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 March 30, 2019
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 or other jurisdiction of incorporation or organization)
 
(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 every Interactive Data File required to be submitted 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 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.:
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨
  
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 April 25, 2019, 268,050,138 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 OPERATIONS
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and per share data)
 
Three Months Ended
 
Six Months Ended
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Revenues:
 
 
 
 
 
 
 
Product
$
667.8

 
$
645.0

 
$
1,350.9

 
$
1,295.7

Service and other
150.6

 
144.3

 
298.2

 
284.7

 
818.4

 
789.3

 
1,649.1

 
1,580.4

Costs of revenues:
 
 
 
 
 
 
 
Product
232.9

 
217.1

 
465.0

 
430.8

Amortization of acquired intangible assets
80.4

 
79.8

 
161.4

 
159.6

Impairment of intangible assets and equipment
374.6

 
—

 
374.6

 
—

Service and other
88.1

 
77.3

 
171.6

 
150.4

Gross profit
42.4

 
415.1

 
476.5

 
839.6

Operating expenses:
 
 
 
 
 
 
 
Research and development
57.3

 
56.8

 
110.5

 
111.6

Selling and marketing
133.5

 
130.5

 
279.5

 
270.0

General and administrative
89.9

 
83.8

 
168.5

 
161.7

Amortization of acquired intangible assets
14.1

 
14.7

 
28.2

 
29.1

Impairment of intangible assets and equipment
69.2

 
46.0

 
69.2

 
46.0

Impairment of goodwill
—

 
685.7

 
—

 
685.7

Restructuring charges
1.6

 
1.8

 
3.3

 
5.6

 
365.6

 
1,019.3

 
659.2

 
1,309.7

Loss from operations
(323.2
)
 
(604.2
)
 
(182.7
)
 
(470.1
)
Interest income
0.8

 
2.1

 
2.1

 
2.9

Interest expense
(34.8
)
 
(38.9
)
 
(70.9
)
 
(79.9
)
Debt extinguishment losses
—

 
(44.9
)
 
(0.8
)
 
(45.9
)
Other income (expense), net
3.5

 
(5.1
)
 
2.9

 
(2.2
)
Loss before income taxes
(353.7
)
 
(691.0
)
 
(249.4
)
 
(595.2
)
Benefit for income taxes
(81.1
)
 
(9.6
)
 
(75.4
)
 
(320.5
)
Net loss
$
(272.6
)
 
$
(681.4
)
 
$
(174.0
)
 
$
(274.7
)
Net loss per common share:
 
 
 
 
 
 
 
Basic
$
(1.01
)
 
$
(2.46
)
 
$
(0.64
)
 
$
(0.99
)
Diluted
$
(1.01
)
 
$
(2.46
)
 
$
(0.64
)
 
$
(0.99
)
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
269,235

 
277,114

 
269,913

 
276,985

Diluted
269,235

 
277,114

 
269,913

 
276,985



See accompanying notes.

3
Table of Contents

HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In millions)
 
Three Months Ended
 
Six Months Ended
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Net loss
$
(272.6
)
 
$
(681.4
)
 
$
(174.0
)
 
$
(274.7
)
Changes in foreign currency translation adjustment
2.4

 
10.1

 
(0.8
)
 
15.6

Changes in unrealized holding gains and losses on available-for-sale securities, net of tax of $0.2 for the six months ended March 31, 2018:
 
 
 
 
 
 
 
Loss reclassified from accumulated other comprehensive loss to the statements of operations
—

 
—

 
—

 
0.4

Changes in pension plans, net of taxes of $0.6 for the six months ended March 31, 2018:
—

 
—

 
—

 
0.6

Changes in value of hedged interest rate caps, net of tax of $0.3 and $0.8 for the three and six months ended March 30, 2019 and $0.3 and $(4.6) for the three and six months ended March 31, 2018:
 
 
 
 
 
 
 
(Loss) gain recognized in other comprehensive (loss) income, net
(1.5
)
 
0.7

 
(5.4
)
 
(3.6
)
Loss reclassified from accumulated other comprehensive loss to the statements of operations
0.5

 
0.3

 
1.2

 
2.6

Other comprehensive income (loss)
1.4

 
11.1

 
(5.0
)
 
15.6

Comprehensive loss
$
(271.2
)
 
$
(670.3
)
 
$
(179.0
)
 
$
(259.1
)
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)
 
 
March 30,
2019
 
September 29,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
401.0

 
$
666.7

Accounts receivable, less reserves of $16.9 and $16.2, respectively
557.5

 
579.2

Inventories
443.4

 
384.1

Prepaid income taxes
40.0

 
31.7

Prepaid expenses and other current assets
69.1

 
61.5

Total current assets
1,511.0

 
1,723.2

Property, plant and equipment, net
469.7

 
478.2

Intangible assets, net
1,874.9

 
2,398.6

Goodwill
2,564.5

 
2,533.2

Other assets
105.2

 
97.7

Total assets
$
6,525.3

 
$
7,230.9

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
310.7

 
$
599.7

Accounts payable
165.2

 
192.2

Accrued expenses
394.1

 
436.1

Deferred revenue
173.5

 
172.9

Current portion of capital lease obligations
1.7

 
1.7

Total current liabilities
1,045.2

 
1,402.6

Long-term debt, net of current portion
2,799.7

 
2,704.6

Capital lease obligations, net of current portion
20.1

 
20.9

Deferred income tax liabilities
335.4

 
498.2

Deferred revenue
17.0

 
18.2

Other long-term liabilities
148.1

 
157.6

Commitments and contingencies (Note 8)

 

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; 291,561 and 289,900 shares issued, respectively
2.9

 
2.9

Additional paid-in-capital
5,722.5

 
5,671.3

Accumulated deficit
(2,659.1
)
 
(2,494.0
)
Treasury stock, at cost – 23,524 and 19,812 shares, respectively
(876.0
)
 
(725.9
)
Accumulated other comprehensive loss
(30.5
)
 
(25.5
)
Total stockholders’ equity
2,159.8

 
2,428.8

Total liabilities and stockholders’ equity
$
6,525.3

 
$
7,230.9

See accompanying notes.


5
Table of Contents

Hologic, Inc.
Consolidated Statements of Stockholders' Equity
(In millions, except number of shares, which are reflected in thousands)

 
 
Common Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Stockholders’
Equity
 
 
Number of
Shares
 
Par Value
 
Number of
Shares
 
Amount
 
Balance at September 30, 2017
 
287,853

 
$
2.9

 
$
5,630.8

 
$
(2,382.7
)
 
$
(16.2
)
 
12,560

 
$
(450.1
)
 
$
2,784.7

Exercise of stock options
 
231

 
—

 
5.8

 
—

 
—

 
—

 
—

 
5.8

Vesting of restricted stock units, net of shares withheld for employee taxes
 
666

 
—

 
(14.3
)
 
—

 
—

 
—

 
—

 
(14.3
)
Stock-based compensation expense
 
—

 
—

 
16.4

 
—

 
—

 
—

 
—

 
16.4

Reacquisition of equity component from convertible notes repurchase, net of taxes
 
—

 
—

 
(9.8
)
 
—

 
—

 
—

 
—

 
(9.8
)
Net income
 
—

 
—

 
—

 
406.7

 
—

 
—

 
—

 
406.7

Other comprehensive income activity
 
—

 
—

 
—

 
—

 
4.5

 
—

 
—

 
4.5

Balance at December 30, 2017
 
288,750

 
$
2.9

 
$
5,628.9

 
$
(1,976.0
)
 
$
(11.7
)
 
12,560

 
$
(450.1
)
 
$
3,194.0

Exercise of stock options
 
154

 
—

 
2.9

 
—

 
—

 
—

 
—

 
2.9

Vesting of restricted stock units, net of shares withheld for employee taxes
 
79

 
—

 
(1.2
)
 
—

 
—

 
—

 
—

 
(1.2
)
Common stock issued under the employee stock purchase plan
 
204

 
—

 
7.4

 
—

 
—

 
—

 
—

 
7.4

Stock-based compensation expense
 
—

 
—

 
19.5

 
—

 
—

 
—

 
—

 
19.5

Reacquisition of equity component from convertible notes repurchase, net of taxes
 
—

 
—

 
(0.1
)
 
—

 
—

 
—

 
—

 
(0.1
)
Net loss
 
—

 
—

 
—

 
(681.4
)
 
—

 
—

 
—

 
(681.4
)
Other comprehensive income activity
 
—

 
—

 
—

 
—

 
11.1

 
—

 
—

 
11.1

Repurchase of common stock
 
—

 
—

 
—

 
—

 
—

 
2,816

 
(106.5
)
 
(106.5
)
Balance at March 31, 2018
 
289,187

 
$
2.9

 
$
5,657.4

 
$
(2,657.4
)
 
$
(0.6
)
 
15,376

 
$
(556.6
)
 
$
2,445.7

Exercise of stock options
 
193

 
—

 
3.9

 
—

 
—

 
—

 
—

 
3.9

Vesting of restricted stock units, net of shares withheld for employee taxes
 
25

 
—

 
(0.5
)
 
—

 
—

 
—

 
—

 
(0.5
)
Stock-based compensation expense
 
—

 
—

 
17.2

 
—

 
—

 
—

 
—

 
17.2

Reacquisition of equity component from convertible notes repurchase, net of taxes
 
—

 
—

 
(30.9
)
 
—

 
—

 
—

 
—

 
(30.9
)
Net income
 
—

 
—

 
—

 
112.9

 
—

 
—

 
—

 
112.9

Other comprehensive income activity
 
—

 
—

 
—

 
—

 
(18.0
)
 
—

 
—

 
(18.0
)
Repurchase of common stock
 
—

 
—

 
—

 
—

 
—

 
2,161

 
(80.8
)
 
(80.8
)

6
Table of Contents

Balance at June 30, 2018
 
289,405

 
$
2.9

 
$
5,647.1

 
$
(2,544.5
)
 
$
(18.6
)
 
17,537

 
$
(637.4
)
 
$
2,449.5

Exercise of stock options
 
218

 
—

 
4.8

 
—

 
—

 
—

 
—

 
4.8

Vesting of restricted stock units, net of shares withheld for employee taxes
 
33

 
—

 
(0.6
)
 
—

 
—

 
—

 
—

 
(0.6
)
Common stock issued under the employee stock purchase plan
 
244

 
—

 
8.2

 
—

 
—

 
—

 
—

 
8.2

Stock-based compensation expense
 
—

 
—

 
11.9

 
—

 
—

 
—

 
—

 
11.9

Reacquisition of equity component from convertible notes repurchase, net of taxes
 
—

 
—

 
(0.1
)
 
—

 
—

 
—

 
—

 
(0.1
)
Net income
 
—

 
—

 
—

 
50.5

 
—

 
—

 
—

 
50.5

Other comprehensive income activity
 
—

 
—

 
—

 
—

 
(6.9
)
 
—

 
—

 
(6.9
)
Repurchase of common stock
 
—

 
 
 
 
 
 
 
 
 
2,275

 
(88.5
)
 
(88.5
)
Balance at September 29, 2018
 
289,900

 
$
2.9

 
$
5,671.3

 
$
(2,494.0
)
 
$
(25.5
)
 
19,812

 
$
(725.9
)
 
$
2,428.8

Accounting standard transition adjustment - ASC 606
 
—

 
—

 
—

 
6.4

 
—

 
—

 
—

 
6.4

Accounting standard transition adjustment - ASU 2016-16
 
—

 
—

 
—

 
2.5

 
—

 
—

 
—

 
2.5

Exercise of stock options
 
373

 
—

 
9.1

 
—

 
—

 
—

 
—

 
9.1

Vesting of restricted stock units, net of shares withheld for employee taxes
 
575

 
—

 
(11.6
)
 
—

 
—

 
—

 
—

 
(11.6
)
Stock-based compensation expense
 
—

 
—

 
17.1

 
—

 
—

 
—

 
—

 
17.1

Net income
 
—

 
—

 
—

 
98.6

 
—

 
—

 
—

 
98.6

Other comprehensive income activity
 
—

 
—

 
—

 
—

 
(6.4
)
 
—

 
—

 
(6.4
)
Repurchase of common stock
 
—

 
—

 
—

 
—

 
—

 
3,712

 
(150.1
)
 
(150.1
)
Balance at December 29, 2018
 
290,848

 
$
2.9

 
$
5,685.9

 
$
(2,386.5
)
 
$
(31.9
)
 
23,524

 
$
(876.0
)
 
$
2,394.4

Exercise of stock options
 
454

 
—

 
11.6

 
—

 
—

 
—

 
—

 
11.6

Vesting of restricted stock units, net of shares withheld for employee taxes
 
33

 
—

 
(0.4
)
 
—

 
—

 
—

 
—

 
(0.4
)
Common stock issued under the employee stock purchase plan
 
226

 
—

 
7.9

 
—

 
—

 
—

 
—

 
7.9

Stock-based compensation expense
 
—

 
—

 
17.5

 
—

 
—

 
—

 
—

 
17.5

Net loss
 
—

 
—

 
—

 
(272.6
)
 
—

 
—

 
—

 
(272.6
)
Other comprehensive income activity
 
—

 
—

 
—

 
—

 
1.4

 
—

 
—

 
1.4

Balance at March 30, 2019
 
291,561

 
$
2.9

 
$
5,722.5

 
$
(2,659.1
)
 
$
(30.5
)
 
23,524

 
$
(876.0
)
 
$
2,159.8




7
Table of Contents

HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
Six Months Ended
 
March 30,
2019
 
March 31,
2018
OPERATING ACTIVITIES
 
 
 
Net loss
$
(174.0
)
 
$
(274.7
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
46.8

 
52.0

Amortization of acquired intangibles
189.6

 
188.7

Non-cash interest expense
4.0

 
11.2

Stock-based compensation expense
34.6

 
35.9

Deferred income taxes
(173.3
)
 
(433.6
)
Goodwill impairment charge
—

 
685.7

Intangible asset and equipment impairment charges

443.8

 
46.0

Debt extinguishment losses
0.8

 
45.9

Fair value write-up of acquired inventory sold
3.6

 
—

Other adjustments and non-cash items
6.0

 
7.3

Changes in operating assets and liabilities, excluding the effect of acquisitions:
 
 
 
Accounts receivable
18.6

 
2.5

Inventories
(54.0
)
 
(27.5
)
Prepaid income taxes
(8.3
)
 
(29.8
)
Prepaid expenses and other assets
(10.4
)
 
(9.1
)
Accounts payable
(27.2
)
 
(9.5
)
Accrued expenses and other liabilities
(71.2
)
 
(22.5
)
Deferred revenue
8.7

 
(2.0
)
Net cash provided by operating activities
238.1

 
266.5

INVESTING ACTIVITIES
 
 
 
Acquisition of businesses, net of cash acquired
(108.6
)
 
(4.4
)
Capital expenditures
(23.0
)
 
(24.6
)
Increase in equipment under customer usage agreements
(28.9
)
 
(24.2
)
Purchase of cost-method investment
(3.0
)
 
(6.0
)
Other activity
(3.6
)
 
(2.1
)
Net cash used in investing activities
(167.1
)
 
(61.3
)
FINANCING ACTIVITIES
 
 
 
Proceeds from long-term debt
1,500.0

 
1,500.0

Repayment of long-term debt
(1,462.5
)
 
(1,340.6
)
Proceeds from senior notes
—

 
1,350.0

Repayment of senior notes
—

 
(1,037.7
)
Payments to extinguish convertible notes
—

 
(302.8
)
Payment of acquired long-term debt
(2.5
)
 
—

Proceeds from amounts borrowed under revolving credit line
480.0

 
710.0

Repayments of amounts borrowed under revolving credit line
(695.0
)
 
(900.0
)
Repayment of amounts borrowed under accounts receivable securitization program
(18.0
)
 
—

Payment of debt issuance costs
(2.7
)
 
(23.5
)
Purchase of interest rate caps
(1.5
)
 
—

Repurchase of common stock
(150.1
)
 
(90.7
)
Proceeds from issuance of common stock pursuant to employee stock plans
28.8

 
16.3

Payments under capital lease obligations
(0.8
)
 
(0.8
)
Payment of minimum tax withholdings on net share settlements of equity awards
(11.9
)
 
(15.6
)
Net cash used in financing activities
(336.2
)
 
(135.4
)
Effect of exchange rate changes on cash and cash equivalents
(0.5
)
 
3.8

Net (decrease) increase in cash and cash equivalents
(265.7
)
 
73.6

Cash and cash equivalents, beginning of period
666.7

 
540.6

Cash and cash equivalents, end of period
$
401.0

 
$
614.2

See accompanying notes.

8
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”) for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended September 29, 2018 included in the Company’s Form 10-K filed with the SEC on November 20, 2018. 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 six months ended March 30, 2019 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending September 28, 2019.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Update No. 2014-09, Revenue from Contracts with Customers (ASC 606), which was subsequently amended. The Company adopted this standard as of September 30, 2018 using the modified retrospective method for contracts that were not complete as of September 30, 2018. The Company's adoption of ASC 606 is more fully described in Note 2.
In August 2018, the SEC issued the final rule on Regulation S-X, Rule 3-04 (Rule 3-04) requiring entities to disclose changes in stockholders equity in the form of a reconciliation for the current and comparative year-to-date interim periods, with subtotals for each interim period. The Company adopted Rule 3-04 in the first quarter of fiscal 2019.
In October 2016, the FASB issued Accounting Standards Update ("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 Company adopted the standard in the first quarter of fiscal 2019 (see Note 10).
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. The adoption of ASU 2016-15 did not have a material effect on the Company's consolidated financial statements.



9
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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 was one recognized subsequent event recorded in the unaudited consolidated financial statements as of and for the three and six months ended March 30, 2019. The Company entered into a Settlement and License Agreement with Enzo Life Sciences, Inc. on April 16, 2019 and recorded a $10.5 million settlement charge as of March 30, 2019 (see Note 8). There were no material unrecognized subsequent events recorded in the unaudited consolidated financial statements as of and for the three and six months ended March 30, 2019.

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(2) Revenue

In May 2014, the FASB issued ASC 606. The Company adopted the standard, which amended ASC Topic 605, Revenue Recognition (ASC 605), as of September 30, 2018 using the modified retrospective method for contracts that were not complete as of September 30, 2018. Under this method, the Company recognized the cumulative effect of initially applying the standard to its open contracts and recorded an adjustment to decrease the opening balance of accumulated deficit within stockholders' equity by $6.4 million, which is net of taxes of $2.4 million, as of September 30, 2018 (the first day of fiscal 2019). The cumulative effect adjustment was primarily due to the Company applying the principles of ASC 606 to contracts for which the Company had deferred revenue as of September 29, 2018 for collectability uncertainty and providing extended payment terms resulting in the fee not being fixed or determinable under ASC 605. Under ASC 606, revenue from certain arrangements may be recognized earlier than under ASC 605 as a result of the ability to apply additional judgment in evaluating collectability and the elimination of the requirement to assess whether a fee is fixed or determinable, specifically as it relates to providing customers with extended payment terms. Results for reporting periods beginning September 30, 2018 and after are presented in accordance with ASC 606. Prior period results were not adjusted and will continue to be reported in accordance with legacy GAAP requirements of ASC 605. As the adoption of this standard did not have a material impact on the Company’s revenue recorded in the first and second quarters of fiscal 2019, transitional disclosures have not been presented.

The Company generates revenue from the sale of its products, primarily medical imaging systems and related components and software, medical aesthetic treatment systems, diagnostic tests/assays and surgical disposable products, and related services, which are primarily support and maintenance services on its medical imaging systems and aesthetic treatment systems, and to a lesser extent installation, training and repairs. The Company's products are sold primarily through a direct sales force, and within international markets, there is more reliance on distributors and resellers. Revenue is recorded net of sales tax. The following table provides revenue from contracts with customers by business and geographic region on a disaggregated basis:

 
 
Three Months Ended March 30, 2019
 
Three Months Ended March 31, 2018
Business (in millions)
United States
International
Total
 
United States
International
Total
Diagnostics:
 
 
 
 
 
 
 
 
Cytology & Perinatal
$
76.6

$
38.9

$
115.5

 
$
78.5

$
39.2

$
117.7

 
Molecular Diagnostics
136.8

31.0

167.8

 
123.7

27.0

150.7

 
Blood Screening
13.4

—

13.4

 
11.3

—

11.3

Total
$
226.8

$
69.9

$
296.7

 
$
213.5

$
66.2

$
279.7

 
 
 
 
 
 
 
 
 
Breast Health:
 
 
 
 
 
 
 
 
Breast Imaging
$
206.2

$
59.7

$
265.9

 
$
191.7

$
58.7

$
250.4

 
Interventional Breast Solutions
46.8

8.8

55.6

 
40.8

8.9

49.7

Total
$
253.0

$
68.5

$
321.5

 
$
232.5

$
67.6

$
300.1

 
 
 
 
 
 
 
 
 
Medical Aesthetics
$
37.6

$
36.2

$
73.8

 
$
44.4

$
41.1

$
85.5

 
 
 
 
 
 
 
 
 
GYN Surgical
$
84.1

$
18.1

$
102.2

 
$
82.4

$
17.0

$
99.4

 
 
 
 
 
 
 
 
 
Skeletal Health
$
14.0

$
10.2

$
24.2

 
$
15.7

$
8.9

$
24.6

 
 
$
615.5

$
202.9

$
818.4

 
$
588.5

$
200.8

$
789.3



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Six Months Ended March 30, 2019
 
Six Months Ended March 31, 2018
Business (in millions)
United States
International
Total
 
United States
International
Total
Diagnostics:
 
 
 
 
 
 
 
 
Cytology & Perinatal
$
155.8

$
77.8

$
233.6

 
$
163.2

$
77.9

$
241.1

 
Molecular Diagnostics
270.9

61.2

332.1

 
247.6

51.7

299.3

 
Blood Screening
27.6

—

27.6

 
23.9

—

23.9

Total
$
454.3

$
139.0

$
593.3

 
$
434.7

$
129.6

$
564.3

 
 
 
 
 
 
 
 
 
Breast Health:
 
 
 
 
 
 
 
 
Breast Imaging
$
412.7

$
122.9

$
535.6

 
$
371.5

$
114.8

$
486.3

 
Interventional Breast Solutions
92.9

17.7

110.6

 
85.4

16.4

101.8

Total
$
505.6

$
140.6

$
646.2

 
$
456.9

$
131.2

$
588.1

 
 
 
 
 
 
 
 
 
Medical Aesthetics
$
74.9

$
78.7

$
153.6

 
$
91.0

$
85.8

$
176.8

 
 
 
 
 
 
 
 
 
GYN Surgical
$
175.2

$
35.4

$
210.6

 
$
173.9

$
33.0

$
206.9

 
 
 
 
 
 
 
 
 
Skeletal Health
$
27.2

$
18.2

$
45.4

 
$
29.3

$
15.0

$
44.3

 
 
$
1,237.2

$
411.9

$
1,649.1

 
$
1,185.8

$
394.6

$
1,580.4


 
 
Three Months Ended
Three Months Ended
Six Months Ended
Six Months Ended
Geographic Regions (in millions)
 
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
United States
 
$
615.5

$
588.5

$
1,237.2

$
1,185.8

Europe
 
102.1

99.3

203.2

190.6

Asia-Pacific
 
64.3

62.0

134.0

130.4

Rest of World
 
36.5

39.5

74.7

73.6

 
 
$
818.4

$
789.3

$
1,649.1

$
1,580.4


The following table provides revenue recognized by source:

 
 
Three Months Ended
Three Months Ended
Six Months Ended
Six Months Ended
Revenue by type (in millions)
 
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
Capital equipment, components and software
 
$
239.4

$
239.6

$
487.8

$
446.0

Consumables
 
428.4

405.4

863.1

849.7

Service
 
141.1

138.0

283.0

273.4

Other
 
9.5

6.3

15.2

11.3

 
 
$
818.4

$
789.3

$
1,649.1

$
1,580.4


The Company considers revenue to be earned when all of the following criteria are met: the Company has a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the amount the Company expects to receive, including an estimate of uncertain amounts subject to a constraint to ensure revenue is not recognized in an amount that would result in a significant reversal upon resolution of the uncertainty, is determinable; and the Company has transferred control of the promised items to the customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the contract. The transaction price for the contract is measured as the amount of consideration the Company expects to receive in exchange for the goods and services expected to be transferred. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control of the distinct good or service is transferred. Transfer of control for the Company's products is generally at shipment or delivery, depending on contractual terms, but occurs when title and risk of loss transfers to the customer. The Company recognizes

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a receivable when it has an unconditional right to payment, and payment terms are typically 30 days in the U.S. but may be longer in international markets. The Company treats shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost and records these costs within costs of product revenue when the corresponding revenue is recognized. The Company's performance obligation related to product sales is satisfied at a point in time. Revenue from support and maintenance contracts, extended warranty and professional services for installation, training and repair is recognized over time based on the period contracted or as the services are performed.

The Company also places instruments (or equipment) at customer sites but retains title to the instrument. The customer has the right to use the instrument for a period of time, and the Company recovers the cost of providing the instrument through the sales of disposables, namely tests and assays in Diagnostics and handpieces in GYN Surgical. These types of agreements include an embedded operating lease for the right to use an instrument and no instrument revenue is recognized at the time of instrument delivery. The Company recognizes a portion of the revenue allocated to the embedded lease concurrent with the sale of disposables over the term of the agreement.

Some of the Company's contracts have multiple performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. The Company determines its best estimate of stand-alone selling price using average selling prices over 3 to 12-month periods of data depending on the products or nature of the services coupled with current market considerations. If the product or service does not have a history of sales or if sales volume is not sufficient, the Company relies on prices set by its pricing committees or applicable marketing department adjusted for expected discounts.

Variable Consideration

The Company exercises judgment in estimating variable consideration, which includes volume discounts, sales rebates, product returns and other adjustments. These amounts are recorded as a reduction to revenue and classified as a current liability. The Company bases its estimates for volume discounts and sales rebates on historical information to the extent it is reasonable to be used as a predictive tool of expected future rebates. To the extent the transaction price includes variable consideration, the Company applies judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. The Company evaluates constraints based on its historical and projected experience with similar customer contracts.
The Company's contracts typically do not provide for product returns. In general, estimates of variable consideration and constraints are not material to the Company's financial statements.

Remaining Performance Obligations

As of March 30, 2019, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $322.8 million. This remaining performance obligation primarily relates to extended warranty and support and maintenance obligations in the Company's Breast Health and Skeletal Health reportable segments. The Company expects to recognize approximately 37% of this amount as revenue in 2019, 24% in 2020, 20% in 2021, 12% in 2022, and 6% thereafter. The Company has applied the practical expedient to not include remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.

Contract Assets and Liabilities

The Company discloses accounts receivable separately in the Consolidated Balance Sheets at their net realizable value. Contract assets primarily relate to the Company's conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were immaterial.

Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. The Company records a contract liability, or deferred revenue, when it has an obligation to provide service, and to a much lesser extent product, to the customer and payment is received or due in advance of performance. Deferred revenue primarily relates to support and maintenance contracts and extended warranty obligations within the Company's Breast Health, Medical Aesthetics and Skeletal Health reportable segments. Contract liabilities are classified as other current liabilities and other long-term liabilities on the Consolidated Balance Sheets. The Company recognized $40.1 million and $97.1 million for the second quarter of fiscal 2019 and first six months of fiscal 2019, respectively, in revenue that was included in the contract liability balance at September 29, 2018.





13
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Practical Expedients

With the adoption of ASC 606, the Company elected to apply certain permitted practical expedients. In evaluating the cumulative-effect adjustment to retained earnings, the Company adopted the standard only for contracts that were not complete as of the date of adoption. For contracts that were modified prior to the adoption date, the Company elected to present the aggregate effect of all contract modifications in determining the transaction price and for the allocation to the satisfied and unsatisfied performance obligations.

The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs solely comprise sales commissions and typically the commissions are incurred at the time of shipment of product and upon billings for support and maintenance contracts.

(3) Fair Value Measurements
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company 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 7 for further discussion and information on the interest rate caps and forward foreign currency contracts.
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following at March 30, 2019: 
 
 
 
Fair Value at Reporting Date Using
 
Balance as of March 30, 2019
 
Quoted Prices in
Active Market for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Interest rate cap - derivative
2.9

 
—

 
2.9

 
—

Forward foreign currency contracts
5.8

 
—

 
5.8

 
—

Total
$
8.7

 
$
—

 
$
8.7

 
$
—

Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
7.6

 
$
—

 
$
—

 
$
7.6

Forward foreign currency contracts
0.9

 
—

 
0.9

 
—

Total
$
8.5

 
$
—

 
$
0.9

 
$
7.6

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 equity investments and long-lived assets, including property, plant and equipment, intangible assets and goodwill. There were no such remeasurements for equity investments in the three and six months ended March 30, 2019 and March 31, 2018. During the second quarter of fiscal 2019, the Company identified indicators of impairment related to its long-lived assets of its Medical Aesthetics reportable segment and recorded impairment charges of $443.8 million, of which $437.0 million was allocated to intangible assets and $6.8 million was allocated to equipment. These are level 3 measurements. See Note 14 for additional information.
During the second quarter of fiscal 2018, the Company recorded impairment charges of $46.0 million and $685.7 million to write-off an in-process research and development intangible asset and goodwill, respectively, related to its Medical Aesthetics reportable segment. As a result of these charges, the remaining carrying value of each asset is zero. These are level 3 measurements. See Note 14 for additional information.
Disclosure of Fair Value of Financial Instruments
The Company’s financial instruments mainly consist of cash and cash equivalents, accounts receivable, equity investments, interest rate caps, forward foreign currency contracts, insurance contracts, 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 interest rate caps and forward foreign currency

14
Table of Contents

contracts are recorded at fair value. The carrying amount of the insurance contracts is recorded at the cash surrender value, as required by U.S. GAAP, which approximates fair value. The Company believes the carrying amounts of its equity investments approximate fair value.
Amounts outstanding under the Company’s 2018 Credit Agreement (as defined below) and Securitization Program of $1.6 billion and $207.0 million aggregate principal, respectively, as of March 30, 2019 are subject to variable interest rates, which are based on current market rates, and as such, the Company believes the carrying amount of these obligations approximates fair value. The Company’s 2025 Senior Notes and 2028 Senior Notes had fair values of $939.3 million and $395.9 million, respectively, as of March 30, 2019 based on their trading prices, representing Level 1 measurements. Refer to Note 6 for the carrying amounts of the various components of the Company’s debt.


(4) Business Combinations

Emsor, S.A.

On December 11, 2017, the Company completed the acquisition of Emsor S.A. ("Emsor") for a purchase price of $16.3 million, which includes a hold-back of $0.5 million that is payable eighteen months from the date of acquisition, and contingent consideration which the Company estimated at $4.9 million as of the measurement date. The contingent consideration is payable upon Emsor achieving predefined amounts of cumulative revenue over a two-year period from the date of acquisition. Emsor was a distributor of the Company's Breast and Skeletal Health products in Spain and Portugal. Based on the Company's valuation, it allocated $4.6 million of the purchase price to the value of customer relationship intangible assets and $5.7 million to goodwill. The remaining $6.0 million of purchase price was allocated to acquired tangible assets and liabilities.

Faxitron

On July 31, 2018, the Company completed the acquisition of Faxitron Bioptics, LLC ("Faxitron") for a purchase price of $89.5 million, which includes hold-backs of $11.7 million that are payable up to one year from the date of acquisition, and contingent consideration, which the Company estimated at $2.9 million as of the measurement date. The contingent consideration is payable upon Faxitron meeting certain revenue growth metrics. Faxitron, headquartered in Tucson, Arizona, develops, manufactures, and markets digital radiography systems. Faxitron's results of operations are reported in the Company's Breast Health reportable segment from the date of acquisition.

The total purchase price was allocated to Faxitron's preliminary tangible and identifiable intangible assets and liabilities based on the estimated fair values of those assets as of July 31, 2018, as set forth below. The preliminary purchase price allocation is as follows:

Cash
$
2.4

Accounts receivable
4.0

Inventory
6.0

Other assets
3.1

Accounts payable and accrued expenses
(4.9
)
Deferred revenue
(1.9
)
Long-term debt
(3.3
)
Identifiable intangible assets:
 
       Developed technology
44.9

       In-process research and development
5.5

       Customer relationships
0.5

       Trade names
2.3

Deferred income taxes, net
(11.5
)
Goodwill
42.4

Purchase Price
$
89.5



15
Table of Contents

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 Faxitron's business. The Company has not yet obtained all of the information related to the fair value of the acquired assets and liabilities, primarily taxes, to finalize the purchase price allocation.    

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"), 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 17% to 19%. 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 weighted average life for both developed technology and customer relationships is 9 years and for trade names it is 7 years. 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 synergistic benefits that are expected to be realized from this acquisition. Benefits include the expectation of broadening the Company's Breast Health portfolio of products and technology. None of the goodwill is expected to be deductible for income tax purposes.

Focal Therapeutics

On October 1, 2018, the Company completed the acquisition of Focal Therapeutics, Inc. ("Focal") for a purchase price of $120.1 million, which includes holdbacks of $14.0 million that are payable up to one year from the date of acquisition. Focal, headquartered in California, manufactures and markets its BioZorb marker, which is an implantable three-dimensional marker that helps clinicians overcome certain challenges in breast conserving surgery.

The total purchase price was allocated to Focal's preliminary tangible and identifiable intangible assets and liabilities based on the estimated fair values of those assets as of October 1, 2018, as set forth below. The preliminary purchase price allocation is as follows:

Cash
$
2.2

Accounts receivable
2.0

Inventory
8.3

Other assets
0.8

Accounts payable and accrued expenses
(5.6
)
Long-term debt
(2.5
)
Identifiable intangible assets:
 
       Developed technology
83.1

       In-process research and development
11.4

       Trade names
2.7

Deferred income taxes, net
(12.7
)
Goodwill
30.4

Purchase Price
$
120.1


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 Focal's business. The Company has not yet obtained all of the information related to the fair value of the acquired assets and liabilities, primarily intangible assets and taxes, to finalize the purchase price allocation.    

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"), 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 15.5% to 16.5%. 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 weighted average life of developed technology and trade names is 11 years and 13 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

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based on synergistic benefits that are expected to be realized from this acquisition. Benefits include the expectation of broadening the Company's Breast Health portfolio of products and technology. None of the goodwill is expected to be deductible for income tax purposes.


(5) Restructuring 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 fiscal 2019 year to date period (six months ended March 30, 2019) and fiscal 2018 (the year ended September 29, 2018) and a rollforward of the accrued balances from September 29, 2018 to March 30, 2019:

 
 
Fiscal 2019 Actions
 
Fiscal 2018 Actions
 
Fiscal 2016 Actions
 
Total    
Restructuring Charges
 
 
 
 
 
 
 
 
Fiscal 2018 charges:
 
 
 
 
 
 
 

Workforce reductions
 
$
—

 
$
11.7

 
$
—

 
$
11.7

Facility closure costs
 
—

 
0.9

 
1.6

 
2.5

Fiscal 2018 restructuring charges
 
$
—

 
$
12.6

 
$
1.6

 
$
14.2

Fiscal 2019 charges:
 
 
 
 
 
 
 
 
Workforce reductions
 
$
2.3

 
$
1.2

 
$
—

 
$
3.5

Facility closure costs
 
—

 
(0.2
)
 
—

 
(0.2
)
Fiscal 2019 restructuring charges
 
$
2.3

 
$
1.0

 
$
—

 
$
3.3

 
 
Fiscal 2019 Actions
 
Fiscal 2018 Actions
 
Fiscal 2017 Actions
 
Fiscal 2016 Actions
 
Other
 
Total    
Rollforward of Accrued Restructuring
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of September 29, 2018
 
$
—

 
$
4.3

 
$
0.8

 
$
3.9

 
$
0.1

 
$
9.1

Fiscal 2019 charges
 
2.3

 
1.0

 
—

 
—

 
—

 
3.3

Severance payments and adjustments
 
(1.9
)
 
(3.6
)
 
(0.5
)
 
—

 
—

 
(6.0
)
Other payments
 
—

 
(0.5
)
 
—

 
(0.9
)
 
—

 
(1.4
)
Balance as of March 30, 2019
 
$
0.4

 
$
1.2

 
$
0.3

 
$
3.0

 
$
0.1

 
$
5.0


17
Table of Contents

Fiscal 2019 Actions    
During the first and second quarters of fiscal 2019, the Company decided to transfer certain shared services positions to its Costa Rica facility from its Marlborough location and announced the termination of approximately 24 personnel and made other restructuring actions. The charges for these actions are being recorded pursuant to ASC 420, Exit or Disposal Cost Obligations (ASC 420) for one-time termination benefits. The Company recorded restructuring expense of $1.0 million and $1.3 million in the first and second quarters of 2019, respectively. The Company expects to record approximately $0.9 million in charges in future quarters as a result of service requirements during the transition period.
Fiscal 2018 Actions
During the first, second and third quarters of fiscal 2018, the Company decided to terminate certain employees across the organization, including a corporate executive and primarily sales and marketing personnel in its Diagnostics and Medical Aesthetics reportable segments. The charges were recorded pursuant to ASC 712, Compensation-Nonretirement Postemployment Benefits (ASC 712) or ASC 420 depending on the employee. As such, the Company recorded severance benefits charges of $3.8 million, $1.8 million and $2.3 million in the first, second and third quarters, respectively. Included within the first quarter charge is $1.3 million related to the modification of equity awards.

During fiscal 2018, the Company finalized its decision and plan to consolidate its legacy international accounting and customer service organizations into its Manchester, UK location and eliminated these positions in Belgium, France, Italy, Spain and Germany. This transition was completed in the first quarter of fiscal 2019 and these employees were terminated. During fiscal 2018, the Company recorded $2.2 million for severance benefits pursuant to both ASC 712 and ASC 420 depending on the legal requirements on a country by country basis. The Company recorded an additional $0.8 million in fiscal 2019 for the remaining pro-rata charges.

During the third quarter of fiscal 2018, the Company decided to close its Hicksville, New York facility where it manufactured certain Cynosure products. In connection with this plan, certain employees, primarily in manufacturing, were terminated. The employees were notified of termination and related benefits in the third quarter of fiscal 2018, 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 $0.5 million in severance benefits charges in fiscal 2018. The Company recorded an additional $0.3 million in the first quarter of fiscal 2019 for the remaining pro-rata charges and this action was completed in January 2019.
    
In the third quarter of fiscal 2018, the Company determined it would not use warehouse space located on Lyberty Way in Westford, Massachusetts. The Company met the cease use date criteria in the third quarter of fiscal 2018, and estimated the time period to sublet the space and related sublease rates resulting in a lease obligation charge of $0.9 million. During the first quarter of fiscal 2019, the Company executed a termination agreement with the landlord and agreed to pay a termination payment of $0.6 million resulting in a benefit of $0.2 million recorded in the first quarter of fiscal 2019.
Fiscal 2017 Actions
In connection with the closure of the Bedford, Massachusetts facility during the first quarter of fiscal 2017, the Company recorded $3.5 million for lease obligation charges related to the first floor of the facility as the Company determined it had 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 would take to obtain a subtenant at the Bedford location and as a result recorded an additional $1.3 million lease obligation charge. During the third quarter of fiscal 2018, the Company further adjusted its assumptions and lowered the estimate of the sublease income rate and extended the time period to obtain a sub-tenant. As a result, the Company recorded an additional charge of $1.6 million. 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 for this facility.

    

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(6) Borrowings and Credit Arrangements
The Company’s borrowings consisted of the following: 
 
March 30,
2019
 
September 29,
2018
Current debt obligations, net of debt discount and deferred issuance costs:
 
 
 
Term Loan
$
18.7

 
$
74.7

Revolver
85.0

 
300.0

Securitization Program
207.0

 
225.0

Total current debt obligations
$
310.7

 
$
599.7

Long-term debt obligations, net of debt discount and deferred issuance costs:
 
 
 
Term Loan
1,469.9

 
1,376.3

2025 Senior Notes
936.3

 
935.2

2028 Senior Notes
393.5

 
393.1

Total long-term debt obligations
$
2,799.7

 
$
2,704.6

Total debt obligations
$
3,110.4

 
$
3,304.3

2018 Amended and Restated Credit Agreement
On December 17, 2018, the Company and certain of its subsidiaries refinanced its term loan and revolving credit facility by entering into an Amended and Restated Credit and Guaranty Agreement as of December 17, 2018 (the "2018 Credit Agreement") with Bank of America, N.A. in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, and certain other lenders. The 2018 Credit Agreement amended and restated the Company's prior credit and guaranty agreement as of October 3, 2017 ("2017 Credit Agreement").

The credit facilities under the 2018 Credit Agreement consist of:

•
A $1.5 billion secured term loan to the Company ("2018 Amended Term Loan") with a maturity date of December 17, 2023; and
•
A secured revolving credit facility ("2018 Amended Revolver"; together with the 2018 Amended Term Loan, the "Amended Credit Facilities") under which the Company may borrow up to $1.5 billion, subject to certain sublimits, with a maturity date of December 17, 2023.

The Company initially borrowed $350 million under the 2018 Amended Revolver. This initial borrowing, together with the net proceeds of the 2018 Amended Term Loan, were used to repay the amounts outstanding under the term loan and revolving credit facility under the 2017 Credit Agreement.

Borrowings under the 2018 Credit Agreement bear interest, at the Company's option and in each case plus an applicable margin as follows:

•
2018 Amended Term Loan: at the Base Rate, Eurocurrency Rate or LIBOR Daily Floating Rate, 
•
2018 Amended Revolver: if funded in U.S. dollars, the Base Rate, Eurocurrency Rate, or LIBOR Daily Floating Rate, and, if funded in an alternative currency, the Eurocurrency Rate; and if requested under the swing line sublimit, the Base Rate.

The applicable margin to the Base Rate, Eurocurrency Rate, or LIBOR Daily Floating Rate is subject to specified changes depending on the total net leverage ratio as defined in the 2018 Credit Agreement. The borrowings of the 2018 Amended Term Loan initially bear interest at an annual rate equal to the Eurocurrency Rate (i.e., the LIBOR rate) plus an Applicable Rate equal to 1.375%. The borrowings of the 2018 Amended Revolver initially bear interest at a rate equal to the LIBOR Daily Floating Rate plus an Applicable Rate equal to 1.375%. The Company is also required to pay a quarterly commitment fee calculated on the undrawn committed amount available under the 2018 Amended Revolver.

The Company is required to make scheduled principal payments under the 2018 Amended Term Loan in increasing amounts ranging from $9.375 million per three-month period commencing with the three-month period ending on December 27, 2019 to $28.125 million per three-month period commencing with the three-month period ending on December 29, 2022 and ending on September 29, 2023. The remaining balance of the 2018 Amended Term Loan after the

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scheduled principal payments, which is $1.2 billion as of March 30, 2019, and any amounts outstanding under the 2018 Amended Revolver are due at maturity. In addition, subject to the terms and conditions set forth in the 2018 Credit Agreement, the Company may be required to make certain mandatory prepayments from the net proceeds of specified types of asset sales (subject to certain reinvestment rights), debt issuances and insurance recoveries (subject to certain reinvestment rights). These mandatory prepayments are required to be applied by the Company, first, to the 2018 Amended Term Loan, second, to any outstanding amount under any Swing Line Loans, third, to the 2018 Amended Revolver, fourth to prepay any outstanding reimbursement obligations with respect to Letters of Credit and fifth, to cash collateralize any Letters of Credit. Subject to certain limitations, the Company may voluntarily prepay any of the 2018 Credit Facilities without premium or penalty.

The 2018 Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants restricting the ability of the Company, subject to negotiated exceptions, to incur additional indebtedness and grant additional liens on its assets, engage in mergers or acquisitions or dispose of assets, enter into sale-leaseback transactions, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses. In addition, the 2018 Credit Agreement requires the Company to maintain certain financial ratios. The 2018 Credit Agreement also contains customary representations and warranties and events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross defaults and an event of default upon a change of control of the Company.

Borrowings are secured by first-priority liens on, and a first-priority security interest in, substantially all of the assets of the Company, with certain exceptions. For example, borrowings under the 2018 Credit Agreement are not secured by those accounts receivable that are transferred to the special purpose entity under the Company's Accounts Receivable Securitization program. The 2018 Credit Agreement contains total net leverage ratio and interest coverage ratio financial covenants measured as of the last day of each fiscal quarter. The total net leverage ratio covenant was 5.00:1.00 beginning on the Company's fiscal quarter ended December 29, 2018, and remains as such until it decreases to 4.50:1.00 for the quarter ending June 25, 2022. The interest coverage ratio covenant was 3.75:1.00 beginning on the Company's fiscal quarter ended December 29, 2018, and remains as such for each quarter thereafter. The total net leverage ratio is defined as the ratio of the Company's consolidated net debt as of the quarter end to its consolidated adjusted EBITDA (as defined in the 2018 Credit Agreement) for the four-fiscal quarter period ending on the measurement date. The interest coverage ratio is defined as the ratio of the Company's consolidated adjusted EBITDA for the prior four-fiscal quarter period ending on the measurement date to adjusted consolidated cash interest expense (as defined in the 2018 Credit Agreement) for the same measurement period. The Company was in compliance with these covenants as of March 30, 2019.

The Company evaluated the 2018 Credit Agreement for derivatives pursuant to ASC 815, Derivatives and Hedging, and identified embedded derivatives that required bifurcation as the features are not clearly and closely related to the host instrument. The embedded derivatives were a default provision, which could require additional interest payments, and a provision requiring contingent payments to compensate the lenders for changes in tax deductions. The Company determined that the fair value of these embedded derivatives was nominal as of March 30, 2019.

Pursuant to ASC 470, Debt (ASC 470), the accounting related to entering into the 2018 Credit Agreement and using the proceeds to pay off the 2017 Credit Agreement was evaluated on a creditor-by-creditor basis to determine whether each transaction should be accounted for as a modification or extinguishment. Certain creditors under the 2017 Credit Agreement did not participate in this refinancing transaction and ceased being creditors of the Company. As a result, the Company recorded a debt extinguishment loss of $0.8 million in the first quarter of fiscal 2019. For the remainder of the creditors, this transaction was accounted for as a modification because on a creditor-by-creditor basis the present value of the cash flows between the two debt instruments before and after the transaction was less than 10%. We accounted for the amendments pursuant to ASC 470, subtopic 50-40, and third-party costs of $0.8 million related to this transaction were recorded as interest expense and $1.9 million was recorded as a reduction to debt representing deferred issuance costs and debt discount for fees paid directly to the lenders.

2017 Credit Agreement
On October 3, 2017, the Company entered into an Amended and Restated Credit and Guaranty Agreement with Bank of America, N.A. and certain other lenders. The 2017 Credit Agreement amended and restated the Company's prior credit and guaranty agreement, originally dated as of May 29, 2015 (the "Prior Credit Agreement"). The proceeds under the 2017 Credit Agreement of $1.8 billion were used, among other things, to pay off the Term Loan of $1.32 billion and the Revolver then outstanding under the Company's Prior Credit Agreement.

Pursuant to ASC 470, the accounting for the 2017 Credit Agreement was evaluated consistent with that described above. As a result, the Company recorded a debt extinguishment loss of $1.0 million in the first quarter of fiscal 2018 related to those

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creditors under the Prior Credit Agreement who ceased being creditors under the 2017 Credit Agreement For the remainder of the creditors, this transaction was accounted for as a modification and pursuant to ASC 470, subtopic 50-40, third-party costs of $1.7 million related to this transaction were recorded as interest expense.

Interest expense, weighted average interest rate, and interest rate at the end of period under the 2018 and 2017 Credit Agreements in fiscal 2019, and the 2017 Credit Agreement in fiscal 2018 were as follows: 

 
Three Months Ended
 
Six Months Ended
 
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Interest expense
$
16.8

 
$
13.8

 
$
35.5

 
$
26.2

Weighted average interest rate
3.86
%
 
3.08
%
 
3.84
%
 
2.96
%
Interest rate at end of period
3.87
%
 
3.38
%
 
3.87
%
 
3.38
%


Senior Notes

On October 10, 2017, the Company completed a private placement of $350 million aggregate principal amount of its 4.375% Senior Notes due 2025 (the "2025 Senior Notes") at an offering price of 100% of the aggregate principal amount of the 2025 Senior Notes.

On January 19, 2018, the Company completed a private placement of $1.0 billion aggregate principal amount of senior notes, allocated between (i) an additional $600 million aggregate principal amounts of its 2025 Senior Notes pursuant to a supplement to the indenture governing the Company's existing 2025 Senior Notes at an offering price of 100% of the aggregate principal amount of the 2025 Senior Notes and (ii) $400 million aggregate principal amounts of its 4.625% Senior Notes due 2028 (the "2028 Senior Notes") at an offering price of 100% of the aggregate principal amount of the 2028 Senior Notes.

2022 Senior Notes

At December 30, 2017, the Company had 5.250% Senior Notes due 2022 (the “2022 Senior Notes”) outstanding that bore interest at the rate of 5.250% per year, payable semi-annually on January 15 and July 15 of each year. The Company used the net proceeds of the 2025 Senior Notes and the 2028 Senior Notes offering in January 2018, plus available cash, to redeem in full the 2022 Senior Notes in the aggregate principal amount of $1.0 billion on February 15, 2018 at an aggregate redemption price of $1.04 billion, including a make-whole provision payment $37.7 million. Since the Company planned to use the proceeds from the 2025 Senior Notes and the 2028 Senior Notes offering to redeem the 2022 Senior Notes, the Company evaluated the accounting for this transaction under ASC 470 to determine modification versus extinguishment accounting on a creditor-by-creditor basis. Certain 2022 Senior Note holders either did not participate in this refinancing transaction or reduced their holdings and these transactions were accounted for as extinguishments. As a result, the Company recorded a debt extinguishment loss in the second quarter of fiscal 2018 of $44.9 million, which comprised pro-rata amounts of the make-whole provision premium payment, debt discount and debt issuance costs. For the remaining 2022 Senior Notes holders who participated in the refinancing, these transactions were accounted for as modifications because on a creditor-by-creditor basis the present value of the cash flows between the debt instruments before and after the transaction was less than 10%. In the second quarter of fiscal 2018, the Company recorded a portion of the transaction expenses of $2.6 million to interest expense pursuant to ASC 470, subtopic 50-40. The remaining debt issuance costs of $1.5 million and debt discount of $1.5 million related to the modified debt were allocated between the 2025 Senior Notes and 2028 Senior Notes on a pro-rata basis, and will be amortized over the life of the debt using the effective interest method.

2025 Senior Notes

The total aggregate principal balance of 2025 Senior Notes is $950 million. The 2025 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain domestic subsidiaries and mature on October 15, 2025.

2028 Senior Notes
    
The aggregate principal balance of the 2028 Senior Notes is $400 million. The 2028 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain domestic subsidiaries and mature on February 1, 2028.

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Interest expense for the 2028 Senior Notes, 2025 Senior Notes and 2022 Senior Notes is as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
 
Interest Rate
 
Interest Expense
 
Interest Expense
 
Interest Expense
 
Interest Expense
2028 Senior Notes
4.625
%
 
$
4.8

 
$
3.7

 
$
9.6

 
$
3.7

2025 Senior Notes
4.375
%
 
10.9

 
9.4

 
21.8

 
12.9

2022 Senior Notes
5.250
%
 
—

 
7.1

 
—

 
21.1

Total
 
 
$
15.7

 
$
20.2

 
$
31.4

 
$
37.7


Accounts Receivable Securitization Program

Effective April 18, 2019, the Company entered into an amendment to extend the Securitization Program an additional year to April 17, 2020. Under the amendment, the maximum borrowing amount increased to $250.0 million. As a result, on April 26, 2019, the Company borrowed an additional $43.0 million increasing the borrowed amount to the $250.0 million maximum allowed. These additional borrowings were used to to pay down the 2018 Amended Revolver in the same amount.


(7) 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), net in the Consolidated Statements of Income.
During fiscal 2017, 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 the term loan feature of its credit facilities (see Note 6). 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 $1.9 million, which was the initial fair value of the instruments recorded in the Company's financial statements.
During fiscal 2018, the Company entered into new separate interest rate cap agreements with multiple counter-parties to extend the expiration date of its hedges by an additional year. The aggregate premium paid for these interest rate cap agreements was $3.7 million, which was the initial fair value of the instruments recorded in the Company's financial statements.
During the second quarter of fiscal 2019, the Company entered into new separate interest rate cap agreements with multiple counter-parties to extend the expiration date of its hedges by an additional year. The aggregate premium paid for these interest cap agreements was $1.5 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 Prior Credit Agreement and Amended and Restated 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, which ended on December 28, 2018 for the contracts entered into in fiscal 2017, and which will end on December 27, 2019 and December 23, 2020 for the interest rate cap agreements entered into in fiscal 2018 and fiscal 2019, respectively.
As of March 30, 2019, 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.

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During the three and six months ended March 30, 2019 and March 31, 2018, the Company reclassified $0.5 million and $1.2 million, respectively and $0.3 million and $2.6 million, respectively, from AOCI to the Consolidated Statements of Operations related to the interest rate cap agreements. The Company expects to similarly reclassify a loss of approximately $3.6 million from AOCI to the Consolidated Statements of Operations in the next twelve months.
The aggregate fair value of these interest rate caps was $2.9 million and $7.7 million at March 30, 2019 and September 29, 2018, respectively, and is included in Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheet. Refer to Note 3 “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, the Chinese Yuan 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 six months ended March 30, 2019, the Company recorded net realized gains of $1.8 million and $3.5 million, respectively, from settling forward foreign currency contracts and net unrealized loss of $1.4 million and net realized gain of $2.0 million, respectively, on the mark-to-market for its outstanding forward foreign currency contracts. During the three and six months ended March 31, 2018, the Company recorded net realized losses of $2.1 million and $2.3 million, respectively, from settling forward foreign currency contracts and unrealized losses of $1.7 million and $0.2 million, respectively, on the mark-to-market for its outstanding forward foreign currency contracts.
As of March 30, 2019, 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, Chinese Yuan and Japanese Yen with an aggregate notional amount of $150.7 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 March 30, 2019:
 
Balance Sheet Location
 
March 30, 2019
 
September 29, 2018
Assets:
 
 
 
 
 
Derivative instruments designated as a cash flow hedge:
 
 
 
 
 
Interest rate cap agreements
Prepaid expenses and other current assets
 
$
1.8

 
$
6.0

Interest rate cap agreements
Other assets
 
1.1

 
1.7