The Cooper Companies, Inc.
COOPER COMPANIES INC (Form: 10-Q, Received: 06/04/2010 16:07:28)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended April 30, 2010

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number 1-8597

 

 

The Cooper Companies, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-2657368

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

6140 Stoneridge Mall Road, Suite 590, Pleasanton, CA 94588

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (925) 460-3600

 

 

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 (or for such shorter period that the registrant was required to file such reports), 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   ¨     No   ¨

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   ¨   (Do not check if a smaller reporting company)    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

Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, $.10 par value

 

46,573,533 Shares

Class

  Outstanding at May 31, 2010

 

 

 


Table of Contents

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

INDEX

 

          Page No.
PART I.    FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
  

Consolidated Statements of Income – Three and Six Months Ended April 30, 2010 and 2009

   3
  

Consolidated Condensed Balance Sheets – April 30, 2010 and October 31, 2009

   4
  

Consolidated Condensed Statements of Cash Flows - Six Months Ended April 30, 2010 and 2009

   5
  

Consolidated Statements of Comprehensive (Loss) Income - Three and Six Months Ended April 30, 2010 and 2009

   6
  

Notes to Consolidated Condensed Financial Statements

   7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    35

Item 3.

   Quantitative and Qualitative Disclosure About Market Risk    50

Item 4.

   Controls and Procedures    50
PART II.    OTHER INFORMATION   

Item 1.

   Legal Proceedings    51

Item 1A.

   Risk Factors    53

Item 6.

   Exhibits    54

Signature

   55

Index of Exhibits

   56

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except for earnings per share)

(Unaudited)

 

     Three Months Ended
April 30,
   Six Months Ended
April 30,
     2010     2009    2010     2009

Net sales

   $ 289,271      $ 260,594    $ 549,530      $ 511,736

Cost of sales

     125,778        111,537      236,274        220,545
                             

Gross profit

     163,493        149,057      313,256        291,191

Selling, general and administrative expense

     111,340        93,705      211,918        188,697

Research and development expense

     8,573        10,065      16,200        17,295

Restructuring costs

     47        —        410        2,954

Amortization of intangibles

     4,499        4,080      8,716        8,257
                             

Operating income

     39,034        41,207      76,012        73,988

Interest expense

     9,730        10,830      19,955        22,287

Litigation settlement charge

     27,000        —        27,000        —  

Other income (expense), net

     168        260      (2,159     8,404
                             

Income before income taxes

     2,472        30,637      26,898        60,105

(Benefit from) provision for income taxes

     (1,984     5,988      2,020        11,583
                             

Net income

   $ 4,456      $ 24,649    $ 24,878      $ 48,522
                             

Basic earnings per share

   $ 0.10      $ 0.55    $ 0.55      $ 1.07
                             

Diluted earnings per share

   $ 0.10      $ 0.54    $ 0.54      $ 1.07
                             

Number of shares used to compute earnings per share:

         

Basic

     45,481        45,170      45,386        45,155
                             

Diluted

     46,367        45,523      46,197        45,204
                             

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

(In thousands)

(Unaudited)

 

     April 30,
2010
    October 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 9,829      $ 3,932   

Trade accounts receivable, net of allowance for doubtful accounts of $4,956 at April 30, 2010 and $4,690 at October 31, 2009

     174,291        170,941   

Inventories

     238,756        260,846   

Deferred tax assets

     28,030        23,360   

Prepaid expense and other current assets

     42,543        44,799   
                

Total current assets

     493,449        503,878   
                

Property, plant and equipment, at cost

     872,460        882,322   

Less: accumulated depreciation and amortization

     302,974        279,754   
                
     569,486        602,568   
                

Goodwill

     1,255,177        1,257,029   

Other intangibles, net

     120,864        114,700   

Deferred tax assets

     28,470        27,781   

Other assets

     41,779        45,951   
                
   $ 2,509,225      $ 2,551,907   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Short-term debt

   $ 13,567      $ 7,051   

Current portion of long-term debt

     —          2,793   

Accounts payable

     42,822        36,878   

Employee compensation and benefits

     35,580        35,781   

Accrued acquisition costs

     3,260        3,599   

Accrued income taxes

     10,466        4,400   

Accrued litigation settlement

     27,000        —     

Other current liabilities

     75,561        84,912   
                

Total current liabilities

     208,256        175,414   
                

Long-term debt

     699,381        771,630   

Deferred tax liabilities

     12,576        16,456   

Accrued pension liability and other

     46,284        48,065   
                

Total liabilities

     966,497        1,011,565   
                

Commitments and contingencies (see Note 12)

    

Stockholders’ equity:

    

Preferred stock, 10 cents par value, shares authorized: 1,000; zero shares issued or outstanding

     —          —     

Common stock, 10 cents par value, shares authorized: 70,000; issued 45,886 at April 30, 2010 and 45,572 at October 31, 2009

     4,589        4,557   

Additional paid-in capital

     1,070,678        1,063,289   

Accumulated other comprehensive loss

     (41,701     (12,920

Retained earnings

     513,967        490,451   

Treasury stock at cost: 313 shares at April 30, 2010 and 328 shares at October 31, 2009

     (4,805     (5,035
                

Stockholders’ equity

     1,542,728        1,540,342   
                
   $ 2,509,225      $ 2,551,907   
                

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Six Months Ended
April 30,
 
     2010     2009  

Cash flows from operating activities:

    

Net income

   $ 24,878      $ 48,522   

Depreciation and amortization

     46,897        46,006   

Accrued litigation settlement

     27,000        —     

Increase (decrease) in operating capital

     20,500        (39,859

Other non-cash items

     8,485        14,070   
                

Net cash provided by operating activities

     127,760        68,739   
                

Cash flows from investing activities:

    

Purchases of property, plant and equipment, net

     (24,119     (54,061

Acquisitions of businesses, net of cash acquired, and other

     (30,971     (3,705
                

Net cash used in investing activities

     (55,090     (57,766
                

Cash flows from financing activities:

    

Net proceeds from short-term debt

     6,516        4,203   

Repayments and repurchase of long-term debt

     (353,210     (494,360

Proceeds from long-term debt

     278,168        482,998   

Dividends on common stock

     (1,362     (1,355

Excess tax benefit from share-based compensation arrangements

     407        135   

Issuance of common stock for employee stock plans

     2,707        (30
                

Net cash used in financing activities

     (66,774     (8,409

Effect of exchange rate changes on cash and cash equivalents

     1        (36
                

Net increase in cash and cash equivalents

     5,897        2,528   

Cash and cash equivalents - beginning of period

     3,932        1,944   
                

Cash and cash equivalents - end of period

   $ 9,829      $ 4,472   
                

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

 

     Three Months Ended
April 30,
   Six Months Ended
April 30,
 
     2010     2009    2010     2009  

Net income

   $ 4,456      $ 24,649    $ 24,878      $ 48,522   

Other comprehensive (loss) income:

         

Foreign currency translation adjustment

     (18,504     9,518      (35,554     (29,788

Change in value of derivative instruments, net of tax

     842        10,647      6,773        (13,819
                               

Other comprehensive (loss) income

     (17,662     20,165      (28,781     (43,607
                               

Comprehensive (loss) income

   $ (13,206   $ 44,814    $ (3,903   $ 4,915   
                               

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1. General

The Cooper Companies, Inc. (Cooper, we or the Company) develops, manufactures and markets healthcare products through its two business units:

 

 

CooperVision (CVI) develops, manufactures and markets a broad range of contact lenses for the worldwide vision care market. Its leading products are disposable and planned replacement lenses.

 

 

CooperSurgical (CSI) develops, manufactures and markets medical devices, diagnostic products and surgical instruments and accessories used primarily by gynecologists and obstetricians.

The unaudited consolidated condensed financial statements presented in this report contain all adjustments necessary to present fairly Cooper’s consolidated financial position at April 30, 2010 and October 31, 2009, the consolidated results of its operations for the three and six months ended April 30, 2010 and 2009 and its consolidated condensed cash flows for the six months ended April 30, 2010 and 2009. Most of these adjustments are normal and recurring. However, certain adjustments associated with acquisitions and the related financial arrangements are of a nonrecurring nature. Readers should not assume that the results reported here either indicate or guarantee future performance.

During interim periods, we follow the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009. Please refer to this when reviewing this Quarterly Report on Form 10-Q.

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 listed below 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. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are:

 

 

Revenue recognition

 

 

Allowance for doubtful accounts

 

 

Net realizable value of inventory

 

 

Valuation of goodwill

 

 

Business combinations

 

 

Income taxes

 

 

Share-based compensation

During the fiscal first half of 2010, there were no significant changes in our estimates and critical accounting policies. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2009, for a more complete discussion of our estimates and critical accounting policies.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

We 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 foreign currency forward contracts and interest rate swap agreements are financially sound and that the credit risk of these contracts is not significant, see Note 6. Derivative Instruments.

New Accounting Pronouncements

On November 1, 2009, the Company adopted the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion (FSP APB 14-1). FSP APB 14-1, which was issued in May 2008, requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. As a result, the liability component would be recorded at a discount reflecting its below market coupon interest rate, and the liability component would be accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected in the results of operations. This change in methodology affects the calculations of net income and earnings per share but will not increase the cash interest payments. FSP APB 14-1 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required and early adoption is prohibited. The convertible senior debentures that the Company issued in fiscal 2003 and subsequently repurchased in fiscal 2008 are within the scope of FSP APB 14-1. The Company has adjusted the reported amounts in its Consolidated Balance Sheet as of October 31, 2009 as follows:

Consolidated Balance Sheet at October 31, 2009

 

     As Reported    Adjustments     As Adjusted
     (In thousands)

Additional paid-in capital

   $ 1,053,662    $ 9,627      $ 1,063,289

Retained earnings

   $ 500,078    $ (9,627   $ 490,451

In March 2010, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-11, which is included in the Codification under ASC 815, Derivatives and Hedging . The amended guidance clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting as well as under which circumstances embedded credit derivative features would not qualify for the scope exception and would be subject to potential bifurcation and separate accounting. The guidance provided in ASU No. 2010-11 is effective at the beginning of the Company’s first fiscal quarter beginning after June 15, 2010. Early adoption is permitted. ASU No. 2010-11 is effective for the Company’s fourth quarter of fiscal year ending October 31, 2010. The Company does not anticipate the adoption of ASU 2010-11 will have a material impact on the consolidated financial statements.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 2. 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 CVI’s manufacturing efficiencies and reduce its manufacturing expenses through a reduction in workforce of approximately 480 employees. The Norfolk plant manufactured about 7% of CooperVision’s annual lens production; however, no additional hires are anticipated in Puerto Rico or the UK as part of this plan due to recent gains in manufacturing efficiencies.

The Company expects to complete restructuring activities in Adelaide, Australia, in our fiscal third quarter of 2010 and expects to complete restructuring activities in Norfolk, Virginia, in our fiscal first quarter of 2011.

We estimate that the total restructuring costs under this plan will be approximately $24 million, with about $17 million associated with assets, including accelerated depreciation and facility lease and contract termination costs, and about $7 million associated with employee benefit costs, including anticipated severance payments, termination benefit costs, retention bonus payouts and other similar costs. These costs will be reported as cost of sales or restructuring costs in our Consolidated Statements of Income.

In the fiscal second quarter of 2010, $3.6 million, including $0.7 million of employee benefit costs and $2.9 million of costs associated with assets, primarily non-cash, are reported as cost of sales. In the fiscal first half of 2010, $5.9 million, including $1.3 million of employee benefit costs and $4.6 million of non-cash costs associated with assets are reported as $5.8 million in cost of sales and $0.1 million in restructuring costs.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

For the fiscal year ended October 31, 2009, total costs of $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.

 

     Balance at
Beginning of  Period
   Additions
Charged to
Cost of Sales
and
Restructuring
Costs
   Payments
and
Adjustments
   Balance at
End of  Period
     (In millions)

Year Ended October 31, 2009

           

Other current liabilities

   $ —      $ 3.6    $ 0.6    $ 3.0

Accelerated depreciation and other

     —        1.5      1.2      0.3
                           
   $ —      $ 5.1    $ 1.8    $ 3.3
                           

Fiscal Quarter Ended January 31, 2010

           

Other current liabilities

   $ 3.0    $ 0.7    $ 0.6    $ 3.1

Accelerated depreciation and other

     0.3      1.6      1.6      0.3
                           
   $ 3.3    $ 2.3    $ 2.2    $ 3.4
                           

Fiscal Quarter Ended April 30, 2010

           

Other current liabilities

   $ 3.1    $ 3.0    $ 2.9    $ 3.2

Accelerated depreciation and other

     0.3      0.6      0.6      0.3
                           
   $ 3.4    $ 3.6    $ 3.5    $ 3.5
                           

Critical Activity Restructuring Plan

In the fiscal first quarter of 2009, CooperVision began a global restructuring plan to focus the organization on our most critical activities, refine our work processes and align costs with prevailing market conditions (Critical Activity restructuring plan). This restructuring plan involved the assessment of all locations’ activities, exclusive of direct manufacturing, and changes to streamline work processes. As a result of the Critical Activity restructuring plan, a number of positions were eliminated across certain business functions and geographic regions. The Company substantially completed the Critical Activity restructuring plan in our fiscal fourth quarter of 2009.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

The total restructuring costs under this plan were $4.6 million, primarily severance and benefit costs, and were reported as cost of sales or restructuring costs in our Consolidated Statements of Income. In the fiscal first half of 2010, we reported $0.3 million in restructuring costs. In the year ended October 31, 2009, we reported $0.5 million in cost of sales and $3.8 million in restructuring costs. At April 30, 2010, the total accrued restructuring liability, recorded in other accrued liabilities, was $0.2 million:

 

     Balance at
Beginning of  Period
   Additions
Charged  to
Cost of Sales
and
Restructuring

Costs
   Payments    Balance at
End of  Period
     (In millions)

Year Ended October 31, 2009

   $ —      $ 4.3    $ 3.7    $ 0.6
                           

Fiscal Quarter Ended January 31, 2010

   $ 0.6    $ 0.3    $ 0.2    $ 0.7
                           

Fiscal Quarter Ended April 30, 2010

   $ 0.7    $ —      $ 0.5    $ 0.2
                           

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

Note 3. Inventories

 

     April 30,
2010
   October 31,
2009
     (In thousands)

Raw materials

   $ 44,799    $ 47,400

Work-in-process

     7,869      6,122

Finished goods

     186,088      207,324
             
   $ 238,756    $ 260,846
             

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.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 4. Intangible Assets

Goodwill

 

     CVI     CSI     Total  
           (In thousands)        

Balance as of October 31, 2008

   $ 1,044,062      $ 207,637      $ 1,251,699   

Net reductions during the year ended October 31, 2009

     (3,624     (10     (3,634

Translation

     8,832        132        8,964   
                        

Balance as of October 31, 2009

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

Net additions during the six-month period ended April 30, 2010

     —          9,618        9,618   

Translation

     (11,374     (96     (11,470
                        

Balance as of April 30, 2010

   $ 1,037,896      $ 217,281      $ 1,255,177   
                        

The Company performed its annual impairment test during the fiscal third quarter of 2009, and our analysis indicated that we had no impairment of goodwill. As described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009, we will continue to monitor conditions and changes that could indicate that our recorded goodwill may be impaired.

 

Other Intangible Assets

           
     As of April 30, 2010    As of October 31, 2009
     Gross  Carrying
Amount
   Accumulated
Amortization
&  Translation
   Gross  Carrying
Amount
   Accumulated
Amortization
& Translation
          (In thousands)     

Trademarks

   $ 2,994    $ 1,062    $ 2,907    $ 979

Technology

     105,122      48,158      91,279      43,846

Shelf space and market share

     88,803      34,054      87,863      30,221

License and distribution rights and other

     13,485      6,266      13,485      5,788
                           
     210,404    $ 89,540      195,534    $ 80,834
                   

Less accumulated amortization and translation

     89,540         80,834   
                   

Other intangible assets, net

   $ 120,864       $ 114,700   
                   

We estimate that amortization expense will be about $16.6 million per year in the five-year period ending October 31, 2014.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 5. Debt

 

     April 30,
2010
   October  31,
2009
     (In thousands)

Short-term:

     

Overdraft and other credit facilities

   $ 13,567    $ 7,051

Current portion of long-term debt

     —        2,793
             
   $ 13,567    $ 9,844
             

Long-term:

     

Revolver

   $ 360,000    $ 425,000

Senior notes

     339,000      339,000

Capital lease

     —        7,207

Other

     381      423
             
   $ 699,381    $ 771,630
             

In November 2009, the Company entered into a $5.0 million overdraft facility for certain of our Asia Pacific subsidiaries. This facility is designed to replace the existing facility which has been reduced to $1.9 million. Both facilities are supported by a continuing and unconditional guaranty by the Company. The Company will pay all forms of indebtedness in the currency in which it is denominated for those certain subsidiaries. Interest expense is calculated on all outstanding balances based on an applicable base rate for each country plus a fixed spread common across all subsidiaries covered under the guaranties. At April 30, 2010, approximately $4.2 million was utilized.

Note 6. Derivative Instruments

We operate multiple foreign subsidiaries that manufacture and/or sell 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. Our policy is to minimize transaction, remeasurement and specified economic exposures with derivative instruments such as foreign exchange forward contracts and cross currency swaps. The gains and losses on these derivatives are intended to at least partially offset the transaction gains and losses recognized in earnings. We do not enter into derivatives for speculative purposes. Under ASC 815, Derivatives and Hedging , all derivatives are recorded on the balance sheet at fair value. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

Through the normal course of our business activities, the Company recognizes that it is exposed to foreign exchange risks. Our objectives are to protect the USD value of future cash flows and minimize the volatility of reported earnings while strictly adhering to accounting principles generally accepted in the United States. To meet these objectives, business exposures to foreign exchange risks must be identified, measured and minimized using the most effective and efficient methods to eliminate, reduce or transfer such exposures.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Exposures are reduced whenever possible by taking advantage of offsetting payable and receivable balances and netting net sales against expenses, also referred to as natural hedges. The Company employs the use of foreign currency derivative instruments to manage a portion of the remaining foreign exchange risk. While we designate our exposures under ASC 815 on a gross basis, foreign currency derivatives may be used to protect against an exposure value resulting from forecasted non-functional currency denominated net sales and expenses. Our risk management objectives and the strategies for achieving those objectives depend on the type of exposure being hedged.

The Company is also exposed to risks associated with changes in interest rates, as the interest rate on our Senior Unsecured Revolving Line of Credit (Revolver) varies with the London Interbank Offered Rate (LIBOR). To mitigate this risk, we hedge portions of our variable rate debt by swapping those portions to fixed rates.

We only enter into derivative financial instruments with institutions that have an International Swap Dealers Association (ISDA) agreement in place. Our derivative financial instruments do not contain credit risk related contingent features such as call features or requirements for posting collateral. Although the Company and its counterparties have some right of set-off, all foreign exchange derivatives are displayed gross in the fair value tabular disclosure and accounted for as such in our Consolidated Condensed Balance Sheet. We adjust our foreign exchange forward contracts and cross currency swaps for credit risk on a per derivative basis. However, when applicable, we record interest rate derivatives as net in our Consolidated Condensed Balance Sheet, in accordance with ASC 815-10, but gross in the fair value tabular disclosure. When we net or set-off our interest rate derivative obligations, only the net asset or liability position will be credit affected. For the fiscal first half ended April 30, 2010, and for the fiscal year ending October 31, 2009, all of our interest rate derivatives were in a liability position and, therefore, were not set-off in the Consolidated Balance Sheet. Since ISDA agreements are signed between the Company and each respective financial institution, netting is permitted on a per institution basis only. On an ongoing basis, we monitor counterparty credit ratings. We consider our credit non-performance risk to be minimal because we award and disperse derivatives business between multiple commercial institutions that have at least an investment grade credit rating.

Cash Flow Hedging

The Company is exposed to the effects of foreign exchange movements. Our strategy is to minimize enterprise risk by locking in all or a portion of the anticipated cash flows that are linked to accounting exposures such as non-functional currency intercompany payables/receivables, through derivative instruments. To execute this strategy, we hedge the specific identified foreign exchange risk exposure, thereby locking in the rate at which these forecasted transactions will be recorded and ultimately reduce earnings volatility related to the enterprise risk.

ASC 815 cash flow hedge accounting allows for the gains or losses on the change in fair value of the derivatives related to forecasted transactions to be recorded in Other Comprehensive Income (OCI) until the underlying forecasted transaction occurs. However, this accounting treatment is limited to hedging specific transactions that can be clearly defined and specifically create risk to functional currency cash flow.

All sales and expenses with unrelated third parties not denominated in USD subject the Company to economic risk. We typically designate and document qualifying foreign exchange forward contracts related to certain forecasted intercompany sales and purchases associated with third party transactions as cash flow hedges.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

To reduce foreign currency exposure related to forecasted foreign currency denominated sales and purchases of product, the Company enters into foreign currency forward contracts; however, in fiscal 2010, we have not entered into any new forward contracts of this kind. In fiscal 2009, we entered into forward contracts of approximately $43.0 million in the fiscal fourth quarter, $40.0 million in the fiscal third quarter, $250.0 million in the fiscal second quarter and none in the fiscal first quarter. These derivatives were accounted for as cash flow hedges under ASC 815 and were expected to be effective through their maturities. As of April 30, 2010, all outstanding cash flow hedging derivatives had maturities of less than 12 months.

Typical currencies traded are those which represent the largest risk for the Company, including but not limited to the British pound sterling, euro and Japanese yen. Hedge amounts vary by currency but typically fall below $10.0 million per month per currency. Hedges for each currency mature monthly to correspond with the payment cycles of the hedged relationships. To maintain a layered hedged position, additional hedges may be placed consistently throughout the year.

Each month during any given period, adjustments are made to the existing hedges by matching them with the actual cash flows that occurred in that month. Each hedge, therefore, will require that compensating trades be adjusted to match the actual flows of the underlying exposure.

The effective portion of the cash flow hedge contracts’ gains or losses resulting from changes in fair value of these hedges is initially reported as a component of accumulated OCI in stockholder’s equity until the underlying hedged item is reflected in our Consolidated Statement of Income, at which time the effective amount in OCI is reclassified to either net sales or cost of sales in our Consolidated Statement of Income. No ineffectiveness was recorded in fiscal 2010. Immaterial amounts of ineffectiveness were recorded during 2009. We expect to reclassify a loss of approximately $1.0 million to the effective accounts over the next twelve months but anticipate no reclasses thereafter.

We calculate hedge effectiveness prospectively and retrospectively, excluding time value, on a monthly basis using regression as well as other timing and probability criteria required by ASC 815. We record any ineffectiveness and any excluded components of the hedge immediately to other income or expense in our Consolidated Statement of Income. In the event the underlying forecasted transaction does not occur within the designated hedge period, or it becomes probable that the forecasted transaction will not occur, the related gains and losses on the cash flow hedges are immediately reclassified from OCI to other income or expense in our Consolidated Statement of Income. In fiscal 2010, no ineffectiveness was recorded. Immaterial amounts of ineffectiveness were recorded during the fiscal first quarter of 2009 and no ineffectiveness was recorded for the remainder of fiscal 2009.

Balance Sheet Hedges

We manage the foreign currency risk associated with non-functional currency assets and liabilities using foreign exchange forward contracts with maturities of less than 24 months and cross currency swaps with maturities up to 36 months. As of April 30, 2010, all outstanding balance sheet hedging derivatives had maturities of less than 12 months. The change in fair value of these derivatives is recognized in other income or expense.

Monthly adjustments to the cash flow hedging program explained above require non-designated hedges to be placed when cash flow hedges are utilized faster or earlier than planned. This occurs regularly, and hedge amounts tend to be less than a few million dollars per affected relationship.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Other common exposures hedged are intercompany payables and receivables between entities. Such obligations are generally short-term in nature, often outstanding for less than 90 days. These types of exposures are hedged monthly and are typically less than $10.0 million per hedge.

These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the non-functional currency assets and liabilities being hedged.

Interest Rate Swaps

In fiscal 2007 and 2008, the Company entered into floating-to-fixed interest rate swaps to fix the floating rate on the Revolver. As of April 30, 2010, the swaps’ notional value totaled $300.0 million with maturities ranging from less than 1 month to 13 months and fixed rates between 2.44% and 4.95%. We qualified and designated these swaps under ASC 815 as cash flow hedges and recorded the offset of the cumulative fair market value (net of tax effect) to OCI in our Consolidated Condensed Balance Sheet.

Effectiveness testing of the hedge relationship and measurement to quantify ineffectiveness is performed at a minimum each fiscal quarter using the hypothetical derivative method. The swaps have been and are expected to remain highly effective for the life of the hedges. Effective amounts are reclassified to interest expense as the related hedged expense is incurred. The fair value of the outstanding swaps is shown in the Consolidated Condensed Balance Sheet and the Fair Value Measurements and Disclosures tables below. Excluded from this table are liabilities of $2.1 million and $2.6 million that were recorded and attributable to accrued interest as of April 30, 2010 and October 31, 2009, respectively. We expect to reclassify $4.7 million from OCI to interest expense in our Consolidated Statements of Income over the next 12 months.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

The fair value of derivative instruments in our Consolidated Condensed Balance Sheet as of April 30, 2010 and October 31, 2009 was as follows:

 

    

Derivative Assets

  

Derivative Liabilities

    

Balance

Sheet

Location

   Fair
Value
4/30/2010
   Fair
Value
10/31/2009
  

Balance

Sheet

Location

   Fair
Value
4/30/2010
   Fair
Value
10/31/2009
     (In millions)

Derivatives designated as hedging instruments under ASC 815

                 

Interest rate contracts

   Prepaid expense and other current assets    $ —      $ —      Other current liabilities    $ 2.6    $ 4.1

Interest rate contracts

   Other assets      —        —      Accrued pension liability and other      2.2      6.3

Foreign exchange contracts

   Prepaid expense and other current assets      2.6      9.4    Other current liabilities      1.6      11.1

Foreign exchange contracts

   Other assets      —        0.9    Accrued pension liability and other      —        0.7
                                 

Total derivatives designated as hedging instruments under ASC 815

      $ 2.6    $ 10.3       $ 6.4    $ 22.2
                                 

Derivatives not designated as hedging instruments under ASC 815

                 

Interest rate contracts

   Prepaid expense and other current assets    $ —      $ —      Other current liabilities    $ —      $ —  

Interest rate contracts

   Other assets      —        —      Accrued pension liability and other      —        —  

Foreign exchange contracts

   Prepaid expense and other current assets      0.7      0.8    Other current liabilities      0.5      0.7

Foreign exchange contracts

   Other assets      —        —      Accrued pension liability and other      —        —  
                                 

Total derivatives not designated as hedging instruments under ASC 815

      $ 0.7    $ 0.8       $ 0.5    $ 0.7
                                 

Total derivatives

      $ 3.3    $ 11.1       $ 6.9    $ 22.9
                                 

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

The Effect of Derivative Instruments on the Consolidated Statements of Income

For the Six Months Ended April 30, 2010 and 2009

(In millions)

 

Derivatives in

ASC 815

Cash Flow

Hedging

Relationships

   Amount of
Gain or (Loss)
Recognized in
OCI on Derivative
(Effective Portion)
   

Location of
Gain or (Loss)
Reclassified
from Accumulated
OCI into Income
(Effective Portion)

   Amount of
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
   

Location of

Gain or (Loss)
Recognized in
Income on
Derivative
Ineffectiveness

   Amount of
Gain or (Loss)
Recognized

in Income
Due to
Ineffectiveness
   

Location of
Gain or (Loss)
Recognized in
Income and
Excluded from
Effectiveness
Testing

   Amount of
Gain or (Loss)
Recognized in
Income and
Excluded from
Effectiveness Testing
     2010     2009          2010     2009          2010    2009          2010    2009

Interest rate contracts

   $ (0.8   $ (10.4   Interest expense    $ (6.5   $ (5.5   Other income/ (expense)    $ —      $ —        Other income/ (expense)    $ —      $ —  

Foreign exchange contracts

     0.6        (12.5   Net sales      (4.4     15.9      Other income/ (expense)      —        (0.1   Other income/ (expense)      —        1.1

Foreign exchange contracts

     —          —        Cost of sales      1.6        (17.4   Other income/ (expense)      —        —        Other income/ (expense)      —        —  
                                                                     

Total

   $ (0.2   $ (22.9      $ (9.3   $ (7.0      $ —      $ (0.1      $ —      $ 1.1
                                                                     

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Derivatives Not Designated

as Hedging Instruments

Under ASC 815

  

Location of Gain or (Loss)

Recognized in Income on

Derivative

  

Amount of Gain or (Loss)

Recognized in Income on

Derivative

 
          (In millions)  
          Six Months Ended April 30,  
          2010     2009  

Interest rate contracts

   Interest expense    $ —        $ —     

Foreign exchange contracts

   Other income (expense), net      (4.2     (1.5
                   

Total

      $ (4.2   $ (1.5
                   

Fair Value Measurements

On November 1, 2008, the Company adopted the required portions of ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 applies to all assets and liabilities that are being measured and reported at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. An asset’s or liability’s level is based on the lowest level of input that is significant to the fair value measurement. ASC 820 requires that assets and liabilities carried at fair value be valued and disclosed in one of the following three levels of the valuation hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.

The Company has derivative assets and liabilities, which include interest rate swaps, cross currency swaps and foreign currency forward contracts. The impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.

We use interest rate swaps to maintain our desired mix of fixed-rate and variable-rate debt. The swaps exchange fixed and variable rate payments without exchanging the notional principal amount of the debt. The Company has elected to use the income approach to value the derivatives using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs are limited to quoted prices for similar assets or liabilities in active markets, specifically euro dollar futures contracts up to three years, and inputs other than quoted prices that are observable for the asset or liability - specifically LIBOR cash and swap rates, credit risk at commonly quoted intervals. Mid-market pricing is used as a practical expedient for fair value measurements.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

We use foreign exchange forward contracts to minimize, to the extent reasonable and practical, our exposure to the impact of changing foreign currency fluctuations. We elected to use the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability - specifically LIBOR cash rates, credit risk at commonly quoted intervals, foreign exchange spot rates and forward points. Mid-market pricing is used as a practical expedient for fair value measurements.

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis during the fiscal first half of 2010, within the fair value hierarchy at April 30, 2010:

 

     Level 2
     (In millions)

Assets:

  

Foreign exchange contracts

   $ 3.3
      

Liabilities:

  

Interest rate swaps

   $ 4.8

Foreign exchange contracts

     2.1
      
   $ 6.9
      

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis during fiscal 2009, within the fair value hierarchy at October 31, 2009:

 

     Level 2
     (In millions)

Assets:

  

Foreign exchange contracts

   $ 11.1
      

Liabilities:

  

Interest rate swaps

   $ 10.4

Foreign exchange contracts

     12.5
      
   $ 22.9
      

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 7. Earnings Per Share

 

     Three Months Ended
April 30,
   Six Months Ended
April 30,
     2010    2009    2010    2009
     (In thousands, except per share amounts)

Net income

   $ 4,456    $ 24,649    $ 24,878    $ 48,522
                           

Basic :

           

Weighted average common shares

     45,481      45,170      45,386      45,155
                           

Basic earnings per common share

   $ 0.10    $ 0.55    $ 0.55    $ 1.07
                           

Diluted :

           

Weighted average common shares

     45,481      45,170      45,386      45,155

Effect of dilutive stock options

     886      353      811      49
                           

Diluted weighted average common shares

     46,367      45,523      46,197      45,204
                           

Diluted earnings per common share

   $ 0.10    $ 0.54    $ 0.54    $ 1.07
                           

The following table sets forth stock options to purchase Cooper’s common stock and restricted stock units that were not included in the diluted net income per share calculation because their effect would have been antidilutive for the periods presented:

 

     Three Months Ended
April 30,
   Six Months Ended
April 30,
     2010    2009    2010    2009
     (In thousands, except exercise prices)

Numbers of stock option shares excluded

     3,571      4,514      3,576      4,579
                           

Range of exercise prices

   $ 41.44-$80.51    $ 24.40-$80.51    $ 37.90-$80.51    $ 22.08-$80.51
                           

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 8. Share-Based Compensation Plans

The Company has several share-based compensation plans that are described in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009. The compensation and related income tax benefit recognized in the Company’s consolidated financial statements for share-based awards were as follows:

 

     Three Months Ended
April 30,
   Six Months Ended
April 30,
     2010    2009    2010    2009
     (In millions)

Selling, general and administrative expense

   $ 1.7    $ 4.0    $ 4.3    $ 7.0

Cost of sales

     0.2      0.2      0.4      0.6

Research and development expense

     0.1      0.2      0.2      0.4

Capitalized in inventory

     0.2      0.2      0.4      0.6
                           

Total compensation expense

   $ 2.2    $ 4.6    $ 5.3    $ 8.6
                           

Related income tax benefit

   $ 0.6    $ 1.6    $ 1.6    $ 2.8
                           

Note 9. Income Taxes

Cooper’s effective tax rate (ETR) (provision for income taxes divided by pretax income) for the fiscal first half of 2010 was 7.5%. GAAP requires that the projected fiscal year ETR, plus any discrete items, be included in the year-to-date results. The ETR used to record the provision for income taxes for the fiscal first half of 2009 was 19.3%. The decrease in the fiscal 2010 ETR reflects the shift in the geographic mix of income as well as litigation settlement charges incurred in the U.S. during the period.

The Company adopted the provisions of ASC 740-10-25-5 through 25-17, Basic Recognition Threshold , formerly FIN 48, on November 1, 2007. Under this guidance, the Company recognizes 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. As of November 1, 2009, the Company had total gross unrecognized tax benefits of $15.9 million. If recognized, $15.4 million of unrecognized tax benefits would impact the Company’s ETR. For the six-month period ended April 30, 2010, there were no material changes to the total amount of unrecognized tax benefits. The Company historically classified unrecognized tax benefits in current taxes payable. As a result of our adoption of ASC 740-10-25-5 through 25-17, unrecognized tax benefits were reclassified to long-term income taxes payable.

Interest and penalties of $1.2 million have been reflected as a component of the total liability as of November 1, 2009. It is the Company’s policy to recognize the items of interest and penalties directly related to income taxes as additional income tax expense.

Included in the balance of unrecognized tax benefits at November 1, 2009, is $2.5 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits related to expiring statutes in various jurisdictions worldwide and is comprised of transfer pricing and other items.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

As of April 30, 2010, the tax years for which the Company remains subject to U.S. Federal income tax assessment upon examination are 2005 through 2008. The Company remains subject to income tax examinations in other major tax jurisdictions including the United Kingdom, France and Australia for the tax years 2004 through 2008.

Note 10. Employee Benefits

Cooper’s Retirement Income Plan (Plan), a defined benefit plan, covers substantially all full-time United States employees. Cooper’s contributions are designed to fund normal cost on a current basis and to fund over 30 years the estimated prior service cost of benefit improvements (5 years for annual gains and losses). The unit credit actuarial cost method is used to determine the annual cost. Cooper pays the entire cost of the Plan and funds such costs as they accrue. Virtually all of the assets of the Plan are comprised of equities and participation in equity and fixed income funds.

Cooper’s results of operations for the three and six months ended April 30, 2010 and 2009 reflect the following components of net periodic pension costs:

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010     2009     2010     2009  
     (In thousands)  

Service cost

   $ 992      $ 766      $ 1,984      $ 1,532   

Interest cost

     668        586        1,336        1,172   

Expected returns on assets

     (611     (577     (1,222     (1,154

Amortization of prior service cost

     6        8        12        15   

Amortization of transition obligation

     5        6        10        13   

Recognized net actuarial loss

     199        9        398        18   

Curtailment loss

     —          —          44        —     
                                

Net periodic pension cost

   $ 1,259      $ 798      $ 2,562      $ 1,596   
                                

The Company contributed to the pension plan $0.8 million and $1.6 million for the three and six months ended April 30, 2010, respectively, and expects to contribute an additional $2.2 million in fiscal 2010. The Company contributed to the pension plan $0.9 million and $1.4 million for the three and six months ended April 30, 2009.

Note 11. Cash Dividends

We paid a semiannual dividend of approximately $1.4 million or 3 cents per share on February 5, 2010, to stockholders of record on January 19, 2010.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 12. Contingencies

Legal Proceedings

In re Cooper Companies, Inc. Securities Litigation

On February 15, 2006, Alvin L. Levine filed a putative securities class action lawsuit in the United States District Court for the Central District of California, Case No. SACV-06-169 CJC, against the Company, A. Thomas Bender, its Chairman of the Board and a director, Robert S. Weiss, its Chief Executive Officer and a director, and John D. Fruth, a former director. On May 19, 2006, the Court consolidated this action and two related actions under the heading In re Cooper Companies, Inc. Securities Litigation and selected a lead plaintiff and lead counsel pursuant to the provisions of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4.

The lead plaintiff filed a consolidated complaint on July 31, 2006. The consolidated complaint was filed on behalf of all purchasers of the Company’s securities between July 28, 2004, and December 12, 2005, including persons who received Company securities in exchange for their shares of Ocular Sciences, Inc. (Ocular) in the January 2005 merger pursuant to which the Company acquired Ocular. In addition to the Company, Messrs. Bender, Weiss, and Fruth, the consolidated complaint named as defendants several of the Company’s other current officers and directors and former officers. On July 13, 2007, the Court granted Cooper’s motion to dismiss the consolidated complaint and granted the lead plaintiff leave to amend to attempt to state a valid claim.

On August 9, 2007, the lead plaintiff filed an amended consolidated complaint. In addition to the Company, the amended consolidated complaint names as defendants Messrs. Bender, Weiss, Fruth, Steven M. Neil, the Company’s former Executive Vice President and Chief Financial Officer, and Gregory A. Fryling, CooperVision’s former President and Chief Operating Officer.

The amended consolidated complaint purports to allege violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 by, among other things, contending that the defendants made misstatements concerning the Biomedics® product line, sales force integration following the merger with Ocular, the impact of silicone hydrogel lenses and financial projections. The amended consolidated complaint also alleges that the Company improperly accounted for assets acquired in the Ocular merger by improperly allocating $100 million of acquired customer relationships and manufacturing technology to goodwill (which is not amortized against earnings) instead of to intangible assets other than goodwill (which are amortized against earnings), that the Company lacked appropriate internal controls and issued false and misleading Sarbanes-Oxley Act certifications.

On October 23, 2007, the Court granted in-part and denied in-part Cooper and the individual defendants’ motion to dismiss. The Court dismissed the claims relating to the Sarbanes-Oxley Act certifications, the Company’s financial projections and the Company’s accounting of assets acquired in the Ocular merger. The Court denied the motion as to the claims related to alleged false statements concerning the Biomedics product line, sales force integration and the impact of silicone hydrogel lenses. On November 28, 2007, the Court dismissed all claims against Mr. Fruth. On December 3, 2007, the Company and Messrs. Bender, Weiss, Neil and Fryling answered the amended consolidated complaint. On April 8, 2008, the Court granted a motion by Mr. Neil for judgment on the pleadings as to him. On October 20, 2009, the Court reaffirmed that Plaintiffs’ financial projection claims had been dismissed in its earlier rulings.

On January 6, 2009, the Court granted plaintiffs’ motion for class certification. The certified class consists of those persons who purchased or otherwise acquired Cooper common stock between July 28, 2004, and November 21, 2005. Discovery in this matter has closed. Cooper and the individual defendants filed summary judgment motions on December 21, 2009. On March 4, 2010, the Court denied in substantial part the motions for summary judgment.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

On May 4, 2010, the Company announced that it has reached an agreement in principle to settle the consolidated class action lawsuit for $27.0 million. The proposed settlement is subject to court approval, the timing of which is not set at this time. The Company expects to exhaust its insurance coverage in defense of this litigation, and if the proposed settlement is not approved by the Court and the case proceeds to trial, general and administrative expenses will increase. The Company intends to defend this matter vigorously if the proposed settlement is not approved by the Court.

In re Cooper Companies, Inc. Derivative Litigation

On March 17, 2006, Eben Brice filed a purported shareholder derivative complaint in the United States District Court for the Central District of California, Case No. 8:06-CV-00300-CJC-RNB, against several current and former officers and directors of the Company. The Company is named as a “nominal defendant.” Since the filing of the first purported shareholder derivative lawsuit, three similar purported shareholder derivative suits were filed in the United States District Court for the Central District of California. All four actions have been consolidated under the heading In re Cooper Companies, Inc. Derivative Litigation and the Court selected a lead plaintiff and lead counsel.

On September 11, 2006, plaintiffs filed a consolidated amended complaint. The consolidated amended complaint names as defendants Messrs. Bender, Weiss, Fruth and Fryling. It also names as defendants current directors Michael Kalkstein, Steven Rosenberg, Stanley Zinberg, Allan Rubenstein, Donald Press and two former directors. The Company is a nominal defendant. The complaint purports to allege causes of action for breach of fiduciary duty, insider trading, breach of contract, and unjust enrichment, and largely repeats the allegations in the class action securities case, described above. The time for the Company to respond to the consolidated amended complaint has not yet passed.

In addition to the derivative action pending in federal court, three similar purported shareholder actions were filed in the Superior Court for the State of California for the County of Alameda. These actions have been consolidated under the heading In re Cooper Companies, Inc. Shareholder Derivative Litigation, Case Nos. RG06260748. A consolidated amended complaint was filed on September 18, 2006. The consolidated amended complaint names as defendants the same individuals that are the defendants in the federal derivative action. In addition, the complaint names current officers Carol R. Kaufman, Paul L. Remmell, Jeffrey Allan McLean, and Nicholas J. Pichotta and former officers. The Company is a nominal defendant. On November 29, 2006, the Superior Court for the County of Alameda entered an order staying the consolidated action pending the resolution of the federal derivative action.

Both the state and federal derivative actions are derivative in nature and do not seek damages from the Company.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 13. Financial Information for Guarantor and Non-Guarantor Subsidiaries

On January 31, 2007, the Company issued $350.0 million aggregate principal amount of 7.125% Senior Notes due 2015 (Senior Notes), of which $339.0 million were outstanding at April 30, 2010. The Senior Notes are guaranteed by certain of our direct and indirect subsidiaries. The Senior Notes represent our general unsecured obligations; senior in right of payment to all of our existing and any future subordinated indebtedness; pari passu in right of payment with all of our existing and any future unsecured indebtedness that is not by its terms expressly subordinated to the Senior Notes; effectively junior in right of payment to our existing and future secured indebtedness to the extent of the value of the collateral securing that indebtedness; unconditionally guaranteed by all of our existing and future domestic subsidiaries, other than any excluded domestic subsidiaries; and structurally subordinated to indebtedness of our subsidiaries that are not subsidiary guarantors.

Presented below are the Consolidating Condensed Statements of Operations for the three and six months ended April 30, 2010 and 2009, the Consolidating Condensed Balance Sheets as of April 30, 2010 and October 31, 2009 and the Consolidating Condensed Statements of Cash Flows for the six months ended April 30, 2010 and 2009 for The Cooper Companies, Inc. (Parent Company), the guarantor subsidiaries (Guarantor Subsidiaries) and the subsidiaries that are not guarantors (Non-Guarantor Subsidiaries).

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Statements of Operations

 

     Parent
Company
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Consolidating
Entries
    Consolidated
Total
 
     (In thousands)  

Three Months Ended April 30, 2010

           

Net sales

   $ —        $ 146,056    $ 197,548      $ (54,333   $ 289,271   

Cost of sales

     —          69,220      116,438        (59,880     125,778   
                                       

Gross profit

     —          76,836      81,110        5,547        163,493   

Operating expenses

     6,768        53,948      63,743        —          124,459   
                                       

Operating income (loss)

     (6,768     22,888      17,367        5,547        39,034   

Interest expense

     9,480        —        250        —          9,730   

Litigation settlement charge

     27,000        —        —          —          27,000   

Other income (expense), net

     3,056        340      (3,228     —          168   
                                       

Income (loss) before income taxes

     (40,192     23,228      13,889        5,547        2,472   

Provision for (benefit from) income taxes

     (16,382     9,608      4,790        —          (1,984
                                       

Net income (loss)

   $ (23,810   $ 13,620    $ 9,099      $ 5,547      $ 4,456   
                                       
     Parent
Company
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Consolidating
Entries
    Consolidated
Total
 
     (In thousands)  

Six Months Ended April 30, 2010

           

Net sales

   $ —        $ 266,223    $ 393,636      $ (110,329   $ 549,530   

Cost of sales

     —          127,159      223,592        (114,477     236,274   
                                       

Gross profit

     —          139,064      170,044        4,148        313,256   

Operating expenses

     12,277        100,225      124,742        —          237,244   
                                       

Operating income (loss)

     (12,277     38,839      45,302        4,148        76,012   

Interest expense

     19,438        —        517        —          19,955   

Litigation settlement charge

     27,000        —        —          —          27,000   

Other income (expense), net

     5,589        1,632      (9,363     (17     (2,159
                                       

Income (loss) before income taxes

     (53,126     40,471      35,422        4,131        26,898   

Provision for (benefit from) income taxes

     (22,619     18,105      6,534        —          2,020   
                                       

Net income (loss)

   $ (30,507   $ 22,366    $ 28,888      $ 4,131      $ 24,878   
                                       

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Statements of Operations

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries
    Consolidated
Total
     (In thousands)

Three Months Ended April 30, 2009

          

Net sales

   $ —        $ 129,879      $ 173,926      $ (43,211   $ 260,594

Cost of sales

     —          59,665        98,410        (46,538     111,537
                                      

Gross profit

     —          70,214        75,516        3,327        149,057

Operating expenses

     5,214        45,989        56,647        —          107,850
                                      

Operating income (loss)

     (5,214     24,225        18,869        3,327        41,207

Interest expense

     10,527        —          303        —          10,830

Other income (expense), net

     7,513        (4,427     (2,826     —          260
                                      

Income (loss) before income taxes

     (8,228     19,798        15,740        3,327        30,637

Provision for (benefit from) income taxes

     (5,191     8,146        3,033        —          5,988
                                      

Net income (loss)

   $ (3,037   $ 11,652      $ 12,707      $ 3,327      $ 24,649
                                      
     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Consolidating
Entries
    Consolidated
Total
     (In thousands)

Six Months Ended April 30, 2009

           

Net sales

   $ —        $ 247,855      $ 326,561    $ (62,680   $ 511,736

Cost of sales

     —          112,622        171,638      (63,715     220,545
                                     

Gross profit

     —          135,233        154,923      1,035        291,191

Operating expenses

     13,384        90,239        113,580      —          217,203
                                     

Operating income (loss)

     (13,384     44,994        41,343      1,035        73,988

Interest expense

     21,748        —          539      —          22,287

Other income (expense), net

     17,604        (9,623     423      —          8,404
                                     

Income (loss) before income taxes

     (17,528     35,371        41,227      1,035        60,105

Provision for (benefit from) income taxes

     (9,697     14,823        6,457      —          11,583
                                     

Net income (loss)

   $ (7,831   $ 20,548      $ 34,770    $ 1,035      $ 48,522
                                     

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Balance Sheets

 

     Parent
Company
   Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Consolidating
Entries
    Consolidated
Total
     (In thousands)

April 30, 2010

            

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 3,270    $ (143   $ 6,702    $ —        $ 9,829

Trade receivables, net

     —        66,997        107,294      —          174,291

Inventories

     —        114,097        171,835      (47,176     238,756

Deferred tax assets

     1,776      22,699        3,555      —          28,030

Other current assets

     5,175      8,574        28,794      —          42,543
                                    

Total current assets

     10,221      212,224        318,180      (47,176     493,449
                                    

Property, plant and equipment, net

     1,246      84,449        483,791      —          569,486

Goodwill

     116      678,743        576,318      —          1,255,177

Other intangibles, net

     —        75,563        45,301      —          120,864

Deferred tax assets

     60,705      (34,672     2,437      —          28,470

Other assets

     1,681,437      23,612        13,398      (1,676,668     41,779
                                    
   $ 1,753,725    $ 1,039,919      $ 1,439,425    $ (1,723,844   $ 2,509,225
                                    

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Current liabilities:

            

Short-term debt

   $ —      $ 658      $ 12,909    $ —        $ 13,567

Other current liabilities

     42,520      53,539        98,630      —          194,689
                                    

Total current liabilities

     42,520      54,197        111,539      —          208,256
                                    

Long-term debt

     699,000      —          381      —          699,381

Deferred tax liabilities

     —        —          12,576      —          12,576

Intercompany and other liabilities

     97,566      (236,619     185,337      —          46,284
                                    

Total liabilities

     839,086      (182,422     309,833      —          966,497
                                    

Stockholders’ equity

     914,639      1,222,341        1,129,592      (1,723,844     1,542,728
                                    
   $ 1,753,725    $ 1,039,919      $ 1,439,425    $ (1,723,844   $ 2,509,225
                                    

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Balance Sheets

 

     Parent
Company
   Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Consolidating
Entries
    Consolidated
Total
     (In thousands)

October 31, 2009

            

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 2,574    $ (1,688   $ 3,046    $ —        $ 3,932

Trade receivables, net

     —        59,926        111,015      —          170,941

Inventories, net

     —        107,475        203,557      (50,186     260,846

Deferred tax assets

     1,849      18,738        2,773      —          23,360

Other current assets

     5,053      5,713        33,766      267        44,799
                                    

Total current assets

     9,476      190,164        354,157      (49,919     503,878
                                    

Property, plant and equipment, net

     1,396      95,331        505,841      —          602,568

Goodwill

     116      669,125        587,788      —          1,257,029

Other intangibles, net

     —        66,904        47,796      —          114,700

Deferred tax assets

     46,081      (20,752     2,452      —          27,781

Other assets

     1,682,377      24,667        15,575      (1,676,668     45,951
                                    
   $ 1,739,446    $ 1,025,439      $ 1,513,609    $ (1,726,587   $ 2,551,907
                                    

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Current liabilities:

            

Short-term debt

   $ —      $ 1,548      $ 8,296    $ —        $ 9,844

Other current liabilities

     22,732      37,068        105,770      —          165,570
                                    

Total current liabilities

     22,732      38,616        114,066      —          175,414
                                    

Long-term debt

     764,000      —          7,630      —          771,630

Deferred tax liabilities

     —        —          16,456      —          16,456

Intercompany and other liabilities

     17,271      (213,151     243,945      —          48,065
                                    

Total liabilities

     804,003      (174,535     382,097      —          1,011,565

Stockholders’ equity

     935,443      1,199,974        1,131,512      (1,726,587     1,540,342
                                    
   $ 1,739,446    $ 1,025,439      $ 1,513,609    $ (1,726,587   $ 2,551,907
                                    

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Statements of Cash Flows

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries
    Consolidated
Total
 
     (In thousands)  

Six Months Ended April 30, 2010

          

Cash flows from operating activities:

          

Net cash provided by (used in) operating activities

   $ (20,436   $ 61,205      $ 86,991      $ —        $ 127,760   
                                        

Cash flows from investing activities:

          

Purchase of property, plant and equipment, net

     (14     (4,420     (19,685     —          (24,119

Acquisitions of businesses, net of cash acquired and other

     —          (28,900     (2,071     —          (30,971

Intercompany (investments in subsidiaries)

     84,394        —          —          (84,394     —     
                                        

Net cash (used in) provided by investing activities

     84,380        (33,320     (21,756     (84,394     (55,090
                                        

Cash flows from financing activities:

          

Net proceeds (repayments) of short-term debt

     —          (890     7,406        —          6,516   

Intercompany proceeds (repayments)

     —          (25,450     (58,944     84,394        —     

Net proceeds (repayments) of long-term debt

     (65,000     —          (10,042     —          (75,042

Dividends on common stock

     (1,362     —          —          —          (1,362

Excess tax benefit from share-based compensation arrangements

     407        —          —          —          407   

Proceeds from exercise of stock options

     2,707        —          —          —          2,707   
                                        

Net cash provided by (used in) financing activities

     (63,248     (26,340     (61,580     84,394        (66,774
                                        

Effect of exchange rate changes on cash and cash equivalents

     —          —          1        —          1   
                                        

Net increase in cash and cash equivalents

     696        1,545        3,656        —          5,897   

Cash and cash equivalents at the beginning of the period

     2,574        (1,688     3,046        —          3,932   
                                        

Cash and cash equivalents at the end of the period

   $ 3,270      $ (143   $ 6,702      $ —        $ 9,829   
                                        

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Statements of Cash Flows

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries
    Consolidated
Total
 
     (In thousands)  

Six Months Ended April 30, 2009

          

Cash flows from operating activities:

          

Net cash provided by (used in) operating activities

   $ (9,027   $ 37,396      $ 40,370      $ —        $ 68,739   
                                        

Cash flows from investing activities:

          

Purchase of property, plant and equipment, net

     (3     (10,751     (43,307     —          (54,061

Acquisitions of businesses, net of cash acquired and other

     (435     (813     (2,457     —          (3,705

Intercompany (investments in subsidiaries)

     33,644        —          —          (33,644     —     
                                        

Net cash (used in) provided by investing activities

     33,206        (11,564     (45,764     (33,644     (57,766
                                        

Cash flows from financing activities:

          

Net proceeds (repayments) of short-term debt

     (707     (775     5,685        —          4,203   

Intercompany proceeds (repayments)

     —          (23,853     (9,791     33,644        —     

Net proceeds (repayments) of long-term debt

     (21,360     —          9,998        —          (11,362

Dividends on common stock

     (1,355     —          —          —          (1,355

Excess tax benefit from share-based compensation arrangements

     135        —          —          —          135   

Proceeds from exercise of stock options

     (30     —          —          —          (30
                                        

Net cash provided by (used in) financing activities

     (23,317     (24,628     5,892        33,644        (8,409
                                        

Effect of exchange rate changes on cash and cash equivalents

     —          —          (36     —          (36
                                        

Net increase in cash and cash equivalents

     862        1,204        462        —          2,528   

Cash and cash equivalents at the beginning of the period

     20        (846     2,770        —          1,944   
                                        

Cash and cash equivalents at the end of the period

   $ 882      $ 358      $ 3,232      $ —        $ 4,472   
                                        

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 14. Business Segment Information

Cooper uses operating income, as presented in our financial reports, as the primary measure of segment profitability. We do not allocate costs from corporate functions to segment operating income. Items below operating income are not considered when measuring the profitability of a segment. We use the same accounting policies to generate segment results as we do for our consolidated results.

Identifiable assets are those used in continuing operations except cash and cash equivalents, which we include as corporate assets. Long-lived assets are property, plant and equipment.

Segment information:

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010     2009     2010     2009  
     (In thousands)  

CooperVision net sales by category:

        

Toric lens

   $ 74,725      $ 60,972      $ 138,258      $ 119,597   

Multifocal lens

     18,287        16,776        34,968        32,626   

Single-use sphere lens

     50,412        42,723        97,355        84,947   

Non single-use sphere and other eye care products and other

     98,869        97,347        187,653        191,856   
                                

Total CooperVision net sales

     242,293        217,818        458,234        429,026   

CooperSurgical net sales

     46,978        42,776        91,296        82,710   
                                

Total net sales

   $ 289,271      $ 260,594      $ 549,530      $ 511,736   
                                

Operating income (loss):

        

CVI

   $ 34,700      $ 35,348      $ 67,134      $ 66,989   

CSI

     11,102        11,073        21,155        20,383   

Headquarters

     (6,768     (5,214     (12,277     (13,384
                                

Total operating income

     39,034        41,207        76,012        73,988   

Interest expense

     9,730        10,830        19,955        22,287   

Litigation settlement charge

     27,000        —          27,000        —     

Other income (expense), net

     168        260        (2,159     8,404   
                                

Income before income taxes

   $ 2,472      $ 30,637      $ 26,898      $ 60,105   
                                

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Concluded

(Unaudited)

 

     April 30,
2010
   October 31,
2009
     (In thousands)

Identifiable assets:

     

CVI

   $ 2,106,740    $ 2,184,856

CSI

     330,841      304,927

Headquarters

     71,644      62,124
             

Total

   $ 2,509,225    $ 2,551,907
             

Geographic information:

 

     Three Months Ended
April 30,
   Six Months Ended
April 30,
     2010    2009    2010    2009
     (In thousands)

Net sales to external customers by country of domicile:

           

United States

   $ 144,698    $ 128,995    $ 263,053    $ 245,257

Europe

     84,728      80,958      168,246      162,874

Rest of world

     59,845      50,641      118,231      103,605
                           

Total

   $ 289,271    $ 260,594    $ 549,530    $ 511,736
                           

 

     April 30,
2010
   October 31,
2009
     (In thousands)

Long-lived assets by country of domicile:

     

United States

   $ 357,455    $ 375,349

Europe

     203,743      218,974

Rest of world

     8,288      8,245
             

Total

   $ 569,486    $ 602,568
             

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Note numbers refer to “Notes to Consolidated Condensed Financial Statements” in Item 1. Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. 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 net sales, CooperVision’s manufacturing restructuring plan, 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.

 

   

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

 

   

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

 

   

New competitors, product innovations or technologies.

 

   

The Company’s failure to realize anticipated savings, or its incurrence of unexpected costs, from CooperVision’s manufacturing restructuring plan.

 

   

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

 

   

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

 

   

The impact of acquisitions or divestitures on net sales, earnings or margins and the ability to successfully integrate acquisitions into the business, including the product lines recently acquired by CooperSurgical.

 

   

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.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

   

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.

 

   

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 research and development activities and other start-up projects.

 

   

Dilution to earnings per share from acquisitions or issuing stock.

 

   

Changes in tax laws or their interpretation and changes in effective tax rates.

 

   

Changes in accounting principles or estimates.

 

   

Environmental risks, including significant environmental cleanup costs above those already accrued.

 

   

Other events described in our Securities and Exchange Commission filings, including the “Business” and “Risk Factors” sections in the Annual Report on Form 10-K for the fiscal year ended October 31, 2009, 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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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

Results of Operations

In this section, we discuss the results of our operations for the fiscal second quarter of 2010 and compare them with the same period of fiscal 2009. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.”

Second Quarter Highlights

 

 

Net sales of $289.3 million, up 11%.

 

 

Gross profit $163.5 million, up from $149.1 million.

 

 

Operating income down 5% to $39.0 million.

 

 

Diluted earnings per share of 10 cents, down from 54 cents per share.

 

 

Results include a $27.0 million charge related to an agreement in principle to settle all claims in the class action lawsuit.

 

 

Operating cash flow $71.6 million, up 63% from $43.8 million.

Six-Month Highlights

 

 

Net sales of $549.5 million, up 7%.

 

 

Gross profit $313.3 million, up from $291.2 million.

 

 

Operating income up 3% to $76.0 million.

 

 

Diluted earnings per share of 54 cents, down from $1.07 per share.

 

 

Results include a $27.0 million charge related to an agreement in principle to settle all claims in the class action lawsuit.

 

 

Operating cash flow $127.8 million, up 86% from $68.7 million

Outlook

Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and women’s healthcare markets. However, recent events affecting the economy as a whole, including the uncertainty and instability of credit markets and ongoing recessionary pressures globally, as well as the instability of the euro caused by debt issues facing certain member states of the European Union, continue to represent a risk to our forecasted performance for fiscal year 2010 and beyond.

We compete in the worldwide contact lens market with our disposable 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 that the shift in practitioner preferences from low-featured “commodity” lenses to higher-value specialty and single-use lenses continue to support a favorable world market outlook. CVI is focused on greater market penetration in Europe and Asia as we roll out new products and continue to expand our presence in those regions.

Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. Competitive silicone hydrogel sphere and toric lens products are making substantial gains in market share and represent a risk to our business. In the past three years, the Company launched monthly silicone hydrogel sphere and toric products under our Biofinity ® brand and two-week silicone hydrogel sphere and toric products under our Avaira ® brand. 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. Our ability to compete successfully with silicone hydrogel products is an important factor to achieving our projected future levels of sales growth and profitability.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

We are also in the process of developing a number of new contact lens products to enhance CVI’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 toric and multifocal lenses.

The medical device segment of women’s healthcare is highly fragmented. CSI competes based on brand awareness and market focused product offerings. CSI’s strategy includes identifying and acquiring selected smaller companies and product lines that improve its existing market position or serve new clinical areas. During our fiscal first half of 2010, CSI purchased the Her Option ® endometrial ablation product line from American Medical Systems Holdings, Inc. Her Option is an FDA approved treatment for women suffering from excessive menstrual bleeding who wish to avoid a hysterectomy. It is ideal for office-based therapy as it requires minimal anesthesia and provides for nominal patient discomfort. CSI also acquired a smoke evacuation system to remove surgical smoke during laparoscopic procedures in an operating room environment. This system is marketed directly to hospitals. We intend to continue to invest in CSI’s business through acquisitions of companies and product lines.

We believe that our cash and cash equivalents, cash flow from operating activities and existing credit facilities will fund future operations, capital expenditures, cash dividends, settlement obligations and acquisitions.

Selected Statistical Information – Percentage of Sales and Growth

 

     Percent of Sales
Three Months Ended
April 30,
    Percent of Sales
Six Months Ended
April 30,
 
       2010     2009     %
Change
    2010     2009     %
Change
 

Net sales

   100   100   11   100   100   7

Cost of sales

   43   43   13   43   43   7
                            

Gross profit

   57   57   10   57   57   8

Selling, general and administrative expense

   38   36   19   39   37   12

Research and development expense

   3   3   (15 )%    2   3   (6 )% 

Restructuring costs

   1   —        —        —        1   (86 )% 

Amortization of intangibles

   2   2   10   2   2   6
                            

Operating income

   13   16   (5 )%    14   14   3
                            

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

Net Sales

Cooper’s two business units, CVI and CSI, generate all of its sales.

 

 

CVI develops, manufactures and markets a broad range of soft contact lenses for the worldwide vision care market.

 

 

CSI develops, manufactures and markets medical devices, diagnostic products and surgical instruments and accessories used primarily by gynecologists and obstetricians.

Our consolidated net sales grew by $28.7 million or 11% and $37.8 million or 7% in the three and six months ended April 30, 2010, respectively.

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010    2009    %
Change
    2010    2009    %
Change
 
     ($ in millions)  

CVI

   $ 242.3    $ 217.8    11   $ 458.2    $ 429.0    7

CSI

     47.0      42.8    10     91.3      82.7    10
                                
   $ 289.3    $ 260.6    11   $ 549.5    $ 511.7    7
                                

CVI Net Sales

Practitioner and patient preferences in the worldwide contact lens market continue to change. The major shifts are from:

 

 

Commodity spherical lenses to value-added spherical lenses such as continuous wear lenses and lenses to alleviate dry eye symptoms as well as lenses with aspherical optical properties or higher oxygen permeable lenses such as silicone hydrogels.

 

 

Commodity lenses to toric and multifocal lenses.

 

 

Conventional lenses replaced annually to 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.

CVI’s product lines of toric and multifocal lenses, PC Technology brand spherical lenses, silicone hydrogel spherical lenses and single-use spherical lenses are intended to take advantage of these trends. CVI’s silicone hydrogel spherical lens products, Biofinity and Avaira, are marketed in the United States, Europe and Asia Pacific, excluding Japan. However, we believe that it is important to develop a full range of toric and multifocal silicone hydrogel products due to increased pressure from silicone hydrogel toric products offered by our major competitors. CVI launched Biofinity toric, a silicone hydrogel toric lens, in the first calendar quarter of 2009 and began selling Avaira toric, a second silicone hydrogel toric lens, in fiscal year 2010.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

Contact lens revenue includes sales of conventional, disposable, long-term extended wear lenses and single-use lenses, some of which are aspherically designed, and toric, multifocal and cosmetic lenses.

 

 

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

 

 

Biofinity and Avaira aspheric and toric lenses, manufactured using proprietary silicone hydrogel Aquaform technology, increase oxygen transmissibility for longer wear.

 

 

Aspheric lenses correct for near- and farsightedness and have additional optical properties that help improve visual acuity in low light conditions and can correct low levels of astigmatism and low levels of presbyopia, an age-related vision defect.

 

 

Toric lenses correct astigmatism by adding the additional optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea.

 

 

Multifocal lens designs correct presbyopia.

 

 

Cosmetic lenses are opaque and color enhancing lenses that alter the natural appearance of the eye.

CVI Net Sales by Region

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010    2009    %
Change
    2010    2009    %
Change
 
     ($ in millions)  

Americas

   $ 110.4    $ 97.8    13   $ 196.4    $ 183.9    7

EMEA

     86.6      81.5    6     171.3      163.8    5

Asia Pacific

     45.3      38.5    18     90.5      81.3    11
                                
   $ 242.3    $ 217.8    11   $ 458.2    $ 429.0    7
                                

CVI’s worldwide net sales grew 11% in the three-month period and grew 7% in the six-month period. Americas net sales grew 13% and 7% in the three- and six-months periods, primarily due to market gains of CVI’s silicone hydrogel spherical and toric lenses, Biofinity and Avaira, up 117% in the three-month period and 121% in the six-month period, and single-use lenses, up 33% in the three-month period and 36% in the six-month period. 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 6% and 5% driven by increases in sales of Biofinity and Avaira, up 171% and 180% in the three- and six-month periods, respectively. Net sales to the Asia Pacific region grew 18% and 11% in the three- and six-month periods, primarily due to sales growth of single-use spherical and toric products, up 14% and 9% in the three- and six-month periods, respectively, and Biofinity and Avaira lenses, up 155% in both periods.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

Net sales growth includes increases in single-use spheres up 18%, all disposable spheres up 16% and total spheres up 15%. Total toric lenses grew 23%, including 38% growth of single-use toric lenses, and multifocal lenses grew 9%. Silicone hydrogel spherical and toric lenses grew 136% worldwide. Older conventional lens products and cosmetic lenses declined 12% and 14%, respectively. Proclear products continued to increase global market share up 17%.

CVI’s net sales growth is driven primarily through increases in the volume of lenses sold as the market continues to move to more frequent replacement. While unit growth and product mix have influenced CVI’s sales growth, average realized prices by product have not materially influenced sales growth.

CSI Net Sales

CSI’s net sales increased 10% in both the three- and six-month periods to $47.0 million and $91.3 million, respectively, with organic net sales growth of 5% and 7%, respectively. Sales of products marketed directly to hospitals grew 19% and now represent 36% of CSI’s sales. Women’s healthcare products used primarily by obstetricians and gynecologists generate 97% of CSI’s sales. The balance are sales of medical devices outside of women’s healthcare which CSI does not actively market. Unit growth and product mix along with increased average realized prices on disposable products have influenced organic sales growth.

Cost of Sales/Gross Profit

Gross profit as a percentage of net sales (margin) was:

 

     Margin
Three Months Ended
April 30,
    Margin
Six Months Ended
April 30,
 
     2010     2009     2010     2009  

CVI

   55   56   56   56

CSI

   62   61   62   61

Consolidated

   57   57   57   57

CVI’s margin was 55% for the three-month period and 56% for the six-month period ended April 30, 2010, compared with 56% for the same periods last year. The decrease in the three-month period ended April 30, 2010, is a result of costs associated with the 2009 CooperVision manufacturing restructuring plan and changing product mix including the continued sales growth of our lower margin single-use sphere and toric products which grew 19% in the quarter representing 22% of net sales compared to 21% in the fiscal second quarter of 2009. We initiated the 2009 CooperVision manufacturing restructuring plan in our fiscal third quarter of 2009, and costs associated with this plan of $3.6 million for the three-month period and $5.8 million for the six-month period ended April 30, 2010 were recorded as cost of sales and, therefore, decreased gross margins. As discussed below, these costs are primarily severance charges and accelerated depreciation, and we expect to incur similar costs related to this manufacturing restructuring plan through the fiscal first quarter of 2011. The decline was partially offset by a shift to higher margin silicone hydrogel products and improvements in manufacturing efficiencies. Gross margin for the fiscal first half of 2010 reflects the increase in accruals for rebates discussed above.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

CSI’s margin was 62% for the three- and six-month periods ended April 30, 2010, compared with 61% for the same periods last year. The increase is a result of changing product mix including higher margin products marketed directly to hospitals that represent 36% of net sales in the current period compared to 34% in the same period of 2009 and efficiencies from the integration of recent acquisitions. The increase is partially offset by the currency impact of materials purchased internationally.

Selling, General and Administrative (SGA) Expense

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010    % Net
Sales
    2009    % Net
Sales
    %
Change
    2010    % Net
Sales
    2009    % Net
Sales
    %
Change
 
     ($ in millions)  

CVI

   $ 89.0    37   $ 75.3    35   18   $ 169.2    37   $ 149.0    35   14

CSI

     15.5    33     13.2    31   18     30.4    33     26.3    32   15

Headquarters

     6.8    —          5.2    —        30     12.3    —          13.4    —        (8 )% 
                                        
   $ 111.3    38   $ 93.7    36   19   $ 211.9    39   $ 188.7    37   12
                                        

In the fiscal second quarter of 2010, consolidated SGA increased by 19% and, as a percentage of net sales, increased to 38% from 36% in the fiscal second quarter of 2009 and increased to 39% from 37% for the respective six-month periods.

CVI’s SGA increased 18% in the fiscal second quarter, primarily due to increased marketing expenses related to our silicone hydrogel products and increased selling and distribution costs to support higher sales. SGA as a percentage of net sales increased to 37% from 35% in the comparable periods of 2009.

CSI’s SGA increased 18% in the fiscal second quarter, primarily due to increased selling costs to support higher sales, and increased legal expenses related to acquisitions. SGA as a percentage of net sales increased to 33% in both periods from 31% and 32% in the three- and six-month periods of fiscal 2009.

Corporate headquarters’ SGA increased 30% to $6.8 million in the fiscal second quarter of 2010 compared to the prior year period primarily due to increased legal costs but decreased 8% to $12.3 million in the six-month period of fiscal 2010, primarily due to reduced headcount and lower share-based compensation expense and audit costs.

Settlement

The Company and several of its directors and officers have been named in a consolidated securities class action lawsuit, the nature and status of which is described in Note 12. Contingencies. The Company announced on May 4, 2010, that it has reached an agreement in principle and recorded a charge in our fiscal second quarter 2010 to settle the consolidated class action lawsuit for $27.0 million. The proposed settlement is subject to court approval, the timing and certainty of which we are unable to estimate at this time. We expect to exhaust our insurance coverage in defense of the litigation, and if the proposed settlement is not approved by the court and the case proceeds to trial, we anticipate general and administrative expenses will increase.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

Research and Development Expense

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010    % Net
Sales
    2009    % Net
Sales
    %
Change
    2010    % Net
Sales
    2009    % Net
Sales
    %
Change
 
     ($ in millions)  

CVI

   $ 7.4    3   $ 9.1    4   (20 )%    $ 13.9    3   $ 15.4    4   (9 )% 

CSI

     1.2    3     1.0    2   34     2.3    2     1.9    2   17
                                        
   $ 8.6    3   $ 10.1    3   (15 )%    $ 16.2    2   $ 17.3    3   (6 )% 
                                        

During the three- and six-month periods ended April 30, 2010, CVI’s research and development expenditures were 3% of net sales at $7.4 million and $13.9 million, respectively. In the fiscal second quarter of 2009, CVI recorded a $3.0 million in-process research and development charge related to the acquisition of certain distribution rights. Excluding the charge, CVI’s research and development expenditures grew 20% and 13% during the three- and six-month periods ended April 30, 2010, as compared to the prior year periods. CVI’s research and development activities include programs to develop disposable silicone hydrogel products and product lines utilizing PC Technology.

CSI’s research and development expenditures were $1.2 million in the fiscal second quarter of 2010, and as a percentage of net sales increased to 3% from 2% in the fiscal second quarter of 2009 and represented 2% of net sales for the six-month periods ended April 30, 2010 and 2009. CSI’s research and development activities include the upgrade and redesign of many CSI incontinence, assisted reproductive technology and uterine manipulation products and other gynecological and obstetrical product development activities.

Restructuring Costs

The Company initiated the Critical Activity restructuring plan in the fiscal first quarter of 2009, and it was substantially completed in our fiscal fourth quarter of 2009. We reported $0.3 million in the fiscal first half of 2010 compared to $3.6 million in the same period of fiscal 2009, with total restructuring costs for this plan of $4.6 million. The Company entered into the 2009 CooperVision manufacturing restructuring plan in the fiscal third quarter of 2009, with total expense reported of $5.9 million in the fiscal first half of 2010, which primarily includes employee benefit costs and non-cash costs associated with assets. The Company expects to complete restructuring activities in Adelaide, Australia, in our fiscal third quarter of 2010 and expects to complete restructuring activities in Norfolk, Virginia, in our fiscal first quarter of 2011. The Company may, from time to time, decide to pursue additional restructuring activities that involve charges in future periods.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

Operating Income

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010     % Net
Sales
    2009     % Net
Sales
    %
Change
    2010     % Net
Sales
    2009     % Net
Sales
    %
Change
 
     ($ in millions)  

CVI

   $ 34.7      14   $ 35.3      16   (2 )%    $ 67.1      15   $ 67.0      16   —     

CSI

     11.1      24     11.1      26   —          21.2      23     20.4      25   4

Headquarters

     (6.8   —          (5.2   —        (30 )%      (12.3   —          (13.4   —        8
                                            
   $ 39.0      13   $ 41.2      16   (5 )%    $ 76.0      14   $ 74.0      14   3
                                            

Operating income decreased by $2.2 million or 5% and increased $2.0 million or 3% in the three- and six-month periods, respectively, as compared to the prior year periods.

Interest Expense

Interest expense in the fiscal second quarter of 2010 decreased 10% to $9.7 million and to 3% of net sales from 4% in the second quarter of the prior fiscal year. The decrease primarily reflects a reduction in our long-term borrowings used for capital expenditures and lower interest rates.

Other Income (Expense), Net

 

     Three Months Ended
April  30,
   Six Months Ended
April  30,
 
     2010     2009    2010     2009  
     (In millions)  

Gain on extinguishment of debt

   $ —        $ —      $ —        $ 1.8   

Foreign exchange gain (loss)

     0.4        0.3      (1.9     6.8   

Other

     (0.2     —        (0.3     (0.2
                               
   $ 0.2      $ 0.3    $ (2.2   $ 8.4   
                               

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 about $0.2 million of unamortized costs related to the Senior Notes and recorded a gain on the repurchase in other income on our Consolidated Statements of Income. The Company paid the aggregate purchase price from borrowings under its $650.0 million revolving line of credit.

In the fiscal first quarter of 2009, we recognized a foreign exchange net gain of $6.5 million, primarily due to the U.S. dollar strengthening against other currencies and an initiative we completed in the quarter related to intercompany transactions.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations, Continued

 

Provision for Income Taxes

We recorded income tax expense of $2.0 million in the fiscal first half of 2010 compared to $11.6 million in the fiscal first half of 2009. Cooper’s effective tax rate (ETR) (provision for income taxes divided by pretax income) for the fiscal first half of 2010 was 7.5%. GAAP requires that the projected fiscal year ETR, plus any discrete items, be included in the year-to-date results. The ETR used to record the provision for income taxes for the fiscal first half of 2009 was 19.3%. The decrease in the fiscal 2010 ETR reflects the shift in the geographic mix of income as well as litigation settlement charges incurred in the U.S. during the period.

Share-Based Compensation Plans

The Company has several share-based compensation plans that are described in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009. The compensation and related income tax benefit recognized in the Company’s consolidated financial statements for stock options, restricted stock awards and restricted stock units were as follows:

 

     Three Months Ended
April  30,
   Six Months Ended
April  30,
     2010    2009