Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 29, 2013

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: 0-18281

 

 

Hologic, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-2902449
(State of incorporation)  

(I.R.S. Employer

Identification No.)

35 Crosby Drive,

Bedford, Massachusetts

  01730
(Address of principal executive offices)   (Zip Code)

(781) 999-7300

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

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

 

 

 


Table of Contents

HOLOGIC, INC.

INDEX

 

         Page  

PART I – FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (unaudited)

  
 

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

     3   
 

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

     4   
 

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

     5   
 

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

     6   
 

Notes to Consolidated Financial Statements

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     54   

Item 4.

 

Controls and Procedures

     54   

PART II – OTHER INFORMATION

     55   

Item 1.

 

Legal Proceedings

     55   

Item 1A.

 

Risk Factors

     55   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     55   

SIGNATURES

     57   

EXHIBITS

  

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  
     June 29,
2013
    June 23,
2012
    June 29,
2013
    June 23,
2012
 

Revenues:

        

Product sales

   $ 529,953      $ 384,593      $ 1,579,323      $ 1,164,774   

Service and other revenues

     96,183        85,635        290,838        249,330   
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of product sales

     187,612        134,062        617,165        420,429   

Cost of product sales – amortization of intangible assets

     75,990        45,280        227,010        135,792   

Cost of product sales – impairment of intangible assets

     1,714        —          1,714        —     

Cost of service and other revenues

     51,062        46,246        153,515        137,763   

Research and development

     47,779        26,229        148,909        83,868   

Selling and marketing

     82,911        76,368        265,379        232,367   

General and administrative

     60,476        43,421        179,689        131,759   

Amortization of intangible assets

     28,678        15,733        85,871        47,204   

Contingent consideration – compensation expense

     21,601        15,502        80,475        44,064   

Contingent consideration – fair value adjustments

     471        (13,276     11,310        35,034   

Gain on sale of intellectual property

     —         —          (53,884     (12,424

Restructuring and divestiture charges

     6,690        136        23,085        828   
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

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

Interest income

     304        695        771        1,947   

Interest expense

     (67,162     (25,593     (215,292     (83,614

Debt extinguishment loss

     —          —          (3,247     (42,347

Other (expense) income, net

     (1,217     (622     (179     2,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (6,923     55,007        (88,024     36,303   

Provision (benefit) for income taxes

     4,027        31,413        (29,088     32,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (10,950   $ 23,594      $ (58,936   $ 4,133   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share:

        

Basic

   $ (0.04   $ 0.09      $ (0.22   $ 0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.04   $ 0.09      $ (0.22   $ 0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding:

        

Basic

     269,430        264,609        267,983        263,742   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

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

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended     Nine Months Ended  
     June 29,
2013
    June 23,
2012
    June 29,
2013
    June 23,
2012
 

Net (loss) income

   $ (10,950   $ 23,594      $ (58,936   $ 4,133   

Foreign currency translation adjustment

     (2,984     (9,528     (9,303     (4,852

Unrealized gain on available-for-sale securities

     131        —          2,261        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (2,853     (9,528     (7,042     (4,852
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (13,803   $ 14,066      $ (65,978   $ (719
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

HOLOGIC, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)

 

     June 29,
2013
    September 29,
2012
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 958,444      $ 560,430   

Restricted cash

     5,941        5,696   

Accounts receivable, less reserves of $8,514 and $6,396, respectively

     400,428        409,333   

Inventories

     306,019        367,191   

Deferred income tax assets

     —          11,715   

Prepaid income taxes

     32,868        69,845   

Prepaid expenses and other current assets

     47,645        44,301   

Other current assets – assets held-for-sale

     —          94,503   
  

 

 

   

 

 

 

Total current assets

     1,751,345        1,563,014   
  

 

 

   

 

 

 

Property, plant and equipment, net

     501,861        507,998   

Intangible assets, net

     3,987,157        4,301,250   

Goodwill

     3,939,172        3,942,779   

Other assets

     153,668        162,067   
  

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 657,370      $ 64,435   

Accounts payable

     74,115        87,223   

Accrued expenses

     359,311        372,381   

Deferred revenue

     126,609        129,688   

Deferred income tax liabilities

     41,518        —     

Other current liabilities – assets held-for-sale

     —          7,622   
  

 

 

   

 

 

 

Total current liabilities

     1,258,923        661,349   
  

 

 

   

 

 

 

Long-term debt, net of current portion

     4,347,300        4,971,179   

Deferred income tax liabilities

     1,553,698        1,771,585   

Deferred service obligations – long-term

     22,436        13,714   

Other long-term liabilities

     154,212        98,250   

Commitments and contingencies (Note 6)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value – 1,623 shares authorized; 0 shares issued

     —          —     

Common stock, $0.01 par value – 750,000 shares authorized; 270,196 and 265,635 shares issued, respectively

     2,702        2,656   

Additional paid-in-capital

     5,498,192        5,396,657   

Accumulated deficit

     (2,502,490     (2,443,554

Accumulated other comprehensive (loss) income

     (252     6,790   

Treasury stock, at cost – 219 shares

     (1,518     (1,518
  

 

 

   

 

 

 

Total stockholders’ equity

     2,996,634        2,961,031   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

HOLOGIC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Nine Months Ended  
     June 29,
2013
    June 23,
2012
 

OPERATING ACTIVITIES

    

Net (loss) income

   $ (58,936   $ 4,133   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation

     70,505        48,107   

Amortization

     312,881        182,996   

Non-cash interest expense

     61,198        54,882   

Stock-based compensation expense

     41,898        26,360   

Excess tax benefit related to equity awards

     (5,394     (3,791

Deferred income taxes

     (119,391     (124,253

Gain on sale of intellectual property

     (53,884     (12,424

Debt extinguishment loss

     3,247        42,347   

Fair value adjustments to contingent consideration

     11,310        35,034   

Fair value write-up of inventory sold

     52,397        —     

Cost-method equity investment impairment

     6,438        —     

Gain on sale of cost-method equity investment

     (1,972     —     

Intangible asset impairment

     1,714        —     

Non-cash restructuring charges

     54        16,435   

Loss on disposal of property and equipment

     3,673        2,402   

Other

     2,553        (1,591

Changes in operating assets and liabilities, net of effects from acquisitions:

    

Accounts receivable

     9,311        (22,055

Inventories

     12,060        (8,959

Prepaid income taxes

     36,978        360   

Prepaid expenses and other assets

     5,294        1,356   

Accounts payable

     (14,416     (8,155

Accrued expenses and other liabilities

     32,100        40,230   

Deferred revenue

     6,206        11,217   
  

 

 

   

 

 

 

Net cash provided by operating activities

     415,824        284,631   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Acquisition of businesses

     (6,273     —     

Payment of additional acquisition consideration

     (16,808     (9,784

Proceeds from sale of business, net of cash transferred

     86,250        —     

Purchase of property and equipment

     (41,116     (20,692

Increase in equipment under customer usage agreements

     (31,911     (32,750

Purchase of insurance contracts

     (4,000     —     

Proceeds from sale of intellectual property

     60,000        12,500   

Purchase of cost-method investments

     (3,625     (250

Sale of a cost-method investment

     2,104        —     

Increase in other assets

     (4,534     (948
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     40,087        (51,924
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Repayment of long-term debt

     (48,750     —     

Payment of debt issuance costs

     (7,019     (7,908

Payment of contingent consideration

     (42,433     (51,680

Deferred acquisition consideration

     (1,655     —     

Net proceeds from issuance of common stock pursuant to employee stock plans

     51,220        21,741   

Excess tax benefit related to equity awards

     5,394        3,791   

Payment of employee restricted stock minimum tax withholdings

     (12,102     (5,707
  

 

 

   

 

 

 

Net cash used in financing activities

     (55,345     (39,763

Effect of exchange rate changes on cash and cash equivalents

     (2,552     (194
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     398,014        192,750   

Cash and cash equivalents, beginning of period

     560,430        712,332   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 958,444      $ 905,082   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

HOLOGIC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(all tabular amounts in thousands except per share data)

(1) Basis of Presentation

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

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

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

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

Subsequent Events Consideration

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

(2) Fair Value Measurements

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

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

 

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Table of Contents

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

 

            Fair Value at Reporting Date Using  
     Balance as of
June 29, 2013
     Quoted Prices in
Active Market for
Identical Assets
(Level  1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Money market funds

   $ 315       $ 315       $ —         $ —     

Marketable securities:

           

Equity securities

     8,290         8,290         —           —     

Mutual funds

     6,664         6,664         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,269       $ 15,269       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deferred compensation liabilities

   $ 36,889       $ 36,889       $ —         $ —     

Contingent consideration

     4,493         —           —           4,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 41,382       $ 36,889       $ —         $ 4,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     June 29,
2013
    June 23,
2012
    June 29,
2013
    June 23,
2012
 

Balance at beginning of period

   $ 3,627      $ 96,212      $ 86,368      $ 103,790   

Contingent consideration recorded at acquisition

     525        —          525        —     

Fair value adjustments

     471        (13,276     11,310        35,034   

Payments made

     (130     —          (93,710     (55,888
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,493      $ 82,936      $ 4,493      $ 82,936   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

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

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

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

 

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Table of Contents

Disclosure of Fair Value of Financial Instruments

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

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

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

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

 

     June 29,
2013
     September 29,
2012
 

2007 Notes

   $ 404,100       $ 771,600   

2010 Notes

     499,100         505,600   

2012 Notes

     500,000         490,700   

2013 Notes

     378,300         —     
  

 

 

    

 

 

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

 

 

    

 

 

 

(3) Business Combinations

Gen-Probe Incorporated

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

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

The purchase price consideration was as follows:

 

Cash paid

   $  3,967,866   

Deferred payment

     1,655   

Fair value of stock options exchanged

     2,655   
  

 

 

 

Total purchase price

   $ 3,972,176   
  

 

 

 

 

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

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

 

Cash

   $ 205,463   

Accounts receivable

     81,444   

Inventory

     153,416   

Property, plant and equipment

     274,095   

Other assets

     192,354   

Assets held-for-sale, net

     87,465   

Accounts payable

     (19,671

Accrued expenses

     (131,566

Other liabilities

     (19,648

Identifiable intangible assets:

  

Developed technology

     1,565,000   

In-process research and development

     227,000   

Customer contract

     585,000   

Trade names

     95,000   

Deferred income taxes, net

     (972,196

Goodwill

     1,649,020   
  

 

 

 

Purchase Price

   $ 3,972,176   
  

 

 

 

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

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

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

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

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

 

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

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

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

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

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

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

 

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

Revenue

   $ 626,225      $ 1,881,561   

Net loss

   $ (10,041   $ (93,420

Basic and diluted net loss per common share

   $ (0.04   $ (0.35

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

Chindex Medical Limited

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

 

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SenoRx, Inc.

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

(4) Restructuring and Divestiture Charges

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

 

Restructuring Charges

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

Fiscal 2012 charges:

            

Non-cash impairment charge

   $ 16,316      $ 585      $ —        $ —        $ —        $ 16,901   

Purchase orders and other contractual obligations

     3,099        —          —          —          —          3,099   

Workforce reductions

     128        14,202        879        —          40        15,249   

Facility closure costs

     —          —          —          —          430        430   

Other

     —          —          900        —          —          900   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fiscal 2012 charges

   $ 19,543      $ 14,787      $ 1,779      $ —        $ 470      $ 36,579   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded to cost of product sales

   $ 19,064      $ —        $ —        $ —        $ —        $ 19,064   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded to restructuring

   $ 479      $ 14,787      $ 1,779      $ —        $ 470      $ 17,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2013 charges:

            

Workforce reductions

   $ —        $ 13,385      $ 4,505      $ 3,592      $ 1,010      $ 22,492   

Facility closure costs

     —          —          —          —          480        480   

Other

     —          —          651        17        —          668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fiscal 2013 charges

   $ —        $ 13,385      $ 5,156      $ 3,609      $ 1,490      $ 23,640   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Rollforward of Accrued Restructuring

                                    

Total fiscal 2012 charges

   $ 19,543      $ 14,787      $ 1,779      $ —        $ 470      $ 36,579   

Non-cash impairment charges

     (16,316     (585     —          —          —          (16,901

Stock compensation

     —          (3,500     —          —          —          (3,500

Severance payments

     (128     (2,423     —          —          (78     (2,629

Payments related to purchase orders and other contractual obligations

     (2,572     —          —          —          —          (2,572

Other payments

     —          —          —          —          (430     (430

Acquired

     —          83        —          —          —          83   

Foreign exchange and other adjustments

     —          22        —          —          91        113   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 29, 2012

   $ 527      $ 8,384      $ 1,779      $ —        $ 53      $ 10,743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2013 charges

   $ —        $ 13,385      $ 5,156      $ 3,609      $ 1,490      $ 23,640   

Stock compensation

     —          (6,322     —          (220     —          (6,542

Non-cash impairment charges

     —          —          —          —          (54     (54

Severance payments

     —          (12,054     (2,261     (1,646     (71     (16,032

Payments related to purchase orders and other contractual obligations

     (527     —          (392     —          (56     (975

Foreign exchange and other adjustments

     —          (2     —          (27     (19     (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 29, 2013

   $ —        $ 3,391      $ 4,282      $ 1,716      $ 1,343      $ 10,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Abandonment of Adiana Product Line

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

Consolidation of Diagnostics Operations

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

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

Closure of Indianapolis Facility

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

Fiscal 2013 Action

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

 

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

Other Operating Cost Reductions:

Consolidation of Selenium Panel Coating Production

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

Other

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

Divestitures

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

(5) Borrowings and Credit Arrangements

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

 

     June 29, 2013      September 29, 2012  

Current debt obligations, net of debt discount:

     

Term Loan A

   $ 49,694       $ 49,582   

Term Loan B

     213,087         14,853   

Convertible Notes

     394,589         —     
  

 

 

    

 

 

 

Total current debt obligations

   $ 657,370       $ 64,435   

Long-term debt obligations, net of debt discount:

     

Term Loan A

   $ 906,911       $ 942,065   

Term Loan B

     1,262,417         1,470,454   

Senior Notes

     1,000,000         1,000,000   

Convertible Notes

     1,177,972         1,558,660   
  

 

 

    

 

 

 

Total long-term debt obligations

     4,347,300         4,971,179   
  

 

 

    

 

 

 

Total debt obligations

   $ 5,004,670       $ 5,035,614   
  

 

 

    

 

 

 

Credit Agreement

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

The credit facilities under the Credit Agreement consisted of:

 

   

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

 

   

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

 

   

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

 

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

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

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

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

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

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

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

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

Senior Notes

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

 

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Convertible Notes

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

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

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

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

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

 

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

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

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

 

     June 29,
2013
    September 29,
2012
 

2007 Notes principal amount

   $ 405,000      $ 775,000   

Unamortized discount

     (10,411     (50,591
  

 

 

   

 

 

 

Net carrying amount

   $ 394,589      $ 724,409   
  

 

 

   

 

 

 

Equity component, net of taxes

   $ 121,946      $ 233,353   
  

 

 

   

 

 

 

2010 Notes principal amount

   $ 450,000      $ 450,000   

Unamortized discount

     (62,335     (74,062
  

 

 

   

 

 

 

Net carrying amount

   $ 387,665      $ 375,938   
  

 

 

   

 

 

 

Equity component, net of taxes

   $ 60,054      $ 60,054   
  

 

 

   

 

 

 

2012 Notes principal amount

   $ 500,000      $ 500,000   

Unamortized discount

     (36,433     (41,687
  

 

 

   

 

 

 

Net carrying amount

   $ 463,567      $ 458,313   
  

 

 

   

 

 

 

Equity component, net of taxes

   $ 49,195      $ 49,195   
  

 

 

   

 

 

 

2013 Notes principal amount

   $ 370,000      $ —    

Principal accretion

     5,489        —    

Unamortized discount

     (48,749     —    
  

 

 

   

 

 

 

Net carrying amount

   $ 326,740      $ —    
  

 

 

   

 

 

 

Equity component, net of taxes

   $ 131,451      $ —    
  

 

 

   

 

 

 

Interest expense under the Convertible Notes was as follows:

 

     Three Months Ended      Nine Months Ended  
     June 29,
2013
     June 23,
2012
     June 29,
2013
     June 23,
2012
 

Amortization of debt discount

   $ 11,638       $ 15,119       $ 40,903       $ 52,018   

Amortization of deferred financing costs

     670         882         2,368         2,864   

Principal accretion

     3,700         —          5,489         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-cash interest expense

     16,008         16,001         48,760         54,882   
  

 

 

    

 

 

    

 

 

    

 

 

 

2.00% accrued interest

     8,575         8,538         25,801         25,683   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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(6) Commitments and Contingencies

(a) Contingent Earn-Out Payments

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

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

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

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

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

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

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

 

Statement of Operations Line Item – 3 Months Ended June 29, 2013

   Interlace      TCT      Total  

Contingent consideration – compensation expense

   $ —        $ 21,601       $ 21,601   

Contingent consideration – fair value adjustments

     471         —          471   
  

 

 

    

 

 

    

 

 

 
   $      471       $ 21,601       $ 22,072   
  

 

 

    

 

 

    

 

 

 

 

Statement of Operations Line Item – 9 Months Ended June 29, 2013

   Interlace      TCT      Total  

Contingent consideration – compensation expense

   $ —        $ 80,475       $ 80,475   

Contingent consideration – fair value adjustments

     11,310         —          11,310   
  

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

 

 

Statement of Operations Line Item – 3 Months Ended June 23, 2012

   Sentinelle
Medical
    Interlace     TCT      Healthcome      Total  

Contingent consideration – compensation expense

   $ —       $ —       $ 15,013       $ 489       $ 15,502   

Contingent consideration – fair value adjustments

     (2,518     (10,758     —          —          (13,276
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

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

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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Statement of Operations Line Item – 9 Months Ended June 23, 2012

   Sentinelle
Medical
    Interlace      TCT      Healthcome      Total  

Contingent consideration – compensation expense

   $ —       $ —        $ 42,552       $ 1,512       $ 44,064   

Contingent consideration – fair value adjustments

     (2,728     37,762         —          —          35,034   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

(b) Litigation and Related Matters

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

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

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

 

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

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

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

(7) Sale of Makena

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

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

(8) Marketable Securities

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

 

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Table of Contents

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

 

     Cost      Gross Unrealized
Gains
     Gross Unrealized
Losses
     Fair Value  

Equity security

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

 

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(9) Net (Loss) Income Per Share

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

 

     Three Months Ended      Nine Months Ended  
     June 29,
2013
     June 23,
2012
     June 29,
2013
     June 23,
2012
 

Basic weighted average common shares outstanding

     269,430         264,609         267,983         263,742   

Weighted average common stock equivalents from assumed exercise of stock options and restricted stock units

     —          2,685        —          2,617  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

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

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average anti-dilutive shares related to:

           

Outstanding stock options

     7,964         7,568         8,724         8,654   

Restricted stock units

     1,147         —           1,089         529   

(10) Stock-Based Compensation

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

 

     Three Months Ended      Nine Months Ended  
     June 29,
2013
     June 23,
2012
     June 29,
2013
     June 23,
2012
 

Cost of revenues

   $ 1,677       $ 1,220       $ 5,234       $ 3,602   

Research and development

     1,717         1,210         5,600         3,688   

Selling and marketing

     2,208         1,840         6,976         5,234   

General and administrative

     4,754         4,484         16,434         13,836   

Restructuring and divestiture

     463         —          7,654         —    
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three Months Ended     Nine Months Ended  
     June 29,
2013
    June 23,
2012
    June 29,
2013
    June 23,
2012
 

Risk-free interest rate

     0.5     0.7     0.5     0.7

Expected volatility

     43.7     46.9     43.7     46.9

Expected life (in years)

     4.4        4.3        4.4        4.3   

Dividend yield

     —         —         —         —    

Weighted average fair value of options granted

   $ 7.47      $ 7.10      $ 7.09      $ 6.43   

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

 

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

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

(11) Other Balance Sheet Information

 

     June 29,
2013
    September 29,
2012
 

Inventories

    

Raw materials

   $ 120,427      $ 134,983   

Work-in-process

     50,732        93,218   

Finished goods

     134,860        138,990   
  

 

 

   

 

 

 
   $ 306,019      $ 367,191   
  

 

 

   

 

 

 

Property, plant and equipment

    

Equipment and software

   $ 319,233      $ 296,776   

Equipment under customer usage agreements

     270,437        249,692   

Building and improvements

     170,650        156,665   

Leasehold improvements

     65,583        71,943   

Land

     51,562        51,430   

Furniture and fixtures

     22,374        21,495   
  

 

 

   

 

 

 
     899,839        848,001   

Less – accumulated depreciation and amortization

     (397,978     (340,003
  

 

 

   

 

 

 
   $ 501,861      $ 507,998   
  

 

 

   

 

 

 

(12) Business Segments and Geographic Information

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

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

 

     Three Months Ended      Nine Months Ended  
     June 29,
2013
     June 23,
2012
     June 29,
2013
     June 23,
2012
 

Total revenues:

           

Diagnostics

   $ 297,416       $ 158,710       $ 899,839       $ 464,615   

Breast Health

     230,016         211,460         670,882         645,443   

GYN Surgical

     75,835         77,672         230,436         233,395   

Skeletal Health

     22,869         22,386         69,004         70,651   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Three Months Ended      Nine Months Ended  
     June 29,
2013
    June 23,
2012
     June 29,
2013
    June 23,
2012
 

Operating income (loss):

         

Diagnostics

   $ (1,067   $ 11,466       $ (33,750   $ 53,223   

Breast Health

     53,167        48,910         146,004        145,196   

GYN Surgical

     6,274        17,740         9,137        (50,650

Skeletal Health

     2,778        2,411         8,532        9,651   
  

 

 

   

 

 

    

 

 

   

 

 

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

 

 

   

 

 

    

 

 

   

 

 

 

Depreciation and amortization:

         

Diagnostics

   $ 92,166      $ 40,382       $ 273,109      $ 120,297   

Breast Health

     10,042        10,594         30,097        31,668   

GYN Surgical

     26,534        25,520         79,537        77,825   

Skeletal Health

     213        443         643        1,313   
  

 

 

   

 

 

    

 

 

   

 

 

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

 

 

   

 

 

    

 

 

   

 

 

 

Capital expenditures:

         

Diagnostics

   $ 13,357      $ 11,016       $ 40,674      $ 28,640   

Breast Health

     4,221        2,691         13,710        6,473   

GYN Surgical

     2,442        4,138         7,538        10,138   

Skeletal Health

     180        —          387        198   

Corporate

     5,984        2,040         10,898        7,993   
  

 

 

   

 

 

    

 

 

   

 

 

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

 

 

   

 

 

    

 

 

   

 

 

 

 

     June 29,
2013
     September 29,
2012
 

Identifiable assets:

     

Diagnostics

   $ 5,867,786       $ 6,170,553   

Breast Health

     940,215         956,134   

GYN Surgical

     1,873,558         1,944,386   

Skeletal Health

     33,477         32,778   

Corporate

     1,618,167         1,373,257   
  

 

 

    

 

 

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

 

 

    

 

 

 

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

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

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

 

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Table of Contents

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

 

     Three Months Ended     Nine Months Ended  
     June 29,
2013
    June 23,
2012
    June 29,
2013
    June 23,
2012
 

United States

     75     73     74     75

Europe

     13     12     14     12

Asia

     8     10     8     8

All others

     4     5     4     5
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

(13) Income Taxes

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

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

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

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

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

(14) Goodwill and Intangible Assets

Goodwill

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

 

     Breast Health     Diagnostics     GYN Surgical      Skeletal Health      Total  

Balance at September 29, 2012

   $ 635,741      $ 2,283,447      $ 1,015,466       $ 8,125       $ 3,942,779   

Gen-Probe acquisition adjustments

     —         (3,526     —          —          (3,526

Chindex acquisition

     1,798        —         —          —          1,798   

SenoRx acquisition

     692        —         —          —          692   

Tax adjustments

     —         (674     12         —          (662

Foreign currency

     (3,102     450        736         7         (1,909
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at June 29, 2013

   $ 635,129      $ 2,279,697      $ 1,016,214       $ 8,132       $ 3,939,172   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Intangible Assets

Intangible assets consisted of the following:

 

Description

   As of June 29, 2013      As of September 29, 2012  
   Gross
Carrying
Value
     Accumulated
Amortization
     Gross
Carrying
Value
     Accumulated
Amortization
 

Developed technology

   $ 3,813,551       $ 1,013,545       $ 3,784,689       $ 788,274   

In-process research and development

     193,000         —          227,000         —    

Customer relationships and contracts

     1,101,244         273,627         1,097,842         205,612   

Trade names

     238,026         77,878         240,092         60,318   

Patents

     12,598         8,293         11,417         7,906   

Business licenses

     2,616         545         2,577         344   

Non-competition agreements

     290         280         310         223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

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

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

Remainder of Fiscal 2013

   $ 111,125   

Fiscal 2014

     399,328   

Fiscal 2015

     384,454   

Fiscal 2016

     370,660   

Fiscal 2017

     361,484   

(15) Product Warranties

Product warranty activity was as follows:

 

     Balance at
Beginning of
Period
     Provisions      Settlements/
Adjustments
    Balance at
End of Period
 

Nine Months Ended:

          

June 29, 2013

   $ 6,179       $ 8,815       $ (7,174   $ 7,820   

June 23, 2012

   $ 4,448       $ 5,632       $ (5,150   $ 4,930   

(16) Equity

Stockholder Rights Plan

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

Amended and Restated 2008 Equity Incentive Plan

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

(17) Pension and Other Employee Benefits

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

 

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Table of Contents

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

(18) Subsequent Event

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

(19) New Accounting Pronouncements

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

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

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

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

 

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Table of Contents

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

June 29, 2013

 

     Parent/Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 504,383       $ 341,769       $ 112,292       $ —       $ 958,444   

Restricted cash

     —          —          5,941         —         5,941   

Accounts receivable, net

     116,115         168,829         115,280         204        400,428   

Inventories

     78,257         163,871         63,908         (17     306,019   

Deferred income tax assets

     —          16,861         689         (17,550     —    

Prepaid income taxes

     36,808         1,912         —          (5,852     32,868   

Prepaid expenses and other current assets

     21,876         12,228         13,541         —         47,645   

Intercompany receivables

     —          2,377,700         53,562         (2,431,262     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     757,439         3,083,170         365,213         (2,454,477     1,751,345   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property, plant and equipment, net

     30,156         369,146         102,559         —         501,861   

Intangible assets, net

     22,099         3,862,762         102,296         —         3,987,157   

Goodwill

     281,067         3,519,727         138,378         —         3,939,172   

Other assets

     107,472         44,100         2,096         —         153,668   

Investment in subsidiaries

     9,749,521         116,145         2,296         (9,867,962     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities:

             

Current portion of long-term debt

   $ 657,370       $ —         $ —         $ —       $ 657,370   

Accounts payable

     25,910         37,983         10,222         —          74,115   

Accrued expenses

     247,160         74,987         43,294         (6,130     359,311   

Deferred revenue

     88,644         8,313         29,652         —         126,609   

Deferred income tax liabilities

     59,068         —          —          (17,550     41,518   

Intercompany payables

     2,348,234         —          90,615         (2,438,849     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     3,426,386         121,283         173,783         (2,462,529     1,258,923   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term debt, net of current portion

     4,347,300         —          —          —         4,347,300   

Deferred income tax liabilities

     80,514         1,462,129         11,055         —         1,553,698   

Deferred service obligations – long-term

     10,269         2,416         11,943         (2,192     22,436   

Other long-term liabilities

     86,651         34,512         33,049         —         154,212   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     2,996,634         9,374,710         483,008         (9,857,718     2,996,634   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

September 29, 2012

 

     Parent/Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 210,028       $ 269,416       $ 80,986       $ —       $ 560,430   

Restricted cash

     —          —          5,696         —         5,696   

Accounts receivable, net

     101,538         192,349         115,522         (76     409,333   

Inventories

     74,500         223,043         70,180         (532     367,191   

Deferred income tax assets

     13,578         —          617         (2,480     11,715   

Prepaid income taxes

     20,805         48,429         611         —         69,845   

Prepaid expenses and other current assets

     18,817         12,816         12,668         —         44,301   

Intercompany receivables

     —          2,094,017         55,761         (2,149,778     —    

Other current assets – assets held-for-sale

     —          67,878         26,625         —         94,503   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     439,266         2,907,948         368,666         (2,152,866     1,563,014   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property, plant and equipment, net

     26,928         379,702         101,368         —         507,998   

Intangible assets, net

     24,034         4,162,930         114,286         —         4,301,250   

Goodwill

     279,956         3,522,474         140,349         —         3,942,779   

Other assets

     112,339         49,036         2,406         (1,714     162,067   

Investments in subsidiaries

     9,782,940         101,615         2,296         (9,886,851     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities:

             

Accounts payable

   $ 29,847       $ 43,339       $ 14,037       $ —       $ 87,223   

Accrued expenses

     238,387         86,566         50,052         (2,624     372,381   

Deferred revenue

     92,234         10,307         27,147         —         129,688   

Current portion of long-term debt

     64,435         —          —          —         64,435   

Intercompany payables

     2,085,339         6,655         66,335         (2,158,329     —    

Other current liabilities – assets held-for-sale

     —          5,520         2,102         —         7,622   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     2,510,242         152,387         159,673         (2,160,953     661,349   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term debt, net of current portion

     4,971,179         —          —          —         4,971,179   

Deferred income tax liabilities

     180,916         1,581,833         8,836         —         1,771,585   

Deferred service obligations – long-term

     7,536         1,160         7,601         (2,583     13,714   

Other long-term liabilities

     34,559         30,587         34,504         (1,400     98,250   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     2,961,031         9,357,738         518,757         (9,876,495     2,961,031   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 29, 2013

 

     Parent/Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Product sales

   $ 106,536      $ 399,152      $ 114,759      $ (90,494   $ 529,953   

Service and other revenues

     81,406        15,874        11,259        (12,356     96,183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of product sales

     57,735        143,819        76,552        (90,494     187,612   

Cost of product sales – amortization of intangible assets

     1,336        73,617        1,037        —         75,990   

Cost of product sales – impairment of intangible assets

     —          —          1,714        —          1,714   

Cost of service and other revenues

     39,108        14,790        9,520        (12,356     51,062   

Research and development

     8,033        37,104        2,642        —         47,779   

Selling and marketing

     17,860        43,536        21,515        —         82,911   

General and administrative

     19,997        31,279        9,200        —         60,476   

Amortization of intangible assets

     779        26,688        1,211        —         28,678   

Contingent consideration – compensation expense

     21,601        —         —         —         21,601   

Contingent consideration – fair value adjustments

     471        —         —         —         471   

Restructuring and divestiture charges

     563        3,746        2,381        —         6,690   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     20,459        40,447        246        —         61,152   

Interest income

     146        35        123        —         304   

Interest expense

     (66,349     (309     (504     —         (67,162

Other (expense) income, net

     178,080        (179,224     (73     —         (1,217
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     132,336        (139,051     (208     —         (6,923

Provision (benefit) for income taxes

     50,844        (49,855     3,038        —         4,027   

Equity in earnings (losses) of subsidiaries

     (92,442     1,099        —         91,343        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (10,950   $ (88,097   $ (3,246   $ 91,343      $ (10,950
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended June 29, 2013

 

     Parent/Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Product sales

   $ 305,193      $ 1,177,734      $ 365,328      $ (268,932   $ 1,579,323   

Service and other revenues

     240,542        56,437        34,512        (40,653     290,838   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of product sales

     163,743        478,024        244,330        (268,932     617,165   

Cost of product sales – amortization of intangible assets

     3,951        219,908        3,151        —         227,010   

Cost of product sales – impairment of intangible assets

     —          —          1,714        —          1,714   

Cost of service and other revenues

     118,106        46,158        29,904        (40,653     153,515   

Research and development

     22,685        118,829        7,395        —         148,909   

Selling and marketing

     59,117        136,138        70,124        —         265,379   

General and administrative

     52,034        100,925        26,730        —         179,689   

Amortization of intangible assets

     2,234        80,024        3,613        —         85,871   

Contingent consideration – compensation expense

     80,475        —         —         —         80,475   

Contingent consideration – fair value adjustments

     11,310        —         —         —         11,310   

Gain on sale of intellectual property, net

     —         (53,884     —         —         (53,884

Restructuring and divestiture charges

     948        17,632        4,505        —         23,085   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     31,132        90,417        8,374        —         129,923   

Interest income

     376        113        282        —         771   

Interest expense

     (212,841     (932     (1,519     —         (215,292

Debt extinguishment loss

     (3,247     —         —         —         (3,247

Other income (expense), net

     179,837        (186,343     6,327        —         (179
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (4,743     (96,745     13,464        —         (88,024

(Benefit) provision for income taxes

     24,255        (61,051     7,708        —         (29,088

Equity in earnings (losses) of subsidiaries

     (29,938     14,492        —         15,446        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (58,936   $ (21,202   $ 5,756      $ 15,446      $ (58,936
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 23, 2012

 

     Parent/Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Product sales

   $ 99,254      $ 245,902      $ 105,023      $ (65,586   $ 384,593   

Service and other revenues

     75,963        15,208        9,027        (14,563     85,635   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of product sales

     51,707        77,535        70,406        (65,586     134,062   

Cost of product sales – amortization of intangible assets

     1,310        42,923        1,047        —         45,280   

Cost of service and other revenues

     37,848        15,125        7,836        (14,563     46,246   

Research and development

     6,805        17,092        2,332        —         26,229   

Selling and marketing

     16,230        38,048        22,090        —         76,368   

General and administrative

     12,755        23,915        6,751        —         43,421   

Amortization of intangible assets

     678        13,859        1,196        —         15,733   

Contingent consideration – compensation expense

     15,502        —         —         —         15,502   

Contingent consideration – fair value adjustments

     (13,276     —         —         —         (13,276

Restructuring and divestiture charges

     —         175        (39     —         136   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     45,658        32,438        2,431        —         80,527   

Interest income

     619        —          76        —         695   

Interest expense

     (24,746     (363     (484     —         (25,593

Other (expense) income, net

     (1,024     23        379        —         (622
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     20,507        32,098        2,402        —         55,007   

Provision (benefit) for income taxes

     27,605        4,618        (810     —         31,413   

Equity in earnings (losses) of subsidiaries

     30,692        (2,809     —         (27,883     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 23,594      $ 24,671      $ 3,212      $ (27,883   $ 23,594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended June 23, 2012

 

     Parent/Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Product sales

   $ 310,500      $ 744,785      $ 311,284      $ (201,795   $ 1,164,774   

Service and other revenues

     224,227        44,856        23,394        (43,147     249,330   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of product sales

     159,344        253,045        209,835        (201,795     420,429   

Cost of product sales – amortization of intangible assets

     3,919        128,744        3,129        —         135,792   

Cost of service and other revenues

     115,557        43,342        22,011        (43,147     137,763   

Research and development

     20,602        54,607        8,659        —         83,868   

Selling and marketing

     48,413        122,803        61,151        —         232,367   

General and administrative

     37,884        70,193        23,682        —         131,759   

Amortization of intangible assets

     2,032        41,578        3,594        —         47,204   

Contingent consideration – compensation expense

     44,064        —         —         —         44,064   

Contingent consideration – fair value adjustments

     35,034        —         —         —         35,034   

Gain on sale of intellectual property, net

     —         (12,424     —         —         (12,424

Restructuring and divestiture charges

     —         371        457        —         828   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     67,878        87,382        2,160        —         157,420   

Interest income

     1,660        77        210        —         1,947   

Interest expense

     (81,117     (1,050     (1,447