What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-12-11 compared with 2019-12-20 · 293 added, 224 removed, 225 unchanged (70% of the section changed)

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Within the tables presented, percentages are calculated based on the underlying whole-dollar amounts and, therefore, may not recalculate exactly from the rounded numbers used for disclosure purposes.

Non-GAAP Financial Measures

The succeeding sections of Management’s Discussion and Analysis (MD&A) may include certain financial measures that are not defined by accounting principles generally accepted in the United States of America (GAAP).

These measures, which are referred to as non-GAAP measures, are listed below:

Free Cash Flow - Free cash flow is calculated as net cash provided by operating activities less capital expenditures.

Constant currency - Constant currency is defined as excluding the effect of foreign currency fluctuations.

For a discussion of these measures and the reasons management believes they are useful to investors, refer to “Summary of Non-GAAP Financial Measures” below.

To the extent applicable, this MD&A includes reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.

The presentation of these non-GAAP financial measures is not intended to be a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP and may be different from non-GAAP financial measures used by other companies, and therefore, may not be comparable among companies.

COVID-19 Considerations

The World Health Organization categorized the Coronavirus disease 2019 (COVID-19) as a pandemic.

The COVID-19 pandemic has caused a severe global health crisis, along with economic and societal disruptions and uncertainties, which have negatively impacted business and healthcare activity globally.

As a result of healthcare systems responding to the demands of managing the pandemic, governments around the world imposing measures designed to reduce the transmission of the COVID-19 virus, and individuals responding to the concerns of contracting the COVID-19 virus, many optical practitioners and retailers, hospitals, medical offices and fertility clinics closed their facilities, restricted access, or delayed or canceled patient visits, exams and elective medical procedures, and many customers that have reopened are experiencing reduced patient visits.

This has had, and we believe will continue to have, an adverse effect on our sales, operating results and cash flows.

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

We have taken an active role in addressing the ongoing pandemic’s impact on our employees, suppliers, distribution channels, operations and customers, including taking precautionary measures, such as implementing contingency plans, and making operational adjustments as necessary.

We have taken measures to help ensure the safety of our personnel in all our facilities, and we have endeavored and continue to follow recommended actions of government and health authorities to protect our employees worldwide.

As of the date of this filing, we have not experienced any significant disruption at our manufacturing facilities.

We have had no significant disruption in our access to necessary raw materials and other supplies or with our distribution network;

however, we have experienced higher unabsorbed fixed overhead costs, labor inefficiencies, higher cost of production and higher freight charges as a result of the COVID-19 pandemic.

As a result, we instituted an inventory control project to reduce buildup of excess inventory.

Our manufacturing and distribution operations have responded to the impacts related to the COVID-19 pandemic, and we have been able to continue to supply our products around the world without interruption.

In the future, we may decide or need to implement additional precautionary measures or operational adjustments as we deem prudent to meet consumer demand or to help further ensure employee safety.

We believe that the actions we are taking have enabled us to keep our employees safe and our supply chain intact and will help us emerge from this global pandemic operationally sound and well positioned for long-term growth.

The extent to which the global COVID-19 pandemic and related economic disruptions impact our business, results of operations, cash flow and financial condition will depend on future developments.

At this time, future developments are highly uncertain, difficult to predict and largely outside of our control.

These include, but are not limited to, the spread, duration and severity of the pandemic outbreak and any subsequent waves of additional outbreaks, actions taken by governments to contain the pandemic, address its impact or respond to the reduction in global and local economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

We will continue to closely monitor the developments relating to the COVID-19 pandemic and the responses from governments and private sector participants and their respective impact on our Company and on our customers, suppliers, vendors and business partners.

For more information on the risks associated with the COVID-19 pandemic, refer to Part I, Item 1A, "Risk Factors" herein.

Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and general health care markets.

However, events affecting the economy as a whole, including but not limited to the uncertainty and instability of global markets driven by foreign currency volatility, changes in tax legislation, debt concerns, the uncertainty caused by the United Kingdom's planned withdrawal from the European Union, global trade barriers including additional tariffs and the trend of consolidations within the health care industry, impact our current performance and continue to represent a risk to our future performance.

CooperVision - We compete in the worldwide contact lens market with our spherical, toric and multifocal contact lenses offered in a variety of materials including using silicone hydrogel Aquaform ® technology and PC Technology™.

We believe that there will be lower contact lens wearer dropout rates as technology improves and enhances the wearing experience through a combination of improved designs and materials and the growth of preferred modalities such as single-use and monthly wearing options.

Recent acquisitions also expanded CooperVision's access to myopia management and specialty eye care markets with new products, such as ortho-k and scleral lenses.

In November 2019, CooperVision received United States Food & Drug Administration (FDA) approval for its MiSight ® 1 day lens, which is the first and only FDA-approved product indicated to slow the progression of myopia in children with treatment initiated between the ages of 8-12 and is expected to be available in the United States in 2020.

CooperVision is focused on greater worldwide market penetration using recently introduced products, and we continue to expand our presence in existing and emerging markets, including through acquisitions.

CooperVision acquired the following entity during fiscal 2019:

Blanchard Contact Lenses on December 28, 2018 - a privately-held scleral lens company, which expands CooperVision's specialty and scleral lens portfolio.

CooperVision acquired the following entities during fiscal 2018:

Blueyes on January 4, 2018 - a long-standing distribution partner, which had a leading position in the distribution of contact lenses to the optical and pharmacy sector in Israel

Paragon Vision Sciences on December 1, 2017 - a leading provider of ortho-k specialty contact lenses and oxygen permeable rigid contact lens materials.

However, the impact, risks and uncertainty relating to the global COVID-19 pandemic and related economic disruptions, as further described in the “COVID-19 Considerations” section above and in the “Risk Factors” section in Part I, Item 1A of this filing, have adversely affected our sales, cash flow and current performance and are likely to further adversely affect our future sales, cash flow and performance.

Additionally, other events affecting the economy as a whole, including but not limited to the uncertainty and instability of global markets driven by foreign currency volatility, changes in tax legislation, debt concerns, the uncertainty during and after the transition period following the United Kingdom's withdrawal from the EU, changes to existing regulations and new regulations, global trade barriers including additional tariffs and the trend of consolidations within the health care industry could impact our current performance and continue to represent a risk to our future performance.

CooperVision - We compete in the worldwide contact lens market with our spherical, toric, multifocal, toric multifocal and myopia management contact lenses offered in a variety of materials including using silicone hydrogel Aquaform ® technology, PC Technology™ and ActivControl™ technology.

We believe that there will be lower contact lens wearer dropout rates as technology improves and enhances the

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

wearing experience through a combination of improved designs and materials and the growth of preferred modalities such as single-use and monthly wearing options.

CooperVision also competes in the myopia management and specialty eye care markets with products such as ortho-k and scleral lenses.

In November 2019, CooperVision received United States Food and Drug Administration (FDA) approval for its MiSight ® 1 day lens, which is the first and only FDA-approved product indicated to slow the progression of myopia in children with treatment initiated between the ages of 8-12 and became available in the United States during fiscal 2020.

On August 7, 2020, CooperVision completed the acquisition of a privately-held U.S contact lens manufacturer focusing on ortho-k lenses.

This acquisition expands CooperVision’s specialty eye care portfolio and its leadership in addressing the increasing severity and prevalence of myopia.

On December 28, 2018, CooperVision completed the acquisition of a privately-held scleral lens company, which expands CooperVision's specialty and scleral lens portfolio.

Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our desired future levels of sales growth and profitability.

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Included in this segment are unique products such as Biofinity Energys ® , which helps individuals with digital eye fatigue.

CooperSurgical - Our CooperSurgical business competes in the general health care market with a focus on advancing the health of women, babies and families through a diversified portfolio of products and services focusing on women's health, fertility, diagnostics and contraception.

CooperSurgical - Our CooperSurgical business competes in the general health care market with a commitment to advancing the health of women, babies and families through its diversified portfolio of products and services focusing on women's health and fertility.

CooperSurgical has established its market presence and distribution system by developing products and acquiring companies, products and services that complement its business model.

CooperSurgical acquired the following entity during fiscal 2019:

Incisive Surgical Inc.

on December 31, 2018 - a privately-held U.S.

CooperSurgical acquired a privately-held distributor of IVF medical devices and systems on December 13, 2019.

On December 31, 2018, CooperSurgical acquired a privately-held U.S.

medical device company that develops mechanical surgical solutions for skin closure.

CooperSurgical acquired the following entities and assets during fiscal 2018:

LifeGlobal Group on April 3, 2018 - a privately held company that specializes primarily in IVF media.

LifeGlobal’s product categories include media products, IVF laboratory air filtration products and dishware

PARAGARD on November 1, 2017 - CooperSurgical acquired the assets of the PARAGARD IUS business from Teva for $1.1 billion.

PARAGARD broadened and strengthened CooperSurgical's women's health product portfolio and it is the only non-hormonal, long lasting, reversible contraceptive option approved by the FDA and available in the United States.

IUS represent a large and growing segment of the Long Acting Reversible Contraceptive market.

We intend to continue investing in CooperSurgical's business with the goal of expanding our integrated solutions model within the areas of women's health, fertility, diagnostics and contraception.

Capital Resources - At October 31, 2019 , we had $89.0 million in unrestricted cash, primarily held outside the United States, and $734.8 million available under our 2016 Revolving Credit Facility (as defined below).

Debt outstanding at October 31, 2019 consisted of:

$1.0 billion outstanding on a $1.425 billion syndicated Term Loan Agreement (the 2017 Term Loan Agreement) used to fund the acquisition of PARAGARD, which matures on November 1, 2022

A $500.0 million 364-day senior unsecured term loan agreement (the 2019 Term Loan Agreement), which matures on September 25, 2020

$264.0 million outstanding on a $1.0 billion multi-currency revolving credit facility (the 2016 Revolving Credit Facility), which matures on March 1, 2021.

Capital Resources - At October 31, 2020 , we had $115.9 million in unrestricted cash, primarily held outside the United States, and $754.6 million available under our 2020 Revolving Credit Facility.

Debt outstanding at October 31, 2020 primarily consisted of:

$850.0 million term loan entered into on April 1, 2020

$534.0 million drawn under our 2020 Revolving Credit Facility entered into on April 1, 2020

$350.0 million term loan entered into on October 16, 2020

Debt of the Consolidated Financial Statements for additional information.

Transition from LIBOR

The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered

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Transition from LIBOR

The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021.

We have undertaken an assessment of contracts that will be impacted by the transition away from LIBOR.

To date, we have identified that substantially all of our term loan and credit facility agreements include an adjusted LIBOR option.

Rate (LIBOR), announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021.

Further, in March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The Company has material contracts that are indexed to LIBOR and is continuing to monitor this activity and evaluate the related risk.

We are continuing to evaluate the scope of impacted contracts and the potential impact.

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2020 Compared with 2019

Gross margin increased to 66% of net sales compared with 64% in fiscal 2018

Operating income increased 36% to $546.7 million from $403.1 million

Interest expense decreased to $68.0 million from $82.7 million due to lower average debt balances, partially offset by higher interest rates

Diluted earnings per share increased 232% to $9.33 from $2.81

Operating cash flow increased 7% to $713.2 million from $668.9 million.

Gross margin decreased to 63% of net sales compared with 66% in fiscal 2019, primarily due to the negative impact of the COVID-19 pandemic on net sales and cost of sales

Operating income decreased 43% to $311.8 million from $546.7 million

Interest expense decreased to $36.8 million from $68.0 million due to lower average debt balances and lower interest rates

Diluted earnings per share decreased 48% to $ 4.81 from $ 9.33

Operating cash flow decreased 32% to $486.6 million from $713.2 million.

Selected Statistical Information – Percentage of Net Sales

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Amortization of intangibles

Impairment of intangibles

Gain on sale of an intangible

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

Net Sales Growth by Business Unit

($ in millions)

2019 vs 2018 % Change

CooperSurgical

CooperVision Net Sales

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In the fiscal year ended October 31, 2020 :

Sales growth in fiscal 2019 was largely organic

Toric lenses grew primarily through the success of Biofinity, clariti and MyDay

The COVID-19 pandemic has negatively impacted our business.

Net sales in fiscal 2020 declined by 7%, compared to fiscal 2019.

Customers have either slowed down purchases or delayed orders due to a desire to reduce inventories, reduced contact lens wear driven by limited social interaction and lack of patient access on account of certain office closures and reduced access as offices reopen.

We started experiencing downward pressure on net sales when markets started closing during our second quarter of fiscal 2020 as social restrictions were put in place and the offices of health care providers were closed

CooperVision’s net sales declined across product categories and all our markets, however the net sales decline was partially offset by higher sales of MyDay, MiSight and Biofinity Energys

"Other" products primarily include lens care which represented approximately 2% of net sales in fiscal 2020 and 2019

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Multifocal lenses increased in fiscal 2019, compared to fiscal 2018 due to higher Biofinity and clariti sales, partially offset by a decrease in sales of older hydrogel products

Single-use sphere lenses growth was primarily attributed to clariti and MyDay lenses

Non-single-use spheres increased in fiscal 2019, compared to fiscal 2018 due to higher Biofinity sales

"Other" products primarily include lens care which represented approximately 2% of net sales in fiscal 2019 and 2018

Increased sales of silicone hydrogel products were partially offset by lower sales of older hydrogel products.

Total silicone hydrogel products grew 9% in fiscal 2019, representing 72% of net sales in fiscal 2019 compared to 69% in fiscal 2018

Foreign exchange rates negatively impacted sales by approximately $53.6 million in fiscal 2019 and positively impacted sales by $43.9 million in fiscal 2018, primarily attributable to fluctuations in the Euro and British Pound

Sales growth was primarily driven by increases in the volume of lenses sold.

Average realized prices by product did not materially influence sales growth.

Total silicone hydrogel products decreased by 4%, representing 74% of net sales in the fiscal 2020 compared to 72% in fiscal 2019

Foreign exchange rates negatively impacted sales by approximately $2.4 million, compared to a negative impact of $53.6 million in fiscal 2019.

In fiscal 2020, net sales decreased 6% in constant currency over the prior year

Sales reduction was primarily driven by a decrease in the volume of lenses sold.

Average realized prices by product did not materially influence sales

We expect to continue seeing downward pressure on net sales if the COVID-19 pandemic continues, optical retailers and healthcare centers continue to restrict access, and social distancing measures continue.

CooperVision Net Sales by Geography

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2019 % Change

CooperVision's regional growth in Americas, EMEA and Asia Pacific was primarily attributable to market gains of silicone hydrogel contact lenses.

CooperVision's regional reduction in net sales was primarily attributable to disruption from the COVID-19 pandemic.

Refer to CooperVision Net Sales by Category above for further discussion.

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Office and surgical products

In the fiscal year ended October 31, 2019 :

Office and surgical products increased compared to prior year due to continued growth in PARAGARD and surgical products, primarily Uterine Manipulators, Surgical Retractors and recently acquired products of Incisive Surgical, partially offset by a decrease in revenue from sales of the Filshie Clip system.

On February 1, 2019, the Company agreed to the early termination of an exclusive distribution agreement which had given CooperSurgical the rights to distribute the Filshie Clip System in the United States

Fertility net sales increased in fiscal 2019 compared to fiscal 2018, primarily due to increased sales of IVF consumables, IVF equipment and LifeGlobal products, partially offset by a decrease in diagnostics revenue and exit of the carrier screening and non-invasive prenatal testing (NIPT) product lines on June 1, 2018

Unit growth and product mix positively impacted sales growth.

CooperSurgical

In th e fiscal year ended October 31, 2020 :

We have experienced COVID-19 pandemic-related economic disruptions and decline in net sales during fiscal 2020.

We experienced downward pressure on revenue when major markets started closing as social restrictions were put in place and the offices of certain health care providers were closed.

In response to the COVID-19 pandemic, as a precautionary measure, certain health care facilities and medical offices were closed or restricted access and surgeries and elective medical procedures and exams have been deferred or canceled.

Further, there has been a significant reduction in physician office visits, and healthcare centers have postponed or canceled capital purchases

Office and surgical products decreased compared to the prior year mainly due to reduction in PARAGARD IUD sales.

Further, there has been a reduction in revenue from other surgical products such as Uterine Manipulators and Closure products, partially offset by an increase in revenue from Incisive Surgical and Endosee products

Fertility net sales declined compared to the prior year mainly due to reduction in revenue from IVF consumables and equipment

Foreign exchange rates negatively impacted sales by approximately $2.1 million, compared to a negative impact of $9.0 million in the prior year.

In fiscal 2020, net sales decreased 13% in constant currency over the prior year

We expect to continue seeing downward pressure on net sales if the COVID-19 pandemic continues, hospitals and healthcare centers continue to restrict access, and social distancing measures continue.

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CooperVision's gross margin decreased in fiscal 2019 compared to fiscal 2018 due to:

the unfavorable impact to revenue from exchange rate fluctuations, primarily attributable to the Euro and British Pound;

and product mix

$14.0 million of costs primarily product transition, integration and manufacturing related costs

partially offset by an increase in sales of higher margin products including Biofinity

fiscal 2018 included $10.1 million of costs primarily product transition and manufacturing related costs.

CooperSurgical's gross margin increased in fiscal 2019 compared to fiscal 2018 due to:

an increase in sales of PARAGARD IUS product and inclusion of LifeGlobal products with higher gross margin

partially offset by $14.2 million of costs, primarily integration and manufacturing related costs

fiscal 2018 included $49.3 million of PARAGARD and LifeGlobal acquisitions inventory step-up charges

fiscal 2018 included $16.2 million of costs primarily integration and manufacturing related costs.

Consolidated Gross Margin decreased in fiscal 2020 to 63% compared to 66% of fiscal 2019 due to:

Decreased revenue due to negative impact of COVID-19 pandemic

Increased cost of sales which included $90.1 million of costs primarily related to the COVID-19 pandemic and other manufacturing related costs

Fiscal 2019 included $28.2 million of primarily product transition, integration and manufacturing related costs.

Selling, General and Administrative Expense (SGA)

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CooperSurgical

CooperVision's SGA increased in fiscal 2019 compared to fiscal 2018 due to investments to support our long-term objectives, including increased headcount in SGA and higher distribution and selling expenses to support revenue growth.

CooperVision's SGA in fiscal 2019 included $7.1 million of acquisition costs, integration costs and costs related to new product launches, including that of MiSight.

CooperVision's SGA in fiscal 2018 included $8.7 million of integration and third-party consulting costs.

The increase in CooperSurgical's SGA in fiscal 2019 compared to fiscal 2018 was primarily due to higher PARAGARD advertising and marketing expenses.

CooperSurgical's SGA in fiscal 2019, included $19.6 million of acquisition and integration expenses of acquired companies, as well as European Medical Devices Regulation costs.

CooperSurgical's SGA in fiscal 2018 included $34.0 million of acquisition and integration expenses of acquired companies and exit costs for the carrier screening and NIPT product lines.

The decrease in Corporate SGA in fiscal 2019 compared to fiscal 2018 was primarily due to $6.2 million of compensation costs related to executives' retirements in fiscal 2018.

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

SGA expense remained relatively flat in fiscal 2020 compared with fiscal 2019.

As a percentage of sales, SGA increased in fiscal 2020 compared to fiscal 2019, due to salaries and benefits, selling, advertising and marketing activities, and fixed General and Administrative (G&A) costs.

CooperVision's SGA remained relatively flat in fiscal 2020 compared to fiscal 2019 primarily due to advertising and marketing activities, including MiSight and increase in G&A costs, partially, offset by lower travel expenses.

CooperVision's SGA in fiscal 2020 included $6.5 million primarily related to acquisition and integration activities.

CooperVision's SGA in fiscal 2019 included $7.1 million of acquisition costs, integration costs and costs related to new product launches.

The decrease in CooperSurgical's SGA in fiscal 2020 compared to fiscal 2019 was primarily due to lower selling and distribution expenses due to lower sales and savings from lower travel expenses, partially offset by an increase in G&A costs.

CooperSurgical's SGA in fiscal 2020, included $19.8 million, primarily related to integration expenses and MDR costs.

CooperSurgical's SGA in fiscal 2019 included $19.6 million of acquisition and integration expenses of acquired companies, as well as MDR costs.

Corporate SGA increased in fiscal 2020 compared to fiscal 2019 primarily due to higher share-based compensation expense.

Research and Development Expense (R&D)

($ in millions)

2018 % Change

CooperSurgical

CooperVision's R&D increase in fiscal 2019 compared to fiscal 2018 was mainly due to increased costs from clinical studies.

CooperVision's R&D decreased in fiscal 2020 compared to fiscal 2019 mainly due to timing of clinical studies.

As a percentage of sales, R&D expense remained flat.

CooperVision's R&D activities are primarily focused on the development of contact lenses, manufacturing technology and process enhancements

The increase in CooperSurgical's R&D in fiscal 2019 compared to fiscal 2018 was primarily due to acquisitions, increased investment and activities in developing new products and services and upgrades of existing products.

As a percentage of sales, R&D expense remained flat.

CooperSurgical's R&D activities include diagnostics, IVF product development, design and upgrade of surgical procedure devices.

The increase in CooperSurgical's R&D in fiscal 2020 compared to fiscal 2019 was primarily due to increased investment activities in developing new products and services and upgrades of existing products.

CooperSurgical has not paused research programs during the COVID-19

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

pandemic and has maintained its spend on innovations and increased its spend on key regulatory investment areas to support our long-term objectives.

As a percentage of sales, R&D expense increased due to increased investment in developing new products coupled with a decline in sales.

CooperSurgical's R&D activities include diagnostics, IVF product development and the design and upgrade of surgical procedure devices.

Amortization Expense

($ in millions)

2018 % Change

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CooperSurgical's amortization expense remained relatively flat.

Impairment of Intangible Assets

In the second quarter of fiscal 2018, CooperSurgical recognized an impairment charge of $24.4 million on the intangible assets acquired from Recombine Inc.

In fiscal 2016, CooperSurgical acquired Recombine Inc., a clinical genetic testing company specializing in carrier screening.

In connection with the impairment charge, on June 1, 2018, CooperSurgical announced the exit of the carrier screening and NIPT product lines.

Both product lines were categorized in Fertility.

Exit and restructuring charges which were substantially completed at the end of fiscal 2018, consisted primarily of compensation and benefits to terminated employees, which were approximately $10.0 million.

The net loss from both product lines were not material to our consolidated results of operations.

Gain on Sale of an Intangible Asset

In the second quarter of fiscal 2019, CooperSurgical sold an exclusive distribution right to distribute Filshie Clip System in the United States for $21.0 million and recognized a gain of $19.0 million.

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

Operating Income

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CooperSurgical

CooperVision operating income remained relatively flat as a percentage of net sales but increased in absolute dollars in fiscal 2019 compared to fiscal 2018 primarily due to improved sales of higher margin products, including Biofinity, partially offset by the negative impact of foreign exchange rates.

CooperSurgical operating income increased in fiscal 2019 compared to fiscal 2018, due to an increase in sales of higher margin products, gain of $19.0 million on sale of an intangible asset, as discussed above, and recent acquisitions.

CooperSurgical operating income in fiscal 2018 included $49.3 million of PARAGARD and LifeGlobal acquisitions inventory step-up charges and an intangible asset impairment charge of $24.4 million.

The decrease of Corporate operating loss in fiscal 2019 compared to fiscal 2018 was primarily due to higher compensation costs related to executives' retirements which impacted the prior year.

On a consolidated basis, operating income increased due to the factors above.

The operating income for fiscal 2020 was primarily impacted by the COVID-19 pandemic which resulted from a decrease to our net sales and additional expenses due to the COVID-19 pandemic related costs as discussed above.

CooperVision operating income decreased as a percentage of net sales and in absolute dollars in fiscal 2020 compared to fiscal 2019 primarily due to a decrease in net sales partially offset by a decrease in operating expenses and a decrease in amortization expenses.

CooperSurgical operating income decreased as a percentage of net sales and in absolute dollars in fiscal 2020 compared to fiscal 2019 primarily due to a decrease in net sales and higher R&D expenses to support growth partially offset by a decrease in SGA.

In the second quarter of fiscal 2019, CooperSurgical sold an exclusive distribution right to distribute Filshie Clip System in the U.S.

for $21.0 million and recognized a gain of $19.0 million.

Corporate operating loss increased in fiscal 2020 compared to fiscal 2019, primarily due to higher stock-based compensation expense.

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

On a consolidated basis, operating income decreased in absolute dollars and as a percentage of net sales primarily due to the negative impact of the COVID-19 pandemic, as discussed above.

Interest Expense

($ in millions)

2018 % Change

Interest expense

Interest expense remained relatively flat as a percentage of net sales and decreased in absolute dollar, primarily due to lower average debt balances, partially offset by higher interest rates compared to prior year period.

Fiscal 2019 interest expense included $0.8 million of write off of debt issuance costs on early repayment of the 2018 term loan.

Fiscal 2018 interest expense included $2.5 million write off of debt issuance costs related to partial prepayments of the 2016 term loan and $1.7 million of Bridge Loan Facility fees that were incurred related to the PARAGARD acquisition.

Interest expense decreased as a percentage of net sales and in absolute dollars during fiscal 2020 primarily due to lower interest rates and lower average debt balances compared to the prior year, partially offset by the write-off of debt issuance costs.

Other Expense (Income), Net

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Foreign exchange loss

Other income, net

Foreign exchange loss primarily resulted from the revaluation and settlement of foreign currencies-denominated balances.

Other income in fiscal 2018 is primarily from the realization of a Puerto Rico research and development credit of $14.2 million.

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

Other expense (income), net

Foreign exchange loss primarily resulted from the revaluation and settlement of foreign currency-denominated balances.

Other expense (income) increased in fiscal 2020, primarily due to non-consolidated subsidiary investments losses and advances during the year.

Provision for Income Taxes

The Company’s effective tax rate (ETR) was 2.3%, 57.9%, and 5.3% for fiscal 2019, 2018 and 2017 respectively.

The ETR in fiscal 2019 decreased in comparison to fiscal 2018 primarily due to the net charge related to the enactment of the 2017 Act which was recorded in fiscal 2018, tax benefits from audit settlements in fiscal 2019, and additional taxes in the United States from the inclusion of earnings from our foreign subsidiaries pursuant to the GILTI provisions that became effective in fiscal 2019.

The ETR in fiscal 2018 increased in comparison to fiscal 2017 primarily due to the net charge related to the enactment of the 2017 Act which was partially offset by a shift in the geographic mix of income.

The ETR for 2019 was less than the U.S.

federal statutory tax rate primarily due to a majority of our taxable income being earned in foreign jurisdictions with lower tax rates, discrete tax benefits from settling income tax audits, excess tax benefits from share-based compensation, and additional taxes in the United States from the inclusion of earnings from our foreign subsidiaries pursuant to the GILTI provisions.

The ETR for 2018 was greater than the U.S.

federal statutory tax rate primarily due to the tax expense related to the enactment of the 2017 Act.

The ETR for 2017 was less than the U.S.

federal statutory tax rate because a majority of our taxable income was earned in foreign jurisdictions with lower tax rates and excess tax benefits from share-based compensation.

The ratio of domestic income to worldwide income significantly impacted our overall tax rate due to the fact that the tax rates in some of the foreign jurisdictions where we operate are significantly lower than the statutory rate in the United States.

The foreign jurisdictions with lower tax rates compared to the U.S.

federal statutory tax rate that had the most significant impact on our provision for foreign income taxes in the fiscal years presented include the United Kingdom, Barbados and Puerto Rico.

The Company’s effective tax rate (ETR) was 10.6% and 2.3% for fiscal 2020 and fiscal 2019, respectively.

The ETR in fiscal 2020 increased in comparison to fiscal 2019 primarily due to foreign earnings subject to US tax, partially offset by a shift in the geographic mix of income.

The ETR for both fiscal 2020 and fiscal 2019 was less than the US federal statutory tax rate primarily due to foreign earnings in jurisdictions with lower tax rates, a step-up of the US tax-deductible basis of intellectual property rights from intra-entity sales and excess tax benefits from share-based compensation.

This was partially offset by foreign earnings subject to US tax.

The jurisdictions with lower tax rates with the most significant tax impact include Barbados, Puerto Rico and the United Kingdom.

Income Taxes of the Consolidated Financial Statements for additional information.

ASC 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment.

However, in December 2017, the SEC provided regulatory guidance for accounting of the 2017 Act referred to as Staff Accounting Bulletin (SAB) 118.

Under the guidance in SAB 118, we recognized in fiscal 2018 a provisional amount of $214.6 million as a reasonable estimate of the impact of the provisions of the 2017 Act.

As of January 31, 2019, we completed our accounting for the tax effects of the enactment of the 2017 Act and did not recognize any material adjustments to the provisional tax expense previously recorded.

Share-Based Compensation Plans

We grant various share-based compensation awards, including stock options, performance shares and restricted stock units.

The share-based compensation and related income tax benefit recognized in the Consolidated Financial Statements in fiscal 2019 was $36.3 million and $5.1 million, respectively, compared to $43.2 million and $8.8 million, respectively, in fiscal 2018.

The share-based compensation and related income tax benefit recognized in the Consolidated Financial Statements in fiscal 2020 was $38.6 and $4.8, respectively, compared to $36.3 million and $5.1 million, respectively, in fiscal 2019.

As of October 31, 2020, there was $82.5 million of total unrecognized share-based compensation cost related to non-vested awards.

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The expected life of the stock option is based on the observed and expected time to post-vesting forfeiture and/or exercise.

Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.

If our assumption for the expected life increased by one year, the fair value of an individual option granted in fiscal 2019 would have increased by approximately $7.62.

To determine the stock price volatility, management considers implied volatility from publicly-

Groups of employees that have similar historical exercise behavior are

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

traded options on the Company's stock at the date of grant, historical volatility and other factors.

considered separately for valuation purposes.

If our assumption for the expected life increased by one year, the fair value of an individual option granted in fiscal 2020 would have increased by approximately $8.08.

To determine the stock price volatility, management considers implied volatility from publicly-traded options on the Company's stock at the date of grant, historical volatility and other factors.

If our assumption for stock price volatility increased by one percentage point, the fair value of an individual option granted in fiscal 2020 would have increased by approximately $2.37.

As of October 31, 2019, the 2006 Long-Term Incentive Plan for Non-Employee Directors has expired and no shares remain available under this plan for future grants.

Retirement Income Plan Soft Freeze

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Existing employees already covered by the Plan, continue to accrue their benefits.

There is no material impact on the Company's results of operations, financial position and cash flows for the fiscal 2019.

There is no material impact on the Company's results of operations, financial position and cash flows for the fiscal 2020 and 2019.

Employee Stock Purchase Plan

On March 18, 2019, the Company received stockholder approval of the Employee Stock Purchase Plan (ESPP).

The first offering period is for U.S.

employees and began on November 4, 2019.

On March 18, 2019, the Company received stockholder approval for the Employee Stock Purchase Plan (ESPP).

The first offering period began on November 4, 2019 and offerings are generally made on a quarterly basis.

The purpose of the ESPP is to provide eligible employees of the Company with the opportunity to acquire shares of common stock at 85% of the market price on the last business day of each offering period by means of accumulated payroll deductions.

Payroll deductions will be limited to a maximum of 15% of the employee’s eligible compensation, not to exceed $21.3 thousand in any one calendar year.

The ESPP would initially authorize the issuance of 1,000,000 shares of common stock.

Payroll deductions will be limited to 15% of the employee’s eligible compensation, not to exceed $21.3 thousand in any one calendar year.

The ESPP initially authorized the issuance of 1,000,000 shares of common stock.

These shares will be made available from shares of common stock reacquired by the Company as Treasury Stock.

At October 31, 2019, there were approximately 4.1 million shares of Treasury Stock.

During fiscal year ended October 31, 2020, we issued 11,641 shares to our employees under the ESPP.

At October 31, 2020, the number of shares remaining available for future issuance under the ESPP is 988,359 shares.

Total ESPP Share-based compensation recognized during the fiscal year ended October 31, 2020 was $0.7 million .

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2020 Highlights

Operating cash flow of $713.2 million up from $668.9 million in fiscal 2018

Operating cash flow of $ 486.6 million compared to $ 713.2 million in fiscal 2019

Expenditures for purchases of property, plant and equipment of $ 310.4 million up from $ 292.1 million in fiscal 2019

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Total debt, net of debt issuance cost, at $ 1.8 billion at the end of fiscal 2020 compared to $ 1.8 billion at the end of fiscal 2019

Cash provided by operations of $ 486.6 million offset by capital expenditures of $ 310.4 million resulted in positive free cash flow of $ 176.2 million, down 58% compared to the prior year period

Comparative Statistics

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Working Capital

The decrease in working capital at October 31, 2019 from the end of fiscal 2018 was primarily due to:

increase in short-term debt $526.6 million, primarily from the $500 million 2019 Term Loan Agreement entered into on September 27, 2019

decrease of $37.5 million in prepaid expense and other current assets, primarily due to a $29.0 million refund from the U.K.

Tax Authorities in the current year

increase in other current liabilities of $33.1 million due to timing of payments

increase in employee compensation and benefits of $10.7 million, partially offset by;

increase in cash $11.3 million

increase in accounts receivables $60.6 million from increased revenue

increase in inventories $38.1 million.

The increase in working capital at October 31, 2020 from the end of fiscal 2019 was primarily due to:

decrease in short-term debt of $ 154.4 million primarily due to repayment of the outstanding balance of the 2019 Term Loan at maturity net of the amount of borrowings received under the new 2020 Term Loan Agreement, entered into on October 16, 2020 (see below)

increase in inventories of $ 63.5 million due to lower sales from the impact of the COVID-19 pandemic and higher manufacturing costs

increase in cash and cash equivalents of $ 26.9 million

decrease in other current liabilities of $ 25.3 million primarily due to timing of payments and a reduction in fiscal 2020 customer rebate accruals due to the decrease in sales resulting from the COVID-19 pandemic

increase in prepaid expense and other current assets of $ 20.3 million, partially offset by;

increase in accounts payable of $ 25.9 million due to timing of payments

increase in employee compensation and benefits of $ 14.3 million

recognition of current operating lease liabilities of $ 33.3 million on adoption of ASC 842, Leases.

At October 31, 2020, our inventory months on hand were 6.6 compared to 6.4 at October 31, 2019.

The $38.1 million increase in inventories was primarily due to increase in finished goods and raw materials to support demand and production levels.

Our days sales outstanding (DSO) was 56 days at October 31, 2019 compared to 53 days at October 31, 2018.

The increase in DSO from October 31, 2018 to October 31, 2019 was primarily due to increased revenue and timing of collections.

We are no longer asserting that cash from our foreign operations are indefinitely reinvested which allows more flexibility in using cash from our foreign operations to fund future working capital in the United States.

The $ 63.5 million increase in inventories was primarily due to lower sales from the impact of the COVID-19 pandemic and higher manufacturing costs.

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Our days sales outstanding (DSO) was 60 days at October 31, 2020 compared to 56 days at October 31, 2019.

The increase in DSO from October 31, 2019 to October 31, 2020 was primarily due to timing of collections.

Operating Cash Flow

Cash provided by operating activities increased by $44.3 million from $668.9 million in fiscal 2018 to $713.2 million in fiscal 2019.

This increase in cash flow provided by operating activities primarily consists of:

increase in net income of $326.8 million from a net income of $139.9 million in fiscal 2018 to $466.7 million in fiscal 2019;

fiscal 2018 net income was unfavorably impacted by a $214.6 million tax expense charge related to the 2017 Act

$104.7 million increase in the net changes in prepayments and other assets primarily due to a $42.0 million payment to the U.K.

Tax Authorities in the prior year period compared to a $29.0 million refund in the current year, partially offset by

$192.9 million decrease in the net changes in other long-term liabilities, primarily due to a decrease in the provisional tax liability for the mandatory deemed repatriation of deferred foreign earnings under the 2017 Act of $141.5 million in fiscal 2018

$50.4 million decrease of step-up charges related to inventory acquired mainly from PARAGARD in fiscal 2018

$48.1 million decrease in the net changes in accrued liabilities

$32.3 million decrease in the net changes in inventories, driven by acquisitions and higher raw materials to support production levels

decrease of $24.0 million in impairment of intangibles, from $24.4 million in fiscal 2018 to $0.4 million in fiscal 2019, primarily due to an impairment charge recognized by CooperSurgical on its exit from the carrier screening and NIPT product lines in fiscal 2018

increase of $19.0 million due to a gain on sale of an intangible asset, representing the sale by CooperSurgical of the Filshie Clip exclusive distribution right

$18.8 million decrease in the net changes in deferred taxes

$10.8 million decrease in the net changes in provision for doubtful accounts.

Cash provided by operating activities decreased by $ 226.6 million from $ 713.2 million in fiscal 2019 to $ 486.6 million in fiscal 2020.

This decrease in cash flow provided by operating activities primarily consists of:

decrease in net income of $ 228.3 million from a net income of $ 466.7 million in fiscal 2019 to $ 238.4 million in fiscal 2020 which resulted from a decrease in our net sales and additional expenses due to the COVID-19 pandemic;

$ 80.9 million decrease in the net changes in prepayments and other assets primarily due to the refund of the prepayment made to the U.K.

Tax Authorities in the prior year period and capitalized cloud computing costs;

$ 42.4 million decrease in the net changes in accrued liabilities partially due to reduction in indirect value-added tax, chargebacks and customer rebate accruals as a result of the decrease in sales;

$ 25.0 million decrease in the net changes in inventories primarily due to lower sales;

$20.0 million decrease in the net changes in operating lease liability and right-of-use asset due to impact from adoption of ASC 842, Leases;

$ 21.1 million decrease in the net changes in income tax payable, partially offset by;

$ 64.1 million increase in the net changes in trade receivables primarily due to timing of collections;

increase of $ 32.5 million in non-cash lease expense due to impact from adoption of ASC 842, Leases;

increase of $ 20.0 million driven by net changes in long term tax liabilities and defined benefit plan;

$ 19.6 million increase in the net changes in accounts payable primarily due to timing of payments;

decrease of $19.0 million due to a gain on sale of an intangible asset, representing the sale by CooperSurgical of the Filshie Clip exclusive distribution right recognized in prior year period;

increase of $16.7 million in impairment and loss on disposal of property, plant and equipment;

$ 15.0 million increase in the net changes in deferred income taxes.

Investing Cash Flow

Cash used in investing activities decreased by $1,166.2 million to $351.3 million in fiscal 2019 from $1,517.5 million in fiscal 2018 due to:

decrease of $1,264.7 million in payments made for acquisitions in fiscal 2019 compared to the prior year period, largely due to the acquisition of PARAGARD at $1.1 billion in first quarter of fiscal 2018, partially offset by;

increase of $98.5 million in capital expenditures primarily used to invest in the expansion of our manufacturing capacity.

Cash used in investing activities increased by $ 13.2 million to $ 364.5 million in fiscal 2020 from $ 351.3 million in fiscal 2019 primarily due to:

increase of $ 18.3 million in capital expenditures, partially offset by;

decrease of $ 5.1 million in payments made for acquisitions in the fiscal 2020 compared to the prior year period.

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Financing Cash Flow

Cash provided by financing activities decreased by $1,195.8 million to $351.4 million cash outflow in fiscal 2019 compared to $844.4 million cash inflow in fiscal 2018, primarily due to:

$1,561.0 million decrease of net proceeds from long-term debt primarily due to additional debt taken on to fund the PARAGARD acquisition in fiscal 2018

$156.1 million was used for share repurchases in fiscal 2019 compared to nil in the fiscal 2018, partially offset by;

$511.7 million increase in short-term notes payable, primarily due to $500 million short term loan taken on September 27, 2019

$5.9 million increase in the net proceeds related to share-based compensation awards.

The 2019 Term Loan Agreement and the 2017 Term Loan Agreement contain customary restrictive covenants, as well as financial covenants that require the Company to maintain a certain Total Leverage

Cash provided by financing activities decreased by $ 255.9 million to $ 95.5 million cash outflow in fiscal 2020 compared to $ 351.4 million cash outflow in fiscal 2019, primarily due to:

$ 2,068.6 million increase in proceeds from long-term debt, primarily due to funds received from the 2020 Credit Agreement (as defined below) partially offset by;

$ 1,374.1 million increase in repayments of long-term debt, primarily related to termination of 2019 Term Loan Agreement (as defined below), 2017 Term Loan Agreement (as defined below) and the 2016 Credit Agreement (as defined below);

$ 531.9 million decrease in net proceeds from short-term debt, primarily due to movements in short term loans.

On April 1, 2020, the Company entered into a Revolving Credit and Term Loan Agreement (the 2020 Credit Agreement), among the Company and KeyBank National Association, as administrative agent.

The 2020 Credit Agreement provides for (a) a multicurrency revolving credit facility (the 2020 Revolving Credit Facility) in an aggregate principal amount of $1.29 billion and (b) a term loan facility (the 2020 Term Loan Facility) in an aggregate principal amount of $850.0 million, each of which, unless terminated earlier, mature on April 1, 2025.

In addition, the Company has the ability from time to time to request an increase to the size of the revolving credit facility or establish one or more new term loans under the term loan facility in an aggregate amount up to $1.605 billion, subject to the discretionary participation of the lenders.

On April 1, 2020, in connection with the Company’s entry into the 2020 Credit Agreement, the Company terminated the senior unsecured term loan agreement entered into on November 1, 2017 in connection with PARAGARD (the 2017 Term Loan Agreement) and the Revolving Credit and Term Loan Agreement entered into on March 1, 2016 (the 2016 Credit Agreement).

In connection with the termination, all borrowings outstanding under the 2017 Term Loan Agreement and the 2016 Credit Agreement were repaid.

At maturity, on September 25, 2020, outstanding amounts under the 2019 Term Loan Agreement (including the Second Amendment to the 2018 Term Loan Agreement) were fully repaid using borrowings under the 2020 Revolving Credit Facility.

On October 16, 2020, the Company entered into a 364 -day, $350.0 million , term loan agreement (the 2020 Term Loan Agreement) by and among the Company, the lenders party thereto and The Bank of Nova Scotia, as administrative agent which matures on October 15, 2021.

The following is a summary of the maximum commitments and the net amounts available to us under different credit facilities as of October 31, 2020:

(In millions)

Facility Limit

Outstanding Borrowings

Outstanding Letters of Credit

Total Amount Available

Maturity Date

2020 Revolving Credit Facility

April 1, 2025

2020 Term Loan Facility

April 1, 2025

2020 Term Loan

October 15, 2021

The 2020 Credit Agreement and the 2019 Term Loan Agreement contain customary restrictive covenants, as well as financial covenants that require the Company to maintain a certain Total Leverage Ratio and

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Ratio and Interest Coverage Ratio (each as defined in the 2019 Term Loan Agreement and the 2017 Term Loan Agreement, respectively), consistent with the 2016 Credit Agreement.

As defined in the 2019 Term Loan Agreement, the 2017 Term Loan Agreement and the 2016 Credit Agreement, we are required to maintain an Interest Coverage Ratio of at least 3.00 to 1.00, and a Total Leverage Ratio of no higher than 3.75 to 1.00.

Interest Coverage Ratio.

As defined, in the 2020 Credit Agreement and the 2019 Term Loan Agreement, we are required to maintain an Interest Coverage Ratio of at least 3.00 to 1.00, and a Total Leverage Ratio of no higher than 3.75 to 1.00.

At October 31, 2020 , we were in compliance with the Interest Coverage Ratio at 21.19 to 1.00 and the Total Leverage Ratio at 2.15 to 1.00.

At October 31, 2019 , we had $500.0 million outstanding under the 2019 Term Loan Agreement, $1.0 billion outstanding under the 2017 Term Loan Agreement, $264.0 million outstanding under the 2016 Revolving Credit Facility and $734.8 million available under the 2016 Revolving Credit Facility.

At October 31, 2019, we had $89.0 million in cash and cash equivalents, predominantly outside the United States.

The Company, after considering the potential impacts of the COVID-19 pandemic, expects to remain in compliance with its financial maintenance covenant and meet its debt service obligations for at least the twelve months following the date of issuance of these financial statements.

Debt of the Consolidated Financial Statements for additional information.

Considering recent market conditions and the ongoing COVID-19 pandemic crisis, we have re-evaluated our operating cash flows and cash requirements and continue to believe that current cash, cash equivalents, future cash flow from operating activities and cash available under our 2020 Credit Agreement will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the Consolidated Financial Statements included in this quarterly report.

To the extent additional funds are necessary to meet our liquidity needs such as that for acquisitions, share repurchases, cash dividends or other activities as we execute our business strategy, we anticipate that additional funds will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds;

however, such financing may not be available on favorable terms, or at all.

Share Repurchases

In December 2011, our Board of Directors authorized the 2012 Share Repurchase Program and through subsequent amendments, the most recent in March 2017, the total repurchase authorization was increased from $500.0 million to $1.0 billion of the Company's common stock.

In December 2011, the Company's Board of Directors authorized the 2012 Share Repurchase Program and through subsequent amendments, the most recent in March 2017, the total repurchase authorization was increased from $500.0 million to $1.0 billion of the Company's common stock.

The program has no expiration date and may be discontinued at any time.

In the fourth quarter of fiscal 2019, we repurchased 512 thousand shares of the Company's common stock for $150.0 million, at an average purchase price of $292.7 per share.

During the fiscal year ended October 31, 2019, we repurchased 537 thousand shares of our common stock for $156.1 million under the 2012 Share Repurchase Program.

During the fiscal year ended October 31, 2018, we did not repurchase any shares.

Purchases under the 2012 Share Repurchase Program are subject to a review of the circumstances in place at the time and may be made from time to time as permitted by securities laws and other legal requirements.

The Company's share repurchases during the fiscal year ended October 31, 2020 and 2019 as follows:

Years Ended October 31,

($ in millions)

Number of shares

Average repurchase price per share

Total costs of shares repurchased (in millions)

At October 31, 2020 , $359.7 million remained authorized for repurchase under the program.

In fiscal 2020 and 2019, the Company paid a semiannual dividend of 3 cents per share:

$1.5 million or 3 cents per share on February 10, 2020 to stockholders of record on January 23, 2020;

$1.5 million or 3 cents on August 7, 2020 to stockholders of record on July 23, 2020;

$1.5 million or 3 cents per share on February 8, 2019 to stockholders of record on January 22, 2019 ;

$1.5 million or 3 cents per share on August 7, 2019 to stockholders of record on July 23, 2019 .

OFF BALANCE SHEET ARRANGEMENTS

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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

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Stand-by letters of credit

(1) As of October 31, 2019, we had recorded $135.8 million of income tax liabilities related to the one-time transition tax that resulted from the enactment of the 2017 Act, which will be payable in seven annual installments.

(1) As of October 31, 2020, we had $124.0 million of income tax liabilities related to the one-time transition tax that resulted from the enactment of the 2017 Act, which is payable in six annual installments.

The installment for 2021 is classified as a current income tax payable on our consolidated balance sheet.

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

The expected future benefit payments for pension plans through 2028 are disclosed in Note 9.

Employee Benefits of the Consolidated Financial Statements.

We are unable to reliably estimate the timing of future payments related to uncertain tax positions;

therefore, about $58.5 million of our long-term income taxes payable have been excluded from the table above.

However, other long-term liabilities, included in our consolidated balance sheet, include these uncertain tax positions.

However, other long-term liabilities, included in our consolidated balance sheet, include a reserve for a portion of these uncertain tax positions.

Income Taxes of the Consolidated Financial Statements for additional information.

(2) Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding and includes obligations for inventory, capital expenditures, information technology and other operating expense commitments.

(3) See Note 9, "Employee Benefits" for more information.

(3) The expected future benefit payments for pension plans through 2030 are disclosed in Note 10.

Employee Benefits of the Consolidated Financial Statements.

Inflation and Changing Prices

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

Summary of Non-GAAP Financial Measures

The non-GAAP financial measures that may be included in this MD&A and the reasons management believes they are useful to investors are described below.

These measures should be considered supplemental in nature and are not intended to be a substitute for the related financial information prepared in accordance with GAAP.

In addition, these measures may not be the same as similarly named measures presented by other companies.

Free cash flow is defined as cash provided by operating activities less capital expenditures.

Management believes free cash flow is useful for investors as an additional measure of liquidity because it represents

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

cash that is available to grow the business, make strategic acquisitions, repay debt, buyback common stock or fund the dividend.

We use free cash flow internally to understand, manage, make operating decisions and evaluate our business.

In addition, we use free cash flow to help plan and forecast future periods.

Constant currency is defined as excluding the effect of foreign currency rate fluctuations.

In order to assist with the assessment of how our underlying businesses performed, we compare the percentage change in net sales from one period to another, excluding the effect of foreign currency fluctuations.

To present this information, current period revenue for entities reporting in currencies other than the United States dollar are converted into United States dollars at the average foreign exchange rates for the corresponding period in the prior year.

Accounting Pronouncements

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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).

Management estimates and judgments are an integral part of financial statements prepared in accordance with GAAP.

We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing the Consolidated Financial Statements in accordance with GAAP.

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however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods.

The World Health Organization categorized the Coronavirus disease 2019 (COVID-19) as a pandemic.

This has had, and we believe will continue to have, an adverse effect on our sales, operating results and cash flows.

The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of net sales and expenses during the reporting period.

Actual results could differ from those estimates particularly as it relates to estimates reliant on forecasts and other assumptions impacted by uncertainty surrounding the COVID-19 pandemic and related economic disruptions.

The extent to which the COVID-19 pandemic and related economic disruptions impact our accounting estimates will depend on future developments including, but not limited to, the continued spread, duration and severity of the COVID-19 pandemic;

the occurrence, spread, duration and severity of any subsequent wave or waves of outbreaks;

the actions taken by the U.S.

and foreign governments to contain the COVID-19 pandemic, address its impact or respond to the reduction in global and local economic activity;

the occurrence, duration and severity of a global, regional or national recession, depression or other sustained adverse market event;

the impact of the developments described above on our customers and suppliers;

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quickly and to what extent normal economic and operating conditions can resume.

The accounting matters assessed included, but were not limited to:

allowance for doubtful accounts and credit losses

carrying value of inventory

carrying value of goodwill and other long-lived assets

There was not a material impact to the above estimates in our Consolidated Financial Statements for fiscal 2020 as a result of the COVID-19 pandemic.

We continually monitor and evaluates the estimates used as additional information becomes available.

Adjustments will be made to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results.

Our future assessment of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material changes to the estimates and material impacts to our Consolidated Financial Statements in future reporting periods.

Our critical accounting policies include:

Revenue recognition - We recognize revenue from product sales when obligations under the terms of a contract with the customer are satisfied;

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Provisions for certain rebates, sales incentives, volume discounts, contractual pricing allowances and product returns are accounted for as variable consideration and recorded as a reduction in sales.

See Note 1 to the Consolidated Financial Statements for the Accounting Standards Update related to revenue, which was adopted in 2019.

Product discounts, including certain rebates, sales incentives, and volume discounts are granted based on terms of the arrangement with direct distribution customers and at times the indirect end consumer.

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We currently disclose the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.

Valuation of goodwill - Effective April 30, 2019, there was a change in the reporting units as a result of realignment in the internal reporting structure of the business around markets and customers at CooperSurgical.

As such, Cooper Surgical has evolved into two reporting units, namely, Office/Surgical and Fertility, which reflects management oversight of operations.

The change in reporting units did not result in a change in operating segments.

We allocated CooperSurgical's goodwill based on relative fair values utilizing the discounted cash flow method and guideline public company method as our allocation base.

The key assumptions and estimates for the market and income approaches used to determine fair value of the reporting units included market data and market multiples, discount rates and terminal growth rates, as well as future levels of revenue growth, and operating margins, which were based upon the Company’s strategic plan.

The allocated fair values exceeded the carrying values for each of the three reporting units

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as of April 30, 2019.

Our reporting units are CooperVision, Office/Surgical and Fertility reflecting the current way we manage our business.

We evaluate goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist.

We account for goodwill and evaluate our goodwill balances and test them for impairment in accordance with related accounting standards.

We performed our annual impairment assessment in our third quarter of fiscal 2019 and 2018 , and our analysis indicated that we had no impairment of goodwill in our reporting units.

Goodwill impairment analysis and measurement is a process that requires significant judgment.

If our common stock price trades below book value per share, there are changes in market conditions or a future downturn in our business, or a future goodwill impairment test indicates an impairment of our goodwill, we may have to recognize a non-cash impairment of goodwill that could be material and could adversely affect our results of operations in the period recognized and also adversely affect our total assets and stockholders' equity.

Valuation of goodwill - We evaluate goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist.

We account for goodwill, evaluate and test goodwill balances for impairment in accordance with related accounting standards.

We performed an annual impairment assessment in our third quarter of fiscal 2020 and 2019 , and our analysis indicated that we had no impairment of goodwill in our reporting units.

We test goodwill impairment in accordance with ASU 2017-04, Intangibles - Goodwill and other (Topic 350):

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Qualitative factors considered in this assessment include industry and market considerations, overall financial performance and other relevant events and factors affecting each reporting unit.

Based on our qualitative assessment, if we determine that the fair value of a reporting unit is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value of the reporting unit.

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recognized for the amount that the carrying value exceeds the fair value of the reporting unit.

A reporting unit is the level of reporting at which goodwill is tested for impairment.

Goodwill impairment analysis and measurement is a process that requires significant judgment.

Leases - We consider an arrangement a lease if the arrangement transfers the right to control the use of an identified asset in exchange for consideration.

We have operating leases, but do not have material financing leases.

Lease right-of-use assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make payments arising from the lease agreement.

These assets and liabilities are recognized at the commencement of the lease based upon the present value of the future minimum lease payments over the lease term.

The lease term reflects the noncancelable period of the lease together with periods covered by an option to extend or terminate the lease when it is reasonably certain that we will exercise such option.

Changes in the lease term assumption could impact the right-of-use assets and lease liabilities recognized on the balance sheet.

As our leases typically do not contain a readily determinable implicit rate, we determine the present value of the lease liability using our incremental borrowing rate at the lease commencement date based on the lease term on a collateralized basis.

Business combinations - We routinely consummate business combinations.

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This process requires significant management judgments and involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations as well as judging the recoverability of deferred tax assets.

To the extent recovery of deferred tax

To the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is established.

Tax exposures can involve complex issues and may require an extended period to resolve.

Frequent changes in tax laws in each jurisdiction complicate future estimates.

To determine the tax rate, we use the full-year income and the related income tax

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assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is established.

Tax exposures can involve complex issues and may require an extended period to resolve.

Frequent changes in tax laws in each jurisdiction complicate future estimates.

To determine the tax rate, we use the full-year income and the related income tax expense in each jurisdiction.

expense in each jurisdiction.

We update the estimated effective tax rate for the effect of significant unusual items as they are identified.

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We file income tax returns in all jurisdictions in which we operate.

We record a liability for uncertain tax positions taken or expected to be taken in income tax returns.

We record a liability for uncertain tax positions taken or expected to be taken in income tax returns that we have determined are not more-likely-than-not realizable.

Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts.

We record a liability for the portion of unrecognized tax benefits claimed that we have determined are not more-likely-than-not realizable.

These tax reserves have been established based on management's assessment as to the potential exposure attributable to our uncertain tax positions as well as interest and penalties attributable to these uncertain tax positions.

All tax reserves are analyzed quarterly and adjustments are made as events occur that result in changes in judgment.

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AND SUBSIDIARIES

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

Aquaform ® , Avaira ® , Avaira Vitality ® , Biofinity ® , MyDay ® , MiSight ® , ActiveControl ® and Proclear ® are registered trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries.

Aquaform ® , Avaira ® , Avaira Vitality ® , Biofinity ® , Biofinity Energys ® , MyDay ® , MiSight ® , ActivControl ® and Proclear ® are registered trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries.

PC Technology™ and FIPS™ are trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries.

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PARAGARD ® is a registered trademark of CooperSurgical, Inc.

THE COOPER COMPANIES, INC.

AND SUBSIDIARIES

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis