Document


 
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 July 1, 2017
or 
¨
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.)
250 Campus Drive,
Marlborough, Massachusetts
 
01752
(Address of principal executive offices)
 
(Zip Code)
(508) 263-2900
(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 31, 2017, 280,473,469 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
 

Table of Contents

HOLOGIC, INC.
INDEX
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
EXHIBITS
 


2
Table of Contents

PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and per share data)
 
Three Months Ended
 
Nine Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Revenues:
 
 
 
 
 
 
 
Product
$
674.1

 
$
601.3

 
$
1,882.3

 
$
1,771.5

Service and other
132.0

 
116.1

 
373.6

 
334.3

 
806.1

 
717.4

 
2,255.9

 
2,105.8

Costs of revenues:
 
 
 
 
 
 
 
Product
249.3

 
191.1

 
648.1

 
561.2

Amortization of intangible assets
79.1

 
77.9

 
217.9

 
222.2

Service and other
68.1

 
55.3

 
186.8

 
165.2

Gross Profit
409.6

 
393.1

 
1,203.1

 
1,157.2

Operating expenses:
 
 
 
 
 
 
 
Research and development
62.5

 
58.8

 
172.3

 
169.6

Selling and marketing
145.4

 
109.0

 
358.8

 
309.2

General and administrative
65.5

 
62.5

 
252.7

 
202.0

Amortization of intangible assets
15.2

 
21.9

 
47.3

 
67.3

Gain on sale of business
—

 
—

 
(899.7
)
 
—

Restructuring and divestiture charges
6.0

 
1.5

 
10.8

 
7.5

 
294.6

 
253.7

 
(57.8
)
 
755.6

Income from operations
115.0

 
139.4

 
1,260.9

 
401.6

Interest income
1.1

 
0.2

 
3.3

 
0.6

Interest expense
(39.1
)
 
(39.1
)
 
(117.1
)
 
(117.4
)
Debt extinguishment loss
(2.6
)
 
—

 
(2.6
)
 
(4.5
)
Other income, net
0.1

 
0.6

 
13.7

 
27.5

Income before income taxes
74.5

 
101.1

 
1,158.2

 
307.8

Provision for income taxes
15.0

 
16.3

 
485.4

 
69.1

Net income
$
59.5

 
$
84.8

 
$
672.8

 
$
238.7

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.21

 
$
0.31

 
$
2.40

 
$
0.85

Diluted
$
0.21

 
$
0.30

 
$
2.35

 
$
0.83

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
280,824

 
277,853

 
279,901

 
281,101

Diluted
287,638

 
282,302

 
285,957

 
287,377



See accompanying notes.

3
Table of Contents

HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
Three Months Ended
 
Nine Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Net income
$
59.5

 
$
84.8

 
$
672.8

 
$
238.7

Changes in foreign currency translation adjustment
11.6

 
(3.8
)
 
(0.7
)
 
(9.2
)
Changes in unrealized holding gains and losses on available-for-sale securities, net of tax of $0.1 and $0.1 for the three and nine months July 1, 2017:
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income (loss)
—

 
—

 
2.4

 
(1.2
)
(Gain) reclassified from accumulated other comprehensive loss to the statements of income
—

 
—

 
(2.4
)
 
(7.2
)
Changes in value of hedged interest rate caps, net of tax of $0.2 and $0.5 for the three and nine months ended July 1, 2017 and $0.9 and $2.1 for the three and nine months ended June 25, 2016:
 
 
 
 
 
 
 
(Loss) gain recognized in other comprehensive income (loss), net
(0.4
)
 
(1.5
)
 
0.7

 
(3.4
)
Loss reclassified from accumulated other comprehensive loss to the statements of income
1.6

 
1.2

 
4.9

 
2.2

Other comprehensive income (loss)
12.8

 
(4.1
)
 
4.9

 
(18.8
)
Comprehensive income
$
72.3

 
$
80.7

 
$
677.7

 
$
219.9

See accompanying notes.


4
Table of Contents

HOLOGIC, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and par value)
 
 
July 1,
2017
 
September 24,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
588.4

 
$
548.4

Accounts receivable, less reserves of $9.3 and $12.7, respectively
520.3

 
447.0

Inventories
357.0

 
274.7

Prepaid income taxes
18.1

 
16.9

Prepaid expenses and other current assets
52.2

 
39.6

Total current assets
1,536.0

 
1,326.6

Property, plant and equipment, net
485.5

 
460.2

Intangible assets, net
2,835.8

 
2,643.4

Goodwill
3,165.0

 
2,803.1

Other assets
95.7

 
83.7

Total assets
$
8,118.0

 
$
7,317.0

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
1,013.3

 
$
296.0

Accounts payable
148.7

 
156.9

Accrued expenses
467.0

 
287.6

Deferred revenue
182.2

 
161.4

Current portion of capital lease obligations
1.6

 
—

Total current liabilities
1,812.8

 
901.9

Long-term debt, net of current portion
2,207.6

 
3,049.4

Capital lease obligations, net of current portion
23.2

 
—

Deferred income tax liabilities
1,032.0

 
982.6

Deferred revenue
20.0

 
15.9

Other long-term liabilities
156.8

 
224.5

Commitments and contingencies (Note 7)

 

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; 287,517 and 285,015 shares issued, respectively
2.9

 
2.9

Additional paid-in-capital
5,605.5

 
5,560.3

Accumulated deficit
(2,465.4
)
 
(3,138.2
)
Treasury stock, at cost – 7,289 shares
(250.0
)
 
(250.0
)
Accumulated other comprehensive loss
(27.4
)
 
(32.3
)
Total stockholders’ equity
2,865.6

 
2,142.7

Total liabilities and stockholders’ equity
$
8,118.0

 
$
7,317.0

See accompanying notes.


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Table of Contents

HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
Nine Months Ended
 
July 1,
2017
 
June 25,
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
672.8

 
$
238.7

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation
63.5

 
61.3

Amortization
265.2

 
289.5

Non-cash interest expense
38.9

 
38.8

Stock-based compensation expense
53.4

 
45.1

Deferred income taxes
(304.6
)
 
(104.2
)
Net gains on sale of marketable securities
(3.6
)
 
(25.1
)
Fair value write-up of inventory sold
22.3

 
—

Debt extinguishment loss
2.6

 
4.5

Gain on sale of business
(899.7
)
 
—

Other adjustments and non-cash items
1.8

 
1.2

Changes in operating assets and liabilities, excluding the effect of acquisitions:
 
 
 
Accounts receivable
(29.7
)
 
(10.8
)
Inventories
(20.2
)
 
2.1

Prepaid income taxes
(4.5
)
 
1.9

Prepaid expenses and other assets
(4.4
)
 
(16.2
)
Accounts payable
(28.3
)
 
14.4

Accrued expenses and other liabilities
15.4

 
34.7

Deferred revenue
0.8

 
(6.2
)
Net cash (used in) provided by operating activities
(158.3
)
 
569.7

INVESTING ACTIVITIES
 
 
 
Acquisition of businesses, net of cash acquired
(1,478.9
)
 
—

Proceeds from sale of business
1,865.0

 
—

Purchase of property and equipment
(35.8
)
 
(27.0
)
Increase in equipment under customer usage agreements
(38.2
)
 
(35.8
)
Proceeds from sale of available-for-sale marketable securities
87.1

 
31.1

Purchases of insurance contracts
—

 
(5.2
)
Sales of mutual funds
—

 
5.2

Purchase of intellectual property
—

 
(4.0
)
Increase in other assets
(5.6
)
 
(0.4
)
Net cash provided by (used in) investing activities
393.6

 
(36.1
)
FINANCING ACTIVITIES
 
 
 
Repayment of long-term debt
(56.3
)
 
(56.2
)
Repayment of amounts borrowed under accounts receivable securitization program
(48.0
)
 
—

Proceeds from accounts receivable securitization program
48.0

 
200.0

Payments to extinguish convertible notes
(290.1
)
 
(311.5
)
Proceeds from amounts borrowed under revolving credit line
125.0

 
50.0

Repayment of amounts borrowed under revolving credit line
—

 
(225.0
)
Repurchase of common stock
—

 
(250.0
)
Net proceeds from issuance of common stock pursuant to employee stock plans
42.5

 
27.4

Payments under capital lease obligations
(0.4
)
 
—

Payment of minimum tax withholdings on net share settlements of equity awards
(19.3
)
 
(16.1
)
Net cash used in financing activities
(198.6
)
 
(581.4
)
Effect of exchange rate changes on cash and cash equivalents
3.3

 
(2.0
)
Net increase (decrease) in cash and cash equivalents
40.0

 
(49.8
)
Cash and cash equivalents, beginning of period
548.4

 
491.3

Cash and cash equivalents, end of period
$
588.4

 
$
441.5

See accompanying notes.

6
Table of Contents

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 24, 2016 included in the Company’s Form 10-K filed with the SEC on November 17, 2016. 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 July 1, 2017 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending September 30, 2017. Fiscal 2017 is a 53 week fiscal period and this additional week was included in the results for the first quarter of fiscal 2017 and the nine months ended July 1, 2017.
On March 22, 2017, the Company completed the acquisition of Cynosure, Inc. ("Cynosure"), which resulted in the Company expanding into the Medical Aesthetics market. Cynosure develops, manufactures and markets aesthetic treatment systems that enable medical practitioners to perform non-invasive and minimally invasive procedures. Cynosure's results of operations are reported within the Company's Medical Aesthetics reportable segment. The Company's acquisition of Cynosure is more fully described in Note 3.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting (ASU 2016-09). This guidance changes how companies account for certain aspects of share-based payments to employees. The amendments in the update are effective for annual periods beginning after December 15, 2016, and were applicable to the Company in fiscal 2018 with early adoption permitted in any interim or annual period. During the first quarter of fiscal 2017, the Company elected to early adopt this standard. The update requires certain changes to presentation of the financial statements as follows:
•
All excess tax benefits and deficiencies are recognized as a component of the provision for income taxes on a discrete basis in the period in which the equity awards vest and/or are settled. Previously, the Company recorded this tax impact directly to additional paid in capital. For the three and nine months ended July 1, 2017, the Company recorded a tax benefit of $2.1 million and $9.9 million, respectively. The standard does not permit retroactive presentation of this benefit to prior fiscal years on the Consolidated Statements of Income.

7
Table of Contents

•
The tax benefit or deficiency is required to be classified as a cash flow provided by (used in) operating activities. It was previously required to be presented as a cash flow provided by financing activities in the Consolidated Statements of Cash Flows, with a corresponding adjustment to operating cash flows. As permitted by ASU 2016-09, the Company has elected to adopt this classification on a retrospective basis, and therefore, the prior fiscal period Consolidated Statement of Cash Flows has been recast for this provision resulting in cash flows provided by operations increasing $9.2 million for the nine months ended June 25, 2016 with a corresponding increase to cash flows used in financing activities.
•
In the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefit. This provision, which is only applicable on a prospective basis, did not have a material impact on the Company's diluted net earnings per share calculations in fiscal 2017.
•
ASU 2016-09 allows a Company to elect to account for award forfeitures as they occur or to continue to estimate forfeitures. The Company has elected to continue to estimate potential forfeitures. As such, there is no impact from a change in accounting principle within stockholders' equity.
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 may require additional disclosure. Subsequent events have been evaluated as required. There were no material recognized or unrecognized subsequent events recorded in the unaudited consolidated financial statements as of and for the three and nine months ended July 1, 2017.


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Table of Contents

(2) Fair Value Measurements
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company has investments in publicly-traded companies, which are valued using quoted market prices, representing Level 1 assets. The Company also has investments in derivative instruments consisting of interest rate caps and forward foreign currency contracts, 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 caps and forward foreign currency contracts represent the estimated amounts the Company would receive or pay to terminate the contracts. Refer to Note 6 for further discussion and information on the interest rate caps and forward foreign currency contracts.
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 July 1, 2017: 
 
 
 
Fair Value at Reporting Date Using
 
Balance as of July 1, 2017
 
Quoted Prices in
Active Market for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Equity securities
$
0.2

 
$
0.2

 
$
—

 
$
—

Interest rate cap - derivative
2.6

 
—

 
2.6

 
—

Forward foreign currency contracts
0.5

 
—

 
0.5

 
—

Total
$
3.3

 
$
0.2

 
$
3.1

 
$
—

Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
42.0

 
$
42.0

 
$
—

 
$
—

Forward foreign currency contracts
0.5

 
—

 
0.5

 
—

Total
$
42.5

 
$
42.0

 
$
0.5

 
$
—

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 consist 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 $3.2 million and $3.5 million at July 1, 2017 and September 24, 2016, 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 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 estimate would be impractical.
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, forward foreign currency contracts, 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, interest rate caps, and forward foreign currency contracts 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.

9
Table of Contents

Amounts outstanding under the Company’s Credit Agreement and Securitization Program of $1.48 billion and $200.0 million aggregate principal, respectively, as of July 1, 2017 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 2022 Senior Notes had a fair value of approximately $1.05 billion as of July 1, 2017 based on their trading price, representing a Level 1 measurement. The fair values of the Company’s Convertible Notes were based on the trading prices of the respective notes and represents a Level 1 measurement. Refer to Note 5 for the carrying amounts of the various components of the Company’s debt.
The estimated fair values of the Company’s Convertible Notes at July 1, 2017 were as follows:
 
2012 Notes
387.1

2013 Notes
329.9

 
$
717.0


(3) Business Combinations

Cynosure Inc.
    
On March 22, 2017, the Company completed the acquisition of Cynosure and acquired all of the outstanding shares of Cynosure, except for 1.2 million shares the holders of which have demanded appraisal rights (the "dissenting shares"). Pursuant to the terms and conditions of the merger agreement, each share of common stock of Cynosure outstanding immediately prior to the effective time of the acquisition was canceled and converted into the right to receive $66.00 in cash, except for the dissenting shares. In addition, all outstanding restricted stock units, performance stock units, and stock options were canceled and converted into the right to receive $66.00 per share in cash less the applicable exercise price, as applicable. The acquisition was funded through available cash, and the Company paid $1.58 billion at closing. The amount allocated to the dissenting shareholders of $79.2 million has been recorded as a liability. As required by law, the Company is accruing interest related to the acquisition consideration owed to the dissenting shares and recorded interest expense of $1.5 million in the third quarter of fiscal 2017. The Company incurred $18.5 million of transaction costs, which were recorded within general and administrative expenses in the second quarter of fiscal 2017.

Cynosure, headquartered in Westford, Massachusetts, develops, manufactures, and markets aesthetic treatment systems that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, reduce fat through laser lipolysis, reduce cellulite, clear nails infected by toe fungus, ablate sweat glands and improve women’s health. Cynosure also markets radiofrequency (RF) energy-sourced medical devices for precision surgical applications such as facial plastic and general surgery, gynecology, ear, nose, and throat procedures, ophthalmology, oral and maxillofacial surgery, podiatry and proctology. Cynosure's results of operations are reported in the Company's Medical Aesthetics reportable segment from the date of acquisition and the goodwill within this reportable segment is solely related to Cynosure.

The purchase price consideration was as follows:

Cash paid
$
1,578.6

Accrued liability relating to dissenting shareholders
79.2

Total purchase price
$
1,657.8


The total purchase price was allocated to Cynosure’s preliminary tangible and identifiable intangible assets and liabilities based on the estimated fair values of those assets as of March 22, 2017, as set forth below. The preliminary purchase price allocation is as follows:


10
Table of Contents

Cash
$
107.2

Marketable securities
82.9

Accounts receivable
40.2

Inventory
121.1

Property, plant and equipment
44.1

Other assets and liabilities, net
13.3

Accounts payable and accrued expenses
(74.5
)
Deferred revenue
(11.2
)
Capital lease obligation
(25.2
)
Identifiable intangible assets:
 
       Developed technology
736.0

       In-process research and development
107.0

       Distribution agreement
42.0

       Customer relationships
35.0

       Trade names
74.0

Deferred income taxes, net
(313.6
)
Goodwill
679.5

Purchase Price
$
1,657.8


In performing the preliminary purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analysis of historical financial performance and estimates of future performance of Cynosure’s business. The Company has not yet obtained all of the information related to the fair value of the acquired assets and liabilities related to the acquisition to finalize the purchase price allocation. It is expected that most aspects of allocation of the purchase price will be finalized upon the completion of the analysis of the acquired assets and liabilities during the year ended September 30, 2017.
    
As part of the preliminary purchase price allocation, the Company has determined the identifiable intangible assets are developed technology, in-process research and development ("IPR&D"), a distribution agreement, customer relationships, and trade names. The preliminary fair value of the intangible assets has been estimated using the income approach, and the cash flow projections were discounted using rates ranging from 11% to 12%, except for the IPR&D assets in which the Company used a range of 14% to 22%. 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 Cynosure's products and relate to currently marketed products. The developed technology assets primarily comprise the significant product families of Cynosure, primarily SculpSure, Icon, and PicoSure.

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 project or expected commercial release depending on the project. The Company recorded, on a preliminary basis, $107.0 million of IPR&D related to three projects. The projects are expected to be completed during fiscal 2018 and 2019 with a total preliminary estimate of cost to complete of approximately $18.0 million. Given the uncertainties inherent with product development and 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.

The distribution agreement intangible asset primarily relates to Cynosure's exclusive distribution rights for the MonaLisa Touch device in certain geographic regions. The customer relationships intangible asset pertains to Cynosure's relationships with its end customers and related service arrangements and distributors throughout the world. Trade names relate to the Cynosure corporate name and primary product names, and the Company used the Relief-from-Royalty Method to estimate the fair value of this asset.

Developed technology, distribution agreement, customer relationships and trade names are being amortized on a

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straight-line basis over a weighted average period of 11.8 years, 8 years, 7.7 years and 8.9 years, respectively.

The preliminary calculation of the excess of the purchase price over the estimated fair value of the tangible net assets and intangible assets acquired was recorded to goodwill. The factors contributing to the recognition of the preliminary amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Cynosure acquisition. These benefits include the expectation that the Company's entry into the aesthetics market will significantly broaden the Company's offering in women's health. The combined company is expected to benefit from a broader global presence, synergistic utilization of Hologic's direct sales force, primarily its GYN Surgical sales force, with certain Cynosure products, and the Company's entry into an adjacent cash-pay segment. None of the goodwill is expected to be deductible for income tax purposes.

Cynosure's revenue and pre-tax loss, which excludes acquisition expenses incurred by the Company, for the period from the acquisition date to July 1, 2017 were $126.0 million and $51.4 million, respectively. The pre-tax loss includes amortization expense, the impact of the step-up in inventory, retention and integration expenses including legal and consulting fees, and restructuring charges. The following unaudited pro forma information presents the combined financial results for the Company and Cynosure as if the acquisition of Cynosure had been completed at the beginning of the prior fiscal year, September 26, 2015:

 
Nine Months Ended
Nine Months Ended
 
July 1, 2017
June 25, 2016
 
(unaudited)
(unaudited)
Revenue
$
2,438.5

$
2,411.6

Net income
$
671.4

$
168.6

Basic earnings per common share
$
2.40

$
0.60

Diluted earnings per common share
$
2.35

$
0.59


The unaudited pro forma information for the nine months ended July 1, 2017 and fiscal 2016 was calculated after applying the Company's accounting policies and the impact of acquisition date fair value adjustments. Fiscal 2017 unaudited pro forma net income was adjusted to exclude acquisition-related transaction costs, restructuring and retention costs solely related to the acquisition, and the impact of the fair value step-up to inventory. These expenses have been added to fiscal 2016 unaudited pro forma net income. 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 27, 2015, such as fair value adjustments to inventory and property, plant and equipment, increased expenses for restructuring charges and retention costs, 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, 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.
    
Medicor Medical Supply

On April 7, 2017, the Company completed the acquisition of MMS Medicor Medical Supplies GmbH ("Medicor") for a purchase price of approximately $19.0 million, which includes a working capital adjustment of $2.0 million that was paid in the fourth quarter of fiscal 2017, and a holdback of $1.9 million that is payable two years from the date of acquisition. Medicor was a long-standing distributor of the Company's Breast and Skeletal Health products in Germany, Austria and Switzerland. Based on the Company's preliminary valuation, it has allocated $5.4 million of the purchase price to the preliminary value of intangible assets, which have a weighted average life of 7.7 years, and $8.4 million to goodwill. The remaining $5.2 million of purchase price has been allocated to the acquired tangible assets and liabilities. The allocation of the purchase price is preliminary as the Company continues to gather information supporting the acquired assets and liabilities.


(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. In addition, the Company continually assesses its management and organizational structure. As a result of these assessments, the Company has undertaken various restructuring actions, which are described below. The following table displays charges related to these actions recorded in the

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fiscal 2017 year to date period (nine months ended July 1, 2017) and fiscal 2016 (the year ended September 24, 2016) and a rollforward of the accrued balances from September 24, 2016 to July 1, 2017:
 
 
Fiscal 2017 Actions
 
Fiscal 2016 Actions
 
Total    
Restructuring and Divestiture Charges
 
 
 
 
 
 
Fiscal 2016 charges:
 
 
 
 
 

Workforce reductions
 
—

 
$
10.5

 
$
10.5

Fiscal 2016 restructuring charges
 
$
—

 
$
10.5

 
$
10.5

Fiscal 2017 charges:
 
 
 
 
 
 
Severance costs and adjustments
 
$
5.8

 
$
0.2

 
$
6.0

Facility closure costs
 
—

 
4.8

 
4.8

Fiscal 2017 restructuring charges
 
$
5.8

 
$
5.0

 
$
10.8

 
 
Fiscal 2017 Actions
 
Fiscal 2016 Actions
 
Fiscal 2015 Actions
 
Fiscal 2014 Actions
 
Total    
Rollforward of Accrued Restructuring
 
 
 
 
 
 
 
 
 
 
Balance as of September 24, 2016
 
$
—

 
$
5.5

 
$
0.2

 
$
0.6

 
$
6.3

Fiscal 2017 charges
 
5.8

 
5.0

 
—

 
—

 
10.8

Severance payments and adjustments
 
—

 
(4.9
)
 
(0.2
)
 
—

 
(5.1
)
Other payments
 
—

 
(1.0
)
 
—

 
(0.2
)
 
(1.2
)
Balance as of July 1, 2017
 
$
5.8

 
$
4.6

 
$
—

 
$
0.4

 
$
10.8


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Fiscal 2017 Actions
During the second quarter of fiscal 2017, the Company completed its acquisition of Cynosure. In connection with the acquisition, the Company decided to terminate certain Cynosure executives in the second quarter of fiscal 2017 and recorded $1.5 million in severance and benefits charges. During the third quarter of fiscal 2017, the Company decided to terminate additional members of the executive team and recorded $4.3 million in severance and benefits charges. The charges were recorded pursuant to ASC 712, Compensation-Nonretirement Postemployment Benefits (ASC 712) or ASC 420, Exit or Disposal Cost Obligations (ASC 420) depending on the executive. Additional terminations may occur, but the Company does not have a formal plan at this time, nor does it expect any resulting charges to be material.
Fiscal 2016 Actions

During the fourth quarter of fiscal 2016, the Company decided to initiate a cost reduction initiative in part of its Diagnostic's reportable segment, resulting in the termination of certain employees. The employees were notified of termination and related benefits in the fourth quarter of fiscal 2016, and the Company recorded these charges pursuant to ASC 420 as the benefits qualify as one-time termination benefits. As such, the Company recorded a charge for severance and benefits of $0.9 million in the fourth quarter. This action is complete and no additional severance and benefits charges are expected.
    
During the third quarter of fiscal 2015, the Company decided to close its Bedford, Massachusetts facility where it manufactured its Skeletal Health products and provided certain support manufacturing services for its Breast Health segment. The manufacturing of the Skeletal Health products was outsourced to a third-party, and the Breast Health manufacturing services were moved to the Company's Danbury, Connecticut and Marlborough, Massachusetts facilities. In addition, research and development, sales and services support and administrative functions were moved to both Marlborough and Danbury. The transition was substantially completed by the end of calendar 2016. In connection with this plan, certain employees, primarily in manufacturing, were terminated. The employees were notified of termination and related benefits in the first quarter of fiscal 2016, and the Company recorded these charges pursuant to ASC 420. Employees were required to remain employed during this transition period and charges were recorded ratably over the required service period. The Company recorded a total of $1.7 million in severance and benefits charges in fiscal 2016 of which $0.5 million and $1.4 million were recorded in the three and nine months ended June 25, 2016, respectively. This action is complete and no additional severance and benefits charges are expected.

In connection with shutting down the Bedford location, during the first quarter of fiscal 2017 the Company recorded $3.5 million for lease obligation charges related to a section of the facility that the Company had determined met the cease-use date criteria. The Company made certain assumptions regarding the time period it would take to obtain a subtenant and the sublease rates it can obtain. During the third quarter of fiscal 2017, the Company updated its assumption regarding the time period it will take to obtain a subtenant at the Bedford location and as a result recorded an additional $1.3 million lease obligation charge. These estimates may vary from the actual sublease agreements executed, if at all, resulting in an adjustment to the charge. The Company has vacated other portions of the building but not the entire facility, and at this time does not meet the cease-use date criteria to record additional restructuring charges.

During the first quarter of fiscal 2016, the Company began implementing a second plan to consolidate and improve operational efficiency of its international sales and marketing and field services operations and certain support functions. As a result, the Company identified and terminated certain employees during each quarter in fiscal 2016. Severance and benefit charges under this action were recorded pursuant to ASC 712 and ASC 420 depending on the circumstances. The Company recorded severance and benefit charges of $7.9 million in fiscal 2016 related to this plan. The Company recorded severance and benefits charges of $1.0 million and $6.1 million in the three and nine months ended June 25, 2016, respectively, related to this plan.     


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(5) Borrowings and Credit Arrangements
The Company’s borrowings consisted of the following: 
 
July 1,
2017
 
September 24,
2016
Current debt obligations, net of debt discount:
 
 
 
Term Loan
$
111.9

 
$
83.8

Revolver
$
125.0

 
$
—

Securitization Program
200.0

 
200.0

Convertible Notes
576.4

 
12.2

Total current debt obligations
$
1,013.3

 
$
296.0

Long-term debt obligations, net of debt discount:
 
 
 
Term Loan
1,227.0

 
1,308.2

2022 Senior Notes
980.6

 
977.7

Convertible Notes
—

 
763.5

Total long-term debt obligations
$
2,207.6

 
$
3,049.4

Total debt obligations
$
3,220.9

 
$
3,345.4

Credit Agreement
Borrowings outstanding under the Credit Agreement for the three and nine months ended July 1, 2017 had weighted-average interest rates of 2.50% and 2.28%, respectively. The interest rate on the outstanding Term Loan borrowing at July 1, 2017 was 2.72%. Borrowings outstanding under the Credit Agreement for the three and nine months ended June 25, 2016 had weighted-average interest rates of 2.19% and 2.11%, respectively. Interest expense under the Credit Agreement aggregated $10.5 million and $30.1 million for the three and nine months ended July 1, 2017, which includes non-cash interest expense of $1.0 million and $3.2 million, respectively, related to the amortization of the deferred issuance costs and accretion of the debt discount. Interest expense under the Credit Agreement aggregated $10.5 million and $31.2 million for the three and nine months ended June 25, 2016, which includes $1.1 million and $3.2 million of non-cash interest expense related to the amortization of the deferred issuance costs and accretion of the debt discount.
During the third quarter of fiscal 2017, the Company borrowed $125.0 million under the Revolver of the Credit Agreement.
The Credit Agreement contains two financial covenants, a total net leverage ratio and an interest coverage ratio, both of which are measured as of the last day of each fiscal quarter. These terms, and the calculation thereof, are defined in the Credit Agreement. As of July 1, 2017, the Company was in compliance with these covenants.
2022 Senior Notes
The Company's 5.250% Senior Notes due 2022 (the “2022 Senior 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 recorded interest expense of $14.0 million and $43.2 million for the three and nine months ended July 1, 2017, respectively, which includes non-cash interest expense of $1.0 million and $2.9 million, respectively, related to the amortization of the deferred issuance costs and accretion of the debt discount. The Company recorded interest expense related to these notes of $14.0 million and $41.9 million in the three and nine months ended June 25, 2016, respectively, which included non-cash interest expense of $1.0 million and $2.9 million, respectively, related to the amortization of deferred issuance costs and accretion of the debt discount.
Convertible Notes
On various dates during the third quarter of fiscal 2017, the Company entered into privately negotiated repurchase transactions and extinguished $100.0 million principal amount of each of its 2.00% Convertible Senior Notes due 2042 (the "2012 Notes") and 2.00% Convertible Senior Notes due 2043 (the "2013 Notes"), for total payments of $269.1 million. This amount includes the conversion premium resulting from the Company's stock price on the date of the transactions being in excess of the conversion prices of $31.175 and $38.59, respectively, and on the 2013 Notes accreted principal of approximately $18.5 million.

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The Company accounted for the extinguishments under the derecognition provisions of subtopic ASC 470-20-40, which requires the allocation of the fair value of the consideration transferred and transaction costs incurred to the extinguishment of the liability component and the reacquisition of the equity component. In connection with these transactions, the Company recorded a debt extinguishment loss of $2.6 million in the third quarter of fiscal 2017. The debt extinguishment loss was comprised of the write-off of the pro-rata amount of debt issuance costs and the loss on the debt itself calculated as the difference between the fair value of the liability component of the notes repurchased and its related carrying value. In addition, under this accounting standard, a portion of the fair value of the consideration transferred is allocated to the reacquisition of the equity component, which is the difference between the fair value of the consideration transferred and the fair value of the liability component immediately before the extinguishment. As a result, on a gross basis, $51.6 million of the consideration paid was allocated to the reacquisition of the equity component of the original instrument, which was recorded net of deferred taxes of $23.5 million within additional paid-in-capital.
On November 9, 2016, the Company announced that pursuant to the terms of the indenture for the 2.00% Convertible Exchange Senior Notes due 2037, issued in November 2010 (the “2010 Notes”), holders of the 2010 Notes, had the option of requiring the Company to repurchase their 2010 Notes on December 16, 2016 at a repurchase price payable in cash equal to 100% of the original principal amount of the 2010 Notes. None of the 2010 Notes were surrendered for repurchase pursuant to the option. In addition, the Company also announced on November 9, 2016 that, pursuant to the terms of the indenture, it had elected to redeem, on December 19, 2016, all of the then outstanding 2010 Notes at a redemption price payable in cash equal to 100% of the accreted principal amount of the 2010 Notes. Holders of the 2010 Notes also had a right to convert their 2010 Notes. During the first quarter of fiscal 2017, all of the outstanding 2010 Notes were either converted or surrendered for conversion in aggregate principal of $12.3 million, which was paid out over the first and second quarters of fiscal 2017. The payouts included an additional $8.7 million of premium payments due to the Company's stock price exceeding the conversion price.
During the third quarter of fiscal 2017, the closing price of the Company's common stock exceeded 130% of the applicable conversion price of its 2012 Notes on at least 20 of the last 30 consecutive trading days of the second calendar quarter ending June 30, 2017. As a result, holders of the 2012 Notes are able to convert their notes during the third calendar quarter of 2017. The carrying amount of the 2012 Notes as of July 1, 2017 was $260.0 million (which had a principal value of $263.4 million at July 1, 2017). In the event the closing price conditions are met in the third calendar quarter of 2017 or a future calendar quarter, the 2012 Notes will be convertible at a holder's option during the immediately following calendar quarter. As of July 1, 2017, the if-converted value of the 2012 Notes exceeded the aggregate principal amount by approximately $123.7 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 2012 Notes and, if applicable, shares of its common stock or cash to satisfy the premium based on a calculated daily conversion value.
On various dates during the second quarter of fiscal 2016, the Company entered into privately negotiated repurchase transactions and extinguished $90.0 million and $136.6 million principal amount of the 2010 Notes and 2012 Notes, respectively, for total payments of $140.1 million and $171.3 million, respectively. These amounts include the conversion premium resulting from the Company's stock price on the date of the transactions being in excess of the conversion price of $23.03 and $31.175 for the 2010 Notes and 2012 Notes, respectively. The Company accounted for the extinguishments under the derecognition provisions of subtopic ASC 470-20-40 and recorded a debt extinguishment loss of $4.5 million in the second quarter of fiscal 2016. In addition, on a gross basis, $88.8 million of the consideration paid was allocated to the reacquisition of the equity component of the original instrument, which was recorded net of deferred taxes of $22.5 million within additional paid-in-capital.
The term "Convertible Notes" refers to the 2010 Notes, the 2012 Notes and the 2013 Notes.
Interest expense under the Convertible Notes was as follows: 
 
Three Months Ended
 
Nine Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Amortization of debt discount
$
4.4

 
$
5.2

 
$
14.5

 
$
17.3

Amortization of deferred financing costs
0.2

 
0.2

 
0.7

 
0.9

Principal accretion
3.9

 
4.2

 
12.8

 
12.4

Non-cash interest expense
8.5

 
9.6

 
28.0

 
30.6

2.00% accrued interest (cash)
1.6

 
2.1

 
5.4

 
8.0

 
$
10.1

 
$
11.7

 
$
33.4

 
$
38.6


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Accounts Receivable Securitization Program
Effective April 21, 2017, the Company entered into an amendment to extend the Securitization Program an additional year to April 20, 2018. The amendment allows the Company to continue to borrow up to $200.0 million and due to structural changes to the terms, the borrowing base has fewer limitations. As a result, on April 25, 2017, the Company borrowed an additional $36.0 million increasing the borrowed amount to the $200.0 million maximum allowed.
Borrowings under the Securitization Program for the three and nine month periods ended July 1, 2017 had weighted-average interest rates of 1.22% and 1.32%, respectively. Interest expense under the Securitization Program aggregated $0.9 million and $2.3 million for the three and nine month period ended July 1, 2017. The interest rate on the amounts outstanding at July 1, 2017 was 1.92%. Interest expense under the Securitization Program aggregated $0.4 million for the three and nine month periods ended June 25, 2016.


(6) 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 through 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 Income.
During fiscal 2015, the Company entered into separate interest rate cap agreements with multiple counter-parties to help mitigate the interest rate volatility associated with the variable interest rate on amounts borrowed under its 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 for the interest rate cap agreements was $13.2 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 its Credit Agreement and therefore are 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 over a three-year period, which ends on December 29, 2017.
As of July 1, 2017, 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 were recorded in the Consolidated Statements of Comprehensive Income as a component of AOCI.
During the three and nine months ended July 1, 2017, $1.6 million and $4.9 million, respectively, was reclassified from AOCI to the Company’s Consolidated Statements of Income related to the interest rate cap agreements. The Company expects to similarly reclassify a loss of approximately $4.4 million from AOCI to the Consolidated Statements of Income in the next twelve months.
The aggregate fair value of these interest rate caps was $2.6 million and $1.4 million at July 1, 2017 and September 24, 2016, respectively, and is included in Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheet. Refer to Note 2 “Fair Value Measurements” above for related fair value disclosures.
Forward Foreign Currency Contracts
The Company enters into forward foreign currency exchange contracts to mitigate certain operational exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company's operations that are denominated in currencies other than the U.S. dollar, primarily the Euro, the UK Pound, the Australian dollar, the Canadian dollar and the Japanese Yen. These foreign currency exchange contracts are entered into to support transactions made in the ordinary course of business and are not speculative in nature. The contracts are generally for periods of one year or less. The Company has not elected hedge accounting for any of the forward foreign currency contracts it has executed; however, the Company may seek to apply hedge accounting in future scenarios. The change in the fair value of these contracts is recognized directly in earnings as a component of other income (expense), net. During the three and nine months ended July 1, 2017, the Company recorded net realized gains of $1.1 million and $4.0 million, respectively, from settling forward foreign currency contracts and an unrealized loss of $3.5 million and an unrealized gain of $1.1 million, respectively, on the mark-to-market for its outstanding forward foreign currency contracts. During the three and nine months ended June 25, 2016, the Company

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recorded a realized loss of $0.2 million and realized gain of $0.8 million, respectively, from settling forward foreign currency contracts and net unrealized gains of $0.2 million and $0.6 million, respectively, on the mark-to-market for its outstanding forward foreign currency contracts.
As of July 1, 2017, the Company had outstanding forward foreign currency contracts that were not designated for hedge accounting and were used to hedge fluctuations in the U.S. dollar of forecasted transactions denominated in the Euro, UK Pound, Australian dollar, Canadian Dollar and Japanese Yen with an aggregate notional amount of $42.3 million.
Financial Instrument Presentation
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the balance sheet as of July 1, 2017:
 
Balance Sheet Location
 
July 1, 2017
 
September 24, 2016
Assets:
 
 
 
 
 
Derivative instruments designated as a cash flow hedge:
 
 
 
 
 
Interest rate cap agreements
Prepaid expenses and other current assets
 
$
2.6

 
$
1.0

Interest rate cap agreements
Other assets
 
—

 
0.4

 
 
 
$
2.6

 
$
1.4

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Forward foreign currency contracts
Prepaid expenses and other current assets
 
$
0.5

 
$
0.2

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Forward foreign currency contracts
Accrued expenses
 
$
0.5

 
$
1.3

The following table presents the unrealized gain (loss) recognized in AOCI related to the interest rate caps for the following reporting periods:
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2017
 
June 25, 2016
 
July 1, 2017
 
June 25, 2016
Amount of gain (loss) recognized in other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Interest rate cap agreements
$
(0.4
)
 
$
(1.5
)
 
$
0.7

 
$
(3.4
)
The following table presents the adjustment to fair value (realized and unrealized) recorded within the Consolidated Statements of Income for derivative instruments for which the Company did not elect hedge accounting:
Derivatives not classified as hedging instruments
 
Amount of Gain (Loss) Recognized in Income
Location of Gain (Loss) Recognized in Income
 
 
Three Months Ended July 1, 2017
 
Three Months Ended June 25, 2016
 
Nine Months Ended July 1, 2017
 
Nine Months Ended June 25, 2016
 
Forward foreign currency contracts
 
$
(2.4
)
 
$
0.1

 
$
5.1

 
$
1.4

Other income, net


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(7) Commitments and Contingencies
Litigation and Related Matters

On June 9, 2010, Smith & Nephew, Inc. ("Smith & Nephew") filed suit against Interlace Medical, Inc. ("Interlace"), which the Company acquired on January 6, 2011, in the United States District Court for the District of Massachusetts. The complaint alleged that the Interlace MyoSure hysteroscopic tissue removal device infringed U.S. patent 7,226,459 (the '459 patent). 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 tissue removal system infringed U.S. patent 8,061,359 (the '359 patent). Both complaints sought preliminary and 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. A two-day bench trial regarding the Company’s assertion of inequitable conduct on the part of Smith & Nephew with regard to the '359 patent began on December 10, 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 also rejected the jury’s damage award and ordered the parties to identify a mechanism for resolving the damages issue. The USPTO issued final decisions that the claims of the '459 and the '359 patents asserted as part of the litigation are not patentable, which decisions Smith & Nephew appealed to the U.S. Patent Trial and Appeal Board. In 2016, the U.S. Patent Trial and Appeal Board (i) affirmed the USPTO decision with respect to the '459 patent, holding that the claims at issue are invalid, and (ii) reversed the USPTO decision with respect to the '359 patent, holding that the claims at issue are not invalid. The Company and Smith & Nephew have appealed the decisions by the Patent Trial and Appeal Board on the '359 patent and the '459 patent, respectively, to the U.S. Court of Appeals for the Federal Circuit. Briefing on both appeals was completed on June 7, 2017. Oral arguments have not been scheduled. 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 April 11, 2017, Minerva Surgical, Inc. (“Minerva”) filed suit against the Company and Cytyc Surgical Products, LLC (“Cytyc”) in the United States District Court for the Northern District of California alleging that the Company’s and Cytyc’s NovaSure ADVANCED endometrial ablation device infringes Minerva’s U.S. patent 9,186,208. Minerva is seeking a preliminary and permanent injunction against the Company and Cytyc from selling this NovaSure device as well as enhanced damages and interest, including in lost profits, price erosion and/or royalty. 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.

In January 2012, Enzo Life Sciences, Inc. ("Enzo") filed suit against the Company's subsidiary, Gen-Probe Incorporated ("Gen-Probe"), in the United States District Court for the District of Delaware, alleging that certain of Gen-Probe’s diagnostics products, including products that incorporate Gen-Probe’s hybridization protection assay technology (HPA), which include the Aptima line of products, infringe Enzo’s U.S. patent 6,992,180 (the '180 patent). On March 6, 2012, Enzo filed suit against the Company in the United States District Court for the District of Delaware, alleging that products based on the Company's Invader chemistry platform, such as Cervista HPV HR and Cervista HPV 16/18, infringe the '180 patent. On July 16, 2012, Enzo amended its complaint to include additional products that include HPA or TaqMan reagent chemistry, including Progensa, AccuProbe and Prodesse product lines. The Company counter-claimed for non-infringement, invalidity and unenforceability of the '180 patent. On September 30, 2013, Enzo filed its infringement contentions which added products including "Torch" probes (e.g., MilliPROBE Real-Time Detection System for Mycoplasma), PACE and certain Procleix assays. Both complaints seek preliminary and permanent injunctive relief and unspecified damages. Enzo asserted the '180 patent claims against six other companies, three of which have settled with Enzo. Summary judgment and Daubert motions were filed by the parties on December 15, 2016. A hearing on the summary judgment motions was held on April 4, 2017, and on June 28, 2017, the Court ruled that the '180 patent is invalid for nonenablement. Once final judgment is entered in the case, Enzo will have an opportunity to appeal the Court’s decision to the Court of Appeals for the Federal Circuit. 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 alleges 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 the '180 patent. The complaint further alleged that certain of the Company’s molecular diagnostic products, including the Company’s Progensa PCA3, Aptima and Procleix products using target capture technology infringe Enzo’s U. S. Patent 7,064,197 (the '197 patent). On June 11, 2015, this matter was stayed pending the resolution of summary judgment motions in

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the other related suits involving the '197 patent. On March 30, 2016, Hologic filed two requests for inter partes review of the ‘197 patent at the USPTO. The USPTO instituted the two inter partes reviews on all challenged claims on October 4, 2016. Combined oral arguments for the two inter partes reviews were held on June 1, 2017. 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 3, 2016, Enzo filed an additional suit against the Company in the United States District Court for the District of Delaware. The complaint alleges that all of the Company's Progensa PCA3, Aptima and Procleix products infringe U.S. Patent 6,221,581 (the '581 patent). On November 28, 2016, the Company filed an answer and counterclaims of non-infringement, invalidity and unenforceability. On June 30, 2017, Hologic filed its initial invalidity contentions, which provide support for finding that the asserted claims of the '581 patent are invalid based on anticipation, obviousness, lack of adequate written description and enablement, and indefiniteness. 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 February 3, 2017, bioMérieux, S.A. and bioMérieux, Inc. (collectively “bioMérieux”) filed suit against the Company in the United States District Court for the Middle District of North Carolina. The complaint alleged that the Company’s Aptima HIV-1 RNA Qualitative assay and Aptima HIV-1 Quant Dx assay, as well as products manufactured by the Company and sold to Grifols, S.A. and Grifols Diagnostic Solutions Inc. (“Grifols USA”) for resale under the names Procleix HIV-1/HCV assay, Procleix Ultrio assay, and Procleix Ultrio Plus assay, infringe U.S. Patent Nos. 8,697,352 and 9,074,262. On April 3, 2017, the Company and Grifols USA filed a Motion to dismiss asking the Court to dismiss the complaint in its entirety for bioMérieux’s failure to state a claim upon which relief can be granted. On June 9, 2017, Hologic and Grifols USA filed a supplemental motion to dismiss for improper venue. bioMérieux filed a response to the venue motion on June 30, 2017, and Hologic and Grifols USA responded by filing a brief in further support of their motion to dismiss for improper venue on July 14, 2017. 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 range of estimates, or potential losses.
On July 27, 2016, plaintiff ARcare, Inc., individually and as putative representative of a purported nationwide class, filed a complaint against Cynosure.  The plaintiff alleges that Cynosure violated the Telephone Consumer Protection Act by: (i) sending fax advertisements that did not comply with statutory and Federal Communications Commission requirements that senders provide recipients with certain information about how to opt out from receiving faxed advertisements in the future; and (ii) sending unsolicited fax advertisements. The complaint sought damages, declaratory and injunctive relief, and attorneys’ fees on behalf of a purported class of all recipients of purported fax advertisements that the plaintiff alleges did not receive an adequate opt-out notice. On September 30, 2016, Cynosure answered the complaint and denied liability. On September 7, 2016, the plaintiff sent a demand letter seeking a class settlement for statutory damages under Massachusetts General Laws, Chapter 93A § 9 (“Chapter 93A”). On October 7, 2016, Cynosure responded denying any liability under Chapter 93A, but offering the plaintiff statutory damages of $25 on an individual basis.  In March 2017, Cynosure and ARcare entered into a settlement agreement, subject to court approval, which requires Cynosure to pay settlement compensation of $8.5 million notwithstanding the number of claims filed. If approved, Cynosure would receive a full release from the settlement class concerning the conduct alleged in the complaint. As a result of the settlement agreement, Cynosure recorded a charge of $9.2 million, in the period ended December 31, 2016, which is still accrued on the Company's balance sheet as of July 1, 2017.

On March 17, 2017, prior to the consummation of Hologic’s acquisition of Cynosure, Hologic received a written demand for appraisal from BlueMountain Capital Management LLC and its affiliates with respect to 1,200,000 shares of Cynosure (value of $79.2 million at $66.00 per share). On April 17, 2017, the shareholders filed a Petition for Appraisal of Stock in the Court of Chancery of the State of Delaware requesting appraisal and payment of the fair value of their shares as well as interest compounded quarterly at 5% over the Federal Reserve discount rate, from March 22, 2017, to the date of payment. The Company filed a response on May 5, 2017, and litigation is expected to proceed.

On March 17, 2017, a purported shareholder of Cynosure, Michael Guido, filed an action against Cynosure in the Court of Chancery of the State of Delaware pursuant to Section 220 of the Delaware General Corporation Law seeking the production of certain books and records, including books and records related to the acquisition of Cynosure by Hologic. The action follows Cynosure’s rejection of Mr. Guido’s demand for these books and records on the ground that he had not met the requirements of the statute. In addition to books and records, the complaint seeks reasonable attorneys’ fees. The Company filed an answer to the complaint on April 10, 2017. At this time, based on available information regarding this matter, the Company is unable to reasonably assess the ultimate outcome of this case or determine an estimate, or range of estimates, or potential losses.

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

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Table of Contents

the ultimate resolution of which could 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.

(8) Marketable Securities
In connection with the acquisition of Cynosure, the Company assumed $82.9 million of short and long-term marketable securities, which were classified as available-for-sale and primarily comprised of state and municipal bonds and U.S. treasury notes. Prior to the end of the second fiscal quarter, the Company liquidated the majority of these investments with the exception of $5.2 million of municipal bonds and recorded a loss of $0.2 million in other income, net. During the third fiscal quarter, the remaining $5.2 million of investments were liquidated.
As of the balance sheet dates, the following reconciles the cost basis to the fair market value of the Company's equity securities that are classified as available-for-sale:
 
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
Other Than Temporary Impairment
 
Fair Value
Period Ended:
 
 
 
 
 
 
 
 
July 1, 2017
$
0.7

 
$
—

 
$
(0.5
)
$
—

 
$
0.2

September 24, 2016
$
2.4

 
$
—

 
$
(0.3
)
$
(1.1
)
 
$
1.0


In the first quarter of fiscal 2017, one of the Company's cost-method equity investments became a marketable security, and the Company recorded the increase in value of $4.0 million to other comprehensive income. In the second quarter of fiscal 2017, the Company sold this marketable security and recorded a gain of $3.8 million in other income, net.

In the first quarter of fiscal 2016, the Company sold all of its shares in one of its marketable securities and recorded a gain of $25.1 million in other income, net.

(9) Net Income Per Share
A reconciliation of basic and diluted share amounts is as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Basic weighted average common shares outstanding
280,824

 
277,853

 
279,901

 
281,101

Weighted average common stock equivalents from assumed exercise of stock options and stock units
2,781

 
2,399

 
2,822

 
2,603

Incremental shares from Convertible Notes premium
4,033

 
2,050

 
3,234

 
3,673

Diluted weighted average common shares outstanding
287,638

 
282,302

 
285,957

 
287,377

Weighted-average anti-dilutive shares related to:
 
 
 
 
 
 
 
Outstanding stock options
1,688

 
1,149

 
1,657

 
996

Stock units
—

 
15

 
4

 
77

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, 2012 and 2013 Notes is included in the calculation of diluted weighted-average shares outstanding to the extent each issuance is dilutive based on the average stock price during each reporting period being greater than the conversion price of the respective Notes.

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(10) Stock-Based Compensation
The following presents stock-based compensation expense in the Company’s Consolidated Statements of Income:
 
Three Months Ended
 
Nine Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Cost of revenues
$
2.3

 
$
2.2

 
$
8.7

 
$
6.9

Research and development
2.2

 
2.4

 
9.1

 
7.3

Selling and marketing
3.4

 
2.5

 
9.3

 
7.8

General and administrative
6.5

 
7.4

 
26.3

 
23.1

 
$
14.4

 
$
14.5

 
$
53.4

 
$
45.1

The Company granted 1.0 million stock options during each of the nine months ended July 1, 2017 and June 25, 2016, respectively, with weighted-average exercise prices of $38.07 and $39.39, respectively. There were 5.6 million options outstanding at July 1, 2017 with a weighted-average exercise price of $28.12.
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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Risk-free interest rate
1.8
%
 
1.6
%
 
1.8
%
 
1.6
%
Expected volatility
36.5
%
 
37.8
%
 
36.6
%
 
37.8
%
Expected life (in years)
4.7

 
4.7

 
4.7

 
4.7

Dividend yield
—

 
—

 
—

 
—

Weighted average fair value of options granted
$
14.40

 
$
11.36

 
$
12.33

 
$
12.95

The Company granted 1.0 million restricted stock units (RSUs) during each of the nine months ended July 1, 2017 and June 25, 2016, respectively, with weighted-average grant date fair values of $37.99 and $39.46 per unit, respectively. As of July 1, 2017, there were 2.4 million unvested RSUs outstanding with a weighted-average grant date fair value of $34.05 per unit. In addition, the Company granted 0.1 million and 0.2 million performance stock units (PSUs) during the nine months ended July 1, 2017 and June 25, 2016, respectively, to members of its senior management team, which have a weighted-average grant date fair value of $38.84 and $39.72 per unit, respectively. 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. The Company also granted 0.1 million market based awards (MSUs) to its senior management team. Each recipient of 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 based upon achieving a certain total shareholder return relative to a defined peer group. The MSUs were valued at $48.90 per share using the Monte Carlo simulation model. The Company is recognizing compensation expense for the MSUs ratably over the service period.
At July 1, 2017, there was $24.1 million and $67.4 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 2.7 and 1.9 years, respectively.

(11) Disposition
    
Blood Screening Business

On December 14, 2016, the Company entered into a definitive agreement to sell the assets of its blood screening business to its long-time commercial partner, Grifols for a sales price of $1.85 billion in cash, subject to adjustment based on an estimated closing amount of inventory. The divestiture was completed on January 31, 2017, and the Company received $1.865 billion. The sale resulted in a gain of $899.7 million recorded in the second quarter of fiscal 2017 within operations in the Consolidated Statements of Income. As a result of this disposition and proceeds received, the Company recorded a tax obligation of $649.5 million, the majority of which was paid in the third quarter of fiscal 2017. Upon the closing of the transaction, the Company's existing collaboration agreement with Grifols terminated, and a new collaboration agreement was executed as part of this transaction pursuant to which the Company provides certain research and development services to Grifols. In addition, the Company agreed to provide transition services to Grifols over the next two to three years depending on the nature of the respective service, including the manufacture of inventory. The Company has also agreed to sell Panther instrumentation and certain supplies to Grifols as part of a long term supply agreement. In determining the accounting for the multiple elements of the overall arrangement, the Company allocated $13.1 million of the proceeds to these elements based on their estimated fair values.

The Company determined this disposal does not qualify to be reported as a discontinued operation as the blood screening business was deemed not to be strategic to the Company and has not had and will not have a major effect on the Company's operations and financial results. Under the previous collaboration agreement, the Company performed research and development activities and manufacturing, while Grifols performed the commercial and distribution activities. The blood screening business was embedded within the Company's molecular diagnostics business, and the Company retains ownership and will continue to use the intellectual property for the underlying technology of its molecular diagnostics assays and instrumentation.
Income from operations of the disposed business presented below represents the pretax profit of the business as it was operated prior to the date of disposition. The operating expenses include only those that were incurred directly by and were retained by the disposed business and are now incurred by Grifols. As noted above, the Company is performing a number of transition services and the financial impact from these services are not included in the amounts presented below and the Company is in effect serving as a contract manufacturer of assays for Grifols for a two to three year period. Income from operations of the disposed business for the three and nine month periods ended July 1, 2017 and June 25, 2016 was as follows:
 
Three Months Ended
Nine Months Ended
 
July 1, 2017
June 25, 2016
July 1, 2017
June 25, 2016
 
 
 
 
 
Income from operations
$
0.0

$
22.9

$
45.8

$
77.3

Under the long term supply agreement and transition services agreement to manufacture assays, subsequent to disposing the blood screening business, the Company recognized revenues of $19.0 million and $26.0 million, respectively, during the three and nine months ended July 1, 2017.




22
Table of Contents


(12) Other Balance Sheet Information

 
July 1,
2017
 
September 24,
2016
Inventories
 
 
 
Raw materials
$
106.4

 
$
96.4

Work-in-process
50.5

 
51.7

Finished goods
200.1

 
126.6

 
$
357.0

 
$
274.7

Property, plant and equipment
 
 
 
Equipment and software
$
410.2

 
$
381.9

Equipment under customer usage agreements
359.0

 
334.6

Building and improvements
171.5

 
186.1

Leasehold improvements
59.8

 
65.6

Land
46.3

 
51.9

Furniture and fixtures
20.7

 
18.4

 
1,067.5

 
1,038.5

Less – accumulated depreciation and amortization
(582.0
)
 
(578.3
)
 
$
485.5

 
$
460.2


(13) Business Segments and Geographic Information
The Company has five reportable segments: Diagnostics, Breast Health, Medical Aesthetics, 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, divestiture and facility consolidation charges and other one-time or unusual items.

23
Table of Contents

Identifiable assets for the five principal operating segments consist of inventories, intangible assets, goodwill, and property, plant and equipment. The Company fully allocates depreciation expense to its five reportable segments. The Company has presented all other identifiable assets as corporate assets. There were no inter-segment revenues during the three and nine months ended July 1, 2017 and June 25, 2016. Segment information is as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Total revenues:
 
 
 
 
 
 
 
Diagnostics
$
284.1

 
$
309.9

 
$
905.4

 
$
925.0

Breast Health
283.7

 
282.5

 
837.4

 
820.5

Medical Aesthetics
110.0

 
—

 
126.1

 
—

GYN Surgical
106.5

 
102.0

 
322.4

 
291.6

Skeletal Health
21.8

 
23.0

 
64.6

 
68.7

 
$
806.1


$
717.4


$
2,255.9


$
2,105.8

Income (loss) from operations:
 
 
 
 
 
 
 
Diagnostics
$
36.8

 
$
31.7

 
$
1,007.8

 
$
97.6

Breast Health
99.2

 
90.8

 
277.1

 
250.7

Medical Aesthetics
(45.4
)
 
—

 
(69.9
)
 
—

GYN Surgical
25.6

 
16.8

 
52.9

 
49.2

Skeletal Health
(1.2
)
 
0.1

 
(7.0
)
 
4.1

 
$
115.0


$
139.4

 
$
1,260.9

 
$
401.6

Depreciation and amortization:
 
 
 
 
 
 
 
Diagnostics
$
64.7

 
$
90.6

 
$
214.0

 
$
258.0

Breast Health
5.0

 
5.1

 
14.7

 
17.5

Medical Aesthetics
24.7

 
—

 
27.3

 
—

GYN Surgical
23.7

 
24.9

 
72.2

 
74.4

Skeletal Health
0.2

 
0.3

 
0.5

 
0.9

 
$
118.3


$
120.9


$
328.7


$
350.8

Capital expenditures:
 
 
 
 
 
 
 
Diagnostics
$
13.0

 
$
12.7

 
$
34.7

 
$
37.6

Breast Health
3.2

 
2.4

 
7.2

 
7.7

Medical Aesthetics
3.3

 
—

 
3.7

 
—

GYN Surgical
3.5

 
4.1

 
10.9

 
10.9

Skeletal Health
0.2

 
0.1

 
0.5

 
0.4

Corporate
1.1

 
1.8

 
17.0

 
6.2

 
$
24.3


$
21.1


$
74.0


$
62.8

 
 
July 1,
2017
 
September 24,
2016
Identifiable assets:
 
 
 
Diagnostics
$
2,670.7

 
$
3,771.9

Breast Health
830.0

 
809.1

Medical Aesthetics
1,783.7

 
—

GYN Surgical
1,512.5

 
1,570.7

Skeletal Health
30.0

 
30.9

Corporate
1,291.1

 
1,134.4

 
$
8,118.0

 
$
7,317.0


24
Table of Contents

The Company had no customers that represented greater than 10% of consolidated revenues during the three and nine months ended July 1, 2017 and June 25, 2016.
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 “Rest of world” 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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
United States
76.7
%
 
78.7
%
 
78.1
%
 
78.7
%
Europe
9.4
%
 
10.6
%
 
9.9
%
 
10.3
%
Asia-Pacific
8.7
%
 
7.5
%
 
7.9
%
 
7.6
%
Rest of world
5.2
%
 
3.2
%
 
4.1
%
 
3.4
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

(14) 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 rate for the three and nine months ended July 1, 2017 was 20.1% and 41.9%, respectively, compared to 16.1% and 22.5%, respectively, for the corresponding periods in the prior year. For the current three month period, the effective tax rate was lower than the statutory tax rate primarily due to earnings in jurisdictions subject to lower tax rates, the domestic production activities deduction benefit, stock compensation tax benefits, and federal and state tax credits. For the current nine month period, the effective tax rate was higher than the statutory tax rate primarily due to the gain on the sale of the blood screening business as the tax basis of the assets sold was lower than the book basis, partially offset by earnings in jurisdictions subject to lower tax rates, the domestic production activities deduction benefit, the reversal of reserves from settling open audits, stock compensation tax benefits, and federal and state tax credits. For the three and nine months ended June 25, 2016, the effective tax rate was lower than the statutory tax rate primarily due to earnings in jurisdictions subject to lower tax rates, the domestic production activities deduction benefit, a favorable state audit settlement, and a change in the valuation allowance related to the sale of a marketable security that had a gain for book purposes.

During the quarter ended April 1, 2017, the Internal Revenue Service ("IRS") completed its audit for fiscal years 2013 and 2014. The Company made a cash payment of $1.7 million and recorded an income tax benefit of $10.9 million related to the reversal of unrecognized tax benefits. 
The Company has $101.9 million of gross unrecognized tax benefits, excluding interest, as of July 1, 2017. The gross unrecognized tax benefits decreased $61.7 million from September 24, 2016, of which $64.0 million was a balance sheet reclassification as a result of the effective settlement during the second quarter of fiscal 2017 of uncertain tax positions related to the convertible debt exchange that took place in the second quarter of fiscal 2013 and $6.2 million was the result of the effective settlement during the second quarter of other unrecognized tax benefits, which were offset by $8.5 million of other net year-to-date additions.

In the next twelve months it is reasonably possible that the Company will reduce its gross unrecognized tax benefits, excluding interest, by up to approximately $20.2 million due to expiring statutes of limitations.

Non-Income Tax Matters


25
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The Company is subject to tax examinations for value added, sales-based, payroll and other non-income tax items. A number of these examinations are ongoing in various jurisdictions. The Company takes certain non-income tax positions in the jurisdictions in which it operates pursuant to ASC 450. In the normal course of business, the Company's positions and conclusions related to its non-income tax positions could be challenged, resulting in assessments by governmental authorities.

In the second quarter of fiscal 2017, based on current period developments in an ongoing state tax audit, the Company determined that it was probable it had incurred a loss related to a non-income tax issue. The Company estimated the most likely amount of loss to be $28.8 million for all open years and recorded this charge to general and administrative expenses in the second quarter of fiscal 2017. While the Company believes its estimate is reasonable and appropriate, this matter is still ongoing and additional charges could be recorded in the future.

During the third quarter of fiscal 2017, the Internal Revenue Service approved and paid refund claims submitted in connection with Medical Device Excise Tax filings for the January 1, 2013 through December 31, 2015 periods. As a result, the Company recorded a gain of $12.4 million in the third quarter of fiscal 2017 within general and administrative expenses.

(15) Intangible Assets
Intangible assets consisted of the following:
 
Description
As of July 1, 2017
 
As of September 24, 2016
Gross
Carrying
Value
 
Accumulated
Amortization
 
Gross
Carrying
Value
 
Accumulated
Amortization
Developed technology
$
4,467.5

 
$
2,107.5

 
$
3,983.7

 
$
1,991.6

In-process research and development
107.0

 
—

 
3.7

 
—

Customer relationships
552.2

 
384.2

 
1,098.9

 
546.2

Trade names
310.2

 
151.6

 
236.2

 
141.6

Non-competition agreements
1.5

 
0.1

 
—

 
—

Distribution agreement
42.0

 
1.5

 
—

 
—

Business licenses
2.4

 
2.1

 
2.4

 
2.1

 
$
5,482.8


$
2,647.0


$
5,324.9


$
2,681.5

During the second quarter, the Company divested its blood screening business and as such $154.0 million of net book value of developed technology and $387.7 million of net book value of customer contract assets were disposed of. In addition, in the second quarter of fiscal 2017, the Company acquired Cynosure and recorded an aggregate of $994.0 million of intangible assets (see Note 3). In the third quarter of fiscal 2017, the Company acquired Medicor and recorded $5.4 million of intangible assets. In addition, during the third quarter of fiscal 2017, the Company obtained CE approval for its last in-process research and development project acquired in the Gen-Probe Incorporated acquisition and transferred $3.7 million to developed technology.
In the third quarter of fiscal 2016, the Company accelerated the amortization of its Cystic Fibrosis developed technology asset of $6.2 million as a result of discontinuing this product line.
The estimated remaining amortization expense as of July 1, 2017 for each of the five succeeding fiscal years is as follows:
Remainder of Fiscal 2017
$
94.3

Fiscal 2018
$
370.4

Fiscal 2019
$
358.7

Fiscal 2020
$
347.5

Fiscal 2021
$
326.0


(16) Product Warranties
Product warranty activity was as follows:
 
 
Balance at
Beginning of
Period
 
Provisions
 
Acquired
 
Settlements/
Adjustments
 
Balance at
End of Period
Nine Months Ended:
 
 
 
 
 
 
 
 
 
July 1, 2017
$
5.0

 
$
12.1

 
$
9.9

 
$
(9.3
)
 
$
17.7

June 25, 2016
$
5.4

 
$
8.5

 
$
—

 
$
(4.8
)
 
$
9.1

During the first quarter of fiscal 2016, the Company recorded a warranty provision of $4.0 million related to certain products sold exclusively in the Chinese market.
(17) Accumulated Other Comprehensive Loss

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

 
Three Months Ended July 1, 2017
 
Nine Months Ended July 1, 2017
 
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
$
(38.4
)
 
$
(0.3
)
 
$
(2.5
)
 
$
1.0

 
$
(40.2
)
 
$
(26.1
)
 
$
(0.3
)
 
$
(2.5
)
 
$
(3.4
)
 
$
(32.3
)
Other comprehensive income (loss) before reclassifications
11.6

 
—

 
—

 
(0.4
)
 
11.2

 
(0.7
)
 
2.4

 
—

 
0.7

 
2.4

Amounts reclassified to statement of income
—

 
—

 
—

 
1.6

 
1.6

 
—

 
(2.4
)
 
—

 
4.9

 
2.5

Ending Balance
$
(26.8
)
 
$
(0.3
)
 
$
(2.5
)
 
$
2.2

 
$
(27.4
)
 
$
(26.8
)
 
$
(0.3
)
 
$
(2.5
)
 
$
2.2

 
$
(27.4
)

 
Three Months Ended June 25, 2016
 
Nine Months Ended June 25, 2016
 
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
$
(21.1
)
 
$
(1.5
)
 
$
(1.8
)
 
$
(4.8
)
 
$
(29.2
)
 
$
(15.7
)
 
$
6.9

 
$
(1.8
)
 
$
(3.9
)
 
$
(14.5
)
Other comprehensive income (loss) before reclassifications
(3.8
)
 
—

 
—

 
(1.5
)
 
(5.3
)
 
(9.2
)
 
(1.2
)
 
—

 
(3.4
)
 
(13.8
)
Amounts reclassified to statement of income
—

 
—

 
—

 
1.2

 
1.2

 
—

 
(7.2
)
 
—

 
2.2

 
(5.0
)
Ending Balance
$
(24.9
)
 
$
(1.5
)
 
$
(1.8
)
 
$
(5.1
)
 
$
(33.3
)
 
$
(24.9
)
 
$
(1.5
)
 
$
(1.8
)
 
$
(5.1
)
 
$
(33.3
)


(18) New Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350). This guidance simplifies how companies calculate goodwill impairments by eliminating Step 2 of the impairment test. The guidance requires companies to compare the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The guidance is effective for annual periods beginning after December 15, 2019, and is applicable to the Company in fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2017-04 on its consolidated financial position and results of operations.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The guidance is effective for annual periods beginning after December 15, 2017, and is applicable to the Company in fiscal 2019. Early adoption is permitted as of the beginning of an annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2016-16 on its consolidated financial position and results of operations.

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In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow (Topic 230). The guidance reduces diversity in how certain cash receipts and cash payments are presented and classified in the Statements of Cash Flows. Certain of ASU 2016-15 requirements are as follows: 1) cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities, 2) contingent consideration payments made soon after a business combination should be classified as cash outflows for investing activities and cash payment made thereafter should be classified as cash outflows for financing up to the amount of the contingent consideration liability recognized at the acquisition date with any excess classified as operating activities, 3) cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss, 4) cash proceeds from the settlement of Corporate-Owned Life Insurance (COLI) Policies should be classified as cash inflows from investing activities and cash payments for premiums on COLI policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities, and 5) cash paid to a tax authority by an employer when withholding shares from an employee's award for tax-withholding purposes should be classified as cash outflows for financing activities. The guidance is effective for annual periods beginning after December 15, 2017, and is applicable to the Company in fiscal 2019. Early adoption is permitted. The adoption of ASU 2016-15 is not expected to have a material effect on the Company's consolidated financial statements.
    
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The guidance requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected credit losses during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The updated guidance is effective for annual periods beginning after December 15, 2019, and is applicable to the Company in fiscal 2021. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial position and results of operations.
  
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires an entity to recognize a right-of-use asset and a lease liability for virtually all of its leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The guidance is effective for annual periods beginning after December 15, 2018, and is applicable to the Company in fiscal 2020. Early adoption is permitted. The updated guidance requires a modified retrospective adoption. The Company is currently evaluating the anticipated impact of the adoption of ASU 2016-02 on its consolidated financial position and results of operations.
 
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes how entities measure equity investments that do not result in consolidation and are not accounted for under the equity method. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values, however; the exception requires the Company to consider relevant transactions that can be reasonably known to identify any observable price changes that would impact the fair value. This guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. This guidance is effective for annual periods beginning after December 15, 2017, and is applicable to the Company in fiscal 2019. Early adoption is permitted. The Company is currently evaluating the anticipated impact of the adoption of ASU 2016-01 on its consolidated financial position and results of operations.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). ASC 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendment requires that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and is applicable to the Company in fiscal 2017. The amendment will be applied prospectively to adjustments to provisional amounts that occur after the effective date.


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In July 2015, the FASB issued guidance under ASC 330, Simplifying the Measurement of Inventory. The new guidance requires inventory to be measured at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. This new guidance is effective for the Company's first quarter of fiscal 2018 and early adoption is permitted. The guidance must be applied prospectively. The Company is currently evaluating the impact of the adoption of this requirement on its consolidated financial statements 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 conditions or events 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 is applicable to the Company in fiscal 2018. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on the Company's consolidated financial statements but the standard requires enhanced disclosures in certain circumstances based on the Company's assessment of whether any such conditions or events exist that raise substantial doubt regarding the Company's ability to continue as a going concern within the one year period.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), 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 anticipated impact of the adoption of ASU 2014-09 on its consolidated financial position and results of operations.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements may include, but are not limited to, statements regarding:
 
•
the effect of the continuing worldwide macroeconomic uncertainty, including the UK's decision to leave the European Union, on our business and results of operations;
•
the coverage and reimbursement decisions of third-party payors and the guidelines, recommendations, and studies published by various organizations relating to the use of our products and treatments;
•
the uncertainty of the impact of cost containment efforts and federal healthcare reform legislation on our business and results of operations;
•
the impact to our results of operations from the disposal of our blood screening business to Grifols, and the operational challenges of separating this business unit from our molecular diagnostics business;
•
the ability to successfully manage ongoing organizational and strategic changes, including our ability to attract, motivate and retain key employees;
•
the impact and anticipated benefits of completed acquisitions, including our acquisition of Cynosure, Inc. in the second quarter of fiscal 2017, and acquisitions we may complete in the future;
•
the ability to consolidate certain of our manufacturing and other operations on a timely basis and within budget, without disrupting our business and to achieve anticipated cost synergies related to such actions;
•
our goal of expanding our market positions;
•
the development of new competitive technologies and products;
•
regulatory approvals and clearances for our products;
•
production schedules for our products;
•
the anticipated development of markets we sell our products into and the success of our products in these markets;
•
the anticipated performance and benefits of our products;
•
business strategies;
•
estimated asset and liability values;
•
the impact and costs and expenses of any litigation we may be subject to now or in the future;
•
our compliance with covenants contained in our debt agreements;
•
anticipated trends relating to our financial condition or results of operations, including the impact of interest rate and foreign currency exchange fluctuations; and
•
our capital resources and the adequacy thereof.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include the cautionary statements set forth herein and in our other filings with the Securities and Exchange Commission, including those set forth under "Risk Factors" set forth in Part II, Item 1A of this Quarterly Report, if any, as well as those described in our Annual Report on Form 10-K for the fiscal year ended September 24, 2016. We qualify all of our forward-looking statements by these cautionary statements.

29


OVERVIEW
We are a developer, manufacturer and supplier of premium diagnostics products, medical imaging systems and surgical products with an emphasis on women's health. On March 22, 2017, we acquired Cynosure, Inc., or Cynosure. Cynosure is a developer and manufacturer of a broad array of light-based aesthetic and medical treatment systems. The products are used to provide a diverse range of treatment applications such as non-invasive body contouring, hair removal, skin revitalization and scar reduction, as well as the treatment of vascular lesions. The Cynosure business is referred to as Medical Aesthetics and operates as a separate business segment. As a result of our acquisition of Cynosure, we operate in five segments: Diagnostics, Breast Health, Medical Aesthetics, GYN Surgical and Skeletal Health. We sell and service our products through a combination of direct sales and service personnel and a network of independent distributors and sales representatives.
We offer a wide range of diagnostic products which are used primarily to aid in the diagnosis of human diseases and through January 31, 2017, we offered products that screened donated human blood and plasma. Our primary diagnostics products include our Aptima family of assays, which run on our advanced instrumentation systems (Panther and Tigris), our ThinPrep system, the Rapid Fetal Fibronectin Test and, through January 31, 2017, our Procleix blood screening assays. The Aptima family of assays is used to detect the infectious microorganisms that cause the common sexually transmitted diseases, or STDs, chlamydia and gonorrhea, certain high-risk strains of human papillomavirus, or HPV, and Trichomonas vaginalis, the parasite that causes trichomoniasis. The ThinPrep System is primarily used in cytology applications, such as cervical cancer screening, and the Rapid Fetal Fibronectin Test assists physicians in assessing the risk of pre-term birth. In blood screening, we developed and manufactured the Procleix family of assays, which are used to detect various infectious diseases. These blood screening products were marketed worldwide by our former blood screening collaborator, Grifols S.A., or Grifols, to whom we sold the blood screening business.
In the first quarter of fiscal 2017, we entered into a definitive agreement to sell our blood screening business to Grifols for a sales price of $1.85 billion in cash, subject to adjustment based on the closing amount of inventory. The transaction closed on January 31, 2017 and we received $1.865 billion. The sales price is subject to adjustment based on a finalization of inventory provided to Grifols. The sale resulted in a gain of $899.7 million recorded in the second quarter of fiscal 2017. As a result of this disposition and proceeds received, we recorded a tax obligation of $649.5 million, of which $632.7 million has been paid as of the third quarter of fiscal 2017. Upon the closing of the transaction, our existing collaboration agreement with Grifols terminated, and a new collaboration agreement was executed as part of this transaction for us to provide certain research and development services to Grifols. In addition, we have agreed to provide transition services to Grifols over the next two to three years depending on the nature of the respective service, including the manufacture of inventory, and we are in effect serving as a contract manufacturer of assays for Grifols for a two to three year period. We have also agreed to sell Panther instrumentation and certain supplies to Grifols as part of a long term supply agreement. Revenue, gross profit and operating income of the disposed business presented below represents the financial impact of the business as it was operated prior to the date of disposition. The operating expenses include only those that were incurred directly by and were retained by the disposed business and are now incurred by Grifols. As noted above, we are performing a number of transition services and the financial impact from these services is not included in the amounts presented below for the disposed business. For the disposed blood screening business, in the third quarter and year to date period of fiscal 2017, revenue was $0.0 million and $96.5 million, respectively, gross profit was $0.0 million and $64.8 million, respectively, and operating income was $0.0 million and $45.8 million, respectively. For the disposed blood screening business, in the third quarter and year to date period of fiscal 2016, revenue was $55.9 million and $178.8 million, respectively, gross profit was $39.0 million and $125.3 million, respectively, and operating income was $22.9 million and $77.3 million, respectively. Following the closing of this disposition, we no longer operate our blood screening business, except to the limited extent we have agreed to support Grifols. Under the long term supply agreement and transition services agreement to manufacture assays, subsequent to disposing the blood screening business, we recognized revenues of $19.0 million and $26.0 million, respectively, during the three and nine months ended July 1, 2017. See Note 11 to our consolidated financial statements included herein.
Our Breast Health products include a broad portfolio of breast imaging and related products and accessories, including digital mammography systems, computer-aided detection, or CAD, for mammography and minimally invasive breast biopsy devices, breast biopsy site markers, and breast biopsy guidance systems. Our most advanced breast imaging platform, Dimensions, utilizes a technology called tomosynthesis to produce 3D images that show multiple contiguous slice images of the breast, which we refer to as the Genius 3D Mammography exam, as well as conventional 2D full field digital mammography images. Our clinical results for FDA approval demonstrated that conventional 2D digital mammography with the addition of 3D tomosynthesis is superior to 2D digital mammography alone for both screening and diagnostics.
Our Medical Aesthetics segment offers a portfolio of aesthetic treatment systems, including SculpSure, PicoSure and MonaLisa Touch that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos,

30

revitalize the skin, reduce fat through laser lipolysis, reduce cellulite, clear nails infected by toe fungus, ablate sweat glands and improve gynecologic health. This segment also markets radio frequency, or RF, energy sourced medical devices for precision surgical applications such as facial plastic and general surgery, gynecology, ear, nose, and throat procedures, back and thigh procedures, ophthalmology, oral and maxillofacial surgery, podiatry and proctology.
Our GYN Surgical products include our NovaSure Endometrial Ablation System, or NovaSure, and our MyoSure Hysteroscopic Tissue Removal System, or MyoSure. The NovaSure system involves a trans-cervical procedure for the treatment of abnormal uterine bleeding. The MyoSure system is a tissue removal device that is designed to provide incision-less removal of fibroids, polyps, and other pathology within the uterus.
Our Skeletal Health segment offers Discovery and Horizon X-ray bone densitometers that assess the bone density of fracture sites; and mini C-arm imaging systems that assist in performing minimally invasive surgical procedures on a patient's extremities, such as the hand, wrist, knee, foot, and ankle.
Unless the context otherwise requires, references to we, us, Hologic or our company refer to Hologic, Inc. and its consolidated subsidiaries.
Trademark Notice
Hologic is a trademark of Hologic, Inc. Other trademarks, logos, and slogans registered or used by Hologic and its divisions and subsidiaries in the United States and other countries include, but are not limited to, the following: 3D, AccuProbe, Affirm, Aptima, Cervista, C-View, Cynosure, Dimensions, Discovery, Eviva, Genius 3D Mammography, Gen-Probe, Horizon, Icon, Interlace, Invader, MyoSure, MyoSure REACH, NovaSure, PACE, Panther, PicoSure, Prodesse, Progensa, SculpSure, ThinPrep and Tigris.
MonaLisa Touch is a trademark of El. En. S.p.A.


31


ACQUISITIONS

Cynosure, Inc.

On March 22, 2017, we completed the acquisition of Cynosure and acquired all of the outstanding shares of Cynosure, except for 1.2 million shares the holders of which have demanded appraisal rights. The acquisition was funded through available cash, and the total purchase price was $1.66 billion. The amount allocated to the dissenting shareholders of $79.2 million has been recorded as a liability. As required by law, we have accrued interest related to the acquisition consideration owed to the dissenting shares and recorded interest expense of $1.5 million in the third quarter of fiscal 2017.

The preliminary allocation of the purchase price is based on estimates of the fair value of assets acquired and liabilities assumed as of March 22, 2017. We are continuing to obtain information to complete our valuation of intangible assets, as well as to determine the identification and valuation of acquired assets and liabilities, including tax assets and liabilities. The purchase price has been allocated to the acquired assets and assumed liabilities based on management’s estimate of their fair values.

As part of the preliminary purchase price allocation, the Company has determined the identifiable intangible assets are developed technology of $736.0 million, in-process research and development of $107.0 million, trade names of $74.0 million, a distribution agreement of $42.0 million and customer relationships of $35.0 million. The preliminary fair value of the intangible assets has been estimated using the income approach, specifically the excess earning method and relief from royalty method, and the cash flow projections were discounted using rates ranging from 11% 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 comprise know-how, patents and technologies embedded in Cynosure’s products and relate to currently marketed products. In-process research and development 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 or expected commercial release depending on the project. We recorded $107.0 million of in-process research and development assets related to three projects. Based on the results of our preliminary purchase accounting, the projects are expected to be completed during fiscal 2018 and 2019 with a total cost to complete of approximately $18.0 million. Given the uncertainties inherent with product development and introduction, we cannot assure that any of our product development efforts will be successful, completed on a timely basis or within budget, if at all. All of the in-process research and development assets were valued using the multiple-period excess earnings method approach using discount rates ranging from 14% to 22%.

The excess of the purchase price over the preliminary estimated fair value of the tangible net assets and intangible assets acquired of $679.5 million was recorded to goodwill. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Cynosure acquisition. These benefits include the expectation that the Company's entry into the aesthetics market will significantly broaden our offering in women's health. The Company is expected to benefit from a broader global presence, synergistic utilization of Hologic's direct sales force, primarily its GYN Surgical sales force, with certain Cynosure products and entry into an adjacent, cash-pay segment.

Medicor Medical Supply

On April 7, 2017, we completed the acquisition of MMS Medicor Medical Supplies GmbH, or Medicor, for a purchase price of approximately $19.0 million, which includes a working capital adjustment of $2.0 million that was paid in the fourth quarter of fiscal 2017, and a holdback of $1.9 million that is payable two years from the date of acquisition. Medicor was a long-standing distributor of our Breast and Skeletal Health products in Germany, Austria and Switzerland. Based on the preliminary valuation, we have allocated $5.4 million of the purchase price to the preliminary value of intangible assets and $8.4 million to goodwill. The allocation of the purchase price is preliminary as we are continuing to gather information supporting the acquired assets and liabilities.


RESULTS OF OPERATIONS
All dollar amounts in tables are presented in millions.

32
Table of Contents

Product Revenues
 
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2017
 
June 25, 2016
 
Change
 
July 1, 2017
 
June 25, 2016
 
Change
 
Amount
 
% of
Total
Revenue
 
Amount
 
% of
Total
Revenue
 
Amount
 
%
 
Amount
 
% of
Total
Revenue
 
Amount
 
% of
Total
Revenue
 
Amount
 
%
Product Revenues