UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
FORM 10-Q
__________________________________________________________
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 29, 2024
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 1-36214
__________________________________________________________
HOLOGIC, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________
| Delaware | 04-2902449 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 250 Campus Drive, | ||||||||
| Marlborough, | ||||||||
| Massachusetts | 01752 | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(508) 263-2900
(Registrant’s telephone number, including area code)
__________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value | HOLX | NASDAQ | ||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 25, 2024, 232,271,906 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
HOLOGIC, INC.
INDEX
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| EXHIBITS | ||||||||
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and per share data)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Product | $ | 811.2 | $ | 799.1 | $ | 2,467.2 | $ | 2,522.9 | |||||||||||||||
| Service and other | 200.2 | 185.3 | 575.1 | 562.2 | |||||||||||||||||||
| 1,011.4 | 984.4 | 3,042.3 | 3,085.1 | ||||||||||||||||||||
| Costs of revenues: | |||||||||||||||||||||||
| Product | 298.2 | 291.0 | 913.9 | 879.3 | |||||||||||||||||||
| Amortization of acquired intangible assets | 44.4 | 51.6 | 134.9 | 159.3 | |||||||||||||||||||
| Impairment of intangible assets and equipment | 13.3 | 179.5 | 39.2 | 179.5 | |||||||||||||||||||
| Service and other | 95.2 | 94.8 | 284.2 | 295.8 | |||||||||||||||||||
| Gross profit | 560.3 | 367.5 | 1,670.1 | 1,571.2 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 64.1 | 72.6 | 205.5 | 221.4 | |||||||||||||||||||
| Selling and marketing | 146.3 | 149.8 | 439.4 | 455.7 | |||||||||||||||||||
| General and administrative | 94.0 | 90.2 | 306.2 | 299.5 | |||||||||||||||||||
| Amortization of acquired intangible assets | 5.3 | 7.1 | 24.3 | 21.9 | |||||||||||||||||||
| Impairment of intangible assets and equipment | 0.4 | 44.3 | 5.6 | 44.3 | |||||||||||||||||||
| Contingent consideration - fair value adjustments | — | — | 1.7 | (12.4) | |||||||||||||||||||
| Restructuring charges | 6.2 | 2.1 | 34.8 | 4.9 | |||||||||||||||||||
| 316.3 | 366.1 | 1,017.5 | 1,035.3 | ||||||||||||||||||||
| Income from operations | 244.0 | 1.4 | 652.6 | 535.9 | |||||||||||||||||||
| Interest income | 28.4 | 32.5 | 80.3 | 84.6 | |||||||||||||||||||
| Interest expense | (31.9) | (27.7) | (90.2) | (83.0) | |||||||||||||||||||
| Other income (expense), net | 0.2 | 5.9 | 0.8 | (7.0) | |||||||||||||||||||
| Income before income taxes | 240.7 | 12.1 | 643.5 | 530.5 | |||||||||||||||||||
| Provision for income taxes | 46.2 | 52.6 | 32.6 | 165.1 | |||||||||||||||||||
| Net income (loss) | $ | 194.5 | $ | (40.5) | $ | 610.9 | $ | 365.4 | |||||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | 0.83 | $ | (0.16) | $ | 2.58 | $ | 1.48 | |||||||||||||||
| Diluted | $ | 0.82 | $ | (0.16) | $ | 2.57 | $ | 1.47 | |||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Basic | 234,604 | 246,908 | 236,373 | 247,319 | |||||||||||||||||||
| Diluted | 236,466 | 246,908 | 238,081 | 249,393 | |||||||||||||||||||
See accompanying notes.
3
HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Net income (loss) | $ | 194.5 | $ | (40.5) | $ | 610.9 | $ | 365.4 | |||||||||||||||
| Changes in foreign currency translation adjustment | (2.8) | 1.1 | 17.4 | 130.2 | |||||||||||||||||||
| Changes in value of hedged interest rate swaps, net of tax of $0.1 and $(2.9) for the three and nine months ended June 29, 2024 and $1.2 and $(1.7) for the three and nine months ended July 1, 2023. | |||||||||||||||||||||||
| Gain (loss) recognized in other comprehensive income (loss), net | 0.3 | 3.7 | (9.3) | (5.6) | |||||||||||||||||||
| Other comprehensive income (loss) | (2.5) | 4.8 | 8.1 | 124.6 | |||||||||||||||||||
| Comprehensive income (loss) | $ | 192.0 | $ | (35.7) | $ | 619.0 | $ | 490.0 | |||||||||||||||
See accompanying notes.
4
HOLOGIC, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and par value)
| June 29, 2024 | September 30, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 2,439.1 | $ | 2,722.5 | |||||||
| Accounts receivable, less reserves | 628.5 | 625.6 | |||||||||
| Inventory | 665.5 | 617.6 | |||||||||
| Prepaid expenses and other current assets | 158.4 | 175.3 | |||||||||
| Prepaid income taxes | 105.5 | 31.6 | |||||||||
| Assets held-for-sale - current assets | — | 11.9 | |||||||||
| Total current assets | 3,997.0 | 4,184.5 | |||||||||
| Property, plant and equipment, net | 528.8 | 517.0 | |||||||||
| Intangible assets, net | 687.6 | 888.6 | |||||||||
| Goodwill | 3,291.1 | 3,281.3 | |||||||||
| Other assets | 385.6 | 267.9 | |||||||||
| Total assets | $ | 8,890.1 | $ | 9,139.3 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 37.5 | $ | 287.0 | |||||||
| Accounts payable | 202.0 | 175.2 | |||||||||
| Accrued expenses | 540.7 | 534.6 | |||||||||
| Deferred revenue | 219.0 | 199.2 | |||||||||
| Finance lease obligations | 3.2 | 3.1 | |||||||||
| Assets held-for-sale - current liabilities | — | 8.2 | |||||||||
| Total current liabilities | 1,002.4 | 1,207.3 | |||||||||
| Long-term debt, net of current portion | 2,505.6 | 2,531.2 | |||||||||
| Finance lease obligations, net of current portion | 12.9 | 15.3 | |||||||||
| Deferred income tax liabilities | 17.8 | 20.2 | |||||||||
| Deferred revenue, net of current portion | 14.8 | 13.8 | |||||||||
| Other long-term liabilities | 385.7 | 334.6 | |||||||||
| 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; 300,787 and 299,940 shares issued, respectively | 3.0 | 3.0 | |||||||||
| Additional paid-in-capital | 6,213.1 | 6,141.2 | |||||||||
| Retained earnings | 2,667.2 | 2,056.3 | |||||||||
| Treasury stock, at cost – 68,731 and 58,231 shares, respectively | (3,792.9) | (3,036.0) | |||||||||
| Accumulated other comprehensive loss | (139.5) | (147.6) | |||||||||
| Total stockholders’ equity | 4,950.9 | 5,016.9 | |||||||||
| Total liabilities and stockholders’ equity | $ | 8,890.1 | $ | 9,139.3 | |||||||
See accompanying notes.
5
Hologic, Inc.
Consolidated Statements of Stockholders’ Equity
(In millions, except number of shares, which are reflected in thousands)
| Common Stock | Additional Paid-in- Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 24, 2022 | 298,533 | $ | 3.0 | $ | 6,042.6 | $ | 1,600.3 | $ | (238.2) | 51,401 | $ | (2,531.5) | $ | 4,876.2 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 267 | — | 10.3 | — | — | — | — | 10.3 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net | 514 | — | (23.0) | — | — | — | — | (23.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under the employee stock purchase plan | 171 | — | 10.2 | — | — | — | — | 10.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 20.5 | — | — | — | — | 20.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 187.4 | — | — | — | 187.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income activity | — | — | — | — | 110.9 | — | — | 110.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | 1,539 | (100.0) | (100.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 299,485 | $ | 3.0 | $ | 6,060.6 | $ | 1,787.7 | $ | (127.3) | 52,940 | $ | (2,631.5) | $ | 5,092.5 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 173 | — | 7.9 | — | — | — | — | 7.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net | 18 | — | (0.2) | — | — | — | — | (0.2) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 23.2 | — | — | — | — | 23.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 218.5 | — | — | — | 218.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income activity | — | — | — | — | 8.9 | — | — | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | 626 | (50.0) | (50.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | 299,676 | $ | 3.0 | $ | 6,091.5 | $ | 2,006.2 | $ | (118.4) | 53,566 | $ | (2,681.5) | $ | 5,300.8 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 64 | — | 3.3 | — | — | — | — | 3.3 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net | 15 | — | (0.5) | — | — | — | — | (0.5) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under the employee stock purchase plan | 177 | 11.3 | 11.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 16.9 | — | — | — | — | 16.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (40.5) | — | — | — | (40.5) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income activity | — | — | — | — | 4.8 | — | — | 4.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock(1) | — | — | — | — | — | 1,424 | (114.1) | (114.1) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2023 | 299,932 | $ | 3.0 | $ | 6,122.5 | $ | 1,965.7 | $ | (113.6) | 54,990 | $ | (2,795.6) | $ | 5,182.0 | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net | 8 | — | (0.3) | — | — | — | — | (0.3) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 19.0 | — | — | — | — | 19.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 90.6 | — | — | — | 90.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income activity | — | — | — | — | (34.0) | — | — | (34.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock(1) | — | — | — | — | — | 3,241 | (240.4) | (240.4) | ||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | 299,940 | $ | 3.0 | $ | 6,141.2 | $ | 2,056.3 | $ | (147.6) | 58,231 | $ | (3,036.0) | $ | 5,016.9 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 124 | — | 5.0 | — | — | — | — | 5.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net | 432 | — | (16.2) | — | — | — | — | (16.2) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 28.7 | — | — | — | — | 28.7 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 246.5 | — | — | — | 246.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income activity | — | — | — | — | 28.8 | — | — | 28.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock(1) | — | — | — | — | — | 2,161 | (155.9) | (155.9) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accelerated share repurchase agreement | — | — | (100.0) | — | — | 5,560 | (400.0) | (500.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 30, 2023 | 300,496 | $ | 3.0 | $ | 6,058.7 | $ | 2,302.8 | $ | (118.8) | 65,952 | $ | (3,591.9) | $ | 4,653.8 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 79 | — | 3.2 | — | — | — | — | 3.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net | 16 | — | (0.1) | — | — | — | — | (0.1) | ||||||||||||||||||||||||||||||||||||||||||||||||
6
| Common stock issued under the employee stock purchase plan | 165 | — | 10.0 | — | — | — | — | 10.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 25.8 | — | — | — | — | 25.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 169.9 | — | — | — | 169.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income activity | — | — | — | — | (18.2) | — | — | (18.2) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accelerated share repurchase agreement | — | — | 100.0 | — | — | 1,428 | (100.0) | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| March 30, 2024 | 300,756 | $ | 3.0 | $ | 6,197.6 | $ | 2,472.7 | $ | (137.0) | 67,380 | $ | (3,691.9) | $ | 4,844.4 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 24 | — | 1.2 | — | — | — | — | 1.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units, net | 7 | — | (0.3) | — | — | — | — | (0.3) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under the employee stock purchase plan | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 14.6 | — | — | — | — | 14.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 194.5 | — | — | — | 194.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income activity | — | — | — | — | (2.5) | — | — | (2.5) | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock(1) | — | — | — | — | — | 1,351 | (101.0) | (101.0) | ||||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | 300,787 | $ | 3.0 | $ | 6,213.1 | $ | 2,667.2 | $ | (139.5) | 68,731 | $ | (3,792.9) | $ | 4,950.9 | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
7
HOLOGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
| Nine Months Ended | |||||||||||
| June 29, 2024 | July 1, 2023 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 610.9 | $ | 365.4 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 75.2 | 66.7 | |||||||||
| Amortization of acquired intangible assets | 159.2 | 181.2 | |||||||||
| Stock-based compensation expense | 69.1 | 60.6 | |||||||||
| Deferred income taxes | (52.3) | (100.2) | |||||||||
| Intangible asset and equipment impairment charges | 44.8 | 223.8 | |||||||||
| Contingent consideration - fair value adjustments | 1.7 | (12.4) | |||||||||
| Other adjustments and non-cash items | 32.4 | 30.6 | |||||||||
| Changes in operating assets and liabilities, excluding the effect of acquisitions and dispositions: | |||||||||||
| Accounts receivable | (2.5) | (51.0) | |||||||||
| Inventories | (47.1) | (48.5) | |||||||||
| Prepaid income taxes | (73.9) | 15.3 | |||||||||
| Prepaid expenses and other assets | (4.2) | 24.6 | |||||||||
| Accounts payable | 26.5 | (20.3) | |||||||||
| Accrued expenses and other liabilities | 58.5 | 10.7 | |||||||||
| Deferred revenue | 19.9 | 46.0 | |||||||||
| Net cash provided by operating activities | 918.2 | 792.5 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Sale of business, net of cash disposed | (31.3) | — | |||||||||
| Capital expenditures | (56.0) | (55.5) | |||||||||
| Proceeds from the Department of Defense | — | 20.5 | |||||||||
| Increase in equipment under customer usage agreements | (43.9) | (42.2) | |||||||||
| Strategic investments | (42.5) | (10.0) | |||||||||
| Purchase of intellectual property | (10.0) | — | |||||||||
| Other activity | (1.6) | (8.9) | |||||||||
| Net cash used in investing activities | (185.3) | (96.1) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Repayment of long-term debt | (278.1) | (11.3) | |||||||||
| Payment of contingent consideration | (2.6) | (7.6) | |||||||||
| Payment of deferred acquisition consideration | — | (0.8) | |||||||||
| Repurchases of common stock | (776.8) | (263.6) | |||||||||
| Proceeds from issuance of common stock pursuant to employee stock plans | 25.2 | 37.7 | |||||||||
| Payment of minimum tax withholdings on net share settlements of equity awards | (16.6) | (23.7) | |||||||||
| Payments under finance lease obligations | (2.9) | (3.3) | |||||||||
| Net cash used in financing activities | (1,051.8) | (272.6) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 2.3 | 1.7 | |||||||||
| Net (decrease) increase in cash and cash equivalents | (316.6) | 425.5 | |||||||||
| Cash and cash equivalents, beginning of period* | 2,755.7 | 2,339.5 | |||||||||
| Cash and cash equivalents, end of period | $ | 2,439.1 | $ | 2,765.0 | |||||||
See accompanying notes.
8
HOLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All tabular amounts in millions, except number of shares, which are reflected in thousands, and per share data)
(1) Basis of Presentation
The unaudited 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 (the “SEC”) for quarterly reports on Form 10-Q and do not include all of the information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for annual financial statements. These unaudited financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended September 30, 2023 included in the Company’s annual report on Form 10-K filed with the SEC on November 21, 2023. In the opinion of management, the unaudited financial statements and notes contain all adjustments (consisting of normal recurring accruals and all other necessary adjustments) considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented.
The unaudited 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 GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates if past experience or other assumptions do not turn out to be substantially accurate. Operating results for the three and nine months ended June 29, 2024 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending September 28, 2024. Fiscal 2023 was a 53-week fiscal year, and the additional week was included in the first quarter of fiscal 2023 consistent with the Company’s historical fiscal calendar.
Subsequent Events Consideration
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that may require additional disclosure. Subsequent events have been evaluated as required. There were no material recognized or unrecognized subsequent events, except as described below, affecting the unaudited consolidated financial statements as of and for the three and nine months ended June 29, 2024.
On April 26, 2024, the Company executed an agreement to acquire Endomagnetics Ltd (“Endomag”) for a purchase price of approximately $310.0 million, subject to working capital and other customary adjustments. Endomag, located in the UK, develops and sells breast surgery localization and lymphatic tracing technologies. The transaction closed on July 25, 2024.
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(2) Revenue
The Company accounts for revenue pursuant to ASC 606, Revenue from Contracts with Customers (ASC 606) and generates revenue from the sale of its products, primarily medical imaging systems and related components and software, diagnostic tests and assays and surgical disposable products, and related services, which are primarily support and maintenance services on its medical imaging systems, and to a lesser extent installation, training and repairs. In addition, the Company generates service revenue from performing laboratory testing services through its Biotheranostics CLIA laboratory, which is included in its Molecular Diagnostics business. The Company’s products are sold primarily through a direct sales force, and within international markets, there is more reliance on distributors and resellers. Revenue is recorded net of sales tax. The following tables provide revenue from contracts with customers by business and geographic region on a disaggregated basis:
| Three Months Ended June 29, 2024 | Three Months Ended July 1, 2023 | |||||||||||||||||||||||||
Business (in millions) | United States | International | Total | United States | International | Total | ||||||||||||||||||||
| Diagnostics: | ||||||||||||||||||||||||||
| Cytology & Perinatal | $ | 73.3 | $ | 48.9 | $ | 122.2 | $ | 79.7 | $ | 47.1 | $ | 126.8 | ||||||||||||||
| Molecular Diagnostics | 245.4 | 65.3 | 310.7 | 240.2 | 62.0 | 302.2 | ||||||||||||||||||||
| Blood Screening | 7.9 | — | 7.9 | 10.7 | — | 10.7 | ||||||||||||||||||||
| Total | $ | 326.6 | $ | 114.2 | $ | 440.8 | $ | 330.6 | $ | 109.1 | $ | 439.7 | ||||||||||||||
| Breast Health: | ||||||||||||||||||||||||||
| Breast Imaging | $ | 240.4 | $ | 68.8 | $ | 309.2 | $ | 220.7 | $ | 65.4 | $ | 286.1 | ||||||||||||||
| Interventional Breast Solutions | 60.1 | 15.7 | 75.8 | 59.2 | 15.0 | 74.2 | ||||||||||||||||||||
| Total | $ | 300.5 | $ | 84.5 | $ | 385.0 | $ | 279.9 | $ | 80.4 | $ | 360.3 | ||||||||||||||
| GYN Surgical | $ | 125.8 | $ | 40.8 | $ | 166.6 | $ | 122.9 | $ | 34.4 | $ | 157.3 | ||||||||||||||
| Skeletal Health | $ | 12.4 | $ | 6.6 | $ | 19.0 | $ | 16.7 | $ | 10.4 | $ | 27.1 | ||||||||||||||
| $ | 765.3 | $ | 246.1 | $ | 1,011.4 | $ | 750.1 | $ | 234.3 | $ | 984.4 | |||||||||||||||
| Nine Months Ended June 29, 2024 | Nine Months Ended July 1, 2023 | |||||||||||||||||||||||||
Business (in millions) | United States | International | Total | United States | International | Total | ||||||||||||||||||||
| Diagnostics: | ||||||||||||||||||||||||||
| Cytology & Perinatal | $ | 213.7 | $ | 149.0 | $ | 362.7 | $ | 226.9 | $ | 138.5 | $ | 365.4 | ||||||||||||||
| Molecular Diagnostics | 748.4 | 204.8 | 953.2 | 831.5 | 238.2 | 1,069.7 | ||||||||||||||||||||
| Blood Screening | 22.8 | — | 22.8 | 28.5 | — | 28.5 | ||||||||||||||||||||
| Total | $ | 984.9 | $ | 353.8 | $ | 1,338.7 | $ | 1,086.9 | $ | 376.7 | $ | 1,463.6 | ||||||||||||||
| Breast Health: | ||||||||||||||||||||||||||
| Breast Imaging | $ | 703.7 | $ | 213.6 | $ | 917.3 | $ | 666.5 | $ | 195.6 | $ | 862.1 | ||||||||||||||
| Interventional Breast Solutions | 181.6 | 48.4 | 230.0 | 176.7 | 41.1 | 217.8 | ||||||||||||||||||||
| Total | $ | 885.3 | $ | 262.0 | $ | 1,147.3 | $ | 843.2 | $ | 236.7 | $ | 1,079.9 | ||||||||||||||
| GYN Surgical | $ | 366.6 | $ | 118.2 | $ | 484.8 | $ | 359.6 | $ | 96.6 | $ | 456.2 | ||||||||||||||
| Skeletal Health | $ | 41.6 | $ | 29.9 | $ | 71.5 | $ | 52.8 | $ | 32.6 | $ | 85.4 | ||||||||||||||
| $ | 2,278.4 | $ | 763.9 | $ | 3,042.3 | $ | 2,342.5 | $ | 742.6 | $ | 3,085.1 | |||||||||||||||
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| Three Months Ended | Nine Months Ended | |||||||||||||||||||
Geographic Regions (in millions) | June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||
| United States | $ | 765.3 | $ | 750.1 | $ | 2,278.4 | $ | 2,342.5 | ||||||||||||
| Europe | 127.9 | 128.5 | 407.7 | 427.3 | ||||||||||||||||
| Asia-Pacific | 65.0 | 62.9 | 193.2 | 191.9 | ||||||||||||||||
| Rest of World | 53.2 | 42.9 | 163.0 | 123.4 | ||||||||||||||||
| $ | 1,011.4 | $ | 984.4 | $ | 3,042.3 | $ | 3,085.1 | |||||||||||||
The following table provides revenue recognized by source:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
Revenue by type (in millions) | June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||
| Disposables | $ | 623.2 | $ | 609.0 | $ | 1,871.0 | $ | 1,963.3 | ||||||||||||
| Capital equipment, components and software | 188.0 | 190.1 | 596.2 | 559.6 | ||||||||||||||||
| Service | 196.8 | 180.4 | 560.6 | 546.7 | ||||||||||||||||
| Other | 3.4 | 4.9 | 14.5 | 15.5 | ||||||||||||||||
| $ | 1,011.4 | $ | 984.4 | $ | 3,042.3 | $ | 3,085.1 | |||||||||||||
The Company considers revenue to be earned when all of the following criteria are met: the Company has a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the amount the Company expects to receive, including an estimate of uncertain amounts subject to a constraint to ensure revenue is not recognized in an amount that would result in a significant reversal upon resolution of the uncertainty, is determinable; and the Company has transferred control of the promised items to the customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. The transaction price for the contract is measured as the amount of consideration the Company expects to receive in exchange for the goods and services expected to be transferred. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control of the distinct good or service is transferred. Transfer of control for the Company’s products is generally at shipment or delivery, depending on contractual terms, but occurs when title and risk of loss transfers to the customer which represents the point in time when the customer obtains the use of and substantially all of the remaining benefits of the product. As such, the Company’s performance obligation related to product sales is satisfied at a point in time. Revenue from support and maintenance contracts, extended warranty, and professional services for installation, training and repairs is recognized over time based on the period contracted or as the services are performed as these methods represent a faithful depiction of the transfer of goods and services.
The Company recognizes a receivable when it has an unconditional right to payment, which represents the amount the Company expects to collect in a transaction and is most often equal to the transaction price in the contract. Payment terms are typically 30 days in the U.S. but may be longer in international markets. The Company treats shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost and records these costs within costs of product revenue when the corresponding revenue is recognized.
The Company also places instruments (or equipment) at customer sites but retains title to the instrument. The customer has the right to use the instrument for a period of time, and the Company recovers the cost of providing the instrument through the sales of disposables, namely tests and assays in Diagnostics and handpieces in GYN Surgical. These types of agreements include an embedded lease, which is generally an operating lease, for the right to use an instrument and no instrument revenue is recognized at the time of instrument delivery. The Company recognizes a portion of the revenue allocated to the embedded lease concurrent with the sale of disposables over the term of the agreement.
Revenue from laboratory testing services, which is generated by the Company’s Biotheranostics business, is recognized based upon contracted amounts with payors and historical cash collection experience for the same test or same payor group. Revenue is recognized once the laboratory services have been performed, the results have been delivered to the ordering physician, the payor has been identified, and insurance has been verified. The estimated timeframes for cash collection are three months for Medicare payors, six months for Medicare Advantage payors, and nine months for commercial payors.
Generally, the contracts for capital equipment include multiple performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using its best estimate of
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the standalone selling price of each distinct good or service in the contract. The Company determines its best estimate of standalone selling price using average selling prices over 3- to 12-month periods of data depending on the products or nature of the services coupled with current market considerations. If the product or service does not have a history of sales or if sales volume is not sufficient, the Company relies on prices set by its pricing committees or applicable marketing department adjusted for expected discounts.
Variable Consideration
The Company exercises judgment in estimating variable consideration, which includes volume discounts, sales rebates, product returns and other adjustments. These amounts are recorded as a reduction to revenue and classified as a current liability. The Company bases its estimates for volume discounts and sales rebates on historical information to the extent it is reasonable to be used as a predictive tool of expected future rebates. To the extent the transaction price includes variable consideration, the Company applies judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. The Company evaluates constraints based on its historical and projected experience with similar customer contracts. The Company’s contracts for the sale of capital equipment and related components, and assays and tests typically do not provide the right to return product, however, its contracts for the sale of its GYN Surgical and Interventional Breast Solutions surgical handpieces provide for a right of return for a limited period of time. In general, estimates of variable consideration and constraints are not material to the Company’s financial statements.
Remaining Performance Obligations
As of June 29, 2024, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $880.0 million. These remaining performance obligations primarily relate to support and maintenance obligations and extended warranty in the Company’s Breast Health and Skeletal Health reportable segments. The Company expects to recognize approximately 14% of this amount as revenue in fiscal 2024, 42% in fiscal 2025, 25% in fiscal 2026, 12% in fiscal 2027, and 7% thereafter. As permitted, the Company does not include remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.
Contract Assets and Liabilities
The Company discloses accounts receivable separately in the Consolidated Balance Sheets at their net realizable value. Contract assets primarily relate to the Company’s conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were immaterial.
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. The Company records a contract liability, or deferred revenue, when it has an obligation to provide service, and to a much lesser extent product, to the customer and payment is received or due in advance of performance. Deferred revenue primarily relates to support and maintenance contracts and extended warranty obligations within the Company’s Breast Health and Skeletal Health reportable segments. Contract liabilities are classified as other current liabilities and other long-term liabilities in the Consolidated Balance Sheets. The Company recognized revenue of $22.8 million and $124.4 million in the three and nine months ended June 29, 2024, respectively, that was included in the contract liability balance at September 30, 2023. The Company recognized $21.0 million and $122.2 million in the three and nine months ended July 1, 2023, respectively, that was included in the contract liability at September 24, 2022.
Practical Expedients
The Company applies a practical expedient to expense costs to obtain a contract with a customer as incurred when the amortization period would have been one year or less. These costs solely comprise sales commissions and typically the commissions are incurred at the time of shipment of product and upon billings for support and maintenance contracts.
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(3) Leases
Lessor Activity - Leases where Hologic is the Lessor
Certain assets, primarily diagnostics instruments, are leased to customers under contractual arrangements that typically include an operating lease and performance obligations for disposables, reagents and other consumables. These contractual arrangements are subject to termination provisions which are evaluated in determining the lease term for lease accounting purposes. Contract terms vary by customer and may include options to terminate the contract or options to extend the contract. Where instruments are provided under operating lease arrangements, some portion or the entire lease revenue may be variable and subject to subsequent non-lease component (e.g., reagent) sales. Sales-type leases are immaterial. The allocation of revenue between the lease and non-lease components is based on stand-alone selling prices. Lease revenue represented less than 3% of the Company’s consolidated revenue for all periods presented.
(4) Fair Value Measurements
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company has investments in money market funds, United States Treasury bills and commercial paper that are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. These investments are classified as Cash and cash equivalents on the Consolidated Balance Sheets.
The Company also has investments in derivative instruments comprised of interest rate swaps and forward foreign currency contracts, which are valued using analyses obtained from independent third-party valuation specialists based on market observable inputs, representing Level 2 assets. The fair values of these derivative contracts represent the estimated amounts the Company would receive or pay to terminate the contracts. Refer to Note 11 for further discussion and information on derivative contracts. In addition, the Company has a contingent consideration liability that is recorded at fair value, which is based on Level 3 inputs.
The following table summarizes certain fair value information at June 29, 2024 and September 30, 2023 for investment assets and other liabilities measured at fair value on a recurring basis, as well as the carrying amount of certain investments.
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| Fair Value at Reporting Date Using | |||||||||||||||||||||||
| Fair Value | Quoted Prices in Active Market for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| June 29, 2024 | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market mutual funds | $ | 371.2 | $ | 371.2 | $ | — | $ | — | |||||||||||||||
| U.S. Treasury bills | 398.1 | 398.1 | — | — | |||||||||||||||||||
| Commercial paper | 49.5 | 49.5 | — | — | |||||||||||||||||||
| Interest rate swaps | 14.7 | — | 14.7 | — | |||||||||||||||||||
| Forward foreign currency contracts | 2.6 | — | 2.6 | — | |||||||||||||||||||
| Total | $ | 836.1 | $ | 818.8 | $ | 17.3 | $ | — | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | 1.1 | $ | — | $ | — | $ | 1.1 | |||||||||||||||
| Forward foreign currency contracts | 0.4 | — | 0.4 | — | |||||||||||||||||||
| Total | $ | 1.5 | $ | — | $ | 0.4 | $ | 1.1 | |||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Interest rate swaps | $ | 26.9 | $ | — | $ | 26.9 | $ | — | |||||||||||||||
| Forward foreign currency contracts | 8.4 | — | 8.4 | — | |||||||||||||||||||
| Total | $ | 35.3 | $ | — | $ | 35.3 | $ | — | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | 2.0 | $ | — | $ | — | $ | 2.0 | |||||||||||||||
| Total | $ | 2.0 | $ | — | $ | — | $ | 2.0 | |||||||||||||||
Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3), which solely consisted of contingent consideration liabilities, during the three and nine month periods ended June 29, 2024 and July 1, 2023 were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | |||||||||||||||||||||||
| Balance at beginning of period | $ | 1.1 | $ | 3.4 | $ | 2.0 | $ | 23.4 | ||||||||||||||||||
| Contingent consideration recorded at acquisition | — | 1.1 | — | 1.1 | ||||||||||||||||||||||
| Fair value adjustments | — | — | 1.7 | (12.4) | ||||||||||||||||||||||
| Payments | — | — | (2.6) | (7.6) | ||||||||||||||||||||||
| Balance at end of period | $ | 1.1 | $ | 4.5 | $ | 1.1 | $ | 4.5 | ||||||||||||||||||
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company remeasures the fair value of certain assets and liabilities upon the occurrence of certain events. Such assets are comprised of equity investments and long-lived assets, primarily comprised of property, plant and equipment, intangible assets and goodwill. During the third quarter of fiscal 2024, the Company recorded intangible asset impairment charges of $13.3 million and $0.4 million, respectively, related to its BioZorb developed technology and trade name intangible assets acquired in the Focal acquisition, which is within the Breast Health reportable segment, reducing the carrying value of the assets to zero. During the second quarter of fiscal 2024, the Company recorded intangible asset impairment charges of $25.9 million and $0.9 million, respectively, related to its BioZorb developed technology and trade name intangible assets reducing the carrying value of the assets to $13.9 million and $0.5 million, respectively. See Note 18 for further discussion. During the first quarter of fiscal 2024, the Company recorded a $12.5 million impairment charge for right-of-use lease assets related to the closure of its Mobidiag facilities in Finland and France (see Note 8 for further discussion), reducing the carrying
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value to zero. In addition, during the first quarter of fiscal 2024, the Company recorded a $4.3 million impairment charge for an in-process research and development project from the Mobidiag acquisition, reducing the carrying value of this asset to $22.4 million.
During the third quarter of fiscal 2023, the Company identified indicators of impairment related to its long-lived assets of its Mobidiag business and based on the fair value of the asset group recorded impairment charges aggregating $186.9 million, of which $174.8 million was allocated to intangible assets and $12.1 million was allocated to property, plant and equipment. Subsequent to the impairment charges, the carrying value of the definite-lived intangible assets and property, plant and equipment was $65.8 million and $4.6 million, respectively. See Note 18 for additional information. In addition, the Company recorded a $10.5 million impairment charge for an in-process research and development project from the Mobidiag acquisition, and the resulting carrying value was $26.5 million. During the third quarter of fiscal 2023, the Company identified indicators of impairment related to its long-lived assets of its SSI ultrasound imaging business and recorded impairment charges aggregating $26.4 million, of which $20.6 million was allocated to intangible assets and $5.8 million was allocated to equipment. Subsequent to the impairment charges, the carrying value of these assets was zero. There were no other remeasurements in the three and nine months ended June 29, 2024 and July 1, 2023.
Disclosure of Fair Value of Financial Instruments
The Company’s financial instruments mainly consist of cash and cash equivalents, United States Treasury bills, commercial paper, accounts receivable, equity investments, interest rate swaps, forward foreign currency contracts, insurance contracts, accounts payable and debt obligations. The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments. The Company’s United States Treasury bills, commercial paper, interest rate swaps and forward foreign currency contracts are recorded at fair value. The carrying amount of the insurance contracts are recorded at the cash surrender value, as required by U.S. GAAP, which approximates fair value. The Company believes the carrying amounts of its equity investments approximate fair value.
The Company’s cash and cash equivalents, including current marketable securities, as of June 29, 2024 are as follows:
| Valuation | Balance Sheet Classification | ||||||||||||||||||||||||||||||||||
| in millions | Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and cash equivalents | Investments | |||||||||||||||||||||||||||||
| Cash | $ | 1,620.3 | $ | — | $ | — | $ | 1,620.3 | $ | 1,620.3 | $ | — | |||||||||||||||||||||||
| Money market mutual funds | 371.2 | — | — | 371.2 | 371.2 | — | |||||||||||||||||||||||||||||
| U.S. Treasury bills | 398.1 | — | — | 398.1 | 398.1 | — | |||||||||||||||||||||||||||||
| Commercial paper | 49.5 | — | — | 49.5 | 49.5 | — | |||||||||||||||||||||||||||||
| Total | $ | 2,439.1 | $ | — | $ | — | $ | 2,439.1 | $ | 2,439.1 | $ | — | |||||||||||||||||||||||
The Company classifies its investments in debt securities as available-for-sale and records them at fair value, with changes in fair value reported as a component of accumulated other comprehensive income (loss), which was immaterial for the three and nine months ended June 29, 2024. The Company periodically assesses these securities for potential impairment losses and credit losses. The amount of credit losses, if any, will be determined by comparing the difference between the present value of future cash flows expected to be collected on these securities and the amortized cost. There were no impairments and credit losses related to available-for-sale securities for the three and nine months ended June 29, 2024.
The Company classifies all highly liquid investments with stated maturities of three months or less from the date of purchase as cash equivalents. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers into or out of Level 3 during the three and nine months ended June 29, 2024 and July 1, 2023, respectively. There were no sales of available-for-sale securities during the three and nine months ended June 29, 2024.
The fair value of the available-for-sale securities by contractual maturity as of June 29, 2024 and September 30, 2023 are as follows:
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| June 29, 2024 | September 30, 2023 | ||||||||||
| in millions | Fair Value | Fair Value | |||||||||
| Due in three months or less | $ | 447.6 | $ | — | |||||||
| Total available-for-sale securities | $ | 447.6 | $ | — | |||||||
Amounts outstanding under the Company’s 2021 Credit Agreement of $1.2 billion aggregate principal as of June 29, 2024 are subject to variable rates of interest based on current market rates, and as such, the Company believes the carrying amount of these obligations approximates fair value. The Company’s 4.625% Senior Notes due 2028 (the “2028 Senior Notes”) and 3.250% Senior Notes due 2029 (the “2029 Senior Notes”) had fair values of $382.9 million and $853.3 million, respectively, as of June 29, 2024 based on their trading prices, representing a Level 1 measurement.
(5) Business Combinations
Fiscal 2024 Acquisitions
Endomag
On April 26, 2024, the Company executed an agreement to acquire Endomagnetics Ltd (“Endomag”) for a purchase price of approximately $310.0 million, subject to working capital and other customary adjustments. Endomag, located in the UK, develops and sells breast surgery localization and lymphatic tracing technologies. The transaction closed on July 25, 2024.
Fiscal 2023 Acquisitions
JW Medical
On July 3, 2023, the Company completed the acquisition of assets from JW Medical Corporation (“JW Medical”) for a purchase price of $6.7 million. JW Medical was a long-standing distributor of the Company’s Breast Health products in South Korea. The majority of the purchase price was allocated to a customer relationship intangible asset with a useful life of 5 years.
Normedi
On April 3, 2023, the Company completed the acquisition of Normedi Nordic AS (“Normedi”) for a purchase price of $7.7 million. Normedi was a long-standing distributor of the Company’s Surgical products in the Nordics region of Europe. The purchase price included $1.1 million for contingent consideration based on incremental revenue growth over a 2-year measurement period. The Company allocated $3.0 million of the purchase price to a customer relationships intangible asset with a useful life of 5 years, and the excess of the purchase price over the net assets acquired was recorded to goodwill.
Contingent Consideration
The Company’s primary contingent consideration liability was related to its acquisition of Acessa Health, Inc. (“Acessa”), which was acquired in August 2020. Acessa developed the ProVu laparoscopic radiofrequency ablation system. The Company estimated the fair value of this liability to be $81.8 million as of the acquisition date. The contingent payments were based on a multiple of annual incremental revenue growth over a three-year period ending annually in December of each of 2021, 2022, and 2023. There was no maximum earnout. Pursuant to ASC 805, Business Combinations (ASC 805), the Company recorded its estimate of the fair value of the contingent consideration liability utilizing the Monte Carlo simulation based on future revenue projections of Acessa, revenue growth rates of comparable companies, implied volatility and applying a risk adjusted discount rate. Each quarter the Company was required to remeasure the fair value of the liability as assumptions change, and such adjustments were recorded in operating expenses. This fair value measurement was based on significant inputs not observable in the market and thus represented a Level 3 measurement as defined in ASC 820, Fair Value Measurements. This fair value measurement was directly impacted by the Company’s estimate of future incremental revenue growth of the business. Accordingly, if actual revenue growth were higher or lower than the estimates within the fair value measurement, the Company would record additional charges or gains. During the second quarter of fiscal 2023, the Company updated its forecasted revenue and recorded a gain of $12.4 million to record the liability at its fair value. The reduction in fair value was due to a decrease in forecasted revenues over the remaining measurement period at that time. During the three months ended December 30, 2023, the third and final measurement period was completed, and the Company recorded a loss of $1.7 million to increase the contingent consideration liability to fair value based on actual revenue results in the final earn-out period. The Company made a final payment of $2.6 million during the second quarter of fiscal 2024.
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(6) Strategic Investment
Maverix Medical
On November 13, 2023, the Company entered into an agreement with KKR Comet, LLC, an affiliate of KKR & Co. Inc. (“KKR Comet”), to form a legal entity to develop and acquire innovative technologies and commercial operations within the lung cancer space. The new entity, named Maverix Medical LLC (“Maverix”), is managed by Ajax Health. As part of this strategic investment, the Company contributed $24.5 million in return for 45% ownership in the Class A Common units of Maverix, and both the Company and KKR Comet have committed to make additional capital contributions in proportion to the ownership percentages upon meeting certain objectives and as approved by the Maverix board. In accordance with ASC 810, Consolidation, and ASC 323, Investments - Equity Method and Joint Ventures, the Company determined that this investment should be accounted for under the equity method, which requires the Company to record its proportional share of the entity’s net income (loss). This investment is recorded within Other assets in the Consolidated Balance Sheets, and the Company’s proportionate share of Maverix’s net loss for the three and nine months ended June 29, 2024 was immaterial.
(7) Disposition
Sale of SuperSonic Imagine Ultrasound Imaging Business
On September 29, 2023, the Company executed an agreement to sell its SSI ultrasound imaging business to SSH Holdings Limited for a sales price of $1.9 million in cash. Under the terms of the contract, the Company agreed to fund the SSI business with $33.2 million of cash. The sale was completed on October 3, 2023. The Company also agreed to provide certain transition services for up to one year, depending on the nature of the service. The SSI ultrasound imaging asset group met the criteria to be classified as assets held-for-sale in the fourth quarter of fiscal 2023. As a result, the Company recorded a charge of $51.7 million in the fourth quarter of fiscal 2023 to record the asset group to its fair value less costs to sell pursuant to ASC 360, Property, Plant and Equipment-Impairment or Disposal of Long-Lived Assets.
The assets and liabilities of the disposed business at the date of disposition were as follows:
| Assets: | |||||
| Cash | $ | 33.2 | |||
| Accounts receivable | 4.5 | ||||
| Inventory | 16.2 | ||||
| Prepaid expenses and other assets | 8.6 | ||||
| Valuation allowance | (50.6) | ||||
| Total assets disposed of | $ | 11.9 | |||
| Liabilities: | |||||
| Accounts payable | $ | 3.1 | |||
| Accrued expenses | 5.1 | ||||
| Total liabilities disposed of | $ | 8.2 | |||
The valuation allowance of $50.6 million was recorded to appropriately reflect the assets held-for-sale classification in the Consolidated Balance Sheet in the fourth quarter of fiscal 2023 relative to the loss recorded and the net tangible assets disposed.
The Company concluded that this disposal did not qualify as a discontinued operation as the sale of the SSI ultrasound imaging business was deemed to not be a strategic shift having or that will have a major effect on the Company’s operations and financial results.
(8) Restructuring
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During the first quarter of fiscal 2024, the Company further refined its strategy for the Mobidiag business, which is within the Diagnostics reportable segment. The strategy change included the decision to discontinue the manufacture and sale of certain products, closure of its facilities in Finland and France, and to move the development activities and operations to the Company’s San Diego, California location. As such, the Company determined certain fixed assets lives should be shortened and that lease assets were impaired at the affected facilities and recorded accelerated depreciation of $7.2 million and a lease asset impairment charge of $12.5 million. In connection with this plan, the Company finalized its decision to terminate the employees at these locations, totaling 190. The Company initiated discussions with the respective Works Councils at the end of the first quarter of fiscal 2024. In addition, the Company recorded the minimum statutory severance benefit for the employees located in France of $1.8 million pursuant to ASC 712, Compensation Nonretirement Postemployment Benefits. During the second quarter of fiscal 2024, the Company finalized its negotiations with the respective Works Councils and communicated the termination and related severance benefits to the affected employees. The Company has estimated the total severance charges, including accelerated stock compensation, will be approximately $13.1 million. The majority of the severance benefits will be recorded pursuant to ASC 420, Exit or Disposal Cost Obligations (ASC 420), which requires the severance benefits to be recognized ratably over the service period to obtain such benefits. The employees will cease employment in phases. During the three and nine months ended June 29, 2024, the Company recorded severance charges of $3.9 million and $7.9 million, respectively. This action is expected to be completed by the second quarter of fiscal 2025.
During the first quarter of fiscal 2022, the Company finalized its decision to close its Danbury, Connecticut facility where it manufactures its Breast Health capital equipment products. The manufacturing of the Breast Health capital equipment products and all other support services are in the process of being transferred to the Company’s Newark, Delaware facility. The transition is expected to be completed by the third quarter of fiscal 2025. In addition, research and development, sales and services support and administrative functions have been transferred to the Newark, Delaware and Marlborough, Massachusetts facilities. The employees were notified of the closure during the first quarter of fiscal 2022, and the majority of employees located in Danbury were given the option to relocate to the new locations. The Company is recording severance benefits ratably over the required service period pursuant to ASC 420. As a result, the Company recorded severance charges of $0.9 million and $2.7 million during the three and nine months ended June 29, 2024, respectively, and $0.4 million and $1.4 million during the three and nine months ended July 1, 2023, respectively. The Company estimates that total severance charges, including retention, will be approximately $7.5 million.
(9) Borrowings and Credit Arrangements
The Company’s borrowings consisted of the following:
| June 29, 2024 | September 30, 2023 | ||||||||||
| Current debt obligations, net of debt discount and deferred issuance costs: | |||||||||||
| Term Loan | $ | 37.5 | $ | 287.0 | |||||||
| Total current debt obligations | $ | 37.5 | $ | 287.0 | |||||||
| Long-term debt obligations, net of debt discount and issuance costs: | |||||||||||
| Term Loan | $ | 1,168.0 | $ | 1,195.6 | |||||||
| 2028 Senior Notes | 397.3 | 396.8 | |||||||||
| 2029 Senior Notes | 940.3 | 938.8 | |||||||||
| Total long-term debt obligations | $ | 2,505.6 | $ | 2,531.2 | |||||||
| Total debt obligations | $ | 2,543.1 | $ | 2,818.2 | |||||||
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2021 Credit Agreement
On September 27, 2021, the Company refinanced its then existing term loan and revolving credit facility with Bank of America, N.A. in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, and certain other lenders (the “2018 Credit Agreement”) by entering into a Refinancing Amendment (the “2021 Credit Agreement”). On August 22, 2022, the Company further amended the 2021 Credit Agreement to address the planned phase out of LIBOR by the UK Financial Conduct Authority. Under this amendment, the interest rates applicable to the loans under the 2021 Credit Agreement denominated in U.S. dollars were converted to a variant of the secured overnight financing rate (“SOFR”), as established from time to time by the Federal Reserve Bank of New York, plus a corresponding spread.
The 2021 Credit Agreement provided a $1.5 billion secured term loan facility (the “2021 Term Loan”) and a $2.0 billion revolving credit facility (the “2021 Revolver”). As of June 29, 2024, the principal amount outstanding under the 2021 Term Loan was $1.2 billion, and the interest rate was 6.44% per annum. No amounts were outstanding under the 2021 Revolver, and the full amount was available to be borrowed by the Company. During the first quarter of fiscal 2024, the Company made a $250.0 million voluntary prepayment on the 2021 Term Loan.
Interest expense, weighted average interest rates, and the interest rate at the end of period under the 2021 Credit Agreement were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Interest expense | $ | 21.1 | $ | 24.3 | $ | 64.9 | $ | 67.2 | |||||||||||||||
| Weighted average interest rate | 6.43 | % | 6.17 | % | 6.43 | % | 5.65 | % | |||||||||||||||
| Interest rate at end of period | 6.44 | % | 6.20 | % | 6.44 | % | 6.20 | % | |||||||||||||||
The Company’s effective interest rate swap agreements, the first of which fixed the SOFR component of the variable interest rate on $1.0 billion of aggregate principal under the 2021 Term Loan at 1.23% and terminated on December 17, 2023, and the second of which fixes the SOFR component of the variable interest rate on $500 million of aggregate principal under the 2021 Term Loan at 3.46% commencing on December 17, 2023 and terminating on December 27, 2024, resulted in the Company receiving $2.4 million and $14.4 million during the three and nine months ended June 29, 2024, respectively, and $9.8 million and $25.0 million during the three and nine months ended July 1, 2023, respectively. These amounts were recorded as a reduction to interest expense.
The 2021 Credit Agreement contains two financial covenants; a total leverage ratio and an interest coverage ratio, both of which are measured as of the last day of each fiscal quarter. These terms, and calculations thereof, are defined in further detail in the 2021 Credit Agreement. As of June 29, 2024, the Company was in compliance with these covenants.
2028 Senior Notes
As of June 29, 2024, the Company had 4.625% Senior Notes due 2028 (the “2028 Senior Notes”) outstanding in the aggregate principal balance of $400 million. The 2028 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company’s domestic subsidiaries and mature on February 1, 2028.
2029 Senior Notes
As of June 29, 2024, the Company had 3.250% Senior Notes due 2029 (the “2029 Senior Notes”) outstanding in the aggregate principal balance of $950 million. The 2029 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company’s domestic subsidiaries and mature on February 15, 2029.
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Interest expense for the 2029 Senior Notes and 2028 Senior Notes was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| Interest Rate | June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | |||||||||||||||||||||||||
| 2028 Senior Notes | 4.625 | % | $ | 4.8 | $ | 4.8 | $ | 14.4 | $ | 14.8 | |||||||||||||||||||
| 2029 Senior Notes | 3.250 | % | 8.2 | 8.2 | 24.7 | 25.3 | |||||||||||||||||||||||
| Total | $ | 13.0 | $ | 13.0 | $ | 39.1 | $ | 40.1 | |||||||||||||||||||||
(10) Trade Receivables and Allowance for Credit Losses
The Company applies ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) to its trade receivables and allowances for credit losses, which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The expected credit losses are developed using an estimated loss rate method that considers historical collection experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The estimated loss rates are applied to trade receivables with similar risk characteristics such as the length of time the balance has been outstanding and the location of the customer. In certain instances, the Company may identify individual trade receivable assets that do not share risk characteristics with other trade receivables, in which case the Company records its expected credit losses on an individual asset basis. For example, potential adverse changes to customer liquidity, such as the ongoing and possible future effects of global challenges including macroeconomic uncertainties, such as inflation, rising interest rates and availability of capital markets, and other economic disruptions. To date, the Company has not experienced significant customer payment defaults, or identified other significant collectability concerns. In connection with assessing credit losses for individual trade receivable assets, the Company considers significant factors relevant to collectability including those specific to the customer such as bankruptcy, length of time an account is outstanding, and the liquidity and financial position of the customer. If a trade receivable asset is evaluated on an individual basis, the Company excludes those assets from the portfolios of trade receivables evaluated on a collective basis.
The following is a rollforward of the allowance for credit losses as of June 29, 2024 compared to July 1, 2023:
| Balance at Beginning of Period | Credit Loss | Write-offs, Payments and Foreign Exchange | Balance at End of Period | |||||||||||||||||||||||||||||
| Nine Months Ended: | ||||||||||||||||||||||||||||||||
| June 29, 2024 | $ | 38.5 | $ | 5.8 | $ | (2.9) | $ | 41.4 | ||||||||||||||||||||||||
| July 1, 2023 | $ | 37.7 | $ | 2.2 | $ | (0.8) | $ | 39.1 | ||||||||||||||||||||||||
(11) Derivatives
Interest Rate Swaps - Cash Flow Hedge
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposure to some of its interest rate risk through the use of interest rate swaps, which are derivative financial instruments. The Company does not use derivatives for speculative purposes. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in accumulated other comprehensive income (“AOCI”) to the extent the derivative is effective at offsetting the changes in the cash flows being hedged until the hedged item affects earnings.
In fiscal 2019, the Company entered into an interest rate swap contract with an effective date of December 23, 2020 and a termination date of December 17, 2023 to hedge a portion of its variable rate debt. On August 25, 2022, the interest rate swap agreement was restructured (consistent with the 2021 Credit Agreement) to convert the benchmark interest rate from LIBOR to the SOFR rate effective September 23, 2022 with a termination date of December 17, 2023. The Company applied the practical and optional expedients in ASC 848, Reference Rate Reform, in evaluating the impact of modifying the contract, which resulted in no change to the accounting for this derivative contract. The notional amount of this swap was $1.0 billion. The restructured interest rate swap fixed the SOFR component of the variable interest rate on $1.0 billion of the notional amount under the 2021 Credit Agreement at 1.23%. The critical terms of the restructured interest rate swap were designed to mirror the terms of the Company’s SOFR-based borrowings under the 2021 Credit Agreement and therefore were highly effective at offsetting the cash flows being hedged. The Company designated this derivative as a cash flow hedge of the variability of the SOFR-based interest
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payments on $1.0 billion of principal. Therefore, changes in the fair value of the swap were recorded in AOCI. The contract expired during the first quarter of fiscal 2024.
On March 23, 2023, the Company entered into two consecutive interest rate swap contracts with the first contract having an effective date of December 17, 2023 and terminating on December 27, 2024, and the second contract having an effective date of December 27, 2024 and terminating on September 25, 2026. The notional amount of these swaps is $500 million, and the first interest rate swap fixes the SOFR component of the variable interest rate at 3.46%, and the second interest rate swap fixes the SOFR component of the variable interest rate at 2.98%. The critical terms of the interest rate swaps are designed to mirror the terms of the Company’s SOFR-based borrowings under the 2021 Credit Agreement and therefore are highly effective at offsetting the cash flows being hedged. The Company designated this derivative as a cash flow hedge of the variability of the SOFR-based interest payments on $500 million of principal. Therefore, changes in the fair value of the swap are recorded in AOCI. The fair value of these swaps was an asset position of $14.7 million as of June 29, 2024.
Forward Foreign Currency Exchange Contracts and Foreign Currency Option Contracts
The Company enters into forward foreign currency exchange contracts and foreign currency option contracts to mitigate certain operational exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s cash and operations that are denominated in currencies other than the U.S. dollar, primarily the Euro, the UK Pound, the Australian dollar, the Canadian dollar, the Chinese Yuan and the Japanese Yen. These foreign currency contracts are entered into to support transactions made in the ordinary course of business and are not speculative in nature. The contracts are generally for periods of one year or less. The Company did not elect hedge accounting for these contracts; however, the Company may seek to apply hedge accounting in future scenarios. As of June 29, 2024, the notional amount was $97.2 million. The change in the fair value of these contracts is recognized directly in earnings as a component of other income (expense), net.
Realized and unrealized gains and losses from these contracts, which were the only derivative contracts not designated for hedge accounting, for the three and nine months ended June 29, 2024 and July 1, 2023, respectively, were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Amount of realized gain (loss) recognized in income | |||||||||||||||||||||||
| Forward foreign currency contracts | $ | 1.7 | $ | 1.4 | $ | 3.5 | $ | (1.3) | |||||||||||||||
| Foreign currency option contracts | — | (1.2) | — | (2.7) | |||||||||||||||||||
| $ | 1.7 | $ | 0.2 | $ | 3.5 | $ | (4.0) | ||||||||||||||||
| Amount of unrealized gain (loss) recognized in income | |||||||||||||||||||||||
| Forward foreign currency contracts | $ | (0.5) | $ | — | $ | (6.2) | $ | (13.8) | |||||||||||||||
| Foreign currency option contracts | — | 1.0 | — | (6.8) | |||||||||||||||||||
| $ | (0.5) | $ | 1.0 | $ | (6.2) | $ | (20.6) | ||||||||||||||||
| Amount of gain (loss) recognized in income | |||||||||||||||||||||||
| Total | $ | 1.2 | $ | 1.2 | $ | (2.7) | $ | (24.6) | |||||||||||||||
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Financial Instrument Presentation
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of June 29, 2024:
| Balance Sheet Location | June 29, 2024 | September 30, 2023 | |||||||||||||||
| Assets: | |||||||||||||||||
| Derivative instruments designated as a cash flow hedge: | |||||||||||||||||
| Interest rate swap contracts | Prepaid expenses and other current assets | $ | 8.5 | $ | 16.2 | ||||||||||||
| Interest rate swap contracts | Other assets | 6.2 | 10.7 | ||||||||||||||
| $ | 14.7 | $ | 26.9 | ||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Forward foreign currency contracts | Prepaid expenses and other current assets | $ | 2.6 | $ | 8.4 | ||||||||||||
| $ | 2.6 | $ | 8.4 | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Forward foreign currency contracts | Accrued expenses | $ | 0.4 | $ | — | ||||||||||||
The following table presents the unrealized gain (loss) recognized in AOCI related to interest rate swaps for the following reporting periods:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Amount of gain (loss) recognized in other comprehensive income, net of taxes: | |||||||||||||||||||||||
| Interest rate swaps | $ | 0.3 | $ | 3.7 | $ | (9.3) | $ | (5.6) | |||||||||||||||
| Total | $ | 0.3 | $ | 3.7 | $ | (9.3) | $ | (5.6) | |||||||||||||||
(12) Commitments and Contingencies
Litigation and Related Matters
On November 4, 2022, a product liability complaint was filed against the Company in Massachusetts state court by a group of plaintiffs who claim they sustained injuries caused by the BioZorb 3D Bioabsorbable Marker, and additional complaints were subsequently filed alleging similar claims. The BioZorb device is an implantable three-dimensional marker that helps clinicians overcome certain challenges presented by breast conserving cancer surgery (lumpectomy). The complaints allege that the plaintiffs suffered side effects that were not disclosed in the BioZorb instructions for use and make various additional claims related to the design, manufacture and marketing of the device. Complaints have been filed on behalf of 88 plaintiffs, one pending in Massachusetts state court, and the remainder in United States District Court for the District of Massachusetts. Discovery is ongoing. While the Company believes it has valid defenses and plans to vigorously defend its position, litigation can be costly and unpredictable, and at this early stage the Company cannot reasonably assess the outcome of this matter.
The Company is a party to various other legal proceedings, claims, governmental and/or regulatory inspections, inquiries and investigations arising out of the ordinary course of its business. The Company believes that except for those matters described above there are no other proceedings, claims, inspections, inquiries or investigations pending against it, the ultimate resolution of which are reasonably likely based upon management’s assessment, to have a material adverse effect on its financial condition or results of operations. It is possible that future results for any particular quarter or annual period may be materially affected by changes in our assumptions or the effectiveness of our strategies relating to these matters. In all cases, at
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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 (ASC 450). Legal costs are expensed as incurred.
(13) Net Income (Loss) Per Share
A reconciliation of basic and diluted share amounts is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Basic weighted average common shares outstanding | 234,604 | 246,908 | 236,373 | 247,319 | |||||||||||||||||||
| Weighted average common stock equivalents from assumed exercise of stock options and issuance of restricted stock units | 1,862 | — | 1,708 | 2,074 | |||||||||||||||||||
| Diluted weighted average common shares outstanding | 236,466 | 246,908 | 238,081 | 249,393 | |||||||||||||||||||
| Weighted-average anti-dilutive shares related to: | |||||||||||||||||||||||
| Outstanding stock options and restricted stock units | 933 | 2,936 | 1,372 | 1,786 | |||||||||||||||||||
In those reporting periods in which the Company has reported net income, anti-dilutive shares generally are comprised of those stock options that either have an exercise price above the average stock price for the period or the stock options’ combined exercise price and average unrecognized stock compensation expense is greater than the average stock price during the period. In those reporting periods in which the Company has a net loss, diluted loss per share is equal to basic loss per share because the effect of potentially dilutive securities would be anti-dilutive.
(14) Stock-Based Compensation
The following presents stock-based compensation expense in the Company’s Consolidated Statements of Income:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Cost of revenues | $ | 2.6 | $ | 2.1 | $ | 8.5 | $ | 7.7 | |||||||||||||||
| Research and development | 2.2 | 2.1 | 8.4 | 8.6 | |||||||||||||||||||
| Selling and marketing | 3.5 | 2.9 | 10.4 | 9.2 | |||||||||||||||||||
| General and administrative | 6.3 | 9.8 | 41.8 | 35.1 | |||||||||||||||||||
| $ | 14.6 | $ | 16.9 | $ | 69.1 | $ | 60.6 | ||||||||||||||||
The Company granted options to purchase 0.6 million and 0.5 million shares of the Company’s common stock during the nine months ended June 29, 2024 and July 1, 2023, respectively, with weighted-average exercise prices of $72.32 and $74.67, respectively. There were 4.5 million options outstanding at June 29, 2024 with a weighted-average exercise price of $54.62.
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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, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Risk-free interest rate | 4.4 | % | 4.3 | % | 4.4 | % | 4.3 | % | |||||||||||||||
| Expected volatility | 33.4 | % | 33.9 | % | 33.4 | % | 33.9 | % | |||||||||||||||
| Expected life (in years) | 4.8 | 4.8 | 4.8 | 4.8 | |||||||||||||||||||
| Dividend yield | — | — | — | — | |||||||||||||||||||
| Weighted average fair value of options granted | $ | 26.44 | $ | 30.51 | $ | 25.06 | $ | 25.95 | |||||||||||||||
The Company granted 0.7 million and 0.6 million restricted stock units (“RSUs”) during the nine months ended June 29, 2024 and July 1, 2023, respectively, with weighted-average grant date fair values of $72.03 and $74.58 per unit, respectively. In addition, the Company granted 0.1 million and 0.1 million performance stock units (“PSUs”) during the nine months ended June 29, 2024 and July 1, 2023, respectively, to members of its senior management team, which have a weighted-average grant date fair value of $71.92 and $74.35 per unit, respectively. Each recipient of PSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of a three-year performance period, provided that the Company’s defined Return on Invested Capital metrics are achieved. The Company also granted 0.1 million and 0.1 million of FCF PSUs based on a three-year cumulative free cash flow measure (“FCF PSUs”) to members of its senior management team, which had a grant date fair value of $71.92 and $74.35 per unit during the nine months ended June 29, 2024 and July 1, 2023, respectively. Each recipient of FCF PSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of the three-year measurement period. The PSUs and FCF PSUs cliff-vest three years from the date of grant, and the Company recognizes compensation expense ratably over the required service period based on its estimate of the probable number of shares that will vest upon achieving the measurement criteria. If there is a change in the estimate of the number of shares that are probable of vesting, the Company will cumulatively adjust compensation expense in the period that the change in estimate is made. The Company also granted 0.1 million and 0.1 million market-based awards (“MSUs”) to members of its senior management team during the nine months ended June 29, 2024 and July 1, 2023, respectively. Each recipient of MSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of a three-year performance period based upon achieving a certain total shareholder return relative to a defined peer group. The MSUs were valued at $88.06 and $97.91 per share using the Monte Carlo simulation model in fiscal 2024 and 2023, respectively. The MSUs cliff-vest three years from the date of grant, and the Company recognizes compensation expense for the MSUs ratably over the service period. At June 29, 2024, there was 1.7 million in aggregate unvested RSUs, PSUs, FCF PSUs and MSUs outstanding.
At June 29, 2024, there was $12.4 million and $55.5 million of unrecognized compensation expense related to stock options and stock units (comprised of RSUs, PSUs, FCF PSUs and MSUs), respectively, to be recognized over a weighted-average period of 2.3 and 1.8 years, respectively.
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(15) Other Balance Sheet Information
| June 29, 2024 | September 30, 2023 | ||||||||||
| Inventories | |||||||||||
| Raw materials | $ | 263.2 | $ | 238.6 | |||||||
| Work-in-process | 58.4 | 66.3 | |||||||||
| Finished goods | 343.9 | 312.7 | |||||||||
| $ | 665.5 | $ | 617.6 | ||||||||
| Property, plant and equipment | |||||||||||
| Equipment | $ | 388.4 | $ | 380.0 | |||||||
| Equipment under customer usage agreements | 507.7 | 508.1 | |||||||||
| Building and improvements | 243.7 | 230.0 | |||||||||
| Leasehold improvements | 42.0 | 44.4 | |||||||||
| Land | 40.8 | 41.1 | |||||||||
| Furniture and fixtures | 23.6 | 19.2 | |||||||||
| Finance lease right-of-use asset | 8.4 | 8.2 | |||||||||
| $ | 1,254.6 | $ | 1,231.0 | ||||||||
| Less – accumulated depreciation and amortization | (725.8) | (714.0) | |||||||||
| $ | 528.8 | $ | 517.0 | ||||||||
During the third quarter of fiscal 2023, the Company identified indicators of impairment related to its long-lived assets of its Mobidiag business and based on the fair value of the asset group recorded impairment charges of $12.1 million to property, plant and equipment. In addition, during the third quarter of fiscal 2023, the Company identified indicators of impairment related to its long-lived assets of its SSI ultrasound imaging business and recorded impairment charges of $5.8 million related to property, plant and equipment. See Note 18 for additional information.
(16) Business Segments and Geographic Information
The Company has four reportable segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health. The Company measures and evaluates its reportable segments based on segment revenues and operating income adjusted to exclude the effect of non-cash charges (such as intangible asset amortization expense, and goodwill and intangible asset impairment charges), transaction and integration expenses for acquisitions, restructuring, consolidation and divestiture charges, litigation charges, and other one-time or unusual items.
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Identifiable assets for the reportable segments consist of inventories, intangible assets, goodwill, and property, plant and equipment. The Company fully allocates depreciation expense to its reportable segments. The Company has presented all other identifiable assets as corporate assets. There were no inter-segment revenues during the three and nine months ended June 29, 2024 and July 1, 2023. Segment information is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| Total revenues: | |||||||||||||||||||||||
| Diagnostics | $ | 440.8 | $ | 439.7 | $ | 1,338.7 | $ | 1,463.6 | |||||||||||||||
| Breast Health | 385.0 | 360.3 | 1,147.3 | 1,079.9 | |||||||||||||||||||
| GYN Surgical | 166.6 | 157.3 | 484.8 | 456.2 | |||||||||||||||||||
| Skeletal Health | 19.0 | 27.1 | 71.5 | 85.4 | |||||||||||||||||||
| $ | 1,011.4 | $ | 984.4 | $ | 3,042.3 | $ | 3,085.1 | ||||||||||||||||
| Income from operations: | |||||||||||||||||||||||
| Diagnostics | $ | 89.7 | $ | (113.5) | $ | 210.1 | $ | 142.8 | |||||||||||||||
| Breast Health | 102.4 | 63.3 | 296.2 | 233.7 | |||||||||||||||||||
| GYN Surgical | 56.7 | 48.5 | 144.3 | 149.6 | |||||||||||||||||||
| Skeletal Health | (4.8) | 3.1 | 2.0 | 9.8 | |||||||||||||||||||
| $ | 244.0 | $ | 1.4 | $ | 652.6 | $ | 535.9 | ||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Diagnostics | $ | 51.0 | $ | 56.8 | $ | 168.3 | $ | 172.9 | |||||||||||||||
| Breast Health | 9.3 | 12.2 | 29.6 | 38.7 | |||||||||||||||||||
| GYN Surgical | 11.9 | 11.9 | 36.1 | 35.8 | |||||||||||||||||||
| Skeletal Health | 0.1 | 0.3 | 0.4 | 0.5 | |||||||||||||||||||
| $ | 72.3 | $ | 81.2 | $ | 234.4 | $ | 247.9 | ||||||||||||||||
| Capital expenditures: | |||||||||||||||||||||||
| Diagnostics | $ | 17.7 | $ | 22.6 | $ | 61.7 | $ | 58.7 | |||||||||||||||
| Breast Health | 10.4 | 8.0 | 25.1 | 22.0 | |||||||||||||||||||
| GYN Surgical | 4.8 | 4.5 | 11.5 | 11.2 | |||||||||||||||||||
| Skeletal Health | 0.7 | — | 1.1 | 0.2 | |||||||||||||||||||
| Corporate | 0.3 | 1.4 | 0.5 | 5.6 | |||||||||||||||||||
| $ | 33.9 | $ | 36.5 | $ | 99.9 | $ | 97.7 | ||||||||||||||||
| June 29, 2024 | September 30, 2023 | ||||||||||
| Identifiable assets: | |||||||||||
| Diagnostics | $ | 2,476.3 | $ | 2,596.4 | |||||||
| Breast Health | 1,217.6 | 1,170.1 | |||||||||
| GYN Surgical | 1,429.8 | 1,455.4 | |||||||||
| Skeletal Health | 35.6 | 33.7 | |||||||||
| Corporate | 3,730.8 | 3,883.7 | |||||||||
| $ | 8,890.1 | $ | 9,139.3 | ||||||||
The Company had no customers that represented greater than 10% of consolidated revenues during the three and nine months ended June 29, 2024 and July 1, 2023.
The Company operates in the following major geographic areas noted in the below chart. Revenue data is based upon customer location. Other than the United States, no single country accounted for more than 10% of consolidated revenues. The Company’s sales in Europe are predominantly derived from the United Kingdom, Germany, France, Spain, Italy and the Netherlands. The Company’s sales in Asia-Pacific are predominantly derived from China, Australia and Japan. The “Rest of World” designation includes Canada, Latin America and the Middle East.
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Revenues by geography as a percentage of total revenues were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| United States | 75.7 | % | 76.2 | % | 74.9 | % | 75.9 | % | |||||||||||||||
| Europe | 12.6 | % | 13.1 | % | 13.4 | % | 13.9 | % | |||||||||||||||
| Asia-Pacific | 6.4 | % | 6.4 | % | 6.4 | % | 6.2 | % | |||||||||||||||
| Rest of World | 5.3 | % | 4.3 | % | 5.3 | % | 4.0 | % | |||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
(17) 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 annual effective tax rate estimated for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, adjusted for discrete taxable events that occur during the interim period.
For the three months ended June 29, 2024, the Company recorded income tax expense of $46.2 million resulting in an effective tax rate of 19.2%. For the nine months ended June 29, 2024, the Company recorded income tax expense of $32.6 million, resulting in an effective tax rate of 5.1%.
The effective tax rate for the three months ended June 29, 2024 was lower than the U.S. statutory tax rate primarily due to the U.S. deduction for foreign derived intangible income, the geographic mix of income earned by the Company’s international subsidiaries, which are generally taxed at rates lower than the U.S. statutory tax rate, and federal and state tax credits. The effective tax rate for the nine months ended June 29, 2024 was lower than the U.S. statutory tax rate primarily due to a discrete tax benefit of $107.2 million related to a worthless stock deduction on an investment in one of the Company’s international subsidiaries recorded in the first quarter of fiscal 2024, the U.S. deduction for foreign derived intangible income, and the geographic mix of income earned by the Company’s international subsidiaries, and federal and state tax credits.
The Company recorded income tax expense of $52.6 million and $165.1 million for the three and nine months ended July 1, 2023, resulting in effective tax rates of 434.7% and 31.1%, respectively.
The effective tax rates for the three and nine months ended July 1, 2023 were higher than the U.S. statutory tax rate primarily due to the tax effect of impairment charges recorded for assets acquired in the Mobidiag acquisition and the impairment of the Company’s SSI ultrasound imaging assets, income tax reserves, the global intangible low-taxed income inclusion, and state income taxes, partially offset by the impact of the U.S. deduction for foreign derived intangible income, and the geographic mix of income earned by the Company’s international subsidiaries.
Non-Income Tax Matters
The Company is subject to tax examinations for value added, sales-based, payroll and other non-income tax items. A number of these examinations are ongoing in various jurisdictions. The Company takes certain non-income tax positions in the jurisdictions in which it operates and records loss contingencies pursuant to ASC 450. Such amounts were not material for any of the periods presented. In the normal course of business, the Company's positions and conclusions related to its non-income tax positions could be challenged, resulting in assessments by governmental authorities. While the Company believes estimated losses previously recorded are reasonable, certain audits are still ongoing and additional charges could be recorded in the future.
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(18) Intangible Assets
Intangible assets consisted of the following:
| Description | As of June 29, 2024 | As of September 30, 2023 | |||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||||||||||
| Acquired intangible assets: | |||||||||||||||||||||||
| Developed technology | $ | 4,375.4 | $ | 3,786.6 | $ | 4,411.0 | $ | 3,649.5 | |||||||||||||||
| In-process research and development | 21.9 | — | 25.7 | — | |||||||||||||||||||
| Customer relationships | 600.6 | 564.4 | 600.0 | 550.6 | |||||||||||||||||||
| Trade names | 252.5 | 222.9 | 253.6 | 212.8 | |||||||||||||||||||
| Total acquired intangible assets | $ | 5,250.4 | $ | 4,573.9 | $ | 5,290.3 | $ | 4,412.9 | |||||||||||||||
| Internal-use software | 25.5 | 20.0 | 24.0 | 17.8 | |||||||||||||||||||
| Capitalized software embedded in products | 29.7 | 24.1 | 27.7 | 22.7 | |||||||||||||||||||
| Total intangible assets | $ | 5,305.6 | $ | 4,618.0 | $ | 5,342.0 | $ | 4,453.4 | |||||||||||||||
The estimated remaining amortization expense of the Company’s acquired intangible assets as of June 29, 2024 for each of the five succeeding fiscal years was as follows:
| Remainder of Fiscal 2024 | $ | 47.2 | |||
| Fiscal 2025 | $ | 180.6 | |||
| Fiscal 2026 | $ | 150.6 | |||
| Fiscal 2027 | $ | 63.6 | |||
| Fiscal 2028 | $ | 60.5 | |||
During the second quarter of fiscal 2024, in connection with commencing its company-wide annual strategic planning process, the Company identified indicators of impairment in its BioZorb product line, which was part of the Focal acquisition. As a result, the Company performed an undiscounted cash flow analysis pursuant to ASC 360, Property, Plant and Equipment - Overall, to determine if the cash flows expected to be generated by the BioZorb product line over the remaining estimated useful life of the primary asset were sufficient to recover the carrying value of the asset group. Based on this analysis, the undiscounted cash flows were not sufficient to recover the carrying value of the long-lived assets. Therefore, the Company was required to perform Step 3 of the impairment test and determine the fair value of the asset group. To estimate the fair value of the asset group, the Company utilized the income approach, which is based on a discounted cash flow (DCF) analysis and calculated the fair value by estimating the after-tax cash flows attributable to the asset group and then discounting the after-tax cash flows to present value using a risk-adjusted discount rate. Based on this analysis, the fair value of the BioZorb asset group was below its carrying value and the Company recorded an impairment charge of $26.8 million during the second quarter of fiscal 2024. The impairment charge was allocated to the long-lived assets on a pro-rata basis as follows: $25.9 million to developed technology and $0.9 million to trade names, which reduced the carrying value of the assets to $13.9 million and $0.5 million respectively.
During the third quarter of fiscal 2024, the Federal Drug Administration classified a prior safety notice for the BioZorb Marker as a Class I recall. This was the technical classification of a prior safety notice only, not a product removal. Following this, the Company lowered its forecasts for this product line, which is an indicator of impairment. Accordingly, the Company performed an undiscounted cash flow analysis, and the cash flows were not sufficient to recover the carrying value of the asset group. The Company performed a fair value analysis and determined that the fair value of the asset group was de minimus. As a result, the Company recorded an impairment charge of $13.3 million and $0.4 million to developed technology and trade names, respectively, to fully write-off the assets.
During the first quarter of fiscal 2024, the Company assessed its only in-process research and development intangible asset from its Mobidiag acquisition for impairment. The Company determined the fair value of this indefinite-lived asset utilizing the DCF model and recorded a $4.3 million impairment charge, reducing the fair value of this asset to $22.4 million.
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The reduction in the fair value of this asset was primarily due to a reduction in forecasted revenues and a delay in the timing of completing the project. In addition, the Company determined that the useful life of the customer relationship and trade name intangible assets from its Mobidiag acquisition should be shortened and recorded accelerated amortization expense of $7.3 million to bring the net carrying values to zero.
During the third quarter of fiscal 2023, in connection with its company-wide annual budgeting and strategic planning process as well as evaluating the current operating performance of its Mobidiag business, including product design and manufacturing requirements, the Company reassessed its short-term and long-term commercial plans for this business. The Company made certain operational and strategic decisions to invest and focus more on the long-term success of this business, which resulted in the Company significantly reducing its forecasted revenues and operating results.
As a result, the Company determined indicators of impairment existed and performed an undiscounted cash flow analysis pursuant to ASC 360 to determine if the cash flows expected to be generated by the Mobidiag business over the estimated remaining useful life of its primary asset were sufficient to recover the carrying value of the asset group. Based on this analysis the undiscounted cash flows were not sufficient to recover the carrying value of the long-lived assets. As a result, the Company was required to perform Step 3 of the impairment test and determine the fair value of the asset group. To estimate the fair value of the asset group, the Company utilized the income approach, which is based on a DCF. Assumptions used in the DCF require significant judgment, including judgment about appropriate discount rates, growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows were based on the Company's most recent strategic plan at the time and for periods beyond the strategic plan, the Company's estimates were based on assumed growth rates expected as of the measurement date. The Company believed its assumptions were consistent with the plans and estimates that a market participant would use to manage the business. The discount rate used is intended to reflect the risks inherent in future cash flow projections and was based on an estimate of the weighted average cost of capital (WACC) of market participants relative to the asset group. The Company used a discount rate of 17.0%. As a result of this analysis, the fair value of the Mobidiag asset group was below its carrying value. Prior to calculating and allocating the impairment charge, the Company assessed the only in-process research and development intangible asset in this asset group for impairment. The Company determined the fair value of this indefinite-lived asset utilizing the DCF model and recorded a $10.5 million impairment charge, reducing the fair value of this asset to $26.5 million. The reduction in fair value of this asset was primarily due to a reduction in forecasted revenues and a delay in the timing of completing the project to focus on other projects.
To record the asset group to fair value, the Company recorded an impairment charge of $186.9 million during the third quarter of fiscal 2023. The impairment charge was allocated to the long-lived assets on a pro-rata basis as follows: $153.7 million to developed technology, $10.4 million to customer relationships, $10.7 million to trade names, and $12.1 million to equipment. The Company believed its assumptions used to determine the fair value of the asset group were reasonable. Actual operating results and the related cash flows of the asset group could differ from the estimated operating results and related cash flows. In the event the asset group does not meet its forecasted projections, additional impairment charges could be recorded in the future. The Company also re-evaluated the remaining useful lives of the intangible assets and concluded no changes were necessary at that time.
During the third quarter of fiscal 2023, the Company also identified indicators of impairment associated with its SSI ultrasound imaging assets. As a result, the Company recorded an impairment charge of $26.4 million, of which $20.6 million was allocated to intangible assets, primarily developed technology, and $5.8 million was allocated to equipment.
(19) 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, 2024 | $ | 8.3 | $ | 7.2 | $ | (6.3) | $ | 9.2 | |||||||||||||||||||||||||||
| July 1, 2023 | $ | 8.0 | $ | 4.9 | $ | (5.4) | $ | 7.5 | |||||||||||||||||||||||||||
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(20) Accumulated Other Comprehensive Income (Loss)
The following tables summarize the changes in accumulated balances of other comprehensive income (loss) for the periods presented:
| Three Months Ended June 29, 2024 | Nine Months Ended June 29, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation | Pension Plans | Hedged Interest Rate Swaps | Total | Foreign Currency Translation | Pension Plans | Hedged Interest Rate Swaps | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance | $ | (147.8) | $ | 0.3 | $ | 10.5 | $ | (137.0) | $ | (168.0) | $ | 0.3 | $ | 20.1 | $ | (147.6) | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (2.8) | — | 0.3 | (2.5) | 17.4 | — | (9.3) | 8.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | (150.6) | $ | 0.3 | $ | 10.8 | $ | (139.5) | $ | (150.6) | $ | 0.3 | $ | 10.8 | $ | (139.5) | |||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended July 1, 2023 | Nine Months Ended July 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation | Pension Plans | Hedged Interest Rate Swaps | Total | Foreign Currency Translation | Pension Plans | Hedged Interest Rate Swaps | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance | $ | (138.1) | $ | (0.3) | $ | 20.0 | $ | (118.4) | $ | (267.2) | $ | (0.3) | $ | 29.3 | $ | (238.2) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 1.1 | — | 3.7 | 4.8 | 130.2 | — | (5.6) | 124.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | (137.0) | $ | (0.3) | $ | 23.7 | $ | (113.6) | $ | (137.0) | $ | (0.3) | $ | 23.7 | $ | (113.6) | |||||||||||||||||||||||||||||||||||||||||||||||||
(21) Share Repurchase
On September 22, 2022, the Board of Directors authorized a stock repurchase program, with a five-year term, to repurchase up to $1.0 billion of the Company’s outstanding common stock, effective as of the close of trading September 23, 2022. This repurchase program replaced the previous $1.0 billion authorization. Exclusive of shares repurchased pursuant to the accelerated share repurchase agreement described below, during the three and nine months ended June 29, 2024, the Company repurchased 1.4 million and 3.5 million shares of its common stock under the authorization for total consideration of $100.0 million and $250.0 million, respectively. As of June 29, 2024, $248.6 million remained available under this authorization.
On November 6, 2023, the Board of Directors authorized the Company to repurchase up to $500 million of the Company’s outstanding shares pursuant to an accelerated share repurchase (“ASR”) agreement. On November 15, 2023, the Company executed the ASR agreement with Goldman Sachs & Co. (“Goldman Sachs”) pursuant to which the Company agreed to repurchase $500 million of the Company’s common stock. In connection with the launch of the ASR, on November 17, 2023, the Company paid Goldman Sachs an aggregate of $500 million and received approximately 5.6 million shares of the Company’s common stock, representing 80% of the transaction value based on the Company’s closing share price on November 14, 2023. On February 27, 2024, the ASR agreement was completed, and the Company received an additional 1.4 million shares for the final settlement. This final settlement was based on the total transaction value and the volume-weighted average share price of the Company’s common stock during the term of the agreement.
(22) New Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures. The guidance requires entities to provide enhanced disclosures about significant segment expenses. For entities that have adopted the amendments in Update 2023-07, the updated guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and is applicable to the Company in fiscal 2025. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2023-07 on its consolidated financial position and results of operations.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures. The FASB issued this Update to enhance income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024, and is applicable to the Company in fiscal 2025. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2023-09 on its consolidated financial position and results of operations.
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In March 2024, the SEC issued its final climate disclosure rule, which requires the disclosure of Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics in annual reports and registration statements, when material. Disclosure requirements were to begin phasing in for fiscal years beginning on or after January 1, 2025, however on April 4, 2024, the SEC issued an order staying the rule pending the completion of an ongoing judicial review. The Company is monitoring SEC developments and evaluating the impact of the new rule to its financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
Some of the statements contained in this report and documents incorporated by reference herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements may include, but are not limited to, statements regarding:
•the ongoing and possible future effects of global challenges, including macroeconomic uncertainties, such as inflation, bank failures, rising interest rates and availability of capital markets, wars, other economic disruptions and U.S. and global recession concerns, on our customers and suppliers and on our business, financial condition, results of operations and cash flows and our ability to draw down our revolver;
•the effect of the worldwide political and social uncertainty and divisions, including the impact on trade regulations and tariffs, that may adversely impact the cost and sale of our products in certain countries, or increase the costs we may incur to purchase materials, parts and equipment from our suppliers;
•the ability to execute acquisitions and the impact and anticipated benefits of completed acquisitions and acquisitions we may complete in the future;
•the development of new competitive technologies and products;
•our ability to predict accurately the demand for our products, and products under development and to develop strategies to address markets successfully;
•continued demand for our COVID-19 assays;
•potential cybersecurity threats and targeted computer crime;
•the ongoing and possible future effects of supply chain constraints, including the availability of critical raw materials and components, as well as cost inflation in materials, packaging and transportation;
•the possibility of interruptions or delays at our manufacturing facilities, or the failure to secure alternative suppliers if any of our sole source third-party manufacturers fail to supply us;
•the ability to consolidate certain of our manufacturing and other operations on a timely basis and within budget, without disrupting our business and to achieve anticipated cost synergies related to such actions;
•the ability to successfully manage ongoing organizational and strategic changes, including our ability to attract, motivate and retain key employees and maintain engagement and efficiency in remote work environments;
•our ability to obtain and maintain regulatory approvals and clearances for our products, including the implementation of the European Union Medical Device and In Vitro Diagnostic Regulation requirements, and maintain compliance with complex and evolving regulations and quality standards, as well as the uncertainty of costs required to obtain and maintain compliance with such regulatory and quality matters;
•the coverage and reimbursement decisions of third-party payors;
•the uncertainty of the impact of cost containment efforts and federal healthcare reform legislation on our business and results of operations;
•the guidelines, recommendations, and studies published by various organizations relating to the use of our products;
•the effect of consolidation in the healthcare industry;
•our ability to meet production and delivery schedules for our products;
•the effect of any future public health pandemic or other crises, including the timing, scope and effect of U.S. and international governmental, regulatory, fiscal, monetary and public health responses to such crises;
•our ability to protect our intellectual property rights;
•the possibility that products may contain undetected errors or defects or otherwise not perform as anticipated;
•the anticipated development of markets we sell our products into and the success of our products in these markets;
•the anticipated performance and benefits of our products;
•business strategies;
•anticipated trends relating to our financial condition or results of operations, including the impact of interest rate and foreign currency exchange fluctuations;
•estimated asset and liability values;
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•the impact of future tax legislation;
•conducting business internationally;
•the impact and costs and expenses of investigative and legal proceedings and compliance risks we may be subject to now or in the future;
•potential negative impacts resulting from climate change or other environmental, social, and governance and sustainability related matters;
•our compliance with covenants contained in our debt agreements; and
•our liquidity, capital resources and the adequacy thereof.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “likely,” “future,” “strategy,” “potential,” “seeks,” “goal” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include the cautionary statements set forth herein and in our other filings with the Securities and Exchange Commission, including the “Risk Factors” set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 or any other of our subsequently filed reports. We qualify all of our forward-looking statements by these cautionary statements.
OVERVIEW
We are a developer, manufacturer and supplier of premium diagnostics products, medical imaging systems and surgical products focused on women’s health and well-being through early detection and treatment. We sell and service our products through a combination of direct sales and service personnel and a network of independent distributors and sales representatives. We operate in four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health.
Through our Diagnostics segment, we offer a wide range of diagnostic products, which are used primarily to aid in the screening and diagnosis of human diseases. Our primary Diagnostics products include our molecular diagnostic assays, which run on our advanced instrumentation systems (Panther and Panther Fusion), our ThinPrep cytology system, and the Rapid Fetal Fibronectin Test. Our Aptima family of molecular diagnostic assays is used to detect, among other things, the infectious microorganisms that cause common sexually transmitted diseases, or STDs, such as chlamydia and gonorrhea, or CT/NG; certain high-risk strains of human papillomavirus, or HPV; Trichomonas vaginalis, the parasite that causes trichomoniasis; Mycoplasma genitalium; and Herpes Simplex viruses 1 and 2. We also offer viral load tests for the quantitation of Hepatitis B virus, Hepatitis C virus, human immunodeficiency virus, or HIV-1, and human cytomegalovirus, or CMV, for use on our Panther instrument system. In addition, we offer bacterial vaginosis and candida vaginitis assays for the diagnosis of vaginitis, a common and complex ailment affecting millions of women a year. Our assay portfolio also includes diagnostic tests for a range of acute respiratory infections, including SARS-CoV-2, various strains of influenza and parainfluenza, and respiratory syncytial virus, as well as a test for the detection of Group B Streptococcus, or GBS, that are run on the Panther Fusion system, a field upgradeable instrument addition to the base Panther system. In response to the COVID-19 pandemic, we developed and launched the Aptima SARS-CoV-2 assay and the Aptima SARS-CoV-2/Flu assay (each of which runs on our standard Panther system) and the Panther Fusion SARS-CoV-2 assay (which runs on our Panther Fusion system). In May 2022, we CE-marked two new molecular assays, Panther Fusion EBV Quant assay for quantitation of Epstein-Barr virus, and the Panther Fusion BKV Quant assay for quantitation of the BK virus. These two new assays are the first quantitative real-time PCR assays on the Panther Fusion system. These assays, along with the Aptima CMV Quant assay already available in Europe, expand our menu of transplant monitoring assays. The ThinPrep System is primarily used in cytology applications, such as cervical cancer screening, and the Rapid Fetal Fibronectin Test assists physicians in assessing the risk of pre-term birth. We also generate service revenues from our CLIA-certified laboratory for testing related to breast cancer and all metastatic cancers.
Our Breast Health segment offers a broad portfolio of solutions for breast cancer care primarily in the areas of radiology, breast surgery, pathology and treatment. These solutions include 3D digital mammography systems, image analytics software utilizing artificial intelligence, reading workstations, minimally invasive breast biopsy guidance systems, breast biopsy site
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markers, localization, specimen radiology, connectivity solutions and breast conserving surgery products. Our most advanced breast imaging platforms, the 3Dimensions and Selenia 3D Dimensions systems, utilize tomosynthesis to produce 3D images that show multiple contiguous slice images of the breast, which we refer to as the Genius 3D Mammography exam.
Our GYN Surgical products include our MyoSure hysteroscopic tissue removal system, or MyoSure, our NovaSure endometrial ablation system, or NovaSure, our Fluent fluid management system, or Fluent, our Acessa ProVu laparoscopic radiofrequency ablation system, or Acessa ProVu, as well as our CoolSeal vessel sealing portfolio and our JustRight surgical stapler. The MyoSure suite of devices offers four options to provide incision-less removal of fibroids, polyps, and other pathology within the uterus. The NovaSure portfolio is comprised of the NovaSure CLASSIC device, NovaSure ADVANCED device and the NovaSure V5 device for the treatment of abnormal uterine bleeding. The Fluent system is a fluid management system that provides liquid distention during diagnostic and operative hysteroscopic procedures. The Acessa ProVu system is a fully integrated system that uses laparoscopic ultrasound, guidance mapping and radiofrequency ablation to treat nearly all types of fibroids. The CoolSeal portfolio includes the Trinity, Reveal, and Mini advanced bipolar vessel sealing devices. The JustRight 5 mm stapler features a smaller instrument profile and is used for laparoscopic general and pediatric surgery.
Our Skeletal Health segment’s products include the Horizon DXA, a dual energy x-ray system, which evaluates bone density and performs body composition assessments, and the Fluoroscan Insight FD mini C-arm, which assists in performing minimally invasive orthopedic surgical procedures on a patient’s extremities, such as the hand, wrist, knee, foot, and ankle.
Unless the context otherwise requires, references to we, us, Hologic or our company refer to Hologic, Inc. and its consolidated subsidiaries.
Trademark Notice
Hologic is a trademark of Hologic, Inc. Other trademarks, logos, and slogans registered or used by Hologic and its divisions and subsidiaries in the United States and other countries include, but are not limited to, the following: 3Dimensions, 3D Mammography, 3D, 3DQuorum, Acessa, Acessa ProVu, Affirm, Amplidiag, Aptima, ATEC, BioZorb, Brevera, Celero, Hologic Clarity HD, CoolSeal, C-View, Directray, Dimensions, Eviva, Faxitron, Fluent, Fluoroscan, Focal Therapeutics, Genius 3D, Genius, Genius AI, Hologic, Horizon, InSight, Intelligent 2D, ImageChecker, JustRight, LOCalizer, MyoSure, NovaSure, Novodiag, Panther, Panther Fusion, Progensa, Quantra, Rapid Ffn, SecurView, Selenia, Sertera, SmartCurve, Smart-Depth, ThinPrep, Tigris, and Tomcat.
All other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Hologic’s use or display of other parties’ trademarks, trade dress or products in this Quarterly Report does not imply that Hologic has a relationship with, or endorsement or sponsorship of, the trademark or trade dress owners.
ACQUISITION
Endomag
On April 26, 2024, we executed an agreement to acquire Endomagnetics Ltd (“Endomag”) for a purchase price of approximately $310.0 million, subject to working capital and other customary adjustments. Endomag, located in the UK, develops and sells breast surgery localization and lymphatic tracing technologies. The transaction closed on July 25, 2024.
DISPOSITION
SuperSonic Imagine Ultrasound Imaging
On September 29, 2023, we executed an agreement to sell our SSI ultrasound imaging business to SSH Holdings Limited for a sales price of $1.9 million in cash. The sale was completed on October 3, 2023, the beginning of the first quarter of fiscal 2024. We are providing certain transition services for up to one year, depending on the nature of the service. The SSI ultrasound imaging asset group met the criteria to be classified as assets held-for-sale in the fourth quarter of fiscal 2023. As a result, we recorded a charge of $51.7 million in the fourth quarter of fiscal 2023 to record the asset group at its fair value less costs to sell.
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RESULTS OF OPERATIONS
All dollar amounts in tables are presented in millions.
Product Revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Product Revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diagnostics | $ | 406.9 | 40.2 | % | $ | 409.7 | 41.6 | % | $ | (2.8) | (0.7) | % | $ | 1,246.8 | 41.0 | % | $ | 1,378.5 | 44.7 | % | $ | (131.7) | (9.6) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Breast Health | 228.9 | 22.6 | % | 214.5 | 21.8 | % | 14.4 | 6.7 | % | 696.7 | 22.9 | % | 631.9 | 20.5 | % | 64.8 | 10.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GYN Surgical | 165.4 | 16.4 | % | 156.3 | 15.9 | % | 9.1 | 5.8 | % | 479.6 | 15.8 | % | 452.9 | 14.7 | % | 26.7 | 5.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Skeletal Health | 10.0 | 1.0 | % | 18.6 | 1.9 | % | (8.6) | (46.2) | % | 44.1 | 1.4 | % | 59.6 | 1.9 | % | (15.5) | (26.0) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 811.2 | 80.2 | % | $ | 799.1 | 81.2 | % | $ | 12.1 | 1.5 | % | $ | 2,467.2 | 81.1 | % | $ | 2,522.9 | 81.8 | % | $ | (55.7) | (2.2) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
We had an increase in product revenues in the current three month period compared to the corresponding period in the prior year primarily due to an increase in Breast Health revenue and GYN Surgical revenue. Partially offsetting this increase was a decrease in Skeletal Health revenue and to a lesser extent a decrease in Diagnostics revenue. We had a decrease in product revenues in the current nine month period compared to the corresponding period in the prior year primarily due to a decrease in revenues in the Diagnostics business as COVID-19 assay sales declined significantly and a decrease in Skeletal Health revenue. In addition, the prior year nine month period included an extra week based on our fiscal calendar. Partially offsetting these decreases was improved performance of our Breast Health division as supply chain constraints continued to have a significant impact in the first quarter of the prior year and to a lesser extent an increase in our GYN Surgical business.
Diagnostics product revenues decreased $2.8 million and $131.7 million, or 0.7% and 9.6%, respectively, in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to a decrease in Molecular Diagnostics revenues of $125.2 million in the current nine month period. Partially offsetting the decrease in the current three month period, Molecular Diagnostics revenue increased $3.9 million. In the current three month period, the increase in revenue in Molecular Diagnostics revenue was primarily due to an increase in volumes of BV/CV assays, our Fusion respiratory products and an increase in HIV assays sales in Africa, partially offset by a decrease in our two SARS-CoV-2 assays (primarily the Aptima SARS-CoV-2 assay and to a lesser extent the Panther Fusion SARS-CoV-2 assay) and a reduction in our CT/NG assay revenue primarily from a decrease in volume. In the current nine month period, the decrease in revenue in Molecular Diagnostics was primarily attributable to a decrease of $163.4 million in sales from our two SARS-CoV-2 assays due to lower volumes, which we primarily attribute to lower demand from an improvement in the COVID-19 pandemic and greater use of rapid tests compared to the prior year. We expect sales of our SARS-CoV-2 assays to continue to be significantly lower in fiscal 2024 compared to fiscal 2023. These decreases were partially offset by an increase in volumes of our BV/CV assays, and our Fusion respiratory products.
Breast Health product revenues increased $14.4 million and $64.8 million, or 6.7% and 10.3%, respectively, in the current three and nine month periods compared to the corresponding periods in the prior year. The increase in the current three and nine month periods compared to the corresponding periods in the prior year was primarily due to an increase in volumes of our digital mammography systems, primarily 3Dimensions systems and related workstation and workflow products, including software, partially offset by a reduction in 2D system sales. The increase in volume of sales of our capital equipment was primarily driven by the supply chain constraints in the first quarter of the prior year related to electronic components which have substantially abated. We are continuing to work down our backlog of orders built up during the COVID-19 pandemic. These increases were partially offset by a decrease in sales of SSI ultrasound imaging products of $4.7 million and $11.7 million, respectively, in the current three and nine month periods as a result of the sale of this business in the beginning of the first quarter of fiscal 2024.
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GYN Surgical product revenues increased $9.1 million and $26.7 million, or 5.8% and 5.9%, respectively, in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to an increase in the sales volume of our MyoSure devices and Fluent Fluid Management products as well as an increase in sales of our Acessa ProVu systems in our U.S. market. These increases were partially offset by a decrease in sales of NovaSure devices in the U.S., which we primarily attribute to lower unit volumes, partially offset by an increase in sales of NovaSure devices in our International markets, primarily Western Europe.
Skeletal Health product revenues decreased $8.6 million and $15.5 million, or 46.2% and 26.0%, respectively, in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to a decrease in sales volume of our Horizon DXA systems as a temporary stop-ship was implemented in the current quarter due to a non-conformance pertaining to electromagnetic compatibility requirements. We are working to resolve this issue with our suppliers and expect to resume shipments during the first quarter of fiscal 2025. For the current nine month period, we also had a decrease in sales volumes of our Insight FD systems from competitive pressures.
Product revenues by geography as a percentage of total product revenues were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | ||||||||||||||||||||
| United States | 73.7 | % | 74.2 | % | 72.8 | % | 74.1 | % | |||||||||||||||
| Europe | 13.6 | % | 14.2 | % | 14.5 | % | 15.0 | % | |||||||||||||||
| Asia-Pacific | 6.8 | % | 6.7 | % | 6.6 | % | 6.5 | % | |||||||||||||||
| Rest of World | 5.9 | % | 4.9 | % | 6.1 | % | 4.4 | % | |||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
In the current three and nine month periods compared to the corresponding periods in the prior year, the percentage of product revenue derived from the U.S. and Europe decreased, which we primarily attribute to the decrease of sales from our two SARS-CoV-2 assays due to lower volumes and a decrease in sales volumes of our Horizon DXA systems, as discussed above. This was partially offset by an increase in the U.S. of Breast Health capital equipment sales and an increase in GYN Surgical sales in both the U.S. and Europe, as discussed above. The percentage of product revenue increased in Rest of World in the current year three and nine month periods compared to the corresponding periods in the prior year. In the current three month period this was primarily due to an increase in HIV assay sales in Africa. In the current nine month period this was primarily due to an increase in Surgical, primarily MyoSure and Fluent Fluid Management systems, and an increase in Diagnostics sales, primarily CT/NG, BV/CV and to a lesser extent Fusion respiratory assays for Canada. In addition, we had an increase in Breast Health capital equipment sales, primarily 3Dimensions systems and related workflow products, in Latin America.
Service and Other Revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Service and Other Revenues | $ | 200.2 | 19.8 | % | $ | 185.3 | 18.8 | % | $ | 14.9 | 8.0 | % | $ | 575.1 | 18.9 | % | $ | 562.2 | 18.2 | % | $ | 12.9 | 2.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Service and other revenues consist primarily of revenue generated from our field service organization to provide ongoing service, installation and repair of our products. The majority of these revenues are generated within our Breast Health segment. Our Diagnostics segment also generates service revenue from lab testing from our Biotheranostics CLIA laboratory testing business. The increase in service and other revenue in the current three and nine month periods compared to the corresponding periods in the prior year was primarily due to an increase in Breast Health service contract revenue from our expanded installed base, and higher lab testing volumes from our Biotheranostics business, which we primarily attribute to greater adoption of our Breast Cancer Index test. In the current nine month period the increase was partially offset by a decrease in service revenue as the prior year period included an extra week of service contract activity, and lower spare parts sales.
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Cost of Product Revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | % of Product Revenue | Amount | % of Product Revenue | Amount | % | Amount | % of Product Revenue | Amount | % of Product Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of Product Revenues | $ | 298.2 | 36.8 | % | $ | 291.0 | 36.4 | % | $ | 7.2 | 2.5 | % | $ | 913.9 | 37.0 | % | $ | 879.3 | 34.9 | % | $ | 34.6 | 3.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of Acquired Intangible Assets | 44.4 | 5.5 | % | 51.6 | 6.5 | % | (7.2) | (14.0) | % | 134.9 | 5.5 | % | 159.3 | 6.3 | % | (24.4) | (15.3) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment of Intangible Assets and Equipment | 13.3 | 1.6 | % | 179.5 | 22.5 | % | (166.2) | ** | 39.2 | 1.6 | % | 179.5 | 7.1 | % | (140.3) | ** | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 355.9 | 43.9 | % | $ | 522.1 | 65.3 | % | $ | (166.2) | (31.8) | % | $ | 1,088.0 | 44.1 | % | $ | 1,218.1 | 48.3 | % | $ | (130.1) | (10.7) | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| ** Percentage not meaningful | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of Product Revenues. The cost of product revenues as a percentage of product revenues was 36.8% and 37.0%, respectively, in the current three and nine month periods compared to 36.4% and 34.9% in the corresponding periods in the prior year. Cost of product revenues as a percentage of revenue was higher in the current nine month period primarily due to a decrease in sales of our SARS-CoV-2 assays, which have higher gross margins compared to our other Diagnostic products.
Diagnostics’ product costs as a percentage of revenue increased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to lower sales of our SARS-CoV-2 assays and an increase in inventory reserves. Partially offsetting these decreases in the current three and nine month periods to gross margin was an increase in volumes of our Women’s Health Aptima and Fusion respiratory assays and a decrease in manufacturing variances.
Breast Health’s product costs as a percentage of revenue decreased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to higher sales volumes of our higher margin products, primarily 3D Dimensions and related software products and a slight increase in average selling prices of our biopsy disposables, as well as an increase in prices across multiple products in Europe. Also contributing to the decrease in product costs as a percentage of revenue in the current nine month period was a decrease in inventory reserves and freight costs. Partially offsetting the decrease in the current three month period was an increase in inventory reserves.
GYN Surgical’s product costs as a percentage of revenue decreased slightly in the current three month period compared to the corresponding period in the prior year primarily due to improved margins on our CoolSeal disposable products as a result of manufacturing efficiencies. Product costs as a percentage of revenue increased in the current nine month period compared to the corresponding period in the prior year primarily due to product mix of higher volumes of lower margin products, mostly attributable to sales of our Fluent Fluid Management systems, lower volumes of our NovaSure devices and unfavorable manufacturing variances partially offset by an increase in volume of our MyoSure devices.
Skeletal Health’s product costs as a percentage of revenue increased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to a $5.0 million charge recorded in the current quarter to repair certain Horizon DXA units in the field due to a non-conformance pertaining to electromagnetic compatibility requirements and to a lesser extent a decrease in volume of Horizon DXA systems due to the temporary stop-ship implemented in the current quarter.
Amortization of Intangible Assets. Amortization of intangible assets relates to acquired developed technology, which is generally amortized over its estimated useful life of between 5 and 15 years using a straight-line method or, if reliably determinable, based on the pattern in which the economic benefits of the assets are expected to be consumed. Amortization expense decreased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to lower amortization of intangible assets as a result of an impairment in the prior year related to the Mobidiag acquisition, the disposition of the SSI ultrasound business as of the beginning of the first quarter of fiscal 2024 and the BioZorb impairment recorded in the second quarter of fiscal 2024.
Impairment of Intangible Assets and Equipment. During the second quarter of fiscal 2024, in connection with commencing our company-wide annual strategic planning process, we identified indicators of impairment in our BioZorb product line, which was part of the Focal acquisition and included in our Breast Health reportable segment. As a result, we
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performed an undiscounted cash flow analysis pursuant to ASC 360, Property, Plant and Equipment - Overall, to determine if the cash flows expected to be generated by the BioZorb product line over the remaining estimated useful life of the primary asset were sufficient to recover the carrying value of the asset group. Based on this analysis the undiscounted cash flows were not sufficient to recover the carrying value of the long-lived assets. Therefore, we were required to perform Step 3 of the impairment test and determine the fair value of the asset group. To estimate the fair value of the asset group, we utilized the income approach, which is based on a discounted cash flow (DCF) analysis and calculated the fair value by estimating the after-tax cash flows attributable to the asset group and then discounting the after-tax cash flows to present value using a risk-adjusted discount rate. Based on this analysis, the fair value of the BioZorb asset group was below its carrying value and we recorded an aggregate impairment charge of $26.8 million. The impairment charge was allocated to the BioZorb long-lived assets, of which $25.9 million was allocated to developed technology. During the third quarter of fiscal 2024, the Federal Drug Administration classified a prior safety notice for the BioZorb Marker as a Class I recall. This was a technical classification of a prior safety notice only, not a product removal. Following this, we lowered our forecast for this product line, which is an indicator of impairment. Accordingly, we performed an undiscounted cash flow analysis and determined the cash flows were not sufficient to recover the carrying value of the asset group. We performed a fair value analysis and determined that the fair value of the asset group was immaterial. As a result, we recorded an impairment charge of $13.3 million to developed technology, to fully write-off the asset.
During the third quarter of fiscal 2023, in connection with our company-wide annual budgeting and strategic planning process as well as evaluating the current operating performance of our Mobidiag business (included in the Diagnostics reportable segment), including product design and manufacturing requirements, we reassessed the short-term and long-term commercial plans for this business. We made certain operational and strategic decisions to invest and focus more on the long-term success of this business, which resulted in the significant reduction of forecasted revenues and operating results. As a result, we determined indicators of impairment existed and performed an undiscounted cash flow analysis pursuant to ASC 360 to determine if the cash flows expected to be generated by the Mobidiag business over the estimated remaining useful life of its primary asset were sufficient to recover the carrying value of the asset group. Based on this analysis the undiscounted cash flows were not sufficient to recover the carrying value of the long-lived assets. As a result, we were required to perform Step 3 of the impairment test and determine the fair value of the asset group. To estimate the fair value of the asset group, we utilized the income approach, which is based on a DCF. Assumptions used in the DCF require significant judgment, including judgment about appropriate discount rates, growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows were based on our most recent strategic plan at the time and for periods beyond the strategic plan, our estimates were based on assumed growth rates expected as of the measurement date. We believed the assumptions were consistent with the plans and estimates that a market participant would use to manage the business. The discount rate used is intended to reflect the risks inherent in future cash flow projections and was based on an estimate of the weighted average cost of capital (WACC) of market participants relative to the asset group. We used a discount rate of 17.0%. As a result of this analysis, the fair value of the Mobidiag asset group was below its carrying value. To record the asset group to fair value, the Company recorded an impairment charge of $186.9 million during the third quarter of fiscal 2023. The impairment charge was allocated to the long-lived assets on a pro-rata basis and $153.7 million of developed technology assets and $9.1 million of equipment was written off to cost of product revenues. We believe our assumptions used to determine the fair value of the asset group were reasonable. Actual operating results and the related cash flows of the asset group could differ from the estimated operating results and related cash flows. In the event the asset group does not meet its forecasted projections, additional impairment charges could be recorded in the future.
In addition to the impairment charges discussed above, in the third quarter of fiscal 2023 we also identified indicators of impairment related to our SSI ultrasound imaging business (included in the Breast Health reportable segment) and recorded an impairment charge of $26.4 million. The impairment charge was allocated to the long-lived assets and $16.7 million of developed technology assets were written off to cost of product revenues.
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Cost of Service and Other Revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | % of Service Revenue | Amount | % of Service Revenue | Amount | % | Amount | % of Service Revenue | Amount | % of Service Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of Service and Other Revenue | $ | 95.2 | 47.5 | % | $ | 94.8 | 51.2 | % | $ | 0.4 | 0.4 | % | $ | 284.2 | 49.4 | % | $ | 295.8 | 52.6 | % | $ | (11.6) | (3.9) | % | |||||||||||||||||||||||||||||||||||||||||||||||
Service and other revenues gross margin increased to 52.4% and 50.6%, respectively, in the current three and nine month periods compared to 48.8% and 47.4%, respectively, in the corresponding periods in the prior year. The increase in gross margin in the current three and nine month periods was primarily due to an increase in lab testing revenue from Biotheranostics, which has higher margins than our legacy service business. The increase in gross margin in the current nine month period was also due to a decrease in service department costs related to the extra week in the prior year period and to a lesser extent a decrease in spare parts sales in Breast Health, which have lower gross margins.
Operating Expenses
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 64.1 | 6.3 | % | $ | 72.6 | 7.4 | % | $ | (8.5) | (11.7) | % | $ | 205.5 | 6.8 | % | $ | 221.4 | 7.2 | % | $ | (15.9) | (7.2) | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Selling and marketing | 146.3 | 14.5 | % | 149.8 | 15.2 | % | (3.5) | (2.3) | % | 439.4 | 14.4 | % | 455.7 | 14.8 | % | (16.3) | (3.6) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | 94.0 | 9.3 | % | 90.2 | 9.2 | % | 3.8 | 4.2 | % | 306.2 | 10.1 | % | 299.5 | 9.7 | % | 6.7 | 2.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 5.3 | 0.5 | % | 7.1 | 0.7 | % | (1.8) | (25.4) | % | 24.3 | 0.8 | % | 21.9 | 0.7 | % | 2.4 | 11.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment of intangible assets and Equipment | 0.4 | — | % | 44.3 | 4.5 | % | (43.9) | ** | 5.6 | 0.2 | % | 44.3 | 1.4 | % | (38.7) | (87.4) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contingent consideration - fair value adjustment | — | — | % | — | — | % | — | ** | 1.7 | 0.1 | % | (12.4) | (0.4) | % | 14.1 | 113.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring charges | 6.2 | 0.6 | % | 2.1 | 0.2 | % | 4.1 | ** | 34.8 | 1.1 | % | 4.9 | 0.2 | % | 29.9 | ** | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 316.3 | 31.3 | % | $ | 366.1 | 37.2 | % | $ | (49.8) | (13.6) | % | $ | 1,017.5 | 33.4 | % | $ | 1,035.3 | 33.6 | % | $ | (17.8) | (1.7) | % | ||||||||||||||||||||||||||||||||||||||||||||||||
** Percentage not meaningful
Research and Development Expenses. Research and development expenses decreased 11.7% and 7.2% in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to a decrease in compensation and benefits from lower headcount, primarily in Breast Health and Diagnostics, a decrease in project spend, and the elimination of expenses from our SSI ultrasound business of $2.7 and $8.7 million, respectively, as a result of its divestiture. These decreases were partially offset by a decrease in credits of $3.2 million and $5.5 million, respectively, recorded for funds received from the Biomedical Advanced Research and Development Authority (BARDA) grant to obtain FDA approval of our SARS-CoV-2 in the current three and nine month periods compared to the corresponding periods in the prior year. In addition, in the current nine month period expenses were lower as the prior year period included an extra week of expenses, partially offset by a $10.0 million charge related to the purchase of intellectual property to be used in a development project in Diagnostics that has no future alternative use. At any point in time, we have a number of different research projects and clinical trials being conducted and the timing of these projects and related costs can vary from period to period.
Selling and Marketing Expenses. Selling and marketing expenses decreased 2.3% and 3.6%, respectively, in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to lower spending on advertising and marketing initiatives, primarily from our sponsorship of the Women’s Tennis Association, the elimination of
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expenses from our SSI ultrasound business of $1.5 and $5.2 million, respectively. and lower travel expenses partially offset by an increase in international headcount and higher meeting expense. In addition, in the current nine month period expenses were lower as the prior year period included an extra week of activity.
General and Administrative Expenses. General and administrative expenses increased 4.2% and 2.2% in the current three and nine month periods compared to the corresponding periods in the prior year. The increase in the current three month period compared to the corresponding period in the prior year was primarily due to an increase in legal expenses, compensation and benefits from higher headcount and acquisition transaction costs, partially offset by lower stock compensation. The increase in the current nine month period compared to the corresponding period in the prior year was primarily due to higher compensation and benefits from stock compensation as a result of the equity plan’s retirement provision and higher expense from our deferred compensation plan, an increase in legal expenses as the prior year included a benefit of $7.4 million from a settlement awarded in the Minerva litigation and an increase in bad debt expense of $3.6 million. This increase in the current nine month period was partially offset by a decrease of $10.0 million in charitable contributions, an $8.9 million charge for a business dispute in connection with terminating the Mobidiag joint venture agreement in China in the prior year period, lower IT infrastructure spend and lower expenses from one less week of activity.
Amortization of Intangible Assets. Amortization of intangible assets primarily results from customer relationships and trade names related to our acquisitions. These intangible assets are generally amortized over their estimated useful lives of between 5 and 30 years using a straight-line method or, if reliably determinable, based on the pattern in which the economic benefits of the assets are expected to be consumed utilizing expected undiscounted future cash flows. Amortization expense decreased in the current three month period compared to the corresponding period in the prior year primarily due to lower Mobidiag intangible asset values from impairment charges recorded in the third quarter of fiscal 2023 and accelerated amortization recorded in the first quarter of fiscal 2024. Amortization expense increased in the current nine month period compared to the corresponding period in the prior year primarily due to accelerated amortization of customer relationship and trade name intangible assets acquired in the Mobidiag acquisition.
Impairment of Intangible Assets and Equipment. During the second quarter of fiscal 2024, as discussed above, we recorded an impairment charge of $26.8 million related to our BioZorb product line of which $0.9 million was allocated to trade names. During the third quarter of fiscal 2024, as discussed above, we recorded an additional impairment charge related to our BioZorb product line of $13.7 million of which $0.4 million was allocated to trade names. During the first quarter of fiscal 2024, as discussed in Note 4 to the consolidated financial statements, we recorded an impairment charge of $4.3 million to record our only IPR&D asset from the Mobidiag acquisition to fair value. The reduction in fair value was primarily due to a reduction in forecasted revenues and timing of completing the project.
During the third quarter of fiscal 2023, as discussed above, we recorded an aggregate impairment charge of $197.4 million related to our Mobidiag acquisition and $26.4 million related to our SSI ultrasound imaging assets. The impairment charges were allocated to the long-lived assets and written off to operating expenses as follows: Mobidiag - $10.5 million to IPR&D, $10.4 million to customer relationships, $10.7 million to trade names, and $3.0 million to equipment; Ultrasound Imaging - $2.4 million to customer relationships, $1.7 million to trade names, and $5.6 million to equipment.
Contingent Consideration Fair Value Adjustments. In connection with the acquisition of Acessa Health Inc., or Acessa, we were obligated to make contingent earn-out payments based on achieving incremental revenue growth over a three-year period ending annually in December of each of 2021, 2022, and 2023. As of the acquisition date, we recorded a contingent consideration liability for the estimated fair value of the amount we expected to pay to the former shareholders of the acquired business. As of the end of the first quarter of fiscal 2024, the third and final measurement period was completed, and we recorded a loss of $1.7 million to increase the contingent consideration liability to fair value based on actual revenue results in the final earn-out period. During the second quarter of fiscal 2023, we updated our forecasted revenue and recorded a gain of $12.4 million to record the liability at its fair value. The reduction in fair value was due to a decrease in forecasted revenues over the remaining measurement period at that time.
Restructuring Charges. During the first quarter of fiscal 2024, we further refined our strategy for the Mobidiag business, which is within the Diagnostics reportable segment. The strategy change included the decision to discontinue the manufacture and sale of certain products, closure of facilities in Finland and France, and to move the development activities and operations to our San Diego, California location. As such, we determined certain fixed assets lives should be shortened and that lease assets were impaired at the affected facilities and recorded accelerated depreciation of $7.2 million and a lease asset impairment charge of $12.5 million. In addition, during the first quarter of fiscal 2024, we recorded the minimum statutory severance benefit for the affected French employees of $1.8 million. During the second quarter of fiscal 2024, we finalized negotiations with the respective Works Councils. We estimate that the total charge for severance benefits will be approximately $13.1 million, the majority of which will be recognized over the service period to receive such benefits. In the second and third
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quarters of fiscal 2024, we recorded severance charges of $4.0 million and $3.9 million, respectively, related to this action. This action is expected to be completed by the second quarter of fiscal 2025. For additional information on restructuring actions, please refer to Note 8 to our consolidated financial statements.
Interest Income
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Interest Income | $ | 28.4 | $ | 32.5 | $ | (4.1) | (12.6) | % | $ | 80.3 | $ | 84.6 | $ | (4.3) | (5.1) | % | |||||||||||||||||||||||||||||||
Interest income decreased in the current three and nine month periods compared to the corresponding periods in the prior year due to lower average cash balances in the current year periods compared to the corresponding periods in the prior year partially offset by higher interest rates in the current year periods as the U.S. Federal Reserve continually raised the Federal Funds Rate throughout our fiscal 2023 year.
Interest Expense
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Interest Expense | $ | (31.9) | $ | (27.7) | $ | (4.2) | 15.2 | % | $ | (90.2) | $ | (83.0) | $ | (7.2) | 8.7 | % | |||||||||||||||||||||||||||||||
Interest expense consists primarily of the cash interest costs and the related amortization of the debt discount and deferred issuance costs on our outstanding debt. Interest expense increased in the current three and nine month periods compared to the corresponding periods in the prior year, primarily due to the increase in the variable interest rate under our 2021 Credit Agreement and a decrease in amounts received under interest rate swap agreements primarily due to a decrease in our overall hedged principal amount from $1.0 billion to $500 million and an increase in the fixed SOFR component under those agreements. These decreases were partially offset by a lower principal balance outstanding under our 2021 Credit Agreement as we voluntarily prepaid $250.0 million during the first quarter of fiscal 2024.
Other Income (Expense), net
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Other Income (Expense), net | $ | 0.2 | $ | 5.9 | $ | (5.7) | (96.6) | % | $ | 0.8 | $ | (7.0) | $ | 7.8 | ** | ||||||||||||||||||||||||||||||||
For the current three month period, this account primarily consisted of a gain of $0.9 million from the change in cash surrender value of life insurance contracts related to our deferred compensation plan driven by stock market gain and net foreign currency exchange gains of $0.4 million primarily from the mark-to-market of foreign currency contracts used to hedge operating results, partially offset by a $0.9 million ownership share loss from our investment in Maverix Medical. For the third quarter of fiscal 2023, this account primarily consisted of net foreign currency exchange gains of $3.4 million and a gain of $2.4 million from the change in cash surrender value of life insurance contracts related to our deferred compensation plan driven by stock market gains.
For the current nine month period, this account primarily consisted of a gain of $10.9 million from the change in cash surrender value of life insurance contracts related to our deferred compensation plan driven by stock market gains. This gain was partially offset by net foreign currency exchange losses of $7.2 million primarily from the mark-to-market of foreign currency contracts used to hedge operating results, and a $2.3 million ownership share loss from our investment in Maverix Medical. For the corresponding nine month period in the prior year, this account primarily consisted of net foreign currency exchange losses of $15.0 million, primarily from the mark-to-market of foreign currency contracts used to hedge operating
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results, partially offset by a gain of $7.7 million from the change in cash surrender value of life insurance contracts related to our deferred compensation plan driven by stock market gains.
Provision for Income Taxes
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Provision for Income Taxes | $ | 46.2 | $ | 52.6 | $ | (6.4) | (12.2) | % | $ | 32.6 | $ | 165.1 | $ | (132.5) | (80.3) | % | |||||||||||||||||||||||||||||||
Our effective tax rates for the three and nine months ended June 29, 2024 were 19.2% and 5.1%, respectively, compared to 434.7% and 31.1% for the corresponding periods in the prior year.
Our effective tax rate for the three months ended June 29, 2024 was lower than the U.S. statutory tax rate primarily due to the U.S. deduction for foreign derived intangible income, the geographic mix of income earned by the Company’s international subsidiaries, which are generally taxed at rates lower than the U.S. statutory tax rate, and federal and state tax credits. Our effective tax rate for the nine months ended June 29, 2024 was lower than the U.S. statutory tax rate primarily due to a discrete tax benefit of $107.2 million related to a worthless stock deduction on the investment in one of the Company’s international subsidiaries recorded in the first quarter of fiscal 2024, the U.S. deduction for foreign derived intangible income, the geographic mix of income earned by the Company’s international subsidiaries, and federal and state tax credits.
Our effective tax rates for the three and nine months ended July 1, 2023 were higher than the U.S. statutory tax rate primarily due to the tax effect of impairment charges recorded for assets acquired in the Mobidiag acquisition and the impairment of the Company’s SSI ultrasound imaging assets, income tax reserves, the global intangible low-taxed income inclusion, and state income taxes, partially offset by the impact of the U.S. deduction for foreign derived intangible income, and the geographic mix of income earned by the Company’s international subsidiaries.
Segment Results of Operations
We operate in four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health. The accounting policies of the segments are the same as those described in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. We measure segment performance based on total revenues and operating income. Revenues from product sales of each of these segments are described in further detail above. The discussion that follows is a summary analysis of total revenues and the primary changes in operating income or loss by segment.
Diagnostics
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 440.8 | $ | 439.7 | $ | 1.1 | 0.3 | % | $ | 1,338.7 | $ | 1,463.6 | $ | (124.9) | (8.5) | % | |||||||||||||||||||||||||||||||
| Operating Income | $ | 89.7 | $ | (113.5) | $ | 203.2 | (179.0) | % | $ | 210.1 | $ | 142.8 | $ | 67.3 | 47.1 | % | |||||||||||||||||||||||||||||||
| Operating Income as a % of Segment Revenue | 20.3 | % | (25.8) | % | 15.7 | % | 9.8 | % | |||||||||||||||||||||||||||||||||||||||
Diagnostics revenues increased in the current three month period compared to the corresponding period in the prior year primarily due to an increase in lab testing revenue from our Biotheranostics business, partially offset by a decrease in product revenues as discussed above. Diagnostic revenues decreased in the current nine month period compared to the corresponding period in the prior year primarily due to a decrease in product revenues as discussed above.
Operating income for this business segment increased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to an increase in gross profit and a decrease in operating expenses. Gross margin was 53.1% and 52.2% in the current three and nine month periods, respectively, compared to 15.5% and 44.2% in the corresponding periods in the prior year, respectively. The increase in gross margin in the current three and nine month periods
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was primarily due an impairment charge of $162.8 million related to Mobidiag recorded in the prior year, lower intangible asset amortization expense, lower manufacturing costs from the shut-down of the Mobidiag Finland facility, an increase in sales volume of Women’s Health Aptima and Fusion assays and an increase in Biotheranostics lab testing revenue which has higher margins. These increases were partially offset by lower sales volumes of our SARS-CoV-2 assays, which have a higher margin than our core products.
Operating expenses decreased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to impairment charges of $34.6 million related to Mobidiag recorded in the prior year and to a lesser extent a decrease in marketing initiative spend and R&D project spend, partially offset by an increase in restructuring in the current three and nine month periods of $3.9 million and $30.2 million, respectively. In addition, operating expenses in the current nine month period were lower as the prior year period included a charge of $8.9 million related to the termination of the Mobidiag joint venture in China, higher allocated charitable contributions, and an additional week of expenses.
Breast Health
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 385.0 | $ | 360.3 | $ | 24.7 | 6.9 | % | $ | 1,147.3 | $ | 1,079.9 | $ | 67.4 | 6.2 | % | |||||||||||||||||||||||||||||||
| Operating Income | $ | 102.4 | $ | 63.3 | $ | 39.1 | 61.8 | % | $ | 296.2 | $ | 233.7 | $ | 62.5 | 26.7 | % | |||||||||||||||||||||||||||||||
| Operating Income as a % of Segment Revenue | 26.6 | % | 17.6 | % | 25.8 | % | 21.6 | % | |||||||||||||||||||||||||||||||||||||||
Breast Health revenues increased in the current three and nine month periods compared to the corresponding periods in the prior year due to an increase in product revenues as discussed above and an increase in service revenue primarily from service contracts.
Operating income for this business segment increased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to an increase in gross profit and a decrease in operating expenses. Gross margin was 54.3% in the current three and nine month periods, compared to 50.9% and 54.2% in the corresponding periods in the prior year, respectively. The increase in gross margin in both periods was primarily due to an increase in sales of 3Dimensions systems, which have a higher margin, lower intangible asset amortization, a slight increase in average selling prices of our biopsy disposables, as well as an increase in prices across multiple products in Europe. In addition, in the current three month period gross margin increased due to lower intangible asset impairment charges partially offset by an increase in inventory reserves. In the current nine month period, partially offsetting the increase in gross margin was higher impairment charges related to the BioZorb intangible asset group partially offset by lower inventory reserves and freight costs.
Operating expenses decreased in the current three month and nine month periods compared to the corresponding periods in the prior year primarily due to the elimination of $15.1 million and $27.4 million, respectively, of expenses from the SSI divestiture, an impairment charge in the prior year of $9.7 million related to the SSI ultrasound imaging disposition, lower compensation and benefit expense from a reduction in headcount in research and development, lower restructuring charges, and a reduction of R&D project spend and marketing initiatives. Partially offsetting these decreases was an increase in acquisition expenses related and an increase in commissions.
GYN Surgical
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 166.6 | $ | 157.3 | $ | 9.3 | 5.9 | % | $ | 484.8 | $ | 456.2 | $ | 28.6 | 6.3 | % | |||||||||||||||||||||||||||||||
| Operating Income | $ | 56.7 | $ | 48.5 | $ | 8.2 | 16.9 | % | $ | 144.3 | $ | 149.6 | $ | (5.3) | (3.5) | % | |||||||||||||||||||||||||||||||
| Operating Income as a % of Segment Revenue | 34.0 | % | 30.9 | % | 29.8 | % | 32.8 | % | |||||||||||||||||||||||||||||||||||||||
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GYN Surgical revenues increased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to the increase in product revenues discussed above.
Operating income for this business segment increased in the current three month period compared to the corresponding period in the prior year primarily due to an increase in gross profit while operating expenses were essentially flat. Operating income decreased in the current nine month period compared to the corresponding period in the prior year primarily due to an increase in operating expenses partially offset by an increase in gross profit. Gross margin was 69.6% and 67.7% in the current three and nine month periods, respectively, compared to 68.7% and 68.4%, in the corresponding periods in the prior year, respectively. The increase in gross margin in the current three month period was primarily due to improved margins on our CoolSeal disposable products. The decrease in gross margin in the current nine month period was primarily due to product mix of higher volumes of lower margin products, mostly attributable to sales of our Fluent Fluid Management systems, lower volumes of our NovaSure devices and unfavorable manufacturing variances partially offset by an increase in volume of our MyoSure devices,
Operating expenses decreased slightly in the current three month period compared to the corresponding period in the prior year primarily due to a decrease in research and development project spend and a decrease in commissions partially offset by an increase in legal expenses. Operating expenses increased in the current nine month period compared to the corresponding period in the prior year primarily due to a gain of $12.4 million recorded in the prior year period to decrease the Acessa contingent consideration liability to fair value and a $7.4 million settlement awarded to us in the Minerva litigation in the prior year. Partially offsetting these increases was a decrease in commissions expense, research and development project spend and travel expense.
Skeletal Health
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| June 29, 2024 | July 1, 2023 | Change | June 29, 2024 | July 1, 2023 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 19.0 | $ | 27.1 | $ | (8.1) | (29.9) | % | $ | 71.5 | $ | 85.4 | $ | (13.9) | (16.3) | % | |||||||||||||||||||||||||||||||
| Operating Income | $ | (4.8) | $ | 3.1 | $ | (7.9) | (254.8) | % | $ | 2.0 | $ | 9.8 | $ | (7.8) | (79.6) | % | |||||||||||||||||||||||||||||||
| Operating Income as a % of Segment Revenue | (25.2) | % | 11.4 | % | 2.8 | % | 11.5 | % | |||||||||||||||||||||||||||||||||||||||
Skeletal Health revenues decreased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to the decrease in product revenues discussed above.
Operating income for this business segment decreased in the current three and nine month periods compared to the corresponding periods in the prior year primarily due to a decrease in gross profit and an increase in operating expenses. Gross margin was 4.9% and 27.9% in the current three and nine month periods, respectively, compared to 30.2% and 32.1% in the corresponding periods in the prior year, respectively. The decrease in gross margin was primarily due to a $5.0 million charge recorded in the current quarter to repair certain Horizon DXA units in the field due to a non-conformance pertaining to electromagnetic compatibility requirements and to a lesser extent a decrease in volume of Horizon DXA systems due to the temporary stop-ship implemented in the current quarter.
Operating expenses increased slightly in the current three and nine month periods compared to the corresponding periods in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At June 29, 2024, we had $2,994.6 million of working capital and our cash and cash equivalents totaled $2,439.1 million. Our cash and cash equivalents decreased by $316.6 million during the first nine months of fiscal 2024 primarily due to cash used in investing and financing activities primarily related to repurchases of our common stock and debt repayments, partially offset by cash generated from operating activities.
In the first nine months of fiscal 2024, our operating activities provided cash of $918.2 million, primarily due to net income of $610.9 million, non-cash charges for depreciation and amortization aggregating $234.4 million, stock-based compensation expense of $69.1 million, intangible asset impairment charges of $44.8 million and a lease asset impairment charge of $12.5 million. These adjustments to net income were partially offset by a decrease in net deferred income taxes of
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$52.3 million primarily due to the amortization of intangible assets and to a lesser extent the capitalization of research expenditures under the tax rules. Cash provided by operations included a net cash outflow of $22.8 million from changes in our operating assets and liabilities. This cash outflow was primarily driven by an increase in prepaid income taxes of $73.9 million primarily due to the worthless stock deduction and to a lesser extent the timing of tax payments relative to the provision for income taxes, and an increase in inventory of $47.1 million to meet expected demand across our primary product lines and the build of Breast Health capital equipment prior to the transfer of manufacturing to Newark, Delaware from Danbury, Connecticut. These cash outflows were partially offset by an increase of $58.5 million in accrued expenses and other liabilities primarily due to an increase in income tax reserves, accrued interest due to the timing of payments and professional fees partially offset by lower compensation accruals, an increase of $26.5 million in accounts payable primarily due to the timing of payments, and an increase in deferred revenue of $19.9 million primarily due to billings for annual service contracts under our expanded installed base of digital mammography systems.
In the first nine months of fiscal 2024, our investing activities used cash of $185.3 million primarily due to capital expenditures of $99.9 million, which primarily consisted of the placement of equipment under customer usage agreements and purchase of manufacturing equipment and building improvements at our Newark and San Diego facilities, $42.5 million for strategic investments and a $31.3 million net payment to sell our SSI ultrasound business.
In the first nine months of fiscal 2024, our financing activities used cash of $1,051.8 million primarily due to $776.8 million for repurchases of our common stock, including a $500 million accelerated share repurchase program, $278.1 million for debt principal payments under our 2021 Credit Agreement, including a $250.0 million voluntary prepayment, and $16.6 million for the payment of employee taxes withheld for the net share settlement of vested restricted stock units. Partially offsetting these uses of cash were proceeds of $25.2 million from our equity plans.
Debt
We had total recorded debt outstanding of $2.54 billion at June 29, 2024, which was comprised of amounts outstanding under our 2021 Credit Agreement of $1.21 billion (principal of $1.21 billion), 2029 Senior Notes of $940.3 million (principal of $950.0 million), and 2028 Senior Notes of $397.3 million (principal of $400.0 million).
2021 Credit Agreement
On September 27, 2021, we refinanced our then existing term loan and revolving credit facility with Bank of America, N.A. in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, and certain other lenders (the “2018 Credit Agreement”) by entering into a Refinancing Amendment (the “2021 Credit Agreement”). Borrowings under the 2021 Credit Agreement are secured by first-priority liens on, and a first priority security interest in, substantially all of our and our Subsidiary Guarantors’ U.S. assets. The credit facilities (the “2021 Credit Facilities”) under the 2021 Credit Agreement consist of:
•A secured term loan in the initial principal amount of $1.5 billion (“2021 Term Loan”) with a stated maturity date of September 25, 2026; and
•A secured revolving credit facility (the “2021 Revolver”) under which the Borrowers may borrow up to $2.0 billion, subject to certain sublimits, with a stated maturity date of September 25, 2026.
As of June 29, 2024, there were no borrowings under the 2021 Revolver.
Borrowings under the 2021 Credit Agreement bear interest, at our option, at the Base Rate, at the Term SOFR Rate, at the Alternative Currency Daily Rate, or at the Daily SOFR Rate, in each case plus the Applicable Rate. The Applicable Rate in regard to the Base Rate, the Term SOFR Rate, the Alternative Currency Daily Rate, the Alternative Currency Term Rate and the Daily SOFR Rate is subject to change depending on the Total Net Leverage Ratio (as defined in the 2021 Credit Agreement). As of June 29, 2024, the interest rate under the 2021 Term Loan was 6.44% per annum.
We are required to make scheduled principal payments under the 2021 Term Loan in increasing amounts, which currently range from $9.375 million per three-month period to $18.75 million per three-month period commencing with the three-month period ending on December 26, 2025. The remaining scheduled balance of $1.085 billion (or such lesser aggregate principal amount of the Term Loans then outstanding) on the 2021 Term Loan and any amounts outstanding under the 2021 Revolver are due at their respective maturities. In addition, subject to the terms and conditions set forth in the 2021 Credit Agreement, we may be required to make certain mandatory prepayments from the net proceeds of specified types of asset sales (subject to certain reinvestment rights), debt issuances (excluding permitted debt) and insurance recoveries (subject to certain
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reinvestment rights). Certain mandatory prepayments are subject to reduction or elimination if certain financial covenants are met. Subject to certain limitations, we may voluntarily prepay any of the 2021 Credit Facilities without premium or penalty. As of June 29, 2024, the outstanding principal balance of the 2021 Term Loan was $1.2 billion.
The 2021 Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including the requirement that we maintain two financial ratios (a total net leverage ratio and an interest coverage ratio) measured as of the last day of each quarter for the previous twelve-month period. As of June 29, 2024, we were in compliance with these covenants.
2028 Senior Notes
The total aggregate principal balance of the 2028 Senior Notes is $400.0 million. The 2028 Senior Notes are general senior unsecured obligations and are guaranteed on a senior unsecured basis by certain of our domestic subsidiaries. The 2028 Senior Notes mature on February 1, 2028 and bear interest at the rate of 4.625% per year, payable semi-annually on February 1 and August 1 of each year. We have the option to redeem the 2028 Senior Notes on or after: February 1, 2024 through February 1, 2025 at 101.541% of par; February 1, 2025 through February 1, 2026 at 100.770% of par; and February 1, 2026 and thereafter at 100% of par. In addition, if there is a change of control coupled with a decline in ratings, as provided in the indenture, we will be required to make an offer to purchase each holder’s 2028 Senior Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
2029 Senior Notes
The total aggregate principal balance of the 2029 Senior Notes is $950.0 million. The 2029 Senior Notes are general senior unsecured obligations and are guaranteed on a senior unsecured basis by certain domestic subsidiaries. The 2029 Senior Notes mature on February 15, 2029 and bear interest at the rate of 3.250% per year, payable semi-annually on February 15 and August 15 of each year. We have the option to redeem the 2029 Senior Notes on or after: September 28, 2023 through September 27, 2024 at 101.625% of par; September 28, 2024 through September 27, 2025 at 100.813% of par; and September 28, 2025 and thereafter at 100% of par. In addition, if there is a change of control coupled with a decline in ratings, as provided in the indenture, we will be required to make an offer to purchase each holder’s 2029 Senior Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
Stock Repurchase Program
On September 22, 2022, the Board of Directors authorized a stock repurchase program, with a five-year term, to repurchase up to $1.0 billion of our outstanding common stock, effective as of the close of trading September 23, 2022. This repurchase program replaced the previous $1.0 billion authorization. As of June 29, 2024, $248.6 million remained available under this authorization.
The timing of the share repurchases will be based upon our continuing analysis of market, financial, and other factors. Repurchases under the authorized share repurchase plan may be made using a variety of methods, which may include, but are not limited to, open market purchases, privately negotiated transactions, accelerated share repurchase agreements, or purchases pursuant to a Rule 10b5-1 plan under the Exchange Act. The authorized share repurchase plan may be suspended, delayed or discontinued at any time.
Acquisition
On April 26, 2024, we executed an agreement to acquire Endomagnetics Ltd (“Endomag”) for a purchase price of approximately $310.0 million, subject to working capital and other customary adjustments. The transaction closed on July 25, 2024.
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Legal Contingencies
We are currently involved in several legal proceedings, claims, governmental and/or regulatory inspections, inquiries and investigations arising out of the ordinary course of our business. In connection with these legal proceedings, claims, inspections, inquiries or investigations, management periodically reviews estimates of potential costs to be incurred by us in connection with the adjudication or settlement, if any, of these proceedings. These estimates are developed, as applicable in consultation with outside counsel, and are based on an analysis of potential litigation outcomes and settlement strategies. In accordance with ASC 450, Contingencies, loss contingencies are accrued if, in the opinion of management, an adverse outcome is probable and such financial outcome can be reasonably estimated. It is possible that future results for any particular quarter or annual period may be materially affected by changes in our assumptions or the effectiveness of our strategies relating to these proceedings. Information with respect to this disclosure may be found in Note 12 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Future Liquidity Considerations
We expect to continue to review and evaluate potential strategic transactions that we believe will complement our current or future business. Subject to the “Risk Factors,” if any, set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 or any other of our subsequently filed reports, and the general disclaimers set forth in our “Cautionary Statement” regarding forward-looking statements at the outset of this Item 2, we believe that our cash and cash equivalents, including marketable securities, cash flows from operations, and the cash available under our 2021 Revolver will provide us with sufficient funds in order to fund our expected normal operations and debt payments over the next twelve months. Our longer-term liquidity is contingent upon future operating performance. We may also require additional capital in the future to fund capital expenditures, repayment of debt, acquisitions, strategic transactions or other investments. As described above, we have significant indebtedness outstanding under our 2021 Credit Agreement, 2028 Senior Notes, and 2029 Senior Notes. These capital requirements could be substantial. For a description of risks to our operating performance and our indebtedness, see the “Risk Factors” set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our interim consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition for multiple element arrangements, allowance for doubtful accounts, reserves for excess and obsolete inventories, valuations, purchase price allocations and contingent consideration related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, warranty reserves, certain accrued expenses, restructuring and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of our net deferred tax assets and related valuation allowances. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Any differences may have a material impact on our financial condition and results of operations. For a discussion of how these and other factors may affect our business, see the “Cautionary Statement” regarding forward-looking statements set forth at the outset of this Item 2 and the “Risk Factors” set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q as well as those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 or any other of our subsequently filed reports.
The critical accounting estimates that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. There have been no material changes to our critical accounting policies or estimates from those set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments. Financial instruments consist of cash and cash equivalents, including money market funds, United States Treasury bills and commercial paper, accounts receivable, equity investments, foreign currency derivative contracts, interest rate swap agreements, insurance contracts, accounts payable and debt obligations. Except for our outstanding 2028 and 2029 Senior Notes, the fair value of these financial instruments approximate their carrying amount. The fair values of our 2028 and 2029 Senior Notes were approximately $382.9 million and $853.3 million, respectively, as of June 29, 2024. Amounts outstanding under our 2021 Credit Agreement of $1.2 billion aggregate principal as of June 29, 2024 are subject to variable rates of interest based on current market rates, and as such, we believe the carrying amount of these obligations approximates fair value.
Primary Market Risk Exposures. Our primary market risk exposure is in the areas of interest rate risk and foreign currency exchange rate risk as well as our investments in money market funds, United States Treasury bills and commercial paper. We consider these investments to be low risk as they are highly rated securities, highly liquid and short term in nature. We incur interest expense on borrowings outstanding under our 2028 and 2029 Senior Notes, and 2021 Credit Agreement. The 2028 and 2029 Senior Notes have fixed interest rates. Borrowings under our 2021 Credit Agreement bear interest at the SOFR Rate plus SOFR Adjustment of 0.10% plus the applicable margin of 1.00% per annum.
As of June 29, 2024, there was $1.2 billion of aggregate principal outstanding under the 2021 Credit Agreement. Since this debt obligation is a variable rate instrument, our interest expense associated with the instrument is subject to change. A hypothetical 10% adverse movement (increase in the SOFR rate) would increase annual interest expense by approximately $3.8 million, which is net of the impact of our interest rate swap hedge. We previously entered into interest rate swap agreements to help mitigate the interest rate volatility associated with the variable rate interest on the amounts outstanding under our credit facilities. The critical terms of the interest rate swaps were designed to mirror the terms of our SOFR-based borrowings under the 2021 Credit Agreement, and therefore the interest rate swap is highly effective at offsetting the cash flows being hedged. We designated these derivative instruments as a cash flow hedge of the variability of the Term SOFR-based interest payments on $500 million of principal.
The return from cash and cash equivalents, including marketable securities, will vary as short-term interest rates change. A hypothetical 10% increase in market interest rates would increase annual interest income by approximately $11.2 million based on our current cash balances.
Foreign Currency Exchange Risk. Our international business is subject to risks, including, but not limited to unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.
We conduct business worldwide and maintain sales and service offices outside the U.S. as well as manufacturing facilities in Costa Rica and the United Kingdom. Our international sales are denominated in a number of currencies, primarily the Euro, U.S. dollar, UK Pound, Australian dollar, Canadian dollar, Chinese Yuan and Japanese Yen. The majority of our foreign subsidiaries functional currency is the local currency, although certain foreign subsidiaries functional currency is the U.S. dollar based on the nature of their operations or functions. Our revenues denominated in foreign currencies are positively affected when the U.S. dollar weakens against them and adversely affected when the U.S. dollar strengthens. Fluctuations in foreign currency rates could affect our sales, cost of goods and operating margins and could result in exchange losses. In addition, currency devaluations can result in a loss if we hold deposits in that currency. We have executed forward foreign currency contracts to hedge a portion of results denominated in the Euro, UK Pound, Australian dollar, Japanese Yen, Canadian dollar and Chinese Yuan. These contracts do not qualify for hedge accounting. As a result, we may experience volatility in our Consolidated Statements of Income due to (i) the impact of unrealized gains and losses reported in other income (expense), net on the mark-to-market of outstanding contracts and (ii) realized gains and losses recognized in other income (expense), net, whereas the offsetting economic gains and losses are reported in the line item of the underlying cash flow, for example, revenue.
We believe that the operating expenses of our international subsidiaries that are incurred in local currencies will not have a material adverse effect on our business, results of operations or financial condition. Our operating results and certain assets and liabilities that are denominated in foreign currencies are affected by changes in the relative strength of the U.S. dollar against those currencies. Our expenses, denominated in foreign currencies, are positively affected when the U.S. dollar strengthens against those currencies and adversely affected when the U.S. dollar weakens. However, we believe that the foreign currency exchange risk is not significant. We believe a hypothetical 10% increase or decrease in foreign currencies that we transact in would not have a material adverse impact on our financial condition or results of operations.
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Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of June 29, 2024, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of June 29, 2024.
An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this Item may be found in Note 12 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Additional information on our commitments and contingencies can be found in our Annual Report on Form 10-K for our fiscal year ended September 30, 2023.
Item 1A. Risk Factors.
There are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for our fiscal year ended September 30, 2023 or any of our subsequently filed reports.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer’s Purchases of Equity Securities
| Period of Repurchase | Average Price Paid Per Share ($) (1) | Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (#) (1) | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under Our Programs (in millions) ($) (1) | |||||||||||||||||
| March 31, 2024 – April 27, 2024 | $ | — | — | $ | 348.6 | |||||||||||||||
| April 28, 2024 – May 25, 2024 | 74.52 | 434,120 | 316.3 | |||||||||||||||||
| May 26, 2024 – June 29, 2024 | 73.79 | 917,207 | 248.6 | |||||||||||||||||
| Total | $ | 74.02 | 1,351,327 | $ | 248.6 | |||||||||||||||
___________________________________
(1)On September 22, 2022, the Board of Directors authorized a stock repurchase program, with a five-year term, to repurchase up to $1.0 billion of the Company’s outstanding common stock, effective as of the close of trading on September 23, 2022. As of June 29, 2024, $248.6 million remained unused under this program. The program does not obligate the Company to acquire a minimum amount of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. For additional information regarding the Company’s repurchase programs, please see “Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Stock Repurchase Program.”
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the third quarter of fiscal 2024, Karleen Oberton, our Chief Financial Officer, adopted a trading plan intended to satisfy Rule 10b5-1(c) under the Exchange Act on May 30, 2024 to sell up to 62,679 shares of our common stock (following the exercise of options) between August 29, 2024 and February 3, 2025, the date this plan expires. The trading plan will cease upon the earlier of February 3, 2025 or the sale of all shares subject to the trading plan.
During the third quarter of fiscal 2024, none of our other directors or executive officers adopted Rule 10b5-1 trading plans and none of our directors or executive officers terminated a Rule 10b5-1 trading plan or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).
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Item 6. Exhibits.
(a) Exhibits
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | Filing Date/ Period End Date | |||||||||||||||||
| 31.1* | ||||||||||||||||||||
| 31.2* | ||||||||||||||||||||
| 32.1** | ||||||||||||||||||||
| 32.2** | ||||||||||||||||||||
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition. | |||||||||||||||||||
| 104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | |||||||||||||||||||
_______________
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Hologic, Inc. | |||||||||||
| (Registrant) | |||||||||||
| Date: | July 30, 2024 | /s/ Stephen P. MacMillan | |||||||||
| Stephen P. MacMillan Chairman, President and Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: | July 30, 2024 | /s/ Karleen M. Oberton | |||||||||
| Karleen M. Oberton | |||||||||||
| Chief Financial Officer (Principal Financial Officer) | |||||||||||
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