The Cooper Companies, Inc.
COOPER COMPANIES INC (Form: 10-K, Received: 12/17/2010 16:09:13)
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-K

 

 

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2010

COMMISSION FILE NO. 1-8597

 

 

 

THE COOPER COMPANIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

6140 Stoneridge Mall Road, Suite 590

Pleasanton, California

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

925-460-3600

(Registrant’s telephone number, including area code)

 

 

 

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.10 par value, and

associated rights

  New York Stock Exchange

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

None

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

(Do not check if a smaller reporting company)

 

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

 

On November 30, 2010, there were 45,525,457 shares of the registrant’s common stock held by non-affiliates with aggregate market value of $1.8 billion on April 30, 2010, the last day of the registrant’s most recently completed fiscal second quarter.

 

Number of shares outstanding of the registrant’s common stock, as of November 30, 2010: 45,837,259

 

Documents Incorporated by Reference:

 

Document

  

Part of Form 10-K

Portions of the Proxy Statement for the Annual Meeting

of Stockholders scheduled to be held March 16, 2011

   Part III

 

 


Table of Contents

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Annual Report on Form 10-K

for the Fiscal Year Ended October 31, 2010

 

Table of Contents

 

PART I

     

Item 1.

  

Business

     5   

Item 1A.

  

Risk Factors

     16   

Item 1B.

  

Unresolved Staff Comments

     30   

Item 2.

  

Properties

     31   

Item 3.

  

Legal Proceedings

     32   

Item 4.

  

Submission of Matters to a Vote of Security Holders

     32   

PART II

     

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

     33   

Item 6.

  

Selected Financial Data

     36   

Item 7.

  

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

     37   

Item 7A.

  

Quantitative and Qualitative Disclosure about Market Risk

     57   

Item 8.

  

Financial Statements and Supplementary Data

     59   

Item 9.

  

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

     117   

Item 9A.

  

Controls and Procedures

     117   

Item 9B.

  

Other Information

     118   

PART III

     

Item 10.

  

Directors, Executive Officers and Corporate Governance

     119   

Item 11.

  

Executive Compensation

     119   

Item 12.

  

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

     119   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     119   

Item 14.

  

Principal Accounting Fees and Services

     119   

PART IV

     

Item 15.

  

Exhibits and Financial Statement Schedules

     120   

 

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PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1934 and Section 21E of the Securities Exchange Act of 1934. These include statements relating to plans, prospects, goals, strategies, future actions, events or performance and other statements which are other than statements of historical fact. In addition, all statements regarding anticipated growth in our revenue, 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.

 

 

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

 

 

New competitors or product innovations or technologies from competitors.

 

 

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 or other causes.

 

 

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

 

 

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

 

 

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

 

 

Interest rate and foreign currency exchange rate fluctuations.

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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.

 

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

 

 

Dilution to earnings per share from acquisitions or issuing stock.

 

 

Changes in 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 this Annual Report on Form 10-K for the fiscal year ended October 31, 2010, as such Risk Factors may be updated in quarterly filings.

 

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

 

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Item 1 . Business .

 

The Cooper Companies, Inc. (Cooper or the Company), a Delaware corporation organized in 1980, is a global medical products company that serves the specialty healthcare market through its two business units, CooperVision, Inc. (CVI) and CooperSurgical, Inc. (CSI).

 

CVI develops, manufactures and markets a broad range of contact lenses for the worldwide vision correction market. Dedicated to enhancing the contact lens experience for practitioners and patients, CVI specializes in lenses for astigmatism, presbyopia and ocular dryness. CVI is a leading manufacturer of toric lenses, which correct astigmatism, multifocal lenses for presbyopia (blurring near vision due to advancing age) and spherical lenses that correct the most common visual defects. CVI’s products are primarily manufactured at its facilities located in the United Kingdom, Puerto Rico and New York. CVI distributes products from Rochester, New York, Fareham, United Kingdom, Liege, Belgium, and various smaller international distribution facilities.

 

CSI develops, manufactures and markets medical devices, diagnostic products and surgical instruments and accessories used primarily by gynecologists and obstetricians. CSI’s major manufacturing and distribution facilities are located in Trumbull, Connecticut, Pasadena, California, Stafford, Texas, and Berlin, Germany.

 

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

 

COOPERVISION

 

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

 

 

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

 

 

Toric and multifocal lenses including lenses that address more complex visual defects such as astigmatism and presbyopia in addition to correcting near- and farsightedness.

 

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

 

CVI offers spherical, aspherical, toric, multifocal and toric multifocal lens products in all primary modalities. We believe that in order to compete successfully in the numerous niches of the contact lens market, companies must offer differentiated products that are priced competitively and manufactured efficiently. CVI believes that it is the only contact lens manufacturer to use three different manufacturing processes to produce its lenses: lathing, cast molding and FIPS™, a cost-effective combination of lathing and molding. This manufacturing flexibility allows us to compete in our markets by:

 

 

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

 

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

 

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

 

The contact lens market has in recent years experienced a shift toward contact lenses made from silicone hydrogel materials. Silicone hydrogel materials supply a higher level of oxygen to the cornea, as measured by the transmissibility of oxygen through a given thickness of material, or “dk/t,” than traditional hydrogel lenses. The use of these materials in contact lenses has grown significantly, and this material is a major product material in the industry. CVI has launched the third generation of silicone hydrogel spherical contact lens products under our brands Biofinity ® and Avaira ® in the United States, Europe and Asia Pacific, excluding Japan. We also launched a monthly silicone hydrogel toric lens under the Biofinity brand in fiscal 2009. In fiscal 2010, we launched two silicone hydrogel lenses: the Biofinity multifocal lens and the Avaira toric lens.

 

In addition to its silicone hydrogel and PC Technology™ product offerings, CVI competes in the contact lens market with its single-use products and with traditional hydrogel products.

 

Contact Lens Product Sales

 

Spheres: Net Sales of CVI’s spherical lenses, representing 61 percent of CVI’s soft lens net sales, grew 9 percent in the year ended October 31, 2010, as compared to fiscal 2009. Single-use sphere net sales, which grew 12 percent, represented 22 percent of CVI’s soft lens net sales.

 

Toric and Multifocal: CVI’s toric lens net sales grew 13 percent in fiscal 2010, representing 31 percent of CVI’s soft lens net sales as compared to fiscal 2009. Multifocal lens sales grew only 1 percent in fiscal 2010. This was primarily due to a trend in the market toward silicone hydrogel multifocal lenses and CVI’s late entry with Biofinity multifocal, our silicone hydrogel offering.

 

Proclear: Net sales of CVI’s PC Technology products – which consist of spherical, toric and multifocal products, including Biomedics ® XC and Proclear 1 Day – increased 9 percent in fiscal 2010 as compared to fiscal 2009 and represented 29 percent of CVI’s soft lens net sales. Proclear 1 Day, CVI’s Proclear single-use offering, grew 58 percent from fiscal 2009.

 

Silicone Hydrogel: CVI’s silicone hydrogel spherical, toric and multifocal lens products grew 108 percent in fiscal 2010 as compared to fiscal 2009 and represented 24 percent of CVI’s soft lens net sales as compared to 12 percent in fiscal 2009.

 

Contact Lens Product Sales by Geographic Region

 

Based on our knowledge of the contact lens market and our review of independent market data, we estimate the worldwide market for contact lenses by modality is 34 percent single-use, 36 percent

 

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two-week and 30 percent monthly. We estimate that the Americas market, representing about 38 percent of the worldwide soft contact lens market, by modality is 13 percent single-use, 58 percent two-week and 29 percent monthly; EMEA, representing about 31 percent of the worldwide market, is 38 percent single-use, 12 percent two-week and 50 percent monthly; and Asia Pacific, representing about 31 percent of the worldwide market, is 55 percent single-use, 33 percent two-week and 12 percent monthly.

 

CVI Competition

 

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

 

Recent trends in marketing spherical lenses include a shift toward silicone hydrogel lenses, primarily in the United States, Europe and Japan, and toward single-use lenses. CVI’s primary competitors currently control the majority of the silicone hydrogel segment of the market. CVI was late in entering the silicone hydrogel segment of the market but has increased sales of its monthly and two-week toric and spherical lens offerings as well as the recently introduced monthly multifocal lens. In Japan, CVI has recently received regulatory approval to sell a silicone hydrogel product.

 

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

 

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

 

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

 

COOPERSURGICAL

 

Since its beginning in 1990, CSI has sought to be a leader in providing medical device products to the obstetrics and gynecology medical specialty. Historically, many small medical device companies have supplied the women’s healthcare market with a wide range of products through a fragmented distribution system. CSI’s strategy continues to be to identify and acquire selected companies and product lines that will improve its existing market position or serve new clinical areas. CSI has grown to $188.0 million in net sales both organically and through a series of more than 25 acquisitions.

 

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Market for Women’s Healthcare

 

CSI participates in the market for women’s healthcare with its diversified product lines of over 600 products. These products are in three major categories: ob/gyn medical offices, surgical procedures, including hospitals, clinics and surgical centers, and fertility.

 

Based on United States Census estimates, CSI expects patient visits to United States obstetricians and gynecologists (ob/gyns) to increase over the next decade. Driving this growth is an increasing base of reproductive age women, a large and stable middle-aged population and a rapidly growing population of women over the age of 65. CSI believes that the resurgence of population growth in the reproductive age group will result in increased office visits related to birth control and childbearing. CSI expects growth in fertility treatments as more women choose to delay childbearing to the mid-thirties and beyond. Office visit activity related to menopausal problems, including abnormal bleeding, incontinence and osteoporosis, are also expected to increase slightly over the next decade. CSI believes that in the past clinicians primarily saw women only during their reproductive years. Now, with new treatment options available and a more educated population, CSI expects the relationship between the patient and clinician will continue into the middle years and later.

 

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

 

Some significant features of this market are:

 

 

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

 

 

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

 

 

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

 

 

Sterilization is a frequently performed surgical procedure.

 

 

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

 

 

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

 

CSI’s Fiscal 2010 Net Sales Growth

 

During fiscal 2010, CSI’s net sales grew 10 percent to $188.0 million from $170.9 million in fiscal 2009, representing 16 percent of Cooper’s net sales in both periods. CSI’s organic growth was 6 percent. Sales of products used in surgical procedures grew 18 percent and represented 33 percent of CSI’s total net sales as compared to 31 percent in fiscal 2009.

 

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CSI Competition

 

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

 

Competitive factors in these segments include technological and scientific advances, product quality, price, customer service and effective communication of product information to physicians and hospitals. CSI competes based on its sales and marketing expertise and the technological advantages of its products. CSI’s strategy includes developing and acquiring new products, including those used in new medical procedures. As CSI expands its product line, it also offers training for medical professionals in the appropriate use of its products.

 

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

 

RESEARCH AND DEVELOPMENT

 

Cooper employs 164 people in its research and development and manufacturing engineering departments. Most of these employees are in CVI. CVI product development and clinical research is supported by internal and external specialists in lens design, formulation science, polymer chemistry, clinical trials, microbiology and biochemistry. CVI’s research and development activities include programs to develop silicone hydrogel products, product lines utilizing PC Technology and expansion of single-use product lines.

 

CSI conducts research and development in-house and also has consulting agreements with external surgical specialists. CSI’s fiscal 2010 research and development activities were for the upgrade and redesign of existing incontinence, assisted reproductive technology and uterine manipulation products.

 

Cooper-sponsored research and development expenditures during fiscal 2010, 2009 and 2008 were $35.3 million, $30.3 million and $35.5 million, respectively, net of acquired in-process research and development of $3.0 million in 2009. Net research and development expenditures represented 3 percent of net sales each fiscal year. During fiscal 2010, CVI represented 85 percent and CSI represented 15 percent of the total research and development expenses. We did not participate in any customer-sponsored research and development programs.

 

GOVERNMENT REGULATION

 

Medical Device Regulation

 

Our products are medical devices subject to extensive regulation by the United States Food and Drug Administration (FDA) in the United States and other regulatory bodies abroad. FDA regulations govern, among other things, medical device design and development, testing, manufacturing, labeling, storage,

 

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recordkeeping, premarket clearance or approval, advertising and promotion, and sales and distribution. Unless an exemption applies, each medical device we wish to distribute commercially in the United States will require either prior 510(k) clearance or prior premarket approval (PMA) from the FDA. A majority of the medical devices we currently market have received FDA clearance through the 510(k) process or approval through the PMA process. Because we cannot be assured that any new products we develop, or any product enhancements, will be subject to the shorter 510(k) clearance process, significant delays in the introduction of any new products or product enhancements may occur.

 

Device Classification

 

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

 

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

 

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

 

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

 

510(k) Clearance Pathway

 

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

 

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After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that changes its intended use, will require a new 510(k) clearance or could require premarket approval. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination that a new clearance or approval is not required for a particular modification, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. In these circumstances, a manufacturer also may be subject to significant regulatory fines or penalties. We have made and plan to continue to make additional product enhancements and modifications to our devices that we believe do not require new 510(k) clearances.

 

Premarket Approval Pathway

 

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

 

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

 

Clinical Trials

 

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

 

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Continuing FDA Regulation

 

After a device is placed on the market, numerous regulatory requirements apply. These include: the QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations.

 

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

 

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

 

Foreign Regulation

 

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

 

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

 

In addition to FDA regulatory requirements, the Company also maintains ISO 13485 certification and CE mark approvals for its products. A CE mark is an international symbol of adherence to certain standards and compliance with applicable European medical device requirements. These quality programs and approvals are required by the European Medical Device Directive and must be maintained for all products intended to be sold in the European market. The ISO 13485 Quality

 

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Measurement System registration is now also required for registration of products in Asia Pacific and Latin American countries. In order to maintain these quality benchmarks, the Company is subjected to rigorous biannual reassessment audits of its quality systems and procedures.

 

Other Health Care Regulation

 

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

 

RAW MATERIALS

 

CVI’s raw materials primarily consist of various chemicals and packaging materials and are generally available from more than one source. However, CVI relies on sole suppliers for certain raw materials used to make our silicone hydrogel contact lens products. On December 1, 2010, CVI purchased certain assets of Asahikasei Aime Co., Ltd. (Aime), our current sole supplier of the primary material used to make our silicone hydrogel contact lens products, from Asahi Kasei Pharma Corporation. While this acquisition has increased CVI’s control over the sourcing of certain raw materials, if current raw material suppliers fail to supply sufficient materials on a timely basis or at all for any reason, we may suffer a disruption in the supply of our silicone hydrogel contact lens products.

 

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

 

MARKETING AND DISTRIBUTION

 

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

 

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

 

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PATENTS, TRADEMARKS AND LICENSING AGREEMENTS

 

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

 

No individual patent or license is material to the Company or either of its principal business units other than:

 

 

Our license related to products manufactured by CVI using the proprietary PC Technology™ patents that we received in connection with the Company’s acquisition of Biocompatibles Eye Care, Inc. Our Proclear ® Compatibles brand of spherical, multifocal and toric soft contact lenses are manufactured using this PC Technology™. This license term extends until the patents expire in 2011.

 

 

Our License Agreement effective as of November 19, 2007, between CooperVision and CIBA Vision AG and CIBA Vision Corporation. This license relates to patents covering CVI’s silicone hydrogel contact lens products, Biofinity ® and Avaira ® . This license extends until the patents expire in 2014 in the United States and in 2016 outside of the United States.

 

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

 

DEPENDENCE ON CUSTOMERS

 

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

 

GOVERNMENT CONTRACTS

 

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

 

BACKLOG

 

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

 

SEASONALITY

 

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

 

COMPLIANCE WITH ENVIRONMENTAL LAWS

 

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

 

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

 

The information required by this item is included in Note 14. Business Segment Information of our Financial Statements and Supplementary Data and Item 1A. Risk Factors – Risks Relating to Our Business, included in this report.

 

EMPLOYEES

 

On October 31, 2010, the Company had about 6,800 employees. The Company believes that its relations with its employees are good.

 

NEW YORK STOCK EXCHANGE CERTIFICATION

 

We submitted our 2010 annual Section 12(a) CEO certification with the New York Stock Exchange. The certification was not qualified in any respect. Additionally, we filed with the Securities and Exchange Commission as exhibits to this Annual Report on Form 10-K for the year ended October 31, 2010, the CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.

 

AVAILABLE INFORMATION

 

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

 

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Item 1A. Risk Factors.

 

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

 

Risks Relating to Our Business

 

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

 

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

 

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

 

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

 

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

 

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

 

We have a history of acquiring businesses and products that have significantly contributed to our growth in recent years. As part of our growth strategy, particularly at CSI, we intend to continue to consider acquiring complementary technologies, products and businesses. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and an increase in amortization and/or write-offs of goodwill and other intangible assets, which could have a material adverse effect upon our business, financial condition and results of operations. Risks we could face with respect to acquisitions include:

 

 

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

 

 

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

 

 

potential loss of employees;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

a dilution of earnings per share; and

 

 

risks inherent in accounting allocations.

 

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

 

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

 

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

 

Certain of our proposed products have not yet been clinically tested or commercially introduced, and we cannot assure that any of them, assuming they receive necessary regulatory approvals, will achieve market acceptance or generate operating profits. In addition, we have been slower to introduce new silicone hydrogel contact lens products than our competitors which put these products at a competitive disadvantage. Market acceptance and customer demand for these products are uncertain. The development of a market for our products may be influenced by many factors, some of which are out of our control, including:

 

 

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

 

 

the cost competitiveness of our products;

 

 

consumer reluctance to try and use a new product;

 

 

regulatory requirements;

 

 

adequate coverage and reimbursement by third party payors;

 

 

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

 

 

the emergence of newer and more competitive products.

 

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

 

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

 

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

 

A significant portion of our current operations for CVI are conducted and located outside the United States, and our growth strategy involves expanding our existing foreign operations and entering into new foreign jurisdictions. We have significant manufacturing and distribution sites in North America and Europe. Approximately two-thirds of our net sales for CVI for the fiscal years ended October 31, 2010 and 2009, respectively, were derived from the sale of products outside the United States. We believe that sales outside the United States will continue to account for a material portion of our total net sales for the foreseeable future. International operations and business expansion plans are subject to numerous additional risks, including:

 

 

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

 

 

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

 

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

 

 

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

 

 

we may find it difficult to comply with a variety of foreign regulatory requirements;

 

 

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

 

 

fluctuations in currency exchange rates could adversely affect our results;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

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

 

In the United States and globally, market and economic conditions have been unprecedented over the past few years and challenging with tighter credit conditions and slower economic growth. The U.S. economy has experienced a recession and faces continued concerns about the systemic impacts of adverse economic conditions such as high energy costs, geopolitical issues, the availability and cost of credit, and an unstable real estate market. Foreign countries are affected by similar systemic impacts. We continue to experience slower than historical growth in contact lens sales, particularly in the U.S. and continue to have lower than historical expectations for market growth in 2011.

 

As a result of these market conditions, the cost and availability of credit has been and may again be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the United States and international market and economic conditions may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers. If these market conditions return, they may limit our ability, and the ability of our customers, to replace maturing liabilities and to access the capital markets to meet liquidity needs, which could have a material adverse effect on our financial condition and results of operations.

 

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

 

We manufacture a significant portion of the medical device products we sell. Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events), enforcement action by the FDA or other regulatory body if we are found to be in non-compliance with current Good Manufacturing Practices (cGMP) or other reasons, could have a material adverse effect on our business, financial condition and results of operations. In addition, materials such as silicone hydrogel require improvements to our manufacturing processes to make them cost effective. While we have improved our manufacturing capabilities for our silicone hydrogel products, our failure to continue to develop improvements to our manufacturing processes and reduce our cost of goods could significantly impact our ability to compete.

 

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

 

CVI distributes products out of Rochester, New York, the United Kingdom, Belgium and various smaller international distribution facilities. CSI’s products are primarily distributed out of its facility in Trumbull, Connecticut. Any prolonged disruption in the operations of our existing distribution facilities, whether due to technical or labor difficulties, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events) or other reasons, could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

be expensive and time consuming to prosecute or defend;

 

 

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

 

 

divert management’s attention and resources; or

 

 

require us to license our intellectual property.

 

We have applied for patent protection in the United States and other foreign jurisdictions relating to certain existing and proposed processes and products. We cannot assure that any of our patent applications will be approved. Patent applications in the United States and other foreign jurisdictions are maintained in secrecy for a period of time, which may last until patents are issued, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we will be the first creator of inventions covered by any patent application we make or the first to file patent applications on such inventions. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. We also cannot assure that we will have adequate resources to enforce our patents.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

be expensive and time consuming to defend;

 

 

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

 

 

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

 

 

divert management’s attention and resources; or

 

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

 

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

 

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

 

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

 

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

 

We face risks related to environmental matters.

 

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

 

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

 

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

 

Our indebtedness could:

 

 

increase our vulnerability to general adverse economic and industry conditions;

 

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

 

 

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

 

 

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

 

 

limit our ability to borrow additional funds; and

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations of those laws. In addition, the Internal Revenue Service (IRS) has been auditing the Company’s income tax returns for the years 2005 – 2007, and we are also subject to the examination of our income tax returns by other tax authorities. The outcome of these examinations could have a material adverse effect on our operating results and financial condition.

 

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

 

We operate globally and changes in tax laws could adversely affect our results. We have overseas manufacturing, administrative and sales offices and generate substantial revenues and profits in foreign jurisdictions. Recently, a number of countries, including the United States, have proposed changes to their tax laws, some of which affect taxation of earnings recognized in foreign jurisdictions. Such changes in tax laws or their interpretation, if adopted, could adversely affect our effective tax rates and our results. The recently enacted Health Care and Education Reconciliation Act of 2010 imposes a new excise tax on medical device companies starting with U.S. domestic sales made after December 31, 2012. While CVI is not affected, CSI will likely be affected by this new tax. We cannot at this time anticipate the magnitude of this new tax that would be imposed on us as there are significant uncertainties concerning key definitions and terms within the law.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our medical devices require clearance or approval by the FDA before they can be commercially distributed in the United States and may require similar approvals by foreign regulatory agencies before distribution in foreign jurisdictions. Medical devices may only be marketed for the indications for which they are approved or cleared. The process of obtaining regulatory clearances and approvals to market a medical device, particularly from the FDA, can be costly and time consuming. There can be no assurance that such clearances and approvals will be granted on a timely basis, if at all, or that significant delays in the introduction of any new products or product enhancements will not occur, which could adversely affect our competitive position and results of operations. In addition, the FDA may change its policies, adopt additional regulations or revise existing regulations, each of which could prevent or delay premarket approval or clearance of our products or could impact our ability to market our currently approved or cleared products.

 

Modifications and enhancements to a medical device also require a new FDA clearance or approval if they could significantly affect its safety or effectiveness or would constitute a major change in its intended use, design or manufacture. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. We have made modifications and enhancements to our medical devices that we do not believe require a new clearance

 

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or application, but we cannot confirm that the FDA will agree with our decisions. If the FDA requires us to seek clearance or approval for modification of a previously cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties, which could have a material adverse effect on our financial results and competitive position. We also cannot assure that we will be successful in obtaining clearances or approvals for our modifications, if required.

 

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

 

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

 

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

 

In the European Economic Area, a medical device can only be placed on the market if it is in conformity with the essential requirements set out in the European Directives and implementing regulations that govern medical devices. These Directives prescribe quality programs and standards which must be maintained in order to achieve required ISO certification and to approve the use of CE marking. In order to maintain ISO certification and CE marking quality benchmarks, firms’ quality systems and procedures are subjected to rigorous periodic inspections and reassessment audits.

 

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

 

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

 

After a device is placed on the market, numerous regulatory requirements apply, including the FDA’s QSR regulations, which require manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and medical device reporting regulations that require us to report to FDA or similar governmental bodies in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental bodies in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design

 

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or manufacture. A government mandated or voluntary recall by us could occur as a result of manufacturing or labeling errors or design defects. Any voluntary or government mandated recall may divert management attention and financial resources and harm our reputation with customers. Any recall involving one of our products could also harm the reputation of the product and the Company and would be particularly harmful to our business and financial results.

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Other federal legislation affects the manner in which we use and disclose health information. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, mandates, among other things, the adoption of standards for the electronic exchange of health information that may require significant and costly changes to current practices. The United States Department of Health and Human Services (HHS) has released several rules mandating the use of specified standards with respect to certain healthcare transactions and health information. The electronic transactions rule requires the use of uniform standards for common healthcare transactions, including healthcare claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits. The privacy rule imposes standards governing the use and disclosure of individually identifiable health information. The security rule released by HHS establishes minimum standards for the security of electronic health information, and requires the adoption of administrative, physical and technical safeguards.

 

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

 

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

 

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failure to comply with certain privacy and security requirements. The costs of complying with these contractual obligations and new legal and regulatory requirements, and the potential liability associated with failure to do so could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

We may be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws, physician self-referral laws and false claims laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE. Similarly, if the physicians or other providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could indirectly have a negative impact on our business, financial condition and results of operations. While we believe that our operations are in material compliance with such laws, because of the complex and far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws. Indeed, recent changes in state laws and model codes of ethics have already required us to alter certain of our compliance efforts. For example, in April of 2009, Massachusetts issued regulations governing the conduct of pharmaceutical and medical device manufacturers with respect to healthcare practitioners. This regulation became effective on July 1, 2009 and sets forth what medical device manufacturers may and may not permissibly do with respect to providing meals, sponsoring continuing medical education and otherwise providing payments or items of economic benefit to healthcare practitioners located within the state. Additionally, the regulation requires medical device manufacturers to have in place robust fraud and abuse compliance programs. Other states (e.g., California, Vermont and Nevada) have adopted similar laws. The Advanced Medical Technology Association (AdvaMed), a trade association representing the interests of medical device manufacturers, has also recently released a revised code of ethics outlining permissible interactions with health care professionals. This code became effective July 1, 2009. These laws, regulations and guidance documents act to limit our marketing practices, require the dedication of resources to ensure compliance, and expose us to additional liabilities.

 

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

 

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

 

Item 1B. Unresolved Staff Comments .

 

None.

 

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Item 2. Properties.

 

The following is a summary of Cooper’s principal facilities as of October 31, 2010. Cooper generally leases its office and operations facilities but owns several manufacturing and research and development facilities, including 205,850 square feet in Hamble, United Kingdom, 49,500 square feet in Scottsville, New York, and 33,630 square feet in Stafford, Texas. Our lease agreements expire at various dates through the year 2030. The Company believes its properties are suitable and adequate for its businesses.

 

Location

   Approximate
Square Feet
    

Operations

AMERICAS

     

United States

     

California

     89,192      

Executive offices; CVI research & development and

CVI administrative offices; CSI manufacturing and distribution

New York

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

Connecticut

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

Texas

     33,630       CSI Manufacturing

Puerto Rico

     

Juana Diaz

     311,374       CVI manufacturing and distribution

Canada

     

Ontario

     10,962       CVI marketing

Brazil

     

Sao Paulo

     6,632       CVI marketing and distribution

EUROPE

     

United Kingdom

     

Hampshire

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

Belgium

     

Liege

     70,200       CVI distribution

Germany

     

Berlin

     12,916       CSI manufacturing and distribution

Frankfurt

     9,964       CVI marketing and distribution

Italy

     

Milan

     29,150       CVI marketing and distribution

France

     

Nice

     12,184       CVI marketing and distribution

Spain

     

Madrid

     36,618       CVI marketing and distribution

ASIA PACIFIC

     

Japan

     

Tokyo

     51,292       CVI marketing, distribution and administrative offices

Australia

     

Adelaide

     36,351       CVI manufacturing, distribution and administrative offices

Other Pacific Rim

     30,201       CVI marketing and distribution

 

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Item 3. Legal Proceedings.

 

In re Cooper Companies, Inc. Securities Litigation

 

A consolidated securities class action lawsuit titled In re Cooper Companies, Inc. Securities Litigation is pending 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 Gregory A. Fryling, CooperVision’s former President and Chief Operating Officer.

 

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 Court granted preliminary approval of the proposed settlement on August 16, 2010, and final approval on December 13, 2010. The Company has exhausted its insurance coverage in defense of this litigation, and if the settlement were to be overturned as a result of an appeal, general and administrative expenses will increase.

 

In re Cooper Companies, Inc. Derivative Litigation

 

The Company is a nominal defendant in shareholder derivative litigation against several current and former officers and directors of the Company. Four actions filed in the United States District Court for the Central District of California have been consolidated under the heading In re Cooper Companies, Inc. Derivative Litigation , Case No. 8:06-CV-00300-CJC-RNB, and three actions filed in the Superior Court for the State of California for the County of Alameda have been consolidated under the heading In re Cooper Companies, Inc. Shareholder Derivative Litigation , Case No. RG06260748. 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. On December 6, 2010, the Company reached an agreement in principle to settle the consolidated derivative actions, which is subject to court approval. If the settlement is approved by the Court, the Company will implement and/or maintain certain corporate governance measures and pay attorneys fees of counsel to the plaintiffs approved by the Court in an amount not to exceed $750 thousand. The Court is expected to consider a motion for preliminary approval of the proposed settlement in fiscal 2011, at which time it is expected to set a hearing date for final approval of the proposed settlement.

 

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

 

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

 

During the fourth quarter of fiscal 2010, the Company did not submit any matters to a vote of the Company’s security holders.

 

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PART II

 

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

 

Our common stock, par value $0.10 per share, is traded on the New York Stock Exchange under the symbol “COO.” In the table that follows, we indicate the high and low selling prices of our common stock for each three-month period of 2010 and 2009:

 

Quarterly Common Stock Price Range

Years Ended October 31,

   2010      2009  
   High      Low      High      Low  

Fiscal Quarter Ended

           

January 31

   $ 38.99       $ 28.12       $ 21.00       $ 10.17   

April 30

   $ 41.55       $ 34.85       $ 30.52       $ 17.58   

July 31

   $ 41.83       $ 34.28       $ 31.40       $ 23.84   

October 31

   $ 51.32       $ 39.00       $ 31.43       $ 23.55   

 

At November 30, 2010, there were 808 common stockholders of record.

 

Dividend Policy

 

Our current policy is to pay annual cash dividends on our common stock of $0.06 per share, in two semiannual payments of $0.03 per share each. In dollar terms, we paid cash for dividends of about $2.7 million in 2010 and $2.7 million in 2009. Dividends are paid when, as and if declared at the discretion of our board of directors from funds legally available for that purpose. Our board of directors periodically reviews our dividend policy and considers the Company’s earnings, financial condition, liquidity needs, business plans and opportunities and other factors in making and setting dividend policy.

 

Performance Graph

 

The following graph compares the cumulative total return on the Company’s common stock with the cumulative total return of the Standard & Poor’s Smallcap 600 Stock Index (which includes the Company) and the Standard & Poor’s Health Care Equipment Index for the five-year period ended October 31, 2010. The graph assumes that the value of the investment in the Company and in each index was $100 on October 31, 2005, and assumes that all dividends were reinvested.

 

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LOGO

 

* $100 invested on 10/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending October 31.

 

  

Copyright © 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 

       10/05      10/06      10/07      10/08      10/09      10/10  

The Cooper Companies, Inc.

   $ 100.00       $ 83.82       $ 61.16       $ 24.04       $ 40.96       $ 72.27   

S&P Smallcap 600

   $ 100.00       $ 116.10       $ 129.51       $ 87.49       $ 92.35       $ 116.62   

S&P Health Care Equipment

   $ 100.00       $ 101.96       $ 112.42       $ 96.97       $ 92.63       $ 96.34   

 

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Equity Compensation Plan Information

 

Plan Category

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

(C)
 

Equity compensation plans approved by shareholders (2)

     5,843,436       $ 44.27         1,405,560   

Equity compensation plans not approved by shareholders

                       
                          

Total

     5,843,436       $ 44.27         1,405,560   
                          

 

(1)

The amount of total securities to be issued under Company equity plans shown in Column A includes 329,258 Restricted Stock Units granted pursuant to the Company’s equity plans. These awards allow for the distribution of shares to the grant recipient upon the completion of time-based holding periods and do not have an associated exercise price. Accordingly, these awards are not reflected in the weighted-average exercise price disclosed in Column B. Amounts in Column A do not reflect performance share awards without a final payout.

 

(2)

Includes information with respect to the Amended and Restated 2007 Long-Term Incentive Plan for Employees of the Cooper Companies, Inc. (“2007 Plan”), which was approved by stockholders on March 18, 2009, and provides for the issuance of up to 3,700,000 shares of Common Stock, and the Amended and Restated 2006 Long Term Incentive Plan for Non-Employee Directors of the Cooper Companies, Inc. (the “Directors’ Plan”), which was approved by stockholders on March 18, 2009 and provides for the issuance of up to 650,000 shares of Common Stock.

 

As of October 31, 2010, up to 1,289,194 shares of Common Stock may be issued pursuant to the 2007 Plan and 116,366 shares of Common Stock may be issued pursuant to the 2006 Directors’ Plan. Also includes information with respect to the 1998 Long-Term Incentive Plan (“1998 Plan”), the 1996 Long Term Incentive Plan for Non-Employee Directors and the Second Amended and Restated 2001 Long Term Incentive Plan (“2001 Plan”) of the Cooper Companies, Inc., which were originally approved by stockholders on March 21, 1996 and March 28, 2001. The 1998 Plan, 1996 Director Plan and 2001 Plan have all expired by their terms, but up to 3,196,058 shares of Common Stock may be issued pursuant to awards that remain outstanding under these plans.

 

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Item 6. Selected Financial Data.

 

Five Year Financial Highlights

 

Years Ended October 31,

(In thousands, except per share amounts)

   2010      2009      2008 (1)
(As Adjusted)
     2007 (1)
(As Adjusted)
    2006 (1)
(As Adjusted)
 
             

Consolidated Operations

             

Net sales

   $ 1,158,517       $ 1,080,421       $ 1,047,375       $ 945,240      $ 858,960   
                                           

Gross profit

   $ 676,723       $ 596,494       $ 610,030       $ 519,531      $ 525,977   
                                           

Income (loss) before income taxes

   $ 124,426       $ 114,828       $ 73,962       $ (2,543   $ 70,298   

Provision for income taxes

     11,623         14,280         10,006         10,826        5,891   
                                           

Net income (loss)

     112,803         100,548         63,956         (13,369     64,407   

Add interest charge applicable to convertible debt, net of tax

                                    3,917   
                                           

Income (loss) for calculating diluted earnings per share

   $ 112,803       $ 100,548       $ 63,956       $ (13,369   $ 68,324   
                                           

Diluted earnings (loss) per share

   $ 2.43       $ 2.21       $ 1.42       $ (0.30   $ 1.44   
                                           

Diluted shares excluding shares applicable to convertible debt

     46,505         45,478         45,117         44,707        44,979   

Shares applicable to convertible debt

                                    2,590   
                                           

Average number of shares used to compute diluted earnings per share

     46,505         45,478         45,117         44,707        47,569   
                                           

Dividends paid per share

   $ 0.06       $ 0.06       $ 0.06       $ 0.06      $ 0.06   
                                           

Consolidated Financial Position

             

Current assets

   $ 491,340       $ 503,878       $ 526,032       $ 519,767      $ 460,165   

Property, plant and equipment, net

     593,887         602,568         602,654         604,530        496,357   

Goodwill

     1,261,976         1,257,029         1,251,699         1,289,584        1,241,807   

Other intangible assets, net

     114,177         114,700         130,587         145,833        147,160   

Other assets

     63,638         73,732         76,644         38,700        37,294   
                                           
   $ 2,525,018       $ 2,551,907       $ 2,587,616       $ 2,598,414      $ 2,382,783   
                                           

Short-term debt

   $ 19,159       $ 9,844       $ 43,013       $ 46,514      $ 61,366   

Other current liabilities

     180,361         165,570         212,394         240,691        216,302   

Long-term debt

     591,977         771,630         861,781         830,116        681,286   

Other liabilities

     66,745         64,521         53,352         20,086        16,901   
                                           

Total liabilities

     858,242         1,011,565         1,170,540         1,137,407        975,855   

Stockholders’ equity

     1,666,776         1,540,342         1,417,076         1,461,007        1,406,928   
                                           
   $ 2,525,018       $ 2,551,907       $ 2,587,616       $ 2,598,414      $ 2,382,783   
                                           

 

(1)

Adjusted as a result of the retrospective adoption of FSP APB 14-1.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

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

 

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

 

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

 

RESULTS OF OPERATIONS

 

We discuss below the results of our operations for fiscal 2010 compared with fiscal 2009 and the results of our operations for fiscal 2009 compared with fiscal 2008. Certain prior period amounts have been reclassified to conform to the current period’s presentation. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.”

 

Outlook

 

Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and women’s healthcare markets. However, recent events affecting the economy as a whole, including the uncertainty and instability of global markets driven by employment, housing and credit concerns continue to represent a risk to our forecasted performance for fiscal year 2011and beyond.

 

We compete in the worldwide contact lens market with our spherical, toric and multifocal contact lenses offered in a variety of materials including using phosphorylcholine (PC) Technology™ and silicone hydrogel Aquaform ® technology. We believe that there will be lower contact lens wearer dropout rates as technology improves thereby enhancing the wearing experience through a combination of improved designs and materials. CooperVision is focused on greater worldwide market penetration as we roll out new products and continue to expand our presence in existing and emerging markets as well as the growth of preferred modalities such as single-use and monthly wearing options.

 

Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. In the past three years, CooperVision launched monthly silicone hydrogel sphere, toric and multifocal lens products under our Biofinity ® brand and two-week silicone hydrogel sphere and toric lens 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. For example, competitive silicone hydrogel single-use and multifocal lens products are making substantial gains in market share and represent a risk to our business. We have limited manufacturing capacity for our silicone hydrogel multifocal product and have not yet marketed a silicone hydrogel single-use product. Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our projected future levels of sales growth and profitability.

 

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

 

The medical device segment of the women’s healthcare market is highly fragmented. CooperSurgical competes based on brand awareness and market focused product offerings, with a strategy that includes identifying and acquiring selected companies and product lines that improve its existing market

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

position or serve new clinical areas. During fiscal 2010, CooperSurgical 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. The therapy was designed for in-office use, requires minimal anesthesia and has high patient satisfaction. CooperSurgical also acquired a smoke evacuation system for use during laparoscopic procedures performed in an operating room environment. This system is marketed directly to hospitals. We intend to continue to invest in CooperSurgical’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. In connection with the normal management of our financial liabilities, we intend to renegotiate our syndicated Senior Unsecured Revolving Line of Credit that matures on January 31, 2012, and may retire or purchase our Senior Notes through open market cash purchases, privately negotiated transactions or otherwise. Such repurchases will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

2010 Compared with 2009

 

Highlights: 2010 vs. 2009

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

Selected Statistical Information – Percentage of Net Sales and Growth

 

Years Ended October 31,

   2010      % Change      2009      % Change     2008  

Net sales

     100%         7%         100%         3%        100%   

Cost of sales

     42%                 45%         11%        42%   
                               

Gross profit

     58%         13%         55%         (2%     58%   

Selling, general and administrative expense

     37%         11%         36%         (9%     41%   

Research and development expense

     3%         6%         3%         (6%     3%   

Amortization of intangibles

     2%         1%         2%         6%        2%   
                               

Operating income

     16%         27%         14%         18%        12%   
                               

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

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.

 

 

CooperVision (CVI) develops, manufactures and markets a broad range of contact lenses for the worldwide vision correction market. Dedicated to enhancing the contact lens experience for practitioners and patients, CooperVision specializes in lenses for astigmatism, presbyopia and ocular dryness.

 

 

CooperSurgical (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 $78.1 million in 2010 and $33.1 million in 2009.

 

Net Sales Growth

 

($ in millions)

   2010 vs. 2009      2009 vs. 2008  

Business unit

           

CVI

   $ 61.0         7%       $ 30.5         3%   

CSI

   $ 17.1         10%       $ 2.6         2%   

 

CVI Net Sales

 

The contact lens market has two major product categories:

 

 

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

 

 

Toric and multifocal lenses including lenses that, in addition to correcting near- and farsightedness, address more complex visual defects such as astigmatism and presbyopia by adding optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea.

 

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

 

The market for conventional lenses that are replaced annually has shifted 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. Significantly, the market for commodity spherical lenses has shifted to value-added spherical lenses to alleviate dry eye symptoms as well as lenses with aspherical optical properties or higher oxygen permeable lenses such as silicone hydrogels.

 

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

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

CVI markets silicone hydrogel spherical, toric and multifocal lens products under our Biofinity and Avaira brands that are manufactured using proprietary Aquaform ® technology to increase oxygen transmissibility for longer wear. We believe that it is important to develop a full range of multifocal and single-use silicone hydrogel products due to increased pressure from silicone hydrogel products offered by our major competitors.

 

In fiscal 2010, CVI introduced the following products:

 

 

Avaira Toric

 

 

Biofinity Multifocal

 

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

 

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

 

CVI Net Sales by Region

 

($ in millions)

   2010      2009      Growth  

Americas

   $ 432.8       $ 392.8         10%   

EMEA

     351.8         345.1         2%   

Asia Pacific

     185.9         171.6         8%   
                    
   $ 970.5       $ 909.5         7%   
                    

 

CVI’s worldwide net sales grew 7% in the period-to-period comparison. Americas net sales grew 10%, primarily due to market gains of CVI’s silicone hydrogel spherical and toric lenses, up 104% in the period, and single-use lenses, up 35%. In our fiscal first quarter of 2010, we recorded $10.1 million of reductions to Americas net sales due to out-of-period adjustments to increase accruals for rebates that were under-accrued in fiscal 2009. EMEA net sales grew 2% in the period driven by increases in sales of silicone hydrogel lenses, up 115% and Proclear 1 Day lenses, up 28%. Net sales to the Asia Pacific region grew 8%, primarily due to sales growth of single-use spherical and toric products, up 9% and silicone hydrogel lenses, up 98%.

 

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

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

CSI Net Sales

 

CSI’s net sales increased 10% in the period-to-period comparison to $188.0 million with organic net sales growth of 6%. Sales of products used in surgical procedures grew 18% and now represent 33% of CSI’s sales compared to 31% in the prior year. Women’s healthcare products used primarily by obstetricians and gynecologists generate 97% of CSI’s sales. The balance consists of 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.

 

2009 Compared with 2008

 

Highlights: 2009 vs. 2008

 

 

Net sales up 3% to $1.08 billion from $1.05 billion in fiscal year 2008.

 

 

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

 

 

Operating income up 18% to $149.9 million from $127.0 million.

 

 

Interest expense down to $44.1 million from $53.0 million in 2008.

 

 

Diluted earnings per share up 56% to $2.21 from $1.42.

 

 

Operating cash flow $223.1 million up 131% from $96.5 million.

 

Selected Statistical Information – Percentage of Net Sales and Growth

 

Years Ended October 31,

   2009      % Change     2008      % Change     2007  

Net sales

     100%         3%        100%         11%        100%   

Cost of sales

     45%         11%        42%         3%        45%   
                              

Gross profit

     55%         (2%     58%         17%        55%   

Selling, general and administrative expense

     36%         (9%     41%         5%        43%   

Research and development expense

     3%         (6%     3%         (11%     4%   

Amortization of intangibles

     2%         6%        2%         4%        3%   
                              

Operating income

     14%         18%        12%         177%        5%   
                              

 

Net Sales

 

Our consolidated net sales grew by 3% in 2009 and 11% in 2008. CVI achieved 3% net sales growth primarily on growth of disposable lenses, including single-use lenses, and the sale of our silicone hydrogel lenses, Biofinity and Avaira. CSI achieved 2% net sales growth in 2009.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

Net Sales Growth

 

($ in millions)

   2009 vs. 2008      2008 vs. 2007  

Business unit

     

CVI

   $ 30.5         3%       $ 88.6         11%   

CSI

   $ 2.6         2%       $ 13.6         9%   

 

CVI Net Sales by Region

 

($ in millions)

   2009      2008      Growth  

Americas

   $ 392.8       $ 387.8         1%   

EMEA

     345.1         337.8         2%   

Asia Pacific

     171.6         153.4         12%   
                    
   $ 909.5       $ 879.0         3%   
                    

 

CVI’s worldwide net sales grew 3%. Americas sales grew 1%, primarily due to market gains of CVI’s silicone hydrogel spherical and toric lenses, Biofinity and Avaira, PC Technology lenses and single-use lenses. EMEA sales grew 2%, driven by increases in sales of Biofinity spherical and toric lenses and PC Technology lenses, including Proclear 1 Day lenses. Sales to the Asia Pacific region grew 12%, primarily due to sales growth of single-use spherical and toric products and Biofinity lenses.

 

Net sales growth includes increases in single-use spheres up 15%, at $185.5 million, all disposable spheres up 4% and total spheres up 3%. Silicone hydrogel spherical and toric lenses grew 92%. Single-use torics grew 71%, but total torics declined 9% primarily due to a continuing trend in the market toward silicone hydrogel toric lenses. Disposable multifocal lens sales grew 15% to $69.9 million. Older conventional lens products declined 20%, and cosmetic lenses declined 11%. Proclear products increased 6%, including Proclear 1 Day spheres up 59% and Proclear multifocal lenses up 21%.

 

CVI’s 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 2% to $170.9 million. Women’s healthcare products used primarily by obstetricians and gynecologists generate 96% of CSI’s sales. The balance are sales of medical devices outside of women’s healthcare which CSI does not actively market. While unit growth and product mix have influenced organic sales growth, average realized prices by product have not materially influenced organic sales growth.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

2010 Compared to 2009 and 2009 Compared to 2008

 

Cost of Sales/Gross Profit

 

Gross Profit Percentage of Net Sales

   2010      2009      2008  

CVI

     57%         54%         58%   

CSI

     64%         60%         59%   

Consolidated

     58%         55%         58%   

 

The increase in CVI’s gross margin is largely attributable to improvements in manufacturing efficiencies and product mix, primarily the shift to higher margin silicone hydrogel products. CVI’s gross margin in fiscal 2009 included costs associated with fixed asset write offs; such costs were not significant in fiscal 2010. The gross margin increase was partially offset by costs associated with the 2009 CooperVision Manufacturing restructuring plan, recorded as cost of sales, of $16.0 million for fiscal 2010 compared to $5.0 million for fiscal 2009. 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. Gross margin for fiscal 2010 reflects the increase in accruals for rebates discussed above.

 

The increase in CSI’s gross margin for fiscal 2010 is largely attributable to efficiency improvements, changing product mix and to the recognition in the current year of a one-time $1.5 million settlement resolving a vendor dispute. CSI’s gross margin for the period also reflects higher margins on products used in surgical procedures, that now represent 33% of net sales in the current period compared to 31% in fiscal 2009.

 

Selling, General and Administrative Expense (SGA)

 

($ in millions)

   2010      % Net
Sales
     2009      % Net
Sales
     2008  

CVI

   $ 343.0         35%       $ 309.9         34%       $ 342.5   

CSI

     61.6         33%         53.7         31%         57.7   

Headquarters

     28.5                 28.0                 29.1   
                                
   $ 433.1         37%       $ 391.6         36%       $ 429.3   
                                

 

Consolidated SGA increased 11% in fiscal 2010 and decreased by 9% in 2009. The decrease in fiscal 2009 was primarily due to recessionary cost control measures partially offset by costs supporting increased sales levels and contact lenses used in marketing programs.

 

The increase in CVI’s SGA in fiscal 2010 of 11% in absolute dollars and as a percentage of net sales is primarily due to our increased investment in sales and marketing to reach new customers and to promote our silicone hydrogel products as well as investments in infrastructure such as information technology. CVI’s SGA in fiscal 2009 included increased efficiencies as a result of the rationalization of distribution centers completed in fiscal 2008, decreased marketing expenses from the prior year that included several new product launches and the Critical Activity restructuring plan discussed below.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

The 15% increase in CSI’s SGA in fiscal 2010 is primarily due to increased selling and marketing costs to support higher sales and anticipated further growth along with legal expenses related to business acquisitions during the period. CSI’s decrease in SGA in fiscal 2009 was primarily due to efficiencies from an acquisition including reduced marketing, distribution and other general and administrative costs and decreased legal and share-based compensation expenses.

 

Corporate headquarters’ SGA increased 2% in fiscal 2010 primarily due to increased legal costs offset by reduced headcount, lower share-based compensation expense and audit costs. The decrease in fiscal 2009 was primarily due to the $1.9 million reduction of accrued legal costs related to our acquisition of Ocular Sciences, Inc. based on a settlement agreement reached in fiscal 2009.

 

Research and Development Expense

 

($ in millions)

   2010      % Net
Sales
     2009      % Net
Sales
     2008  

CVI

   $ 29.9         3%       $ 28.9         3%       $ 30.7   

CSI

     5.4         3%         4.4         3%         4.8   
                                
   $ 35.3         3%       $ 33.3         3%       $ 35.5   
                                

 

CVI research and development expense increased 3% in fiscal 2010 primarily due to investments in new technologies and clinical trials. In fiscal 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 16% during fiscal 2010, as compared to the prior year period. CVI’s research and development activities include programs to develop disposable silicone hydrogel products and product lines utilizing PC Technology.

 

CSI research and development expense increased 23%, primarily due to investments in new products. CSI 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

 

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.

 

CVI completed restructuring activities in Adelaide, Australia, in our fiscal third quarter of 2010 and ceased operations in Norfolk at the end of fiscal 2010. CVI expects to complete restructuring activities in Norfolk in our fiscal first quarter of 2011.

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

We estimate that the total restructuring costs under this plan will be approximately $24.3 million, with about $17.3 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 year ended October 31, 2010, $16.1 million, including $3.3 million of employee benefits costs and $12.8 million of costs associated with assets, primarily non-cash, are reported as $16.0 million in cost of sales and $0.1 million in restructuring costs. In the year ended October 31, 2009, $5.1 million including $3.6 million of employee benefit costs and $1.5 million of non-cash costs associated with assets are reported as $5.0 million in cost of sales and $0.1 million in restructuring costs.

 

Critical Activity Restructuring Plan

 

In fiscal 2009, CooperVision substantially completed 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 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 year ended October 31, 2010, we reported $0.3 million in restructuring costs and in fiscal 2009, we reported $0.5 million in cost of sales and $3.8 million in restructuring costs.

 

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

 

Amortization of Intangibles

 

Amortization of intangibles was $18.1 million in 2010, $17.9 million in 2009 and $16.8 million in 2008. Amortization expense in fiscal 2009 includes a $1.5 million charge for a CSI license that no longer had value.

 

Operating Income

 

Operating income grew $62.9 million, or 50%, between 2008 and 2010, increasing 27% or $40.0 million in 2010 and 18% or $22.9 million in 2009.

 

($ in millions)

   2010     % Net
Sales
     2009     % Net
Sales
     2008  

CVI

   $ 171.3        18%       $ 138.3        15%       $ 123.4   

CSI

     47.1        25%         39.6        23%         32.7   

Headquarters

     (28.5             (28.0             (29.1
                              
   $ 189.9        16%       $ 149.9        14%       $ 127.0   
                              

Percent growth

     27%           18%           177%   

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

The increase in operating income in the fiscal 2010 period both in absolute dollars and as a percentage of net sales was primarily due to increased gross margin dollars up 13%, partially offset by increased operating expenses up 9%.

 

Interest Expense

 

Interest expense decreased 17% to $36.7 million in 2010 and decreased 17% to $44.1 million in 2009, following an increase of 16% to $53.0 million in 2008. The fiscal 2010 and 2009 decreases primarily reflect decreases in our long-term borrowings used for capital expenditures and lower interest rates. The fiscal 2008 increase included the write-off of $3.0 million of unamortized costs related to the repurchase of our 2.625% Convertible Senior Debentures, and excluding such costs, interest expense increased 9% in 2008. We had $591.8 million in loans on our credit facility on October 31, 2010, compared to $764.0 million outstanding on October 31, 2009.

 

Settlements

 

The Company and several of its directors and officers were named in a consolidated securities class action lawsuit, the nature and status of which is described in Note 12. Commitments and Contingencies. The Company announced on May 4, 2010, that it 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, which we funded into escrow in our fiscal fourth quarter of 2010. The Court granted preliminary approval of the proposed settlement on August 16, 2010, and final approval on December 13, 2010. The Company has exhausted its insurance coverage in defense of this litigation, and if the settlement were to be overturned as a result of an appeal, general and administrative expenses will increase.

 

The Company is also a nominal defendant in shareholder derivative litigation against several current and former officers and directors of the Company. As described in Note 12. Commitments and Contingencies, an agreement in principle to settle has been reached, which is subject to court approval. This agreement would have the Company pay attorney’s fees of counsel to the plaintiff’s in an amount not to exceed $750 thousand but no other amounts. The Company recorded a charge for the settlement amount in our fiscal fourth quarter of 2010.

 

Other (Loss) Income, Net

 

Years Ended October 31,

(In millions)

   2010     2009     2008  

Interest income

   $      $ 0.4      $ 0.3   

Gain on extinguishment of debt

            1.8          

Foreign exchange (loss) gain

     (1.2     7.0        0.4   

Other income (expense)

     0.1        (0.1     (0.7
                        
   $ (1.1   $ 9.1      $   
                        

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

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

 

In December 2008, we purchased through the open market, in a privately negotiated transaction, $11.0 million in aggregate principal amount of our 7.125% Senior Notes at a discounted price of approximately $9.0 million plus accrued and unpaid interest. We also wrote off approximately $0.2 million of unamortized costs related to the Senior Notes and recorded a gain on the repurchase in other income on our Consolidated Statement of Income. The Company paid the aggregate purchase price from borrowings under its $650.0 million revolving line of credit.

 

Provision for Income Taxes

 

We recorded tax expense of $11.6 million for fiscal year 2010 compared to $14.3 million for fiscal year 2009 based on effective tax rates of 9.3% and 12.4% for 2010 and 2009, respectively. The decrease in the effective tax rate is driven by changes in our geographic mix of income as well as litigation settlement charges incurred in the United States during the period.

 

Share-Based Compensation Plans

 

The Company grants various share-based compensation awards, including stock options, performance shares, restricted stock and restricted stock units. The share-based compensation and related income tax benefit recognized in the consolidated financial statements in fiscal 2010 was $10.2 million and $3.2 million, respectively, compared to $13.0 million and $4.2 million, respectively, in fiscal year 2009. As of October 31, 2010, there was $15.1 million of total unrecognized share-based compensation cost: $5.4 million for stock options; $6.9 million for restricted stock units; and $2.8 million for performance shares. The unrecognized compensation is expected to be recognized over weighted average remaining vesting periods of 2.8 years for nonvested stock options, 2.3 years for restricted stock units and 1.8 years for performance shares. Cash received from options exercised under all share-based compensation arrangements for fiscal 2010, 2009 and 2008 was $11.1 million, $1.1 million and $6.3 million, respectively.

 

The Company estimates the fair value of each stock option award on the date of grant using the Black-Scholes valuation model, which requires management to make estimates regarding expected option life, stock price volatility and other assumptions. The use of different assumptions could lead to a different estimate of fair value. The expected life of the stock option is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. If our assumption for the expected life increased by one year, the fair value of an individual option granted in fiscal 2010 would have increased by approximately $1. To determine the stock price volatility, management considers implied volatility from publicly-traded options on the Company’s stock at the date of grant, historical volatility and other factors. If our assumption for stock price volatility increased by one percentage point, the fair value of an individual option granted in fiscal 2010 would have increased by less than $1.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

The Company estimates stock option forfeitures based on historical data for each employee grouping, and adjusts the rate to expected forfeitures periodically. The adjustment of the forfeiture rate will result in a cumulative catch-up adjustment in the period the forfeiture estimate is changed. These adjustments totaled $1.2 million, $2.9 million and $3.2 million in fiscal years 2010, 2009 and 2008, respectively.

 

The Company grants performance units that provide for the issuance of common stock to certain executive officers if the Company achieves specified long-term performance goals, and vest after three years. The Company estimates the fair value of each award on the date of grant based on the current market price of our stock. The total amount of compensation expense recognized reflects our initial assumptions of the achievement of the performance goals and the estimated forfeiture rates. The Company reviews our assessment of the probability of the achievement of the performance goals each fiscal quarter. If achievement of the goals are not met or it is determined that achievement of the goals is not probable, previously recognized compensation expense is adjusted prospectively to reflect the expected achievement. If we determine that achievement of the goals will exceed the original assessment, additional compensation expense is recognized prospectively.

 

CAPITAL RESOURCES AND LIQUIDITY

 

2010 Highlights

 

 

Operating cash flow $267.7 million, compared to $223.1 million in fiscal 2009.

 

 

Expenditures for purchases of property, plant and equipment $73.8 million, compared to $93.9 million in 2009.

 

 

Total debt decreased to $611.1 million from $781.5 million in 2009.

 

 

Cash payments for acquisitions totaled $32.8 million vs. $4.7 million in 2009.

 

Comparative Statistics

 

Years Ended October 31,

($ in millions)

   2010      2009  

Cash and cash equivalents

   $ 3.6       $ 3.9   

Total assets

   $ 2,525.0       $ 2,551.9   

Working capital

   $ 291.8       $ 328.5   

Total debt

   $ 611.1       $ 781.5   

Stockholders’ equity

   $ 1,666.8       $ 1,540.3   

Ratio of debt to equity

     0.37:1         0.51:1   

Debt as a percentage of total capitalization

     27%         34%   

 

Working Capital

 

The decrease in working capital in fiscal 2010 was primarily due to decreases in inventories and prepaid expenses and other current assets along with increases in accounts payable and short-term debt. The decrease in working capital was partially offset by an increase in accounts receivable.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

Operating Cash Flows

 

Cash flow provided by operating activities continued as Cooper’s major source of liquidity, totaling $267.7 million in fiscal 2010 and $223.1 million in 2009. Operating cash flow increased primarily due to higher net income and the reduction of inventory arising from higher sales volumes.

 

At the end of fiscal 2010, Cooper’s inventory months on hand (MOH) were 5.4 compared to 6.3 at fiscal year-end 2009. Our days sales outstanding (DSO) increased to 57 days at October 31, 2010, from 55 days at October 31, 2009. Based on our experience and knowledge of our customers and our analysis of inventoried products and product levels, we believe that our accounts receivable and inventories are recoverable.

 

Investing Cash Flows

 

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

 

Financing Cash Flows

 

The cash outflow of $161.6 million from financing activities in fiscal 2010 was driven by the $182.5 million net repayments of long-term debt, including the capital lease, along with dividends on our common stock of $2.7 million. The outflow was partially offset by proceeds from short-term debt of $12.1 million and $11.5 million from the exercise of stock options and related tax benefit.

 

Risk Management

 

Most of our operations outside the United States have their local currency as their functional currency. We are exposed to risks caused by changes in foreign exchange, principally our British pound sterling, euro, Japanese yen and Canadian dollar-denominated debt and receivables, and from operations in foreign currencies. We have taken steps to minimize our balance sheet exposure. Although we enter into foreign exchange agreements with financial institutions to reduce our exposure to fluctuations in foreign currency values relative to our debt or receivables obligations, these hedging transactions do not eliminate that risk entirely. We are also exposed to risks associated with changes in interest rates, as the interest rate on our Senior Unsecured Revolving Line of Credit varies with the London Interbank Offered Rate. Our significant increase in debt following the acquisition of Ocular has significantly increased the risk associated with changes in interest rates. We have decreased this interest rate risk by hedging a portion of variable rate debt effectively converting that portion to fixed rate debt for varying periods through May 2011. For additional detail, see Item 1A. Risk Factors and Note 1 and Note 7 to the consolidated financial statements.

 

On January 31, 2007, Cooper entered into a $650 million syndicated Senior Unsecured Revolving Line of Credit (Revolver) and $350 million aggregate principal amount of 7.125% senior notes due 2015 of which $339 million are outstanding (see Note 6 to the consolidated financial statements). KeyBank led the Revolver refinancing, and the Revolver matures on January 31, 2012.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

In connection with the normal management of our financial liabilities, we intend to renegotiate the Revolver, and we may retire or purchase our Senior Notes through open market cash purchases, privately negotiated transactions or otherwise. Such repurchases will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

OFF BALANCE SHEET ARRANGEMENTS

 

None.

 

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

 

As of October 31, 2010, we had the following contractual obligations and commercial commitments:

 

Payments Due by Period

(In millions)

   Total      2011      2012
& 2013
     2014
& 2015
     2016
& Beyond
 

Contractual obligations:

              

Long-term debt

   $ 592.0       $ —         $ 252.8       $ 339.0       $ 0.2   

Interest payments

     110.1         28.7         49.2         32.2           

Operating leases

     170.6         28.6         45.3         25.3         71.4   
                                            

Total contractual obligations

     872.7         57.3         347.3         396.5         71.6   

Commercial commitments:

              

Stand-by letters of credit

     0.1         0.1                           
                                            

Total

   $ 872.8       $ 57.4       $ 347.3       $ 396.5       $ 71.6   
                                            

 

The expected future benefit payments for pension plans through 2020 are disclosed in Note 11. Employee Benefits.

 

Inflation and Changing Prices

 

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

 

New Accounting Pronouncements

 

On November 1, 2009, the Company adopted the Financial Accounting Standards Board (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), now included within FASB Accounting Standards Codification 470 (ASC 470), Debt with Conversion and Other Options . ASC 470-20 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.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

This change in methodology affects the calculations of net income and earnings per share but does not increase the cash interest payments. The convertible senior debentures that the Company issued in fiscal 2003 and subsequently repurchased in fiscal 2008 are within the scope of ASC 470-20 and retrospective application to all periods presented is required. Therefore, prior year amounts reflect the cumulative effect adjustment made to the opening retained earnings of fiscal year 2006 as presented in Item 6. Selected Financial Data.

 

The Company has adjusted its reported results in its Consolidated Statement of Income for the year ended October 31, 2008 and its Consolidated Balance Sheet as of October 31, 2009 as follows:

 

Consolidated Statement of Income for the year ended October 31, 2008

 

     As Reported      Adjustments     As Adjusted  
     (In thousands)  

Interest expense

   $ 50,784       $ 2,245      $ 53,029   

Provision for income taxes

   $ 10,731       $ (725   $ 10,006   

Net income

   $ 65,476       $ (1,520   $ 63,956   

Basic earnings per share

   $ 1.46       $ (0.04   $ 1.42   
                         

Diluted earnings per share

   $ 1.43       $ (0.01   $ 1.42   
                         

 

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   

 

On November 1, 2009, the Company adopted ASC Subtopic 350-30-35-5A, Accounting for Defensive Intangible Assets . ASC 350-30-35-5A applies to defensive intangible assets, which are acquired intangible assets that an entity does not intend to actively use but does intend to prevent others from obtaining access to the asset. ASC 350-30-35-5A requires an entity to account for defensive intangible assets as a separate unit of accounting. Defensive intangible assets should not be included as part of the cost of an entity’s existing intangible assets because the defensive intangible assets are separately identifiable. Defensive intangible assets must be recognized at fair value in accordance with ASC 805 Business Combinations and ASC 820 Fair Value Measurement and Disclosure . ASC 350-30-35-5A is effective prospectively for intangible assets acquired in fiscal years beginning after December 15, 2008, or our fiscal year 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

On November 1, 2009, the Company adopted the deferred portions of FASB ASC 820, Fair Value Measurements and Disclosures , for its non financial assets and liabilities that are recognized at fair value on a nonrecurring basis, including long-lived assets, goodwill, other intangible assets and exit liabilities. This guidance defines fair value, establishes a framework for measuring fair value under

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

generally accepted accounting principles and expands disclosures about fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, which amends ASC 820, Fair Value Measurements and Disclosures Improving Disclosures about Fair Value Measurements . ASU 2010-06 amends ASC 820 to add new requirements for disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in level 3 fair value measurements and (4) the transfers between levels 1, 2 and 3 fair value measurements. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. However, those disclosures are required for periods ending after initial adoption. The Company does not anticipate the adoption of ASU 2010-06, which is partially effective for the Company for the fiscal year beginning on November 1, 2010, will have a material impact on our consolidated financial statements.

 

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The amendment in the ASU was effective for the Company upon issuance (February 24, 2010). As this guidance relates to removing a disclosure, its adoption had no effect on the consolidated financial statements.

 

On August 1, 2010, the Company adopted 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 adoption of this guidance did not have a material impact on our consolidated financial statements.

 

On October 31, 2010, the Company adopted a new accounting standard under ASC 715-20, Compensation – Retirement Benefits , that requires additional disclosures about the major categories of plan assets and concentrations of risk for an employer’s plan assets of a defined benefit pension or other postretirement plan, as well as disclosure of fair value levels, similar to the disclosure

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

requirements of the fair value measurements accounting standard (See Note 11). As this guidance only requires enhanced disclosures, which the Company has provided, its adoption did not have a material impact on the consolidated financial statements.

 

Estimates and Critical Accounting Policies

 

Management estimates and judgments are an integral part of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing our consolidated financial statements in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods.

 

 

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

 

 

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

 

 

Net realizable value of inventory – In assessing the value of inventories, we make estimates and judgments regarding aging of inventories and other relevant issues potentially affecting the saleable condition of products and estimated prices at which those products will sell. On an ongoing basis, we review the carrying value of our inventory, measuring number of months on hand and other indications of salability. We reduce the value of inventory if there are indications that the carrying value is greater than market, resulting in a new, lower-cost basis for that inventory. Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

 

established cost basis. While estimates are involved, historically, obsolescence has not been a significant factor due to long product dating and lengthy product life cycles. We target to keep, on average, five to seven months of inventory on hand to maintain high customer service levels given the complexity of our contact lens and women’s healthcare product portfolios.

 

 

Valuation of goodwill – We account for goodwill and evaluate our goodwill balances and test them for impairment in accordance with related accounting standards. We no longer amortize goodwill. We test goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. We performed our annual impairment test in our fiscal third quarter 2010, and our analysis indicated that we had no impairment of goodwill.

 

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

 

The fair value of our reporting units is determined using either the income or the market valuation approach or a combination thereof. Under the income approach, specifically the discounted cash flow method, the fair value of the reporting unit is based on the present value of estimated future cash flows that the reporting unit is expected to generate over its remaining life. Under the market approach, the value of the reporting unit is based on an analysis that compares the value of the reporting unit to values of publicly traded companies in similar lines of business. For the current year, management determined the fair value of our reporting units using the income valuation approach.

 

In the application of the income approach, the Company is required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results related to assumed variables could differ from these estimates. Discount rates are based on a weighted average cost of capital, which represents the average rate a business must pay its providers of debt and equity capital. We used discount rates that are the representative weighted average cost of capital for each of our reporting units, with consideration given to the current condition of the global economy. The discount rates used in the current year are about 200 basis points higher than those used in our analysis for fiscal year 2009 reflecting the current condition of the United States and the global economy. The Company determines net sales forecasts based on our best estimate of near term net sales expectations and long-term projections which include review of published independent industry analyst reports. As a sensitivity analysis, a 100 basis point reduction in the assumed net sales growth beginning in fiscal 2010 and extending through the valuation period would decrease the excess amount of the estimated fair value of each reporting unit over the carrying value but would not cause a change in the results of our impairment testing that indicated that we had no impairment of goodwill.

 

Goodwill impairment analysis and measurement is a process that requires significant judgment. If our common stock price trades below book value per share, there are changes in market conditions or a future downturn in our business, or a future annual goodwill impairment test indicates an

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

impairment of our goodwill, the Company may have to recognize a non-cash impairment of its goodwill that could be material, and could adversely affect our results of operations in the period recognized and also adversely affect our total assets, stockholders’ equity and financial condition.

 

 

Business combinations – We routinely consummate business combinations. Results of operations for acquired companies are included in our consolidated results of operations from the date of acquisition. In fiscal 2009 and prior periods, we allocated the purchase price of acquisitions based on our estimates and judgments of the fair value of net assets purchased, direct acquisition costs incurred and intangibles other than goodwill. In fiscal 2010, based on the FASB revision to the accounting standard for business combinations, we now recognize separately from goodwill, the identifiable assets acquired, including acquired in-process research and development, the liabilities assumed, and any noncontrolling interest in the acquiree generally at the acquisition date fair values as defined by accounting standards related to fair value measurements. As of the acquisition date, goodwill is measured as the excess of consideration given, generally measured at fair value, and the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are now expensed as incurred.

 

 

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

 

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

 

Regarding accounting for uncertainty in income taxes, we recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. We measure the income tax benefits from the tax positions that are recognized, assess the timing of the derecognition of previously recognized tax benefits and classify and disclose the liabilities within the consolidated financial statements for any

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – (Continued)

 

unrecognized tax benefits based on the guidance in the interpretation of ASC 740 Accounting for Income Taxes . The interpretation also provides guidance on how the interest and penalties related to tax positions may be recorded and classified within our Consolidated Statement of Income and presented in the Consolidated Balance Sheet. We classify interest and penalties related to uncertain tax positions as additional income tax expense.

 

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company is exposed to market risks that relate principally to changes in interest rates and foreign currency fluctuations. The Company’s policy is to minimize, to the extent reasonable and practical, its exposure to the impact of changing interest rates and foreign currency fluctuations by entering into interest rate swaps and foreign currency forward exchange contracts, respectively. The Company does not enter into derivative financial instrument transactions for speculative purposes. For additional information please see Risk Management discussed above in Capital Resources and Liquidity and Derivative Instruments in Note 1 and Note 7 to the consolidated financial statements.

 

Long-term Debt

 

Total debt decreased to $611.1 million at October 31, 2010, from $781.5 million at October 31, 2009. Long-term debt includes $339 million of senior notes issued in fiscal 2007 (see Note 6 to the consolidated financial statements). 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 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 our $650 million revolving line of credit. On July 1, 2008, the Company repurchased all $115 million in aggregate principal amount of our 2.625% Convertible Senior Debentures issued in 2003 and due 2023 (Securities) pursuant to the terms of the debentures for the Securities and, therefore, no Securities remain outstanding (see Note 6 to the consolidated financial statements). The Company paid the aggregate repurchase price from borrowings under our $650 million revolving line of credit. On July 1, 2008, we also wrote off $3.0 million of unamortized costs related to the Securities.

 

In connection with the normal management of our financial liabilities, we intend to renegotiate the Revolver, and we may retire or purchase our Senior Notes through open market cash purchases, privately negotiated transactions or otherwise. Such repurchases will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

October 31,

(In millions)

   2010      2009  

Short-term debt

   $ 19.1       $ 9.9   

Long-term debt

     592.0         771.6   
                 

Total

   $ 611.1       $ 781.5   
                 

 

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As of October 31, 2010, the scheduled maturities of the Company’s fixed and variable rate long-term debt obligations, their weighted average interest rates and their estimated fair values were as follows:

 

Expected Maturity Date Fiscal Year

($ in millions)

  2011     2012     2013     2014     2015     Thereafter     Total     Fair
Value
 

Long-term debt:

               

Fixed interest rate

    $—          $ —            $—            $—          $ 339.0      $ 0.2      $ 339.2      $ 351.9   

Average interest rate

    7.1%        7.1%        7.1%        7.1%        7.1%        6.0%       

Variable interest rate

    $—          $ 252.8        $—            $—            $—             $—          $ 252.8      $ 252.8   

Average interest rate

    1.8%        1.4%               

 

As the table incorporates only those exposures that existed as of October 31, 2010, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on interest rates, the exposures that arise during the period and our hedging strategies at that time. As of October 31, 2010, the Company has interest rate swaps outstanding that are designed to fix the borrowing costs related to $125.0 million of the outstanding balance on the Company’s syndicated senior unsecured revolving line of credit. If interest rates were to increase or decrease by 1% or 100 basis points, annual interest expense would increase or decrease by about $2.2 million.

 

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Item 8. Financial Statements and Supplementary Data.

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

The Cooper Companies, Inc.:

 

We have audited the accompanying consolidated balance sheets of The Cooper Companies, Inc. and subsidiaries (the Company) as of October 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended October 31, 2010. We also have audited the Company’s internal control over financial reporting as of October 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

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

 

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

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Cooper Companies, Inc. and subsidiaries as of October 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, The Cooper Companies, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/s/ KPMG LLP

 

San Francisco, California

December 17, 2010

 

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Consolidated Statements of Income

 

Years Ended October 31,

(In thousands, except per share amounts)

   2010     2009      2008 (1)  

Net sales

   $ 1,158,517      $ 1,080,421       $ 1,047,375   

Cost of sales

     481,794        483,927         437,345   
                         

Gross profit

     676,723        596,494         610,030   

Selling, general and administrative expense

     433,057        391,593         429,304   

Research and development expense

     35,274        33,298         35,468   

Restructuring costs

     424        3,887         1,521   

Amortization of intangibles

     18,056        17,860         16,774   
                         

Operating income

     189,912        149,856         126,963   

Interest expense

     36,668        44,143         53,029   

Litigation settlement charges

     27,750        0         0   

Other (loss) income, net

     (1,068     9,115         28   
                         

Income before income taxes

     124,426        114,828         73,962   

Provision for income taxes

     11,623        14,280         10,006   
                         

Net income

   $ 112,803      $ 100,548       $ 63,956   
                         

Basic earnings per share

   $ 2.48      $ 2.23       $ 1.42   
                         

Diluted earnings per share

   $ 2.43      $ 2.21       $ 1.42   
                         

Number of shares used to compute earnings per share:

       

Basic

     45,530        45,173         44,995   
                         

Diluted

     46,505        45,478         45,117   
                         

 

(1)

Adjusted as a result of the retrospective adoption of FSP APB 14-1.

 

See accompanying notes to consolidated financial statements.

 

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Consolidated Balance Sheets

 

October 31,

(In thousands)

   2010     2009  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 3,573      $ 3,932   

Trade accounts receivable, net of allowance for doubtful accounts of $4,238 and $4,690 at October 31, 2010 and 2009, respectively

     197,490        170,941   

Inventories

     227,902        260,846   

Deferred tax assets

     28,828        23,360   

Prepaid expense and other current assets

     33,547        44,799   
                

Total current assets

     491,340        503,878   
                

Property, plant and equipment, at cost

     919,268        882,322   

Less: accumulated depreciation and amortization

     325,381        279,754   
                
     593,887        602,568   
                

Goodwill

     1,261,976        1,257,029   

Other intangibles, net

     114,177        114,700   

Deferred tax assets

     23,072        27,781   

Other assets

     40,566        45,951   
                
   $ 2,525,018      $ 2,551,907   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Short-term debt

   $ 19,159      $ 7,051   

Current portion of long-term debt

     0        2,793   

Accounts payable

     51,792        36,878   

Employee compensation and benefits

     44,821        35,781   

Accrued acquisition costs

     2,379        3,599   

Accrued income taxes

     4,494        4,400   

Other current liabilities

     76,875        84,912   
                

Total current liabilities

     199,520        175,414   
                

Long-term debt

     591,977        771,630   

Deferred tax liabilities

     20,202        16,456   

Accrued pension liability and other

     46,543        48,065   
                

Total liabilities

     858,242        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

     0        0   

Common stock, 10 cents par value, shares authorized:

    

    70,000; issued 46,140 and 45,572 at October 31, 2010 and 2009,     respectively

     4,614        4,557   

Additional paid-in capital

     1,083,779        1,063,289   

Accumulated other comprehensive loss

     (17,334     (12,920

Retained earnings

     600,522        490,451   

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

     (4,805     (5,035
                

Stockholders’ equity

     1,666,776        1,540,342   
                
   $ 2,525,018      $ 2,551,907   
                

 

See accompanying notes to consolidated financial statements.

 

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Consolidated Statements of Cash Flows

 

Years Ended October 31,

(In thousands)

   2010     2009     2008 (1)  

Cash flows from operating activities:

      

Net income

   $ 112,803      $ 100,548      $ 63,956   

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

      

Depreciation and amortization expense

     94,001        92,602        82,185   

Share-based compensation expense

     9,638        12,037        13,567   

In-process research and development expense

     0        3,035        0   

Impairment of property, plant and equipment

     0        0        655   

Loss on disposal of property, plant and equipment

     7,840        10,934        10,978   

(Gain) write-off on extinguishment of debt

     0        (1,823     3,066   

Deferred income taxes

     (1,755     7,292        3,139   

Provision for doubtful accounts

     (833     1,306        378   

Change in assets and liabilities:

      

Accounts receivable

     (24,789     (13,090     4,528   

Inventories

     34,978        22,601        (15,540

Other assets

     16,078        20,211        (55,579

Accounts payable

     8,644        (13,517     (11,917

Accrued liabilities

     2,474        (18,302     8,598   

Income taxes payable

     468        (2,657     (12,692

Other long-term liabilities

     8,116        1,951        1,206   
                        

Cash provided by operating activities

     267,663        223,128        96,528   
                        

Cash flows from investing activities:

      

Purchases of property, plant and equipment

     (73,757     (93,906     (124,885

Acquisitions of businesses, net of cash acquired

     (32,847     (4,731     (3,872
                        

Cash used in investing activities

     (106,604     (98,637     (128,757
                        

Cash flows from financing activities:

      

Proceeds from long-term debt

     564,114        736,467        894,220   

Repayments and repurchase of long-term debt

     (736,560     (821,785     (864,820

Capital lease repayment

     (10,000     0        0   

Proceeds (repayments) under short-term agreements

     12,108        (35,960     (3,505

Excess tax benefit from share-based compensation arrangements

     407        135        1,758   

Issuance of common stock for stock plans

     11,096        1,116        6,250   

Dividends on common stock

     (2,732     (2,712     (2,699
                        

Cash (used in) provided by financing activities

     (161,567     (122,739     31,204   
                        

Effect of exchange rate changes on cash and cash equivalents

     149        236        (257
                        

Net (decrease) increase in cash and cash equivalents

     (359     1,988        (1,282

Cash and cash equivalents at beginning of year

     3,932        1,944        3,226   
                        

Cash and cash equivalents at end of year

   $ 3,573      $ 3,932      $ 1,944   
                        

Supplemental disclosures of cash flow information:

      

Cash paid for:

      

Interest, net of amounts capitalized

   $ 36,658      $ 42,999      $ 48,616   
                        

Income taxes

   $ 8,603      $ 6,359      $ 11,568   
                        

Litigation settlement charge

   $ 27,000      $ 0      $ 0   
                        

 

(1)

Adjusted as a result of the retrospective adoption of FSP APB 14-1.

 

See accompanying notes to consolidated financial statements.

 

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

 

    Common Shares     Treasury Stock     Additional
Paid-In
Capital (1)
    Accumulated
Other

Comprehensive
Income (Loss)
    Retained
Earnings (1)
    Treasury
Stock
    Total
Stockholders’
Equity
 

(In thousands)

  Shares     Amount     Shares     Amount            

Balance at October 31, 2007

    44,869      $ 4,487        384      $ 38      $ 1,028,576      $ 107,780      $ 326,020      $ (5,894   $ 1,461,007   

Net income

    0        0        0        0        0        0        65,476        0        65,476   

Adjustment to net income for adoption of FSP APB 14-1

                (1,520 )         (1,520

Other comprehensive loss:

                 

Foreign currency translation adjustment

    0        0        0        0        0        (132,065     0        0        (132,065

Change in value of derivative instruments, net of tax benefit $3,368

    0        0        0        0        0        (564     0        0        (564

Additional minimum pension liability, net of tax ($250)

    0        0        0        0        0        (391     0        0        (391
                       

Comprehensive loss

    0        0        0        0        0        0        0        0        (69,064

Prior year adjustment for adoption of ASC 740

    0        0        0        0        0        0        5,338        0        5,338   

Issuance of common stock for stock plans

    260        26        (31     (3     5,752        0        0        475        6,250   

Tax benefit from exercise of stock options

    0        0        0        0        2,677        0        0        0        2,677   

Dividends on common stock

    0        0        0        0        0        0        (2,699     0        (2,699

Share-based compensation expense

    0        0        0        0        13,567        0        0        0        13,567   
                                                                       

Balance at October 31, 2008

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

Net income

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

Other comprehensive income (loss):

                 

Foreign currency translation adjustment

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

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

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

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

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

Comprehensive income

    0        0        0        0        0        0        0        0        112,868   

Issuance of common stock for stock plans

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

Tax benefit from exercise of stock options

    0        0        0        0        (43     0        0        0        (43

Dividends on common stock

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

Share-based compensation expense

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

Balance at October 31, 2009

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

Net income

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

Other comprehensive income (loss):

                 

Foreign currency translation adjustment

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

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

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

Additional minimum pension liability, net of tax benefit $495

    0        0        0        0        0        342        0        0        342   
                       

Comprehensive income

    0        0        0        0        0        0        0        0        108,389   

Issuance of common stock for stock plans

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

Tax benefit from exercise of stock options

    0        0        0        0        43        0        0        0        43   

Dividends on common stock

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

Share-based compensation expense

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

Balance at October 31, 2010

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

 

(1)

Adjusted as a result of the retrospective adoption of FSP APB 14-1.

 

See accompanying notes to consolidated financial statements.

 

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Notes to Consolidated Financial Statements

 

Note 1. Summary of Significant Accounting Policies

 

General

 

The Cooper Companies, Inc. (Cooper, we or the Company) is a global medical products company that serves the specialty healthcare market through its two business units:

 

 

CVI develops, manufactures and markets a broad range of soft contact lenses for the worldwide vision correction market. CVI is a leading manufacturer of toric lenses, which correct astigmatism, multifocal lenses for presbyopia (blurring near vision due to advancing age) and spherical lenses that correct the most common visual defects.

 

 

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

 

Estimates and Critical Accounting Policies

 

Management estimates and judgments are an integral part of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing our consolidated financial statements in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods.

 

 

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

 

 

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

 

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Notes to Consolidated Financial Statements – (Continued)

 

 

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

 

 

Valuation of goodwill – We account for goodwill and evaluate our goodwill balances and test them for impairment in accordance with related accounting standards. We no longer amortize goodwill. We test goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. We performed our annual impairment test in our fiscal third quarter 2010, and our analysis indicated that we had no impairment of goodwill.

 

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

 

The fair value of our reporting units is determined using either the income or the market valuation approach or a combination thereof. Under the income approach, specifically the discounted cash flow method, the fair value of the reporting unit is based on the present value of estimated future cash flows that the reporting unit is expected to generate over its remaining life. Under the market approach, the value of the reporting unit is based on an analysis that compares the value of the reporting unit to values of publicly traded companies in similar lines of business. For the current year, management determined the fair value of our reporting units using the income valuation approach.

 

In the application of the income approach, the Company is required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results related to assumed variables could differ from these estimates. Discount rates are based on a weighted average cost of capital, which represents the average rate a business must pay its providers of debt and equity capital. We used discount rates that are the representative weighted average cost of capital for each of our reporting units, with consideration given to the current condition of the global economy. The discount rates used in the current year are about 200 basis points higher than those used in our analysis for fiscal year 2009 reflecting the current condition of the United States and the global economy. The Company determines net sales forecasts based on our best estimate of near term net sales expectations and long-term projections which include review of published independent industry analyst reports. As a sensitivity analysis, a 100 basis point reduction in the assumed net sales growth beginning in fiscal 2010 and extending through the valuation period

 

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Notes to Consolidated Financial Statements – (Continued)

 

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

 

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

 

 

Business combinations – We routinely consummate business combinations. Results of operations for acquired companies are included in our consolidated results of operations from the date of acquisition. In fiscal 2009 and prior periods, we allocated the purchase price of acquisitions based on our estimates and judgments of the fair value of net assets purchased, direct acquisition costs incurred and intangibles other than goodwill. In fiscal 2010, based on the FASB revision to the accounting standard for business combinations, we now recognize separately from goodwill, the identifiable assets acquired, including acquired in-process research and development, the liabilities assumed, and any noncontrolling interest in the acquiree generally at the acquisition date fair values as defined by accounting standards related to fair value measurements. As of the acquisition date, goodwill is measured as the excess of consideration given, generally measured at fair value, and the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are now expensed as incurred.

 

 

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

 

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements – (Continued)

 

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

 

 

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

 

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

 

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

 

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

 

New Accounting Pronouncements

 

On November 1, 2009, the Company adopted the Financial Accounting Standards Board (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), now included within FASB Accounting Standards Codification 470 (ASC 470), Debt with Conversion and Other Options . ASC 470-20 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

 

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Notes to Consolidated Financial Statements – (Continued)

 

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 does not increase the cash interest payments. The convertible senior debentures that the Company issued in fiscal 2003 and subsequently repurchased in fiscal 2008 are within the scope of ASC 470-20 and retrospective application to all periods presented is required. Therefore, prior year amounts reflect the cumulative effect adjustment made to the opening retained earnings of fiscal year 2006 as presented in Item 6. Selected Financial Data.

 

The Company has adjusted its reported results in its Consolidated Statement of Income for the year ended October 31, 2008 and its Consolidated Balance Sheet as of October 31, 2009 as follows:

 

Consolidated Statement of Income for the year ended October 31, 2008

 

     As Reported      Adjustments     As Adjusted  
     (In thousands)  

Interest expense

   $ 50,784       $ 2,245      $ 53,029   

Provision for income taxes

   $ 10,731       $ (725   $ 10,006   

Net income

   $ 65,476       $ (1,520   $ 63,956   

Basic earnings per share

   $ 1.46       $ (0.04   $ 1.42   
                         

Diluted earnings per share

   $ 1.43       $ (0.01   $ 1.42   
                         

 

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   

 

On November 1, 2009, the Company adopted ASC Subtopic 350-30-35-5A, Accounting for Defensive Intangible Assets . ASC 350-30-35-5A applies to defensive intangible assets, which are acquired intangible assets that an entity does not intend to actively use but does intend to prevent others from obtaining access to the asset. ASC 350-30-35-5A requires an entity to account for defensive intangible assets as a separate unit of accounting. Defensive intangible assets should not be included as part of the cost of an entity’s existing intangible assets because the defensive intangible assets are separately identifiable. Defensive intangible assets must be recognized at fair value in accordance with ASC 805 Business Combinations and ASC 820 Fair Value Measurement and Disclosure . ASC 350-30-35-5A is effective prospectively for intangible assets acquired in fiscal years beginning after December 15, 2008, or our fiscal year 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

On November 1, 2009, the Company adopted the deferred portions of FASB ASC 820, Fair Value Measurements and Disclosures , for its non financial assets and liabilities that are recognized at fair

 

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value on a nonrecurring basis, including long-lived assets, goodwill, other intangible assets and exit liabilities. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, which amends ASC 820, Fair Value Measurements and Disclosures Improving Disclosures about Fair Value Measurements . ASU 2010-06 amends ASC 820 to add new requirements for disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in level 3 fair value measurements and (4) the transfers between levels 1, 2 and 3 fair value measurements. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. However, those disclosures are required for periods ending after initial adoption. The Company does not anticipate the adoption of ASU 2010-06, which is partially effective for the Company for the fiscal year beginning on November 1, 2010, will have a material impact on our consolidated financial statements.

 

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The amendment in the ASU was effective for the Company upon issuance (February 24, 2010). As this guidance relates to removing a disclosure, its adoption had no effect on our consolidated financial statements.

 

On August 1, 2010, the Company adopted 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 adoption of this guidance did not have a material impact on our consolidated financial statements.

 

On October 31, 2010, the Company adopted a new accounting standard under ASC 715-20, Compensation – Retirement Benefits , that requires additional disclosures about the major categories of plan assets and concentrations of risk for an employer’s plan assets of a defined benefit pension or other postretirement plan, as well as disclosure of fair value levels, similar to the disclosure

 

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