Edgar Filing: HOLOGIC INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

HOLX_Q3-2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________

FORM 10-Q

__________________________________________________________

(Mark One)



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

For the quarterly period ended June 27, 2015



¨	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: 1-36214

__________________________________________________________

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 ý 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 ý 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 ý

As of July 24, 2015, 281,802,585 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.

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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 27, 2015 and June 28, 2014	3

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 27, 2015 and June 28, 2014	4

	Consolidated Balance Sheets as of June 27, 2015 and September 27, 2014	5

	Consolidated Statements of Cash Flows for the Nine Months Ended June 27, 2015 and June 28, 2014	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	52

Item 4.	Controls and Procedures	53

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 5.	Other Information	55

Item 6.	Exhibits	55

SIGNATURES		57

EXHIBITS

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PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements (unaudited)

HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except number of shares, which are reflected in thousands, and per share data)



	Three Months Ended						Nine Months Ended
	June 27, 2015			June 28, 2014			June 27, 2015			June 28, 2014
Revenues:
Product	$	583.0		$	529.3		$	1,676.0		$	1,562.8
Service and other	110.9			103.3			326.2			307.3
	693.9			632.6			2,002.2			1,870.1
Costs of revenues:
Product	186.2			186.7			559.6			549.3
Amortization of intangible assets	73.1			80.5			225.6			234.1
Impairment of intangible assets	—			—			—			26.6
Service and other	55.9			52.6			163.7			159.6
Gross Profit	378.7			312.8			1,053.3			900.5
Operating expenses:
Research and development	56.0			52.5			161.2			151.1
Selling and marketing	94.3			83.0			263.3			245.0
General and administrative	73.1			64.7			194.7			194.6
Amortization of intangible assets	27.4			29.7			82.8			85.0
Impairment of intangible assets	—			—			—			0.5
Restructuring and divestiture charges	11.9			6.7			21.9			36.6
	262.7			236.6			723.9			712.8
Income from operations	116.0			76.2			329.4			187.7
Interest income	0.3			0.3			1.0			0.8
Interest expense	(52.4		)	(52.4		)	(154.3		)	(168.1		)
Debt extinguishment loss	(18.2		)	—			(24.9		)	(7.4		)
Other income (expense), net	1.0			(1.5		)	0.6			(3.5		)
Income before income taxes	46.7			22.6			151.8			9.5
Provision for income taxes	17.3			11.3			45.3			20.3
Net income (loss)	$	29.4		$	11.3		$	106.5		$	(10.8	)
Net income (loss) per common share:
Basic	$	0.10		$	0.04		$	0.38		$	(0.04	)
Diluted	$	0.10		$	0.04		$	0.37		$	(0.04	)
Weighted average number of shares outstanding:
Basic	281,184			276,843			280,064			274,713
Diluted	292,612			279,205			287,790			274,713

See accompanying notes.

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HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In millions)



	Three Months Ended					Nine Months Ended
	June 27, 2015			June 28, 2014		June 27, 2015			June 28, 2014
Net income (loss)	$	29.4		$	11.3	$	106.5		$	(10.8	)
Changes in foreign currency translation adjustment	4.5			3.3		(14.0		)	(3.7		)
Changes in unrealized holding gains and losses on available-for-sale securities	(0.7		)	4.2		(3.9		)	2.0
Changes in pension plans, net of taxes of $0.2 in fiscal 2014	—			—		0.1			(0.6		)
Changes in value of hedged interest rate caps, net of tax of $0.5 and $1.4 for the three and nine months ended June 27, 2015	(0.7		)	—		(2.3		)	—
Other comprehensive income (loss)	3.1			7.5		(20.1		)	(2.3		)
Comprehensive income (loss)	$	32.5		$	18.8	$	86.4		$	(13.1	)

See accompanying notes.

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HOLOGIC, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except number of shares, which are reflected in thousands, and par value)



	June 27, 2015			September 27, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	885.0		$	736.1
Restricted cash	3.8			5.5
Accounts receivable, less reserves of $10.6 and $12.0, respectively	382.8			396.0
Inventories	295.0			330.6
Deferred income tax assets	—			39.4
Prepaid income taxes	23.7			22.4
Prepaid expenses and other current assets	38.5			35.8
Total current assets	1,628.8			1,565.8
Property, plant and equipment, net	449.9			461.9
Intangible assets, net	3,125.4			3,433.6
Goodwill	2,809.0			2,810.8
Other assets	117.4			142.6
Total assets	$	8,130.5		$	8,414.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	671.5		$	114.5
Accounts payable	89.9			92.1
Accrued expenses	259.5			262.1
Deferred revenue	152.2			150.9
Deferred income tax liabilities	16.1			—
Total current liabilities	1,189.2			619.6
Long-term debt, net of current portion	3,270.8			4,153.2
Deferred income tax liabilities	1,209.7			1,375.4
Deferred revenue	17.6			20.1
Other long-term liabilities	206.1			183.4
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; 281,485 and 277,972 shares issued, respectively	2.8			2.8
Additional paid-in-capital	5,736.3			5,658.2
Accumulated deficit	(3,494.1		)	(3,600.6		)
Accumulated other comprehensive income (loss)	(7.9		)	2.6
Total stockholders’ equity	2,237.1			2,063.0
Total liabilities and stockholders’ equity	$	8,130.5		$	8,414.7

See accompanying notes.

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HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)



	Nine Months Ended
	June 27, 2015			June 28, 2014
OPERATING ACTIVITIES
Net income (loss)	$	106.5		$	(10.8	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	60.8			72.7
Amortization	308.3			319.1
Non-cash interest expense	49.5			52.2
Stock-based compensation expense	42.2			39.1
Excess tax benefit related to equity awards	(8.0		)	(5.2		)
Deferred income taxes	(110.9		)	(204.6		)
Asset impairment charges	—			33.3
Cost-method equity investment impairment charges	—			6.9
Debt extinguishment loss	24.9			7.4
Loss on disposal of business	9.6			—
Loss on disposal of property and equipment	4.5			5.1
Other	0.5			(1.4		)
Changes in operating assets and liabilities:
Accounts receivable	3.5			28.4
Inventories	32.9			(42.2		)
Prepaid income taxes	(1.3		)	34.4
Prepaid expenses and other assets	4.7			13.8
Accounts payable	(1.8		)	1.7
Accrued expenses and other liabilities	25.3			16.1
Deferred revenue	2.4			10.7
Net cash provided by operating activities	553.6			376.7
INVESTING ACTIVITIES
Net proceeds from sale of business	—			2.4
Purchase of property and equipment	(27.9		)	(30.9		)
Increase in equipment under customer usage agreements	(30.2		)	(26.9		)
Net (purchases) sales of insurance contracts	(6.4		)	13.8
Purchases of mutual funds	—			(29.7		)
Sales of mutual funds	7.7			22.4
Increase in other assets	—			(3.0		)
Net cash used in investing activities	(56.8		)	(51.9		)
FINANCING ACTIVITIES
Repayment of long-term debt	(2,045.0		)	(578.8		)
Net proceeds from long-term debt	1,495.1			—
Proceeds from revolving credit line	175.0			—
Payment of debt issuance costs	(8.3		)	(2.4		)
Purchase of interest rate caps	(6.1		)	—
Payment of deferred acquisition consideration	—			(5.0		)
Net proceeds from issuance of common stock pursuant to employee stock plans	50.4			75.8
Excess tax benefit related to equity awards	8.0			5.2
Payment of minimum tax withholdings on net share settlements of equity awards	(12.6		)	(9.2		)
Net cash used in financing activities	(343.5		)	(514.4		)
Effect of exchange rate changes on cash and cash equivalents	(4.4		)	(0.4		)
Net increase (decrease) in cash and cash equivalents	148.9			(190.0		)
Cash and cash equivalents, beginning of period	736.1			822.5
Cash and cash equivalents, end of period	$	885.0		$	632.5

See accompanying notes.

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HOLOGIC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(all tabular amounts in millions, except number of shares, which are reflected in thousands, and 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 (“GAAP”). These financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended September 27, 2014 included in the Company’s Form 10-K filed with the SEC on November 20, 2014. 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. GAAP 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 27, 2015 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending September 26, 2015.

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 was one significant unrecognized subsequent event related to the unaudited consolidated financial statements for the three and nine months ended June 27, 2015 related to the Company's issuance of $1.0 billion aggregate principal amount of 5.250% senior notes due 2022 in a private offering and the subsequent discharge of the Company's existing $1.0 billion aggregate principal amount of 6.25% senior notes due 2020 (see Note 4) on July 2, 2015. 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 27, 2015.

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(2) Fair Value Measurements

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

The Company has investments in publicly-traded companies and mutual funds, both of which are valued using quoted market prices, representing Level 1 assets, and investments in interest rate cap derivative instruments, which are valued using analyses obtained from independent third party valuation specialists based on market observable inputs, representing Level 2 assets. The fair values of the Company's interest rate cap derivative instruments represent the estimated amounts the Company would receive to terminate the contracts. Refer to Note 5 for further discussion and information on the interest rate cap derivative instruments.

The Company has a payment obligation to the participants under its Nonqualified Deferred Compensation Plan (“DCP”). This liability is recorded at fair value based on the underlying value of certain hypothetical investments under the DCP as designated by each participant for their benefit. Since the value of the DCP obligation is based on market prices, the liability is classified within Level 1.

Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following at June 27, 2015:



			Fair Value at Reporting Date Using
	Balance as of June 27, 2015		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable securities:
Equity securities	$	21.1	$	21.1	$	—	$	—
Mutual funds	8.4		8.4		—		—
Interest rate cap - derivative	2.4		—		2.4		—
Total	$	31.9	$	29.5	$	2.4	$	—
Liabilities:
Deferred compensation liabilities	$	33.4	$	33.4	$	—	$	—
Total	$	33.4	$	33.4	$	—	$	—

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.

In the second quarter of fiscal 2014, the Company evaluated its MRI breast coils product line asset group, which is within its Breast Health segment, for impairment due to the Company’s expectation that it would be sold or disposed of significantly before the end of its previously estimated useful life. The undiscounted cash flows expected to be generated by this asset group over its estimated remaining useful life were not sufficient to recover its carrying value. The Company estimated the fair value of the asset group using market participant assumptions, which were based on underlying cash flow estimates, resulting in an impairment charge of $28.6 million. Pursuant to ASC 360, Property, Plant, and Equipment-Other, subtopic 10-35-28, the impairment charge was allocated to the long-lived assets, with $27.1 million to intangible assets and $1.5 million to property and equipment. The property and equipment charge was recorded to cost of product revenues and general and administrative expenses in the amounts of $0.3 million and $1.2 million, respectively. The Company believes this adjustment falls within Level 3 of the fair value hierarchy. This asset group was sold in the fourth quarter of fiscal 2014 (see Note 3).

In the first quarter of fiscal 2014, the Company recorded a $3.1 million impairment charge to record certain of its buildings at fair value related to the Hitec-Imaging organic photoconductor manufacturing line shutdown (see Note 3). The Company believes this adjustment falls within Level 3 of the fair value hierarchy.

The Company holds certain cost-method equity investments in non-publicly traded securities aggregating $4.4 million and $5.2 million at June 27, 2015 and September 27, 2014, respectively, which are included in other long-term assets on the Company’s Consolidated Balance Sheets. These investments are generally carried at cost, less any write-downs for other-than-temporary impairment charges. 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

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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 make such an estimation would be impractical. In the three and nine month periods ended June 28, 2014, the Company recorded other-than-temporary impairment charges of $3.2 million and $6.9 million, respectively, related to its cost-method equity investments.

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, interest rate caps, insurance contracts, DCP liability, 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 Company’s marketable securities and interest rate caps are recorded at fair value. The carrying amount of the insurance contracts are recorded at the cash surrender value, as required by U.S. GAAP, which approximates fair value, and the related DCP liability is recorded at fair value. The Company believes the carrying amounts of its cost-method equity investments approximate fair value.

Amounts outstanding under the Company’s Credit Agreement of $1.68 billion aggregate principal as of June 27, 2015 are 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 had a fair value of approximately $1.03 billion as of June 27, 2015 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 and represents a Level 1 measurement. Refer to Note 4 for the carrying amounts of the various components of the Company’s debt.

The estimated fair values of the Company’s Convertible Notes at June 27, 2015 were as follows:



2010 Notes	$	746.2
2012 Notes	651.3
2013 Notes	449.2
	$	1,846.7

(3) 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. In addition, the Company continually assesses its management structure. As a result of these assessments, the Company has undertaken various restructuring actions, which are described below. The following table displays charges taken in the fiscal 2015 year to date period and fiscal 2014 related to these actions and a rollforward of the accrued balances from September 27, 2014 to June 27, 2015:

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	Consolidation of Diagnostics Operations		Fiscal 2015 Actions		Fiscal 2014 Actions		Other Operating Cost Reductions		Total
Fiscal 2014 charges:
Workforce reductions	$	2.9	$	—	$	29.5	$	9.8	$	42.2
Non-cash impairment charge	—		—		—		3.1		3.1
Facility closure costs	—		—		—		0.6		0.6
Other	0.1		—		—		0.2		0.3
Fiscal 2014 restructuring charges	$	3.0	$	—	$	29.5	$	13.7	$	46.2
Divestiture net charges									5.5
Fiscal 2014 restructuring and divestiture charges									$	51.7
Fiscal 2015 charges:
Workforce reductions	$	0.1	$	3.7	$	6.1	$	0.2	$	10.1
Facility closure costs	0.5		—		1.6		0.1		2.2
Fiscal 2015 restructuring and divestiture charges	$	0.6	$	3.7	$	7.7	$	0.3	$	12.3
Divestiture net charges									9.6
Fiscal 2015 restructuring and divestiture charges									$	21.9



	Consolidation of Diagnostics Operations			Fiscal 2015 Actions			Fiscal 2014 Actions			Other Operating Cost Reductions			Total
Rollforward of Accrued Restructuring
Balance as of September 27, 2014	$	3.0		$	—		$	12.0		$	1.9		$	16.9
Fiscal 2015 restructuring charges	0.6			3.7			7.7			0.3			12.3
Stock-based compensation	—			(0.7		)	—			—			(0.7		)
Severance payments	(3.0		)	(1.7		)	(15.0		)	(1.9		)	(21.6		)
Other payments	(0.5		)	—			(1.0		)	(0.3		)	(1.8		)
Balance as of June 27, 2015	$	0.1		$	1.3		$	3.7		$	—		$	5.1

Consolidation of Diagnostics Operations

In connection with its acquisition of Gen-Probe Incorporated (“Gen-Probe”) in August 2012, the Company implemented restructuring actions to consolidate its Diagnostics operations, including streamlining product development initiatives, reducing overlapping functional areas in sales, marketing and general and administrative functions, and consolidating 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 also decided to move its legacy molecular diagnostics operations from Madison, Wisconsin to Gen-Probe’s facilities in San Diego, California. This transfer was completed at the end of fiscal 2014, and as a result, many of the employees in Madison were terminated. The Company recorded severance and benefit charges pursuant to ASC 420, Exit or Disposal Cost Obligations (ASC 420), beginning in fiscal 2012 through the first quarter of fiscal 2015. The Company recorded $3.0 million for severance and benefits in fiscal 2014. The Company recorded $0.6 million for facility closure costs and severance and benefits in the nine months ended June 27, 2015 and $0.6 million and $2.3 million for severance and benefits in the three and nine months ended June 28, 2014, respectively.

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Fiscal 2015 Actions

In the first, second and third quarters of fiscal 2015, the Company continued to make executive management changes resulting in the termination of certain executives and employees on a worldwide basis. In addition, the Company continued to consolidate and close certain international offices. Severance and benefit charges under these actions have been recorded pursuant to ASC 712, Compensation-Nonretirement Postemployment Benefits (ASC 712), and ASC 420 depending on the circumstances, and the Company recorded severance and benefit charges of $0.7 million and $3.7 million in the three and nine months ended June 27, 2015, respectively. Included in the charge is $0.7 million of stock-based compensation in the nine month period.

Fiscal 2014 Actions

During the first quarter of fiscal 2014, 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 recorded the severance and benefit charges pursuant to ASC 420 and ASC 712 depending on the circumstances. The Company recorded $6.3 million of severance and benefit charges in the first quarter of fiscal 2014, which included $0.4 million of stock-based compensation.

On December 6, 2013, Stephen P. MacMillan was appointed as President, Chief Executive Officer and a director of the Company. The employment of John W. Cumming, the Company’s prior President and Chief Executive Officer, terminated upon Mr. MacMillan’s appointment. The Company provided separation benefits to Mr. Cumming pursuant to his employment letter dated July 18, 2013 resulting in a charge of $6.6 million in the first quarter of fiscal 2014, which included $4.4 million of stock-based compensation related to the acceleration of all of Mr. Cumming’s outstanding equity awards in accordance with the existing terms of Mr. Cumming’s stock-based payment arrangements.

In the second, third, and fourth quarters of fiscal 2014, the Company continued to make executive management changes and implemented additional cost reduction initiatives resulting in the termination of certain executives and employees on a worldwide basis. In addition, in the fourth quarter of fiscal 2014, the Company decided to consolidate and close certain international offices. Severance and benefit charges under these actions were recorded pursuant to ASC 420 and ASC 712 depending on the circumstances, and the Company recorded severance and benefit charges of $16.6 million in fiscal 2014. Included in the charge was $1.8 million of stock-based compensation for the modification of the terms of equity awards to certain employees. Of these charges, $3.0 million and $5.0 million was recorded in the second and third quarters of fiscal 2014, respectively, for severance and benefits pursuant to ASC 712. The Company recorded $0.2 million and $6.1 million for severance and benefits in the three and nine months ended June 27, 2015, respectively, and $1.4 million and $1.6 million for facility closure costs in the three and nine months ended June 27, 2015, respectively. The facility closure costs primarily relate to lease obligation charges for two office locations.

Other Operating Cost Reductions:

Hitec-Imaging Organic Photoconductor Manufacturing Line Shut-down

In the fourth quarter of fiscal 2013, in connection with the Company’s cost reduction initiatives, the Company decided to shut-down its Hitec-Imaging organic photoconductor manufacturing line located in Germany. This production line is included within the Breast Health segment. As a result, the Company terminated certain employees, primarily in manufacturing, in fiscal 2014. During the first quarter of fiscal 2014, the Company completed its negotiations with the local Works Council to determine severance benefits for the approximately 95 affected employees. The Company recorded severance and benefit charges pursuant to ASC 420 and estimates the total severance and related charges related to this action will be approximately $9.3 million. The Company began notifying the affected employees in the second quarter of fiscal 2014, and as such no charges were recorded in the first quarter of fiscal 2014. The Company recorded charges of $8.7 million in fiscal 2014 in connection with terminating these employees of which $7.3 million and $1.1 million was recorded in the second and third quarters of fiscal 2014, respectively. In fiscal 2015, the Company recorded $0.3 million for severance and benefits and facility closure costs. The Company also recorded an impairment charge of $3.1 million in the first quarter of fiscal 2014 to record certain buildings at this location to their estimated fair value.

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Divestitures

In the fourth quarter of fiscal 2014, the Company completed the sale of its MRI breast coils product line and recorded a loss on disposal of $5.3 million. The Company also provided certain transition services through April 2015, including the manufacturing and sale of inventory to the buyer. Since all operations had ceased during the third quarter of fiscal 2015, the Company concluded that this subsidiary had been substantially liquidated and recorded a $9.6 million charge in the third quarter of fiscal 2015 related to writing off the cumulative translation adjustment related to the subsidiary.

(4) Borrowings and Credit Arrangements

The Company’s borrowings consisted of the following:



	June 27, 2015	September 27, 2014
Current debt obligations, net of debt discount:
Term Loan	74.7	—
Revolver	175.0	—
Term Loan A	—	99.6
Term Loan B	—	14.9
Convertible Notes	421.8	—
Total current debt obligations	671.5	114.5
Long-term debt obligations, net of debt discount:
Term Loan	1,418.1	—
Term Loan A	—	796.7
Term Loan B	—	1,120.9
Senior Notes	1,000.0	1,000.0
Convertible Notes	852.7	1,235.6
Total long-term debt obligations	3,270.8	4,153.2
Total debt obligations	3,942.3	4,267.7

The debt maturity schedule for the Company's obligations as of June 27, 2015 was as follows:



	Remainder 2015		2016		2017		2018		2019		2020 and Thereafter		Total
Term Loan	$	18.7	$	75.0	$	84.4	$	121.9	$	150.0	$	1,050.0	$	1,500.0
Revolver	—		175.0		—		—		—		—		175.0
Senior Notes	—		—		—		—		—		1,000.0		1,000.0
Convertible Notes (1)	450.0		—		—		906.4		—		—		1,356.4
	$	468.7	$	250.0	$	84.4	$	1,028.3	$	150.0	$	2,050.0	$	4,031.4

(1) Classified based on the earliest date of redemption for each respective issuance with the exception of the 2010 Notes which are convertible by their respective holders as further discussed below. In addition, the balance in fiscal 2018 reflects accretion on the 2013 Notes through June 27, 2015.

Credit Agreement

On May 29, 2015, the Company entered into a Credit and Guaranty Agreement (the “Credit Agreement”) with Bank of America, N.A., in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, and certain other lenders party thereto (collectively, the "Lenders"). This Credit Agreement replaced the Company's existing senior secured credit facility with Goldman Sachs Bank USA, in its capacity as administrative and collateral agent and the lenders party thereto ("Prior Credit Agreement") entered into on August 1, 2012, and the proceeds under the Credit Agreement of $1.68 billion were used to pay off the amounts outstanding under the Prior Credit Agreement.

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The credit facilities under the Credit Agreement consist of:


•	A $1.5 billion secured term loan to Hologic with a final maturity date of May 29, 2020 (the “Term Loan”); and


•	A secured revolving credit facility under which the Borrowers (as defined below) may borrow up to $1 billion, subject to certain sublimits, with a final maturity date of May 29, 2020 (the “Revolver”).

Hologic and one of its subsidiaries, Hologic GGO 4 Ltd ("Hologic U.K.") are the initial borrowers (the “Borrowers”) under the Credit Agreement. Hologic’s obligations under the Credit Agreement are guaranteed by certain of Hologic's domestic subsidiaries (the "Subsidiary Guarantors"). Hologic U.K.’s obligations under the Credit Agreement are guaranteed by Hologic and the Subsidiary Guarantors.

In addition to the Term Loan, the Company borrowed $175.0 million under the Revolver. Borrowings under the Revolver may be made in certain alternative currencies pursuant to the terms of the Credit Agreement. The Company has the ability, subject to the terms of the Credit Agreement, to designate any additional wholly-owned foreign subsidiary of Hologic as a Designated Borrower (as defined in the Credit Agreement) to receive loans up to a $100 million sublimit. The obligations of any Designated Borrower under such sublimit would be guaranteed by Hologic and the Subsidiary Guarantors.

Borrowings under the Credit Facilities bear interest, at the Company's option and in each case plus an applicable margin, as follows:


•	Term Loan: the Base Rate (as defined in the Credit Agreement) or the Eurocurrency Rate (i.e., the Libor rate); and


•	Revolver: if funded in U.S. Dollars, the Base Rate or the Eurocurrency Rate, and, if funded in an alternative currency, the Eurocurrency Rate; and if requested under the swing line sublimit, the Base Rate.

The applicable margin to the Base Rate and the Eurocurrency Rate is subject to specified changes depending on the total net leverage ratio as defined in the Credit Agreement. Current borrowings outstanding under the Credit Agreement bear interest at the Eurocurrency Rate plus the applicable margin of 1.75% per annum. The Company is also required to pay a quarterly commitment fee on the undrawn committed amount available under the Revolver.

The Company is required to make scheduled principal payments under the Term Loan in increasing amounts ranging from $18.75 million per three-month period commencing with the three-month period ending on September 25, 2015 to $37.5 million per three-month period commencing with the three-month period ending on September 28, 2018. The remaining balance of the Term Loan is due at maturity. Any amounts outstanding under the Revolver are due at maturity. In addition, subject to the terms and conditions set forth in the Credit Agreement, the Company is required to make certain mandatory prepayments from specified excess cash flows from operations (to the extent the Company’s net senior secured leverage ratio exceeds a certain ratio) and from the net proceeds of specified types of asset sales (subject to certain reinvestment rights), debt issuances and insurance recoveries (subject to certain reinvestment rights) (“Mandatory Prepayments”). Mandatory Prepayments are required to be applied by the Company, first, to the Term Loan, second, to any outstanding amount under the swing line sublimit, third, to the Revolver, and fourth to any outstanding amount under a letter of credit sublimit. Subject to certain limitations, the Company may voluntarily prepay any of the credit facilities under the Credit Agreement without premium or penalty.

Borrowings outstanding under the Credit Agreement and the Prior Credit Agreement for the three and nine months ended June 27, 2015 had weighted-average interest rates of 2.39% and 2.59%, respectively. The interest rate on the outstanding Term Loan borrowing at June 27, 2015 was 1.94%. Interest expense under the Credit Agreement and Prior Credit Agreement aggregated $12.8 million and $44.7 million for the three and nine months ended June 27, 2015, respectively, which includes non-cash interest expense of $2.2 million and $8.0 million related to the amortization of the deferred issuance costs and accretion of the debt discount, respectively. Interest expense totaled $17.9 million and $57.5 million for the three and nine months ended June 28, 2014, respectively, which includes non-cash interest expense of $3.1 million and $9.6 million related to the amortization of the deferred issuance costs and accretion of the debt discount, respectively.

The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants restricting the ability of the Borrowers and the Subsidiary 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 Agreement also contains customary representations and warranties and events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross defaults and an event of default upon a change of control of the Company.

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Borrowings are secured by first-priority liens on, and a first-priority security interest in, substantially all of the assets of the Company, with certain exceptions. The Credit Agreement contains total net leverage ratio and interest coverage ratio financial covenants measured as of the last day of each fiscal quarter. The total net leverage ratio is 5.50:1.00 beginning on the Company's fiscal quarter ending September 26, 2015, and then decreases over time to 4.00:1.00 for the quarter ending March 28, 2020. The interest coverage ratio is 3.75:1.00 beginning on the Company's fiscal quarter ending September 26, 2015, and will remain as such for each quarter thereafter. The total net leverage ratio is defined as the ratio of the Company's consolidated net debt as of the quarter end to its consolidated adjusted EBITDA (as defined in the Credit Agreement) for the four-fiscal quarter period ending on the measurement date. The interest coverage ratio is defined as the ratio of the Company's consolidated adjusted EBITDA for the prior four-fiscal quarter period ending on the measurement date to adjusted consolidated cash interest expense for the same measurement period. These terms, and the calculation thereof, are defined in further detail in the Credit Agreement. Although the covenant calculations were not required as of June 27, 2015, the Company would have been in compliance.

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 27, 2015.

Pursuant to ASC 470, Debt (ASC 470), the accounting for the Credit Agreement was evaluated on a creditor-by-creditor basis with regard to the Prior Credit Agreement to determine whether each transaction should be accounted for as a modification or extinguishment. Certain creditors under the Prior 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 $18.2 million in the third quarter of fiscal 2015 to write-off the pro-rata amount of unamortized debt discount and deferred issuance costs related to these creditors. For the remainder of the creditors, this transaction has been accounted for as a modification because on a creditor-by-creditor basis the present value of the cash flows between the two debt instruments before and after the transaction was less than 10%. Pursuant to ASC 470, subtopic 50-40, third-party costs of $4.6 million related to this transaction were recorded as interest expense and $3.8 million were recorded as deferred issuance costs to be amortized over the term of the agreement. In addition, fees paid directly to the Lenders of $4.9 million were recorded as a debt discount.

Prior Credit Agreement

On December 24, 2014, the Company voluntarily pre-paid $300.0 million of its Term Loan B facility. Pursuant to ASC 470, the Company recorded a debt extinguishment loss of $6.7 million in the first quarter of fiscal 2015 to write-off the pro-rata amount of unamortized debt discount and deferred issuance costs related to this voluntary prepayment.

On October 31, 2013, the Company voluntarily pre-paid $100.0 million of its Term Loan B facility, which was reflected in current debt obligations as of September 28, 2013. Pursuant to ASC 470, the Company recorded a debt extinguishment loss of $3.0 million in the first quarter of fiscal 2014 to write-off the pro-rata amount of unamortized debt discount and deferred issuance costs related to this voluntary prepayment.

During the second quarter of fiscal 2014, the Company, the Guarantors, Goldman Sachs, and the Lenders entered into Refinancing Amendment No. 3 to the Prior Credit Agreement and reduced the applicable interest rates. In connection with this refinancing, the Company voluntarily prepaid $25.0 million of the new senior secured tranche B term loan facility (the "Amended Term Loan B"). Pursuant to ASC 470, the accounting for this refinancing was 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 Prior 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 $4.4 million in the second quarter of fiscal 2014 to write-off the pro-rata amount of unamortized debt discount and deferred issuance costs related to these creditors. For the remainder of the creditors, this transaction was accounted for as a modification because on a creditor-by-creditor basis the present value of the cash flows between the two debt instruments before and after the transaction was less than 10%. Pursuant to ASC 470, subtopic 50-40, third-party costs of $1.0 million related to this transaction were recorded to interest expense.

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Senior Notes

As of June 27, 2015, the Company had outstanding $1.0 billion of 6.25% senior notes due 2020 (the “Senior Notes”). The Senior Notes had a maturity date of August 1, 2020 and bore 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 both the three and nine month periods ended June 27, 2015 and June 28, 2014, respectively, which includes non-cash interest expense of $0.4 million and $1.2 million in both the three and nine month periods ended June 27, 2015 and June 28, 2014, respectively, related to the amortization of the deferred issuance costs.

On July 2, 2015, the Company completed a private placement of $1.0 billion aggregate principal amount of its 5.250% Senior Notes due 2022 (the “2022 Notes”) at an offering price of 100% of the aggregate principal amount of the 2022 Notes. The 2022 Notes mature on July 15, 2022 and bear interest at the rate of 5.250% per year, payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2016. The Company used the net proceeds of the 2022 Notes, plus available cash to discharge the outstanding Senior Notes and will redeem such Senior Notes, in the aggregate principal amount of $1.0 billion on August 1, 2015 at an aggregate redemption price of $1.03125 billion, reflecting a premium payment of $31.25 million. In addition, the Company will make a final interest payment in the amount of $31.25 million for interest accrued to August 1, 2015, to holders of record of the Senior Notes as of July 15, 2015. As a result of this transaction, the Company will record a debt extinguishment loss in the fourth quarter of fiscal 2015, which will include the premium payment and pro-rata debt issuance costs. Debt issuance costs related to the Senior Notes were $8.4 million as of June 27, 2015. The Company is required to evaluate the accounting under ASC 470 at the creditor-by-creditor level to determine modification versus extinguishment accounting.

The 2022 Notes were not registered, and will not registered, under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States in accordance with Regulation S under the Securities Act. The 2022 Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain domestic subsidiaries of Hologic (the “Guarantors”).

The 2022 Notes were issued pursuant to an indenture (the "Indenture"), dated as of July 2, 2015, among the Company, the Guarantors and Wells Fargo Bank, National Association, as trustee. The Indenture contains covenants which limit, among other things, the ability of the Company and the Guarantors to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, enter into certain transactions with affiliated persons and to make certain investments. These covenants are subject to a number of exceptions and qualifications, including the suspension of certain of these covenants upon the 2022 Notes receiving an investment grade credit rating. The Company is not required to maintain any financial covenants with respect to the 2022 Notes.

The Company may redeem the 2022 Notes at any time prior to July 15, 2018 at a price equal to 100% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium set forth in the Indenture. The Company may also redeem up to 35% of the aggregate principal amount of the 2022 Notes with the net cash proceeds of certain equity offerings at any time and from time to time before July 15, 2018, at a redemption price equal to 105.250% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date. The Company also has the option to redeem the 2022 Notes on or after: July 15, 2018 through July 14, 2019 at 102.625% of par; July 15, 2019 through July 14, 2020 at 101.313% of par; and July 15, 2020 and thereafter at 100% of par. In addition, if the Company undergoes a change of control, as provided in the Indenture, the Company will be required to make an offer to purchase each holder’s 2022 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

Convertible Notes

During the third quarter of fiscal 2015, the closing price of the Company's common stock exceeded 130% of the applicable conversion price of its 2010 Notes on at least 20 of the last 30 consecutive trading days of the quarter; therefore, holders of 2010 Notes may convert their notes during the fourth quarter of fiscal 2015. As such, the Company classified the $421.8 million carrying value of its 2010 Notes (which have a principal value of $450.0 million) as a current debt obligation. In the event the closing price conditions are met in the fourth quarter of fiscal 2015 or a future fiscal quarter, the 2010 Notes will be convertible at a holder's option during the immediately following fiscal quarter. As of June 27, 2015, the if-converted value of the 2010 Notes exceeded the aggregate principal amount by approximately $296.2 million. It is the Company's current intent and policy to settle any conversion of the Convertible Notes as if the Company had elected to make either a net share settlement or all cash election, such that upon conversion, the Company intends to pay the holders in cash for the principal amount of the 2010 Notes and, if applicable, shares of its common stock or cash to satisfy the premium based on a calculated daily conversion value.

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Interest expense under the Convertible Notes is as follows:



	Three Months Ended				Nine Months Ended
	June 27, 2015		June 28, 2014		June 27, 2015		June 28, 2014
Amortization of debt discount	$	9.2	$	8.5	$	27.0	$	28.4
Amortization of deferred financing costs	0.4		0.4		1.3		1.5
Principal accretion	4.0		3.9		11.9		11.4
Non-cash interest expense	13.6		12.8		40.2		41.3
2.00% accrued interest (cash)	4.7		4.7		14.2		17.6
	$	18.3	$	17.5	$	54.4	$	58.9

(5) Derivatives

Interest Rate Cap - Cash Flow Hedge

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposure to some of its interest rate risk by the use of interest rate caps, which are derivative financial instruments. The Company does not use derivatives for speculative purposes. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in accumulated other comprehensive income ("AOCI") to the extent the derivative is effective at offsetting the changes in the cash flows being hedged until the hedged item affects earnings. To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings in Other income (expense) in the Consolidated Statements of Operations.

On January 7, 2015, the Company entered into two separate interest rate cap agreements to help mitigate the interest rate volatility associated with the variable rate interest on its credit facilities under the Prior Credit Agreement, which has been replaced by the new Credit Agreement. Interest rate cap agreements provide the right to receive cash if the reference interest rate rises above a contractual rate. The aggregate premium paid by the Company for the interest rate cap agreements was $6.1 million, which was the initial fair value of the instruments recorded in the Company's financial statements.

The critical terms of the interest rate caps were designed to mirror the terms of the Company’s LIBOR-based borrowings under the Prior Credit Agreement. The terms in the new Credit Agreement are consistent with the Prior Credit Agreement, and therefore the interest rate caps continue to be highly effective at offsetting the cash flows being hedged. The Company designated these derivatives as cash flow hedges of the variability of the LIBOR-based interest payments on $1.0 billion of principal for a two-year period, which ends on December 30, 2016.

As of June 27, 2015, the Company determined that the existence of hedge ineffectiveness, if any, was immaterial and all changes in the fair value of the interest rate caps are recorded in the Consolidated Statements of Comprehensive Income as a component of AOCI.

The aggregate fair value of these interest rate caps was $2.4 million at June 27, 2015 and is included in both Prepaid expenses and other current assets and Other assets on the Company’s Consolidated Balance Sheet. Refer to Note 2 “Fair Value Measurements” above for related fair value disclosures.

The tables below present the location of the Company’s derivative financial instruments on the Consolidated Balance Sheets and the unrealized loss recognized in AOCI related to the interest rate caps for the following reporting periods (in millions):



	Balance Sheet Location	June 27, 2015
Assets:
Derivative instruments designated as a cash flow hedge:
Interest rate cap agreements	Prepaid expenses and other current assets	$	0.8
Interest rate cap agreements	Other assets	1.6
		$	2.4

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During the three and nine months ended June 27, 2015, an immaterial amount was reclassified from AOCI to the Company’s Consolidated Statements of Operations related to the derivative financial instruments. The Company expects to similarly reclassify approximately $2.3 million from AOCI to the Consolidated Statements of Operations in the next twelve months.

(6) Commitments and Contingencies

Litigation and Related Matters

On June 9, 2010, Smith & Nephew, Inc. ("Smith & Nephew") filed suit in the United States District Court for the District of Massachusetts against Interlace Medical, Inc. ("Interlace"), which the Company acquired on January 6, 2011. The complaint alleged that the Interlace MyoSure hysteroscopic tissue removal device infringed U.S. patent 7,226,459. On November 22, 2011, Smith & Nephew filed suit against the Company in the United States District Court for the District of Massachusetts. The complaint alleged that use of the MyoSure hysteroscopic tissue removal system infringed U.S. patent 8,061,359. Both complaints sought permanent injunctive relief and unspecified damages. 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. On June 27, 2013, the Court 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 also rejected the jury’s damage award and 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. The USPTO has issued final decisions that the claims of the ‘459 and the '359 patents asserted as part of the litigation are not patentable. Smith & Nephew has appealed these decisions to the U.S. Patent Trial and Appeal Board. 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.

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. The complaint 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 fall of 2015. In January 2012, Enzo filed suit against Gen-Probe in the United States District Court for the District of Delaware. The Gen-Probe complaint alleged that certain of Gen-Probe’s diagnostics products, including products that incorporate Gen-Probe’s patented hybridization protection assay technology, such as the Aptima Combo 2 and Aptima HPV assays, infringe Enzo’s U.S. patent 6,992,180. On September 30, 2013, Enzo amended its list of accused products to include Prodesse, MilliPROBE, PACE and Procleix assays. The complaint seeks permanent injunctive relief and unspecified damages. Enzo has asserted the ‘180 patent claims against six other companies. The court issued a Markman order on July 7, 2015 construing the claims, and it is expected that summary judgment motions will be heard in the fall 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.

On March 27, 2015, Enzo filed an additional suit against the Company in the United States District Court for the District of Delaware, The complaint alleged that certain additional Company molecular diagnostic products, including, inter alia, the Procleix Parvo/HAV assays and coagulation products, including the Invader Factor II test and the Invader Factor V test, also infringe U.S. Patent 6,992,180. The complaint further alleged that certain of the Company’s molecular diagnostic products, including Hologic’s Progensa PCA3 products, all Aptima products and all Procleix products infringe Enzo’s U. S. Patent 7,064,197. On June 11, 2015, this matter was stayed pending the resolution of summary judgment motions in the 2012 case referenced above. 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.

On October 29, 2013, the Interlace stockholder representatives filed a complaint in the Delaware Court of Chancery alleging breach of contract for issues related to the payment of contingent consideration under the Interlace acquisition agreement, and sought $14.7 million in additional payments. On October 20, 2014, a trial was held in Delaware. The parties

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executed a settlement agreement in January 2015 for an amount less than that sought. The effect of this settlement was not material to the Company's financial statements.

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 matters described above there are no other proceedings or claims pending against it the ultimate resolution of which 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) Marketable Securities

The following reconciles the cost basis to the fair market value of the Company’s equity securities that are classified as available-for-sale:



Period Ended:	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 27, 2015	$	16.1	$	12.4	$	(7.4	)	$	21.1
September 27, 2014	$	15.5	$	10.2	$	(1.3	)	$	24.4

The Company's investments in marketable securities consist primarily of investments in common stock of entities in the medical device and healthcare industries. One of the Company's investments is in an unrealized loss position of $7.3 million, and the Company has evaluated the near-term prospects of this investment in relation to the severity and duration of the unrealized loss. The near-term prospects since the initial investment have not changed significantly and the unrealized losses have been deemed to be of a short-term nature. Based on that evaluation and the Company's ability and intent to hold this investment to full recovery of its carrying cost, the Company does not consider this investment to be other-than-temporarily impaired at June 27, 2015.

(8) Net Income (Loss) Per Share

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



	Three Months Ended		Nine Months Ended
	June 27, 2015	June 28, 2014	June 27, 2015	June 28, 2014
Basic weighted average common shares outstanding	281,184	276,843	280,064	274,713
Weighted average common stock equivalents from assumed exercise of stock options and stock units	3,108	2,130	2,688	—
Incremental shares from assumed conversion of the Convertible Notes premium	8,320	232	5,038	—
Diluted weighted average common shares outstanding	292,612	279,205	287,790	274,713
Weighted-average anti-dilutive shares related to:
Outstanding stock options	168	4,727	1,939	7,007
Stock units	4	21	63	811

The Company has outstanding Convertible Notes, and the principal balance and any conversion premium may be satisfied, at the Company’s option, by issuing shares of common stock, cash or a combination of shares and cash. The Company's current policy is that it will settle the principal balance of the Convertible Notes in cash. As such, the Company applies the treasury stock method to these securities and the dilution related to the conversion premium of the 2010 and 2012 Notes is included in the calculation of diluted weighted-average shares outstanding for fiscal 2015 as the average stock price during the quarterly periods was greater than the conversion price of the 2010 and 2012 Notes.

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(9) 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 27, 2015		June 28, 2014		June 27, 2015		June 28, 2014
Cost of revenues	$	2.3	$	1.9	$	6.5	$	5.5
Research and development	2.0		2.2		6.1		6.3
Selling and marketing	2.1		2.0		6.4		6.1
General and administrative	9.4		5.2		22.5		14.7
Restructuring and divestiture	0.6		1.7		0.7		6.5
	$	16.4	$	13.0	$	42.2	$	39.1

The Company granted 1.2 million and 2.4 million stock options during the nine months ended June 27, 2015 and June 28, 2014, respectively, with weighted-average exercise prices of $26.95 and $21.92, respectively. There were 7.3 million options outstanding at June 27, 2015 with a weighted-average exercise price of $22.05.

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 27, 2015			June 28, 2014			June 27, 2015			June 28, 2014
Risk-free interest rate	1.7		%	1.3		%	1.7		%	1.2		%
Expected volatility	38.6		%	41.4		%	38.6		%	41.4		%
Expected life (in years)	5.3			4.5			5.3			4.4
Dividend yield	—			—			—			—
Weighted average fair value of options granted	$	12.07		$	7.97		$	9.73		$	7.64

The Company granted 1.4 million and 2.4 million restricted stock units (RSUs) during the nine months ended June 27, 2015 and June 28, 2014, respectively, with weighted-average grant date fair values of $26.65 and $21.97, per unit respectively. As of June 27, 2015, there were 3.7 million unvested RSUs outstanding with a weighted-average grant date fair value of $24.10 per unit. In addition, the Company granted 0.3 million performance stock units (PSUs) in fiscal 2015 to members of its senior management team, which have a weighted-average grant date fair value of $26.58 per unit. Each recipient of PSUs 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 defined Return on Invested Capital metrics are achieved. The Company is recognizing compensation expense ratably over the required service period based on its estimate of the number of shares that will vest. If there is a change in the estimate of the number of shares that are probable of vesting, the Company will cumulatively adjust compensation expense in the period that the change in estimate is made. During the third quarter of fiscal 2015, the Company increased its estimate of those shares that are probable of vesting and recognized an additional $3.2 million of stock-based compensation expense.

At June 27, 2015, there was $25.1 million and $82.0 million of unrecognized compensation expense related to stock options and stock units (comprised of RSUs and PSUs), respectively, to be recognized over a weighted-average period of 3.5 years and 2.7 years, respectively.

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(10) Other Balance Sheet Information



	June 27, 2015		September 27, 2014
Inventories
Raw materials	$	99.9	$	115.6
Work-in-process	63.4		57.1
Finished goods	131.7		157.9
	$	295.0	$	330.6



Property, plant and equipment
Equipment and software	$	353.4		$	342.5
Equipment under customer usage agreements	295.5			285.2
Building and improvements	180.1			176.9
Leasehold improvements	59.9			63.2
Land	51.5			51.6
Furniture and fixtures	16.3			16.3
	956.7			935.7
Less – accumulated depreciation and amortization	(506.8		)	(473.8		)
	$	449.9		$	461.9

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(11) 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 adjusted to exclude the effect of non-cash charges, such as intangible asset amortization expense, intangible asset and goodwill impairment charges, acquisition related fair value adjustments and integration expenses, restructuring and divestiture charges and other one-time or unusual items.

Identifiable assets for the four principal operating segments consist of inventories, intangible assets, 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 27, 2015 and June 28, 2014. Segment information is as follows:



	Three Months Ended				Nine Months Ended
	June 27, 2015		June 28, 2014		June 27, 2015		June 28, 2014
Total revenues:
Diagnostics	$	306.9	$	293.1	$	907.7	$	869.7
Breast Health	279.5		238.0		777.1		703.2
GYN Surgical	85.5		78.5		248.9		229.4
Skeletal Health	22.0		23.0		68.5		67.8
	$	693.9	$	632.6	$	2,002.2	$	1,870.1
Income from operations:
Diagnostics	$	30.0	$	4.8	$	85.3	$	24.8
Breast Health	74.7		58.4		210.7		128.0
GYN Surgical	9.5		9.1		27.2		26.8
Skeletal Health	1.8		3.9		6.2		8.1
	$	116.0	$	76.2	$	329.4	$	187.7
Depreciation and amortization:
Diagnostics	$	88.8	$	95.8	$	269.2	$	282.6
Breast Health	5.9		11.7		21.8		30.2
GYN Surgical	25.6		26.3		77.0		78.4
Skeletal Health	0.3		0.2		1.1		0.6
	$	120.6	$	134.0	$	369.1	$	391.8
Capital expenditures:
Diagnostics	$	12.4	$	12.8	$	38.6	$	37.9
Breast Health	2.8		2.7		8.4		6.8
GYN Surgical	2.2		2.0		6.6		5.9
Skeletal Health	0.1		—		0.3		0.2
Corporate	0.9		2.5		4.2		7.0
	$	18.4	$	20.0	$	58.1	$	57.8

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	June 27, 2015		September 27, 2014
Identifiable assets:
Diagnostics	$	4,134.1	$	4,383.5
Breast Health	827.5		859.8
GYN Surgical	1,678.1		1,748.2
Skeletal Health	24.8		26.1
Corporate	1,466.0		1,397.1
	$	8,130.5	$	8,414.7

The Company had no customers with balances greater than 10% of accounts receivable as of June 27, 2015 or September 27, 2014, or any customer that represented greater than 10% of consolidated revenues during the three and nine months ended June 27, 2015 and June 28, 2014.

The Company operates in the following major geographic areas as noted in the below chart. Revenue data is based upon customer location. 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 France, Germany and the United Kingdom. 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 27, 2015		June 28, 2014		June 27, 2015		June 28, 2014
United States	77.8	%	75.7	%	75.8	%	74.8	%
Europe	11.3	%	12.5	%	12.2	%	13.9	%
Asia-Pacific	7.9	%	8.0	%	8.5	%	7.4	%
All others	3.0	%	3.8	%	3.5	%	3.9	%
	100.0	%	100.0	%	100.0	%	100.0	%

(12) Income Taxes

In accordance with ASC 740, Income Taxes (ASC 740), 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 annual effective tax rate estimated for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, adjusted for discrete taxable events that occur during the interim period.

The Company’s effective tax rates for the three and nine month periods ended June 27, 2015 were 37.1% and 29.8%, respectively, compared to 50.0% and 214.2%, respectively, for the corresponding periods in the prior year. For the current three month period, the effective tax rate was higher than the statutory tax rate primarily due to the non-deductible write-off of the cumulative translation adjustment related to one of the Company's subsidiaries that was deemed to be substantially liquidated in the third quarter of fiscal 2015. For the current nine month period, the effective tax rate was lower than the statutory rate primarily due to the domestic production activities deduction and reserve reversals due to a favorable income tax audit settlement partially offset by the non-deductible cumulative translation adjustment write-off. For the three and nine month periods ended June 28, 2014, the effective tax rate was higher than the statutory rate primarily due to unbenefited foreign losses.

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(13) Intangible Assets

Intangible assets consisted of the following:



Description	As of June 27, 2015				As of September 27, 2014
Description	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Developed technology	$	3,979.2	$	1,624.6	$	3,965.6	$	1,399.4
In-process research and development	3.7		—		17.9		—
Customer relationships and contracts	1,102.4		447.3		1,102.4		384.7
Trade names	236.4		124.9		236.5		105.3
Business licenses	2.6		2.1		2.6		2.0
	$	5,324.3	$	2,198.9	$	5,325.0	$	1,891.4

During the first quarter of fiscal 2015, the Company received regulatory approval for one of its in-process research and development projects acquired in the Gen-Probe acquisition and reclassified this asset of $14.2 million to developed technology.

The estimated remaining amortization expense as of June 27, 2015 for each of the five succeeding fiscal years is as follows:



Remainder of Fiscal 2015	$	100.6
Fiscal 2016	$	375.4
Fiscal 2017	$	366.3
Fiscal 2018	$	355.9
Fiscal 2019	$	344.4

(14) 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 27, 2015	$	6.3	$	4.4	$	(5.1	)	$	5.6
June 28, 2014	$	9.3	$	5.5	$	(7.5	)	$	7.3

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(15) Accumulated Other Comprehensive Income

The following tables summarize the changes in accumulated balances of other comprehensive income for the periods presented:



	Three months ended June 27, 2015															Nine months ended June 27, 2015
	Foreign Currency Translation			Marketable Securities			Pension Plans			Hedged Interest Rate Caps			Total			Foreign Currency Translation			Marketable Securities			Pension Plans			Hedged Interest Rate Caps			Total
Beginning Balance	$	(23.2	)	$	5.7		$	(1.5	)	$	(1.6	)	$	(20.6	)	$	(4.7	)	$	8.9		$	(1.6	)	$	—		$	2.6
Other comprehensive income (loss)	4.5			(0.7		)	—			(0.7		)	3.1			(14.0		)	(3.9		)	0.1			(2.3		)	(20.1		)
Amounts reclassified from accumulated other comprehensive income	9.6			—			—			—			9.6			9.6			—			—			—			9.6
Ending Balance	$	(9.1	)	$	5.0		$	(1.5	)	$	(2.3	)	$	(7.9	)	$	(9.1	)	$	5.0		$	(1.5	)	$	(2.3	)	$	(7.9	)

The reclassification out of accumulated other comprehensive income to restructuring and divestiture charges for the three and nine months ended June 27, 2015 was $9.6 million related to writing off the cumulative translation adjustment related to the MRI breast coils product line (see note 3).



	Three months ended June 28, 2014									Nine months ended June 28, 2014
	Foreign Currency Translation		Marketable Securities		Pension Plans			Total		Foreign Currency Translation			Marketable Securities		Pension Plans			Total
Beginning Balance	$	1.6	$	9.9	$	(0.9	)	$	10.6	$	8.6		$	12.1	$	(0.3	)	$	20.4
Other comprehensive income (loss)	3.3		4.2		—			7.5		(3.7		)	2.0		(0.6		)	(2.3		)
Amounts reclassified from accumulated other comprehensive income	—		—		—			—		—			—		—			—
Ending Balance	$	4.9	$	14.1	$	(0.9	)	$	18.1	$	4.9		$	14.1	$	(0.9	)	$	18.1

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(16) New Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Presentation of Debt Issuance Costs. This guidance intends to simplify the presentation of debt issuance costs and more closely align the presentation of debt issuance costs under U.S. GAAP to IFRS standards. This guidance is effective for annual periods beginning after December 15, 2015, and is applicable to the Company in fiscal 2017. Early adoption is permitted. The Company is currently evaluating this guidance, but does not anticipate that adoption of this guidance will have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This guidance focuses on a reporting company’s consolidation evaluation to determine whether certain legal entities should be consolidated. This guidance is effective for annual periods beginning after December 15, 2015, and is applicable to the Company in fiscal 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating this guidance, but does not anticipate that adoption of this guidance will have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and earlier application is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on the Company's consolidated financial statements or disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 660), which provides guidance for revenue recognition. This ASU is applicable to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to receive in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current U.S. GAAP. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. On July 9, 2015, the FASB voted in favor of delaying the effective date of the new standard by one year, with early adoption permitted as of the original effective date. ASU 2014-09 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which is fiscal 2019 for the Company. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial position and results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. ASU 2013-11 amends the presentation requirements of ASC 740 and requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. The ASU is effective for annual periods, and interim periods within those years, beginning after December 15, 2013, which is fiscal 2015 for the Company. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. The adoption of ASU 2013-11 did not have a material impact on the Company's consolidated financial position or results of operations.

In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance outlines the events when cumulative translation adjustments should be released into net income. The ASU is effective for annual periods, and interim periods within those years, beginning after December 15, 2013, which is fiscal 2015 for the Company. The adoption of ASU 2013-05 did not have a material impact on the Company's consolidated financial position or results of operations.

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(17) Supplemental Guarantor Condensed Consolidating Financials

The Company’s Senior Notes are fully and unconditionally and jointly and severally guaranteed by Hologic, Inc. (“Parent/Issuer”) and certain of its domestic subsidiaries which are 100% owned by Hologic, Inc. The following represents the supplemental condensed financial information of Hologic, Inc. and its guarantor and non-guarantor subsidiaries as of June 27, 2015 and September 27, 2014 and for the three and nine months ended June 27, 2015 and June 28, 2014, as applicable.

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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 27, 2015



	Parent/Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Product	$	172.2		$	448.6		$	116.2		$	(154.0	)	$	583.0
Service and other	94.6			10.0			13.2			(6.9		)	110.9
	266.8			458.6			129.4			(160.9		)	693.9
Costs of revenues:
Product	84.0			171.0			85.2			(154.0		)	186.2
Amortization of intangible assets	0.8			72.2			0.1			—			73.1
Service and other	46.4			8.1			8.3			(6.9		)	55.9
Gross Profit	135.6			207.3			35.8			—			378.7
Operating expenses:
Research and development	10.2			44.0			1.8			—			56.0
Selling and marketing	26.8			50.0			17.5			—			94.3
General and administrative	21.5			43.2			8.4			—			73.1
Amortization of intangible assets	0.2			26.2			1.0			—			27.4
Restructuring and divestiture charges	10.1			—			1.8			—			11.9
	68.8			163.4			30.5			—			262.7
Income (loss) from operations	66.8			43.9			5.3			—			116.0
Interest income	0.2			—			0.1			—			0.3
Interest expense	(51.8		)	(0.3		)	(0.3		)	—			(52.4		)
Debt extinguishment loss	(18.2		)	—			—			—			(18.2		)
Other income (expense), net	1.1			0.3			(0.3		)	(0.1		)	1.0
Income (loss) before income taxes	(1.9		)	43.9			4.8			(0.1		)	46.7
Provision for income taxes	4.3			12.3			0.7			—			17.3
Equity in earnings (losses) of subsidiaries	35.6			3.5			—			(39.1		)	—
Net income (loss)	$	29.4		$	35.1		$	4.1		$	(39.2	)	$	29.4

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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended June 27, 2015



	Parent/Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Revenues:
Product	$	438.3	$	1,312.1	$	348.9	$	(423.3	)	$	1,676.0
Service and other	278.1		39.9		38.1		(29.9		)	326.2
	716.4		1,352.0		387.0		(453.2		)	2,002.2
Costs of revenues:
Product	217.9		515.2		249.8		(423.3		)	559.6
Amortization of intangible assets	3.6		221.8		0.2		—			225.6
Service and other	130.9		38.7		24.0		(29.9		)	163.7
Gross Profit	364.0		576.3		113.0		—			1,053.3
Operating expenses:
Research and development	28.2		127.8		5.2		—			161.2
Selling and marketing	74.3		132.5		56.5		—			263.3
General and administrative	56.3		113.8		24.6		—			194.7
Amortization of intangible assets	1.1		78.5		3.2		—			82.8
Restructuring and divestiture charges	11.5		0.6		9.8		—			21.9
	171.4		453.2		99.3		—			723.9