COOPER COMPANIES, INC. - Annual Report: 2020 (Form 10-K)

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•	The effects of the ongoing COVID-19 pandemic and related economic disruptions and new governmental regulations on our business, results of operations, cash flow and financial condition, including but not limited to the potential impact on our sales, operations and supply chain.

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Adverse changes in the global or regional general business, political and economic conditions, including the impact of continuing uncertainty and instability of certain countries, that could adversely affect our global markets, and the potential adverse economic impact and related uncertainty caused by these items, including but not limited to, the ongoing COVID-19 pandemic, and escalating global trade barriers including additional tariffs, by countries such as China.

•	Adverse changes in global political and economic conditions, and related uncertainty caused by the United Kingdom’s (UK) withdrawal from the European Union (EU) and its potential impact on, among other things, the movement of goods and materials in our supply chain, additional regulatory approvals and requirements, and increased tariffs and duties.

•	Changes in tax laws or their interpretation, changes in statutory tax rates, and adverse outcomes in tax disputes, including but not limited to, the U.S., the United Kingdom and other countries may affect our taxation of earnings recognized in foreign jurisdictions, result in unexpected tax liabilities, and/or negatively impact our effective tax rate.

•	Foreign currency exchange rate and interest rate fluctuations including the risk of fluctuations in the value of foreign currencies or interest rates that would decrease our net sales and earnings.

•	Our existing and future variable rate indebtedness and associated interest expense is impacted by rate increases, which could adversely affect our financial health or limit our ability to borrow additional funds.

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Acquisition-related adverse effects including the failure to successfully obtain the anticipated net sales, margins and earnings benefits of acquisitions, integration delays or costs and the requirement to record significant adjustments to the preliminary fair value of assets acquired and liabilities assumed within the measurement period, required regulatory approvals for an acquisition not being obtained or being delayed or subject to conditions that are not anticipated, adverse impacts of changes to accounting controls and reporting procedures, contingent liabilities or indemnification obligations, increased leverage and lack of access to available financing (including financing for the acquisition or refinancing of debt owed by us on a timely basis and on reasonable terms).

•	Compliance costs and potential liability in connection with U.S. and foreign laws and health care regulations pertaining to privacy and security of personal information, such as HIPAA and the California Consumer Privacy Act (CCPA) in the U.S. and the General Data Protection Regulation (GDPR) requirements in Europe, including but not limited to those resulting from data security breaches.

•	A major disruption in the operations of our manufacturing, accounting and financial reporting, research and development, distribution facilities or raw material supply chain due to the ongoing COVID-19 pandemic, integration of acquisitions, man-made or natural disasters, cybersecurity incidents or other causes.

•	A major disruption in the operations of our manufacturing, accounting and financial reporting, research and development or distribution facilities due to technological problems, including any

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•	Market consolidation of large customers globally through mergers or acquisitions resulting in a larger proportion or concentration of our business being derived from fewer customers.

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

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New U.S. and foreign government laws and regulations, and changes in existing laws, regulations and enforcement guidance, which affect areas of our operations including, but not limited to, those affecting the health care industry, including the contact lens industry specifically and the medical device or pharmaceutical industries generally, including but not limited to the EU Medical Devices Regulation (MDR) and the EU In Vitro Diagnostic Medical Devices Regulation (IVDR).

•	Legal costs, insurance expenses, settlement costs and the risk of an adverse decision, prohibitive injunction or settlement related to product liability, patent infringement or other litigation.

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

•	New competitors, product innovations or technologies, including but not limited to, technological advances by competitors, new products and patents attained by competitors, and competitors' expansion through acquisitions.

•	Reduced sales, loss of customers and costs and expenses related to product recalls and warning letters.

•	Failure to receive, or delays in receiving, regulatory approvals for products.

•	Failure of our customers and end users to obtain adequate coverage and reimbursement from third-party payors for our products and services.

•	The requirement to provide for a significant liability or to write off, or accelerate depreciation on, a significant asset, including goodwill, other intangible assets and idle manufacturing facilities and equipment.

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

•	Dilution to earnings per share from acquisitions or issuing stock.

•	Impact and costs incurred from changes in accounting standards and policies.

•	Environmental risks, including increasing environmental legislation and the broader impacts of climate change.

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•	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.

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

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

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•	Routine office visits: annual well-women checkups, preventative cancer screening and contraception.

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•	Evaluation and management (E/M) office visits: assessment of menstrual disorders, pelvic infections, urinary incontinence, abnormal Pap smears, fertility concerns, pregnancy and menopause. Approximately a third of gynecology office visits are related to abnormal uterine bleeding.

•	Office based procedures are increasing given high patient satisfaction, reduction of health system cost and comparative clinical outcomes.

•	Hysterectomy and cesarean section remain common hospital surgical interventions in women worldwide.

•	Infertility rates are increasing globally. Patient awareness and access are also on the rise.

•	Initial evaluation and treatments for infertility, such as ovulatory medications and intrauterine insemination (IUI), begin with the OB/GYN then transition to fertility clinics.

•	In-Vitro Fertilization (IVF) is performed by reproductive endocrinologists, specialized OB/GYNs.

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•	we may find it difficult to manage the effects of the ongoing COVID-19 pandemic on our ability to operate internationally and for our employees to travel internationally;

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

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

•	we may find it difficult to grow in emerging markets such as China, India, Russia, Brazil and other developing nations due to, among other things, customer acceptance, undeveloped and/or unfamiliar distribution channels, regulatory restrictions and changes, and business knowledge of these new markets;

•	tax rates in some foreign countries may exceed those of the United States, and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions, including the tariffs enacted by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods, the scope and duration of which remain uncertain;

•	we may find it difficult to comply with a variety of United States and foreign legal, compliance and regulatory requirements such as the Foreign Corrupt Practices Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the United Kingdom Bribery Act, international data security and privacy laws, MDR and IVDR;

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

•	fluctuations in currency exchange rates could adversely affect our results;

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

•	failure to comply with United States Department of Commerce and other nations' import-export controls may result in fines and/or penalties;

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

•	natural disasters, pandemics such as COVID-19, war, terrorism, labor disruptions and international conflicts may cause significant economic disruption and political and social instability, resulting in decreased demand for our products, adversely affecting our manufacturing and distribution capabilities, or causing interruptions in our supply chain;

•	foreign governments may adopt regulations, including those similar to MDR and IVDR or take other actions that would have a direct or indirect adverse impact on our business and market opportunities, including but not limited to increased enforcement of potentially conflicting and ambiguous anti-bribery laws;

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

•	we may be subject to unforeseen economic or political events in certain countries that may have an impact on our customers' ability or preferences to buy our products.

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•	failure to successfully obtain the anticipated revenues, margins and earnings benefits;

•	difficulties in, and expenses related to, the integration of the operations, technologies, products and personnel of the acquired company and establishment of appropriate accounting controls and reporting procedures and other regulatory compliance procedures, including but not limited to third party compliance and due diligence;

•	increased leverage and the risk of lack of access to available financing, including financing for the acquisition or refinancing of debt owed by us on a timely basis and on reasonable terms;

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

•	potential loss of employees;

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

•	diversion of management's attention away from other business concerns;

•	risks of the acquired company’s noncompliance with applicable laws or regulations;

•	expenses of any undisclosed or potential liabilities, contingent liabilities or indemnification obligations of the acquired company;

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

•	application of and compliance with new and unfamiliar regulatory frameworks such as pharmaceutical regulation applicable to our PARAGARD IUD;

•	Failure to successfully obtain or maintain reimbursements under the third-party payor plans, including but not limited to governmental programs, due to complex reporting and payment obligations;

•	a dilution of earnings per share; and

•	risks inherent in accounting allocations and the risk that we are required to record significant adjustments to the preliminary fair value of assets acquired and liabilities assumed within the measurement period.

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•	be expensive and time consuming to prosecute or defend;

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

•	divert management's attention and resources; or

•	require us to license our intellectual property.

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•	be expensive and time consuming to defend;

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

•	require us to redesign or re-engineer our products, if feasible;

•	divert management's attention and resources; or

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

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•	acceptance of our products by eye care and health care practitioners;

•	the cost competitiveness of our products;

•	consumer reluctance to try and use a new product;

•	regulatory and legislative requirements;

•	adequate coverage and reimbursement by third party payors;

•	the earlier release of competitive products, such as new silicone hydrogel products, into the market by our competitors; and the emergence of newer and more competitive products.

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

•	Payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain health care services through bundled payment models;

•	Creation of the Independent Payment Advisory Board which has authority to recommend certain changes to reduce Medicare spending and those recommendations could have the effect of law even if Congress doesn't act on the recommendations;

•	Establishment of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending; and

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•	An increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively.

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•	strengthen the rules on placing devices on the market and reinforce surveillance once they are available;

•	establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;

•	improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;

•	set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and

•	strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before they are placed on the market.

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the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration (including any kickback, bribe or certain rebates), directly or indirectly, overtly or covertly, in cash or in kind, in return for, either the referral of an individual or the purchase, lease, or order, or arranging for or recommending the purchase, lease, or order of any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti- Kickback Statute or specific intent to violate it in order to have committed a violation;

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the federal physician self-referral prohibitions, commonly known as the Stark Law, which generally prohibit entities from billing a patient or the Medicare or Medicaid programs for certain designated health services, including clinical laboratory services, when the physician ordering the service, or any member of such physician’s immediate family, has a financial interest, such as an ownership or investment interest in or compensation arrangement with us, unless the arrangement meets an exception to the prohibition. These prohibitions apply regardless of any intent by the parties to induce or reward referrals or the reasons for the financial relationship and the referral;

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the federal false claims laws, including the civil False Claims Act, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making or causing to be made a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti- Kickback Statute of Stark Law constitutes a false or fraudulent claim for purposes of the civil False Claims Act;

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the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

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the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the CMS, information related to payments and other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by such healthcare professionals and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding payments and transfers of value provided during the previous year to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists and certified nurse-midwives; and

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analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers and self-pay patients; some state laws require biotechnology companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug and device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; some state laws that require biotechnology companies to report information on the pricing of certain drug products; and some state and local laws require the registration of sales representatives.

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•	increase our vulnerability to general adverse economic and industry conditions;

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

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

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

•	result in greater interest rate risk and volatility;

•	limit our ability to borrow additional funds; and

•	make it more difficult for us to satisfy our obligations with respect to our debt, including our obligation to repay our credit facilities under certain circumstances, or refinance our indebtedness on favorable terms or at all.

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

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

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

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

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

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

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

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

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

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

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•	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.

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The COVID-19 pandemic has negatively impacted our business. Net sales in fiscal 2020 declined by 7%, compared to fiscal 2019. Customers have either slowed down purchases or delayed orders due to a desire to reduce inventories, reduced contact lens wear driven by limited social interaction and lack of patient access on account of certain office closures and reduced access as offices reopen. We started experiencing downward pressure on net sales when markets started closing during our second quarter of fiscal 2020 as social restrictions were put in place and the offices of health care providers were closed

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

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

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

•	Foreign exchange rates negatively impacted sales by approximately $2.4 million, compared to a negative impact of $53.6 million in fiscal 2019. In fiscal 2020, net sales decreased 6% in constant currency over the prior year

•	Sales reduction was primarily driven by a decrease in the volume of lenses sold. Average realized prices by product did not materially influence sales

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

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We have experienced COVID-19 pandemic-related economic disruptions and decline in net sales during fiscal 2020. We experienced downward pressure on revenue when major markets started closing as social restrictions were put in place and the offices of certain health care providers were closed. In response to the COVID-19 pandemic, as a precautionary measure, certain health care facilities and medical offices were closed or restricted access and surgeries and elective medical procedures and exams have been deferred or canceled. Further, there has been a significant reduction in physician office visits, and healthcare centers have postponed or canceled capital purchases

•	Office and surgical products decreased compared to the prior year mainly due to reduction in PARAGARD IUD sales. Further, there has been a reduction in revenue from other surgical products such as Uterine Manipulators and Closure products, partially offset by an increase in revenue from Incisive Surgical and Endosee products

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

•	Foreign exchange rates negatively impacted sales by approximately $2.1 million, compared to a negative impact of $9.0 million in the prior year. In fiscal 2020, net sales decreased 13% in constant currency over the prior year

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

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•	Decreased revenue due to negative impact of COVID-19 pandemic

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

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

•	CooperVision's R&D decreased in fiscal 2020 compared to fiscal 2019 mainly due to timing of clinical studies. As a percentage of sales, R&D expense remained flat. CooperVision's R&D activities are primarily focused on the development of contact lenses, manufacturing technology and process enhancements

•	The increase in CooperSurgical's R&D in fiscal 2020 compared to fiscal 2019 was primarily due to increased investment activities in developing new products and services and upgrades of existing products. CooperSurgical has not paused research programs during the COVID-19

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

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

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

•	Cash payments for acquisitions and others of $54.1 million compared to $59.2 million in fiscal 2019

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

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

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

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

•	increase in cash and cash equivalents of $26.9 million

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

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

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

•	increase in employee compensation and benefits of $14.3 million

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

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

•	$80.9 million decrease in the net changes in prepayments and other assets primarily due to the refund of the prepayment made to the U.K. Tax Authorities in the prior year period and capitalized cloud computing costs;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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•	allowance for doubtful accounts and credit losses

•	carrying value of inventory

•	carrying value of goodwill and other long-lived assets

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Revenue recognition - We recognize revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers and/or when services are rendered. Our payment terms are typically between 30 to 120 days. Provisions for certain rebates, sales incentives, volume discounts, contractual pricing allowances and product returns are accounted for as variable consideration and recorded as a reduction in sales.

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Valuation of goodwill - We evaluate goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. We account for goodwill, evaluate and test goodwill balances for impairment in accordance with related accounting standards. We performed an annual impairment assessment in our third quarter of fiscal 2020 and 2019, and our analysis indicated that we had no impairment of goodwill in our reporting units. We test goodwill impairment in accordance with ASU 2017-04, Intangibles - Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment. We perform 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

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Leases - We consider an arrangement a lease if the arrangement transfers the right to control the use of an identified asset in exchange for consideration. We have operating leases, but do not have material financing leases. Lease right-of-use assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make payments arising from the lease agreement. These assets and liabilities are recognized at the commencement of the lease based upon the present value of the future minimum lease payments over the lease term. The lease term reflects the noncancelable period of the lease together with periods covered by an option to extend or terminate the lease when it is reasonably certain that we will exercise such option. Changes in the lease term assumption could impact the right-of-use assets and lease liabilities recognized on the balance sheet. As our leases typically do not contain a readily determinable implicit rate, we determine the present value of the lease liability using our incremental borrowing rate at the lease commencement date based on the lease term on a collateralized basis.

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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, over the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are expensed as incurred.

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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 carry forwards. 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.

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•	evaluating the Company’s tax planning strategies and its interpretation and application of tax laws,

•	assessing transfer pricing studies for transactions between subsidiaries of the Company for compliance with applicable laws and regulations and evaluating the transfer prices based on observations for comparable companies that perform similar functions, and

•	inspecting correspondence and settlements from taxing authorities, and analyzing the expiration of statutes of limitations.

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

•	CooperSurgical primarily develops, manufactures, markets medical devices and procedures solutions, and provides services to improve health care delivery to women, babies and families.

•	allowance for doubtful accounts and credit losses

•	carrying value of inventory

•	the carrying value of goodwill and other long-lived assets.

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•	Revenue recognition

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Leases - We consider an arrangement a lease if the arrangement transfers the right to control the use of an identified asset in exchange for consideration. We have operating leases, but do not have material financing leases. Lease right-of-use assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make payments arising from the lease agreement. These assets and liabilities are recognized at the commencement of the lease based upon the present value of the future minimum lease payments over the lease term. The lease term reflects the noncancelable period of the lease together with periods covered by an option to extend or terminate the lease when management is reasonably certain that it will exercise such option. Changes in the lease term assumption could impact the right-of-use assets and lease liabilities recognized on the balance sheet. As our leases typically do not contain a readily determinable implicit rate, we determine the present value of the lease liability using our incremental borrowing rate at the lease commencement date based on the lease term on a collateralized basis.

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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.

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Valuation of goodwill -     We evaluate goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. We account for goodwill and evaluate our goodwill balances and test them for impairment in accordance with related accounting standards. We performed our annual impairment test in our third quarter of fiscal 2020 and 2019, and our analysis indicated that we had no impairment of goodwill in our reporting units.

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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

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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 carry forwards. 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.

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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.

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•	Interest Coverage Ratio, as defined, to be at least 3.00 to 1.00 at all times.

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•	Total Leverage Ratio, as defined, to be no higher than 3.75 to 1.00.

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(1)	Represents reclassification to retained earnings from adoption of ASU 2018-02.

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CooperVision. Competes in the worldwide contact lens market by developing, manufacturing and marketing a broad range of products for contact lens wearers, featuring advanced materials and optics. CooperVision designs its products to solve vision challenges such as astigmatism, presbyopia, myopia, ocular dryness and eye fatigues, with a broad collection of spherical, toric and multifocal contact lenses.

•	CooperSurgical. Competes in the general health care market with a focus on advancing the health of women, babies and families through a diversified portfolio of products and services focusing on women's health and fertility.

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(2)	Fiscal year 2018 reductions includes $16.5 million of valuation allowance from prior years as a result of the sale of investment in research and development credits.

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(a)	The agreement received confidential treatment from the Securities and Exchange Commission with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Commission.

#	Indicates management contract or compensatory plan.

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