Correspondence 0000711404-24-000049 from COOPER COMPANIES, INC. (COO)
COOPER COMPANIES, INC.
Date: July 29, 2024 · CIK: 0000711404 · Accession: 0000711404-24-000049
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-08597
Referenced dates: July 16, 2024, July 8, 2024, May 22, 2024
Letter
Re: The Cooper Companies, Inc. Responses to Letter dated July 16, 2024 Form 10-K for Fiscal Year Ended October 31, 2023 Filed December 8, 2023 Form 8-K Filed May 30, 2024 File No. 001-08597
Document
[Letterhead]
July 29, 2024
VIA EDGAR AND ELECTRONIC MAIL
United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Washington, D.C. 20549-6010
Attention: Tracey Houser
Terence O’Brien
To the addressees set forth above:
The Cooper Companies, Inc. (the “Company”) is transmitting this letter in response to the comments received from the staff of the Securities and Exchange Commission (the “Staff”) contained in the Staff’s letter dated July 16, 2024, with respect to the Company’s Form 10-K for the fiscal year ended October 31, 2023 and the Company’s Form 8-K filed May 30, 2024.
For ease of review, we have set forth below each of the Staff’s comments in bold type followed by the Company’s responses thereto.
Form 10-K for Fiscal Year Ended October 31, 2023
Consolidated Statements of Income
1.We note your response to comment 1. Given that you initially stated in your response letter dated May 22, 2024 related to comment 3 that you would revise the cost of sales line item to include the parenthetical to note that it excludes amortization of intangibles and remove the gross profit subtotal and now have concluded that the missing amortization of intangibles is immaterial and will no longer comply with the requirements in Item 10(e)(1)(ii)(C) of Regulation S-K and SAB Topic 11:B, please provide us with your full materiality analysis in accordance with SAB Topic 1:M that includes how you calculated the amount of excluded intangible asset amortization given that a portion of the composite intangible asset includes a technology component.
Response:
We respectfully acknowledge the Staff’s comment. Our initial response in our letter dated May 22, 2024 provided the quantitative factors supporting our presentation of gross profits on the face of the consolidated statements of income in the Form 10-K for fiscal years 2023, 2022 and 2021. While we had determined that it was still appropriate to present gross profit without being fully burdened by amortization of intangibles, at the time we had considered the revision of “Cost of sales” to “Costs of sales (excluding amortization of intangibles)” and the removal of the “Gross profit” subtotal line to be immaterial changes to the presentation of our consolidated statements of income and as such had agreed to make the change going forward. However, as the Staff raised a valid concern that such updates could send conflicting messages to our investors and suggest that our current presentation of gross profit was not in accordance with US GAAP, we determined to retain the “Gross profit” subtotal on the face of our statements of income. Below is our full materiality analysis in accordance with SAB Topic 1:M.
Materiality Assessment
Management’s review of the Company’s operations and profitability and the discussion management has with the investors and analysts place more emphasis on GAAP and non-GAAP operating margin and EPS. The bifurcation of amortization expense between cost of sales and operating expenses would not affect operating margin and EPS from both GAAP and non-GAAP perspective. Additionally, from a non-GAAP perspective, amortization expense is excluded and therefore has no impact on the review of our operating results.
As explained in our response to comment 3 in our letter dated July 8, 2024, the different components of the composite intangible asset are inherently inseparable because there is no reasonable way for a market participant to separate cash flows attributable to any one of the intangible assets of the composite asset in isolation. All composite asset components are needed to work in unison for there to be a marketable product. As there is no logical way to estimate the value of the developed technology component within the composite intangible asset, it would take undue effort thus impracticable for us to bifurcate the amortization of this intangible asset to cost of sales and gross profit. Below is further elaboration of the discussion we previously provided.
▪Technology: No patents were acquired as part of this transaction. The acquired technology relies on the New Drug Application (NDA) approval, which is non-transferrable to any other product.
▪NDA approval: The product will generate zero revenue if it didn’t have an NDA approval as without the approval, the Company would not be able to sell and monetize the product.
▪Customer relationships: The customer (a.k.a. physician/practitioner) relationships in isolation cannot generate any revenue because unlike a commodity product, the practitioner does not prescribe the intrauterine device (IUD) due to their relationships or due to the trade name. The practitioner prescribes the IUD based on the features of the product such as the products safety and efficacy, and suitability of the product to the patient’s health. For example, a copper IUD cannot be prescribed if the patient has structural abnormality of the womb, or pelvic infection, etc. If the practitioner decides
that a copper IUD is suitable, then, in the U.S., there is only one option (PARAGARD). The practitioner will prescribe PARAGARD without consideration of the brand name. The practitioner is legally obligated to give a prescription independent of any biases due to relationships with companies. By law, a practitioner cannot prescribe a particular product due to their relationship with the product manufacturer or their preference to a certain brand. Furthermore, the Company, being in the women’s healthcare business and like its market participants, already has relationships with most if not all of the practitioners.
▪Trade name: The product trade name will only be used to market the existing PARAGARD product; thus, its remaining economic life is the same as that of the PARAGARD product. This is consistent with the treatment of the PARAGARD trade name when it was acquired in 2008 as a part of Teva’s acquisition of Barr Pharmaceuticals. Additionally, there are no plans to develop future products that could use this brand name and there is also only this single product using the PARAGARD brand name as there is not a suite of products available. There is only the one, single IUD and no derivations (i.e. different strengths or lengths of use, etc.).
Quantitative Evaluation
The Company quantified the impact of amortization expenses of intangibles on gross profit in the consolidated statements of income for fiscal years 2023, 2022 and 2021. Our total consolidated revenue in fiscal years 2023, 2022, and 2021 was $3,593.2 million, $3,308.4 million and $2,922.5 million, respectively. As discussed above, we have excluded amortization of the composite intangible asset because it is impracticable to bifurcate the developed technology component from the composite intangible asset. Accordingly, the classification of amortization expense related to the total composite intangible asset to operating expenses is deemed appropriate. The amortization expenses related to developed technology from other acquisitions approximated 1% of our total consolidated revenue in fiscal years 2023, 2022, and 2021.
Based on our analysis above, the trends in gross margin are not materially distorted. Also, there is no impact to operating margin and EPS in any given year.
Qualitative Evaluation
We considered the following when assessing whether amortization expense related to developed technology is considered material to our consolidated statements of income.
1.Whether the item masks a change in earnings or other trends, hides a failure to meet analysts’ consensus expectations for the enterprise, or changes a loss into income or vice versa
The fully burdening of gross profit with amortization expense related to technology does not impact our earnings. Given the developed technology is not material, the trends in gross margin are not materially distorted. Analysts’ consensus expectations for the enterprise are set at the revenue and EPS levels, which are not impacted by technology-related amortization
expense at the gross profit level. Additionally, the non-GAAP operating margin reviewed by the analysts do not include amortization expense.
2.Whether the item affects the registrant’s compliance with regulatory requirements, loan covenants or other contractual requirements
The item does not affect our compliance with regulatory requirements, loan covenants and any other contractual requirements.
3.Whether the item has the effect of increasing management's compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation
Neither GAAP or non-GAAP gross margin is considered in the assessment of management’s compensation.
4.Whether the item involves concealment of an unlawful transaction
The item does not involve concealment of an unlawful transaction.
5.Whether the item arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate
There is no estimate involved in calculating the amortization expense of the intangible assets. It is impracticable for us to bifurcate the composite intangible asset. The amortization expense that should be included in cost of sales (i.e. amortization expense related to technology) is a precise measure.
6.Whether the item concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability
We assess a segment’s operations and profitability at the operating income level, which is consistent with our segment disclosure. The item has no impact on how we assess the operations and profitability of the CooperSurgical segment.
Conclusion
Based on our analysis above, we have determined that the financial impact of not fully burdening gross profit with amortization of intangibles is not material, either quantitatively or qualitatively, for the fiscal years 2023, 2022, and 2021.
Note 1. Organization and Significant Accounting Policies
Revenue Recognition
2. We note your response to comment 2. Considering the significance of total consolidated revenue to the Consolidated Statements of Income and the other financial statements provided, please provide us with a comprehensive materiality analysis prepared in accordance with SAB Topic 1:M to clearly demonstrate that your service revenues are immaterial to your consolidated financial statements, including the amount of revenues and associated costs and income being recognized for each period presented including your subsequent interim periods. Also, provide us with your accounting policy for your
revenues. To the extent that you conclude the service revenues are material to your consolidated financial statements, we continue to request that you provide the disclosures for revenues related to the various services you provide including (a) identification of the performance obligations (i.e., when typically satisfied, significant payment terms, nature of goods and services, obligations for returns, refunds, and other similar obligations, and types of warranties and related obligations) with reference to ASC 606-10-50-12 and 50-12A, (b) significant judgments for the method used to recognize revenue over time and why the method faithfully depicts the transfer of the services with reference to ASC 606-10-50-18, and (c) variable consideration and any other obligations with reference to ASC 606-10-50- 20.
Response:
We respectfully acknowledge the Staff’s comment. Below is our full materiality analysis in accordance with SAB Topic 1:M. We respectfully decline to provide the amount of service revenues and associated costs and income being recognized for each period presented including our subsequent interim periods as we have determined that service revenues are not material to our consolidated statements of income and we have not previously disclosed such amounts in any investor presentation or analysts call. We will continue to monitor the impact of service revenues to our consolidated financial statements and will provide the disclosures for revenue related to services as necessary. Please see our accounting policy for revenues attached as Exhibit A to this letter.
Materiality Assessment
Quantitative Evaluation
The Company quantified the impact of service revenues on the consolidated statements income for fiscal years 2023, 2022 and 2021. Our total consolidated revenue in fiscal years 2023, 2022, and 2021 was $3,593.2 million, $3,308.4 million and $2,922.5 million, respectively. Article 5-03(b) of Regulation S-X states that each class of income which is not more than 10 percent of total consolidated revenue may be combined with another class of income and the related costs and expenses shall be combined in the same manner. Service revenues comprised less than 10% of the Company’s revenues in the fiscal years 2023, 2022, and 2021. Services also account for a similar portion of operating income and net income for each period in which service revenue is generated.
Qualitative Evaluation
We considered the following considerations when assessing whether service revenue is considered material to our consolidated statements of income.
1.Whether the item concerns a segment or other portion of the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability
The Company has two operating segments: CooperVision and CooperSurgical. Service revenue is included in both segments with the majority of it being in CooperSurgical. From an operational standpoint, CooperSurgical product and service offerings are intertwined because our broad portfolio of products and services work together to aid health care professionals in the diagnosis and treatment of a wide spectrum of women’s health and reproductive issues.
Our cost structuring for products and services tend to align despite having different types of costs for products versus services. From a cost of sales perspective, products mainly include the costs of the actual medical devices versus services include items like collection kits, lab tests, costs associated with gamete donation sites, etc. From an operating expense perspective, since product and service offerings are intertwined, the majority of selling and marketing costs tend to be shared between products and services. Services also have some selling expenses that products might not have such as employee costs involved in providing consultation to customers. However, taken as a whole, operating expenses related to products and services tend to trend closely. As such, we do not see significant differentiation in amount of costs between products versus services at the gross margin and operating margin levels.
In short, service revenue does not alter the way we assess operations and profitability at the segment or the consolidated level.
2.Whether the item masks a change in earnings or other trends, hides a failure to meet analysts' consensus expectations for the enterprise, or changes a loss into income or vice versa
Service revenue does not mask a change in earnings or other trends or change a loss into income or vice versa because as explained above it consistently accounts for less than 10% of total consolidated performance at the net sales, gross margin and operating margin level. Analysts’ consensus expectations for the enterprise is set at the total consolidated level for net sales and non-GAAP EPS. As such, service revenue does not impact our ability to meet analysts’ consensus expectations.
3.Whether the item arises from an item capable of precise measurement or whet
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Document
[Letterhead]
July 29, 2024
VIA EDGAR AND ELECTRONIC MAIL
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-6010
Attention: Tracey Houser
Terence O’Brien
Re: The Cooper Companies, Inc.
Responses to Letter dated July 16, 2024
Form 10-K for Fiscal Year Ended October 31, 2023
Filed December 8, 2023
Form 8-K Filed May 30, 2024
File No. 001-08597
To the addressees set forth above:
The Cooper Companies, Inc. (the “Company”) is transmitting this letter in response to the comments received from the staff of the Securities and Exchange Commission (the “Staff”) contained in the Staff’s letter dated July 16, 2024, with respect to the Company’s Form 10-K for the fiscal year ended October 31, 2023 and the Company’s Form 8-K filed May 30, 2024.
For ease of review, we have set forth below each of the Staff’s comments in bold type followed by the Company’s responses thereto.
Form 10-K for Fiscal Year Ended October 31, 2023
Consolidated Statements of Income
1.We note your response to comment 1. Given that you initially stated in your response letter dated May 22, 2024 related to comment 3 that you would revise the cost of sales line item to include the parenthetical to note that it excludes amortization of intangibles and remove the gross profit subtotal and now have concluded that the missing amortization of intangibles is immaterial and will no longer comply with the requirements in Item 10(e)(1)(ii)(C) of Regulation S-K and SAB Topic 11:B, please provide us with your full materiality analysis in accordance with SAB Topic 1:M that includes how you calculated the amount of excluded intangible asset amortization given that a portion of the composite intangible asset includes a technology component.
Response:
We respectfully acknowledge the Staff’s comment. Our initial response in our letter dated May 22, 2024 provided the quantitative factors supporting our presentation of gross profits on the face of the consolidated statements of income in the Form 10-K for fiscal years 2023, 2022 and 2021. While we had determined that it was still appropriate to present gross profit without being fully burdened by amortization of intangibles, at the time we had considered the revision of “Cost of sales” to “Costs of sales (excluding amortization of intangibles)” and the removal of the “Gross profit” subtotal line to be immaterial changes to the presentation of our consolidated statements of income and as such had agreed to make the change going forward. However, as the Staff raised a valid concern that such updates could send conflicting messages to our investors and suggest that our current presentation of gross profit was not in accordance with US GAAP, we determined to retain the “Gross profit” subtotal on the face of our statements of income. Below is our full materiality analysis in accordance with SAB Topic 1:M.
Materiality Assessment
Management’s review of the Company’s operations and profitability and the discussion management has with the investors and analysts place more emphasis on GAAP and non-GAAP operating margin and EPS. The bifurcation of amortization expense between cost of sales and operating expenses would not affect operating margin and EPS from both GAAP and non-GAAP perspective. Additionally, from a non-GAAP perspective, amortization expense is excluded and therefore has no impact on the review of our operating results.
As explained in our response to comment 3 in our letter dated July 8, 2024, the different components of the composite intangible asset are inherently inseparable because there is no reasonable way for a market participant to separate cash flows attributable to any one of the intangible assets of the composite asset in isolation. All composite asset components are needed to work in unison for there to be a marketable product. As there is no logical way to estimate the value of the developed technology component within the composite intangible asset, it would take undue effort thus impracticable for us to bifurcate the amortization of this intangible asset to cost of sales and gross profit. Below is further elaboration of the discussion we previously provided.
▪Technology: No patents were acquired as part of this transaction. The acquired technology relies on the New Drug Application (NDA) approval, which is non-transferrable to any other product.
▪NDA approval: The product will generate zero revenue if it didn’t have an NDA approval as without the approval, the Company would not be able to sell and monetize the product.
▪Customer relationships: The customer (a.k.a. physician/practitioner) relationships in isolation cannot generate any revenue because unlike a commodity product, the practitioner does not prescribe the intrauterine device (IUD) due to their relationships or due to the trade name. The practitioner prescribes the IUD based on the features of the product such as the products safety and efficacy, and suitability of the product to the patient’s health. For example, a copper IUD cannot be prescribed if the patient has structural abnormality of the womb, or pelvic infection, etc. If the practitioner decides
2
that a copper IUD is suitable, then, in the U.S., there is only one option (PARAGARD). The practitioner will prescribe PARAGARD without consideration of the brand name. The practitioner is legally obligated to give a prescription independent of any biases due to relationships with companies. By law, a practitioner cannot prescribe a particular product due to their relationship with the product manufacturer or their preference to a certain brand. Furthermore, the Company, being in the women’s healthcare business and like its market participants, already has relationships with most if not all of the practitioners.
▪Trade name: The product trade name will only be used to market the existing PARAGARD product; thus, its remaining economic life is the same as that of the PARAGARD product. This is consistent with the treatment of the PARAGARD trade name when it was acquired in 2008 as a part of Teva’s acquisition of Barr Pharmaceuticals. Additionally, there are no plans to develop future products that could use this brand name and there is also only this single product using the PARAGARD brand name as there is not a suite of products available. There is only the one, single IUD and no derivations (i.e. different strengths or lengths of use, etc.).
Quantitative Evaluation
The Company quantified the impact of amortization expenses of intangibles on gross profit in the consolidated statements of income for fiscal years 2023, 2022 and 2021. Our total consolidated revenue in fiscal years 2023, 2022, and 2021 was $3,593.2 million, $3,308.4 million and $2,922.5 million, respectively. As discussed above, we have excluded amortization of the composite intangible asset because it is impracticable to bifurcate the developed technology component from the composite intangible asset. Accordingly, the classification of amortization expense related to the total composite intangible asset to operating expenses is deemed appropriate. The amortization expenses related to developed technology from other acquisitions approximated 1% of our total consolidated revenue in fiscal years 2023, 2022, and 2021.
Based on our analysis above, the trends in gross margin are not materially distorted. Also, there is no impact to operating margin and EPS in any given year.
Qualitative Evaluation
We considered the following when assessing whether amortization expense related to developed technology is considered material to our consolidated statements of income.
1.Whether the item masks a change in earnings or other trends, hides a failure to meet analysts’ consensus expectations for the enterprise, or changes a loss into income or vice versa
The fully burdening of gross profit with amortization expense related to technology does not impact our earnings. Given the developed technology is not material, the trends in gross margin are not materially distorted. Analysts’ consensus expectations for the enterprise are set at the revenue and EPS levels, which are not impacted by technology-related amortization
3
expense at the gross profit level. Additionally, the non-GAAP operating margin reviewed by the analysts do not include amortization expense.
2.Whether the item affects the registrant’s compliance with regulatory requirements, loan covenants or other contractual requirements
The item does not affect our compliance with regulatory requirements, loan covenants and any other contractual requirements.
3.Whether the item has the effect of increasing management's compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation
Neither GAAP or non-GAAP gross margin is considered in the assessment of management’s compensation.
4.Whether the item involves concealment of an unlawful transaction
The item does not involve concealment of an unlawful transaction.
5.Whether the item arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate
There is no estimate involved in calculating the amortization expense of the intangible assets. It is impracticable for us to bifurcate the composite intangible asset. The amortization expense that should be included in cost of sales (i.e. amortization expense related to technology) is a precise measure.
6.Whether the item concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability
We assess a segment’s operations and profitability at the operating income level, which is consistent with our segment disclosure. The item has no impact on how we assess the operations and profitability of the CooperSurgical segment.
Conclusion
Based on our analysis above, we have determined that the financial impact of not fully burdening gross profit with amortization of intangibles is not material, either quantitatively or qualitatively, for the fiscal years 2023, 2022, and 2021.
Note 1. Organization and Significant Accounting Policies
Revenue Recognition
2. We note your response to comment 2. Considering the significance of total consolidated revenue to the Consolidated Statements of Income and the other financial statements provided, please provide us with a comprehensive materiality analysis prepared in accordance with SAB Topic 1:M to clearly demonstrate that your service revenues are immaterial to your consolidated financial statements, including the amount of revenues and associated costs and income being recognized for each period presented including your subsequent interim periods. Also, provide us with your accounting policy for your
4
revenues. To the extent that you conclude the service revenues are material to your consolidated financial statements, we continue to request that you provide the disclosures for revenues related to the various services you provide including (a) identification of the performance obligations (i.e., when typically satisfied, significant payment terms, nature of goods and services, obligations for returns, refunds, and other similar obligations, and types of warranties and related obligations) with reference to ASC 606-10-50-12 and 50-12A, (b) significant judgments for the method used to recognize revenue over time and why the method faithfully depicts the transfer of the services with reference to ASC 606-10-50-18, and (c) variable consideration and any other obligations with reference to ASC 606-10-50- 20.
Response:
We respectfully acknowledge the Staff’s comment. Below is our full materiality analysis in accordance with SAB Topic 1:M. We respectfully decline to provide the amount of service revenues and associated costs and income being recognized for each period presented including our subsequent interim periods as we have determined that service revenues are not material to our consolidated statements of income and we have not previously disclosed such amounts in any investor presentation or analysts call. We will continue to monitor the impact of service revenues to our consolidated financial statements and will provide the disclosures for revenue related to services as necessary. Please see our accounting policy for revenues attached as Exhibit A to this letter.
Materiality Assessment
Quantitative Evaluation
The Company quantified the impact of service revenues on the consolidated statements income for fiscal years 2023, 2022 and 2021. Our total consolidated revenue in fiscal years 2023, 2022, and 2021 was $3,593.2 million, $3,308.4 million and $2,922.5 million, respectively. Article 5-03(b) of Regulation S-X states that each class of income which is not more than 10 percent of total consolidated revenue may be combined with another class of income and the related costs and expenses shall be combined in the same manner. Service revenues comprised less than 10% of the Company’s revenues in the fiscal years 2023, 2022, and 2021. Services also account for a similar portion of operating income and net income for each period in which service revenue is generated.
Qualitative Evaluation
We considered the following considerations when assessing whether service revenue is considered material to our consolidated statements of income.
1.Whether the item concerns a segment or other portion of the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability
5
The Company has two operating segments: CooperVision and CooperSurgical. Service revenue is included in both segments with the majority of it being in CooperSurgical. From an operational standpoint, CooperSurgical product and service offerings are intertwined because our broad portfolio of products and services work together to aid health care professionals in the diagnosis and treatment of a wide spectrum of women’s health and reproductive issues.
Our cost structuring for products and services tend to align despite having different types of costs for products versus services. From a cost of sales perspective, products mainly include the costs of the actual medical devices versus services include items like collection kits, lab tests, costs associated with gamete donation sites, etc. From an operating expense perspective, since product and service offerings are intertwined, the majority of selling and marketing costs tend to be shared between products and services. Services also have some selling expenses that products might not have such as employee costs involved in providing consultation to customers. However, taken as a whole, operating expenses related to products and services tend to trend closely. As such, we do not see significant differentiation in amount of costs between products versus services at the gross margin and operating margin levels.
In short, service revenue does not alter the way we assess operations and profitability at the segment or the consolidated level.
2.Whether the item masks a change in earnings or other trends, hides a failure to meet analysts' consensus expectations for the enterprise, or changes a loss into income or vice versa
Service revenue does not mask a change in earnings or other trends or change a loss into income or vice versa because as explained above it consistently accounts for less than 10% of total consolidated performance at the net sales, gross margin and operating margin level. Analysts’ consensus expectations for the enterprise is set at the total consolidated level for net sales and non-GAAP EPS. As such, service revenue does not impact our ability to meet analysts’ consensus expectations.
3.Whether the item arises from an item capable of precise measurement or whet