fiscal periods. A reduction in the ratio of domestic income to worldwide income effectively lowers the overall tax rate due to the fact that the tax rates in the majority of foreign jurisdictions where the Company operates are significantly lower than the statutory rate in the United States. The completion of the Company’s restructuring plan to close a CooperVision manufacturing facility, located in Norfolk, Virginia, with the manufacturing demand subsequently

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

absorbed by our plants in the United Kingdom and Puerto Rico contributed to this change in the geographic mix of income. As a result of this restructuring, substantially all of CooperVision’s contact lens products are manufactured outside of the United States.

 

Additionally, in fiscal 2011, the Company recorded a $16.5 million domestic loss on the repurchase of its Senior Notes that included the write off of about $4.4 million of unamortized costs and the redemption premium of $12.1 million. This impacted the Company’s tax provision and further reduced the overall effective tax rate.

 

Share-Based Compensation Plans

 

The Company grants various share-based compensation awards, including stock options, performance shares, restricted stock and restricted stock units. The share-based compensation and related income tax benefit recognized in the consolidated financial statements in fiscal 2011 was $14.7 million and $4.4 million, respectively, compared to $10.2 million and $3.2 million, respectively, in fiscal 2010. As of October 31, 2011, there was $32.4 million of total unrecognized share-based compensation cost related to non-vested awards: $7.2 million for stock options; $19.0 million for restricted stock units; and $6.2 million for performance shares. The unrecognized compensation is expected to be recognized over weighted average remaining vesting periods of 2.7 years for nonvested stock options, 2.9 years for restricted stock units and 1.8 years for performance shares. Cash received from options exercised under all share-based compensation arrangements for fiscal 2011, 2010 and 2009 was $82.0 million, $11.1 million and $1.1 million, respectively.

 

The Company estimates the fair value of each stock option award on the date of grant using the Black-Scholes valuation model, which requires management to make estimates regarding expected option life, stock price volatility and other assumptions. The use of different assumptions could lead to a different estimate of fair value. The expected life of the stock option is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. If our assumption for the expected life increased by one year, the fair value of an individual option granted in fiscal 2011 would have increased by approximately $1.50. To determine the stock price volatility, management considers implied volatility from publicly-traded options on the Company’s stock at the date of grant, historical volatility and other factors. If our assumption for stock price volatility increased by one percentage point, the fair value of an individual option granted in fiscal 2011 would have increased by less than $1.

 

The Company estimates stock option forfeitures based on historical data for each employee grouping, and adjusts the rate to expected forfeitures periodically. The adjustment of the forfeiture rate will result in a cumulative catch-up adjustment in the period the forfeiture estimate is changed. These adjustments totaled $1.9 million, $1.2 million and $2.9 million in fiscal years 2011, 2010 and 2009, respectively.

 

The Company grants performance units that provide for the issuance of common stock to certain executive officers if the Company achieves specified long-term performance goals over a three-year period. The Company estimates the fair value of each award on the date of grant based on the current

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

market price of our common stock. The total amount of compensation expense recognized reflects our initial assumptions of the achievement of the performance goals and the estimated forfeiture rates. The Company reviews our assessment of the probability of the achievement of the performance goals each fiscal quarter. If achievement of the goals are not met or it is determined that achievement of the goals is not probable, previously recognized compensation expense is adjusted prospectively to reflect the expected achievement. If we determine that achievement of the goals will exceed the original assessment, additional compensation expense is recognized prospectively.

 

CAPITAL RESOURCES AND LIQUIDITY

 

2011 Highlights

 

 

Operating cash flow $336.3 million, compared to $267.7 million in fiscal 2010.

 

 

Expenditures for purchases of property, plant and equipment $103.7 million, compared to $73.8 million in fiscal 2010.

 

 

Total debt decreased to $380.4 million at the end of fiscal 2011 from $611.1 million at the end of fiscal 2010.

 

 

Cash payments for acquisitions totaled $58.0 million vs. $32.8 million in fiscal 2010.

 

Comparative Statistics

 

Years Ended October 31,
($ in millions)

   2011     2010  

Cash and cash equivalents

   $ 5.2      $ 3.6   

Total assets

   $ 2,624.5      $ 2,525.0   

Working capital

   $ 273.1      $ 291.8   

Total debt

   $ 380.4      $ 611.1   

Stockholders’ equity

   $ 1,937.5      $ 1,666.8   

Ratio of debt to equity

     0.20:1        0.37:1   

Debt as a percentage of total capitalization

     16     27

 

Working Capital

 

The decrease in working capital at the end of fiscal 2011 from the end of fiscal 2010 was primarily due to increases in accounts payable, other accrued liabilities, including the charge related to the Rembrandt settlement, and short-term debt including the portion of the term loan which became current during the fiscal year. This decrease was partially offset by increases in trade accounts receivable, inventory and a decrease in accrued interest payable. The decrease in accrued interest payable was due to lower interest rates primarily as a result of the redemption of our Senior Notes in February 2011, lower average outstanding debt and the timing of interest payments.

 

The increases in trade accounts receivable and inventory were primarily due to the growth in sales and to production to support new product launches. At October 31, 2011, Cooper’s inventory months on hand (MOH) were 5.9, excluding the reserves for inventory related to the recall of certain lots of

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

Avaira contact lenses, representing an increase from 5.4 at October 31, 2010. Including the reserves for inventory MOH were 5.5 at October 31, 2011. Our days sales outstanding (DSO) decreased to 55 days in fiscal 2011 from 57 days in the prior fiscal year. Based on our experience and knowledge of our customers and our analysis of inventoried products and product levels, we believe that our reported accounts receivable and inventories are recoverable.

 

The Company has reviewed its needs in the United States for possible repatriation of undistributed earnings or cash of its foreign subsidiaries. The Company presently intends to continue to indefinitely invest all earnings and cash outside of the United States of all foreign subsidiaries to fund foreign investments or meet foreign working capital and property, plant and equipment requirements.

 

Operating Cash Flow

 

Cash flow provided by operating activities continued in fiscal 2011 as Cooper’s major source of liquidity, increasing to $336.3 million from $267.7 million in fiscal 2010 and $223.1 million in fiscal 2009. The $68.6 million increase in cash flow provided by operations from fiscal 2010 to fiscal 2011 is primarily due to the increase in net income of $62.6 million. Fiscal 2011 results include $175.4 million of net income, $114.8 million of non-cash items primarily related to depreciation, amortization, share-based compensation and currency translation and $16.5 million for the loss on extinguishment of debt. Results also include $29.6 million from the net changes in assets and liabilities.

 

For fiscal 2011, our primary source of cash flows provided by operating activities was cash collections from our customers for purchase of our products totaling $1.3 billion. Our uses of cash flows provided by operating activities included $939.4 million used primarily for personnel and material costs and cash payments of $25.6 million and $12.2 million for interest and income tax, respectively.

 

For fiscal 2010, our primary source of cash flows provided by operating activities was cash collections from our customers for purchase of our products totaling $1.1 billion. Our primary uses of cash flows from operating activities included $819.0 million used for personnel and material costs and cash payments of $36.7 million and $8.6 million for interest and income tax, respectively.

 

Investing Cash Flow

 

Cash used in investing activities of $161.7 million in fiscal 2011 was for capital expenditures of $103.7 million, primarily to improve manufacturing efficiency, and payments of $58.0 million related to acquisitions.

 

Cash used in investing activities of $106.6 million in fiscal 2010 was for capital expenditures of $73.8 million primarily to improve manufacturing capacity and payments of $32.8 million related to acquisitions.

 

Financing Cash Flow

 

The changes in cash flows from financing activities primarily relate to borrowings and payments of debt as well as proceeds from share-based compensation award exercises and dividend payments. Cash

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

used in financing activities of $172.9 million in fiscal 2011 was driven by net repayments of debt of $242.8 million, including the redemption of all outstanding Senior Notes and the related redemption premium, acquisition costs related to the Credit Agreement of $9.6 million, a $2.6 million payment for contingent consideration and dividends paid on our common stock of $2.8 million, offset by proceeds of $82.0 million from the exercise of share-based compensation awards and $2.9 million for the excess tax benefit from share-based compensation arrangements.

 

Cash used in financing activities of $161.6 million in fiscal 2010 was driven by net repayments of long-term debt of $182.5 million, including the capital lease, and dividends paid on our common stock of $2.7 million, offset by proceeds from short-term debt of $12.1 million and $11.5 million from the exercise of share-based compensation awards and related tax benefit.

 

At October 31, 2011, we had $650.7 million available under the Credit Agreement, and we are in compliance with the covenants including the Interest Coverage Ratio and Total Leverage Ratio at 21.42 to 1.00 versus the requirement to be at least 3.00 to 1.00 and 1.03 to 1.00 versus the requirement to remain below 3.75 to 1.00, respectively. As defined in the Credit Agreement, the Interest Coverage Ratio is the ratio of Consolidated Proforma EBITDA to Consolidated Interest Expense and the Total Leverage Ratio is the ratio of Consolidated Funded Indebtedness to Consolidated Proforma EBITDA.

 

Risk Management

 

We operate multiple foreign subsidiaries that manufacture and market our products worldwide. As a result, our earnings, cash flow and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables, sales transactions, capital expenditures and net investment in certain foreign operations. We are exposed to risks caused by changes in foreign exchange, primarily to the British pound, euro, Japanese yen, Swedish krona, Australian dollar and Canadian dollar. Our policy is to minimize, to the extent reasonable and practical, transaction, remeasurement and specified economic exposures with derivatives instruments. Although we may enter into foreign exchange agreements with financial institutions to reduce our nonfunctional currency exposure, these hedging transactions do not eliminate that risk entirely. We are also exposed to risks associated with changes in interest rates, as the interest rate on our Credit Agreement may vary with the London Interbank Offered Rate (LIBOR). We have decreased this interest rate risk by hedging a significant portion of variable rate debt effectively converting it to fixed rate debt for varying periods through December 2014. For additional detail, see Item 1A. Risk Factors and Note 1 and Note 10 to the consolidated financial statements.

 

In the fiscal first quarter of 2011, we refinanced our syndicated Senior Unsecured Revolving Line of Credit due to mature on January 31, 2012, with a new Credit Agreement that provides for a multicurrency revolving credit facility in an aggregate principal amount of $750.0 million and an amortizing term loan facility with an original principal amount of $250.0 million, each of which, mature on January 12, 2016. On February 15, 2011, we redeemed all $339.0 million aggregate principal amount outstanding of our Senior Notes, in accordance with the terms of the Indenture, from borrowings under the new Credit Agreement, including $250.0 million from the term loan facility.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

OFF BALANCE SHEET ARRANGEMENTS

 

None.

 

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

 

As of October 31, 2011, we had the following contractual obligations and commercial commitments:

 

Payments Due by Period
(In millions)

   Total      2012      2013
& 2014
     2015
& 2016
     2017
& Beyond
 

Contractual obligations:

              

Long-term debt

   $ 339.9       $ 12.5       $ 34.4       $ 292.8       $ 0.2   

Interest payments

     28.0         7.9         14.4         5.7           

Operating leases

     156.4         31.6         34.8         35.3         54.7   

Patent litigation settlement

     10.0         10.0                           

Consideration for marketing rights

     7.7         1.3         6.4                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

     542.0         63.3         90.0         333.8         54.9   

Commercial commitments:

              

Stand-by letters of credit

     2.8         2.8                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 544.8       $ 66.1       $ 90.0       $ 333.8       $ 54.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The expected future benefit payments for pension plans through 2021 are disclosed in Note 9. Employee Benefits.

 

We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, such amounts of our long-term income taxes payable have been excluded from the table above. However, other long-term liabilities, included in our consolidated balance sheet, included these uncertain tax positions. For additional information, please see Note 5. Income Taxes.

 

Inflation and Changing Prices

 

Inflation has had no appreciable effect on our operations in the last three fiscal years.

 

New Accounting Pronouncements

 

On November 1, 2010, the Company adopted portions of the Accounting Standards Update (ASU) 2010-6, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (ASC) 820, Fair Value Measurements. This ASU added new requirements for disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements and (4) the transfers between Levels 1, 2 and 3 fair value measurements. The requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis will be effective for the Company for the fiscal year beginning on November 1, 2011. As this guidance only requires enhanced disclosures, as applicable, its adoption did not have a material impact on our consolidated financial statements.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

In December 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-29, Business Combinations: Disclosure of Supplementary Proforma Information for Business Combinations, which amends ASC 805, Business Combinations. The amendments in this ASU affect any public entity as defined by ASC 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental proforma disclosures to include a description of the nature and amount of material, nonrecurring proforma adjustments directly attributable to the business combination included in the reported proforma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2010-29, which is effective for the Company for the fiscal year beginning on November 1, 2011, will have a material impact on our consolidated financial statements.

 

In December 2010, the FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, which amends ASC 350, Intangibles – Goodwill and Other. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that an impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company does not anticipate the adoption of ASU 2010-28, which is effective for the Company on November 1, 2011, will have a material impact on our consolidated financial statements. Early adoption is not permitted.

 

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends ASC 820, Fair Value Measurement. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement. The amendments (1) clarify the Boards’ intent regarding the application of existing fair value measurement guidance, (2) revise certain measurement guidance that changes or modifies a principle and (3) add disclosure requirements concerning the measurement uncertainty of level 3 measurements. The Boards concluded that the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments are effective during interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The Company is currently evaluating the potential impact of ASU 2011-04, which is effective for the Company on November 1, 2012, on our consolidated financial statements.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. This ASU, which amends ASC 220, Comprehensive Income, allows an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments made by ASU 2011-05 should be applied retrospectively and become effective for fiscal years (and interim periods within those years) beginning after December 15, 2011. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2011-05, which is effective for the Company for the fiscal year beginning on November 1, 2012, will have an impact on our consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test as described in ASC 350, Intangibles-Goodwill and Other. The ASU defines the more-likely-than-not threshold as having a likelihood of more than 50%. Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not anticipate the adoption of this ASU, which is effective for the Company for the fiscal year beginning on November 1, 2012, will have an impact on our consolidated financial statements.

 

Estimates and Critical Accounting Policies

 

Management estimates and judgments are an integral part of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing our consolidated financial statements 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 periods.

 

 

Revenue recognition – We recognize product net sales, net of discounts, returns, and rebates in accordance with related accounting standards and SEC Staff Accounting Bulletins. As required by these standards, we recognize revenue when it is realized or realizable and earned, based on terms of sale with the customer, where persuasive evidence of an agreement exists, delivery has occurred, the seller’s price is fixed and determinable and collectability is reasonably assured. For contact

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

 

lenses as well as CooperSurgical medical devices, diagnostic products and surgical instruments and accessories, this primarily occurs when title and risk of ownership transfers to our customers. We believe our revenue recognition policies are appropriate in all circumstances, and that our policies are reflective of our customer arrangements. We record, based on historical statistics, estimated reductions to revenue for customer incentive programs offered including cash discounts, promotional and advertising allowances, volume discounts, contractual pricing allowances, rebates and specifically established customer product return programs. The Company records taxes collected from customers on a net basis, as these taxes are not included in net sales.

 

 

Allowance for doubtful accounts – Our reported balance of accounts receivable, net of the allowance for doubtful accounts, represents our estimate of the amount that ultimately will be realized in cash. We review the adequacy and adjust our allowance for doubtful accounts on an ongoing basis, using historical payment trends and the age of the receivables and knowledge of our individual customers. However, if the financial condition of our customers were to deteriorate, additional allowances may be required. While estimates are involved, bad debts historically have not been a significant factor given the diversity of our customer base, well established historical payment patterns and the consistent healthcare needs of patients regardless of the economic environment.

 

 

Net realizable value of inventory – In assessing the value of inventories, we make estimates and judgments regarding aging of inventories and other relevant issues potentially affecting the saleable condition of products and estimated prices at which those products will sell. On an ongoing basis, we review the carrying value of our inventory, measuring number of months on hand and other indications of salability. We reduce the value of inventory if there are indications that the carrying value is greater than market, resulting in a new, lower-cost basis for that inventory. Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. While estimates are involved, historically, obsolescence has not been a significant factor due to long product dating and lengthy product life cycles. We target to keep, on average, five to seven months of inventory on hand to maintain high customer service levels given the complexity of our contact lens and women’s healthcare product portfolios.

 

 

Valuation of goodwill – We account for goodwill and evaluate our goodwill balances and test them for impairment in accordance with related accounting standards. We performed our annual impairment test in our fiscal third quarter of 2011, and our analysis indicated that we had no impairment of goodwill. We test goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist.

 

The goodwill impairment test is a two-step process. Initially, we compare the book value of net assets to the fair value of each reporting unit that has goodwill assigned to it. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment. A reporting unit is the level of reporting at which goodwill is tested for impairment. Our reporting units are the same as our business segments – CooperVision and CooperSurgical – reflecting the way that we manage our business.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

The fair value of our reporting units was determined using the income valuation approach. Under the income approach, specifically the discounted cash flow method, the fair value of the reporting unit is based on the present value of estimated future cash flows that the reporting unit is expected to generate over its remaining life.

 

In the application of the income approach, the Company is required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results related to assumed variables could differ from these estimates. Discount rates are based on a weighted average cost of capital, which represents the average rate a business must pay its providers of debt and equity capital. We used discount rates that are the representative weighted average cost of capital for each of our reporting units, with consideration given to the current condition of the global economy. The discount rates used in the current year are about 100 basis points lower than those used in our analysis for fiscal year 2010 reflecting the current condition of the United States and global economy. The Company determines net sales forecasts based on our best estimate of near-term net sales expectations and long-term projections which include review of published independent industry analyst reports. As a sensitivity analysis, a 100 basis point reduction in the assumed net sales growth beginning in fiscal 2011 and extending through the valuation period would decrease the excess amount of the estimated fair value of each reporting unit over the carrying value but would not cause a change in the results of our impairment testing that indicated that we had no impairment of goodwill.

 

Goodwill impairment analysis and measurement is a process that requires significant judgment. If our common stock price trades below book value per share, there are changes in market conditions or a future downturn in our business, or a future annual goodwill impairment test indicates an impairment of our goodwill, the Company may have to recognize a non-cash impairment of its goodwill that could be material, and could adversely affect our results of operations in the period recognized and also adversely affect our total assets, stockholders’ equity and financial condition.

 

 

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. Based on the FASB revision to the accounting standard for business combinations, 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 generally at the acquisition date fair values as defined by accounting standards related to fair value measurements. As of the acquisition date, goodwill is measured as the excess of consideration given, generally measured at fair value, and the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are expensed as incurred.

 

During the fiscal third quarter of 2011, we recorded an out-of-period adjustment related to CooperVision’s acquisition of certain assets of Asahikasei Aime Co., Ltd. (Aime), reported in our fiscal first quarter of 2011, to reduce the amount of recorded goodwill and reverse the $6.1 million gain on settlement of preexisting relationship. The Company determined that it incorrectly applied the guidance in ASC 805, Business Combinations, relating to the settlement of preexisting relationships due to our interpretation of specific language in the underlying contract. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

provisions of ASC 270-10-45-16, Accounting Changes in Interim Periods, and ASC 250, Accounting Changes and Error Corrections, that incorporates SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we do not believe that the effect of the out-of-period adjustment is material to our fiscal year 2011 financial results. We also do not believe that the out-of-period adjustment is material to any previously issued quarterly consolidated financial statements. Based on this assessment of materiality, the out-of-period adjustment was recorded in our consolidated financial statements for the fiscal third quarter of 2011. There is no impact on our fiscal year results as the error and its correction were both recorded in the fiscal year ended October 31, 2011.

 

 

Income taxes – We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

As part of the process of preparing our consolidated financial statements, we must estimate our income tax expense for each of the jurisdictions in which we operate. This process requires significant management judgments and involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations as well as judging the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is established. Tax exposures can involve complex issues and may require an extended period to resolve. Frequent changes in tax laws in each jurisdiction complicate future estimates. To determine the tax rate, we are required to estimate full-year income and the related income tax expense in each jurisdiction. We update the estimated effective tax rate for the effect of significant unusual items as they are identified. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate, and such changes could be material.

 

Regarding accounting for uncertainty in income taxes, we recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. We measure the income tax benefits from the tax positions that are recognized, assess the timing of the derecognition of previously recognized tax benefits and classify and disclose the liabilities within the consolidated financial statements for any unrecognized tax benefits based on the guidance in the interpretation of ASC 740, Accounting for Income Taxes. The interpretation also provides guidance on how the interest and penalties related to tax positions may be recorded and classified within our Consolidated Statement of Income and presented in the Consolidated Balance Sheet. We classify interest and penalties related to uncertain tax positions as additional income tax expense.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

 

Share-Based Compensation – The Company grants various share-based compensation awards, including stock options, performance unit shares, restricted stock and restricted stock units. Under fair value recognition provisions, share-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating Cooper’s stock price volatility, employee exercise behaviors and related employee forfeiture rates.

 

The expected life of the share-based awards is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. In determining the expected volatility, management considers implied volatility from publicly-traded options on the Company’s stock at the date of grant, historical volatility and other factors. The risk-free interest rate is based on the continuous rates provided by the U.S. Treasury with a term equal to the expected life of the award. The dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

 

As share-based compensation expense recognized in our Consolidated Statements of Income is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant, based on historical experience, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

If factors change and the Company employs different assumptions in the application of the fair value recognition provisions, the compensation expense that it records in future periods may differ significantly from what it has recorded in the current period.

 

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

 

Note numbers refer to the “Notes to Consolidated Financial Statements” included in Item 8. Financial Statements and Supplementary Data.

 

The Company is exposed to market risks that relate principally to changes in interest rates and foreign currency fluctuations. The Company’s policy is to minimize, to the extent reasonable and practical, its exposure to the impact of changing interest rates and foreign currency fluctuations by entering into interest rate swaps and foreign currency forward exchange contracts, respectively. The Company does not enter into derivative financial instrument transactions for speculative purposes. For additional information please see Risk Management discussed above in Capital Resources and Liquidity and Item 1A. Risk Factors and Note 1 and Note 10 to the consolidated financial statements.

 

Long-term Debt

 

Total debt decreased to $380.4 million at October 31, 2011 from $611.1 million at October 31, 2010. On January 12, 2011, Cooper refinanced its existing syndicated Senior Unsecured Revolving Line of Credit with a new Credit Agreement that provides for a multicurrency revolving credit facility in an aggregate principal amount of $750.0 million and an amortizing term loan facility in an original principal amount of $250.0 million, each of which, unless terminated earlier, mature on January 12, 2016. In addition, the Company has the ability from time to time to increase the size of the revolving credit facility by up to an additional $250.0 million.

 

In February 2011, we redeemed all $339.0 million aggregate principal amount outstanding of the Senior Notes issued on January 31, 2007, in accordance with the terms of the Indenture among the Company, the guarantors party thereto and HSBC Bank USA, National Association, as trustee, pursuant to which the Senior Notes were issued. In accordance with the Indenture, the redemption price for the Notes was 103.563% of their principal amount plus accrued and unpaid interest to February 15, 2011, the redemption date. In our fiscal second quarter of 2011, we recorded a $16.5 million loss on the repurchase that includes the write-off of about $4.4 million of unamortized costs and the redemption premium of $12.1 million related to the Senior Notes on our Consolidated Statement of Income. The Company paid the aggregate purchase price from borrowings under the new Credit Agreement, including $250.0 million from the term loan facility. See Note 4 to the consolidated financial statements for further information about the Company’s debt.

 

October 31,

(In millions)

   2011      2010  

Short-term debt

   $ 52.9       $ 19.1   

Long-term debt

     327.5         592.0   
  

 

 

    

 

 

 

Total

   $ 380.4       $ 611.1   
  

 

 

    

 

 

 

 

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At October 31, 2011, the scheduled maturities of the Company’s fixed and variable rate long-term debt obligations, their weighted average interest rates and their estimated fair values were as follows:

 

Expected Maturity Date Fiscal Year

($ in millions)

  2012     2013     2014     2015     2016     Thereafter     Total     Fair
Value
 

Long-term debt:

               

Fixed interest rate

  $ —          $ —          $ —          $ —            $—          $ 0.2      $ 0.2      $ 0.2   

Average interest rate

    —            —            —            —            —            6.0%       

Variable interest rate

  $ 12.5      $ 12.5      $ 21.9      $ 25.0      $ 267.8      $ —          $ 339.7      $ 339.7   

Average interest rate

    1.6%        1.6%        1.6%        1.6%        1.6%         

 

As the table incorporates only those exposures that existed as of October 31, 2011, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on interest rates, the exposures that arise during the period and our hedging strategies at that time. As of October 31, 2011, the Company has interest rate swaps outstanding that are designed to fix the borrowing costs related to $200.0 million of the outstanding balance on the Company’s amortizing term loan under the Credit Agreement. If interest rates were to increase or decrease by 1% or 100 basis points, annual interest expense would increase or decrease by about $1.4 million.

 

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Item 8. Financial Statements and Supplementary Data.

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

The Cooper Companies, Inc.:

 

We have audited the accompanying consolidated balance sheets of The Cooper Companies, Inc. and subsidiaries (the Company) as of October 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended October 31, 2011. We also have audited the Company’s internal control over financial reporting as of October 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Cooper Companies, Inc. and subsidiaries as of October 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, The Cooper Companies, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/s/ KPMG LLP

 

San Francisco, California

December 16, 2011

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Consolidated Statements of Income

 

Years Ended October 31,

(In thousands, except per share amounts)

   2011     2010     2009  

Net sales

   $ 1,330,835      $ 1,158,517      $ 1,080,421   

Cost of sales

     526,031        481,794        483,927   
  

 

 

   

 

 

   

 

 

 

Gross profit

     804,804        676,723        596,494   

Selling, general and administrative expense

     513,138        433,057        391,593   

Research and development expense

     43,581        35,274        33,298   

Restructuring costs

     0        424        3,887   

Amortization of intangibles

     20,529        18,056        17,860   
  

 

 

   

 

 

   

 

 

 

Operating income

     227,556        189,912        149,856   

Interest expense

     17,342        36,668        44,143   

(Loss) gain on extinguishment of debt

     (16,487     0        1,823   

Litigation settlement charges

     0        27,750        0   

Other (loss) income, net

     (963     (1,068     7,292   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     192,764        124,426        114,828   

Provision for income taxes

     17,334        11,623        14,280   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 175,430      $ 112,803      $ 100,548   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 3.74      $ 2.48      $ 2.23   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 3.63      $ 2.43      $ 2.21   
  

 

 

   

 

 

   

 

 

 

Number of shares used to compute earnings per share:

      

Basic

     46,904        45,530        45,173   
  

 

 

   

 

 

   

 

 

 

Diluted

     48,309        46,505        45,478   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

October 31,

(In thousands)

   2011     2010  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 5,175      $ 3,573   

Trade accounts receivable, net of allowance for doubtful accounts of $4,826 and $4,238 at October 31, 2011 and 2010, respectively

     214,779        197,490   

Inventories

     253,584        227,902   

Deferred tax assets

     33,684        28,828   

Prepaid expense and other current assets

     33,125        33,547   
  

 

 

   

 

 

 

Total current assets

     540,347        491,340   
  

 

 

   

 

 

 

Property, plant and equipment, at cost

     955,980        919,268   

Less: accumulated depreciation and amortization

     346,775        325,381   
  

 

 

   

 

 

 
     609,205        593,887   
  

 

 

   

 

 

 

Goodwill

     1,276,567        1,261,976   

Other intangibles, net

     128,341        114,177   

Deferred tax assets

     21,828        23,072   

Other assets

     48,230        40,566   
  

 

 

   

 

 

 
   $ 2,624,518      $ 2,525,018   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Short-term debt

   $ 52,979      $ 19,159   

Accounts payable

     61,755        51,792   

Employee compensation and benefits

     48,790        44,821   

Accrued income taxes

     2,828        4,494   

Other current liabilities

     100,854        79,254   
  

 

 

   

 

 

 

Total current liabilities

     267,206        199,520   
  

 

 

   

 

 

 

Long-term debt

     327,453        591,977   

Deferred tax liabilities

     20,127        20,202   

Accrued pension liability and other

     72,244        46,543   
  

 

 

   

 

 

 

Total liabilities

     687,030        858,242   
  

 

 

   

 

 

 

Commitments and contingencies (see Note 12)

    

Stockholders’ equity:

    

Preferred stock, 10 cents par value, shares authorized:

    

    1,000; zero shares issued or outstanding

     0        0   

Common stock, 10 cents par value, shares authorized:

    

    70,000; issued 48,015 and 46,140 at October 31, 2011 and 2010, respectively

     4,802        4,614   

Additional paid-in capital

     1,180,250        1,083,779   

Accumulated other comprehensive loss

     (18,110     (17,334

Retained earnings

     773,136        600,522   

Treasury stock at cost: 169 and 313 shares at October 31, 2011 and 2010, respectively

     (2,590     (4,805
  

 

 

   

 

 

 

Stockholders’ equity

     1,937,488        1,666,776   
  

 

 

   

 

 

 
   $ 2,624,518      $ 2,525,018   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

Years Ended October 31,

(In thousands)

   2011     2010     2009  

Cash flows from operating activities:

      

Net income

   $ 175,430      $ 112,803      $ 100,548   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization expense

     98,149        94,001        92,602   

Accrued litigation settlement

     10,000        0        0   

Share-based compensation expense

     13,876        9,638        12,037   

In-process research and development expense

     0        0        3,035   

Loss on disposal of property, plant and equipment

     12,068        7,840        10,934   

Loss (gain) on extinguishment of debt

     16,487        0        (1,823

Deferred income taxes

     (4,420     (1,755     7,292   

Provision for doubtful accounts

     527        (833     1,306   

Change in assets and liabilities:

      

Accounts receivable

     (2,684     (24,789     (13,090

Inventories

     (17,205     34,978        22,601   

Other assets

     196        16,078        20,211   

Accounts payable

     5,185        8,644        (13,517

Accrued liabilities

     19,315        2,474        (18,302

Accrued income taxes

     (3,541     468        (2,657

Other long-term liabilities

     12,898        8,116        1,951   
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     336,281        267,663        223,128   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property, plant and equipment

     (103,665     (73,757     (93,906

Acquisitions of businesses, net of cash acquired

     (58,010     (32,847     (4,731
  

 

 

   

 

 

   

 

 

 

Cash used in investing activities

     (161,675     (106,604     (98,637
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from long-term debt

     1,416,523        564,114        736,467   

Repayments and repurchase of long-term debt

     (1,680,625     (736,560     (821,785

Long-term debt acquisition costs

     (9,617     0        0   

Capital lease repayment

     0        (10,000     0   

Proceeds (repayments) under short-term agreements

     21,319        12,108        (35,960

Excess tax benefit from share-based compensation arrangements

     2,895        407        135   

Issuance of common stock for stock plans

     82,035        11,096        1,116   

Dividends on common stock

     (2,816     (2,732     (2,712

Payment of contingent consideration

     (2,587     0        0   
  

 

 

   

 

 

   

 

 

 

Cash used in financing activities

     (172,873     (161,567     (122,739
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (131     149        236   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,602        (359     1,988   

Cash and cash equivalents at beginning of year

     3,573        3,932        1,944   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 5,175      $ 3,573      $ 3,932   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

      

Cash paid for:

      

Interest, net of amounts capitalized

   $ 25,629      $ 36,658      $ 42,999   
  

 

 

   

 

 

   

 

 

 

Income taxes

   $ 12,207      $ 8,603      $ 6,359   
  

 

 

   

 

 

   

 

 

 

Litigation settlement charge

   $ 750      $ 27,000      $ 0   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

 

    Common Shares     Treasury Stock     Additional
Paid-In

Capital
    Accumulated
Other
Comprehensive

Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’

Equity
 

(In thousands)

  Shares     Amount     Shares     Amount            

Balance at October 31, 2008

    45,129      $ 4,513        353      $ 35      $ 1,050,572      $ (25,240   $ 392,615      $ (5,419   $ 1,417,076   

Net income

    0        0        0        0        0        0        100,548        0        100,548   

Other comprehensive income (loss):

                 

Foreign currency translation adjustment

    0        0        0        0        0        22,760        0        0        22,760   

Change in value of derivative instruments, net of tax benefit $108

    0        0        0        0        0        (2,725     0        0        (2,725

Additional minimum pension liability, net of tax ($4,932)

    0        0        0        0        0        (7,715     0        0        (7,715
                 

 

 

 

Comprehensive income

                    112,868   

Issuance of common stock for stock plans

    115        12        (25     (3     723        0        0        384        1,116   

Tax benefit from exercise of stock options

    0        0        0        0        (43     0        0        0        (43

Dividends on common stock

    0        0        0        0        0        0        (2,712     0        (2,712

Share-based compensation expense

    0        0        0        0        12,037        0        0        0        12,037   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 31, 2009

    45,244      $ 4,525        328      $ 32      $ 1,063,289      $ (12,920   $ 490,451      $ (5,035   $ 1,540,342   

Net income

    0        0        0        0        0        0        112,803          112,803   

Other comprehensive income (loss):

                 

Foreign currency translation adjustment

    0        0        0        0        0        (14,396     0        0        (14,396

Change in value of derivative instruments, net of tax ($3,566)

    0        0        0        0        0        9,640        0        0        9,640   

Additional minimum pension liability, net of tax benefit $495

    0        0        0        0        0        342        0        0        342   
                 

 

 

 

Comprehensive income

                    108,389   

Issuance of common stock for stock plans

    583        58        (15     (1     10,809        0        0        230        11,096   

Tax benefit from exercise of stock options

    0        0        0        0        43        0        0        0        43   

Dividends on common stock

    0        0        0        0        0        0        (2,732     0        (2,732

Share-based compensation expense

    0        0        0        0        9,638        0        0        0        9,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 31, 2010

    45,827      $ 4,583        313      $ 31      $ 1,083,779      $ (17,334   $ 600,522      $ (4,805   $ 1,666,776   

Net income

    0        0        0        0        0        0        175,430        0        175,430   

Other comprehensive income (loss):

                 

Foreign currency translation adjustment

    0        0        0        0        0        5,817        0        0        5,817   

Change in value of derivative instruments, net of tax benefit $1,307

    0        0        0        0        0        (3,798     0        0        (3,798

Additional minimum pension liability, net of tax ($1,806)

    0        0        0        0        0        (2,804     0        0        (2,804

Unrealized gain on marketable securities, net of tax

    0        0        0        0        0        9        0        0        9   
                 

 

 

 

Comprehensive income

                    174,654   

Issuance of common stock for stock plans

    2,019        202        (144     (14     79,632        0        0        2,215        82,035   

Tax benefit from exercise of stock options

    0        0        0        0        0        0        0        0        0   

Dividends on common stock

    0        0        0        0        0        0        (2,816     0        (2,816

Share-based compensation expense

    0        0        0        0        13,876        0        0        0        13,876   

Tax provision deferred tax assets adjustment

    0        0        0        0        2,963        0        0        0        2,963   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 31, 2011

    47,846      $ 4,785        169      $ 17      $ 1,180,250      $ (18,110   $ 773,136      $ (2,590   $ 1,937,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Note 1. Summary of Significant Accounting Policies

 

General

 

The Cooper Companies, Inc. (Cooper or the Company) is a global medical device company publicly traded on the NYSE Euronext (NYSE:COO). Cooper is dedicated to serving the needs of the healthcare professional, improving the quality of life for its employees and customers and providing competitive products. Cooper operates through two business units, CooperVision and CooperSurgical.

 

 

CooperVision produces a broad range of monthly, two-week and single-use contact lenses, featuring advanced materials and optics. CooperVision brings a commitment to solving the toughest vision challenges such as astigmatism, presbyopia and ocular dryness; with a broad collection of spherical, toric and multifocal contact lenses.

 

 

CooperSurgical develops, manufactures and markets medical devices and procedure solutions to improve healthcare delivery to women regardless of the clinical setting.

 

Estimates and Critical Accounting Policies

 

Management estimates and judgments are an integral part of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing our consolidated financial statements 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 periods.

 

 

Revenue recognition – We recognize product net sales, net of discounts, returns, and rebates in accordance with related accounting standards and SEC Staff Accounting Bulletins. As required by these standards, we recognize revenue when it is realized or realizable and earned, based on terms of sale with the customer, where persuasive evidence of an agreement exists, delivery has occurred, the seller’s price is fixed and determinable and collectability is reasonably assured. For contact lenses as well as CooperSurgical medical devices, diagnostic products and surgical instruments and accessories, this primarily occurs when title and risk of ownership transfers to our customers. We believe our revenue recognition policies are appropriate in all circumstances, and that our policies are reflective of our customer arrangements. We record, based on historical statistics, estimated reductions to revenue for customer incentive programs offered including cash discounts, promotional and advertising allowances, volume discounts, contractual pricing allowances, rebates and specifically established customer product return programs. The Company records taxes collected from customers on a net basis, as these taxes are not included in net sales.

 

 

Allowance for doubtful accounts – Our reported balance of accounts receivable, net of the allowance for doubtful accounts, represents our estimate of the amount that ultimately will be realized in cash. We review the adequacy and adjust our allowance for doubtful accounts on an ongoing basis, using historical payment trends and the age of the receivables and knowledge of our individual customers. However, if the financial condition of our customers were to deteriorate, additional allowances may

 

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Notes to Consolidated Financial Statements – (Continued)

 

 

be required. While estimates are involved, bad debts historically have not been a significant factor given the diversity of our customer base, well established historical payment patterns and the consistent healthcare needs of patients regardless of the economic environment.

 

 

Net realizable value of inventory – In assessing the value of inventories, we make estimates and judgments regarding aging of inventories and other relevant issues potentially affecting the saleable condition of products and estimated prices at which those products will sell. On an ongoing basis, we review the carrying value of our inventory, measuring number of months on hand and other indications of salability. We reduce the value of inventory if there are indications that the carrying value is greater than market, resulting in a new, lower-cost basis for that inventory. Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. While estimates are involved, historically, obsolescence has not been a significant factor due to long product dating and lengthy product life cycles. We target to keep, on average, five to seven months of inventory on hand to maintain high customer service levels given the complexity of our contact lens and women’s healthcare product portfolios.

 

 

Valuation of goodwill – We account for goodwill and evaluate our goodwill balances and test them for impairment in accordance with related accounting standards. We performed our annual impairment test in our fiscal third quarter of 2011, and our analysis indicated that we had no impairment of goodwill. We test goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist.

 

The goodwill impairment test is a two-step process. Initially, we compare the book value of net assets to the fair value of each reporting unit that has goodwill assigned to it. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment. A reporting unit is the level of reporting at which goodwill is tested for impairment. Our reporting units are the same as our business segments – CooperVision and CooperSurgical – reflecting the way that we manage our business.

 

The fair value of our reporting units was determined using the income valuation approach. Under the income approach, specifically the discounted cash flow method, the fair value of the reporting unit is based on the present value of estimated future cash flows that the reporting unit is expected to generate over its remaining life.

 

In the application of the income approach, the Company is required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results related to assumed variables could differ from these estimates. Discount rates are based on a weighted average cost of capital, which represents the average rate a business must pay its providers of debt and equity capital. We used discount rates that are the representative weighted average cost of capital for each of our reporting units, with consideration given to the current condition of the global economy. The discount rates used in the current year are about 100 basis points lower than those used in our analysis for fiscal year 2010 reflecting the current condition of the United States and global economy. The Company determines net sales forecasts based on our best estimate of near-term net sales expectations and long-term projections which include review of published independent industry analyst reports. As a sensitivity analysis, a 100 basis point reduction in the assumed net sales growth beginning in fiscal 2011 and extending through the valuation period

 

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Notes to Consolidated Financial Statements – (Continued)

 

would decrease the excess amount of the estimated fair value of each reporting unit over the carrying value but would not cause a change in the results of our impairment testing that indicated that we had no impairment of goodwill.

 

Goodwill impairment analysis and measurement is a process that requires significant judgment. If our common stock price trades below book value per share, there are changes in market conditions or a future downturn in our business, or a future annual goodwill impairment test indicates an impairment of our goodwill, the Company may have to recognize a non-cash impairment of its goodwill that could be material, and could adversely affect our results of operations in the period recognized and also adversely affect our total assets, stockholders’ equity and financial condition.

 

 

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. Based on the FASB revision to the accounting standard for business combinations, 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 generally at the acquisition date fair values as defined by accounting standards related to fair value measurements. As of the acquisition date, goodwill is measured as the excess of consideration given, generally measured at fair value, and the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are expensed as incurred.

 

During the fiscal third quarter of 2011, we recorded an out-of-period adjustment related to CooperVision’s acquisition of certain assets of Asahikasei Aime Co., Ltd. (Aime), reported in our fiscal first quarter of 2011, to reduce the amount of recorded goodwill and reverse the $6.1 million gain on settlement of preexisting relationship. The Company determined that it incorrectly applied the guidance in ASC 805, Business Combinations, relating to the settlement of preexisting relationships due to our interpretation of specific language in the underlying contract. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the provisions of ASC 270-10-45-16, Accounting Changes in Interim Periods, and ASC 250, Accounting Changes and Error Corrections, that incorporates SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we do not believe that the effect of the out-of-period adjustment is material to our fiscal year 2011 financial results. We also do not believe that the out-of-period adjustment is material to any previously issued quarterly consolidated financial statements. Based on this assessment of materiality, the out-of-period adjustment was recorded in our consolidated financial statements for the fiscal third quarter of 2011. There is no impact on our fiscal year results as the error and its correction were both recorded in the fiscal year ended October 31, 2011.

 

 

Income taxes – We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes

 

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Notes to Consolidated Financial Statements – (Continued)

 

 

the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

As part of the process of preparing our consolidated financial statements, we must estimate our income tax expense for each of the jurisdictions in which we operate. This process requires significant management judgments and involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations as well as judging the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is established. Tax exposures can involve complex issues and may require an extended period to resolve. Frequent changes in tax laws in each jurisdiction complicate future estimates. To determine the tax rate, we are required to estimate full-year income and the related income tax expense in each jurisdiction. We update the estimated effective tax rate for the effect of significant unusual items as they are identified. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate, and such changes could be material.

 

Regarding accounting for uncertainty in income taxes, we recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. We measure the income tax benefits from the tax positions that are recognized, assess the timing of the derecognition of previously recognized tax benefits and classify and disclose the liabilities within the consolidated financial statements for any unrecognized tax benefits based on the guidance in the interpretation of ASC 740, Accounting for Income Taxes. The interpretation also provides guidance on how the interest and penalties related to tax positions may be recorded and classified within our Consolidated Statement of Income and presented in the Consolidated Balance Sheet. We classify interest and penalties related to uncertain tax positions as additional income tax expense.

 

 

Share-Based Compensation – The Company grants various share-based compensation awards, including stock options, performance unit shares, restricted stock and restricted stock units. Under fair value recognition provisions, share-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating Cooper’s stock price volatility, employee exercise behaviors and related employee forfeiture rates.

 

The expected life of the share-based awards is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. In determining the expected volatility, management considers implied volatility from publicly-traded options on the Company’s stock at the date of grant, historical volatility and other factors. The risk-free interest rate is based on the continuous rates provided by the U.S. Treasury with a term equal to the expected life of the award. The dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

 

As share-based compensation expense recognized in our Consolidated Statements of Income is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated

 

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Notes to Consolidated Financial Statements – (Continued)

 

forfeitures. Forfeitures are estimated at the time of grant, based on historical experience, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

If factors change and the Company employs different assumptions in the application of the fair value recognition provisions, the compensation expense that it records in future periods may differ significantly from what it has recorded in the current period.

 

New Accounting Pronouncements

 

On November 1, 2010, the Company adopted portions of the Accounting Standards Update (ASU) 2010-6, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (ASC) 820, Fair Value Measurements. This ASU added new requirements for disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements and (4) the transfers between Levels 1, 2 and 3 fair value measurements. The requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis will be effective for the Company for the fiscal year beginning on November 1, 2011. As this guidance only requires enhanced disclosures, as applicable, its adoption did not have a material impact on our consolidated financial statements.

 

In December 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-29, Business Combinations: Disclosure of Supplementary Proforma Information for Business Combinations, which amends ASC 805, Business Combinations. The amendments in this ASU affect any public entity as defined by ASC 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental proforma disclosures to include a description of the nature and amount of material, nonrecurring proforma adjustments directly attributable to the business combination included in the reported proforma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2010-29, which is effective for the Company for the fiscal year beginning on November 1, 2011, will have a material impact on our consolidated financial statements.

 

In December 2010, the FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, which amends ASC 350, Intangibles – Goodwill and Other. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that an impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely

 

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Notes to Consolidated Financial Statements – (Continued)

 

than not reduce the fair value of a reporting unit below its carrying amount. The Company does not anticipate the adoption of ASU 2010-28, which is effective for the Company on November 1, 2011, will have a material impact on our consolidated financial statements. Early adoption is not permitted.

 

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends ASC 820, Fair Value Measurement. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement. The amendments (1) clarify the Boards’ intent regarding the application of existing fair value measurement guidance, (2) revise certain measurement guidance that changes or modifies a principle and (3) add disclosure requirements concerning the measurement uncertainty of level 3 measurements. The Boards concluded that the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments are effective during interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The Company is currently evaluating the potential impact of ASU 2011-04, which is effective for the Company on November 1, 2012, on our consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. This ASU, which amends ASC 220, Comprehensive Income, allows an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments made by ASU 2011-05 should be applied retrospectively and become effective for fiscal years (and interim periods within those years) beginning after December 15, 2011. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2011-05, which is effective for the Company for the fiscal year beginning on November 1, 2012, will have an impact on our consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test as described in ASC 350, Intangibles-Goodwill and Other. The ASU defines the more-likely-than-not threshold as having a likelihood of more than 50%. Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not anticipate the adoption of this ASU, which is effective for the Company for the fiscal year beginning on November 1, 2012, will have an impact on our consolidated financial statements.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Consolidation

 

The financial statements in this report include the accounts of all of Cooper’s consolidated entities. All significant intercompany transactions and balances are eliminated in consolidation.

 

Foreign Currency Translation

 

Most of our operations outside the United States use their local currency as their functional currency. We translate these assets and liabilities into U.S. dollars at year-end exchange rates. We translate income and expense accounts at weighted average rates for each year. We record gains and losses from the translation of financial statements in foreign currencies into U.S. dollars in other comprehensive income. We record gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location’s functional currency in net income for each period. We recorded in other income net foreign exchange losses of $1.0 million for fiscal 2011 and $1.2 million for fiscal 2010, and a net foreign exchange gain of $7.0 million for fiscal 2009.

 

Financial Instruments

 

We may use derivatives to reduce market risks associated with changes in foreign exchange and interest rates. We do not use derivatives for trading or speculative purposes. We believe that the counterparties with which we enter into forward exchange contracts and interest rate swap agreements are financially sound and that the credit risk of these contracts is not significant.

 

Litigation

 

We are subject to various claims and contingencies relating to litigation arising out of the normal course of business. If we believe the likelihood of an adverse legal outcome is probable and the amount is estimable, we accrue a liability in accordance with accounting guidance for contingencies. We consult with legal counsel on matters related to litigation and seek input both within and outside the Company with respect to matters in the ordinary course of business.

 

Long-lived Assets

 

The Company reviews long-lived assets held and used, intangible assets with finite useful lives and assets held for sale for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows associated with the asset are compared to the asset’s carrying amount to determine if a write-down is required. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds the fair value. If management has committed to a plan to dispose of long-lived assets, the assets to be disposed of are reported at the lower of carrying amount or fair value less estimated costs to sell.

 

The Company provides optometric practices with in-office lenses used in marketing programs to facilitate efficient and convenient fitting of contact lenses by practitioners. Such lens fitting sets generally consist of a physical binder or rack to store contact lenses and an array of lenses. We record the costs associated with the original fitting set to other long-term assets on our Consolidated Balance

 

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Notes to Consolidated Financial Statements – (Continued)

 

Sheet. We amortize such costs over their estimated useful lives to selling, general and administrative expense on our Consolidated Statements of Income. We also expense the cost for lenses provided to practitioners as replenishment for fitting sets in the period shipped to selling, general and administrative expense on our Consolidated Statements of Income.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include short-term income producing investments with maturity dates of three months or less. These investments are readily convertible to cash and are carried at cost, which approximates market value.

 

Inventories

 

October 31,

(In thousands)

   2011      2010  

Raw materials

   $ 62,832       $ 47,411   

Work-in-process

     15,440         8,937   

Finished goods

     175,312         171,554   
  

 

 

    

 

 

 
   $ 253,584       $ 227,902   
  

 

 

    

 

 

 

 

Inventories are stated at the lower of cost or market. Cost is computed using standard cost that approximates actual cost on a first-in, first-out basis.

 

Property, Plant and Equipment

 

October 31,

(In thousands)

   2011      2010  

Land and improvements

   $ 6,614       $ 6,555   

Buildings and improvements

     160,765         145,117   

Machinery and equipment

     671,661         602,330   

Construction in progress

     116,940         165,266   

Less: Accumulated depreciation

     346,775         325,381   
  

 

 

    

 

 

 
   $ 609,205       $ 593,887   
  

 

 

    

 

 

 

 

Property, plant and equipment are stated at cost. We compute depreciation using the straight-line method in amounts sufficient to write off depreciable assets over their estimated useful lives. We amortize leasehold improvements over their estimated useful lives or the period of the related lease, whichever is shorter. We depreciate buildings over 35 to 40 years and machinery and equipment over 3 to 15 years.

 

We expense costs for maintenance and repairs and capitalize major replacements, renewals and betterments. We eliminate the cost and accumulated depreciation of depreciable assets retired or otherwise disposed of from the asset and accumulated depreciation accounts and reflect any gains or losses in operations for the period. We had no impairments of property, plant and equipment for the

 

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Notes to Consolidated Financial Statements – (Continued)

 

years ended October 31, 2011 and 2010. We had capitalized interest included in construction in progress of $8.7 million and $14.6 million for the years ended October 31, 2011 and 2010, respectively.

 

Earnings Per Share

 

We determine basic earnings per share (EPS) by using the weighted average number of shares outstanding. We determine diluted EPS by increasing the weighted average number of shares outstanding in the denominator by the number of outstanding dilutive equity awards using the treasury stock method. In fiscal 2008, related to our convertible debentures, we used the if-converted method to include in the denominator the number of shares of common stock contingently issuable pursuant to the convertible debentures, and we adjust the numerator to add back the after-tax amount of interest recognized in the period associated with the convertible debentures. The numerator and denominator are only adjusted when the impact is dilutive.

 

Treasury Stock

 

The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. At October 31, 2011 and 2010, the number of shares in treasury was 168,885 and 313,285, respectively. No shares were purchased during the years ended October 31, 2011 and 2010.

 

Note 2. Restructuring Costs

 

Restructuring Costs

 

2009 CooperVision Manufacturing Restructuring Plan

 

In the fiscal third quarter of 2009, CooperVision initiated a restructuring plan to relocate contact lens manufacturing from Norfolk, Virginia, and transfer part of its contact lens manufacturing from Adelaide, Australia, to existing manufacturing operations in Juana Diaz, Puerto Rico, and Hamble, UK (2009 CooperVision Manufacturing restructuring plan). This plan is intended to better utilize CooperVision’s manufacturing efficiencies and reduce its manufacturing expenses through a reduction in workforce of approximately 480 employees.

 

CooperVision completed restructuring activities in Adelaide in our fiscal third quarter of 2010 and in Norfolk in our fiscal first quarter of 2011.

 

The total restructuring costs under this plan were approximately $23.1 million, with $15.4 million associated with assets, including accelerated depreciation and facility lease and contract termination costs, and $7.7 million associated with employee benefit costs, including severance payments, termination benefit costs, retention bonus payouts and other similar costs. These costs were reported as cost of sales or restructuring costs in our Consolidated Statements of Income.

 

In fiscal 2011, $1.9 million, including $0.8 million of employee benefit costs and $1.1 million of costs associated with assets, primarily non-cash, were reported in cost of sales. In fiscal 2010, $16.1 million, including $3.3 million of employee benefit costs and $12.8 million of costs associated with assets,

 

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Notes to Consolidated Financial Statements – (Continued)

 

primarily non-cash, were reported as $16.0 million in cost of sales and $0.1 million in restructuring costs. In fiscal 2009, $5.1 million including $3.6 million of employee benefit costs and $1.5 million of non-cash costs associated with assets were reported as $5.0 million in cost of sales and $0.1 million in restructuring costs.

 

(In millions)

   Balance  at
Beginning
of Period
     Additions
Charged  to
Costs of Sales
and
Restructuring
Costs
     Payments
and
Adjustments
     Balance
at End
of Period
 

Year Ended October 31, 2009

           

Other current liabilities

   $ 0       $ 3.6       $ 0.6       $ 3.0   

Accelerated depreciation and other

     0         1.5         1.2         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 0       $ 5.1       $ 1.8       $ 3.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Year Ended October 31, 2010

           

Other current liabilities

   $ 3.0       $ 4.4       $ 4.9       $ 2.5   

Accelerated depreciation and other

     0.3         11.7         10.2         1.8   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3.3       $ 16.1       $ 15.1       $ 4.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Year Ended October 31, 2011

           

Other current liabilities

   $ 2.5       $ 0.9       $ 3.3       $ 0.1   

Accelerated depreciation and other

     1.8         1.0         1.9         0.9   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4.3       $ 1.9       $ 5.2       $ 1.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

The Company may, from time to time, decide to pursue additional restructuring activities that involve charges in future periods.

 

Note 3. Intangible Assets

 

(In thousands)

   CooperVision     CooperSurgical     Total  

Goodwill:

      

Balance as of October 31, 2009

   $ 1,049,270      $ 207,759      $ 1,257,029   

Net additions during the year ended October 31, 2010

     0        10,102        10,102   

Translation

     (4,998     (157     (5,155
  

 

 

   

 

 

   

 

 

 

Balance as of October 31, 2010

   $ 1,044,272      $ 217,704      $ 1,261,976   

Net additions during the year ended October 31, 2011

     952        12,272        13,224   

Translation

     1,363        4        1,367   
  

 

 

   

 

 

   

 

 

 

Balance as of October 31, 2011

   $ 1,046,587      $ 229,980      $ 1,276,567   
  

 

 

   

 

 

   

 

 

 

 

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Notes to Consolidated Financial Statements – (Continued)

 

Of the October 31, 2011 goodwill balance, $79.7 million is expected to be deductible for tax purposes.

 

     As of October 31, 2011      As of October 31, 2010      Weighted
Average
Amortization
Period
 

(In thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
&
Translation
     Gross
Carrying
Amount
     Accumulated
Amortization
&
Translation
    
                                 (In years)  

Other intangible assets:

              

Trademarks

   $ 3,204       $ 1,431       $ 3,022       $ 1,195         12   

Technology

     109,896         62,525         105,527         52,954         11   

Shelf space and market share

     110,296         47,861         88,803         37,953         12   

License and distribution rights and other

     23,782         7,020         15,701         6,774         16   
  

 

 

    

 

 

    

 

 

    

 

 

    
     247,178       $ 118,837         213,053       $ 98,876         12   
     

 

 

       

 

 

    

Less accumulated amortization and translation

     118,837            98,876         
  

 

 

       

 

 

       

Other intangible assets, net

   $ 128,341          $ 114,177         
  

 

 

       

 

 

       

 

We estimate that amortization expense will average $20.6 million per year in the three-year period ending October 31, 2014, and average $11.6 million in the two succeeding years ending October 31, 2016.

 

Note 4. Debt

 

October 31,

(In thousands)

   2011      2010  

Short-term:

     

Overdraft and other credit facilities

   $ 40,479       $ 19,159   

Current portion of long-term debt

     12,500         0   
  

 

 

    

 

 

 
   $ 52,979       $ 19,159   
  

 

 

    

 

 

 

Long-term:

     

Credit agreements

   $ 327,225       $ 252,750   

Senior notes

     0         339,000