Document 06M4qnNQK3M9L9wGqnv17BBQJ

elOvk Page 17 of 84 Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, includes certain forward-looking statements The forward-looking statements reflect Cooper's expectations, objectives and goals with respect to future events and financial performance, and are based on assumptions and estimates which Cooper believes are reasonable Forward-looking statements include, but are not limited to, statements regarding facilities closures and production rationalization plans and cost-reduction programs (including implementation of an Enterprise Business System), resolution of income tax matters, potential liability exposure resulting from Federal-Mogul Corporation's ("Federal-Mogul") bankruptcy filing and any statements regarding future revenues, costs and expenses, earnings, earnings per share, margins, cash flows, dividends and capital expenditures Cooper wishes to caution readers not to put undue reliance on these statements and that actual results could differ materially from anticipated results Important factors which may affect the actual results include, but are not limited to, the resolution of Federal-Mogul's bankruptcy proceedings, political developments, market and economic conditions, changes in raw material and energy costs, industry competition, the net effects of Cooper's cost-reduction programs, the timing and net effects of facility closures and the magnitude of any disruptions from such closures, changes in mix of products sold, mergers and acquisitions and their integration into Cooper, the timing and amount of any stock repurchases by Cooper, changes m financial markets including foreign currency exchange rate fluctuations and changing legislation and regulations including changes in tax law, tax treaties or tax regulations The forward-looking statements contained m this report are intended to qualify for the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended Critical Accounting Policies The Consolidated Financial Statements and Notes to the Consolidated Financial Statements contain information that is pertinent to management's discussion and analysis The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities Cooper believes the following critical accounting policies involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts Cooper recognizes revenues when products are shipped and accruals for sales returns and other allowances are provided at the time of shipment based upon past experience If actual future returns and allowances differ from past experience, additional allowances may be required The accrual for sales returns and other allowances was $45 6 million and $33 8 million at December 31, 2004 and 2003, respectively Allowances for excess and obsolete inventory are provided based on current assessments about future demands, market conditions and related management initiatives If market conditions are less favorable than those projected by management, additional inventory allowances may be required The allowance for excess and obsolete inventory was $58 9 million at December 31, 2004 and $47 6 million at December 31, 2003 Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets, discount rates and estimated future employee earnings and demographics Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized Differences between actuarial assumptions and estimates and actual experience are deferred as unrecognized gains and losses Unrecognized gains and losses in excess of a calculated minimum annual amount are amortized and recognized in net periodic pension cost over the average remaining service period of active employees 13 http //www sec gov/Archives/edgar/data/1141982/000095012905001490/h22660el0vk.htm 2/6/2006