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

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

RESULTS OF OPERATIONS

We discuss below the results of our operations for fiscal 2013 compared with fiscal 2012 and the results of our operations for fiscal 2012 compared with fiscal 2011. Certain prior period amounts have been reclassified to conform to the current period's presentation. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.”

Outlook

Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and women’s healthcare markets. However, events affecting the economy as a whole, including the uncertainty and instability of global markets driven by United States debt and uncertainty surrounding employment, housing and credit concerns together with the European debt crisis and related foreign currency volatility impact our current performance and continue to represent a risk to our performance for fiscal year 2014.

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 phosphorylcholine technology (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. CooperVision is focused on greater worldwide market penetration as we introduce new products and continue to expand our presence in existing and emerging markets, including through acquisitions.

Sales of contact lenses utilizing silicone hydrogel materials, a major product material in the industry, have grown significantly. Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our projected future levels of sales growth and profitability. CooperVision markets monthly and two-week silicone hydrogel spherical and toric lens products under our Biofinity® and Avaira® brands and a multifocal lens under Biofinity.

We believe that the global market for single-use contact lenses is expanding and will continue to grow. In fiscal 2013, we launched MyDayTM, our single-use spherical silicone hydrogel lens, in Europe, and in fiscal 2012 we launched Proclear® 1 Day multifocal. We forecast increasing demand for our existing and future single-use products. To meet this anticipated demand, in fiscal 2014 we plan to continue the implementation of capital projects to invest in increased single-use manufacturing capacity. Competitive silicone hydrogel single-use lens products are gaining market share and represent a risk to our business.

On October 31, 2013, we completed a transaction to sell Aime, our rigid gas-permeable contact lens and solutions business in Japan, to Nippon Contact Lens Inc. In our fiscal fourth quarter of 2013, we recorded a pre-tax loss of approximately $21.1 million. The business was originally obtained as part of the December 1, 2010, acquisition which included obtaining the rights to market Biofinity in Japan. The divestiture is consistent with the strategy to focus on our core soft contact lens business. Additionally, Aime revenue has declined in recent periods, and the products have lower than average company margins. Results from operations of Aime are included in our Consolidated Statements of Income for fiscal 2013, 2012 and 2011. Post divestiture, we expect the transaction to be neutral to earnings per share.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

The medical device segment of the women's healthcare market is highly fragmented. CooperSurgical has steadily grown its market presence and distribution system by developing products and acquiring companies and products that complement its business model. We intend to continue to invest in CooperSurgical's business through acquisitions of companies and product lines. CooperSurgical product sales are categorized based on the point of healthcare delivery including products used in medical office and surgical procedures by obstetricians and gynecologists (ob/gyns) representing 67% of CooperSurgical's net sales. CooperSurgical's remaining sales represent products used in fertility clinics that now represent 33% of CooperSurgical's net sales up from 16% in the prior year period due to the July 2012 acquisition of Origio, a global in-vitro fertilization medical device company.

As part of the new health care reform law, a 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, became effective January 1, 2013. CooperVision's products are not subject to this new tax because contact lenses are excluded from the tax. However, United States sales of CooperSurgical's products are subject to this new tax which is primarily recorded in selling, general and administrative expense on the Statement of Income.

On September 12, 2013, we entered into a five-year, $300.0 million, senior unsecured term loan agreement (Term Loan) that will mature on September 12, 2018, and will be subject to amortization of principal of 5% per year payable quarterly beginning October 31, 2016, with the balance payable at maturity. We utilized the funds provided by this Term Loan to repay amounts outstanding on our revolving Credit Agreement, and at October 31, 2013, $300.0 million remained outstanding on the Term Loan.

At October 31, 2013, we had $999.8 million available under the revolving Credit Agreement. We believe that our cash and cash equivalents, cash flow from operating activities and borrowing capacity under existing credit facilities will fund operations both in the next 12 months and in the longer term as well as current and long-term cash requirements for capital expenditures, acquisitions, share repurchases and cash dividends.

2013 Compared with 2012

Highlights: 2013 vs. 2012

•	Net sales up 10% to $1.6 billion from $1.4 billion in fiscal year 2012.

•	Gross margin 65% of net sales up from 64%.

•	Operating income up 8% to $305.9 million from $283.4 million.

•	Interest expense down 22% to $9.2 million from $11.8 million.

•	Diluted earnings per share up 18% to $5.96 from $5.05.

•	Operating cash flow $415.9 million up 32% from $315.1 million.

Fiscal 2013 pre-tax results include a $21.1 million loss on divestiture of Aime, $14.1 million of insurance proceeds related to a business interruption claim and $0.6 million of costs related to the acquisition of Origio. Fiscal 2012 pre-tax results include a $1.4 million loss related to the May 31, 2012, amendment to our revolving Credit Agreement, and costs related to the acquisition of Origio consisting of $4.9 million in direct acquisition costs and a $0.4 million net gain related to the repayment of debt acquired recorded in interest expense.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

Selected Statistical Information – Percentage of Net Sales

Years Ended October 31,	2013			2013 vs. 2012 % Change			2012			2012 vs. 2011 % Change			2011
Net sales	100	%		10	%		100	%		9	%		100	%
Cost of sales	35	%		8	%		36	%		(1	)%		40	%
Gross profit	65	%		11	%		64	%		15	%		60	%
Selling, general and administrative expense	38	%		8	%		39	%		10	%		38	%
Research and development expense	4	%		14	%		4	%		19	%		3	%
Amortization of intangibles	2	%		26	%		1	%		17	%		2	%
Loss on divestiture of Aime	2	%		—			—			—			—
Operating income	19	%		8	%		20	%		25	%		17	%

Net Sales

Our two business units, CooperVision and CooperSurgical, generate all of our sales.

•	CooperVision develops, manufactures and markets a broad range of soft contact lenses for the worldwide vision correction market.

•	CooperSurgical develops, manufactures and markets medical devices and procedure solutions to improve healthcare delivery to women.

Net Sales Growth by Business Unit

Our consolidated net sales grew by $142.6 million in fiscal 2013 and $114.3 million in 2012:

($ in millions)	2013 vs. 2012				% Change			2012 vs. 2011				% Change
CooperVision	$	79.1			7	%		$	68.1			6	%
CooperSurgical	63.5				25	%		46.2				22	%
	$	142.6			10	%		$	114.3			9	%

CooperVision Net Sales

The contact lens market has two major product categories:

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

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

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

The contact lens market consists primarily of disposable and frequently replaced lenses. Disposable lenses are designed for either daily, two-week or monthly replacement; frequently replaced lenses are designed for replacement after one to three months. Significantly, the market for spherical lenses is growing with value-

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

added spherical lenses to alleviate dry eye symptoms as well as lenses with aspherical optical properties or higher oxygen permeable lenses such as silicone hydrogels.

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

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

CooperVision net sales growth included increases in total sphere lenses up 4%, representing 56% of net sales and total toric lenses up 9%, representing 31% of net sales. Total multifocal lenses grew 29% to 10% of net sales up from 8% in the prior year on increased sales of Biofinity monthly and Proclear single-use multifocal products. Silicone hydrogel products, including MyDay, our single-use silicone hydrogel lens, grew 26% worldwide, representing 43% of net sales up from 36% in the prior year. Proclear product sales grew 6% as compared to the prior year and represented 25% of net sales, the same as the prior year. Older conventional lens products, including cosmetic lenses, declined 12% and represented 3% of net sales, the same as the prior year.

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

CooperVision Net Sales by Geography

($ in millions)	2013				2012				% Change
Americas	$	546.2			$	498.9			9	%
EMEA	439.4				402.3				9	%
Asia Pacific	282.7				288.0				(2	)%
	$	1,268.3			$	1,189.2			7	%

CooperVision’s worldwide net sales grew 7% in the year-to-year comparison. Americas net sales grew 9%, primarily due to market gains of CooperVision’s silicone hydrogel contact lenses along with single-use sphere and multifocal products. EMEA net sales increased 9% primarily driven by sales of silicone hydrogel lenses and single-use sphere and multifocal products. Net sales to the Asia Pacific region decreased 2% due to the negative impact of the weakening of the Japanese yen compared to the United States dollar. Excluding the impact of currency, sales in the Asia Pacific region grew on market gains of silicone hydrogel lenses and single-use products.

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

CooperSurgical Net Sales

CooperSurgical’s fiscal 2013 net sales increased 25% from fiscal 2012 to $319.4 million with net sales growth excluding acquisitions of 3%. Sales of products used in fertility clinics now represent 33% of net sales compared to 16% in the prior year due to the acquisition of Origio in July 2012. Sales of products used in medical office and surgical procedures by ob/gyns declined 1% as compared to the prior year and now

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

represent 67% of CooperSurgical's net sales compared to 84% in the prior year. CooperSurgical’s sales primarily comprise women’s healthcare products used in fertility procedures and by gynecologists and obstetricians in surgical procedures and in the medical office. The balance consists of sales of medical devices outside of women’s healthcare which CooperSurgical does not actively market. Unit growth and product mix, primarily sales of fertility products, along with increased average realized prices on disposable products influenced organic sales growth.

Acquisition of Origio: On July 11, 2012, we completed a voluntary tender offer for the outstanding shares of Origio a/s at a purchase price of Norwegian krone (NOK) 28 per share in cash, or $147.4 million, and acquired about 97% of the outstanding shares. During our fiscal fourth quarter of 2012 and our fiscal first quarter of 2013, we completed a mandatory redemption to obtain the remaining shares in accordance with the Danish Companies Act. We, through our subsidiaries, financed the acquisition with available offshore cash and credit facilities. Origio is a global in-vitro fertilization (IVF) medical device company that develops, manufactures and distributes highly specialized products that target IVF treatment with a goal to make fertility treatment safer, more efficient and convenient. Based in Malov, Denmark, Origio had approximately 320 employees. We assumed about $45.4 million of Origio's debt that we repaid concurrent with the acquisition. Our allocation of the purchase price at fair value included amortizable intangible assets of $107.7 million and goodwill of $103.7 million. We incurred $4.9 million of acquisition costs which were primarily reported as selling, general and administrative expense in our Consolidated Statement of Income. See Note 2 for additional information.

2012 Compared with 2011

Highlights: 2012 vs. 2011

•	Net sales up 9% to $1.4 billion from $1.3 billion in fiscal year 2011.

•	Gross margin 64% of net sales up from 60%.

•	Operating income up 25% to $283.4 million from $227.6 million.

•	Interest expense down 32% to $11.8 million from $17.3 million.

•	Diluted earnings per share up 39% to $5.05 from $3.63.

•	Operating cash flow $315.1 million down 6% from $336.3 million.

Fiscal 2012 pre-tax results include a $1.4 million loss related to the May 31, 2012, amendment to our revolving Credit Agreement, and costs related to the acquisition of Origio consisting of $4.9 million in direct acquisition costs and a $0.4 million net gain related to the repayment of debt acquired recorded in interest expense. Fiscal 2011 pre-tax results included a charge of $20.4 million related to the limited recall of Avaira contact lenses, costs of $16.5 million related to the redemption of our Senior Notes, a $10.0 million charge related to the settlement of all claims in a patent infringement lawsuit and restructuring costs of $1.9 million related to the CooperVision manufacturing restructuring plan that was completed in fiscal 2011.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

Selected Statistical Information – Percentage of Net Sales

Years Ended October 31,	2012			2012 vs. 2011 % Change			2011			2011 vs. 2010 % Change			2010
Net sales	100	%		9	%		100	%		15	%		100	%
Cost of sales	36	%		(1	)%		40	%		9	%		42	%
Gross profit	64	%		15	%		60	%		19	%		58	%
Selling, general and administrative expense	39	%		10	%		38	%		18	%		37	%
Research and development expense	4	%		19	%		3	%		24	%		3	%
Amortization of intangibles	1	%		17	%		2	%		14	%		2	%
Operating income	20	%		25	%		17	%		20	%		16	%

Net Sales Growth by Business Unit

Our consolidated net sales grew by $114.3 million in fiscal 2012 and $172.3 million in 2011:

($ in millions)	2012 vs. 2011				% Change			2011 vs. 2010				% Change
CooperVision	$	68.1			6	%		$	150.6			16	%
CooperSurgical	46.2				22	%		21.7				12	%
	$	114.3			9	%		$	172.3			15	%

CooperVision Net Sales

Net sales growth included increases in single-use spheres up 10%, representing 22% of net sales. Total toric lenses grew 5% and were 30% of net sales, and multifocal lenses grew 26% to 8% of net sales up from 7% in the prior year. Silicone hydrogel products grew 28% worldwide and represented 36% of net sales up from 30% in the prior year. Proclear product sales were flat as compared to the prior year and represented 25% of net sales down from 27% in the prior year. Older conventional lens products and cosmetic lenses declined 16% and 20%, respectively, and together represented 3% of net sales, down from 4% in the prior year.

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

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

CooperVision Net Sales by Geography

($ in millions)	2012				2011				% Change
Americas	$	498.9			$	469.7			6	%
EMEA	402.3				398.5				1	%
Asia Pacific	288.0				252.9				14	%
	$	1,189.2			$	1,121.1			6	%

CooperVision’s worldwide net sales grew 6% in the year-to-year comparison. Americas net sales grew 6%, primarily due to market gains of CooperVision’s silicone hydrogel lenses and single-use lenses. EMEA net sales grew 1% primarily driven by sales growth of silicone hydrogel lenses, as sales in fiscal 2012 were negatively impacted due to the weakening euro and the British pound compared to the United States dollar. Net sales to the Asia Pacific region grew 14%, primarily due to sales growth in fiscal 2012 of single-use lenses and silicone hydrogel lenses. Asia Pacific net sales growth was positively impacted by the strengthening of the Japanese yen and Australian dollar compared to the United States dollar.

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

CooperSurgical Net Sales

CooperSurgical’s fiscal 2012 net sales increased 22% from fiscal 2011 to $255.9 million with net sales growth excluding acquisitions of 6%. Origio net sales of $25.1 million are included in fiscal 2012 beginning on July 1, 2012. Sales of products used in surgical procedures grew 19% and represented 36% of CooperSurgical’s fiscal 2012 net sales, 40% excluding Origio's IVF business, compared to 37% in the prior year. Unit growth and product mix along with increased average realized prices on disposable products have influenced organic sales growth.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

2013 Compared to 2012 and 2012 Compared to 2011

Cost of Sales/Gross Profit

Gross Profit Percentage of Net Sales	2013			2012			2011
CooperVision	65	%		63	%		60	%
CooperSurgical	64	%		66	%		65	%
Consolidated	65	%		64	%		60	%

The increase in CooperVision's gross margin is largely attributable to the lower royalty payment on our silicone hydrogel products beginning on January 1, 2013, increased manufacturing efficiencies and product mix. Sales of higher margin Biofinity products increased as compared to the prior year. Sales of our lower margin Avaira family of products also grew in the fiscal 2013 as we completed the relaunch of these products that compete in the two-week modality market. Gross margin was unfavorably impacted by lower net sales on products sold in Japan due to the weakening of the Japanese yen as compared to the United States dollar in fiscal 2013. The sequential increases in gross margin over the fiscal years presented are largely attributable to improvements in manufacturing efficiencies and product mix, primarily the shift to higher margin Biofinity silicone hydrogel products. We expect our plans to ramp up production of MyDay, our single-use spherical silicone hydrogel lens, to provide headwinds to our gross margin over future fiscal periods.

The decrease in CooperSurgical's gross margin for fiscal 2013 as compared to fiscal 2012 is largely attributable to product mix and increased sales of lower margin fertility products due to the acquisition of Origio in July 2012. Sales of lower margin fertility products now represent 33% of net sales compared to 16% in fiscal 2012. The increase in CooperSurgical’s gross margin for fiscal 2012 as compared to fiscal 2011 is largely attributable to manufacturing efficiency improvements and product mix. The changes in product mix included higher margins on products used in surgical procedures that grew 19% over the prior year and represented 36% of net sales in fiscal 2012, or 40% excluding Origio sales for the last four months of 2012, compared to 37% in fiscal 2011. The increase was partially offset by the inclusion of four months of sales of lower margin fertility products from the acquisition of Origio in July 2012.

Selling, General and Administrative Expense (SGA)

($ in millions)	2013				% Net Sales			% Change			2012				% Net Sales			% Change			2011				% Net Sales
CooperVision	$	448.2			35	%		3	%		$	433.5			36	%		6	%		$	410.2			37	%
CooperSurgical	118.5				37	%		27	%		93.0				36	%		32	%		70.6				34	%
Corporate	44.0				—			15	%		38.4				—			19	%		32.3				—
	$	610.7			38	%		8	%		$	564.9			39	%		10	%		$	513.1			38	%

Consolidated SGA decreased to 38% of net sales in fiscal 2013 from 39% of net sales in fiscal 2012 and was flat as compared to fiscal 2011.

The 3% increase in CooperVision's SGA in fiscal 2013 compared to fiscal 2012 in absolute dollars is primarily due to our investment in sales and marketing, including increased headcount, to reach new customers and support geographic expansion. Programs included the promotion of our silicone hydrogel products, including MyDay, our single-use spherical silicone hydrogel lens, and Proclear 1 Day multifocal in Japan. SGA as a percent of net sales decreased to 35% from 36% and 37% in fiscal 2012 and 2011, respectively, primarily due to reduced legal costs and the $10.0 million patent litigation settlement in fiscal 2011 discussed below.

The 27% increase in CooperSurgical's SGA in absolute dollars in fiscal 2013 as compared to fiscal 2012 and the increase as a percentage of net sales is primarily due to operating expenses related to Origio, including approximately $0.6 million of acquisition costs in fiscal 2013. In addition to the acquisition and integration

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

activities related to Origio, CooperSurgical continues to invest in sales activities to promote our products, with emphasis on products used in surgical procedures, and to reach new customers. On January 1, 2013, the new medical device excise tax became effective on sales of CooperSurgical's products in the United States and added $2.4 million to SGA expense in fiscal 2013.

The 32% increase in CooperSurgical's SGA in absolute dollars in fiscal 2012 as compared to fiscal 2011 as well as the increase as a percentage of sales is primarily due to operating expenses related to Origio as well as approximately $4.6 million of acquisition costs expensed in fiscal 2012. Fiscal 2012 SGA was 34% as a percentage of net sales, the same as fiscal 2011, excluding Origio operating expenses and related acquisition costs.

Corporate headquarters’ SGA increased 15% in absolute dollars in fiscal 2013 primarily due to increased share-based compensation costs. The 19% growth in absolute dollars in fiscal 2012 as compared to fiscal 2011 was primarily due to increased share-based compensation costs and legal expenses.

Research and Development Expense (R&D)

($ in millions)	2013				% Net Sales			% Change			2012				% Net Sales			% Change			2011				% Net Sales
CooperVision	$	46.4			4	%		10	%		$	42.3			4	%		14	%		$	37.0			3	%
CooperSurgical	12.4				4	%		32	%		9.4				4	%		43	%		6.6				3	%
	$	58.8			4	%		14	%		$	51.7			4	%		19	%		$	43.6			3	%

The sequential increases in CooperVision's R&D in absolute dollars over the fiscal years presented and the fiscal 2012 increase as a percentage of net sales as compared to the prior year are primarily due to investments in new technologies, clinical trials and increased headcount. CooperVision’s research and development activities primarily include programs to develop new contact lens designs.

The sequential increases in CooperSurgical's R&D in absolute dollars over the fiscal years presented and the fiscal 2012 increase as a percentage of net sales as compared to the prior year are due to the addition of Origio's in-vitro fertilization product development and investments in the design and upgrade of surgical procedure devices.

Divested Operation

On October 31, 2013, we completed a transaction to sell Aime, our rigid gas-permeable contact lens and solutions business in Japan, to Nippon Contact Lens Inc. The business was originally obtained as part of the December 1, 2010 acquisition which included obtaining the rights to market Biofinity in Japan. The divestiture is consistent with CooperVision’s strategy to focus on its core soft contact lens business. Additionally, Aime revenue has declined in recent periods, and the products have lower than average company margins. Post divestiture, we expect the transaction to be neutral to earnings per share.

The Aime divestiture was originally announced on May 31, 2013, and met the criteria for classification as held for sale during the fiscal fourth quarter of 2013. During the fourth quarter of 2013, we completed several conditions to closing and facilitated the transfer of manufacturing technology. We recorded a pre-tax loss of approximately $21.1 million in our Consolidated Statement of Income for fiscal 2013. Results from operations of Aime are included in our Consolidated Statements of Income for fiscal 2013, 2012 and 2011, and we have not segregated the results of operations or net assets of Aime on our financial statements for any period presented. The disposition of the assets and liabilities of Aime did not qualify for classification as discontinued operations as CooperVision shall maintain continuing involvement through a distribution arrangement with Aime for a minimum of three years.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

Amortization of Intangibles

Amortization of intangibles was $30.2 million in fiscal 2013, $24.0 million in fiscal 2012 and $20.5 million in fiscal 2011. The 26% increase in fiscal 2013 as compared to fiscal 2012 and the 17% increase in fiscal 2012 as compared to fiscal 2011 were primarily due to intangible assets from acquisitions primarily the acquisition of Origio in July 2012.

Settlements

On December 2, 2011, CooperVision and Rembrandt Vision Technologies, L.P. entered into a settlement agreement under which CooperVision agreed to make a lump sum payment of $10.0 million to Rembrandt, and Rembrandt executed a covenant not to sue regarding patent infringement claims. We recorded a charge in selling, general and administrative expense for the settlement in our fiscal fourth quarter of 2011.

Operating Income

Operating income grew $78.4 million or 35% between fiscal 2011 and fiscal 2013, increasing $22.6 million or 8% in fiscal 2013 from fiscal 2012 and $55.8 million or 25% in fiscal 2012 from fiscal 2011.

($ in millions)	2013				% Net Sales			% Change			2012				% Net Sales			% Change			2011				% Net Sales
CooperVision	$	289.3			23	%		10	%		$	262.8			22	%		27	%		$	207.5			19	%
CooperSurgical	60.6				19	%		3	%		59.0				23	%		12	%		52.4				25	%
Corporate	(44.0		)		—			(15	)%		(38.4		)		—			(19	)%		(32.3		)		—
	$	305.9			19	%		8	%		$	283.4			20	%		25	%		$	227.6			17	%

The increase in consolidated operating income in fiscal 2013 as compared to fiscal 2012 in absolute dollars was primarily due to the increase in gross profit of 11%, partially offset by the increase in operating expenses of 13%. The decrease in consolidated operating income as a percentage of sales in fiscal 2013 as compared to fiscal 2012 was primarily due to the $21.1 million loss on divestiture of Aime, discussed above, recorded in operating expenses for CooperVision. CooperSurgical's operating income in fiscal 2012 increased in absolute dollars primarily due to the increase in gross profit that also included the results of Origio beginning in July 2012, and operating income decreased as a percentage of sales primarily due to the $4.6 million of Origio acquisition costs.

Interest Expense

Interest expense decreased 22% to $9.2 million in fiscal 2013 constituting 0.6% of net sales in fiscal 2013 as compared to 0.8% of net sales in fiscal 2012. The fiscal 2013 decrease reflects lower average debt and lower average interest rates in the current year. Interest expense decreased 32% to $11.8 million in fiscal 2012 as compared to fiscal 2011 reflecting lower average debt and the reduction in our long-term borrowings used for capital expenditures together with lower interest rates as a result of the redemption of our 7.125% Senior Notes in February 2011. We had $300.0 million outstanding on the new Term Loan and $0.2 million outstanding under our revolving Credit Agreement at October 31, 2013, compared to $346.3 million outstanding under our revolving Credit Agreement at October 31, 2012.

Insurance Proceeds

On October 28, 2011, a manufacturing building in the United Kingdom experienced an incident in which a pipe broke in our fire suppression system, causing water and fire retardant foam damage to the facility. While this incident did not substantially impact our existing customers, the repairs to the facility and resultant decrease in manufacturing capacity impacted the timing of marketing initiatives to generate additional sales. In January 2013, we resolved our business interruption claim with our insurer for a total of $19.1 million.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

We received payments of $5.0 million in our fiscal fourth quarter of 2012. In our fiscal first quarter of 2013, we recorded the remaining $14.1 million in our Consolidated Statement of Income of which we received payment of $2.9 million during the fiscal first quarter and payment of the remaining $11.2 million in the fiscal second quarter.

Losses on Extinguishment of Debt

In fiscal 2012, we recorded a $1.4 million loss related to the amendment to our revolving Credit Agreement on May 31, 2012. In fiscal 2011, we recorded a $16.5 million loss related to the repurchase of all outstanding 7.125% Senior Notes that includes the write-off of about $4.4 million of unamortized costs and the redemption premium of $12.1 million.

Other Income (Expense), Net

Years Ended October 31, (In millions)	2013				2012				2011
Foreign exchange gain (loss)	$	0.1			$	(1.5	)		$	(1.0	)
Other, net	1.3				1.7				—
	$	1.4			$	0.2			$	(1.0	)

Provision for Income Taxes

We recorded income tax expense of $15.4 million in fiscal 2013 compared to $26.8 million in fiscal 2012. Our effective tax rate (ETR) (provision for income taxes divided by pretax income) for fiscal 2013 was 4.9% and for fiscal 2012 was 9.7%. The decrease in the ETR in fiscal 2013 is driven by changes in our geographic mix of income as well as discrete items primarily the loss on divestiture of Aime, the decrease in the United Kingdom's tax rate and the reinstatement of the federal R&D credit.

The ETR is below the United States statutory rate as a majority of our income is earned in foreign jurisdictions with lower tax rates reflecting the shift in the geographic mix of income during recent periods with income earned in foreign jurisdictions increasing as compared to income earned in the United States. As a result, the ratio of domestic income to worldwide income, primarily within CooperVision but augmented by CooperSurgical's July 2012 acquisition of Origio, has decreased over recent fiscal periods. A reduction in the ratio of domestic income to worldwide income effectively lowers the overall tax rate due to the fact that the tax rates in the majority of foreign jurisdictions where we operate are significantly lower than the statutory rate in the United States.

The impact on our provision for income taxes of income earned in foreign jurisdictions being taxed at rates different than the United States federal statutory rate was a benefit of approximately $97.0 million and a foreign effective tax rate of approximately 0.6% in our fiscal year 2013 compared to $71.3 million and a foreign effective tax rate of approximately 5.1% in our fiscal year 2012. The foreign jurisdictions with lower tax rates as compared to the United States federal statutory 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. See Note 5 for additional information.

Share Repurchases

In December 2011, we announced a $150.0 million share repurchase program, and in December 2012 the total authorized repurchase amount was increased to $300.0 million, both authorized by our Board of Directors. The program has no expiration date and may be discontinued at any time. During fiscal 2013, we repurchased 1.4 million shares of our common stock for $167.3 million at an average purchase price of $117.78 per share. During fiscal 2012, we repurchased 984 thousand shares of our common stock for $71.1

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

million at an average purchase price of $72.30 per share. At October 31, 2013, we had remaining authorization to repurchase about $61.5 million of our common stock. Subsequent to our fiscal year end, the Board of Directors authorized the repurchase of an additional $200.0 million under this program increasing the remaining authorization to $261.5 million. See Note 7 for additional information.

Share-Based Compensation Plans

We grant various share-based compensation awards, including stock options, performance shares, restricted stock and restricted stock units. The share-based compensation and related income tax benefit recognized in the consolidated financial statements in fiscal 2013 was $30.4 million and $8.8 million, respectively, compared to $22.8 million and $7.0 million, respectively, in fiscal 2012. As of October 31, 2013, there was $55.5 million of total unrecognized share-based compensation cost related to non-vested awards: $9.0 million for stock options; $36.7 million for restricted stock units; and $9.8 million for performance shares. The unrecognized compensation is expected to be recognized over weighted average remaining vesting periods of 3.1 years for nonvested stock options, 3.1 years for restricted stock units and 1.7 years for performance shares. Cash received from options exercised under all share-based compensation arrangements for fiscal 2013, 2012 and 2011 was $19.3 million, $55.1 million and $82.0 million, respectively.

We estimate the fair value of each stock option award on the date of grant using the Black-Scholes valuation model, which requires management to make estimates regarding expected option life, stock price volatility and other assumptions. The use of different assumptions could lead to a different estimate of fair value. The expected life of the stock option is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. If our assumption for the expected life increased by one year, the fair value of an individual option granted in fiscal 2013 would have increased by approximately $3. 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 2013 would have increased by less than $1.

We estimate stock option forfeitures based on historical data for each employee grouping and adjusts the rate to expected forfeitures periodically. The adjustment of the forfeiture rate will result in a cumulative catch-up adjustment in the period the forfeiture estimate is changed.

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

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

CAPITAL RESOURCES AND LIQUIDITY

2013 Highlights

•	Operating cash flow $415.9 million up from $315.1 million in fiscal 2012.

•	Expenditures for purchases of property, plant and equipment $178.1 million up from $99.8 million in fiscal 2012.

•	Cash payments for acquisitions totaled $13.3 million compared to $145.3 million in fiscal 2012.

•	Total debt decreased to $344.7 million at the end of fiscal 2013 from $373.7 million at the end of fiscal 2012.

Comparative Statistics

Years Ended October 31, ($ in millions)	2013				2012
Cash and cash equivalents	$	77.4			$	12.8
Total assets	$	3,137.3			$	2,941.4
Working capital	$	426.0			$	395.3
Total debt	$	344.7			$	373.7
Stockholders’ equity	$	2,423.5			$	2,213.2
Ratio of debt to equity	0.14:1				0.17:1
Debt as a percentage of total capitalization	12		%		14		%

Working Capital

The increase in working capital at the end of fiscal 2013 from the end of fiscal 2012 was primarily due to increases in cash, inventory and other current assets. This increase was partially offset by increases in accounts payable and short-term debt.

The $18.7 million increase in inventory was primarily due to increased production of single-use silicone contact lenses and to support the relaunch of Avaira Toric contact lenses. At October 31, 2013, our inventory months on hand (MOH) were 6.9 representing an increase from 6.7 at October 31, 2012, due to the increase in inventory and the reduction of the royalty payment, recognized in costs of sales, for CooperVision's silicone hydrogel contact lenses. The $4.8 million decrease in trade accounts receivable was primarily due to timing of collections as well as the divestiture of Aime in October 2013. Our days sales outstanding (DSO) decreased to 53 days at October 31, 2013, from 54 days at October 31, 2012.

We have reviewed our needs in the United States for possible repatriation of undistributed earnings or cash of our foreign subsidiaries. We presently intend to continue to indefinitely invest all earnings and cash outside of the United States of all foreign subsidiaries to fund foreign investments or meet foreign working capital and property, plant and equipment requirements.

Operating Cash Flow

Cash flow provided by operating activities continued in fiscal 2013 as our major source of liquidity at $415.9 million compared to $315.1 million in fiscal 2012 and $336.3 million in fiscal 2011. Fiscal 2013 net income increased $48.3 million from the prior year to $296.9 million, and our results include $127.5 million of non-cash items primarily related to depreciation and amortization, $28.5 million related to share-based compensation, $21.1 million related to the divestiture of Aime and $8.9 million related to currency translation. Results also include changes in operating assets and liabilities, which primarily reflect the increases in

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

inventories and accrued income taxes payable. The $100.8 million increase in cash flow provided by operations in fiscal 2013 as compared to fiscal 2012 is primarily due to the fiscal 2013 increase in net income, that includes the loss on divestiture of Aime and the $14.1 million for insurance proceeds received, and the lower investment in inventories compared to fiscal 2012.

For fiscal 2013, our primary source of cash flows provided by operating activities was cash collections from our customers for purchase of our products and the $14.1 million for insurance proceeds received. Our primary uses of cash flows from operating activities were for personnel and material costs along with cash payments of $5.4 million for interest.

For fiscal 2012, our primary source of cash flows provided by operating activities was cash collections from our customers for purchase of our products. Our primary uses of cash flows from operating activities were for personnel and material costs along with cash payments of $10.6 million for interest and the $10.0 million single lump-sum payment, accrued in fiscal 2011, to settle the Rembrandt Vision Technologies, L.P. lawsuit under the agreement reached on December 2, 2011.

Investing Cash Flow

Cash used in investing activities of $189.9 million in fiscal 2013 was for capital expenditures of $178.1 million, primarily to increase manufacturing capacity, and payments of $13.3 million related to acquisitions, partially offset by the $1.3 million insurance recovery related to facility repairs. As discussed in Outlook above, during fiscal 2013, CooperVision implemented capital projects to invest in increased single-use manufacturing capacity which is the primarily driver of the $117.4 million increase in construction in progress.

Cash used in investing activities of $238.5 million in fiscal 2012 was for capital expenditures of $99.8 million, primarily to increase manufacturing capacity, and payments of $145.3 million related to acquisitions, primarily the acquisition of Origio, partially offset by the $6.6 million insurance recovery related to facility repairs.

Financing Cash Flow

The changes in cash flows from financing activities primarily relate to borrowings and payments of debt as well as share repurchases and share-based compensation awards. Cash used in financing activities of $161.6 million in fiscal 2013 was driven by $25.8 million for net repayments of debt, $167.3 million in payments for share repurchases under our share repurchase plan, $5.2 million to purchase Origio shares and other distributions to noncontrolling interests, a $3.6 million payment for contingent consideration and $2.9 million for dividends. Cash used in financing activities was partially offset by $37.4 million from the exercise of share-based compensation awards and $5.9 million from a construction allowance.

In fiscal 2012, the changes in cash flows from financing activities primarily related to borrowings and payments of debt as well as share-based compensation awards and share repurchases. Cash used in financing activities of $68.4 million in fiscal 2012 was driven by $56.7 million for net repayments of debt, including repayment of debt acquired with Origio, and $71.2 million in payments for share repurchases under our share repurchase plan together with dividends paid on our common stock of $2.9 million, $2.2 million to purchase Origio shares from noncontrolling interests and a $1.3 million payment for contingent consideration. Cash used in financing activities was partially offset by $55.1 million from the exercise of share-based compensation awards and $10.7 million for the excess tax benefit from share-based compensation arrangements.

At October 31, 2013, we had $300.0 million outstanding on the new Term Loan and $999.8 million available under the revolving Credit Agreement, and we are in compliance with our financial covenants including the Interest Coverage Ratio at 54.29 to 1.00 and the Total Leverage Ratio at 0.69 to 1.00. As defined, in both

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

the Credit Agreement and Term Loan, the Interest Coverage Ratio is the ratio of Consolidated Proforma EBITDA to Consolidated Interest Expense with the requirement to be at least 3.00 to 1.00 and the Total Leverage Ratio is the ratio of Consolidated Funded Indebtedness to Consolidated Proforma EBITDA with the requirement to be no higher than 3.75 to 1.00.

OFF BALANCE SHEET ARRANGEMENTS

None.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of October 31, 2013, we had the following contractual obligations and commercial commitments:

Payments Due by Period (In millions)	Total				2014				2015 & 2016				2017 & 2018				2019 & Beyond
Contractual obligations:
Long-term debt	$	301.7			$	—			$	4.6			$	296.6			$	0.5
Interest payments	15.9				4.9				6.1				4.9				—
Operating leases	119.0				20.8				30.8				23.2				44.2
Land and building construction	11.4				11.4				—				—				—
Consideration for marketing rights	2.5				2.5				—				—				—
Contingent consideration	2.6				1.3				1.3				—				—
Total contractual obligations	453.1				40.9				42.8				324.7				44.7
Commercial commitments:
Stand-by letters of credit	3.0				3.0				—				—				—
Total	$	456.1			$	43.9			$	42.8			$	324.7			$	44.7

The expected future benefit payments for pension plans through 2023 are disclosed in Note 9. Employee Benefits.

We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, about $29.0 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, included these uncertain tax positions. See Note 5 for additional information.

Inflation and Changing Prices

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

Recently Issued Accounting Pronouncements

In fiscal 2013, the Company adopted the provisions of Financial Accounting Standards Board Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The Company has elected to present net income and other comprehensive income on two separate but consecutive statements. The adoption of ASU 2011-05 did not have an impact on the Company’s consolidated results of operations, financial condition or cash flows.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to present, either on the face of the statement where net income is presented or as a separate disclosure in the notes, the effect on the respective line items of net income for items required to be reclassified out of accumulated other comprehensive income to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in its entirety to net income in the same reporting period, an entity is required to cross-reference to other required disclosures that provide additional details about those amounts. The Company does not anticipate that the adoption of this amendment, which is effective for the Company for the fiscal year beginning on November 1, 2013, will have a material impact on our consolidated results of operations, financial condition or cash flows.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. When a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available, or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company does not anticipate the adoption of these amendments, which are effective for the Company for the fiscal year beginning on November 1, 2014, will have a material impact on our consolidated results of operations, financial condition or cash flows.

Estimates and Critical Accounting Policies

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

•

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

•	Net realizable value of inventory - In assessing the value of inventories, we make estimates and judgments regarding aging of inventories and other relevant issues potentially affecting the saleable condition of products and estimated prices at which those products will sell. On an ongoing basis,

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

we review the carrying value of our inventory, measuring number of months on hand and other indications of salability. We reduce the value of inventory if there are indications that the carrying value is greater than market, resulting in a new, lower-cost basis for that inventory. Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. While estimates are involved, historically, obsolescence has not been a significant factor due to long product dating and lengthy product life cycles. We target to keep, on average, five to seven months of inventory on hand to maintain high customer service levels given the complexity of our contact lens and women's healthcare product portfolios.

•

Valuation of goodwill - We account for goodwill and evaluate our goodwill balances and test them for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist in accordance with related accounting standards. We performed our annual impairment test in our fiscal third quarter of 2013, and our analysis indicated that we had no impairment of goodwill. We performed our annual impairment test in our fiscal third quarter of 2012 and concluded that we had no impairment of goodwill in that year.

In fiscal 2013 and 2012, we performed qualitative assessments to test each reporting unit's goodwill for impairment. 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 two-step impairment test will be performed.

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

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

•

Business combinations - We routinely consummate business combinations. Results of operations for acquired companies are included in our consolidated results of operations from the date of acquisition. We recognize separately from goodwill, the identifiable assets acquired, including acquired in-process research and development, the liabilities assumed, and any noncontrolling interest in the acquiree generally at the acquisition date fair values as defined by accounting standards related to fair value measurements. As of the acquisition date, goodwill is measured as the excess of consideration given, generally measured at fair value, and the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are expensed as incurred.

•

Income taxes - We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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

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

•

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

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

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

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

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