The Cooper Companies, Inc.
COOPER COMPANIES INC (Form: 10-Q, Received: 03/05/2010 16:34:01)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For Quarterly Period Ended January 31, 2010

 

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

For the transition period from              to             

Commission File Number 1-8597

 

 

The Cooper Companies, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-2657368

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

6140 Stoneridge Mall Road, Suite 590, Pleasanton,   CA 94588
(Address of principal executive offices)   (Zip Code)

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

 

 

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

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

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

 

Common Stock, $.10 par value

 

45,425,373 Shares

Class   Outstanding at February 28, 2010

 

 

 


Table of Contents

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

INDEX

 

          Page No.

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Consolidated Statements of Income - Three Months Ended January 31, 2010 and 2009

   3
  

Consolidated Condensed Balance Sheets - January 31, 2010 and October 31, 2009

   4
  

Consolidated Condensed Statements of Cash Flows - Three Months Ended January 31, 2010 and 2009

   5
  

Consolidated Statements of Comprehensive Gain (Loss) - Three Months Ended January 31, 2010 and 2009

   6
  

Notes to Consolidated Condensed Financial Statements

   7

Item 2.

  

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

   33

Item 3.

  

Quantitative and Qualitative Disclosure About Market Risk

   46

Item 4.

  

Controls and Procedures

   46

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   47

Item 1A.

  

Risk Factors

   49

Item 6.

  

Exhibits

   50

Signature

   51

Index of Exhibits

   52

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except for earnings per share)

(Unaudited)

 

     Three Months Ended
January 31,
     2010     2009

Net sales

   $ 260,258      $ 251,142

Cost of sales

     110,495        109,007
              

Gross profit

     149,763        142,135

Selling, general and administrative expense

     100,578        94,992

Research and development expense

     7,626        7,232

Restructuring costs

     363        2,954

Amortization of intangibles

     4,217        4,177
              

Operating income

     36,979        32,780

Interest expense

     10,225        11,457

Other (expense) income, net

     (2,328     8,145
              

Income before income taxes

     24,426        29,468

Provision for income taxes

     4,003        5,595
              

Net income

   $ 20,423      $ 23,873
              

Basic earnings per share

   $ 0.45      $ 0.53
              

Diluted earnings per share

   $ 0.44      $ 0.53
              

Number of shares used to compute earnings per share:

    

Basic

     45,293        45,141
              

Diluted

     46,123        45,141
              

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

(In thousands)

(Unaudited)

 

     January 31,
2010
    October 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,822      $ 3,932   

Trade accounts receivable, net of allowance for doubtful accounts of $4,632 at January 31, 2010 and $4,690 at October 31, 2009

     174,945        170,941   

Inventories

     251,842        260,846   

Deferred tax assets

     25,339        23,360   

Prepaid expense and other current assets

     42,460        44,799   
                

Total current assets

     496,408        503,878   
                

Property, plant and equipment, at cost

     878,608        882,322   

Less: accumulated depreciation and amortization

     291,892        279,754   
                
     586,716        602,568   
                

Goodwill

     1,254,767        1,257,029   

Other intangibles, net

     114,963        114,700   

Deferred tax assets

     25,027        27,781   

Other assets

     43,519        45,951   
                
   $ 2,521,400      $ 2,551,907   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Short-term debt

   $ 15,119      $ 7,051   

Current portion of long-term debt

     4,021        2,793   

Accounts payable

     36,105        36,878   

Employee compensation and benefits

     33,331        35,781   

Accrued acquisition costs

     3,442        3,599   

Accrued income taxes

     5,981        4,400   

Other current liabilities

     80,808        84,912   
                

Total current liabilities

     178,807        175,414   
                

Long-term debt

     724,178        771,630   

Deferred tax liabilities

     15,046        16,456   

Accrued pension liability and other

     51,313        48,065   
                

Total liabilities

     969,344        1,011,565   
                

Commitments and contingencies (see Note 12)

    

Stockholders’ equity:

    

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

     —          —     

Common stock, 10 cents par value, shares authorized: 70,000; issued 45,726 at January 31, 2010 and 45,572 at October 31, 2009

     4,573        4,557   

Additional paid-in capital

     1,066,815        1,063,289   

Accumulated other comprehensive loss

     (24,039     (12,920

Retained earnings

     509,512        490,451   

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

     (4,805     (5,035
                

Stockholders’ equity

     1,552,056        1,540,342   
                
   $ 2,521,400      $ 2,551,907   
                

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Three Months Ended
January 31,
 
     2010     2009  

Cash flows from operating activities:

    

Net income

   $ 20,423      $ 23,873   

Depreciation and amortization

     22,905        25,000   

Increase (decrease) in operating capital

     645        (7,225

Other non-cash items

     12,169        (16,744
                

Net cash provided by operating activities

     56,142        24,904   
                

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (12,911     (34,095

Acquisitions of businesses, net of cash acquired, and other

     (8,507     (1,254
                

Net cash used in investing activities

     (21,418     (35,349
                

Cash flows from financing activities:

    

Net proceeds (repayments) of short-term debt

     8,068        (1,224

Repayments and repurchase of long-term debt

     (158,910     (244,860

Proceeds from long-term debt

     112,686        256,486   

Excess tax benefit from share-based compensation arrangements

     407        136   

Issuance of common stock for employee stock plans

     919        —     
                

Net cash (used in) provided by financing activities

     (36,830     10,538   
                

Effect of exchange rate changes on cash and cash equivalents

     (4     (152

Net decrease in cash and cash equivalents

     (2,110     (59

Cash and cash equivalents - beginning of period

     3,932        1,944   
                

Cash and cash equivalents - end of period

   $ 1,822      $ 1,885   
                

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Gain (Loss)

(In thousands)

(Unaudited)

 

     Three Months Ended
January 31,
 
     2010     2009  

Net income

   $ 20,423      $ 23,873   

Other comprehensive loss:

    

Foreign currency translation adjustment

     (17,050     (39,306

Change in value of derivative instruments, net of tax

     5,931        (24,466
                

Other comprehensive loss

     (11,119     (63,772
                

Comprehensive gain (loss)

   $ 9,304      $ (39,899
                

See accompanying notes.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1. General

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

 

 

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

 

 

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

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

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

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

 

 

Revenue recognition

 

 

Allowance for doubtful accounts

 

 

Net realizable value of inventory

 

 

Valuation of goodwill

 

 

Business combinations

 

 

Income taxes

 

 

Share-based compensation

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

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

During the fiscal first quarter of 2010, we recorded out-of-period adjustments primarily to increase accruals for rebates that were under-accrued in fiscal 2009. These out-of-period accruals were offset in part by a reduction in accrued compensation and income tax expense, resulting in a decrease in net income of $6.0 million in the fiscal first quarter of 2010. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the provisions of ASC 270-10-45-16, Accounting Changes in Interim Periods, and ASC 250, Accounting Changes and Error Corrections , that incorporates SEC Staff Accounting Bulletin (SAB) No. 99, Materiality , and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , we do not believe that the effect of the out-of-period adjustments is material to our estimated full-year 2010 financial results. We also do not believe that the out-of-period adjustments are material to any previously issued consolidated financial statements. Because the out-of-period adjustments are not material to any of the prior year’s consolidated financial statements and are not expected to be material to our estimated full-year 2010 financial results, the out-of-period adjustments were recorded in our consolidated financial statements for the fiscal first quarter of 2010.

We use derivatives to reduce market risks associated with changes in foreign exchange and interest rates. We do not use derivatives for trading or speculative purposes. We believe that the counterparties with which we enter into foreign currency forward contracts and interest rate swap agreements are financially sound and that the credit risk of these contracts is not significant, see Note 6. Derivative Instruments.

New Accounting Pronouncements

On November 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 350-30-35-5A, Accounting for Defensive Intangible Assets . ASC Subtopic 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.

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 non recurring 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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

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). The adoption of ASU 2010-09 had no effect on our consolidated financial statements.

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

Consolidated Balance Sheet at October 31, 2009

 

     As Reported    Adjustments     As Adjusted
     (In thousands)

Additional paid-in capital

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

Retained earnings

   $ 500,078    $ (9,627   $ 490,451

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 2. Restructuring Costs

2009 CooperVision Manufacturing Restructuring Plan

In the fiscal third quarter of 2009, CooperVision initiated a restructuring plan to relocate contact lens manufacturing from Norfolk, Virginia, and transfer part of its contact lens manufacturing from Adelaide, Australia, to existing manufacturing operations in Juana Diaz, Puerto Rico, and Hamble, UK (2009 CooperVision manufacturing restructuring plan). This plan is intended to better utilize CVI’s manufacturing efficiencies and reduce its manufacturing expenses through a reduction in workforce of approximately 480 employees. The Norfolk plant manufactures about 7% of CooperVision’s annual lens production; however, no additional hires are anticipated in Puerto Rico or the UK as part of this plan due to recent gains in manufacturing efficiencies.

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

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

In the fiscal first quarter of 2010, $2.3 million, including $0.6 million of employee benefit costs and $1.7 million of non-cash costs associated with assets are reported as $2.2 million in cost of sales and $0.1 million in restructuring costs. For the year ended October 31, 2009, total costs of $5.1 million including $3.6 million of employee benefit costs and $1.5 million of non-cash costs associated with assets were reported as $5.0 million in cost of sales and $0.1 million in restructuring costs.

 

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

Year Ended October 31, 2009

           

Other current liabilities

   $ —      $ 3.6    $ 0.6    $ 3.0

Accelerated depreciation and other

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

Fiscal Quarter Ended

           

January 31, 2010

           

Other current liabilities

   $ 3.0    $ 0.7    $ 0.6    $ 3.1

Accelerated depreciation and other

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Critical Activity Restructuring Plan

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

The total restructuring costs under this plan were $4.6 million, primarily severance and benefit costs, and are reported as cost of sales or restructuring costs in our Consolidated Statements of Income. In the fiscal first quarter of 2010, we reported $0.3 million in restructuring costs. In the year ended October 31, 2009, we reported $0.5 million in cost of sales and $3.8 million in restructuring costs. At January 31, 2010, the total accrued restructuring liability, recorded in other accrued liabilities, was $0.7 million:

 

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

Year Ended October 31, 2009

   $ —      $ 4.3    $ 3.7    $ 0.6
                           

Fiscal Quarter Ended January 31, 2010

   $ 0.6    $ 0.3    $ 0.2    $ 0.7
                           

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

Note 3. Inventories

 

     January 31,
2010
   October 31,
2009
     (In thousands)

Raw materials

   $ 45,762    $ 47,400

Work-in-process

     7,924      6,122

Finished goods

     198,156      207,324
             
   $ 251,842    $ 260,846
             

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 4. Intangible Assets

Goodwill

 

     CVI     CSI     Total  
     (In thousands)  

Balance as of October 31, 2008

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

Net reductions during the year ended October 31, 2009

     (3,624     (10     (3,634

Translation

     8,832        132        8,964   
                        

Balance as of October 31, 2009

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

Net additions during the three-month period ended January 31, 2010

     —          3,055        3,055   

Translation

     (5,261     (56     (5,317
                        

Balance as of January 31, 2010

   $ 1,044,009      $ 210,758      $ 1,254,767   
                        

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

Other Intangible Assets

 

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

Trademarks

   $ 2,994    $ 1,020    $ 2,907    $ 979

Technology

     94,732      45,881      91,279      43,846

Shelf space and market share

     88,803      32,112      87,863      30,221

License and distribution rights and other

     13,485      6,038      13,485      5,788
                           
     200,014    $ 85,051      195,534    $ 80,834
                   

Less accumulated amortization and translation

     85,051         80,834   
                   

Other intangible assets, net

   $ 114,963       $ 114,700   
                   

We estimate that amortization expense will be about $15.6 million per year in the five-year period ending October 31, 2014.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 5. Debt

 

     January 31,
2010
   October 31,
2009
     (In thousands)

Short-term:

     

Overdraft and other credit facilities

   $ 15,119    $ 7,051

Current portion of long-term debt

     4,021      2,793
             
   $ 19,140    $ 9,844
             

Long-term:

     

Revolver

   $ 378,800    $ 425,000

Senior notes

     339,000      339,000

Capital lease

     5,979      7,207

Other

     399      423
             
   $ 724,178    $ 771,630
             

In November 2009, the Company entered into a $5.0 million overdraft facility for certain of our Asia Pacific subsidiaries. This facility is designed to replace the existing facility of approximately $3.0 million originating in April 2007. Both facilities are supported by a continuing and unconditional guaranty by the Company. The Company will pay all forms of indebtedness in the currency in which it is denominated for those certain subsidiaries. Interest expense is calculated on all outstanding balances based on an applicable base rate for each country plus a fixed spread common across all subsidiaries covered under the guaranty. At January 31, 2010, approximately $1.8 million was utilized.

Note 6. Derivative Instruments

We operate multiple foreign subsidiaries that manufacture and/or sell our products worldwide. As a result, our earnings, cash flow and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables, sales transactions, capital expenditures and net investment in certain foreign operations. Our policy is to minimize transaction, remeasurement and specified economic exposures with derivatives instruments such as foreign exchange forward contracts and cross currency swaps. The gains and losses on these derivatives are intended to at least partially offset the transaction gains and losses recognized in earnings. We do not enter into derivatives for speculative purposes. Under ASC 815, Derivatives and Hedging (ASC 815 ) , all derivatives are recorded on the balance sheet at fair value. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

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

Exposures are reduced whenever possible by taking advantage of offsetting payable and receivable balances and netting net sales against expenses, also referred to as natural hedges. The Company employs the use of foreign currency derivative instruments to manage a portion of the remaining foreign exchange risk. While we designate our exposures under ASC 815 on a gross basis, foreign

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

currency derivatives may be used to protect against an exposure value resulting from forecasted non-functional currency denominated net sales and expenses. Our risk management objectives and the strategies for achieving those objectives depend on the type of exposure being hedged.

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

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

Cash Flow Hedging

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

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

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

To reduce foreign currency exposure related to forecasted foreign currency denominated sales and purchases of product, the Company enters into foreign currency forward contracts; however, in fiscal 2010, we have not entered into any new forward contracts of this kind. In fiscal 2009, we entered into forward contracts of approximately $43.0 million in the fiscal fourth quarter, $40.0 million in the fiscal

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

third quarter, $250.0 million in the fiscal second quarter and none in the fiscal first quarter. These derivatives were accounted for as cash flow hedges under ASC 815 and were expected to be effective through their maturities. As of January 31, 2010, all outstanding cash flow hedging derivatives had maturities of less than 12 months. Immaterial amounts of ineffectiveness were recorded during the fiscal first quarter of 2009 and no ineffectiveness was recorded for the remainder of fiscal 2009.

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

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

The effective portion of the cash flow hedge contracts’ gains or losses resulting from changes in fair value of these hedges is initially reported as a component of accumulated OCI in stockholder’s equity until the underlying hedged item is reflected in our Consolidated Statement of Income, at which time the effective amount in OCI is reclassified to either net sales or cost of sales in our Consolidated Statement of Income.

We record any ineffectiveness and any excluded components of the hedge immediately to other income or expense in our Consolidated Statement of Income. We calculate hedge effectiveness at a minimum each fiscal quarter. Monthly, we evaluate hedge effectiveness prospectively and retrospectively, excluding time value, using regression as well as other timing and probability criteria required by ASC 815.

In the event the underlying forecasted transaction does not occur within the designated hedge period, or it becomes probable that the forecasted transaction will not occur, the related gains and losses on the cash flow hedges are immediately reclassified from OCI to other income or expense in our Consolidated Statement of Income at that time. We expect to reclassify a loss of approximately $0.1 million to other expense over the next twelve months and a gain of approximately $2.0 million thereafter.

Balance Sheet Hedges

We manage the foreign currency risk associated with non-functional currency assets and liabilities using foreign exchange forward contracts with maturities of less than 24 months and cross currency swaps with maturities up to 36 months. As of January 31, 2010, all outstanding balance sheet hedging derivatives had maturities of less than 12 months. The change in fair value of these derivatives is recognized in other income or expense.

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

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

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

Interest Rate Swaps

In fiscal 2007 and 2008, the Company entered into floating-to-fixed interest rate swaps to fix the floating rate on the Revolver. As of January 31, 2010, the swaps’ notional value totaled $375.0 million with maturities ranging from 2 months to 16 months and fixed rates between 2.40% and 4.95%. We qualified and designated these swaps under ASC 815 as cash flow hedges and recorded the offset of the cumulative fair market value (net of tax effect) to OCI in our Consolidated Condensed Balance Sheet.

Effectiveness testing of the hedge relationship and measurement to quantify ineffectiveness is performed at a minimum each fiscal quarter using the hypothetical derivative method. The swaps have been and are expected to remain highly effective for the life of the hedges. Effective amounts are reclassified to interest expense as the related hedged expense is incurred. The fair value of the outstanding swaps is shown in the Consolidated Condensed Balance Sheet and the Fair Value Measurements and Disclosures tables, below. Liabilities of $2.2 million and $2.6 million were recorded and attributable to accrued interest as of January 31, 2010 and October 31, 2009, respectively. We expect to reclassify $7.2 million from OCI to interest expense in our Consolidated Statements of Income over the next 12 months and $0.5 million thereafter.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

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

 

    

Derivative Assets

  

Derivative Liabilities

    

Balance

Sheet

Location

   Fair
Value
1/31/2010
   Fair
Value
10/31/2009
  

Balance

Sheet

Location

   Fair
Value

1/31/2010
   Fair
Value

10/31/2009
     (In millions)

Derivatives designated as hedging instruments under ASC 815

                 

Interest rate contracts

  

Prepaid expense & other current assets

   $ —      $ —     

Other current liabilities

   $ 5.0    $ 4.1

Interest rate contracts

  

Other assets

     —        —     

Accrued pension liability and other

     2.7      6.3

Foreign exchange contracts

  

Prepaid expense & other current assets

     7.0      9.4   

Other current liabilities

     5.1      11.1

Foreign exchange contracts

  

Other assets

     —        0.9   

Accrued pension liability and other

     —        0.7
                                 

Total derivatives designated as hedging instruments under ASC 815

      $ 7.0    $ 10.3       $ 12.8    $ 22.2
                                 

Derivatives not designated as hedging instruments under ASC 815

                 

Interest rate contracts

  

Prepaid expense & other current assets

   $ —      $ —     

Other current liabilities

   $ —      $ —  

Interest rate contracts

  

Other assets

     —        —     

Accrued pension liability and other

     —        —  

Foreign exchange contracts

  

Prepaid expense & other current assets

     0.4      0.8   

Other current liabilities

     2.6      0.7

Foreign exchange contracts

  

Other assets

     —        —     

Accrued pension liability and other

     —        —  
                                 

Total derivatives not designated as hedging instruments under ASC 815

      $ 0.4    $ 0.8       $ 2.6    $ 0.7
                                 

Total derivatives

      $ 7.4    $ 11.1       $ 15.4    $ 22.9
                                 

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

The Effect of Derivative Instruments on the Consolidated Statement of Income

For the Three Months Ended January 31, 2010 and 2009

(in millions)

 

Derivatives in

ASC 815

Cash Flow

Hedging

Relationships

   Amount of
Gain or (Loss)
Recognized in
OCI on Derivative
(Effective Portion)
    Location of
Gain or (Loss)
Reclassified
from Accumulated
OCI into Income
(Effective Portion)
   Amount of
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
    Location of
Gain or (Loss)
Recognized in
Income on
Derivative
Ineffectiveness
   Amount of
Gain or (Loss)
Recognized

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

Interest rate contracts

   $ (0.7   $ (8.6   Interest expense    $ (3.4   $ (2.1   Other income/
(expense)
   $ —      $ —        Other income/
(expense)
  $ —      $ —  

Foreign exchange contracts

     1.8        (17.2   Net sales      (2.3     9.2      Other income/
(expense)
     —        (0.1   Other income/
(expense)
    —        0.7

Foreign exchange contracts

     —          —        Cost of sales      (0.1     (5.7   Other income/
(expense)
     —        —        Other income/
(expense)
    —        —  
                                                                    

Total

   $ 1.1      $ (25.8      $ (5.8   $ 1.4         $ —      $ (0.1     $ —      $ 0.7
                                                                    

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Derivatives Not Designated

as Hedging Instruments

Under ASC 815

  

Location of Gain or (Loss)

Recognized in Income on

Derivative

   Amount of Gain or (Loss)
Recognized in Income on
Derivative
 
          (in millions)  
          Three Months Ended January 31,  
          2010     2009  
Interest rate contracts    Interest income/(expense)    $ —        $ —     
Foreign exchange contracts    Other (expense)/income, net      (1.5     (2.0
                   
Total       $ (1.5   $ (2.0
                   

Fair Value Measurements

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

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

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

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

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

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

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis during the fiscal first quarter of 2010, within the fair value hierarchy at January 31, 2010:

 

     Level 2
     (In millions)

Assets:

  

Foreign exchange contracts

   $ 7.4
      

Liabilities:

  

Interest rate swaps

   $ 7.7

Foreign exchange contracts

     7.7
      
   $ 15.4
      

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

 

     Level 2
     (In millions)

Assets:

  

Foreign exchange contracts

   $ 11.1
      

Liabilities:

  

Interest rate swaps

   $ 10.4

Foreign exchange contracts

     12.5
      
   $ 22.9
      

Note 7. Earnings Per Share

 

     Three Months Ended
January 31,
     2010    2009
     (In thousands, except per
share amounts)

Net income

   $ 20,423    $ 23,873
             

Basic :

     

Weighted average common shares

     45,293      45,141
             

Basic earnings per common share

   $ 0.45    $ 0.53
             

Diluted :

     

Weighted average common shares

     45,293      45,141

Effect of dilutive stock options

     830      —  
             

Diluted weighted average common shares

     46,123      45,141
             

Diluted earnings per common share

   $ 0.44    $ 0.53
             

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

The following table sets forth stock options to purchase Cooper’s common stock and restricted stock units that are not included in the diluted net income per share calculation because to do so would be antidilutive for the periods presented:

 

     Three Months Ended
January 31,
     2010    2009
     (In thousands, except exercise prices)

Numbers of stock option shares excluded

     3,957      4,775
             

Range of exercise prices

   $ 35.69-$80.51    $ 17.09-$80.51
             

Note 8. Share-Based Compensation Plans

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

 

     Three Months Ended
January 31,
     2010    2009
     (In millions)

Selling, general and administrative expense

   $ 2.5    $ 3.0

Cost of sales

     0.2      0.4

Research and development expense

     0.1      0.2

Capitalized in inventory

     0.2      0.4
             

Total compensation expense

   $ 3.0    $ 4.0
             

Related income tax benefit

   $ 1.0    $ 1.2
             

Note 9. Income Taxes

Cooper’s effective tax rate (ETR) (provision for income taxes divided by pretax income) for the fiscal first quarter of 2010 was 16%. GAAP requires that the projected fiscal year ETR, plus any discrete items, be included in the year-to-date results. The ETR used to record the provision for income taxes for the fiscal first quarter of 2009, was 19%. The decrease in the fiscal 2010 ETR reflects the shift in the geographic mix of income during the period.

The Company adopted the provisions of ASC 740-10-25-5 through 25-17, Basic Recognition Threshold , formerly FIN 48, on November 1, 2007. Under this guidance, the Company recognizes the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. As of November 1, 2009, the Company had total gross unrecognized tax benefits of $15.9 million. If recognized, $15.4 million of unrecognized tax benefits would impact the Company’s ETR. For the three-month period ended January 31, 2010, there were no material changes to the total amount of unrecognized tax benefits. The Company historically classified unrecognized tax benefits in current taxes payable. As a result of our adoption of ASC 740-10-25-5 through 25-17, unrecognized tax benefits were reclassified to long-term income taxes payable.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

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

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

As of January 31, 2010, the tax years for which the Company remains subject to U.S. Federal income tax assessment upon examination are 2005 through 2008. The Company remains subject to income tax examinations in other major tax jurisdictions including the United Kingdom, France and Australia for the tax years 2004 through 2008.

Note 10. Employee Benefits

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

Cooper’s results of operations for the three months ended January 31, 2010 and 2009 reflect the following components of net periodic pension costs:

 

     Three Months Ended
January 31,
 
     2010     2009  
     (In thousands)  

Service cost

   $ 992      $ 766   

Interest cost

     668        586   

Expected return on assets

     (611     (577

Amortization of prior service cost

     6        7   

Amortization of transition obligation

     5        7   

Recognized net actuarial loss

     199        9   

Curtailment loss

     44        —     
                

Net periodic pension cost

   $ 1,303      $ 798   
                

The Company contributed $745,200 to the pension plan in the fiscal first quarter of 2010 and expects to contribute an additional $3.0 million in fiscal 2010. The Company contributed $512,069 to the pension plan during the first quarter of fiscal 2009.

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 11. Cash Dividends

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

Note 12. Contingencies

Legal Proceedings

In re Cooper Companies, Inc. Securities Litigation

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

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

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

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

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

On January 6, 2009, the Court granted plaintiffs’ motion for class certification. The certified class consists of those persons who purchased or otherwise acquired Cooper common stock between July 28, 2004, and November 21, 2005. Discovery in this matter has closed. Cooper and the individual defendants filed summary judgment motions on December 21, 2009. On February 2, 2010, the Court vacated the pre-trial and trial dates while it considered the summary judgment motions. On March 4, 2010, the Court denied in substantial part the motions for summary judgment. Court ordered settlement efforts have not been successful. The Company expects to exhaust its insurance coverage in defense of this litigation and if the case proceeds to trial, general and administrative expenses will increase. The Company intends to defend this matter vigorously.

In re Cooper Companies, Inc. Derivative Litigation

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

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

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

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

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

On January 31, 2007, the Company issued $350 million aggregate principal amount of 7.125% Senior Notes due 2015 (Senior Notes), of which $339 million are outstanding at January 31, 2010. The Senior Notes are guaranteed by certain of our direct and indirect subsidiaries. The Senior Notes represent our general unsecured obligations; senior in right of payment to all of our existing and any future subordinated indebtedness; pari passu in right of payment with all of our existing and any future unsecured indebtedness that is not by its terms expressly subordinated to the Senior Notes; effectively junior in right of payment to our existing and future secured indebtedness to the extent of the value of the collateral securing that indebtedness; unconditionally guaranteed by all of our existing and future domestic subsidiaries, other than any excluded domestic subsidiaries; and structurally subordinated to indebtedness of our subsidiaries that are not subsidiary guarantors.

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Statements of Operations

 

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

Three Months Ended January 31, 2010

          

Net sales

   $ —        $ 120,168      $ 196,086      $ (55,996   $ 260,258   

Cost of sales

     —          57,939        107,153        (54,597     110,495   
                                        

Gross profit

     —          62,229        88,933        (1,399     149,763   
                                        

Operating expenses

     5,509        46,277        60,998        —          112,784   
                                        

Operating income (loss)

     (5,509     15,952        27,935        (1,399     36,979   

Interest expense

     9,958        —          267        —          10,225   

Other income (expense), net

     2,533        1,292        (6,135     (18     (2,328
                                        

Income (loss) before income taxes

     (12,934     17,244        21,533        (1,417     24,426   

Provision for (benefit from) income taxes

     (6,237     8,497        1,743        —          4,003   
                                        

Net income (loss)

   $ (6,697   $ 8,747      $ 19,790      $ (1,417   $ 20,423   
                                        
     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries
    Consolidated
Total
 
     (In thousands)  

Three Months Ended January 31, 2009

          

Net sales

   $ —        $ 117,975      $ 152,636      $ (19,469   $ 251,142   

Cost of sales

     —          52,959        73,225        (17,177     109,007   
                                        

Gross profit

     —          65,016        79,411        (2,292     142,135   
                                        

Operating expenses

     8,170        44,251        56,934        —          109,355   
                                        

Operating income (loss)

     (8,170     20,765        22,477        (2,292     32,780   

Interest expense

     11,221        —          236        —          11,457   

Other income (expense), net

     10,090        (5,196     3,251        —          8,145   
                                        

Income (loss) before income taxes

     (9,301     15,569        25,492        (2,292     29,468   

Provision for (benefit from) income taxes

     (4,505     6,676        3,424        —          5,595   
                                        

Net income (loss)

   $ (4,796   $ 8,893      $ 22,068      $ (2,292   $ 23,873   
                                        

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Balance Sheets

 

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

January 31, 2010

            

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 72    $ (788   $ 2,538    $ —        $ 1,822

Trade receivables, net

     —        67,723        107,222      —          174,945

Inventories

     —        112,592        191,609      (52,359     251,842

Deferred tax assets

     1,400      19,859        4,080      —          25,339

Other current assets

     5,169      4,725        32,566      —          42,460
                                    

Total current assets

     6,641      204,111        338,015      (52,359     496,408
                                    

Property, plant and equipment, net

     1,328      88,738        496,650      —          586,716

Goodwill

     116      672,180        582,471      —          1,254,767

Other intangibles, net

     —        68,370        46,593      —          114,963

Deferred tax assets

     47,518      (24,885     2,394      —          25,027

Other assets

     1,681,890      24,463        13,834      (1,676,668     43,519
                                    
   $ 1,737,493    $ 1,032,977      $ 1,479,957    $ (1,729,027   $ 2,521,400
                                    

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Current liabilities:

            

Short-term debt

   $ 254    $ 2,488      $ 16,398    $ —        $ 19,140

Other current liabilities

     25,318      41,608        92,741      —          159,667
                                    

Total current liabilities

     25,572      44,096        109,139      —          178,807
                                    

Long-term debt

     717,800      —          6,378      —          724,178

Deferred tax liabilities

     —        —          15,046      —          15,046

Intercompany and other liabilities

     61,534      (219,841     209,620      —          51,313
                                    

Total liabilities

     804,906      (175,745     340,183      —          969,344
                                    

Stockholders’ equity

     932,587      1,208,722        1,139,774      (1,729,027     1,552,056
                                    
   $ 1,737,493    $ 1,032,977      $ 1,479,957    $ (1,729,027   $ 2,521,400
                                    

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Balance Sheets

 

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

October 31, 2009

            

ASSETS

            

Current assets:

            

Cash and cash equivalents

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

Trade receivables, net

     —        59,926        111,015      —          170,941

Inventories, net

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

Deferred tax assets

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

Other current assets

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

Total current assets

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

Property, plant and equipment, net

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

Goodwill

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

Other intangibles, net

     —        66,904        47,796      —          114,700

Deferred tax assets

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

Other assets

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

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Current liabilities:

            

Short-term debt

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

Other current liabilities

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

Total current liabilities

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

Long-term debt

     764,000      —          7,630      —          771,630

Deferred tax liabilities

     —        —          16,456      —          16,456

Intercompany and other liabilities

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

Total liabilities

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

Stockholders’ equity

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Statements of Cash Flows

 

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

Three Months Ended January 31, 2010

          

Cash flows from operating activities:

          

Net cash provided by (used in) operating activities

   $ (6,138   $ 16,642      $ 45,638      $ —        $ 56,142   
                                        

Cash flows from investing activities:

          

Purchase of property, plant and equipment

     (14     (876     (12,021     —          (12,911

Acquisitions of businesses, net of cash acquired

     —          (8,400     (107     —          (8,507

Intercompany (investments in subsidiaries)

     48,270        —          —          (48,270     —     
                                        

Net cash (used in) provided by investing activities

     48,256        (9,276     (12,128     (48,270     (21,418
                                        

Cash flows from financing activities:

          

Net proceeds (repayments) of short-term debt

     278        940        6,850        —          8,068   

Intercompany proceeds (repayments)

     —          (7,406     (40,864     48,270        —     

Net proceeds (repayments) of long-term debt

     (46,224     —          —          —          (46,224

Dividends on common stock

     —          —          —          —          —     

Excess tax benefit from share-based compensation arrangements

     407        —          —          —          407   

Proceeds from exercise of stock options

     919        —          —          —          919   
                                        

Net cash (used in) provided by financing activities

     (44,620     (6,466     (34,014     48,270        (36,830
                                        

Effect of exchange rate changes on cash and cash equivalents

     —          —          (4     —          (4
                                        

Net (decrease) increase in cash and cash equivalents

     (2,502     900        (508     —          (2,110

Cash and cash equivalents at the beginning of the period

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

Cash and cash equivalents at the end of the period

   $ 72      $ (788   $ 2,538      $ —        $ 1,822   
                                        

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Consolidating Condensed Statements of Cash Flows

 

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

Three Months Ended January 31, 2009

          

Cash flows from operating activities:

          

Net cash provided by (used in) operating activities

   $ 12,069      $ 16,608      $ (3,773   $ —        $ 24,904   
                                        

Cash flows from investing activities:

          

Purchase of property, plant and equipment

     (7     (5,843     (28,245     —          (34,095

Acquisitions of businesses, net of cash acquired

     (37     (711     (506     —          (1,254

Intercompany (investments in subsidiaries)

     (24,320     —          —          24,320        —     
                                        

Net cash (used in) provided by investing activities

     (24,364     (6,554     (28,751     24,320        (35,349
                                        

Cash flows from financing activities:

          

Net proceeds (repayments) of short-term debt

     550        (81     (1,693     —          (1,224

Intercompany proceeds (repayments)

     —          (9,005     33,325        (24,320     —     

Net proceeds (repayments) of long-term debt

     11,640        —          (14     —          11,626   

Dividends on common stock

     —          —          —          —          —     

Excess tax benefit from share-based compensation arrangements

     136        —          —          —          136   

Proceeds from exercise of stock options

     —          —          —          —          —     
                                        

Net cash provided by (used in) financing activities

     12,326        (9,086     31,618        (24,320     10,538   
                                        

Effect of exchange rate changes on cash and cash equivalents

     —          —          (152     —          (152
                                        

Net (decrease) increase in cash and cash equivalents

     31        968        (1,058     —          (59

Cash and cash equivalents at the beginning of the period

     20        (846     2,770        —          1,944   
                                        

Cash and cash equivalents at the end of the period

   $ 51      $ 122      $ 1,712      $ —        $ 1,885   
                                        

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Continued

(Unaudited)

 

Note 14. Business Segment Information

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

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

Segment information:

 

     Three Months Ended
January 31,
 
     2010     2009  
     (In thousands)  

CooperVision net sales by category:

    

Toric soft lens

   $ 63,533      $ 58,625   

Multifocal soft lens

     16,681        15,849   

Single-use sphere soft lens

     46,943        42,224   

Non single-use sphere and other eye care products

     88,783        94,510   
                

Total CooperVision net sales

     215,940        211,208   

CooperSurgical net sales

     44,318        39,934   
                

Total net sales

   $ 260,258      $ 251,142   
                

Operating income (loss):

    

CVI

   $ 32,433      $ 31,641   

CSI

     10,055        9,309   

Headquarters

     (5,509     (8,170
                

Total operating income

     36,979        32,780   

Interest expense

     (10,225     (11,457

Other (expense) income, net

     (2,328     8,145   
                

Income before income taxes

   $ 24,426      $ 29,468   
                

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements, Concluded

(Unaudited)

 

     January 31,
2010
   October 31,
2009
     (In thousands)

Identifiable assets:

     

CVI

   $ 2,153,871    $ 2,184,856

CSI

     309,980      304,927

Headquarters

     57,549      62,124
             

Total

   $ 2,521,400    $ 2,551,907
             

Geographic information:

     
     Three Months Ended
January 31,
     2010    2009
     (In thousands)

Net sales to external customers by country of domicile:

     

United States

   $ 118,356    $ 116,261

Europe

     83,517      72,496

Rest of world

     58,385      62,385
             

Total

   $ 260,258    $ 251,142
             
     January 31,
2010
   October 31,
2009
     (In thousands)

Long-lived assets by country of domicile:

     

United States

   $ 366,135    $ 375,349

Europe

     212,236      218,974

Rest of world

     8,345      8,245
             

Total

   $ 586,716    $ 602,568
             

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

and Results of Operations, Continued

 

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These include statements relating to plans, prospects, goals, strategies, future actions, events or performance and other statements which are other than statements of historical fact. In addition, all statements regarding anticipated growth in our net sales, CooperVision’s manufacturing restructuring plan, anticipated market conditions, planned product launches and expected results of operations and integration of any acquisition are forward-looking. To identify these statements look for words like “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates” or “anticipates” and similar words or phrases. Forward-looking statements necessarily depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Among the factors that could cause our actual results and future actions to differ materially from those described in forward-looking statements are:

 

   

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

 

   

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

 

   

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

 

   

New competitors, product innovations or technologies.

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Interest rate and foreign currency exchange rate fluctuations.

 

   

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

 

   

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

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

and Results of Operations, Continued

 

   

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

 

   

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

 

   

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

 

   

The success of research and development activities and other start-up projects.

 

   

Dilution to earnings per share from acquisitions or issuing stock.

 

   

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

 

   

Changes in accounting principles or estimates.

 

   

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

 

   

Other events described in our Securities and Exchange Commission filings, including the “Business” and “Risk Factors” sections in the Annual Report on Form 10-K for the fiscal year ended October 31, 2009, as such Risk Factors may be updated in quarterly filings.

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

 

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

and Results of Operations, Continued

 

Results of Operations

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

First Quarter Highlights

 

 

Sales of $260.3 million, up 4%.

 

 

Gross profit $149.8 million, up from $142.1 million.

 

 

Operating income up 13% to $37.0 million.

 

 

Diluted earnings per share of 44 cents, down from 53 cents.

 

 

Operating cash flow $56.1 million, up 125% from $24.9 million.

Outlook

Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and women’s healthcare markets. However, recent events affecting the economy as a whole, including the uncertainty and instability of the United States and international credit markets and ongoing recessionary pressures in the United States and globally, continue to represent a risk to our forecasted performance for fiscal year 2010 and beyond.

We compete in the worldwide contact lens market with our disposable spherical, toric and multifocal contact lenses offered in a variety of materials including using phosphorylcholine (PC) Technology™ and silicone hydrogel Aquaform® technology. We believe that there will be lower contact lens wearer dropout rates as technology improves and that the shift in practitioner preferences from low-featured “commodity” lenses to higher-value specialty and single-use lenses continue to support a favorable world market outlook. CVI is focused on greater market penetration in Europe and Asia as we roll out new products and continue to expand our presence in those regions.

Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. The Company launched Biofinity® sphere in 2007 and Avaira® sphere in 2008, both silicone hydrogel contact lens products. 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. In addition to spheres, competitive silicone hydrogel toric products are making substantial gains in market share and represent a risk to our toric business. We launched a monthly silicone hydrogel toric lens, under the Biofinity label, in the first calendar quarter of 2009 and plan to launch a two-week silicone hydrogel toric, under the Avaira label, in fiscal year 2010. Our ability to compete successfully with 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 CVI’s broad and competitive worldwide product lines. New products planned for introduction over the next two years include additional lenses utilizing silicone hydrogel and PC Technology™ materials and new lens designs, including toric and multifocal lenses.

 

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

and Results of Operations, Continued

 

The medical device segment of women’s healthcare is highly fragmented. CSI competes based on brand awareness and market focused product offerings. CSI’s strategy includes identifying and acquiring selected smaller companies and product lines that improve its existing market position or serve new clinical areas. We intend to continue to invest in CSI’s business through acquisitions of companies and product lines.

We believe that our cash and cash equivalents, cash flow from operating activities and existing credit facilities will fund future operations, capital expenditures, cash dividends and acquisitions for at least the next twelve months.

Selected Statistical Information – Percentage of Sales and Growth

 

     Percent of Sales
Three Months Ended
January 31,
       
     2010     2009     %
Change
 

Net sales

   100   100   4

Cost of sales

   42   43   1
              

Gross profit

   58   57   5

Selling, general and administrative expense

   39   38   6

Research and development expense

   3   3   5

Restructuring costs

   —        1   (88 )% 

Amortization of intangibles

   2   2   1
              

Operating income

   14   13   13
              

Net Sales

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

 

 

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

 

 

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

Our consolidated net sales grew by $9.2 million, or 4%.

 

     Three Months Ended
January 31,
   %
Change
 
     2010    2009   
     ($in millions)       

CVI

   $ 215.9    $ 211.2    2

CSI

     44.4      39.9    11
                
   $ 260.3    $ 251.1    4
                

 

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

and Results of Operations, Continued

 

CVI Net Sales

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

 

 

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

 

 

Commodity lenses to toric and multifocal lenses.

 

 

Conventional lenses replaced annually to disposable and frequently replaced lenses. Disposable lenses are designed for either daily, two-week or monthly replacement; frequently replaced lenses are designed for replacement after one to three months.

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

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

Multifocal lens designs correct presbyopia.

 

 

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

 

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

and Results of Operations, Continued

 

CVI Net Sales by Region

 

     Three Months Ended
January 31,
      
     2010    2009    %
Change
 
     ($ in millions)       

Americas

   $ 86.0    $ 86.1    —  

EMEA

     84.7      82.3    3

Asia Pacific

     45.2      42.8    6
                    
   $ 215.9    $ 211.2    2
                    

CVI’s worldwide net sales grew 2%. Americas net sales were flat overall with total torics down 1% and total multifocals down 1% offset by market gains of CVI’s silicone hydrogel spherical and toric lenses, Biofinity and Avaira, up 125% and Proclear 1 Day spheres, up 60%. 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 sales grew 3% 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 6% primarily due to sales growth of single-use spherical and toric products and Biofinity and Avaira lenses.

Net sales growth includes increases in single-use spheres up 11%, all disposable spheres up 10% and total spheres up 9%. Silicone hydrogel spheres were up 84%, primarily in the United States and Europe. Our silicone hydrogel toric lenses, which we launched in the fiscal first quarter of 2009, had sales of $11.0 million and single-use torics grew 32%, with total torics up 8%. Disposable multifocal lens sales grew 6% to $16.5 million. Older conventional lens products declined 15%, and cosmetic lenses declined 10%. Proclear products continued global market share gains as Proclear 1 Day spheres increased 74% and Proclear multifocal lenses increased 10%.

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 11% to $44.4 million with organic sales growth of about 10%. Sales of products marketed directly to hospitals grew 15% and now represent 36% of CSI’s sales. 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. Unit growth and product mix along with increased average realized prices on disposable products have influenced organic sales growth.

 

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

and Results of Operations, Continued

 

Cost of Sales/Gross Profit

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

 

     Margin
Three Months Ended
January 31,
 
     2010     2009  

CVI

   57   56

CSI

   61   62

Consolidated

   58   57

CVI’s margin was 57% for the fiscal first quarter of 2010 compared with 56% for the first quarter last year with the increase a result of changing product mix including a shift to higher margin silicone hydrogel products and improvements in manufacturing efficiencies. The increase was partially offset by the increase in accruals for rebates discussed above and $2.2 million of costs associated with the 2009 CooperVision manufacturing restructuring plan that we initiated in our fiscal third quarter of 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.

CSI’s margin was 61% for the first quarter of 2010 compared with 62% for the first quarter last year. The decrease is a result of changing product mix and the currency impact of materials purchased internationally partially offset by an increase in higher margin products marketed directly to hospitals that represent 36% of net sales in the current period compared to 34% in the first quarter of 2009.

Selling, General and Administrative (SGA) Expense

 

     Three Months Ended January 31,  
     2010    % Net
Sales
    2009    % Net
Sales
    %
Change
 
     ($ in millions)  

CVI

   $ 80.2    37   $ 73.7    35   9

CSI

     14.9    34     13.2    33   13

Headquarters

     5.5    N/A        8.1    N/A      (33 )% 
                    
   $ 100.6    39   $ 95.0    38   6
                    

In the fiscal first quarter of 2010, consolidated SGA increased by 6% and, as a percentage of net sales, increased to 39% from 38% in the fiscal first quarter of 2009.

CVI’s SGA increased 9% in the fiscal first quarter, primarily due to increased marketing expenses related to our silicone hydrogel products and increased selling and distribution costs to support higher sales. SGA as a percentage of net sales increased to 37% from 35% in the fiscal first quarter of 2009.

 

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

and Results of Operations, Continued

 

CSI’s SGA increased 13% in the fiscal first quarter and as a percentage of net sales increased to 34% from 33% in the fiscal first quarter of 2009. Selling costs increased to support higher sales and other general and administration costs increased primarily due to acquisition related legal expenses.

Corporate headquarters’ SGA decreased 33% to $5.5 million in the fiscal first quarter primarily due to reduced headcount, lower share-based compensation expense and audit costs.

Research and Development Expense

During the fiscal first quarter, CVI’s research and development expenditures were $6.6 million, up 6% over the fiscal first quarter of 2009 and were 3% of net sales in both periods. CVI’s research and development activities include programs to develop disposable silicone hydrogel products and product lines utilizing PC Technology.

CSI’s research and development expenditures were $1.0 million, and as a percentage of net sales decreased to 2% from 3% in the first quarter of 2009. CSI’s research and development activities include the upgrade and redesign of many CSI incontinence, assisted reproductive technology and uterine manipulation products and other gynecological and obstetrical product development activities.

Restructuring Costs

The Company initiated the Critical Activity restructuring plan in the fiscal first quarter of 2009, and it was substantially complete in our fiscal fourth quarter of 2009. We reported $0.3 million in the fiscal first quarter of 2010 compared to $3.6 million in the first quarter last year with total restructuring costs for this plan of $4.6 million, with total expense reported of $0.3 million in the first fiscal quarter of 2010. The Company entered into the 2009 CooperVision manufacturing restructuring plan in the fiscal third quarter of 2009, with total expense reported of $2.3 million in the fiscal first quarter of 2010, which primarily included non-cash costs associated with assets. The Company expects to complete restructuring activities in Adelaide, Australia, in our fiscal third quarter of 2010 and expects to complete restructuring activities in Norfolk, Virginia, in our fiscal first quarter of 2011. The Company may, from time to time, decide to pursue additional restructuring activities that involve charges in future periods.

Operating Income

Operating income increased by $4.2 million, or 13%, in the first quarter:

 

     Three Months Ended January 31,  
     2010     % Net
Sales
    2009     % Net
Sales
    %
Change
 
     ($ in millions)  

CVI

   $ 32.4      15   $ 31.6      15   3

CSI

     10.1      23     9.3      23   8

Headquarters

     (5.5   N/A        (8.1   N/A      33
                      
   $ 37.0      14   $ 32.8      13   13
                      

Interest Expense

Interest expense in the fiscal first quarter decreased 11% to $10.2 million and to 4% of net sales from 5% in the first quarter last year. The decrease primarily reflects a reduction in our long-term borrowings used for capital expenditures and lower interest rates.

 

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

and Results of Operations, Continued

 

Other (Expense) Income, Net

 

     Three Months Ended
January 31,
 
     2010     2009  
     (In millions)  

Gain on extinguishment of debt

   $ —        $ 1.8   

Foreign exchange (loss) gain

     (2.3     6.5   

Other

     —          (0.2
                
   $ (2.3   $ 8.1   
                

In December 2008, we purchased through the open market, in a privately negotiated transaction, $11.0 million in aggregate principal amount of our 7.125% Senior Notes at a discounted price of approximately $9.0 million plus accrued and unpaid interest. We also wrote off about $0.2 million of unamortized costs related to the Senior Notes and recorded a gain on the repurchase in other income on our Consolidated Statements of Income. The Company paid the aggregate purchase price from borrowings under its $650 million revolving line of credit.

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

Provision for Income Taxes

We recorded tax expense of $4.0 million in the fiscal first quarter of 2010 compared to $5.6 million in the fiscal first quarter of 2009. Cooper’s effective tax rate (ETR) (provision for income taxes divided by pretax income) for the fiscal first quarter of 2010 was 16%. GAAP requires that the projected fiscal year ETR, plus any discrete items, be included in the year-to-date results. The ETR used to record the provision for income taxes for the fiscal first quarter of 2009, was 19%. The decrease in the fiscal 2010 ETR reflects the shift in the geographic mix of income during the period.

Share-Based Compensation Plans

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

 

     Three Months Ended
January 31,
     2010    2009
     (In millions)

Selling, general and administrative expense

   $ 2.5    $ 3.0

Cost of sales

     0.2      0.4

Research and development expense

     0.1      0.2

Capitalized in inventory

     0.2      0.4
             

Total compensation expense

   $ 3.0    $ 4.0
             

Related income tax benefit

   $ 1.0    $ 1.2
             

 

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

and Results of Operations, Continued

 

Capital Resources and Liquidity

First Quarter Highlights

 

 

Operating cash flow $56.1 million vs. $24.9 million in the fiscal first quarter of 2009.

 

 

Expenditures for purchases of property, plant and equipment (PP&E) $12.9 million vs. $34.1 million in last year’s first quarter.

 

 

Total debt decreased to $743.3 million from $781.5 million at October 31, 2009.

Comparative Statistics

 

     January 31, 2010     October 31, 2009  
     ($ in millions)  

Cash and cash equivalents

   $ 1.8      $ 3.9   

Total assets

   $ 2,521.4      $ 2,551.9   

Working capital

   $ 317.6      $ 328.5   

Total debt

   $ 743.3      $ 781.5   

Stockholders’ equity

   $ 1,552.1      $ 1,540.3   

Ratio of debt to equity

     0.48:1        0.51:1   

Debt as a percentage of total capitalization

     32     34

Operating cash flow - twelve months ended

   $ 254.4      $ 223.1   

Working Capital

The decrease in working capital in the fiscal first quarter of 2010 was primarily due to a decrease in inventories and an increase in short-term debt. The decrease in working capital was partially offset by an increase in trade accounts receivable and a decrease in accounts payable and other accrued liabilities.

Operating Cash Flow

Cash flow provided by operating activities totaled $56.1 million in the first quarter of fiscal 2010 and $254.4 million over the twelve-month period ended January 31, 2010. Operating cash flow increased compared to the first quarter of fiscal 2009, primarily due to reduction in inventory due to higher sales volume and timing of accounts payable and income tax payments.

At the end of the fiscal first quarter of 2010, Cooper’s inventory months on hand (MOH) decreased to 6.8 from 7.9 in last year’s first quarter. Our days sales outstanding (DSO) increased to 61 days from 58 days in last year’s first quarter. 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.

 

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

and Results of Operations, Continued

 

Investing Cash Flow

The cash outflow of $21.4 million from investing activities was for capital expenditures of $12.9 million primarily to improve manufacturing efficiency and payments of $8.5 million related to acquisitions.

Financing Cash Flow

The cash outflow of $36.8 million from financing activities in the fiscal first quarter of 2010 was driven by net repayments of debt of $38.1 million partially offset by proceeds of $1.3 million from the exercise of stock options.

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, Swedish krona 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 significant portion of variable rate debt effectively converting it to fixed rate debt for varying periods through May 2011. For additional detail, see Item 1A. Risk Factors and Note 1 and Note 8 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009.

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. KeyBank led the Revolver refinancing, and the Revolver matures on January 31, 2012.

In connection with the normal management of our financial liabilities, we may from time to time seek to 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.

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 listed below address the more significant estimates required of management when preparing our consolidated financial statements in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are:

 

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

and Results of Operations, Continued

 

 

Revenue recognition

 

 

Allowance for doubtful accounts

 

 

Net realizable value of inventory

 

 

Valuation of goodwill

 

 

Business combinations

 

 

Income taxes

 

 

Share-based compensation

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

New Accounting Pronouncements

On November 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 350-30-35-5A, Accounting for Defensive Intangible Assets . ASC Subtopic 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.

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 non recurring 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.

 

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

and Results of Operations, Concluded

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). The adoption of ASU 2010-09 had no effect on our consolidated financial statements.

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

Consolidated Balance Sheet at October 31, 2009

 

     As Reported    Adjustments     As Adjusted
     (In thousands)

Additional paid-in capital

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

Retained earnings

   $ 500,078    $ (9,627   $ 490,451

Trademarks

Aquaform, Avaira, Biofinity, Biomedics and Proclear are registered trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries. PC Technology is a trademark of The Cooper Companies, Inc., its affiliates and/or subsidiaries.

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

See “Risk Management” under Capital Resources and Liquidity in Item 2 of this report.

Item 4. Controls and Procedures

The Company has established and currently maintains disclosure controls and procedures designed to ensure that material information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that any material information relating to the Company is recorded, processed, summarized and reported to its principal officers to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In conjunction with the close of each fiscal quarter, the Company conducts a review and evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, based upon their evaluation as of January 31, 2010, the end of the fiscal quarter covered in this report, concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

As of January 31, 2010, there has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is from time to time involved in various litigation and legal matters arising in the normal course of its business operations. By describing any particular matter, the Company does not intend to imply that it or its legal advisors have concluded or believe that the outcome of any of those particular matters is or is not likely to have a material adverse impact upon the Company’s consolidated financial position, cash flows or results of operations.

In re Cooper Companies, Inc. Securities Litigation

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

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

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

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

 

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

On January 6, 2009, the Court granted plaintiffs’ motion for class certification. The certified class consists of those persons who purchased or otherwise acquired Cooper common stock between July 28, 2004, and November 21, 2005. Discovery in this matter has closed. Cooper and the individual defendants filed summary judgment motions on December 21, 2009. On February 2, 2010, the Court vacated the pre-trial and trial dates while it considered the summary judgment motions. On March 4, 2010, the Court denied in substantial part the motions for summary judgment. Court ordered settlement efforts have not been successful. The Company expects to exhaust its insurance coverage in defense of this litigation and if the case proceeds to trial, general and administrative expenses will increase. The Company intends to defend this matter vigorously.

In re Cooper Companies, Inc. Derivative Litigation

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

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

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

 

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

Item 1A. Risk Factors

Our business faces significant risks. These risks include the risk described below. The risk factor set forth below was disclosed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009, and has been modified to reflect changes since that filing. This risk should be read in conjunction with the other information in this report and the Annual Report on Form 10-K for the fiscal year ended October 31, 2009. 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.

We face risks in connection with securities litigation.

The Company and several of its directors and officers have been named in a consolidated putative securities class action lawsuit and its directors and certain of its officers have been named in two consolidated derivative lawsuits, the nature and status of which are described in Item 1. Legal Proceedings. The consolidated putative securities class action seeks unspecified damages from the Company, and we are unable to estimate the range of potential losses that would be incurred if the plaintiffs in this action were to prevail, or to determine the total effect that it may have on our results of operations, financial position and cash flows. We expect to exhaust our insurance coverage in defense of this litigation and if the case proceeds to trial, general and administrative expenses will increase. A settlement or adverse judgment on the merits of this action could have a material adverse effect on the Company’s liquidity, results of operations and financial condition. In addition, securities litigation, irrespective of its merits, is costly to defend and diverts management’s attention and resources, which could adversely affect our business.

The purported derivative lawsuits, which are at a very preliminary stage, do not seek damages from the Company. However, derivative litigation is costly, and these lawsuits may divert management’s attention and resources, which could adversely affect our business.

 

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Item 6. Exhibits

 

Exhibit
Number

 

Description

10.1   The Cooper Companies, Inc. 2010 Incentive Payment Plan, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 28, 2010.
11*   Calculation of Earnings Per Share
31.1   Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1   Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350
32.2   Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350

 

* The information called for in this Exhibit is provided in Footnote 7, “Earnings per Share,” to the Consolidated Condensed Financial Statements in this report.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

The Cooper Companies, Inc.

    (Registrant)
Date: March 5, 2010    

/s/ Rodney E. Folden

    Rodney E. Folden
    Vice President and Corporate Controller
    (Principal Accounting Officer)

 

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THE COOPER COMPANIES, INC. AND SUBSIDIARIES

Index of Exhibits

 

Exhibit No.

       

Page No.

     
10.1   The Cooper Companies, Inc. 2010 Incentive Payment Plan, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 28, 2010.    
11*   Calculation of Earnings Per Share    
31.1   Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934    
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934    
32.1   Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350    
32.2   Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350    

 

* The information called for in this Exhibit is provided in Footnote 7, “Earnings per Share,” to the Consolidated Condensed Financial Statements in this report.

 

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Exhibit 31.1

CERTIFICATIONS

I, Robert S. Weiss, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Cooper Companies, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 5, 2010

 

/s/ Robert S. Weiss

Robert S. Weiss
President and Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, Eugene J. Midlock, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Cooper Companies, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 5, 2010

 

/s/ Eugene J. Midlock

Eugene J. Midlock
Senior Vice President and Chief Financial Officer

Exhibit 32.1

Certification of Chief Executive Officer

I, Robert S. Weiss, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

the Quarterly Report on Form 10-Q of the Company for the quarterly period ended January 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: March 5, 2010    

/s/ Robert S. Weiss

    Robert S. Weiss
    President and Chief Executive Officer

Exhibit 32.2

Certification of Chief Financial Officer

I, Eugene J. Midlock, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

the Quarterly Report on Form 10-Q of the Company for the quarterly period ended January 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 5, 2010

 

/s/ Eugene J. Midlock

Eugene J. Midlock
Senior Vice President and
Chief Financial Officer