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

In this section, we discuss the results of our operations for fiscal 2017 compared with fiscal 2016 and the results of our operations for fiscal 2016 compared with fiscal 2015. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.” 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.

Outlook

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, debt concerns, the uncertainty caused by the United Kingdom's intention to withdraw from the European Union, and the trend of consolidation 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 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 of recently introduced products, and we continue to expand our presence in existing and emerging markets, including through acquisitions.

On December 1, 2017, subsequent to fiscal 2017, CooperVision acquired Paragon Vision Sciences, a leading provider of orthokeratology (ortho-k) specialty contact lenses and oxygen permeable rigid contact lens materials for approximately $80.0 million. In fiscal 2017, we acquired Procornea, a Netherlands based manufacturer of specialty contact lenses, which expands CooperVision's access to myopia (nearsightedness) management markets with new products; and Grand Vista LLC, a distributor in Russia of soft contact lenses. In fiscal 2016, we acquired Soflex, an Israeli manufacturer and distributor of soft contact lenses and aftercare solutions.

Sales of contact lenses utilizing silicone hydrogel materials continue to grow and this material represents about half of the industry. 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. CooperVision manufactures and markets a wide variety of silicone hydrogel contact lenses within the daily, two-week and monthly modalities along with manufacturing some of these lenses as toric and/or multifocal lenses. We market these lenses under a number of different brand names, including but not limited to Biofinity®, clariti®, MyDay® and Avaira®.

We believe that the global market for single-use contact lenses will continue growing and our single-use silicone hydrogel products represent an opportunity for our business. Our clariti 1day brand provides the only single-use silicone hydrogel lenses in the marketplace with a complete line of spherical, toric and multifocal contact lenses. We expect increasing aggregate demand for clariti 1day and MyDay products, as well as future single-use products.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

CooperSurgical - Our CooperSurgical business competes in the general health care market with a focus on advancing the health of families through a diversified portfolio of products and services focusing on women's health, fertility, diagnostics and contraception. CooperSurgical has established its market presence and distribution system by developing products and acquiring companies, products and services that complement its business model. CooperSurgical product sales are categorized based on the point of health care delivery including products used in medical office and surgical procedures primarily by obstetricians and gynecologists (ob/gyns) that represented 46% of CooperSurgical's net sales in the fiscal 2017 compared to 55% in the prior year. CooperSurgical's remaining sales are specialized products and services that largely target the in vitro fertilization (IVF) process used in fertility that now represent 54% of CooperSurgical's net sales up from 45% in fiscal 2016. This change in product mix was primarily attributable to recent acquisitions discussed below.

We have continued to invest in CooperSurgical's business through the acquisition of companies and product lines for new or complementary products and services for the IVF process. In fiscal 2017, we acquired Wallace, the IVF segment of Smiths Medical International Ltd. In fiscal 2016, we acquired Recombine, Inc., Reprogenetics UK and Genesis Genetics Inc., which compete in service offerings of carrier screening, preimplantation genetic screening (PGS) and/or preimplantation genetic diagnosis (PGD) used during the IVF process, and we also acquired Kivex Biotec A/S, The Pipette Company and Research Instruments, which are manufacturers and distributors of IVF medical devices, systems, and/or equipment. 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 and diagnostics.

On November 1, 2017, subsequent to fiscal 2017, CooperSurgical acquired the global rights and business of the PARAGARD Intrauterine Device (IUD) business (PARAGARD) from Teva Pharmaceuticals Industries Limited (Teva) for $1.1 billion. We acquired PARAGARD as the product broadens and strengthens CooperSurgical's current women's health product portfolio in office and surgical procedures. PARAGARD is the only non-hormonal, long lasting, reversible contraceptive option approved by FDA available in the United States. IUDs represent a large and growing segment of the contraceptive market and this acquisition allows CooperSurgical to accelerate growth providing opportunities for operational synergies. In connection with the acquisition, we entered into a new five-year, $1.425 billion, senior unsecured term loan agreement by and among the Company, the lenders party thereto and DNB Bank, as administrative agent. We used part of the facility to fund the acquisition of PARAGARD and used the remainder of the funds to partially repay outstanding borrowings under our revolving credit agreement. Refer to Note 15. Subsequent Events for more information.

Capital Resources - At October 31, 2017, we had $88.8 million in cash, primarily outside the United States, $676.7 million available under our syndicated revolving credit agreement and $830.0 million outstanding on the term loan entered on March 1, 2016. In fiscal 2017, we fully repaid the remaining balances from the $700.0 million term loan originally entered into on August 4, 2014 and the $300.0 million term loan originally entered into on September 12, 2013 using funds from operations and our revolving credit agreement.

On March 1, 2016, we entered into a syndicated revolving Credit and Term Loan Agreement with Keybank as administrative agent. This agreement, maturing on March 1, 2021, replaced our previous revolving Credit Agreement, entered into on January, 12, 2011 and provides for a multi-currency revolving credit facility in an aggregate principal amount of $1.0 billion and a term loan facility in the aggregate principal amount of $830.0 million. We used funds from the term loan to repay outstanding amounts under the previous Credit Agreement, other outstanding term loans and for general corporate purposes. See Note 5. Debt for additional information.

We believe our cash and cash equivalents, cash flow from operating activities and borrowing capacity under our 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.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

However, depending on the size or timing of these business activities, we may seek to raise additional equity or debt financing, which may not be available on favorable terms, or at all.

2017 Compared with 2016

Highlights: 2017 vs. 2016

•	Net sales increased 9% to $2.14 billion from $1.97 billion in fiscal 2016

•	Gross margin 64% of net sales compared with 60% in fiscal 2016

•	Operating income increased 32% to $429.1 million from $324.1 million

•	Interest expense increased to $33.4 million from $26.2 million

•	Diluted earnings per share increased 35% to $7.52 from $5.59

•	Operating cash flow $593.6 million increased 16% from $509.6 million

Selected Statistical Information – Percentage of Net Sales

Years Ended October 31,	2017			2017 vs. 2016 % Change			2016			2016 vs. 2015 % Change			2015
Net sales	100	%		9	%		100	%		9	%		100	%
Cost of sales	36	%		(3	)%		40	%		9	%		40	%
Gross profit	64	%		16	%		60	%		10	%		60	%
Selling, general and administrative expense	37	%		11	%		37	%		1	%		40	%
Research and development expense	3	%		6	%		3	%		(6	)%		4	%
Amortization of intangibles	3	%		13	%		3	%		18	%		3	%
Operating income	20	%		32	%		16	%		37	%		13	%

Net Sales Growth by Business Unit

Our two business units, CooperVision and CooperSurgical, generate all of our sales. Our consolidated net sales grew by $172.2 million or 9% in fiscal 2017 and $169.7 million or 9% in fiscal 2016:

($ in millions)	2017 vs. 2016				% Change			2016 vs. 2015				% Change
CooperVision	$	96.8			6	%		$	89.4			6	%
CooperSurgical	75.4				19	%		80.3				26	%
	$	172.2			9	%		$	169.7			9	%

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

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, toric, multifocal and toric multifocal lens products in most modalities.

Single-use lenses are designed for daily replacement and frequently replaced lenses are designed for two-week or monthly replacement. Significantly, the market for spherical lenses is growing with value-added spherical lenses to alleviate dry eye symptoms, to reduce eye fatigue from use of digital devices, to add aspherical optical properties and/or higher oxygen permeable lenses such as silicone hydrogels.

We manufacture CooperVision’s silicone hydrogel Biofinity brand spherical, toric and multifocal contact lenses, Avaira brand spherical and toric lenses and MyDay brand spherical and toric lenses using proprietary Aquaform technology to increase oxygen transmissibility for longer wear. Our silicone hydrogel clariti brand spherical, toric and multifocal contact lenses are available in monthly and single-use modalities. We believe the clariti single-use silicone hydrogel lens products provide a competitive advantage in approved markets as clariti is the only single-use silicone hydrogel lens available in all vision correction categories - spherical, toric and multifocal.

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

CooperVision Net Sales by Category

($ in millions)	2017				% Net Sales			2016				%Net sales			2017 vs. 2016 % Change
Toric	$	526.8			31	%		$	480.2			30	%		10	%
Multifocal	177.2				11	%		169.8				11	%		4	%
Single-use spheres	438.3				26	%		403.1				26	%		9	%
Non single-use sphere, other	531.8				32	%		524.1				33	%		1	%
	$	1,674.1			100	%		$	1,577.2			100	%		6	%

In fiscal 2017, CooperVision's toric and multifocal lenses grew largely through the success of our Biofinity, clariti and MyDay portfolios, offset by declines in older hydrogel products. Single-use sphere lenses growth was largely attributed to clariti and MyDay lenses offset by declines in older hydrogel products. Non single-use spheres grew largely on sales of Biofinity offset by declines in older hydrogel products. The term "other" products primarily includes lens care, approximately 3% of net sales in fiscal 2017. Total silicone hydrogel products, including clariti, Biofinity, Avaira and MyDay grew 16% in fiscal 2017, representing 65% of net sales compared to 60% in the prior fiscal year.

CooperVision competes in the worldwide soft contact lens market and services in 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)	2017				2016				2017 vs. 2016 % Change
Americas	$	675.4			$	650.7			4	%
EMEA	651.2				612.3				6	%
Asia Pacific	347.5				314.2				11	%
	$	1,674.1			$	1,577.2			6	%

CooperVision fiscal 2017 net sales growth was partially offset by foreign exchange rate fluctuations which had a negative impact on net sales of $19.8 million. Americas net sales growth was primarily due to market gains of silicone hydrogel contact lenses including Biofinity, clariti and MyDay, partially offset by a decrease in sales of older hydrogel lens products. EMEA net sales growth was largely due to market gains of silicone hydrogel contact lenses including Biofinity, clariti and MyDay, offset by a decrease in sales of older hydrogel products and weakening foreign currencies, primarily the British pound, compared to the prior year against the United States Dollar for the first three fiscal quarters and euro, for the first half of the fiscal year. Net sales in the Asia Pacific region grew on market gains of silicone hydrogel and hydrogel lenses, including Biofinity, clariti and MyDay, partially offset by weakening foreign currencies, primarily the Japanese yen, for the second half of the fiscal year.

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

CooperSurgical Net Sales

CooperSurgical supplies the market for family health care with a diversified portfolio of products and services for use in surgical and other medical procedures that are performed primarily by obstetricians and gynecologists in hospitals, surgical centers, fertility clinics and in the medical office. Fertility offerings include highly specialized products and services that target the in vitro fertilization (IVF) process with a goal to make fertility treatment safer, more efficient and convenient.

Year Ended October 31, ($ in millions)		2017				% Net Sales			2016				% Net Sales			2017 vs. 2016 % Change
Fertility		$	250.2			54	%		$	175.8			45	%		42	%
Office and surgical procedures		214.7				46	%		213.8				55	%		—	%
		$	464.9			100	%		$	389.6			100	%		19	%

CooperSurgical's net sales increase in fertility products compared to the prior year period was mainly due to incremental sales from products and services of acquired companies. The net sales of medical office and surgical procedures remained relatively flat in fiscal 2017 compared to the prior year due to declines in sales of disposable products, partially offset by growth in recently launched products used in surgical procedures. Unit growth and product mix, primarily sales of recently acquired products and services, influenced sales growth. Net sales growth was partially offset by the negative impact from the weakening of foreign currencies compared to the United States dollar during the year.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

2016 Compared with 2015

Highlights: 2016 vs. 2015

•	Net sales up 9% to $1.97 billion from $1.80 billion in fiscal year 2015

•	Gross margin 60% of net sales compared with 60% in fiscal 2015

•	Operating income up 37% to $324.1 million from $236.7 million

•	Interest expense increased to $26.2 million from $18.1 million

•	Diluted earnings per share up 35% to $5.59 from $4.14

•	Operating cash flow $509.6 million up 30% from $391.0 million

Fiscal 2016 pre-tax results include $60.8 million for amortization of intangible assets and $95.1 million of acquisition, integration and restructuring costs primarily related to acquisitions as well as certain legal costs. Acquisition related and integration expenses include items such as personnel costs for transitional employees, other acquired employee related costs and integration related professional services. Restructuring expenses consist of employee severance, product and equipment rationalization, facility and other exit costs. We expect amortization of intangible assets will recur in future periods; however, the amounts are affected by the timing and size of our acquisitions. Expenses such as the acquisition related and integration expenses generally diminish over time with respect to past acquisitions. However, we generally will incur similar expenses in connection with any future acquisitions.

Our fiscal 2016 results include $58.9 million of expenses primarily due to product and equipment rationalization costs, and severance related to the Sauflon acquisition, $6.3 million of costs associated with the start-up of new manufacturing facilities, and $4.4 million of integration costs in our CooperSurgical business, all recorded in cost of sales. Included in our selling, general and administrative expense is $21.2 million of expense for acquisition, restructuring and integration activities, and $2.9 million of certain legal costs. Research and development includes $0.4 million primarily for severance related to restructuring activities. We also incurred a loss of $1.0 million relating to debt extinguishment and foreign exchange loss on forward contracts for an acquisition, both recorded in other expense. The legal costs relate to litigation of the class action complaints filed against CooperVision and other contact lens manufacturers, distributors and retailers relating to Unilateral Pricing Policy (UPP) and related lobbying expenses.

Fiscal 2015 pre-tax results include $51.5 million for amortization of intangible assets and $126.4 million of acquisition, integration and restructuring costs primarily related to the acquisition of Sauflon and other recent acquisitions, as well as certain legal costs.

Our fiscal 2015 results include $57.8 million of expenses primarily due to product and equipment rationalization costs related to recent acquisitions, $8.0 million of costs associated with the start-up of new manufacturing facilities, and $4.5 million of severance costs, all recorded in cost of sales. Included in our selling, general and administrative expense is $31.7 million in costs for CooperVision's acquisition of Sauflon and the related integration and restructuring activities, severance costs in our CooperSurgical business along with other acquisition costs; and $19.8 million of legal costs. The legal costs include a $17.0 million settlement related to intellectual property claims by Johnson & Johnson Vision Care (JJVC) as well as litigation costs relating to the class action complaints filed against CooperVision and other contact lens manufacturers, distributors and retailers relating to Unilateral Pricing Policy (UPP). Research and development expense includes $4.6 million of integration and restructuring activities primarily for equipment rationalization along with severance costs.

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,	2016			2015			2016 vs. 2015 % Change
Net sales	100	%		100	%		9	%
Cost of sales	40	%		40	%		9	%
Gross profit	60	%		60	%		10	%
Selling, general and administrative expense	37	%		40	%		1	%
Research and development expense	3	%		4	%		(6	)%
Amortization of intangibles	3	%		3	%		18	%
Operating income	16	%		13	%		37	%

Net Sales Growth by Business Unit

Our consolidated net sales grew by $169.7 million or 9% in fiscal 2016:

($ in millions)	2016 vs. 2015				% Change
CooperVision	$	89.4			6	%
CooperSurgical	80.3				26	%
	$	169.7			9	%

CooperVision Net Sales

CooperVision fiscal 2016 net sales increased 6% from fiscal 2015 to $1.58 billion. Net sales growth included increases in total sphere lenses up 6%, representing 55% of net sales, the same as in the prior year, primarily on sales of Biofinity, clariti, and MyDay lenses, offset by declines in older products. Total toric lenses grew 9%, representing 30% of net sales, the same as in the prior year, predominantly on sales of Biofinity and clariti products. Total multifocal lenses grew 5%, representing 11% of net sales, the same as in the prior year, primarily from growth in sales of Biofinity and clariti products. Total silicone hydrogel products, including Biofinity, clariti, MyDay and Avaira, grew 15%, representing 60% of net sales up from 55% 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)	2016				2015				2016 vs. 2015 % Change
Americas	$	650.7			$	624.3			4	%
EMEA	612.3				602.1				2	%
Asia Pacific	314.2				261.4				20	%
	$	1,577.2			$	1,487.8			6	%

CooperVision fiscal 2016 net sales growth was partially offset by foreign exchange rate fluctuations which had a net negative impact on net sales of $22.6 million. Americas net sales growth was primarily due to market gains of silicone hydrogel contact lenses including Biofinity, clariti and MyDay partially offset by a decrease in sales of older hydrogel lens products. EMEA net sales growth was largely due to market gains of silicone hydrogel contact lenses including Biofinity, clariti and MyDay, offset by a decrease in sales of older hydrogel products and weakening foreign currencies, primarily the British pound and euro, compared to the United States dollar. Net sales in the Asia Pacific region grew on market gains of silicone hydrogel and hydrogel lenses, including Biofinity, clariti, MyDay, and Proclear 1 Day lenses. Net sales growth in the Asia Pacific region benefited by exchange rate changes of the United States dollar compared to the Japanese yen.

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

CooperSurgical Net Sales

CooperSurgical supplies the market for family health care with a diversified portfolio of products and services for use in surgical and other medical procedures that are performed primarily by obstetricians and gynecologists in hospitals, surgical centers, fertility clinics and in the medical office. Fertility offerings include highly specialized products and services that target the in vitro fertilization (IVF) process with a goal to make fertility treatment safer, more efficient and convenient.

Year Ended October 31, ($ in millions)		2016				% Net Sales			2015				% Net Sales			2016 vs. 2015 % Change
Office and surgical procedures		$	213.8			55	%		$	204.1			66	%		5	%
Fertility		175.8				45	%		105.2				34	%		67	%
		$	389.6			100	%		$	309.3			100	%		26	%

CooperSurgical's net sales of medical office and surgical procedures increased in fiscal 2016 compared to the prior year due to growth in sales of disposable products used in surgical procedures and recently launched products. The net sales increase in fertility products compared to the prior year period was mainly due to sales of products and services of recently acquired companies. Unit growth and product mix, primarily sales of recently acquired products and services, influenced sales growth. Net sales growth was partially offset by the negative impact from the weakening of foreign currencies compared to the United States dollar.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

2017 Compared to 2016 and 2016 Compared to 2015

Cost of Sales/Gross Profit

Gross Profit Percentage of Net Sales	2017			2016			2015
CooperVision	65	%		59	%		59	%
CooperSurgical	60	%		62	%		64	%
Consolidated	64	%		60	%		60	%

CooperVision's increase in gross margin in fiscal 2017 compared to fiscal 2016 was primarily due to the increase in sales of higher margin products including Biofinity and favorable currency impact to CooperVision's cost of sales primarily led by the weakening of the British pound compared to the United States dollar. CooperVision's cost of sales included $17.2 million from $10.9 million of primarily incremental costs associated with the impact of Hurricane Maria on our Puerto Rico manufacturing facility, $5.7 million of product write off costs related to the product transition from Avaira sphere to Avaira Vitality, and $0.6 million of facility start up costs in the fiscal year ended October 31, 2017. Fiscal 2016 gross margin was also negatively impacted by higher restructuring and integrations costs described below.

CooperVision's gross margin in fiscal 2016 remained flat compared to fiscal 2015. Gross margin was impacted positively from an increase in sales of higher margin products including Biofinity, offset by the negative effects of foreign currency changes that unfavorably impacted gross margin as we reported lower net sales due to the weakening of foreign currencies as compared to the United States dollar. Fiscal 2016 and 2015 gross margins were negatively impacted by product and equipment rationalization charges and the related severance costs, arising from our review of Sauflon's products, materials and manufacturing processes, and facility start-up costs of $65.2 million and $69.6 million, respectively.

CooperSurgical’s sequential decrease in gross margin in fiscal 2017, compared to fiscal 2016 and 2015 was primarily due to a change in product mix arising from sales of recently acquired lower margin products and services. CooperSurgical's fiscal 2017 cost of sales included $5.8 million of integration costs compared to $4.4 million in fiscal 2016.

Selling, General and Administrative Expense (SGA)

($ in millions)	2017				% Net Sales			2017 vs. 2016 % Change			2016				% Net Sales			2016 vs. 2015 % Change			2015				% Net Sales
CooperVision	$	583.5			35	%		9	%		$	535.3			34	%		(3	)%		$	552.1			37	%
CooperSurgical	167.8				36	%		19	%		141.6				36	%		27	%		111.2				36	%
Corporate	47.8				—			4	%		45.9				—			(7	)%		49.2				—
	$	799.1			37	%		11	%		$	722.8			37	%		1	%		$	712.5			40	%

The increase in CooperVision's SGA in fiscal 2017 compared to fiscal 2016 in absolute dollars and as a percentage of sales was due to investments to support our long term objectives, including increased headcount in sales and G&A, investments in information technology and higher distribution expenses to support revenue growth. CooperVision's SGA in fiscal 2017 included $9.1 million of legal costs and $4.7 million of acquisition and integration costs. Legal costs related to litigation of class action complaints filed against CooperVision and other contact lens manufacturers relating to Unilateral Pricing Policy (UPP), including a settlement accrual of $3.0 million.

The decrease in CooperVision's SGA in fiscal 2016 compared to fiscal 2015 in absolute dollars was primarily due to lower litigation settlement, legal and related lobbying costs consisting of $2.9 million in the current year compared to $19.8 million in the fiscal 2015. The litigation, legal and related lobbying costs were related to UPP, as well as a $17.0 million settlement made to JJVC in the third quarter of fiscal 2015. The reduction

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

in SGA expense is also due to lower Sauflon restructuring and integration activities of approximately $9.0 million in fiscal 2016, compared to $24.5 million in fiscal 2015. CooperVision's SGA excluding legal, restructuring and integration activities discussed above, increased in fiscal 2016 due to investment in sales and marketing, including headcount, to promote our silicone hydrogel products and to reach new customers and support geographic expansion.

The increase in CooperSurgical's SGA in fiscal 2017 compared to fiscal 2016 in absolute dollars was primarily due to the inclusion of operating expenses of acquired companies and investment in headcount to support growth. CooperSurgical's SGA included $16.3 million of primarily acquisition and integration expenses of acquired companies compared to $11.3 million in fiscal 2016.

The increase in CooperSurgical's SGA in fiscal 2016 compared to fiscal 2015 in absolute dollars is primarily due to the inclusion of operating expenses of recently acquired companies as well as $11.3 million of acquisition and integration expenses in fiscal 2016 compared to $4.9 million in fiscal 2015. CooperSurgical continues to invest in sales activities to promote our products and to reach new customers.

The increase in Corporate SGA in fiscal 2017 compared to fiscal 2016 was primarily due to share based compensation related expenses. The decrease in Corporate SGA in fiscal 2016 compared to the prior year in absolute dollars was primarily due to lower share-based compensation costs and efficiencies achieved as a result of cost control measures.

Research and Development Expense (R&D)

($ in millions)	2017				% Net Sales			2017 vs. 2016 % Change			2016				% Net Sales			2016 vs. 2015 % Change			2015				% Net Sales
CooperVision	$	47.3			3	%		1	%		$	46.9			3	%		(15	)%		$	55.2			4	%
CooperSurgical	21.9				5	%		18	%		18.5				5	%		28	%		14.4				5	%
	$	69.2			3	%		6	%		$	65.4			3	%		(6	)%		$	69.6			4	%

CooperVision's research and development (R&D) remained relatively flat in fiscal 2017 compared to fiscal 2016. The decrease in CooperVision's R&D expense in fiscal 2016 compared to 2015 in absolute dollars and as a percentage of sales was primarily due to synergies resulting from the integration of Sauflon. In fiscal 2016, CooperVision recorded $0.2 million in charges primarily for severance costs compared to $4.6 million in fiscal 2015 primarily for equipment rationalization and severance costs related to integration activities. CooperVision's R&D activities are primarily focused on the development of contact lenses and manufacturing improvements.

The sequential increases in CooperSurgical's R&D in fiscal 2017 compared to 2016 and 2015 in absolute dollars was primarily due to increased activity to bring newly acquired products to market, increased investment in projects to develop new products and the upgrade of existing products. As a percentage of sales, R&D expense remained flat. CooperSurgical's R&D activities include in vitro fertilization product development and the design and upgrade of surgical procedure devices.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

Amortization of Intangibles

($ in millions)	2017				% Net Sales			2017 vs. 2016 % Change			2016				% Net Sales			2016 vs. 2015 % Change			2015				% Net Sales
CooperVision	$	36.7			2	%		(9	)%		$	40.1			3	%		9	%		$	36.6			3	%
CooperSurgical	31.7				7	%		54	%		20.7				5	%		40	%		14.9				5	%
	$	68.4			3	%		13	%		$	60.8			3	%		18	%		$	51.5			3	%

The sequential increases in amortization were due primarily to amortization of intangible assets acquired in recent acquisitions by CooperSurgical. The decrease in CooperVision's amortization in fiscal 2017 compared to 2016 was due to certain intangible assets that were fully amortized and due to a charge of $2.3 million in the fiscal first quarter of 2016 discussed below.

The increase in CooperVision's amortization expense in fiscal 2016 compared to 2015 was due to a charge of $2.3 million in the fiscal first quarter of 2016 to write off acquired in-process research and development. We expect amortization in fiscal 2018 to be approximately $18.0 million in each of our fiscal quarters primarily due to intangible assets acquired through our acquisitions, offset by intangible assets which we forecast to become fully amortized. This does not include amortization of intangible assets acquired subsequent to the fiscal year 2017.

Restructuring and Integration Costs

During the fourth quarter of fiscal 2014, in connection with the Sauflon acquisition, our CooperVision business unit initiated restructuring and integration activities to optimize operational synergies of the combined companies. The 2014 Sauflon Integration Plan activities included workforce reductions, consolidation of duplicative facilities and product rationalization. As of October 31, 2016, our activities related to this restructuring and integration plan were essentially complete. The total restructuring costs under this plan were $148.3 million, as discussed in our notes to consolidated financial statements.

In fiscal 2016, we recorded in cost of sales $56.4 million of expense, arising from production-related asset disposals, accelerated depreciation on equipment, and inventory rationalization, primarily related to older lens products, based on our review of products, materials and manufacturing processes of Sauflon. We recorded in cost of sales $1.1 million of employee termination costs. We recorded in selling, general and administrative expense a reduction of $1.1 million due to a decrease in expected employee termination payments; and we recorded $0.2 million of expense for lease termination costs. In addition, CooperVision incurred $10.0 million of integration costs in fiscal 2016, included in operating expenses.

In fiscal 2015, we recorded in cost of sales $57.7 million of expense, arising from production-related asset disposals and accelerated depreciation on equipment, primarily related to our hydrogel lenses, based on our review of products, materials and manufacturing processes of Sauflon. We recorded in cost of sales $4.0 million of employee termination costs. We recorded in selling, general and administrative expense a reduction of $7.2 million, as a result of decreased estimates in expected employee termination costs and voluntary terminations; and we recorded $0.4 million of expense for lease termination costs. We recorded in research and development expense $0.7 million of employee termination costs. In addition, CooperVision incurred $35.2 million of integration costs in fiscal 2015, included in operating expenses.

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

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

Operating Income

($ in millions)	2017				% Net Sales			2017 vs. 2016 % Change			2016				% Net Sales			2016 vs. 2015 % Change			2015				% Net Sales
CooperVision	$	418.4			25	%		35	%		$	309.8			20	%		35	%		$	229.8			15	%
CooperSurgical	58.5				13	%		(3	)%		60.2				15	%		7	%		56.1				18	%
Corporate	(47.8		)		—			(4	)%		(45.9		)		—			7	%		(49.2		)		—
	$	429.1			20	%		32	%		$	324.1			16	%		37	%		$	236.7			13	%

The increase in consolidated operating income in fiscal 2017 compared to fiscal 2016 in absolute dollars and as a percentage of net sales was primarily due to the increase in consolidated gross margins. The increase in CooperVision operating income in fiscal 2017 compared to fiscal 2016 was primarily due to increase in sales and gross margin primarily from higher margin products including Biofinity and lower restructuring and integration costs compared to fiscal 2016 as discussed above. The decrease in CooperSurgical operating income in fiscal 2017 compared to fiscal 2016 was due to higher operating expenses relating to acquisitions and investments to support growth.

The increase in consolidated operating income in fiscal 2016 compared to fiscal 2015 in absolute dollars and as a percentage of net sales was primarily due to the increase in consolidated net sales. In addition, the Company's total operating expenses as a percentage of sales in fiscal 2016 decreased by 3% compared to fiscal 2015 which had a corresponding increase in operating income as a percentage of sales. The increase in CooperVision operating income in fiscal 2016 compared to fiscal 2015 was primarily due to decreases in expenses relating to legal, and restructuring and integration costs primarily related to Sauflon, as discussed above, recorded in cost of sales and operating expenses, in addition to the $17.0 million litigation settlement made in 2015 as discussed above. CooperSurgical's operating income increased in absolute dollars in fiscal 2016 compared to 2015 due primarily to an increase in sales of higher margin legacy products as a result of our investment in sales and promotional activities to reach new customers as well as recently launched products, partially offset by the sales of recently acquired lower margin products and services and the increase in total operating expenses.

Interest Expense

($ in millions)	2017				% Net Sales			2017 vs. 2016 % Change			2016				% Net Sales			2016 vs. 2015 % Change			2015				% Net Sales
Interest expense	$	33.4			2	%		28	%		$	26.2			1	%		45	%		$	18.1			1	%

Sequential increases in interest expense in absolute dollars and as a percentage of sales reflect higher average debt balances as a result of debt incurred in connection with acquisitions as well as higher interest rates. Fiscal 2017 interest expense also included $2.2 million of Bridge Loan Facility fees that were incurred related to the PARAGARD acquisition as discussed in Note 15. Subsequent Events.

Current debt outstanding at October 31, 2017 includes the $830.0 million term loan entered on March 1, 2016, and $323.0 million borrowed under the revolving credit agreement. We expect interest expense to increase in fiscal 2018 due to the new $1.425 billion term loan entered into on November 1, 2017 to fund the PARAGARD acquisition.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

Other Expense (Income), Net

Years Ended October 31, (In millions)	2017				2016				2015
Foreign exchange loss	$	1.4			$	1.6			$	3.5
Other expense (income), net	0.3				0.7				(0.4		)
	$	1.7			$	2.3			$	3.1

Other expense in fiscal 2017 includes a $0.2 million foreign exchange loss on forward contracts related to an acquisition. Other expense in fiscal 2016 includes a $0.6 million foreign exchange loss on forward contracts related to an acquisition and a $0.4 million loss related to extinguishment of debt.

Provision for Income Taxes

We recorded income tax expense of $21.1 million in fiscal 2017 compared to $20.7 million in fiscal 2016. Our effective tax rate (ETR) (provision for income taxes divided by pretax income) was 5.3%, 7.0% and 4.8% for fiscal 2017, 2016 and 2015, respectively. The ETR in fiscal 2017 decreased in comparison to fiscal 2016 due to the shift in the geographic mix of income as well as discrete benefits from adopting ASU 2016-9 (Excess tax benefit from share-based compensation). The ETR in fiscal 2016 increased in comparison to fiscal 2015 due to an increase in foreign non-deductible integration and transaction expenses, partially offset by renewal of the R&D tax credit and lower state income taxes.

The ETR is below the United States statutory rate as a majority of our taxable income is earned in foreign jurisdictions with lower tax rates. The ratio of domestic taxable income to worldwide taxable income has decreased over recent fiscal years effectively lowering 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 $114.6 million and a foreign effective tax rate of approximately 3.8% in our fiscal year 2017 compared to $81.2 million and a foreign effective tax rate of approximately 3.5% in our fiscal year 2016. The foreign jurisdictions with lower tax rates 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 the notes to consolidated financial statements for additional information.

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. The program has no expiration date and may be discontinued at any time. We repurchased 108 thousand shares of our common stock for $25.5 million at an average purchase price of $237.12 per share in the fourth quarter of fiscal 2017; and repurchased 150 thousand shares of our common stock for $29.5 million at an average purchase price of $196.82 per share in the second quarter of fiscal 2017. At October 31, 2017, we had remaining authorization to repurchase $563.5 million of our common stock.

We did not repurchase any shares during fiscal 2016. During fiscal 2015, we repurchased 468 thousand shares of our common stock for $67.3 million at an average purchase price of $143.93 per share.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

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 2017 was $37.2 million and $11.4 million, respectively, compared to $29.9 million and $9.0 million, respectively, in fiscal 2016. As of October 31, 2017, there was $75.4 million of total unrecognized share-based compensation cost related to non-vested awards: $10.7 million for stock options; $60.0 million for restricted stock units; and $4.7 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, 3.2 years for restricted stock units and 1.3 years for performance shares. Net (payments) proceeds related to share-based compensation awards for the fiscal years ended October 31, 2017, 2016 and 2015 were approximately $(5.3) million, $7.2 million and $(4.8) million, respectively. Net payments relate to tax withholding for share-based compensation arrangements.

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 2017 would have increased by approximately $4.00. 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 2017 would have increased by approximately $1.51.

We estimate stock option forfeitures based on historical data for each employee grouping and adjust the rate of 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 to certain key employees that provide for the issuance of common stock 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 the goals are not achieved or it is determined that achievement of the goals is not probable, previously recognized compensation expense is adjusted to reflect the expected achievement. If we determine that achievement of the goals will exceed the original assessment, additional compensation expense is recognized.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

CAPITAL RESOURCES AND LIQUIDITY

2017 Highlights

•	Operating cash flow $593.6 million up from $509.6 million in fiscal 2016

•	Expenditures for purchases of property, plant and equipment $127.2 million down from $152.6 million in fiscal 2016

•	Cash payments for acquisitions, $254.1 million compared to $266.1 million in fiscal 2016

•	Total debt at $1.17 billion at the end of fiscal 2017 compared to $1.33 billion at the end of fiscal 2016

Comparative Statistics

Years Ended October 31, ($ in millions)	2017				2016
Cash and cash equivalents	$	88.8			$	100.8
Total assets	$	4,858.7			$	4,478.6
Working capital	$	557.1			$	393.9
Total debt	$	1,172.7			$	1,333.7
Stockholders’ equity	$	3,175.8			$	2,695.9
Ratio of debt to equity	0.37:1				0.49:1
Debt as a percentage of total capitalization	27		%		33		%

Working Capital

The increase in working capital at the end of fiscal 2017 from the end of fiscal 2016 was primarily due to the increases in accounts receivable, inventories, other current assets and decrease in short-term debt, offset by a decrease in cash balances, increase in accounts payable and other current liabilities.

The $36.4 million increase in inventories was primarily related to increase in raw materials to support production levels and acquired inventories from acquisitions. Our inventory months on hand (MOH) were 6.5 and 5.6 at October 31, 2017 and 2016, respectively. MOH at October 31, 2016, was 6.7 after adjusting for product rationalization costs related to Sauflon. Our days sales outstanding (DSO) remained constant at 53 days at October 31, 2017 compared to October 31, 2016.

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 in fiscal 2017 continued to be our major source of liquidity, at $593.6 million compared to $509.6 million in fiscal 2016 and $390.9 million in fiscal 2015. Fiscal 2017 results include $372.9 million of net income and non-cash items primarily made up of $188.4 million related to depreciation and amortization, $37.2 million of share-based compensation and $6.1 million of loss on disposal of property, partially offset by $7.1 million related to deferred income taxes. Cash flow from operating capital reflect the changes in operating assets and liabilities, which are primarily $25.1 million increase in accounts receivable, driven by higher revenue, increase in inventories of $30.9 million, driven by higher raw materials to support production levels and inventories from acquisitions, and other assets of $13.8 million, offset by increase in accounts payable of $25.0 million, increase in accrued expenses of $18.9 million, and increase in other long term liabilities of $9.8 million. The $84.0 million increase in cash flows provided by

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

operating activities in fiscal 2017 compared to fiscal 2016 is primarily due to the increase in net income and inclusion of excess tax benefit from share based compensation awards in operating activities from the adoption of ASU2016-09 (See note 1).

Fiscal 2016 results include $274.9 million of net income and non-cash items primarily made up of $198.3 million related to depreciation and amortization, $29.9 million of share-based compensation and $30.6 million of charges primarily for write-off of property, plant and equipment related to Sauflon restructuring, partially offset by $19.8 million related to excess tax benefits from share-based compensation. Results also include changes in operating assets and liabilities, which primarily reflects the decrease in inventories of $12.2 million mainly due to product sales and older products rationalization excluding the increases related to recently acquired companies, increase in accounts receivables and other assets of $3.6 million, increase in accounts payable and other liabilities of $4.1 million, and decrease in income tax payable of $8.9 million. The $118.7 million increase in cash flows provided by operating activities in fiscal 2016 compared to fiscal 2015 is primarily due to the increase in net income, favorable changes in working capital, and the negative impact in fiscal 2015 due to the $17.0 million settlement with JJVC.

Investing Cash Flow

Cash used in investing activities of $381.3 million in fiscal 2017 was for capital expenditures of $127.2 million primarily to increase manufacturing capacity and payments of $254.1 million primarily related to acquisitions in fiscal 2017.

Cash used in investing activities of $418.7 million in fiscal 2016 was for capital expenditures of $152.6 million primarily to increase manufacturing capacity and payments of $266.1 million primarily related to CooperSurgical acquisitions in fiscal 2016.

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 $227.9 million in fiscal 2017 was driven by $211.7 million net repayments of short term debt, $55.0 million for repurchase of common stock, $5.3 million net payments related to share-based compensation awards, $4.3 million of payments of contingent consideration for prior acquisitions and $2.9 million for dividends, partially offset by $49.2 million net proceeds from long term debt.

Cash used in financing activities of $1.4 million in fiscal 2016 was driven by $15.0 million net repayment of debt, $12.6 million for debt acquisition costs, $3.4 million mainly related to the purchase of noncontrolling interests, $2.9 million for dividends, offset by $27.0 million in excess tax benefits and proceeds from share-based compensation awards, and $5.5 million of proceeds from construction allowance.

At October 31, 2017, we had $88.8 million in cash, predominantly outside the United States, and $676.7 million available under our 2016 Credit Agreement. The $830.0 million term loan entered into on March 1, 2016 was outstanding as of October 31, 2017. We are in compliance with our financial covenants including the Interest Coverage Ratio at 21.29 to 1.00 and the Total Leverage Ratio at 1.53 to 1.00. As defined in both the 2016 Credit Agreement and our Term Loan Agreements, 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.

Subsequent to our fiscal year ended October 31, 2017, we entered into a new five-year $1.425 billion senior unsecured term loan agreement on November 1, 2017 in connection with the PARAGARD acquisition. See Note 15. Subsequent Events.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

OFF BALANCE SHEET ARRANGEMENTS

None.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of October 31, 2017, we had the following contractual obligations and commercial commitments:

Payments Due by Period (In millions)	Total				2018				2019 & 2020				2021 & 2022				2023 & Beyond
Contractual obligations:
Long-term debt	$	1,153.2			$	—			$	323.0			$	830.2			$	—
Interest payments	90.0				27.0				54.0				9.0				—
Operating leases	275.5				33.4				55.8				40.5				145.8
Total contractual obligations	1,518.7				60.4				432.8				879.7				145.8
Commercial commitments:
Stand-by letters of credit	4.9				4.9				—				—				—
Total	$	1,523.6			$	65.3			$	432.8			$	879.7			$	145.8

The expected future benefit payments for pension plans through 2027 are disclosed in Note 10. Employee Benefits.

We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, about $45.3 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. See Note 6. Income Taxes for additional information.

Inflation and Changing Prices

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

Accounting Pronouncements

Information regarding new accounting pronouncements is included in Note 1 of the Consolidated Financial Statements.

Estimates and Critical Accounting Policies

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

•	Revenue recognition - We recognize product net sales, net of discounts, returns and rebates in accordance with related accounting standards and SEC Staff Accounting Bulletins. As required by

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

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, surgical instruments, accessories, diagnostic products and services, this primarily occurs when title and risk of ownership transfers to our customers, and/or when services are rendered. 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. We record 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, we review the carrying value of our inventory, measuring number of months on hand and other indications of saleability. We reduce the value of inventory if there are indications that the carrying value is greater than net realizable value, 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 health care 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 2017, and our analysis indicated that we had no impairment of goodwill. We performed our annual impairment test in our fiscal third quarter of 2016 and concluded that we had no impairment of goodwill in that year.

In the third quarter of fiscal 2017, we adopted ASU 2017-04, Intangibles - Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment where FASB eliminated Step 2 from the goodwill impairment test, which required a hypothetical purchase price allocation. We performed a qualitative assessment 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 fair value of a reporting unit will be compared with its carrying amount and an impairment charge will be recognized for the carrying amount which exceeds the reporting unit's fair value. 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, we may have to recognize a non-cash impairment of our 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.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

•

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 at the acquisition date fair values as defined by accounting standards related to fair value measurements. Key assumptions routinely utilized in allocation of purchase price to intangible assets include projected financial information such as revenue projections for companies acquired. 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 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 - We grant 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 COOPER COMPANIES, INC. AND SUBSIDIARIES

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

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 Cooper's common 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.

If factors change and we employ different assumptions in the application of the fair value recognition provisions, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.

THE COOPER COMPANIES, INC. AND SUBSIDIARIES

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

Trademarks

Aquaform®, Avaira®, Biofinity®, MyDay® and Proclear® are registered trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries. PC Technology™, FIPS™, Avaira VitalityTM and A Quality of Life Company™ are trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries. The clariti® mark is a registered trademark of The Cooper Companies, Inc., its affiliates and/or subsidiaries worldwide except in the United States where the use of clariti® is licensed. PARAGARD® is a registered trademark of CooperSurgical, Inc.