Edgar Filing: HOLOGIC INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-18281

Hologic, Inc.

(Exact name of registrant as specified in its charter)


Delaware		04-2902449
(State of incorporation)		(I.R.S. Employer Identification No.)

35 Crosby Drive, Bedford, Massachusetts		01730
(Address of principal executive offices)		(Zip Code)

(781) 999-7300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

As of August 1, 2013, 270,441,506 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.

HOLOGIC, INC.

INDEX


		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Statements of Operations for the Three and Nine Months Ended June 29, 2013 and June 23, 2012		3

	Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended June 29, 2013 and June 23, 2012		4

	Consolidated Balance Sheets as of June 29, 2013 and September 29, 2012		5

	Consolidated Statements of Cash Flows for the Nine Months Ended June 29, 2013 and June 23, 2012		6

	Notes to Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		54

Item 4.	Controls and Procedures		54

PART II – OTHER INFORMATION			55

Item 1.	Legal Proceedings		55

Item 1A.	Risk Factors		55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		55

SIGNATURES			57

EXHIBITS

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)


	Three Months Ended						Nine Months Ended
	June 29, 2013			June 23, 2012			June 29, 2013			June 23, 2012
Revenues:
Product sales	$	529,953		$	384,593		$	1,579,323		$	1,164,774
Service and other revenues		96,183			85,635			290,838			249,330

		626,136			470,228			1,870,161			1,414,104

Costs and expenses:
Cost of product sales		187,612			134,062			617,165			420,429
Cost of product sales – amortization of intangible assets		75,990			45,280			227,010			135,792
Cost of product sales – impairment of intangible assets		1,714			—			1,714			—
Cost of service and other revenues		51,062			46,246			153,515			137,763
Research and development		47,779			26,229			148,909			83,868
Selling and marketing		82,911			76,368			265,379			232,367
General and administrative		60,476			43,421			179,689			131,759
Amortization of intangible assets		28,678			15,733			85,871			47,204
Contingent consideration – compensation expense		21,601			15,502			80,475			44,064
Contingent consideration – fair value adjustments		471			(13,276	)		11,310			35,034
Gain on sale of intellectual property		—			—			(53,884	)		(12,424	)
Restructuring and divestiture charges		6,690			136			23,085			828

		564,984			389,701			1,740,238			1,256,684

Income from operations		61,152			80,527			129,923			157,420
Interest income		304			695			771			1,947
Interest expense		(67,162	)		(25,593	)		(215,292	)		(83,614	)
Debt extinguishment loss		—			—			(3,247	)		(42,347	)
Other (expense) income, net		(1,217	)		(622	)		(179	)		2,897

(Loss) income before income taxes		(6,923	)		55,007			(88,024	)		36,303
Provision (benefit) for income taxes		4,027			31,413			(29,088	)		32,170

Net (loss) income	$	(10,950	)	$	23,594		$	(58,936	)	$	4,133

Net (loss) income per common share:
Basic	$	(0.04	)	$	0.09		$	(0.22	)	$	0.02

Diluted	$	(0.04	)	$	0.09		$	(0.22	)	$	0.02

Weighted average number of shares outstanding:
Basic		269,430			264,609			267,983			263,742

Diluted		269,430			267,294			267,983			266,359

See accompanying notes.

HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands)


	Three Months Ended						Nine Months Ended
	June 29, 2013			June 23, 2012			June 29, 2013			June 23, 2012
Net (loss) income	$	(10,950	)	$	23,594		$	(58,936	)	$	4,133
Foreign currency translation adjustment		(2,984	)		(9,528	)		(9,303	)		(4,852	)
Unrealized gain on available-for-sale securities		131			—			2,261			—

Other comprehensive loss		(2,853	)		(9,528	)		(7,042	)		(4,852	)

Comprehensive (loss) income	$	(13,803	)	$	14,066		$	(65,978	)	$	(719	)

See accompanying notes.

HOLOGIC, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)


	June 29, 2013			September 29, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	958,444		$	560,430
Restricted cash		5,941			5,696
Accounts receivable, less reserves of $8,514 and $6,396, respectively		400,428			409,333
Inventories		306,019			367,191
Deferred income tax assets		—			11,715
Prepaid income taxes		32,868			69,845
Prepaid expenses and other current assets		47,645			44,301
Other current assets – assets held-for-sale		—			94,503

Total current assets		1,751,345			1,563,014

Property, plant and equipment, net		501,861			507,998
Intangible assets, net		3,987,157			4,301,250
Goodwill		3,939,172			3,942,779
Other assets		153,668			162,067

Total assets	$	10,333,203		$	10,477,108


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	657,370		$	64,435
Accounts payable		74,115			87,223
Accrued expenses		359,311			372,381
Deferred revenue		126,609			129,688
Deferred income tax liabilities		41,518			—
Other current liabilities – assets held-for-sale		—			7,622

Total current liabilities		1,258,923			661,349

Long-term debt, net of current portion		4,347,300			4,971,179
Deferred income tax liabilities		1,553,698			1,771,585
Deferred service obligations – long-term		22,436			13,714
Other long-term liabilities		154,212			98,250
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.01 par value – 1,623 shares authorized; 0 shares issued		—			—
Common stock, $0.01 par value – 750,000 shares authorized; 270,196 and 265,635 shares issued, respectively		2,702			2,656
Additional paid-in-capital		5,498,192			5,396,657
Accumulated deficit		(2,502,490	)		(2,443,554	)
Accumulated other comprehensive (loss) income		(252	)		6,790
Treasury stock, at cost – 219 shares		(1,518	)		(1,518	)

Total stockholders’ equity		2,996,634			2,961,031

Total liabilities and stockholders’ equity	$	10,333,203		$	10,477,108

See accompanying notes.

HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended
	June 29, 2013			June 23, 2012
OPERATING ACTIVITIES
Net (loss) income	$	(58,936	)	$	4,133
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		70,505			48,107
Amortization		312,881			182,996
Non-cash interest expense		61,198			54,882
Stock-based compensation expense		41,898			26,360
Excess tax benefit related to equity awards		(5,394	)		(3,791	)
Deferred income taxes		(119,391	)		(124,253	)
Gain on sale of intellectual property		(53,884	)		(12,424	)
Debt extinguishment loss		3,247			42,347
Fair value adjustments to contingent consideration		11,310			35,034
Fair value write-up of inventory sold		52,397			—
Cost-method equity investment impairment		6,438			—
Gain on sale of cost-method equity investment		(1,972	)		—
Intangible asset impairment		1,714			—
Non-cash restructuring charges		54			16,435
Loss on disposal of property and equipment		3,673			2,402
Other		2,553			(1,591	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		9,311			(22,055	)
Inventories		12,060			(8,959	)
Prepaid income taxes		36,978			360
Prepaid expenses and other assets		5,294			1,356
Accounts payable		(14,416	)		(8,155	)
Accrued expenses and other liabilities		32,100			40,230
Deferred revenue		6,206			11,217

Net cash provided by operating activities		415,824			284,631

INVESTING ACTIVITIES
Acquisition of businesses		(6,273	)		—
Payment of additional acquisition consideration		(16,808	)		(9,784	)
Proceeds from sale of business, net of cash transferred		86,250			—
Purchase of property and equipment		(41,116	)		(20,692	)
Increase in equipment under customer usage agreements		(31,911	)		(32,750	)
Purchase of insurance contracts		(4,000	)		—
Proceeds from sale of intellectual property		60,000			12,500
Purchase of cost-method investments		(3,625	)		(250	)
Sale of a cost-method investment		2,104			—
Increase in other assets		(4,534	)		(948	)

Net cash provided by (used in) investing activities		40,087			(51,924	)

FINANCING ACTIVITIES
Repayment of long-term debt		(48,750	)		—
Payment of debt issuance costs		(7,019	)		(7,908	)
Payment of contingent consideration		(42,433	)		(51,680	)
Deferred acquisition consideration		(1,655	)		—
Net proceeds from issuance of common stock pursuant to employee stock plans		51,220			21,741
Excess tax benefit related to equity awards		5,394			3,791
Payment of employee restricted stock minimum tax withholdings		(12,102	)		(5,707	)

Net cash used in financing activities		(55,345	)		(39,763	)
Effect of exchange rate changes on cash and cash equivalents		(2,552	)		(194	)

Net increase in cash and cash equivalents		398,014			192,750
Cash and cash equivalents, beginning of period		560,430			712,332

Cash and cash equivalents, end of period	$	958,444		$	905,082

See accompanying notes.

HOLOGIC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(all tabular amounts in thousands except per share data)

(1) Basis of Presentation

The consolidated financial statements of Hologic, Inc. (“Hologic” or the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and disclosures required by U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 29, 2012, included in the Company’s Form 8-K filed with the SEC on January 28, 2013. The Form 8-K was filed to add a footnote to the consolidated financial statements for the requirement to provide financial information of the Company’s guarantors of its Senior Notes (see Note 5) in connection with registering the Senior Notes on a Registration Statement on Form S-4 filed with the SEC on January 28, 2013. In the opinion of management, the financial statements and notes contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates if past experience or other assumptions do not turn out to be substantially accurate. Operating results for the three and nine months ended June 29, 2013 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending September 28, 2013.

During the third quarter of fiscal 2013, the Company determined that certain amounts previously classified as a component of product sales and cost of product sales in the first and second quarters of fiscal 2013 should be reclassified to service and other revenues and cost of service and other revenues in the Consolidated Statement of Operations for the nine months ended June 29, 2013. This reclassification, which aggregated $3.8 million and $2.2 million, respectively, is not material to the Company’s consolidated financial statements for any of the respective periods and is reflected in the Consolidated Statement of Operations for the nine months ended June 29, 2013.

Subsequent Events Consideration

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. There were no material recognized subsequent events recorded in the unaudited consolidated financial statements as of and for the three and nine months ended June 29, 2013.

(2) Fair Value Measurements

Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis

As of June 29, 2013 and September 29, 2012, the Company’s financial assets that are re-measured at fair value on a recurring basis included $0.3 million in money market mutual funds in both periods that are classified as cash and cash equivalents in the Consolidated Balance Sheets. Money market funds are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets. As a result of its acquisition of Gen-Probe Incorporated (“Gen-Probe”), the Company has an equity investment in a publicly-traded company and mutual funds, both of which are valued using quoted market prices, representing Level 1 assets. The Company has a payment obligation to the participants under its Nonqualified Deferred Compensation Plan (“DCP”) and the deferred compensation plan assumed in the Gen-Probe acquisition. This aggregate liability is recorded at fair value based on the underlying value of certain hypothetical investments under the DCP and actual investments under the plan assumed from Gen-Probe as designated by each participant for their benefit. Since the value of the deferred compensation plan obligations is based on market prices, the liability is classified within Level 1. In addition, the Company had contingent consideration liabilities related to its acquisitions that were recorded at fair value and were based on Level 3 inputs (see Note 6(a)).

Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following at June 29, 2013:


			Fair Value at Reporting Date Using
	Balance as of June 29, 2013		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	315	$	315	$	—	$	—
Marketable securities:
Equity securities		8,290		8,290		—		—
Mutual funds		6,664		6,664		—		—

Total	$	15,269	$	15,269	$	—	$	—


Liabilities:
Deferred compensation liabilities	$	36,889	$	36,889	$	—	$	—
Contingent consideration		4,493		—		—		4,493

Total	$	41,382	$	36,889	$	—	$	4,493

Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3), which solely consisted of contingent consideration liabilities, were as follows:


	Three Months Ended						Nine Months Ended
	June 29, 2013			June 23, 2012			June 29, 2013			June 23, 2012
Balance at beginning of period	$	3,627		$	96,212		$	86,368		$	103,790
Contingent consideration recorded at acquisition		525			—			525			—
Fair value adjustments		471			(13,276	)		11,310			35,034
Payments made		(130	)		—			(93,710	)		(55,888	)

Balance at end of period	$	4,493		$	82,936		$	4,493		$	82,936

The contingent consideration liability at June 29, 2013 is comprised of $4.0 million for the Interlace Medical, Inc. (“Interlace”) acquisition and $0.5 million for the Chindex Medical Limited acquisition. The remaining contingent consideration liability for Interlace represents amounts withheld from payments made to the former shareholders of Interlace for legal indemnification provisions. As of the end of the second quarter of fiscal 2013, the Interlace contingent liability was no longer being remeasured as the final measurement period lapsed. The withheld amount is being used to pay qualifying legal charges.

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company remeasures the fair value of certain assets and liabilities upon the occurrence of certain events. Such assets are comprised of cost-method equity investments and long-lived assets, including property, plant and equipment, intangible assets and goodwill.

The Company holds certain cost-method equity investments in non-publicly traded securities aggregating $12.6 million and $16.0 million at June 29, 2013 and September 29, 2012, respectively, which are included in other long-term assets on the Company’s Consolidated Balance Sheets. These investments are generally carried at cost. As the inputs utilized for the Company’s periodic impairment assessment are not based on observable market data, these cost-method investments are classified within Level 3 of the fair value hierarchy. To determine the fair value of these investments, the Company uses all available financial information related to the entities, including information based on recent or pending third-party equity investments in these entities. In certain instances, a cost-method investment’s fair value is not estimated as there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment and to do so would be impractical. For the three and nine months ended June 29, 2013, the Company recorded other-than-temporary impairment charges of $4.7 million and $6.4 million, respectively, related to these investments. In the third quarter of fiscal 2013, the Company sold one of its investments and recorded a gain of $2.0 million.

Refer to Note 4 for disclosure of the nonrecurring fair value measurement related to the impairment charge for manufacturing equipment and equipment located at customer sites recorded in the second quarter of fiscal 2012. Refer to Note 5 for disclosure of the nonrecurring fair value measurement related to the debt extinguishment losses recorded in the second quarter of fiscal 2013 and 2012. Refer to Note 14 for disclosure of the nonrecurring fair value measurement related to an intangible asset impairment charge recorded in the third quarter of fiscal 2013.

Disclosure of Fair Value of Financial Instruments

The Company’s financial instruments mainly consist of cash and cash equivalents, accounts receivable, marketable securities, cost-method equity investments, insurance contracts, deferred compensation plan liabilities, accounts payable and debt obligations. The carrying amounts of the Company’s cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments. The carrying amount of the insurance contracts are recorded at the cash surrender value, as required by U.S. generally accepted accounting principles, which approximates fair value, and the related DCP liability is recorded at fair value. The Company believes the carrying amounts of its cost-method investments approximate fair value.

The $2.45 billion in aggregate principal outstanding under the Company’s Credit Agreement is subject to variable rates of interest based on current market rates, and as such, the Company believes the carrying amount of these obligations approximates fair value. The Company’s Senior Notes were registered with the SEC in the second quarter of fiscal 2013, and had a fair value of approximately $1.04 billion as of June 29, 2013 based on their trading price, representing a Level 1 measurement.

The fair value of the Company’s Convertible Notes is based on the trading prices of the respective notes at the dates noted and represents a Level 1 measurement. The Company had $1.57 billion and $1.56 billion of Convertible Notes recorded (see Note 5 for further discussion) as of June 29, 2013 and September 29, 2012, respectively. The aggregate principal amount of the Convertible Notes at both periods was $1.725 billion. As of June 29, 2013, the Company has four issues of Convertible Notes outstanding: the 2007 Notes (principal of $405.0 million), the 2010 Notes (principal of $450.0 million), the 2012 Notes (principal of $500.0 million) and the 2013 Notes (principal of $370.0 million).

The estimated fair values of the Company’s Convertible Notes were as follows:


	June 29, 2013		September 29, 2012
2007 Notes	$	404,100	$	771,600
2010 Notes		499,100		505,600
2012 Notes		500,000		490,700
2013 Notes		378,300		—

	$	1,781,500	$	1,767,900

(3) Business Combinations

Gen-Probe Incorporated

On August 1, 2012, the Company completed its acquisition of Gen-Probe and acquired all of the outstanding shares of Gen-Probe. Pursuant to the merger agreement, each share of common stock outstanding immediately prior to the effective time of the acquisition was cancelled and converted into the right to receive $82.75 in cash. In addition, all outstanding restricted shares, restricted stock units, performance shares, and those stock options granted prior to February 8, 2012 were cancelled and converted into the right to receive $82.75 per share in cash less the exercise price, as applicable. Stock options granted after February 8, 2012 were converted into stock options to acquire shares of Hologic common stock determined by the conversion formula defined in the merger agreement. The Company paid $3.8 billion to the shareholders of Gen-Probe and $169.0 million to equity award holders. The Company funded the acquisition using available cash and financing consisting of senior secured credit facilities and Senior Notes (see Note 5 for further discussion) resulting in aggregate proceeds of $3.48 billion, excluding financing fees to the underwriters. The Company incurred approximately $34.3 million of direct transaction costs, which were recorded within general and administrative expenses in fiscal 2012.

Gen-Probe, headquartered in San Diego, California, is a leader in molecular diagnostics products and services that are used primarily to diagnose human diseases and screen donated human blood. The Company expects this acquisition to enhance its molecular diagnostics franchise and to complement its existing portfolio of diagnostics products. Gen-Probe’s results of operations are reported within the Company’s Diagnostics reportable segment from the date of acquisition.

The purchase price consideration was as follows:


Cash paid	$	3,967,866
Deferred payment		1,655
Fair value of stock options exchanged		2,655

Total purchase price	$	3,972,176

The fair value of stock options exchanged, that were recorded as purchase price, represented the fair value of Gen-Probe options converted into the Company’s stock options attributable to pre-combination services pursuant to Accounting Standards Codification 805, Business Combinations (ASC 805). The remainder of the fair value of these stock options of $23.2 million is being recognized as stock-based compensation expense ratably over the remaining vesting period, which was approximately 3.5 years at the date of acquisition. The Company estimated the fair value of the stock options using a binomial valuation model with the following weighted average assumptions: risk free interest rate of 0.41%, expected volatility of 39.9%, expected life of 3.6 years and dividend yield of 0.0%. The weighted average fair value of stock options granted was $7.07 per share.

The preliminary allocation of the purchase price presented below is based on estimates of the fair value of assets acquired and liabilities assumed as of August 1, 2012. The Company is continuing to obtain information to complete its valuation of acquired assets and liabilities, including tax assets and liabilities. The components of the preliminary purchase price allocation are as follows:


Cash	$	205,463
Accounts receivable		81,444
Inventory		153,416
Property, plant and equipment		274,095
Other assets		192,354
Assets held-for-sale, net		87,465
Accounts payable		(19,671	)
Accrued expenses		(131,566	)
Other liabilities		(19,648	)
Identifiable intangible assets:
Developed technology		1,565,000
In-process research and development		227,000
Customer contract		585,000
Trade names		95,000
Deferred income taxes, net		(972,196	)
Goodwill		1,649,020

Purchase Price	$	3,972,176

The purchase price has been allocated to the acquired assets and liabilities based on management’s estimate of their fair values. During fiscal 2013, as the Company continues to complete its valuation procedures, it lowered the valuation of trade names by $2.0 million with an offsetting increase to goodwill. In addition, certain tax related adjustments have been recorded.

Certain of Gen-Probe’s assets were designated as assets held-for-sale and recorded at fair value less the estimated cost to sell such assets. These represented non-core assets to the Company’s business plan and were expected to be sold within one year of the acquisition. On January 3, 2013, the Company entered into a definitive agreement to sell its LIFECODES business to Immucor, Inc. for $85.0 million in cash, subject to adjustment, plus a contingent payment of an additional $10.0 million if certain future revenue results are achieved. This transaction closed on March 22, 2013, and the Company recorded a gain on the sale of $0.9 million in the second quarter of fiscal 2013. LIFECODES sells molecular and antibody-based assays in the markets of transplant diagnostics, specialty coagulation and transfusion medicine. In the first and third quarters of fiscal 2013, the Company completed the sale of the other asset groups classified as held-for-sale for an aggregate of $2.8 million.

As part of the preliminary purchase price allocation, the Company determined that the identifiable intangible assets are developed technology, in-process research and development (“IPR&D”), a customer contract, and trade names. The fair value of the intangible assets has been estimated using the income approach and the cash flow projections were discounted using rates ranging from 10% to 12%. The cash flows are based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital.

The developed technology assets are comprised of know-how, patents and technologies embedded in Gen-Probe’s products and relate to currently marketed products and related instrument automation. In valuing the developed technology assets, consideration was only given to products that have received regulatory approval. The developed technology assets primarily comprise the significant product families used in diagnostic testing, and the majority of fair value relates to the Aptima family of assays for testing of certain sexually transmitted diseases and microbial infectious diseases and the Procleix family of assays for blood screening. The Company applied the Excess Earnings Method under the income approach to determine the fair value of the developed technology assets excluding the Procleix technology asset, for which the Company applied the Relief-from-Royalty Method to determine the fair value of this asset.

IPR&D projects relate to in-process projects that have not reached technological feasibility as of the acquisition date and have no alternative future use. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval to market the underlying product, which primarily pertains to receiving approval to perform certain diagnostic testing on Gen-Probe’s

instrumentation, such as the Panther and Tigris systems. The Company recorded $227.0 million of IPR&D assets related to six projects. Subsequent to acquisition and through July 2013, the Company has received FDA approval for three projects with an aggregate value of $201.0 million. Amortization of these assets begins once FDA approval is received. The other projects are expected to be completed over the next four years with a total cost of approximately $42 million to complete such projects. Given the uncertainties inherent with product development and commercial introduction, there can be no assurance that any of the Company’s product development efforts will be successful, completed on a timely basis or within budget, if at all. All of the IPR&D assets were valued using the Multiple-Period Excess Earnings Method approach using a discount rate of 12.0%.

The customer contract intangible asset pertains to Gen-Probe’s relationship with Novartis Vaccines and Diagnostics, Inc., and the Company used the Excess Earnings Method to estimate the fair value of this asset. Trade names relate to the Gen-Probe corporate name and the primary product names, and the Company used the Relief-from-Royalty Method to estimate the fair value of these assets.

Developed technology, customer contract and trade names are being amortized on a straight-line basis over a weighted average period of 12.5 years, 13.0 years and 11.0 years, respectively.

The Company estimated the fair value of property, plant and equipment using a combination of the cost and market approaches, depending on the component. The Company applied the cost approach as the primary method in estimating the fair value of land and buildings. In total, the fair value adjustment to increase the carrying amount of property, plant and equipment was $107.9 million, of which $70.6 million related to land and buildings.

The excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired was recorded to goodwill. The factors contributing to the recognition of the amount of goodwill were based on several strategic and synergistic benefits that are expected to be realized from the Gen-Probe acquisition. These benefits include the expectation that the combination of the combined company’s complementary products in the molecular diagnostics market with Gen-Probe’s fully automated product franchise will significantly broaden the Company’s offering in women’s health and diagnostics. The combined company is expected to benefit from a broader global presence and with Hologic’s direct sales force and marketing in Europe and its investment in China distribution, the growth prospects of Gen-Probe’s products are expected to be enhanced significantly. The combined company anticipates significant cross-selling opportunities within the diagnostics market through Hologic’s larger channel coverage and physician sales team. None of the goodwill is expected to be deductible for income tax purposes.

The following unaudited pro forma information presents the combined financial results for the Company and Gen-Probe as if the acquisition of Gen-Probe had been completed as of the beginning of the fiscal year prior to the period of acquisition, September 26, 2010:


	Three Months Ended June 23, 2012			Nine Months Ended June 23, 2012

Revenue	$	626,225		$	1,881,561
Net loss	$	(10,041	)	$	(93,420	)
Basic and diluted net loss per common share	$	(0.04	)	$	(0.35	)

The unaudited pro forma information for the three and nine months ended June 23, 2012 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments to reflect pro forma results of operations as if the acquisition occurred on September 26, 2010, such as fair value adjustments to inventory, accounts receivable, and property, plant and equipment, increased expenses for restructuring charges and retention costs, increased interest expense on debt obtained to finance the transaction, lower investment income and increased amortization for the fair value of acquired intangible assets. The pro forma information does not reflect the effect of costs, other than restructuring and retention, or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.

Chindex Medical Limited

On December 31, 2012, the Company acquired certain assets from Chindex Medical Limited (“Chindex”) for a net purchase price of $4.4 million, including contingent consideration. Chindex was a distributor of certain of the Company’s Breast Health products in China. The Company has accounted for this transaction as the acquisition of a business pursuant to ASC 805 and has allocated the majority of the purchase price to customer relationships.

SenoRx, Inc.

On May 31, 2013, the Company acquired certain assets related to SenoRx, Inc.’s (“SenoRx”) Contura brachytherapy device for a net purchase price of $2.4 million. The Company has accounted for this transaction as the acquisition of a business pursuant to ASC 805 and has allocated the majority of the purchase price to developed technology.

(4) Restructuring and Divestiture Charges

The Company evaluates its operations for opportunities to improve operational effectiveness and efficiency, including facility and operations consolidation, and to better align expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions. These actions are described below. The following table displays charges taken related to restructuring actions in fiscal 2013 and 2012 and a rollforward of the charges to the accrued balances as of June 29, 2013. This table excludes divestiture net charges from the disposal of assets held-for sale, which are discussed below.


Restructuring Charges	Abandonment of Adiana Product Line			Consolidation of Diagnostics Operations			Closure of Indianapolis Facility			Fiscal 2013 Action			Other Operating Cost Reductions			Total

Fiscal 2012 charges:
Non-cash impairment charge	$	16,316		$	585		$	—		$	—		$	—		$	16,901
Purchase orders and other contractual obligations		3,099			—			—			—			—			3,099
Workforce reductions		128			14,202			879			—			40			15,249
Facility closure costs		—			—			—			—			430			430
Other		—			—			900			—			—			900


Total fiscal 2012 charges	$	19,543		$	14,787		$	1,779		$	—		$	470		$	36,579

Recorded to cost of product sales	$	19,064		$	—		$	—		$	—		$	—		$	19,064

Recorded to restructuring	$	479		$	14,787		$	1,779		$	—		$	470		$	17,515

Fiscal 2013 charges:
Workforce reductions	$	—		$	13,385		$	4,505		$	3,592		$	1,010		$	22,492
Facility closure costs		—			—			—			—			480			480
Other		—			—			651			17			—			668


Total fiscal 2013 charges	$	—		$	13,385		$	5,156		$	3,609		$	1,490		$	23,640


Rollforward of Accrued Restructuring

Total fiscal 2012 charges	$	19,543		$	14,787		$	1,779		$	—		$	470		$	36,579
Non-cash impairment charges		(16,316	)		(585	)		—			—			—			(16,901	)
Stock compensation		—			(3,500	)		—			—			—			(3,500	)
Severance payments		(128	)		(2,423	)		—			—			(78	)		(2,629	)
Payments related to purchase orders and other contractual obligations		(2,572	)		—			—			—			—			(2,572	)
Other payments		—			—			—			—			(430	)		(430	)
Acquired		—			83			—			—			—			83
Foreign exchange and other adjustments		—			22			—			—			91			113

Balance at September 29, 2012	$	527		$	8,384		$	1,779		$	—		$	53		$	10,743

Fiscal 2013 charges	$	—		$	13,385		$	5,156		$	3,609		$	1,490		$	23,640
Stock compensation		—			(6,322	)		—			(220	)		—			(6,542	)
Non-cash impairment charges		—			—			—			—			(54	)		(54	)
Severance payments		—			(12,054	)		(2,261	)		(1,646	)		(71	)		(16,032	)
Payments related to purchase orders and other contractual obligations		(527	)		—			(392	)		—			(56	)		(975	)
Foreign exchange and other adjustments		—			(2	)		—			(27	)		(19	)		(48	)

Balance at June 29, 2013	$	—		$	3,391		$	4,282		$	1,716		$	1,343		$	10,732

Abandonment of Adiana Product Line

At the end of the second quarter of fiscal 2012, the Company decided to cease manufacturing, marketing and selling its Adiana system, which was a product line within the Company’s GYN Surgical reporting segment. Management determined that the product was not financially viable and would not become so in the foreseeable future. In addition, the Company settled its intellectual property litigation regarding the Adiana system with Conceptus, Inc., which did not result in any additional charges. In the second quarter of fiscal 2012, the Company recorded a charge of $18.3 million and recorded additional adjustments in fiscal 2012 resulting in an aggregate charge of $19.5 million. Of the total charge, $19.1 million was recorded within cost of product sales and $0.4 million was recorded in restructuring. The amount recorded in cost of product sales comprised impairment charges of $9.9 million to record inventory at its net realizable value, $6.5 million to write down certain manufacturing equipment and equipment placed at customer sites to its fair value that had no further utility, and $2.7 million for outstanding contractual purchase orders of raw materials and components that will not be utilized and other contractual obligations. In connection with this action, the Company terminated certain manufacturing and other personnel primarily at its Costa Rica location, resulting in severance charges of $0.1 million, and incurred other contractual charges of $0.3 million. All identified employees were terminated and paid as of September 29, 2012.

Consolidation of Diagnostics Operations

In connection with its acquisition of Gen-Probe, the Company implemented restructuring actions to consolidate its Diagnostics operations, such as streamlining product development initiatives, reducing overlapping functional areas such as sales, marketing and general and administrative functions, and consolidation of manufacturing resources, field services and support. As a result, the Company terminated certain employees from Gen-Probe and its legacy diagnostics business in research and development, sales, marketing, and general and administrative functions. The Company recorded severance and benefit charges in fiscal 2012 of $13.3 million related to this action pursuant to ASC 420, Exit or Disposal Cost Obligations (ASC 420). The majority of these employees ceased working in the fourth quarter of fiscal 2012, and their full severance charge was recorded in the fourth quarter of fiscal 2012. In addition, certain of the terminated Gen-Probe employees had unvested stock options, which were accelerated at termination pursuant to the stock options’ original terms. As such, the severance charges in fiscal 2012 include $3.5 million of stock-based compensation expense. For the nine months ended June 29, 2013, the Company recorded $10.8 million of severance charges, including $6.3 million for stock-based compensation. Included in these charges is $9.7 million recorded in the second quarter of fiscal 2013 related to certain Gen-Probe executives including Carl Hull, Gen-Probe’s former Chairman, President and Chief Executive Officer, who ceased employment. The charge was for the acceleration of certain retention payments and equity awards pursuant to the original terms of the related agreements.

In addition, the Company is moving its legacy molecular diagnostics operations from Madison, Wisconsin to Gen-Probe’s facilities in San Diego, California. This transfer is expected to be finalized by the end of calendar 2014, and the majority of employees in Madison will be terminated in fiscal 2013 and 2014. The Company is recording severance and benefit charges pursuant to ASC 420 and estimates the total severance and benefits charge to be approximately $6.1 million, which will be recorded ratably over the estimated service period of the affected employees. The Company recorded $0.8 million and $2.6 million in the three and nine months ended June 29, 2013, respectively, and $0.9 million in the fourth quarter of fiscal 2012. The Company also recorded non-cash charges of $0.6 million in the fourth quarter of fiscal 2012 as a result of exiting certain research projects. Additional charges, which are not expected to be significant, will be recorded as the manufacturing operation is transferred and the facility is closed down. These charges will be recorded as they are incurred.

Closure of Indianapolis Facility

In the fourth quarter of fiscal 2012, the Company finalized its decision to transfer production of the majority of its interventional breast products, which are included within the Breast Health reporting segment, from its Indianapolis facility to its facility in Costa Rica. The transfer is expected to be completed in the first half of calendar 2014, and the majority of employees at the Indianapolis location will be terminated. The Company is recording severance and benefit charges pursuant to ASC 420 and estimates the total severance and benefits charge to be approximately $6.2 million, which will be recorded ratably over the estimated service period of the affected employees. The Company recorded $1.4 million and $4.5 million of severance benefits in the three and nine months ended June 29, 2013, respectively, and $0.9 million in the fourth quarter of fiscal 2012. In addition, the Company recorded charges of $0.7 million in fiscal 2013 for additional miscellaneous items and $0.9 million in the fourth quarter of fiscal 2012 for amounts owed to the state of Indiana for employment credits. Additional charges, which are not expected to be significant, will be recorded as the manufacturing operation is transferred and the facility is closed down. These charges will be recorded as they are incurred.

Fiscal 2013 Action

During the third quarter of fiscal 2013, as a result of operating results not meeting management’s expectations in fiscal 2013, the Company implemented a cost reduction initiative comprised of reducing headcount and evaluating research projects and operating costs. In connection with this plan, the Company terminated certain employees on a worldwide basis. The Company is primarily recording severance and benefit charges pursuant to ASC 420 and estimates the total severance and benefits charge to be approximately $4.4 million based on the actions taken to date. For those employees who will continue to be employed beyond the

minimum retention period, charges will be recorded ratably over the estimated service period of the affected employees. The Company recorded $3.6 million of severance and benefit charges in the third quarter of fiscal 2013. Additional headcount reductions may occur in the fourth quarter of fiscal 2013 but are not expected to result in material charges.

Other Operating Cost Reductions:

Consolidation of Selenium Panel Coating Production

During the third quarter of fiscal 2012, the Company finalized its decision to consolidate its Selenium panel coating process and transfer the production line to its Newark, Delaware facility from its Hitec-Imaging German subsidiary. This production line is included within the Breast Health segment. The transfer is expected to be completed in fiscal 2013. In connection with this consolidation plan, the Company is terminating certain employees, primarily manufacturing personnel. Severance charges will be recorded pursuant to ASC 420 because the severance benefits qualify as one-time employee termination benefits. The termination communications began in January 2013, and the Company recorded severance charges of $0.4 million and $1.0 million in the three and nine months ended June 29, 2013, respectively.

Other

The Company recorded a charge of $0.2 million in the second quarter of fiscal 2013 for a lease obligation charge and the write-off of related leaseholds, and in the third quarter of fiscal 2013 increased the charge by $0.3 million due to a change in assumptions.

Divestitures

The Company completed the sale of its LIFECODES business and recorded a net gain of $0.9 million in the second quarter of fiscal 2013. For the nine months ended June 29, 2013, the Company recorded a charge of $0.3 million related to the disposition of certain assets held-for-sale.

(5) Borrowings and Credit Arrangements

The Company had total debt with a carrying value of $5.00 billion and $5.04 billion at June 29, 2013 and September 29, 2012, respectively. The Company’s borrowings consisted of the following:


	June 29, 2013		September 29, 2012
Current debt obligations, net of debt discount:
Term Loan A	$	49,694	$	49,582
Term Loan B		213,087		14,853
Convertible Notes		394,589		—

Total current debt obligations	$	657,370	$	64,435

Long-term debt obligations, net of debt discount:
Term Loan A	$	906,911	$	942,065
Term Loan B		1,262,417		1,470,454
Senior Notes		1,000,000		1,000,000
Convertible Notes		1,177,972		1,558,660

Total long-term debt obligations		4,347,300		4,971,179

Total debt obligations	$	5,004,670	$	5,035,614

Credit Agreement

On August 1, 2012, the Company and certain of its domestic subsidiaries (the “Guarantors”) entered into a credit and guaranty agreement (the “Credit Agreement”) with Goldman Sachs Bank USA, in its capacity as administrative and collateral agent (“Goldman Sachs”), and the lenders party thereto (collectively, the “Lenders”).

The credit facilities under the Credit Agreement consisted of:

•

$1.0 billion senior secured tranche A term loan (“Term Loan A”) with a final maturity date of August 1, 2017;

•

$1.5 billion senior secured tranche B term loan (“Term Loan B”) with a final maturity date of August 1, 2019; and

•

$300.0 million secured revolving credit facility (“Revolving Facility”) with a final maturity date of August 1, 2017.

On March 20, 2013, the Company, the Guarantors, Goldman Sachs, and the Lenders entered into Refinancing Amendment No. 1 (the “Credit Agreement Amendment”) to the Credit Agreement.

The Credit Agreement Amendment (i) refinanced the Company’s original Term Loan A with a new senior secured tranche A term loan facility with the same principal amount, maturity date and amortization schedule but with an applicable margin 1.00% less than the original Term Loan A (at each margin level) (“New Term Loan A”), (ii) refinanced the Company’s original Revolving Facility with a new senior secured revolving credit facility with the same principal amount and maturity date, but with an applicable margin 1.00% less than the original Revolving Facility (at each margin level) (the “New Revolving Facility”), and (iii) amended certain covenants and terms of the Credit Agreement.

Effective as of the date of the Credit Agreement Amendment and as of June 29, 2013, amounts outstanding under the New Term Loan A and the New Revolving Facility will bear interest, at the Company’s option: (i) at the Base Rate plus 1.00% per annum, or (ii) at the Adjusted Eurodollar Rate (i.e., the Libor rate) plus 2.00% per annum. The applicable margin with respect to the New Term Loan A and the New Revolving Facility are subject to specified changes depending on the Company’s total net leverage ratio, as defined in the Credit Agreement.

Pursuant to ASC 470, Debt (ASC 470), the accounting for this refinancing is required to be evaluated on a creditor-by-creditor basis to determine whether each transaction should be accounted for as a modification or extinguishment. Certain creditors under the Credit Agreement did not participate in this refinancing transaction and ceased being creditors of the Company. As a result, the Company recorded a debt extinguishment loss of $3.2 million to write-off the pro-rata amount of unamortized debt discount and deferred issuance costs related to these creditors for the initial borrowings under the Term Loan A facility. For the remainder of the creditors, this transaction has been accounted for as a modification. Pursuant to ASC 470, subtopic 50-40, third-party costs incurred directly related to the exchange were expensed as incurred. As such, the Company recorded issuance costs related to the refinancing of $2.4 million to interest expense in the second quarter of fiscal 2013.

On August 2, 2013, the Company, the Guarantors, Goldman Sachs, and the Lenders entered into Refinancing Amendment No. 2 (the “Credit Agreement Amendment 2”) to the Credit Agreement. The Credit Agreement Amendment 2 (i) refinanced the Company’s original Term Loan B with a new senior secured tranche B term loan facility with the same principal amount (subject to the prepayment referenced below), maturity date and amortization schedule but with an applicable margin .75% less than the original Term Loan B, and (ii) amended certain covenants and terms of the Credit Agreement. Effective as of the date of the Credit Agreement Amendment 2, amounts outstanding under the New Term Loan B will bear interest, at the Company’s option: (A) at the Base Rate with a floor of 2.00%, plus 1.75% per annum, or (B) at the Adjusted Eurodollar Rate (i.e., the Libor rate) with a floor of 1.00% plus 2.75% per annum. In connection with this refinancing, the Company voluntarily prepaid $200.0 million of principal of the Term Loan B and reflected this amount within current debt obligations in the Consolidated Balance Sheet as of June 29, 2013.

Borrowings outstanding under the Credit Agreement for the three and nine months ended June 29, 2013 had a weighted average interest rate of 3.59% and 3.86%, respectively. The interest rates on the outstanding Term Loan A and Term Loan B borrowings at June 29, 2013 were 2.20% and 4.50%, respectively. Interest expense under the Credit Agreement totaled $26.1 million and $84.7 million for the three and nine months ended June 29, 2013, respectively, which includes non-cash interest expense of $3.4 million and $11.2 million, respectively, related to the amortization of the deferred financing costs and accretion of the debt discount.

The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants restricting the ability of the Company and the Guarantors, subject to negotiated exceptions, to: incur additional indebtedness and additional liens on their assets; engage in mergers or acquisitions or dispose of assets; enter into sale-leaseback transactions; pay dividends or make other distributions; voluntarily prepay other indebtedness; enter into transactions with affiliated persons; make investments; and change the nature of their businesses. The credit facilities also contain total net leverage ratio and interest coverage ratio financial covenants measured as of the last day of each fiscal quarter, which are effective in our second quarter of fiscal 2013. The Company was in compliance with the Credit Agreement’s covenants as of June 29, 2013.

The Company has evaluated the Credit Agreement for derivatives pursuant to ASC 815, Derivatives and Hedging, and identified embedded derivatives that require bifurcation as the features are not clearly and closely related to the host instrument. The embedded derivatives are a default provision, which could require additional interest payments, and a provision requiring contingent payments to compensate the lenders for changes in tax deductions. The Company has determined that the fair value of these embedded derivatives was nominal as of June 29, 2013.

Senior Notes

The Company’s 6.25% senior notes due 2020 (the “Senior Notes”) mature on August 1, 2020 and bear interest at the rate of 6.25% per year, payable semi-annually on February 1 and August 1 of each year, commencing on February 1, 2013. The Company recorded interest expense of $16.0 million and $48.0 million in the three and nine months ended June 29, 2013, respectively, which includes non-cash interest expense of $0.4 million and $1.2 million, respectively, related to the amortization of the deferred financing costs.

Convertible Notes

On December 10, 2007, the Company issued and sold $1.725 billion, at par, of 2.00% Convertible Senior Notes due 2037 (the “2007 Notes”). The Company recorded the 2007 Notes net of the unamortized debt discount, which was attributable to the fair value of the embedded conversion option, as required by U.S. generally accepted accounting principles. On November 18, 2010, the Company entered into separate, privately-negotiated exchange agreements under which it retired $450.0 million in aggregate principal of the 2007 Notes for $450.0 million in aggregate principal of new 2.00% Convertible Exchange Senior Notes due 2037 (the “2010 Notes”). On February 29, 2012, the Company entered into separate, privately-negotiated exchange agreements under which it retired $500.0 million in aggregate principal of the 2007 Notes for $500.0 million in aggregate principal of new 2.00% Convertible Senior Notes due 2042 (the “2012 Notes”). In connection with this exchange transaction for the 2012 Notes, the Company recorded a loss on extinguishment of debt of $42.3 million in the second quarter of fiscal 2012. For additional information pertaining to the terms and provisions and related accounting for the 2007 Notes, 2010 Notes and 2012 Notes, refer to Note 5 to the consolidated financial statements for the year ended September 29, 2012 included in the Company’s Form 8-K filed with the SEC on January 28, 2013.

On February 14, 2013, the Company entered into separate, privately-negotiated exchange agreements under which it retired $370.0 million in aggregate principal of the 2007 Notes for $370.0 million in aggregate principal of new 2.00% Convertible Senior Notes due 2043 (the “2013 Notes”). Following this transaction, $405.0 million in principal amount of the 2007 Notes remain outstanding. The 2007 Notes, the 2010 Notes, the 2012 Notes and the 2013 Notes are collectively referred to herein as the “Convertible Notes.”

Pursuant to ASC 470-50, this exchange transaction is being accounted for as a modification and not an extinguishment because the terms of the two debt instruments are not substantially different. As a result, there is no gain or loss from this exchange. As required, the Company recorded the increase in the fair value of the conversion option of $32.5 million from this exchange to additional paid-in-capital, net of deferred taxes. The Company determined the fair value of the conversion option for each debt instrument on the date of modification by calculating the fair value of each debt instrument using the binomial model and subtracting the fair value of the respective debt instrument’s liability component. The fair value of the liability component for each debt instrument was determined by using a discounted cash flow technique with an effective interest rate of 3.25% and 5.42% for the 2007 Notes and 2013 Notes, respectively. These rates represent the estimated nonconvertible borrowing rate with a maturity as of the measurement date consistent with the first put dates of each debt instrument. The difference between the debt’s fair value and the fair value of its liability component represents the value allocated to the debt’s conversion option. In addition, direct costs incurred for this exchange of $4.1 million have been expensed as incurred within interest expense.

Holders may require the Company to repurchase the 2013 Notes on each of December 15, 2017, 2022, 2027, 2032 and 2037, or upon a fundamental change, as provided in the indenture for the 2013 Notes, at a repurchase price equal to 100% of their accreted principal amount, plus accrued and unpaid interest. The Company may redeem any of the 2013 Notes beginning December 15, 2017. The Company may redeem the 2013 Notes either in whole or in part at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and liquidated damages, if any, to, but excluding, the redemption date.

The 2013 Notes bear interest at a rate of 2.00% per year on the original principal amount, payable semi-annually in arrears in cash on June 15 and December 15 of each year, ending on December 15, 2013. The 2013 Notes accrete principal from their date of issuance at a rate of 4.00% per year until and including December 15, 2017, and 2.00% per year thereafter. Beginning with the six month interest period commencing December 15, 2017, the Company will pay contingent interest to the holders of 2013 Notes during any six month interest period if the “trading price,” as defined, of the 2013 Notes for each of the five trading days ending on the second trading day immediately preceding the first day of the applicable six month interest period equals or exceeds 120% of the accreted principal amount of the 2013 Notes. The holders of the 2013 Notes may convert the notes into shares of the Company’s common stock at a conversion price of approximately $38.59 per share, subject to adjustment, prior to the close of business on September 15, 2043 under any of the following circumstances: (1) during any calendar quarter if the last reported sale price of the Company’s common stock exceeds 130% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any five consecutive trading day period in which the trading price per note for each day of such period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (3) if the notes have been called for redemption; or (4) upon the occurrence of specified corporate events. At the option of the holder, regardless of the foregoing circumstances, holders may convert their respective 2013 Notes at any time on or after September 15, 2043 through the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate will not be adjusted for accrued interest or accreted principal in excess of the original $1,000 principal amount, as accrued interest and accreted principal will not be convertible into common stock. None of these triggering events had occurred as of June 29, 2013.

In lieu of delivery of shares of the Company’s common stock in satisfaction of the Company’s obligation upon conversion of the 2013 Notes, the Company may elect to deliver cash or a combination of cash and shares of its common stock. If the Company elects to satisfy its conversion obligation in a combination of cash and shares of the Company’s common stock, the Company is required to deliver a specified dollar amount of cash per $1,000 original principal amount of 2013 Notes, and will settle the remainder of its conversion obligation in shares of its common stock, in each case based on the daily conversion value calculated as provided in the indenture for the 2013 Notes. This net share settlement election is in the Company’s sole discretion and does not require the consent of holders of the 2013 Notes. It is the Company’s current intent and policy to settle any conversion of the 2013 Notes as if the Company had elected to make the net share settlement election.

The 2013 Notes are the Company’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured debt. The 2013 Notes are effectively subordinated to any future secured indebtedness to the extent of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The Convertible Notes and related equity components (recorded in additional paid-in-capital, net of deferred taxes) consisted of the following:


	June 29, 2013			September 29, 2012
2007 Notes principal amount	$	405,000		$	775,000
Unamortized discount		(10,411	)		(50,591	)

Net carrying amount	$	394,589		$	724,409


Equity component, net of taxes	$	121,946		$	233,353


2010 Notes principal amount	$	450,000		$	450,000
Unamortized discount		(62,335	)		(74,062	)

Net carrying amount	$	387,665		$	375,938


Equity component, net of taxes	$	60,054		$	60,054


2012 Notes principal amount	$	500,000		$	500,000
Unamortized discount		(36,433	)		(41,687	)

Net carrying amount	$	463,567		$	458,313


Equity component, net of taxes	$	49,195		$	49,195


2013 Notes principal amount	$	370,000		$	—
Principal accretion		5,489			—
Unamortized discount		(48,749	)		—


Net carrying amount	$	326,740		$	—


Equity component, net of taxes	$	131,451		$	—

Interest expense under the Convertible Notes was as follows:


	Three Months Ended				Nine Months Ended
	June 29, 2013		June 23, 2012		June 29, 2013		June 23, 2012
Amortization of debt discount	$	11,638	$	15,119	$	40,903	$	52,018
Amortization of deferred financing costs		670		882		2,368		2,864
Principal accretion		3,700		—		5,489		—

Non-cash interest expense		16,008		16,001		48,760		54,882

2.00% accrued interest		8,575		8,538		25,801		25,683

	$	24,583	$	24,539	$	74,561	$	80,565

(6) Commitments and Contingencies

(a) Contingent Earn-Out Payments

In connection with certain of its acquisitions, the Company has incurred the obligation to make contingent earn-out payments tied to performance criteria, principally revenue growth of the acquired businesses over a specified period. In certain circumstances, such as a change of control, a portion of these obligations may be accelerated. In addition, contractual provisions relating to these contingent earn-out obligations may include covenants to operate the businesses acquired in a manner that may not otherwise be most advantageous to the Company.

The Company made its final contingent consideration payment of $16.8 million to the former Adiana shareholders, which was net of amounts withheld for qualifying legal costs, in the first quarter of fiscal 2013.

The measurement period for the Company’s remaining contingent consideration obligation to the former shareholders of Sentinelle Medical was completed in the fourth quarter of fiscal 2012. The Company had accrued $3.4 million as of September 29, 2012 and made its final payment in the first quarter of fiscal 2013.

In connection with the Company’s acquisition of Interlace in fiscal 2011, the Company had an obligation to the former Interlace stockholders to make contingent payments over a two-year period up to a maximum payout of $225.0 million based on a multiple of incremental revenue growth during the two-year period following the completion of the acquisition. Pursuant to ASC 805, the Company recorded its estimate of the fair value of the contingent consideration liability based on future revenue projections of the Interlace business under various potential scenarios and weighted probability assumptions of these outcomes. The final measurement period ended during the second quarter of fiscal 2013, resulting in a contingent consideration liability of $93.8 million, of which, $86.9 million was paid to the former Interlace stockholders in the second quarter of fiscal 2013. The remainder was withheld for legal indemnification provisions and is being used to pay qualifying legal expenses. At June 29, 2013, the Company had accrued $4.0 million.

In connection with the Company’s acquisition of TCT International Co., Ltd. (“TCT”) in June 2011, the Company had an obligation to certain of the former TCT shareholders, based on future employment, to make contingent payments over a two year period not to exceed $200.0 million less a deferred payment of $35.0 million from the initial consideration. The first earn-out payment of $54.0 million was made in the fourth quarter of fiscal 2012. The final measurement and respective service period for the second contingent earn-out payment was completed during the third quarter of fiscal 2013. At June 29, 2013, the Company had accrued $119.5 million for the second contingent earn-out payment. In July 2013, the Company paid $56.4 million.

In connection with the Company’s acquisition of Beijing Healthcome Technology Company, Ltd. (“Healthcome”) in July 2011, the Company has an obligation to the former Healthcome shareholders to make contingent payments totaling $5.0 million over the next two fiscal years. At June 29, 2013, the Company had accrued $5.0 million for these contingent payments as employment was no longer required. In July 2013, the Company paid $1.7 million per the terms of the acquisition agreement.

A summary of amounts recorded to the Consolidated Statements of Operations is as follows:


Statement of Operations Line Item – 3 Months Ended June 29, 2013	Interlace		TCT		Total
Contingent consideration – compensation expense	$	—	$	21,601	$	21,601
Contingent consideration – fair value adjustments		471		—		471

	$	471	$	21,601	$	22,072


Statement of Operations Line Item – 9 Months Ended June 29, 2013	Interlace		TCT		Total
Contingent consideration – compensation expense	$	—	$	80,475	$	80,475
Contingent consideration – fair value adjustments		11,310		—		11,310

	$	11,310	$	80,475	$	91,785


Statement of Operations Line Item – 3 Months Ended June 23, 2012	Sentinelle Medical			Interlace			TCT		Healthcome		Total
Contingent consideration – compensation expense	$	—		$	—		$	15,013	$	489	$	15,502
Contingent consideration – fair value adjustments		(2,518	)		(10,758	)		—		—		(13,276	)

	$	(2,518	)	$	(10,758	)	$	15,013	$	489	$	2,226


Statement of Operations Line Item – 9 Months Ended June 23, 2012	Sentinelle Medical			Interlace		TCT		Healthcome		Total
Contingent consideration – compensation expense	$	—		$	—	$	42,552	$	1,512	$	44,064
Contingent consideration – fair value adjustments		(2,728	)		37,762		—		—		35,034

	$	(2,728	)	$	37,762	$	42,552	$	1,512	$	79,098

(b) Litigation and Related Matters

On June 9, 2010, Smith & Nephew, Inc. (“Smith & Nephew”) filed suit against Interlace, which the Company acquired on January 6, 2011, in the United States District Court for the District of Massachusetts. In the complaint, it is alleged that the Interlace MyoSure hysteroscopic tissue removal device infringes U.S. patent 7,226,459. The complaint seeks permanent injunctive relief and unspecified damages. A Markman hearing on claim construction was held on November 9, 2010, and a ruling was issued on April 21, 2011. On November 22, 2011, Smith & Nephew filed suit against the Company in the United States District Court for the District of Massachusetts. In the complaint, it is alleged that use of the MyoSure hysteroscopic tissue removal system infringes U.S. patent 8,061,359. The complaint seeks preliminary and permanent injunctive relief and unspecified damages. On January 17, 2012, at a hearing on Smith & Nephew’s motion for preliminary injunction with respect to the suit filed on November 22, 2011, the judge did not issue an injunction, consolidated the two matters for a single trial and scheduled a trial on the merits for both claims for June 25, 2012. A case management conference held on February 14, 2012 resulted in the trial being rescheduled to begin on August 20, 2012. On March 15, 2012, the Court heard summary judgment arguments related to the ‘459 patent and claim construction arguments related to the ‘359 patent. On June 5, 2012, the Court denied Smith & Nephew’s request for summary judgment of infringement, denied Smith & Nephew’s request for preliminary injunction, and denied the Company’s requests for summary judgment of non-infringement and invalidity. On September 4, 2012, following a two week trial, the jury returned a verdict of infringement of both the ‘459 and ‘359 patents and assessed damages of $4.0 million. A bench trial regarding the Company’s assertion of inequitable conduct on the part of Smith & Nephew with regard to the ‘359 patent was held on December 9, 2012 and oral arguments on the issue of inequitable conduct were presented on February 27, 2013. On June 27, 2013, the Court denied the Company’s motions related to inequitable conduct and allowed Smith & Nephew’s request for injunction, but ordered that enforcement of the injunction be stayed until final resolution, including appeal, of the current re-examinations of both patents at the United States Patent and Trademark Office (“USPTO”). The Court’s decision to stay the injunction is based in part on the fact that the USPTO has taken up a re-examination of both the ‘359 and ‘459 patents, rejecting all previously issued claims, including all claims asserted against the MyoSure product. The Court also rejected the jury’s damage award and has ordered the parties to identify a mechanism for resolving the damages issue. The Company intends to file post trial motions seeking to reverse the jury’s verdict. At this time, based on available information regarding this litigation, the Company does not believe a loss is probable and is unable to reasonably assess the ultimate outcome of this case or determine an estimate, or a range of estimates, of potential losses, beyond the pending jury verdict. The purchase and sale agreement associated with the acquisition of Interlace includes an indemnification provision that provides for the reimbursement of a portion of legal expenses in defense of the Interlace intellectual property. The Company has the right to collect certain amounts set aside in escrow and, as applicable, offset contingent consideration payments of qualifying legal costs. The Company is recording legal fees incurred for this suit pursuant to the indemnification provision on a net basis within accrued expenses.

On February 10, 2012, C.R. Bard (as acquirer of SenoRx) filed suit against the Company in the United States District Court for the District of Delaware. In the complaint, it is alleged that the Company’s MammoSite product infringes SenoRx’s U.S. Patents 8,079,946 and 8,075,469. The complaint seeks permanent injunctive relief and unspecified damages. On September 4, 2012 and October 16, 2012, the USPTO took up a re-examination of the ‘946 and ‘469 patents, respectively. With respect to the ‘469 patent, all previously issued claims were rejected and with respect to the ‘946 patent all but four claims were rejected. Based on the actions of the USPTO, the Company filed a motion seeking to stay all litigation proceedings pending the outcome of the USPTO’s re-examination of both patents in suit. On January 11, 2013, the Court issued an order denying the stay. On February 1, 2013, the Court entered a stay of the proceedings in the case to allow the parties to pursue settlement discussions. On May 31, 2013, the parties settled the litigation and entered into an agreement under which the Company purchased SenoRx’s Contura assets.

On March 6, 2012, Enzo Life Sciences, Inc. (“Enzo”) filed suit against the Company in the United States District Court for the District of Delaware. In the complaint, it is alleged that certain of the Company’s molecular diagnostics products, including without limitation products based on its proprietary Invader chemistry, such as Cervista HPV HR and Cervista HPV 16/18, infringe Enzo’s U.S. Patent 6,992,180. The complaint seeks permanent injunctive relief and unspecified damages. The Company was formally served with the complaint on July 3, 2012, and a trial is tentatively scheduled for the spring of 2015. In January 2012, Enzo filed suit against Gen-Probe in the United States District Court for the District of Delaware. In that complaint, it is alleged that certain of Gen-Probe’s diagnostics products, including products that incorporate Gen-Probe’s patented HPA technology, such as the Aptima Combo 2 and Aptima HPV assays, infringe Enzo’s U.S. Patent 6,992,180. The complaint seeks permanent injunctive relief and unspecified damages, and a trial is tentatively scheduled for the spring of 2015. At this time, based on available information regarding this litigation, the Company is unable to reasonably assess the ultimate outcome of this case or determine an estimate, or a range of estimates, of potential losses.

Prior to its acquisition by Hologic, Gen-Probe had patent infringement claims against Becton Dickinson (“BD”) seeking monetary damages and injunctive relief. The parties settled this litigation in the first quarter of fiscal 2013. Under the terms of the settlement, BD made a one-time payment and was granted a non-exclusive royalty-bearing license to the asserted intellectual property.

A number of lawsuits were filed against the Company, Gen-Probe, and Gen-Probe’s board of directors related to the Company’s acquisition of Gen-Probe. These include: (1) Teamsters Local Union No. 727 Pension Fund v. Gen-Probe Incorporated, et al. (Superior Court of the State of California for the County of San Diego); (2) Timothy Coyne v. Gen-Probe Incorporated, et al. (Delaware Court of Chancery); and (3) Douglas R. Klein v. John W. Brown, et al. (Delaware Court of Chancery). The two Delaware actions were consolidated into a single action titled: In re: Gen-Probe Shareholders Litigation. The suits were filed after the announcement of the Company’s acquisition of Gen-Probe on April 30, 2012 as putative stockholder class actions. Each of the actions asserted similar claims alleging that Gen-Probe’s board of directors failed to adequately discharge its fiduciary duties to shareholders by failing to adequately value Gen-Probe’s shares and ensure that Gen-Probe’s shareholders received adequate consideration in the Company’s acquisition of Gen-Probe, that the acquisition was the product of a flawed sales process, and that the Company aided and abetted the alleged breach of fiduciary duty. The plaintiffs sought, among other things, a preliminary and permanent injunction enjoining the Company’s acquisition of Gen-Probe and rescinding the transaction or any part thereof that had been implemented. On May 24, 2012, the plaintiffs in the Delaware action filed an amended complaint, adding allegations that the disclosures in Gen-Probe’s preliminary proxy statement were inadequate. The defendants in the Delaware action answered the complaint on June 4, 2012. On July 18, 2012, the parties in the Delaware action entered into a memorandum of understanding regarding a proposed settlement of the litigation. The proposed settlement was conditioned upon, among other things, the execution of an appropriate stipulation of settlement, consummation of the merger, and final approval of the proposed settlement by the Delaware Court of Chancery. On April 10, 2013, the Delaware Court of Chancery approved the proposed settlement and the consolidated action in Delaware was dismissed with prejudice. On July 9, 2012, the plaintiffs in the California action filed a motion for voluntary dismissal without prejudice. On July 12, 2012, the California Superior Court entered an order dismissing the California complaint without prejudice.

The Company is a party to various other legal proceedings and claims arising out of the ordinary course of its business. The Company believes that except for those described above there are no other proceedings or claims pending against it of which the ultimate resolution would have a material adverse effect on its financial condition or results of operations. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies. Legal costs are expensed as incurred.

(7) Sale of Makena

On January 16, 2008, the Company entered into an agreement to sell the full world-wide rights of its Makena (formerly Gestiva) pharmaceutical product to K-V Pharmaceutical Company (“KV”) upon FDA approval of the then pending Makena new drug application for $82.0 million. The Company executed certain amendments to this agreement resulting in an increase in the total sales price to $199.5 million and changing the timing of when payments are due to the Company. Gains attributable to payments in the amount of $79.5 million received from KV prior to FDA approval were deferred.

On February 3, 2011, the Company received FDA approval of Makena, and subject to a security interest and a right of reversion for failure to make future payments, all rights to Makena were transferred to KV. Upon FDA approval, the Company received $12.5 million, and including the $79.5 million previously received, the Company recorded a gain on the sale of intellectual property, net of the write-off of certain assets, of $84.5 million in the second quarter of fiscal 2011. Pursuant to the amended agreement, the Company received $12.5 million in the second quarter of fiscal 2012, which was recorded net of amounts due to the inventor of Makena. The Company was to receive the remaining $95.0 million of the sales price over a period of 18 to 30 months from FDA approval (subject to further deferral elections) depending on which one of two payment options KV selected. KV would also have owed the Company a 5% royalty on sales for certain time periods determined based upon the payment option or deferral elections selected by KV. On August 4, 2012, KV and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York. The Company had been pursuing its claims against KV in these proceedings for amounts due to the Company under its agreement with KV, and in December 2012, the Company and KV executed a settlement agreement, which became effective on December 28, 2012 upon the Bankruptcy Court entering certain orders. Under the settlement agreement, the Company released KV from all claims in consideration of a $60.0 million payment. The Company recorded this amount in the first quarter of fiscal 2013, net of certain costs, including contingent fees and amounts due to the inventor, resulting in a gain of $53.9 million. The Company will receive no further payments from KV.

(8) Marketable Securities

The Company’s marketable securities are comprised of an equity security and mutual funds. The equity security is an investment in the common stock of a publicly traded company, and the mutual funds are to fund the Gen-Probe deferred compensation plan. The equity security is classified as available-for-sale and is recorded at fair value with the unrealized gains or losses, net of tax, within accumulated other comprehensive income (loss), which is a component of stockholders’ equity. The mutual funds are classified as trading and are recorded at fair value with unrealized gains and losses recorded in other income in the Consolidated Statements of Operations.

The following reconciles the cost basis to the fair market value of the Company’s one equity security as of June 29, 2013:


	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Equity security	$	5,931	$	2,359	$	—	$	8,290

(9) Net (Loss) Income Per Share

A reconciliation of basic and diluted share amounts is as follows:


	Three Months Ended				Nine Months Ended
	June 29, 2013		June 23, 2012		June 29, 2013		June 23, 2012
Basic weighted average common shares outstanding		269,430		264,609		267,983		263,742
Weighted average common stock equivalents from assumed exercise of stock options and restricted stock units		—		2,685		—		2,617


Diluted weighted average common shares outstanding		269,430		267,294		267,983		266,359


Weighted-average anti-dilutive shares related to:
Outstanding stock options		7,964		7,568		8,724		8,654
Restricted stock units		1,147		—		1,089		529

(10) Stock-Based Compensation

The following presents stock-based compensation expense in the Company’s Consolidated Statements of Operations:


	Three Months Ended				Nine Months Ended
	June 29, 2013		June 23, 2012		June 29, 2013		June 23, 2012
Cost of revenues	$	1,677	$	1,220	$	5,234	$	3,602
Research and development		1,717		1,210		5,600		3,688
Selling and marketing		2,208		1,840		6,976		5,234
General and administrative		4,754		4,484		16,434		13,836
Restructuring and divestiture		463		—		7,654		—

	$	10,819	$	8,754	$	41,898	$	26,360

The Company granted approximately 2.3 million and 2.1 million stock options during the nine months ended June 29, 2013 and June 23, 2012, respectively, with weighted average exercise prices of $19.95 and $17.09, respectively. There were 16.2 million options outstanding at June 29, 2013 with a weighted average exercise price of $18.38.

The Company uses a binomial model to determine the fair value of its stock options. The weighted-average assumptions utilized to value these stock options are indicated in the following table:


	Three Months Ended						Nine Months Ended
	June 29, 2013			June 23, 2012			June 29, 2013			June 23, 2012
Risk-free interest rate		0.5	%		0.7	%		0.5	%		0.7	%
Expected volatility		43.7	%		46.9	%		43.7	%		46.9	%
Expected life (in years)		4.4			4.3			4.4			4.3
Dividend yield		—			—			—			—
Weighted average fair value of options granted	$	7.47		$	7.10		$	7.09		$	6.43

The Company granted approximately 2.0 million and 1.5 million restricted stock units (RSU) during the nine months ended June 29, 2013 and June 23, 2012, respectively, with weighted average grant date fair values of $19.86 and $17.09, respectively. As of June 29, 2013, there were 3.6 million unvested RSUs outstanding with a weighted average grant date fair value of $18.42. The Company also granted approximately 0.1 million market stock units (MSU) in the first quarter of fiscal 2013 to its chief executive officer and chief financial officer. The MSUs were valued at $18.49 using the Monte Carlo simulation model. Each recipient of the MSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of three years provided the Company’s stock price achieves the defined measurement criteria. The Company is recognizing compensation expense over the required service period, and since these are market-based awards, the compensation expense will be recognized by the Company regardless of whether the required criteria is met to receive such shares unless the requisite service is not rendered.

The Company uses the straight-line attribution method to recognize stock-based compensation expense for stock options and RSUs. The vesting term of stock options granted to employees is generally five years with annual vesting of 20% per year on the anniversary of the grant date, and RSUs granted to employees generally vest over four years with annual vesting at 25% per year on the anniversary of the grant date. The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that is ultimately expected to vest. Based on an analysis of historical forfeitures, the Company has determined a specific forfeiture rate for certain employee groups and has applied forfeiture rates ranging from 0% to 7% as of June 29, 2013. This analysis is periodically re-evaluated and forfeiture rates will be adjusted as necessary. Ultimately, the actual stock-based compensation expense recognized will only be for those stock options and RSUs that vest.

At June 29, 2013, there was $39.6 million and $50.5 million of unrecognized compensation expense related to stock options and stock units (comprised of RSUs and MSUs), respectively, to be recognized over a weighted average period of 3.2 years and 2.8 years, respectively.

(11) Other Balance Sheet Information


	June 29, 2013			September 29, 2012
Inventories
Raw materials	$	120,427		$	134,983
Work-in-process		50,732			93,218
Finished goods		134,860			138,990

	$	306,019		$	367,191

Property, plant and equipment
Equipment and software	$	319,233		$	296,776
Equipment under customer usage agreements		270,437			249,692
Building and improvements		170,650			156,665
Leasehold improvements		65,583			71,943
Land		51,562			51,430
Furniture and fixtures		22,374			21,495

		899,839			848,001
Less – accumulated depreciation and amortization		(397,978	)		(340,003	)

	$	501,861		$	507,998

(12) Business Segments and Geographic Information

The Company has four reportable segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health. Certain reportable segments represent an aggregation of operating units within each segment. The Company measures and evaluates its reportable segments based on segment revenues and operating income (loss) adjusted to exclude the effect of non-cash charges, such as intangible asset amortization expense, intangible asset impairment charges, contingent consideration charges, restructuring and divestiture charges and other one-time or unusual items and related tax effects.

Identifiable assets for the four principal operating segments consist of inventories, intangible assets including goodwill, and property, plant and equipment. The Company fully allocates depreciation expense to its four reportable segments. The Company has presented all other identifiable assets as corporate assets. There were no intersegment revenues during the three and nine months ended June 29, 2013 and June 23, 2012. Segment information is as follows:


	Three Months Ended				Nine Months Ended
	June 29, 2013		June 23, 2012		June 29, 2013		June 23, 2012
Total revenues:
Diagnostics	$	297,416	$	158,710	$	899,839	$	464,615
Breast Health		230,016		211,460		670,882		645,443
GYN Surgical		75,835		77,672		230,436		233,395
Skeletal Health		22,869		22,386		69,004		70,651

	$	626,136	$	470,228	$	1,870,161	$	1,414,104


	Three Months Ended					Nine Months Ended
	June 29, 2013			June 23, 2012		June 29, 2013			June 23, 2012
Operating income (loss):
Diagnostics	$	(1,067	)	$	11,466	$	(33,750	)	$	53,223
Breast Health		53,167			48,910		146,004			145,196
GYN Surgical		6,274			17,740		9,137			(50,650	)
Skeletal Health		2,778			2,411		8,532			9,651

	$	61,152		$	80,527	$	129,923		$	157,420

Depreciation and amortization:
Diagnostics	$	92,166		$	40,382	$	273,109		$	120,297
Breast Health		10,042			10,594		30,097			31,668
GYN Surgical		26,534			25,520		79,537			77,825
Skeletal Health		213			443		643			1,313

	$	128,955		$	76,939	$	383,386		$	231,103


Capital expenditures:
Diagnostics	$	13,357		$	11,016	$	40,674		$	28,640
Breast Health		4,221			2,691		13,710			6,473
GYN Surgical		2,442			4,138		7,538			10,138
Skeletal Health		180			—		387			198
Corporate		5,984			2,040		10,898			7,993

	$	26,184		$	19,885	$	73,207		$	53,442


	June 29, 2013		September 29, 2012
Identifiable assets:
Diagnostics	$	5,867,786	$	6,170,553
Breast Health		940,215		956,134
GYN Surgical		1,873,558		1,944,386
Skeletal Health		33,477		32,778
Corporate		1,618,167		1,373,257

	$	10,333,203	$	10,477,108

The Company had no customers with balances greater than 10% of accounts receivable as of June 29, 2013 or September 29, 2012, or any customer that represented greater than 10% of consolidated revenues during the three and nine months ended June 29, 2013 and June 23, 2012.

Products sold by the Company internationally are manufactured at both domestic and international locations. Transfers between the Company and its subsidiaries are generally recorded at amounts similar to the prices paid by unaffiliated foreign dealers. All intercompany profit is eliminated in consolidation.

The Company operates in the major geographic areas as noted in the below chart. Revenue data is based upon customer location, and internationally totaled $153.8 million and $478.7 million during the three and nine months ended June 29, 2013, respectively, and totaled $125.1 million and $360.1 million during the three and nine months ended June 23, 2012, respectively. Other than the United States, no single country accounted for more than 10% of consolidated revenues. The Company’s sales in Europe are predominantly derived from Germany, the United Kingdom and the Netherlands. The Company’s sales in Asia-Pacific are predominantly derived from China, Australia and Japan. The “All others” designation includes Canada, Latin America and the Middle East.

Revenues by geography as a percentage of total revenues were as follows:


	Three Months Ended						Nine Months Ended
	June 29, 2013			June 23, 2012			June 29, 2013			June 23, 2012
United States		75	%		73	%		74	%		75	%
Europe		13	%		12	%		14	%		12	%
Asia		8	%		10	%		8	%		8	%
All others		4	%		5	%		4	%		5	%

		100	%		100	%		100	%		100	%

(13) Income Taxes

In accordance with ASC 740, Income Taxes, each interim period is considered integral to the annual period and tax expense is measured using an estimated annual effective tax rate. An entity is required to record income tax expense each quarter based on its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, as adjusted for discrete taxable events that occur during the interim period. If, however, the entity is unable to reliably estimate its projected annual earnings or effective tax rate, then the actual effective tax rate for the year-to-date may be the best annual effective tax rate estimate. For the nine months ended June 29, 2013, the Company determined that it was unable to reliably estimate its annual profit before tax and effective tax rate due to the sensitivity of the rate from the forecasted fiscal 2013 results. Therefore, the Company recorded a tax benefit for the nine months ended June 29, 2013 based on the actual effective rate for the nine months ended June 29, 2013.

The Company’s effective tax rates for the three and nine month periods ended June 29, 2013 were 58.2% and (33.0)% respectively, compared to 57.1% and 88.6%, respectively, for the corresponding periods in the prior year. For the three months ended June 29, 2013, the tax rate was higher than the statutory rate primarily due to non-deductible contingent consideration expense related to the TCT acquisition and unbenefited foreign losses, partially offset by the Section 199 manufacturing deduction. For the nine months ended June 29, 2013, the tax rate was lower than the statutory rate primarily due to a $19.6 million valuation allowance release related to capital losses that the Company has concluded are more likely than not realizable due to the $53.9 million gain recorded on the Makena sale (see Note 7), and the Section 199 manufacturing deduction, partially offset by non-deductible contingent consideration expense related to the TCT and Interlace acquisitions and unbenefited foreign losses. For the three and nine months ended June 23, 2012, the effective tax rates were higher than the statutory rate primarily due to non-deductible contingent consideration charges related to the TCT, Interlace, and Sentinelle Medical acquisitions and state taxes partially offset by the Section 199 manufacturing deduction. The Company also established a $2.6 million valuation allowance for Canadian tax credits due to uncertainties surrounding its ability to generate future taxable income to fully utilize these tax assets.

As of June 29, 2013, the Company has recorded $1.60 billion of net deferred tax liabilities compared to $1.76 billion at September 29, 2012. The Company’s deferred tax assets are periodically evaluated to determine their recoverability.

The Company has $113.4 million of gross unrecognized tax benefits, including interest, as of June 29, 2013. The gross unrecognized tax benefits increased by $58.5 million from September 29, 2012, of which $52.7 million resulted from uncertain tax positions related to the convertible debt exchange that took place in the second quarter of fiscal 2013. As of June 29, 2013, $58.8 million of the unrecognized tax benefits, if recognized, would reduce the Company’s effective tax rate. The remaining $54.6 million relates to temporary differences that would not affect the Company’s effective tax rate. The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits and income tax liabilities in income tax expense. As of June 29, 2013, accrued interest, net of tax benefit, was $2.4 million and no penalties have been accrued.

The Company’s consolidated federal income tax return for the year ended September 24, 2011 is currently under audit, which began in July 2013.

(14) Goodwill and Intangible Assets

Goodwill

A rollforward of goodwill activity by reportable segment from September 29, 2012 to June 29, 2013 was as follows:


	Breast Health			Diagnostics			GYN Surgical		Skeletal Health		Total
Balance at September 29, 2012	$	635,741		$	2,283,447		$	1,015,466	$	8,125	$	3,942,779
Gen-Probe acquisition adjustments		—			(3,526	)		—		—		(3,526	)
Chindex acquisition		1,798			—			—		—		1,798
SenoRx acquisition		692			—			—		—		692
Tax adjustments		—			(674	)		12		—		(662	)
Foreign currency		(3,102	)		450			736		7		(1,909	)

Balance at June 29, 2013	$	635,129		$	2,279,697		$	1,016,214	$	8,132	$	3,939,172

Intangible Assets

Intangible assets consisted of the following:


Description	As of June 29, 2013				As of September 29, 2012
Description	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Developed technology	$	3,813,551	$	1,013,545	$	3,784,689	$	788,274
In-process research and development		193,000		—		227,000		—
Customer relationships and contracts		1,101,244		273,627		1,097,842		205,612
Trade names		238,026		77,878		240,092		60,318
Patents		12,598		8,293		11,417		7,906
Business licenses		2,616		545		2,577		344
Non-competition agreements		290		280		310		223

Totals	$	5,361,325	$	1,374,168	$	5,363,927	$	1,062,677

During the third quarter of fiscal 2013, the Company determined that a developed technology asset was impaired and recorded a $1.7 million charge to cost of product sales to record the asset at its estimated fair value.

The estimated remaining amortization expense as of June 29, 2013 for each of the five succeeding fiscal years was as follows:


Remainder of Fiscal 2013	$	111,125
Fiscal 2014		399,328
Fiscal 2015		384,454
Fiscal 2016		370,660
Fiscal 2017		361,484

(15) Product Warranties

Product warranty activity was as follows:


	Balance at Beginning of Period		Provisions		Settlements/ Adjustments			Balance at End of Period
Nine Months Ended:
June 29, 2013	$	6,179	$	8,815	$	(7,174	)	$	7,820
June 23, 2012	$	4,448	$	5,632	$	(5,150	)	$	4,930

(16) Equity

Stockholder Rights Plan

The Amended and Restated Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, dated as of April 2, 2008 (the “Rights Plan”), and all preferred share purchase rights distributed to holders of the Company’s common stock pursuant to the Rights Plan, expired by their terms on January 1, 2013. As a result, the Rights Plan is of no further force and effect.

Amended and Restated 2008 Equity Incentive Plan

On March 11, 2013, the Company’s shareholders approved the Company’s Amended and Restated 2008 Equity Incentive Plan, in which the number of shares that are authorized for issuance under this plan was increased by 10 million to 31.5 million.

(17) Pension and Other Employee Benefits

The Company has certain defined benefit pension plans covering the employees of its Hitec-Imaging German subsidiary (formerly AEG). As of June 29, 2013 and September 29, 2012, the Company’s pension liability was $9.9 million and $9.7 million,

respectively, which is primarily recorded as a component of long-term liabilities in the Consolidated Balance Sheets. As of June 29, 2013 and September 29, 2012, the pension plans held no assets. The Company’s net periodic benefit cost and components thereof were not material during the three and nine months ended June 29, 2013 and June 23, 2012.

(18) Subsequent Event

Effective as of July 18, 2013, Robert A. Cascella resigned as the Company’s President and Chief Executive Officer, and as a member of the board of directors of the Company. He will continue to serve the Company through November 30, 2013 as a full-time, non-executive employee to assist in the transition to the Company’s new President and Chief Executive Officer. Effective as of July 18, 2013, John W. Cumming was appointed as the Company’s President and Chief Executive Officer.

(19) New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income (AOCI) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 is not expected to have a significant impact on the Company’s results of operations or financial position.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 amended ASC 210, Balance Sheet, to converge the presentation of offsetting assets and liabilities between U.S. GAAP and IFRS. ASU 2011-11 requires that entities disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013, which is the Company’s fiscal year 2014. The Company is currently evaluating the impact of the adoption of ASU 2011-11 on its consolidated financial statements.

(20) Supplemental Guarantor Condensed Consolidating Financial Statements (Unaudited)

The Company’s Senior Notes issued in August 2012 are fully and unconditionally and jointly and severally guaranteed by Hologic, Inc. (“Parent/Issuer”) and each of its domestic subsidiaries. The following represents the supplemental condensed financial information of Hologic, Inc. and its guarantor and non-guarantor subsidiaries, as of June 29, 2013 and September 29, 2012 and for the three and nine months ended June 29, 2013 and June 23, 2012.

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

June 29, 2013


	Parent/Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	504,383	$	341,769	$	112,292	$	—		$	958,444
Restricted cash		—		—		5,941		—			5,941
Accounts receivable, net		116,115		168,829		115,280		204			400,428
Inventories		78,257		163,871		63,908		(17	)		306,019
Deferred income tax assets		—		16,861		689		(17,550	)		—
Prepaid income taxes		36,808		1,912		—		(5,852	)		32,868
Prepaid expenses and other current assets		21,876		12,228		13,541		—			47,645
Intercompany receivables		—		2,377,700		53,562		(2,431,262	)		—

Total current assets		757,439		3,083,170		365,213		(2,454,477	)		1,751,345

Property, plant and equipment, net		30,156		369,146		102,559		—			501,861
Intangible assets, net		22,099		3,862,762		102,296		—			3,987,157
Goodwill		281,067		3,519,727		138,378		—			3,939,172
Other assets		107,472		44,100		2,096		—			153,668
Investment in subsidiaries		9,749,521		116,145		2,296		(9,867,962	)		—

Total assets	$	10,947,754	$	10,995,050	$	712,838	$	(12,322,439	)	$	10,333,203


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	657,370	$	—	$	—	$	—		$	657,370
Accounts payable		25,910		37,983		10,222		—			74,115
Accrued expenses		247,160		74,987		43,294		(6,130	)		359,311
Deferred revenue		88,644		8,313		29,652		—			126,609
Deferred income tax liabilities		59,068		—		—		(17,550	)		41,518
Intercompany payables		2,348,234		—		90,615		(2,438,849	)		—

Total current liabilities		3,426,386		121,283		173,783		(2,462,529	)		1,258,923

Long-term debt, net of current portion		4,347,300		—		—		—			4,347,300
Deferred income tax liabilities		80,514		1,462,129		11,055		—			1,553,698
Deferred service obligations – long-term		10,269		2,416		11,943		(2,192	)		22,436
Other long-term liabilities		86,651		34,512		33,049		—			154,212

Total stockholders’ equity		2,996,634		9,374,710		483,008		(9,857,718	)		2,996,634

Total liabilities and stockholders’ equity	$	10,947,754	$	10,995,050	$	712,838	$	(12,322,439	)	$	10,333,203

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

September 29, 2012


	Parent/Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	210,028	$	269,416	$	80,986	$	—		$	560,430
Restricted cash		—		—		5,696		—			5,696
Accounts receivable, net		101,538		192,349		115,522		(76	)		409,333
Inventories		74,500		223,043		70,180		(532	)		367,191
Deferred income tax assets		13,578		—		617		(2,480	)		11,715
Prepaid income taxes		20,805		48,429		611		—			69,845
Prepaid expenses and other current assets		18,817		12,816		12,668		—			44,301
Intercompany receivables		—		2,094,017		55,761		(2,149,778	)		—
Other current assets – assets held-for-sale		—		67,878		26,625		—			94,503

Total current assets		439,266		2,907,948		368,666		(2,152,866	)		1,563,014

Property, plant and equipment, net		26,928		379,702		101,368		—			507,998
Intangible assets, net		24,034		4,162,930		114,286		—			4,301,250
Goodwill		279,956		3,522,474		140,349		—			3,942,779
Other assets		112,339		49,036		2,406		(1,714	)		162,067
Investments in subsidiaries		9,782,940		101,615		2,296		(9,886,851	)		—

Total assets	$	10,665,463	$	11,123,705	$	729,371	$	(12,041,431	)	$	10,477,108


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	29,847	$	43,339	$	14,037	$	—		$	87,223
Accrued expenses		238,387		86,566		50,052		(2,624	)		372,381
Deferred revenue		92,234		10,307		27,147		—			129,688
Current portion of long-term debt		64,435		—		—		—			64,435
Intercompany payables		2,085,339		6,655		66,335		(2,158,329	)		—
Other current liabilities – assets held-for-sale		—		5,520		2,102		—			7,622

Total current liabilities		2,510,242		152,387		159,673		(2,160,953	)		661,349

Long-term debt, net of current portion		4,971,179		—		—		—			4,971,179
Deferred income tax liabilities		180,916		1,581,833		8,836		—			1,771,585
Deferred service obligations – long-term		7,536		1,160		7,601		(2,583	)		13,714
Other long-term liabilities		34,559		30,587		34,504		(1,400	)		98,250

Total stockholders’ equity		2,961,031		9,357,738		518,757		(9,876,495	)		2,961,031

Total liabilities and stockholders’ equity	$	10,665,463	$	11,123,705	$	729,371	$	(12,041,431	)	$	10,477,108

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 29, 2013


	Parent/Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Product sales	$	106,536		$	399,152		$	114,759		$	(90,494	)	$	529,953
Service and other revenues		81,406			15,874			11,259			(12,356	)		96,183

		187,942			415,026			126,018			(102,850	)		626,136

Costs and expenses:
Cost of product sales		57,735			143,819			76,552			(90,494	)		187,612
Cost of product sales – amortization of intangible assets		1,336			73,617			1,037			—			75,990
Cost of product sales – impairment of intangible assets		—			—			1,714			—			1,714
Cost of service and other revenues		39,108			14,790			9,520			(12,356	)		51,062
Research and development		8,033			37,104			2,642			—			47,779
Selling and marketing		17,860			43,536			21,515			—			82,911
General and administrative		19,997			31,279			9,200			—			60,476
Amortization of intangible assets		779			26,688			1,211			—			28,678
Contingent consideration – compensation expense		21,601			—			—			—			21,601
Contingent consideration – fair value adjustments		471			—			—			—			471
Restructuring and divestiture charges		563			3,746			2,381			—			6,690

		167,483			374,579			125,772			(102,850	)		564,984

Income (loss) from operations		20,459			40,447			246			—			61,152
Interest income		146			35			123			—			304
Interest expense		(66,349	)		(309	)		(504	)		—			(67,162	)
Other (expense) income, net		178,080			(179,224	)		(73	)		—			(1,217	)

(Loss) income before income taxes		132,336			(139,051	)		(208	)		—			(6,923	)
Provision (benefit) for income taxes		50,844			(49,855	)		3,038			—			4,027
Equity in earnings (losses) of subsidiaries		(92,442	)		1,099			—			91,343			—

Net (loss) income	$	(10,950	)	$	(88,097	)	$	(3,246	)	$	91,343		$	(10,950	)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended June 29, 2013


	Parent/Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Product sales	$	305,193		$	1,177,734		$	365,328		$	(268,932	)	$	1,579,323
Service and other revenues		240,542			56,437			34,512			(40,653	)		290,838

		545,735			1,234,171			399,840			(309,585	)		1,870,161

Costs and expenses:
Cost of product sales		163,743			478,024			244,330			(268,932	)		617,165
Cost of product sales – amortization of intangible assets		3,951			219,908			3,151			—			227,010
Cost of product sales – impairment of intangible assets		—			—			1,714			—			1,714
Cost of service and other revenues		118,106			46,158			29,904			(40,653	)		153,515
Research and development		22,685			118,829			7,395			—			148,909
Selling and marketing		59,117			136,138			70,124			—			265,379
General and administrative		52,034			100,925			26,730			—			179,689
Amortization of intangible assets		2,234			80,024			3,613			—			85,871
Contingent consideration – compensation expense		80,475			—			—			—			80,475
Contingent consideration – fair value adjustments		11,310			—			—			—			11,310
Gain on sale of intellectual property, net		—			(53,884	)		—			—			(53,884	)
Restructuring and divestiture charges		948			17,632			4,505			—			23,085


		514,603			1,143,754			391,466			(309,585	)		1,740,238

Income from operations		31,132			90,417			8,374			—			129,923
Interest income		376			113			282			—			771
Interest expense		(212,841	)		(932	)		(1,519	)		—			(215,292	)
Debt extinguishment loss		(3,247	)		—			—			—			(3,247	)
Other income (expense), net		179,837			(186,343	)		6,327			—			(179	)

(Loss) income before income taxes		(4,743	)		(96,745	)		13,464			—			(88,024	)
(Benefit) provision for income taxes		24,255			(61,051	)		7,708			—			(29,088	)
Equity in earnings (losses) of subsidiaries		(29,938	)		14,492			—			15,446			—

Net (loss) income	$	(58,936	)	$	(21,202	)	$	5,756		$	15,446		$	(58,936	)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 23, 2012


	Parent/Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Product sales	$	99,254		$	245,902		$	105,023		$	(65,586	)	$	384,593
Service and other revenues		75,963			15,208			9,027			(14,563	)		85,635

		175,217			261,110			114,050			(80,149	)		470,228

Costs and expenses:
Cost of product sales		51,707			77,535			70,406			(65,586	)		134,062
Cost of product sales – amortization of intangible assets		1,310			42,923			1,047			—			45,280
Cost of service and other revenues		37,848			15,125			7,836			(14,563	)		46,246
Research and development		6,805			17,092			2,332			—			26,229
Selling and marketing		16,230			38,048			22,090			—			76,368
General and administrative		12,755			23,915			6,751			—			43,421
Amortization of intangible assets		678			13,859			1,196			—			15,733
Contingent consideration – compensation expense		15,502			—			—			—			15,502
Contingent consideration – fair value adjustments		(13,276	)		—			—			—			(13,276	)
Restructuring and divestiture charges		—			175			(39	)		—			136

		129,559			228,672			111,619			(80,149	)		389,701

Income from operations		45,658			32,438			2,431			—			80,527
Interest income		619			—			76			—			695
Interest expense		(24,746	)		(363	)		(484	)		—			(25,593	)
Other (expense) income, net		(1,024	)		23			379			—			(622	)

Income before income taxes		20,507			32,098			2,402			—			55,007
Provision (benefit) for income taxes		27,605			4,618			(810	)		—			31,413
Equity in earnings (losses) of subsidiaries		30,692			(2,809	)		—			(27,883	)		—

Net income (loss)	$	23,594		$	24,671		$	3,212		$	(27,883	)	$	23,594

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended June 23, 2012


	Parent/Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Revenues:
Product sales	$	310,500		$	744,785		$	311,284	$	(201,795	)	$	1,164,774
Service and other revenues		224,227			44,856			23,394		(43,147	)		249,330

		534,727			789,641			334,678		(244,942	)		1,414,104

Costs and expenses:
Cost of product sales		159,344			253,045			209,835		(201,795	)		420,429
Cost of product sales – amortization of intangible assets		3,919			128,744			3,129		—			135,792
Cost of service and other revenues		115,557			43,342			22,011		(43,147	)		137,763
Research and development		20,602			54,607			8,659		—			83,868
Selling and marketing		48,413			122,803			61,151		—			232,367
General and administrative		37,884			70,193			23,682		—			131,759
Amortization of intangible assets		2,032			41,578			3,594		—			47,204
Contingent consideration – compensation expense		44,064			—			—		—			44,064
Contingent consideration – fair value adjustments		35,034			—			—		—			35,034
Gain on sale of intellectual property, net		—			(12,424	)		—		—			(12,424	)
Restructuring and divestiture charges		—			371			457		—			828

		466,849			702,259			332,518		(244,942	)		1,256,684

Income from operations		67,878			87,382			2,160		—			157,420
Interest income		1,660			77			210		—			1,947
Interest expense		(81,117	)		(1,050	)		(1,447</

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