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 25, 2021 included in the Company’s Form 10-K filed with the SEC on November 16, 2021. 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 25, 2022 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending September 24, 2022.
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 affecting the unaudited consolidated financial statements as of and for the three and nine months ended June 25, 2022.
(2) Revenue
The Company accounts for revenue pursuant to ASC 606, Revenue from Contracts with Customer (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 acquired in its Biotheranostics, Inc. acquisition, which are 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 25, 2022 | | Three Months Ended June 26, 2021 |
Business (in millions) | United States | International | Total | | United States | International | Total |
| Diagnostics: | | | | | | | |
| Cytology & Perinatal | $ | 74.3 | | $ | 41.6 | | $ | 115.9 | | | $ | 73.9 | | $ | 42.0 | | $ | 115.9 | |
| Molecular Diagnostics | 304.2 | | 131.1 | | 435.3 | | | 270.1 | | 266.3 | | 536.4 | |
| Blood Screening | 8.9 | | — | | 8.9 | | | 13.2 | | — | | 13.2 | |
| Total | $ | 387.4 | | $ | 172.7 | | $ | 560.1 | | | $ | 357.2 | | $ | 308.3 | | $ | 665.5 | |
| | | | | | | | |
| Breast Health: | | | | | | | |
| Breast Imaging | $ | 165.5 | | $ | 46.7 | | $ | 212.2 | | | $ | 218.4 | | $ | 61.9 | | $ | 280.3 | |
| Interventional Breast Solutions | 56.8 | | 13.8 | | 70.6 | | | 54.8 | | 13.9 | | 68.7 | |
| | | | | | | | |
| Total | $ | 222.3 | | $ | 60.5 | | $ | 282.8 | | | $ | 273.2 | | $ | 75.8 | | $ | 349.0 | |
| | | | | | | | |
| GYN Surgical | $ | 112.2 | | $ | 25.9 | | $ | 138.1 | | | $ | 103.9 | | $ | 24.0 | | $ | 127.9 | |
| | | | | | | | |
| | | | | | | |
| | | | | | | |
| Skeletal Health | $ | 12.7 | | $ | 9.0 | | $ | 21.7 | | | $ | 15.6 | | $ | 10.3 | | $ | 25.9 | |
| | $ | 734.6 | | $ | 268.1 | | $ | 1,002.7 | | | $ | 749.9 | | $ | 418.4 | | $ | 1,168.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended June 25, 2022 | | Nine Months Ended June 26, 2021 |
Business (in millions) | United States | International | Total | | United States | International | Total |
| Diagnostics: | | | | | | | |
| Cytology & Perinatal | $ | 227.4 | | $ | 134.6 | | $ | 362.0 | | | $ | 230.8 | | $ | 127.1 | | $ | 357.9 | |
| Molecular Diagnostics | 1,395.9 | | 715.2 | | 2,111.1 | | | 1,561.7 | | 905.3 | | 2,467.0 | |
| Blood Screening | 24.5 | | — | | 24.5 | | | 33.3 | | — | | 33.3 | |
| Total | $ | 1,647.8 | | $ | 849.8 | | $ | 2,497.6 | | | $ | 1,825.8 | | $ | 1,032.4 | | $ | 2,858.2 | |
| | | | | | | | |
| Breast Health: | | | | | | | |
| Breast Imaging | $ | 561.8 | | $ | 177.7 | | $ | 739.5 | | | $ | 619.5 | | $ | 198.3 | | $ | 817.8 | |
| Interventional Breast Solutions | 171.1 | | 42.1 | | 213.2 | | | 164.9 | | 35.3 | | 200.2 | |
| | | | | | | | |
| Total | $ | 732.9 | | $ | 219.8 | | $ | 952.7 | | | $ | 784.4 | | $ | 233.6 | | $ | 1,018.0 | |
| | | | | | | | |
| GYN Surgical | $ | 315.4 | | $ | 74.2 | | $ | 389.6 | | | $ | 296.8 | | $ | 69.4 | | $ | 366.2 | |
| | | | | | | | |
| | | | | | | |
| | | | | | | |
| Skeletal Health | $ | 43.3 | | $ | 26.4 | | $ | 69.7 | | | $ | 44.7 | | $ | 28.6 | | $ | 73.3 | |
| | $ | 2,739.4 | | $ | 1,170.2 | | $ | 3,909.6 | | | $ | 2,951.7 | | $ | 1,364.0 | | $ | 4,315.7 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
Geographic Regions (in millions) | | June 25, 2022 | June 26, 2021 | | June 25, 2022 | June 26, 2021 |
| United States | | $ | 734.6 | | $ | 749.9 | | | $ | 2,739.4 | | $ | 2,951.7 | |
| Europe | | 164.5 | | 289.0 | | | 750.8 | | 963.9 | |
| Asia-Pacific | | 71.7 | | 89.6 | | | 301.1 | | 268.1 | |
| Rest of World | | 31.9 | | 39.8 | | | 118.3 | | 132.0 | |
| | $ | 1,002.7 | | $ | 1,168.3 | | | $ | 3,909.6 | | $ | 4,315.7 | |
The following table provides revenue recognized by source:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
Revenue by type (in millions) | | June 25, 2022 | June 26, 2021 | | June 25, 2022 | June 26, 2021 |
| Disposables | | $ | 713.0 | | $ | 797.7 | | | $ | 2,930.5 | | $ | 3,239.2 | |
| Capital equipment, components and software | | 124.1 | | 197.5 | | | 478.2 | | 590.2 | |
| Service | | 160.8 | | 158.4 | | | 486.2 | | 437.2 | |
| Other | | 4.8 | | 14.7 | | | 14.7 | | 49.1 | |
| | $ | 1,002.7 | | $ | 1,168.3 | | | $ | 3,909.6 | | $ | 4,315.7 | |
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.
Some of the Company's contracts have multiple performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. The Company determines its best estimate of 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, sales rebates and product returns 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 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 25, 2022, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $844.4 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 12% of this amount as revenue in fiscal 2022, 39% in fiscal 2023, 26% in fiscal 2024, 15% in fiscal 2025, and 8% thereafter. The Company has applied the practical expedient to not include remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.
Contract Assets and Liabilities
The Company discloses accounts receivable separately in the Consolidated Balance Sheets at their net realizable value. Contract assets primarily relate to the Company's conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were immaterial.
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. The Company records a contract liability, or deferred revenue, when it has an obligation to provide service, and to a much lesser extent product, to the customer and payment is received or due in advance of performance. Deferred revenue primarily relates to support and maintenance contracts and extended warranty obligations within the Company's Breast Health 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 $21.4 million and $108.7 million in the three and nine months ended June 25, 2022, respectively, that was included in the contract liability balance at September 25, 2021. The Company recognized $20.1 million and $100.9 million for the three and nine months ended June 26, 2021, respectively, that was included in the contract liability balance at September 26, 2020.
(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, assays, tests 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 5% 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 derivative instruments comprised of an interest rate swap 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 measurements. The fair values of these derivative contracts represent the estimated
amounts the Company would receive or pay to terminate the contracts. Refer to Note 9 for further discussion and information on derivative instruments.
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following at June 25, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value at Reporting Date Using |
| | Balance as of June 25, 2022 | | Quoted Prices in
Active Market for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) |
| Assets: | | | | | | | |
| | | | | | | |
| Interest rate swap | $ | 28.6 | | | $ | — | | | $ | 28.6 | | | $ | — | |
| | | | | | | |
| Forward foreign currency contracts | 10.3 | | | — | | | 10.3 | | | — | |
| Total | $ | 38.9 | | | $ | — | | | $ | 38.9 | | | $ | — | |
| Liabilities: | | | | | | | |
| Contingent consideration | $ | 23.4 | | | $ | — | | | $ | — | | | $ | 23.4 | |
| | | | | | | |
| | | | | | | |
| Total | $ | 23.4 | | | $ | — | | | $ | — | | | $ | 23.4 | |
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 25, 2022 and June 26, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Month Ended | | Nine Months Ended |
| | June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
| Balance at beginning of period | $ | 58.8 | | | $ | 71.7 | | | $ | 75.1 | | | $ | 81.8 | |
| Contingent consideration recorded at acquisition | — | | | — | | | — | | | — | |
| Fair value adjustments | (35.4) | | | — | | | (39.5) | | | (10.1) | |
| Payments | — | | | — | | | (12.2) | | | — | |
| Balance at end of period | $ | 23.4 | | | $ | 71.7 | | | $ | 23.4 | | | $ | 71.7 | |
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, including property, plant and equipment, intangible assets, goodwill and right of use assets. During the third quarter of fiscal 2022, the Company recorded a $9.2 million impairment charge to write-off two developed technology assets acquired in the Faxitron acquisition. During the first quarter of fiscal 2022, the Company recorded a $4.3 million charge to write-off an equity method investment. There were no other remeasurements in the three and nine months ended June 25, 2022 and June 26, 2021.
Disclosure of Fair Value of Financial Instruments
The Company’s financial instruments mainly consist of cash and cash equivalents, accounts receivable, equity investments, an interest rate swap, 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 interest rate swap 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 GAAP, which approximates fair value. The Company believes the carrying amounts of its equity investments approximate fair value.
Amounts outstanding under the Company’s 2021 Credit Agreement of $1.5 billion aggregate principal as of June 25, 2022 are subject to variable interest rates based on current market rates, and as such, the Company believes the carrying amount of these obligations approximates fair value, representing Level 1 measurements. 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 $379.9 million and $817.6 million, respectively, as of June 25, 2022 based on their trading prices, representing Level 1 measurements. Refer to Note 7 for the carrying amounts of the various components of the Company’s debt.
(5) Business Combinations
Fiscal 2022 Acquisitions
Bolder Surgical
On November 29, 2021, the Company completed the acquisition of Bolder Surgical Holdings, Inc. ("Bolder"), for a purchase price of $160.1 million. Bolder, located in Louisville, Colorado, is a developer and manufacturer of energy vessel sealing surgical devices used in both laparoscopic and open procedures. Bolder's results of operations are reported in the Company's GYN Surgical reportable segment from the date of acquisition.
The total purchase price was allocated to Bolder's preliminary tangible and identifiable intangible assets and liabilities based on the estimated fair values as of November 29, 2021, as set forth below.
| | | | | | | | |
| Cash | | $ | 1.9 | |
| Accounts receivable | 1.3 | |
| Inventory | 3.3 | |
| |
| Other assets | 3.0 | |
| Accounts payable and accrued expenses | (3.2) | |
| |
| Identifiable intangible assets: | |
| Developed technology | 73.6 | |
| Customer relationship | 21.7 | |
| Trade names | 1.4 | |
| |
| |
| Deferred income taxes, net | (13.8) | |
| Goodwill | 70.9 | |
| Purchase Price | $ | 160.1 | |
In performing the preliminary purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analysis of historical financial performance and estimates of future performance of Bolder's business. The allocation of the purchase price is preliminary as the Company continues to gather information supporting the acquired assets and liabilities, including, but not limited to, the estimate of fair value of identifiable intangible assets and deferred income taxes.
As part of the preliminary purchase price allocation, the Company determined the identifiable intangible assets are developed technology, customer relationships and trade names. The preliminary fair value of the intangible assets was estimated using the income approach, and the cash flow projections were discounted using a 16.0% rate. The cash flows were based on estimates used to price the transaction, and the discount rate applied was benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital.
The developed technology assets are comprised of know-how, patents and technologies embedded in Bolder's products and relate to currently marketed products. The developed technology assets comprise the primary product families under the JustRight and CoolSeal technology platforms.
The preliminary estimate of the weighted average life for the developed technology, customer relationship, and trade name assets is 10 years. The preliminary calculation of the excess of the purchase price over the estimated fair value of the tangible net assets and intangible assets acquired was recorded to goodwill. Factors contributing to the recognition of the preliminary amount of goodwill were primarily based on anticipated strategic and synergistic benefits that are expected to be
realized from the Bolder acquisition. These benefits include expanding the Company's surgical portfolio and utilizing GYN Surgical's sales and regulatory expertise to drive adoption and revenue growth. None of the goodwill is expected to be deductible for income tax purposes.
Fiscal 2021 Acquisitions
Mobidiag
On June 17, 2021, the Company completed the acquisition of Mobidiag Oy ("Mobidiag"), for a purchase price of $729.6 million. Mobidiag, located in Finland, manufactures molecular diagnostic solutions for gastrointestinal infections, antimicrobial resistance management and other infections. Mobidiag's results of operations are reported in the Company's Diagnostics reportable segment from the date of acquisition.
The total purchase price was allocated to Mobidiag's tangible and identifiable intangible assets and liabilities based on the estimated fair values as of June 17, 2021, as set forth below.
| | | | | | | | |
| Cash | | $ | 7.0 | |
| Accounts receivable | 4.2 | |
| Inventory | 12.1 | |
| |
| Other assets | 29.6 | |
| Accounts payable and accrued expenses | (16.5) | |
| Other liabilities | (12.2) | |
| |
| Identifiable intangible assets: | |
| Developed technology | 285.0 | |
| In-process research and development | 74.0 | |
| Customer relationships | 20.9 | |
| Trade names | 20.0 | |
| |
| Long-term debt | (66.1) | |
| Deferred income taxes, net | (56.1) | |
| Goodwill | 427.7 | |
| Purchase Price | $ | 729.6 | |
In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analysis of historical financial performance and estimates of future performance of Mobidiag's business.
As part of the purchase price allocation, the Company determined the identifiable intangible assets are development technology, in-process research and development ("IPR&D"), customer relationships and trade names. The fair value of the intangible assets was estimated using the income approach, and the cash flow projections were discounted using rates ranging from 15.0% to 19.0%. The cash flows were based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital.
The developed technology assets are comprised of know-how, patents and technologies embedded in Mobidiag's products and relate to currently marketed products. The developed technology assets comprise the primary product families under the Novodiag and Amplidiag technology platforms.
The IPR&D project relates to an in-process project that had not reached technological feasibility as of the acquisition date and has no future alternative use. The primary basis for determining technological feasibility of the project is obtaining regulatory approval to market the underlying product. The asset recorded relates to one project, and the Company expects to complete the project in approximately three years. Given the uncertainties inherent with product development and introduction, there can be no assurance that the Company's product development efforts will be successful, completed on a timely basis or within budget, if at all. The IPR&D asset was valued using the income approach.
The estimate of the weighted average life for the developed technology assets was 11.7 years, for customer relationships
was 9.1 years, and for tradenames was 11.6 years. The calculation of the excess of the purchase price over the estimated fair value of the tangible net assets and intangible assets acquired was recorded to goodwill. Factors contributing to the recognition of the amount of goodwill were primarily based on anticipated strategic and synergistic benefits that are expected to be realized from the Mobidiag acquisition. These benefits include expanding the Company's molecular diagnostics portfolio into the near-patient testing market and utilizing Diagnostic's commercial sales, manufacturing and regulatory expertise to drive adoption and revenue growth. None of the goodwill is expected to be deductible for income tax purposes.
Biotheranostics
On February 22, 2021, the Company completed the acquisition of Biotheranostics, Inc. ("Biotheranostics"), for a purchase price of $231.3 million. Biotheranostics, located in San Diego, California, manufactures molecular diagnostic tests that support physicians in the treatment of breast cancer and all metastatic cancers and performs the lab testing procedures at its Clinical Laboratory Improvement Amendments ("CLIA") certified laboratory. Biotheranostics' results of operations are reported in the Company's Diagnostics reportable segment from the date of acquisition and its revenues are reported within Service and other revenue in the Company's Consolidated Statements of Income and within service revenue in the disclosure of disaggregated revenue in Note 2.
The total purchase price was allocated to Biotheranostics' tangible and identifiable intangible assets and liabilities based on the estimated fair values as of February 22, 2021, as set forth below.
| | | | | | | | |
| | |
| Cash | | $ | 9.6 | |
| Accounts receivable | 6.6 | |
| |
| |
| Other assets | 6.5 | |
| Accounts payable and accrued expenses | (8.2) | |
| Other liabilities | (8.1) | |
| Identifiable intangible assets: | |
| Developed technology | 160.3 | |
| | |
| Trade names | 2.1 | |
| |
| |
| Deferred income taxes, net | (18.4) | |
| Goodwill | 80.9 | |
| Purchase Price | $ | 231.3 | |
In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analysis of historical financial performance and estimates of future performance of Biotheranostics' business. As part of the purchase price allocation, the Company determined the identifiable intangible assets are developed technology and trade names. The fair value of the intangible assets was estimated using the income approach, and the cash flow projections were discounted using a 18.0% rate. The cash flows were based on estimates used to price the transaction, and the discount rate applied was benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital. The weighted average life of developed technology and trade names was 10 years. The calculation of the excess of the purchase price over the estimated fair value of the tangible net assets and intangible assets acquired was recorded to goodwill. Factors contributing to the recognition of the amount of goodwill were primarily based on anticipated synergistic benefits of adding Biotheranostics' CLIA lab to the Company's portfolio of offerings and utilizing Diagnostic's marketing and regulatory expertise to drive adoption and revenue growth. None of the goodwill is expected to be deductible for income tax purposes.
Diagenode
On March 1, 2021, the Company completed the acquisition of Diagenode SA ("Diagenode") for a purchase price of $155.1 million. Diagenode, located in Belgium, is a developer and manufacturer of molecular diagnostic assays based on PCR (polymerase chain reaction) technology to detect infectious diseases of bacterial, viral and parasite origin. Diagenode's results of operations are reported in the Company's Diagnostics reportable segment from the date of acquisition.
The total purchase price was allocated to Diagenode's tangible and identifiable intangible assets and liabilities based on the estimated fair values as of March 1, 2021, as set forth below.
| | | | | | | | |
| | |
| Cash | | $ | 5.6 | |
| Accounts receivable | 9.3 | |
| Inventory | 9.0 | |
| |
| Other assets | 13.9 | |
| Accounts payable and accrued expenses | (16.7) | |
| Other liabilities | (9.2) | |
| Identifiable intangible assets: | |
| Developed technology | 69.8 | |
| | |
| Customer relationships | 9.2 | |
| |
| |
| Deferred income taxes, net | (19.3) | |
| Goodwill | 83.5 | |
| Purchase Price | $ | 155.1 | |
In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analysis of historical financial performance and estimates of future performance of Diagenode's business. As part of the purchase price allocation, the Company determined the identifiable intangible assets are developed technology and customer relationships. The fair value of the intangible assets was estimated using the income approach, and the cash flow projections were discounted using a 14.5% rate for developed technology and a 13.5% rate for customer relationships. The cash flows were based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital. The weighted average life of developed technology and customer relationships was 10 years. The calculation of the excess of the purchase price over the estimated fair value of the tangible net assets and intangible assets acquired was recorded to goodwill. Factors contributing to the recognition of the amount of goodwill were based on anticipated synergistic benefits of Diagenode's products broadening the Diagnostics portfolio of molecular diagnostics products primarily in the transplant and acute care gastrointestinal and respiratory space as customers seek a broader menu of tests, utilizing Diagnostic's sales force to drive menu expansion and revenue growth and gaining additional PCR assay development expertise. None of the goodwill is expected to be deductible for income tax purposes.
Somatex Medical Technologies
On December 30, 2020, the Company completed the acquisition of Somatex Medical Technologies GmbH ("Somatex") for a purchase price of $62.9 million. Somatex, located in Germany, is a manufacturer of biopsy site markers, including the Tumark product line of tissue markers, which were distributed by the Company in the U.S. prior to the acquisition. The allocation of the purchase price was based on the Company's valuation, and it allocated $38.0 million to the value of developed technology with a weighted average life of 8 years, $1.2 million to customer relationships, $0.9 million to trade names and $32.4 million to goodwill. The remaining $9.6 million of the purchase price was allocated to the net acquired tangible assets and liabilities. Somatex's results of operations are reported in the Company's Breast Health reportable segment from the date of acquisition. None of the goodwill is expected to be deductible for income tax purposes.
NXC Imaging
On September 28, 2020, the Company completed the acquisition of assets from NXC Imaging, for a purchase price of $5.6 million. NXC Imaging was a long-standing distributor of the Company's Breast and Skeletal products in the U.S. The majority of the purchase price was allocated to a customer relationships intangible asset with a useful life of 5 years.
Contingent Consideration
The Company has a contingent consideration liability related to its acquisition of Acessa Health, Inc. ("Acessa"), which occurred in August 2020. Acessa was the developer of the ProVu laparoscopic radiofrequency ablation system. The Company estimated the fair value of this liability to be $81.8 million at the date of acquisition. The contingent payments are 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 is 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 is required to remeasure the fair value of the liability as assumptions change and such adjustments are 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 is directly impacted by the Company's estimate of future incremental revenue growth of the business. Accordingly, if actual revenue growth is higher or lower than the estimates within the fair value measurement, the Company would record additional charges or benefits, respectively. During the three and nine months ended June 25, 2022, the Company remeasured the contingent consideration liability and recorded a gain of $35.4 million and $39.5 million, respectively, to record the liability at fair value as of June 25, 2022. The reduction in fair value was primarily due to a decrease in forecasted revenues over the measurement period and to a much lesser extent an increase in the discount rate driven by market rates. For the nine month period ended June 26, 2021, the Company remeasured the contingent consideration liability and recorded a gain of $10.1 million to record the liability at fair value. The reduction in fair value was primarily due to a decrease in forecasted revenues over the measurement period. As of September 25, 2021, the contingent consideration liability was $75.1 million. During the three months ended December 25, 2021, the first measurement period was completed, and the Company recorded a gain of $4.1 million to decrease the contingent consideration liability to fair value based on actual revenue results in the first earn-out period. During the second quarter of fiscal 2022, the Company made a payment of $12.2 million for the first earn-out period. As of June 25, 2022, the contingent consideration liability was $23.4 million.
(6) Restructuring
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 will be moved to the Company's Newark, Delaware facility. In addition, research and development, sales and services support and administrative functions will be moved to the Newark, Delaware and Marlborough, Massachusetts facilities. The transition is expected to be completed by the third quarter of fiscal 2025. The majority of employees located in Danbury were given the option to relocate to the new locations. As a result of this plan, the Company expects a number of employees to not relocate resulting in their termination. The employees were notified of the closure during the first quarter of fiscal 2022, but were not communicated about their termination and related severance and benefits until the third quarter of fiscal 2022. The Company is recording severance benefits pursuant to pursuant to ASC 420, Exit or Disposal Cost Obligations (ASC 420) and the benefits will be expensed ratably over the required service period. As a result, the Company recorded $0.8 million of severance and benefits charges in the third quarter of fiscal 2022. The Company estimates that total severance and benefits charges, including retention, will be approximately $7.0 million.
(7) Borrowings and Credit Arrangements
The Company’s borrowings consisted of the following:
| | | | | | | | | | | |
| June 25,
2022 | | September 25,
2021 |
| Current debt obligations, net of debt discount and deferred issuance costs: | | | |
| Term Loan | $ | 7.5 | | | $ | — | |
| | | |
| Securitization Program | — | | | 248.5 | |
| Other | — | | | 64.5 | |
| Total current debt obligations | $ | 7.5 | | | $ | 313.0 | |
| Long-term debt obligations, net of debt discount and issuance costs: | | | |
| Term Loan | 1,482.6 | | | 1,382.3 | |
| | | |
| 2028 Senior Notes | 395.9 | | | 395.4 | |
| 2029 Senior Notes | 936.1 | | | 934.5 | |
| | | |
| Total long-term debt obligations | $ | 2,814.6 | | | $ | 2,712.2 | |
| Total debt obligations | $ | 2,822.1 | | | $ | 3,025.2 | |
2021 Credit Agreement
On September 27, 2021, the Company and certain of its subsidiaries refinanced its term loan and revolving credit facility under its then credit agreement (the "2018 Credit Agreement") by entering into Refinancing Amendment No. 2 dated as of September 27, 2021, to the Amended and Restated Credit and Guaranty Agreement as of October 3, 2017, as amended (the "2021 Credit Agreement") with Bank of America, N.A. in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, and certain other lenders. Substantially all of the proceeds under the 2021 Credit Agreement of $1.5 billion were used to repay the amounts outstanding under the 2018 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 the Company's and its Subsidiary Guarantors' U.S. assets. These liens are subject to release during the term of the facilities if the Company is able to achieve certain corporate or corporate family ratings and other conditions are met. The credit facilities under the 2021 Credit Agreement (the "2021 Credit Facilities") consist of:
•A $1.5 billion secured term loan ("2021 Term Loan") with a maturity date of September 25, 2026; and
•A secured revolving credit facility ("2021 Revolver") under which the Company may borrow up to $2.0 billion, subject to certain sublimits, with a maturity date of September 25, 2026.
Borrowings under the 2021 Credit Agreement, other than Swing Line Loans, bear interest, at the Company's option, at the Base Rate, at the Eurocurrency Rate, at the Alternative Currency Daily Rate, or at the LIBOR Daily Floating Rate, in each case plus the Applicable Rate (as such terms are defined in the 2021 Credit Agreement).
The Applicable Rate in regards to the Base Rate, the Eurocurrency Rate, the Alternative Currency Daily Rate, the Alternative Currency Term Rate, and the LIBOR Daily Floating Rate is subject to change depending on the Total Net Leverage Ratio (as defined in the 2021 Credit Agreement). As of June 25, 2022, the interest rate under the 2021 Term Loan was 2.63% per annum.
The Company is also required to pay a quarterly commitment fee calculated on daily basis equal to the Applicable Rate as of such day multiplied by the undrawn committed amount available under the 2021 Revolver (taking into account any outstanding amounts under the LC Sublimit). As of June 25, 2022, this commitment fee was 0.15% per annum.
Upon the earliest to occur of June 30, 2023 and certain specified events, relating to the planned phase out of LIBOR by the UK Financial Conduct Authority, the interest rate applicable to the loans under the 2021 Credit Agreement denominated in U.S. Dollars will convert 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 Company is required to make scheduled principal payments under the 2021 Term Loan in increasing amounts ranging from $3.75 million per three-month period commencing with the three-month period ending on December 29, 2022 to $18.75 million per three-month period commencing with the three month period ending on December 26, 2025. The remaining balance of $1.335 billion (or such lesser aggregate principal amount of Term Loans then outstanding) on the 2021 Term Loan and any amounts outstanding under the 2021 Revolver are due at maturity. In addition, subject to the terms and conditions set forth in the 2021 Credit Agreement, the Company is 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 reinvestment rights). Certain of the mandatory prepayments are subject to reduction or elimination if certain financial covenants are met. These mandatory prepayments are required to be applied by the Company, first to the 2021 Term Loan, second to any outstanding amount under any Swing Line Loans, third to the 2021 Revolver, fourth to prepay any outstanding reimbursement obligations with respect to letters of credit and fifth to cash collateralize such letters of credit. Subject to certain limitations, the Company may voluntarily prepay any of the 2021 Credit Facilities without premium or penalty. As of June 25, 2022, the outstanding principal balance of the 2021 Term Loan was $1.5 billion, and there were no amounts outstanding under the 2021 Revolver.
The 2021 Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants restricting the ability of the Company, subject to negotiated exceptions, to incur additional indebtedness and grant additional liens on its assets, engage in mergers or acquisitions or dispose of assets, enter into sale-leaseback transactions, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses. In addition, the 2021 Credit Agreement requires the Borrowers to maintain certain financial ratios. The 2021 Credit Agreement also contains customary representations and warranties and events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross defaults and an event of default upon a change of control of the Company.
The Company evaluated the 2021 Credit Agreement for derivatives pursuant to ASC 815, Derivatives and Hedging, and identified embedded derivatives that required bifurcation as the features are not clearly and closely related to the host instrument. The embedded derivatives were a default provision, which could require additional interest payments, and a provision requiring contingent payments to compensate the lenders for changes in tax deductions. The Company determined that the fair value of these embedded derivatives was immaterial as of June 25, 2022.
Pursuant to ASC 470, Debt (ASC 470), the accounting for the refinancing was evaluated on a creditor-by-creditor basis to determine whether each transaction should be accounted for as a modification or extinguishment. Certain creditors under the 2018 Credit Agreement did not participate in this refinancing transaction and ceased being creditors of the Company. As a result, the Company recorded a debt extinguishment loss of $0.7 million in the first quarter of fiscal 2022 to write-off the pro-rata amount of unamortized debt discount and deferred issuance costs related to these creditors. For the remainder of the creditors, this transaction was accounted for as a modification. Pursuant to ASC 470, third-party costs of $7.0 million were recorded as a reduction to debt representing deferred issuance costs and fees paid directly to the lenders.
Interest expense, weighted average interest rates, and the interest rate at the end of period under the 2021 and 2018 Credit Agreements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
| Interest expense | $ | 7.8 | | | $ | 5.1 | | | $ | 18.8 | | | $ | 17.0 | |
| Weighted average interest rate | 1.67 | % | | 1.10 | % | | 1.30 | % | | 1.15 | % |
| Interest rate at end of period | 2.63 | % | | 1.09 | % | | 2.63 | % | | 1.09 | % |
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 25, 2022, the Company was in compliance with these covenants.
Senior Notes
On September 28, 2020, the Company completed a private placement of $950 million aggregate principal amount of its Senior Notes due 2029 at an offering price of 100% of the aggregate principal amount of the 2029 Senior Notes. The Company used the net proceeds of the 2029 Senior Notes offering and cash on hand to redeem in full its 4.375% Senior Notes due 2025 (the "2025 Senior Notes") in the aggregate principal amount of $950.0 million on October 15, 2020 at an aggregate redemption price of $970.8 million, which included a premium payment $20.8 million.
2025 Senior Notes
Immediately prior to redemption in full of the 2025 Senior Notes on October 15, 2020, the total aggregate principal balance of 2025 Senior Notes was $950.0 million. Since the Company used the proceeds from the 2029 Senior Notes offering to redeem the 2025 Senior Notes, the Company evaluated the accounting for this transaction under ASC 470 to determine modification versus extinguishment accounting on a creditor-by-creditor basis. Certain 2025 Senior Note holders either did not participate in this refinancing transaction or reduced their holdings, and these transactions were accounted for as extinguishments. As a result, the Company recorded a debt extinguishment loss in the first quarter of fiscal 2021 of $21.6 million. For the remaining 2025 Senior Notes holders who participated in the refinancing, these transactions were accounted for as modifications because on a creditor-by-creditor basis the present value of the cash flows between the debt instruments before and after the transaction was less than 10%. The Company recorded a portion of the transaction expenses of $5.8 million to interest expense pursuant to ASC 470, subtopic 50-40. The remaining debt issuance costs of $7.9 million and debt discount of $6.4 million related to the modified debt is being amortized over the new term of the 2029 Senior Notes using the effective interest method.
2028 Senior Notes
As of June 25, 2022, the Company had Senior Notes due 2028 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 25, 2022, the Company had 2029 Senior Notes due 2029 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.
Interest expense for the 2029 Senior Notes, 2028 Senior Notes and 2025 Senior Notes was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| Interest Rate | | June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
| 2025 Senior Notes | 4.375 | % | | $ | — | | | $ | — | | | $ | — | | | $ | 2.3 | |
| 2028 Senior Notes | 4.625 | % | | 4.8 | | | 4.8 | | | 14.4 | | | 14.4 | |
| 2029 Senior Notes | 3.250 | % | | 8.2 | | | 8.2 | | | 24.6 | | | 24.5 | |
| Total | | | $ | 13.0 | | | $ | 13.0 | | | $ | 39.0 | | | $ | 41.2 | |
Accounts Receivable Securitization Program
During April 2022, the Company repaid the outstanding balance of $248.5 million under the accounts receivable securitization program (the "Securitization Program"). On June 10, 2022, the Company amended the Credit and Security agreement with lenders, temporarily suspending the ability to borrow and the need to comply with covenants for up to a year. As of June 25, 2022, the Company did not have any borrowings under this program.
Other
Other represents debt acquired in the Mobidiag acquisition, which was primarily with the European Investment Bank ("EIB"). Multiple tranches were withdrawn under the agreement and were primarily used to fund research and development projects and expansion efforts. The debt agreement contained change-in-control provisions allowing the EIB to call the debt at any time after a change-in-control, which occurred as a result of Hologic acquiring Mobidiag. The tranches withdrawn under this agreement had interest rates ranging from 6.0% to 7.0%. The debt agreement included additional payments to the EIB based on revenues generated by products developed under the funding as well as prepayment penalties. During the first quarter of fiscal 2022, the Company paid off the outstanding debt obligation of $63.7 million, and the debt agreement with the EIB was terminated.
(8) Trade Receivables and Allowance for Credit Losses
Effective September 27, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), 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 from new macroeconomic events, such as the COVID-19 pandemic, must be taken into consideration. To date, the Company has not experienced significant customer payment defaults, or identified other significant collectability concerns as a result of the COVID-19 pandemic. 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 25, 2022 compared to June 26, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at
Beginning
of Period | | Credit Loss | | | | Write-
offs and
Payments | | Balance at
End of
Period |
| Nine Months Ended | | | | | | | | | | |
| June 25, 2022 | | $ | 40.5 | | | $ | 4.4 | | | | | $ | (3.9) | | | $ | 41.0 | |
| June 26, 2021 | | $ | 31.6 | | | $ | 11.6 | | | | | $ | (3.4) | | | $ | 39.8 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(9) Derivatives
Interest Rate Swap - 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. To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings in other income (expense), net in the Consolidated Statements of Income.
In fiscal 2019, in order to hedge a portion of its variable rate debt, 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. The notional amount of this swap is $1.0 billion. The interest rate swap effectively fixes the LIBOR 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 interest rate swap are designed to mirror the terms of the Company’s LIBOR-based borrowings under its credit agreement and therefore are highly effective at offsetting the cash flows being hedged. The Company designated this derivative as a cash flow hedge of the variability of the LIBOR-based interest payments on $1.0 billion of principal. Therefore, changes in the fair value of the swap are recorded in AOCI. The fair value of this derivative was in an asset position of $28.6 million as of June 25, 2022.
Forward Foreign Currency 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 exchange contracts are entered into to support transactions made in the ordinary course of business and are not speculative in nature. The contracts are generally for periods of one year or less. The Company did not elect hedge accounting for these contracts. The change in the fair value of these contracts is recognized directly in the Consolidated Statements of Income 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 25, 2022 and June 26, 2021, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
| Amount of realized gain (loss) recognized in income | | | | | | | |
| Forward foreign currency contracts | $ | 19.6 | | | $ | (7.0) | | | $ | 42.4 | | | $ | (6.5) | |
| Foreign currency option contracts | — | | | (1.4) | | | — | | | (4.4) | |
| $ | 19.6 | | | $ | (8.4) | | | $ | 42.4 | | | $ | (10.9) | |
| Amount of unrealized gain (loss) recognized in income | | | | | | | |
| Forward foreign currency contracts | $ | 2.5 | | | $ | 1.5 | | | $ | 9.2 | | | $ | (2.0) | |
| Foreign currency option contracts | — | | | 0.4 | | | — | | | (5.5) | |
| $ | 2.5 | | | $ | 1.9 | | | $ | 9.2 | | | $ | (7.5) | |
| Amount of gain (loss) recognized in income | | | | | | | |
| Total | $ | 22.1 | | | $ | (6.5) | | | $ | 51.6 | | | $ | (18.4) | |
As of June 25, 2022, the Company had outstanding forward foreign currency contracts that were not designated for hedge accounting and are used to hedge fluctuations in the U.S. dollar of certain of the Company's cash balances denominated in the Euro and UK pound, as well as forecasted transactions denominated in the Euro, UK Pound, Australian Dollar, Canadian Dollar, Chinese Yuan and Japanese Yen with an aggregate notional amount of $330.2 million.
Financial Instrument Presentation
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the balance sheet as of June 25, 2022:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | June 25, 2022 | | September 25, 2021 |
| Assets: | | | | | |
| Derivative instruments designated as a cash flow hedge: | | | | | |
| | | | | |
| | | | | |
| Interest rate swap contract | Prepaid expenses and other current assets | | $ | 19.0 | | | $ | — | |
| Interest rate swap contract | Other assets | | 9.6 | | | — | |
| | | $ | 28.6 | | | $ | — | |
| | | | | |
| Derivatives not designated as hedging instruments: | | | | | |
| Forward foreign currency contracts | Prepaid expenses and other current assets | | $ | 10.3 | | | $ | 1.7 | |
| | | | | |
| | | $ | 10.3 | | | $ | 1.7 | |
| | | | | |
| Liabilities: | | | | | |
| Derivative instruments designated as a cash flow hedge: | | | | | |
| Interest rate swap contract | Accrued expenses | | $ | — | | | $ | 11.1 | |
| Interest rate swap contract | Other long-term liabilities | | — | | | 7.6 | |
| Total | | | $ | — | | | $ | 18.7 | |
| Derivatives not designated as hedging instruments: | | | | | |
| Forward foreign currency contracts | Accrued expenses | | $ | — | | | $ | 0.6 | |
The following table presents the unrealized gain (loss) recognized in AOCI related to the interest rate caps and interest rate swap for the following reporting periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
| Amount of gain (loss) recognized in other comprehensive income, net of taxes: | | | | | | | |
| Interest rate swap | $ | 8.4 | | | $ | 3.0 | | | $ | 35.7 | | | $ | 8.2 | |
| Interest rate cap agreements | — | | | — | | | — | | | (0.2) | |
| Total | $ | 8.4 | | | $ | 3.0 | | | $ | 35.7 | | | $ | 8.0 | |
(10) Commitments and Contingencies
Litigation and Related Matters
On November 6, 2015, the Company filed a suit against Minerva Surgical, Inc. (“Minerva”) in the United States District Court for the District of Delaware, alleging that Minerva’s endometrial ablation device infringes U.S. Patent 6,872,183 (the '183 patent), U.S. Patent 8,998,898 and U.S. Patent 9,095,348 (the '348 patent). On January 25, 2016, the Company amended the complaint to include claims against Minerva for unfair competition, deceptive trade practices and tortious interference with
business relationships. On February 5, 2016, the Company filed a second amended complaint to additionally allege that Minerva’s endometrial ablation device infringes U.S. Patent 9,247,989 (the '989 patent). On March 4, 2016, Minerva filed an answer and counterclaims against the Company, seeking declaratory judgment on the Company’s claims and asserting claims against the Company for unfair competition, deceptive trade practices, interference with contractual relationships, breach of contract and trade libel. On June 2, 2016, the Court denied the Company’s motion for a preliminary injunction on its patent claims and denied Minerva’s request for preliminary injunction related to the Company’s alleged false and deceptive statements regarding the Minerva product. On June 28, 2018, the Court granted the Company's summary judgment motions on infringement and no invalidity with respect to the ‘183 and ‘348 patents. The Court also granted the Company’s motion for summary judgment on assignor estoppel, which bars Minerva’s invalidity defenses. The Court also denied all of Minerva’s defenses, including its motions for summary judgment on invalidity, non-infringement, no willfulness, and no unfair competition. On July 27, 2018, after a two-week trial, a jury returned a verdict that: (1) awarded the Company $4.8 million in damages for Minerva’s infringement; (2) found that Minerva’s infringement was not willful; and (3) found for the Company regarding Minerva’s counterclaims. Damages continued to accrue as Minerva continues its infringing conduct. On May 2, 2019, the Court issued rulings that denied the parties' post-trial motions, including the Company's motion for a permanent injunction seeking to prohibit Minerva from selling infringing devices. Both parties appealed the Court's rulings regarding the post-trial motions. On March 4, 2016, Minerva filed two petitions at the United States Patent and Trademark Office ("USPTO") for inter partes review of the '348 patent. On September 12, 2016, the Patent Trial and Appeal Board of the USPTO (“PTAB") declined both petitions to review patentability of the '348 patent. On April 11, 2016, Minerva filed a petition for inter partes review of the '183 patent. On October 6, 2016, the PTAB granted the petition and instituted a review of the '183 patent. On December 15, 2017, the PTAB issued a final written decision invalidating all claims of the ‘183 patent. On February 9, 2018, the Company appealed this decision to the United States Court of Appeals for the Federal Circuit ("Court of Appeals"). On April 19, 2019, the Court of Appeals affirmed the PTAB's final written decision regarding the '183 patent. On July 16, 2019, the Court of Appeals denied the Company’s petition for rehearing in the appeal regarding the '183 patent. On April 22, 2020, the Court of Appeals affirmed the district court’s summary judgment ruling in favor of the Company of no invalidity and infringement, and summary judgment that assignor estoppel bars Minerva from challenging the validity of the ‘348 patent. The Court of Appeals also denied the Company’s motion for a permanent injunction and ongoing royalties for infringement of the ‘183 patent. The Court of Appeals denied Minerva’s arguments for no damages or, alternatively, a new trial. On May 22, 2020 both parties petitioned for en banc review of the Court of Appeals decision. On July 22, 2020, the Court of Appeals denied both parties' petitions for en banc review. On August 28, 2020, the district court entered final judgment against Minerva but stayed execution pending resolution of Minerva’s petition for Supreme Court review. On September 30, 2020, Minerva filed a petition requesting Supreme Court review on the issue of assignor estoppel. On November 5, 2020, the Company filed a cross-petition requesting Supreme Court review on the issue of assignor estoppel. On January 8, 2021, the Supreme Court granted Minerva’s petition to address the issue of assignor estoppel and denied the Company's petition. Oral argument before the Supreme Court was held on April 21, 2021. On June 29, 2021, the Supreme Court ruled 5-4 to uphold the assignor estoppel but limited its application to situations in which an assignor’s claim of invalidity contradicts a prior representation the assignor made in assigning the patent. The Court also vacated the ruling of the Court of Appeals and remanded the case for further proceedings consistent with its opinion. An oral argument before the Court of Appeals was held January 27, 2022 and the parties are awaiting a decision.
On April 11, 2017, Minerva filed suit against the Company and Cytyc Surgical Products, LLC (“Cytyc”) in the United States District Court for the Northern District of California alleging that the Company’s and Cytyc’s NovaSure ADVANCED endometrial ablation device infringes Minerva’s U.S. patent 9,186,208 (the '208 patent). Minerva is seeking a preliminary and permanent injunction against the Company and Cytyc from selling this NovaSure device as well as enhanced damages and interest, including lost profits, price erosion and/or royalty. On January 5, 2018, the Court denied Minerva's motion for a preliminary injunction. On February 2, 2018, at the parties’ joint request, this action was transferred to the District of Delaware. On March 26, 2019, the Magistrate Judge issued a claims construction ruling regarding the disputed terms in the patent, which the District Court Judge adopted in all respects on October 21, 2019. On July 27, 2021, the Delaware district court granted the Company’s motion for summary judgment on invalidity of the '208 patent and entered judgment in favor of the Company. On August 24, 2021, Minerva appealed this and the other rulings to the Court of Appeals. At this time, based on available information regarding this litigation, the Company is unable to reasonably assess the ultimate outcome of this case or determine an estimate, or a range of estimates, of potential losses.
In connection with the 2019 divestiture of its Medical Aesthetics business, the Company agreed to indemnify Clayton Dubilier & Rice for certain legal matters that existed at the date of disposition. This included payment of an $8.5 million settlement in resolution of a 2016 complaint filed by ARcare, Inc. against Cynosure, Inc., alleging violations of the Telephone Consumer Protection Act. Following court approval on June 6, 2022, the Company made a final payment of $8.5 million, which was previously accrued, on behalf of Cynosure, Inc. to close out its indemnification obligation on the matter. There are currently no further accruals related to the Company’s indemnification obligations under the Medical Aesthetic business divestiture agreements.
The Company is a party to various other legal proceedings and claims arising out of the ordinary course of its business. The Company believes that except for those matters described above there are no other proceedings or claims pending against it
the ultimate resolution of which could have a material adverse effect on its financial condition or results of operations. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies (ASC 450). Legal costs are expensed as incurred.
(11) Net Income Per Share
A reconciliation of basic and diluted share amounts is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | June 25,
2022 | | June 26,
2021 | | June 25,
2022 | | June 26,
2021 |
| Basic weighted average common shares outstanding | 250,756 | | | 256,230 | | | 251,943 | | | 257,769 | |
| Weighted average common stock equivalents from assumed exercise of stock options and issuance of restricted stock units | 2,337 | | | 2,351 | | | 2,330 | | | 2,602 | |
| | | | | | | |
| Diluted weighted average common shares outstanding | 253,093 | | | 258,581 | | | 254,273 | | | 260,371 | |
| Weighted-average anti-dilutive shares related to: | | | | | | | |
| Outstanding stock options and restricted stock units | 1,066 | | | 653 | | | 1,021 | | | 515 | |
| | | | | | | |
(12) 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 25,
2022 | | June 26,
2021 | | June 25,
2022 | | June 26,
2021 |
| Cost of revenues | $ | 2.2 | | | $ | 1.9 | | | $ | 7.1 | | | $ | 6.4 | |
| Research and development | 1.8 | | | 1.4 | | | 7.3 | | | 6.2 | |
| Selling and marketing | 2.6 | | | 2.3 | | | 8.0 | | | 7.7 | |
| General and administrative | 8.7 | | | 8.9 | | | 29.4 | | | 29.8 | |
| Restructuring | — | | | 0.9 | | | — | | | 0.9 | |
| $ | 15.3 | | | $ | 15.4 | | | $ | 51.8 | | | $ | 51.0 | |
The Company granted options to purchase 0.7 million and 0.6 million shares of the Company's common stock during the nine months ended June 25, 2022 and June 26, 2021, respectively, with weighted-average exercise prices of $71.12 and $68.62, respectively. There were 4.4 million options outstanding at June 25, 2022 with a weighted-average exercise price of $48.49.
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 25,
2022 | | June 26,
2021 | | June 25,
2022 | | June 26,
2021 |
| Risk-free interest rate | 1.1 | % | | 0.4 | % | | 1.1 | % | | 0.4 | % |
| Expected volatility | 34.2 | % | | 35.0 | % | | 34.2 | % | | 35.0 | % |
| Expected life (in years) | 4.8 | | 4.8 | | 4.8 | | 4.8 |
| Dividend yield | — | | | — | | | — | | | — | |
| Weighted average fair value of options granted | $ | 21.48 | | | $ | 19.17 | | | $ | 21.03 | | | $ | 20.07 | |
The Company granted 0.6 million and 0.5 million restricted stock units ("RSUs") during the nine months ended June 25, 2022 and June 26, 2021, respectively, with weighted-average grant date fair values of $71.18 and $68.45 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 25, 2022 and June 26, 2021, respectively, to members of its senior management team, which have a weighted-average
grant date fair value of $71.16 and $68.51 per unit, respectively. Each recipient of PSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of three years provided the Company’s defined Return on Invested Capital metrics are achieved. The Company also granted 0.1 million and 0.1 million of PSUs based on a three-year cumulative free cash flow measure ("FCF PSUs") to its senior management team, which had a grant date fair value of $71.16 and $68.51 per unit during the nine months ended June 25, 2022 and June 26, 2021, 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 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 its senior management team during the nine months ended June 25, 2022 and June 26, 2021, 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 three years based upon achieving a certain total shareholder return relative to a defined peer group. The MSUs were valued at $75.43 and $82.31 per share using the Monte Carlo simulation model in fiscal 2022 and 2021, 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 25, 2022, there was 1.7 million in aggregate unvested RSUs, PSUs, FCF PSUs and MSUs outstanding.
At June 25, 2022, there was $18.4 million and $67.4 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 2.0 years, respectively.
(13) Other Balance Sheet Information
| | | | | | | | | | | |
| June 25,
2022 | | September 25,
2021 |
| Inventories | | | |
| Raw materials | $ | 228.9 | | | $ | 163.3 | |
| Work-in-process | 59.5 | | | 53.0 | |
| Finished goods | 292.8 | | | 284.9 | |
| $ | 581.2 | | | $ | 501.2 | |
| | | | | | | | | | | |
| Property, plant and equipment | | | |
| Equipment | $ | 414.7 | | | $ | 467.1 | |
| Equipment under customer usage agreements | 492.5 | | | 484.6 | |
| Building and improvements | 196.2 | | | 191.2 | |
| Leasehold improvements | 51.0 | | | 49.7 | |
| Land | 41.1 | | | 41.3 | |
| Furniture and fixtures | 17.5 | | | 16.8 | |
| Finance lease right of use asset | 8.2 | | | 9.9 | |
| $ | 1,221.2 | | | $ | 1,260.6 | |
| Less – accumulated depreciation and amortization | (731.1) | | | (695.9) | |
| $ | 490.1 | | | $ | 564.7 | |
In September 2020 and October 2020, the Company received grants of $7.6 million and $119.3 million, respectively, from the Department of Defense Joint Acquisition Task Force ("DOD") to expand production capacity for the Company's two SARS-CoV-2 assays. These grants are specifically to fund capital equipment and labor investments to increase manufacturing capacity to enable the Company to provide a certain amount of COVID-19 tests per month for the U.S. market. The Company is accounting for the funds received under these grants as a reimbursement of the purchased capital equipment. The Company procures and pays for the capital equipment and necessary resources to build out its facility and construct the manufacturing lines to meet the requirements specified in the grant agreement. Subsequent to the Company paying for the capital equipment, the DOD will reimburse the Company upon it meeting certain requirements. However, the DOD retains title to assets purchased under the agreement, and title is transferred to the Company upon meeting certain milestones of the manufacturing efforts and obtaining approval from the DOD that the respective milestone has been met. As of June 25, 2022, the Company had $20.5 million of capital equipment that was awaiting approval from the DOD pending completion of the defined milestones. During the current three and nine month periods, the Company received $16.2 million and $75.0 million, respectively, from the DOD, which has been recorded as a reduction of the cost basis of the purchased equipment. During the year ended September 25, 2021, the Company received $21.2 million from the DOD under these grants. Payments under these grants are subject to satisfaction of the conditions of the grants, including applicable governmental appropriations.
(14) 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, 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. Each segment's operating results include its share of allocated corporate administrative expenses.
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 25, 2022 and June 26, 2021. Segment information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | June 25,
2022 | | June 26,
2021 | | June 25,
2022 | | June 26,
2021 |
| Total revenues: | | | | | | | |
| Diagnostics | $ | 560.1 | | | $ | 665.5 | | | $ | 2,497.6 | | | $ | 2,858.2 | |
| Breast Health | 282.8 | | | 349.0 | | | 952.7 | | | 1,018.0 | |
| GYN Surgical | 138.1 | | | 127.9 | | | 389.6 | | | 366.2 | |
| Skeletal Health | 21.7 | | | 25.9 | | | 69.7 | | | 73.3 | |
| | | | | | | |
| $ | 1,002.7 | | | $ | 1,168.3 | | | $ | 3,909.6 | | | $ | 4,315.7 | |
| Income (loss) from operations: | | | | | | | |
| Diagnostics | $ | 175.0 | | | $ | 260.1 | | | $ | 1,247.4 | | | $ | 1,745.1 | |
| Breast Health | 32.0 | | | 81.0 | | | 163.1 | | | 235.1 | |
| GYN Surgical | 60.1 | | | 18.2 | | | 92.4 | | | 60.5 | |
| Skeletal Health | (3.2) | | | (0.7) | | | (3.6) | | | 0.1 | |
| | | | | | | |
| $ | 263.9 | | | $ | 358.6 | | | $ | 1,499.3 | | | $ | 2,040.8 | |
| Depreciation and amortization: | | | | | | | |
| Diagnostics | $ | 67.8 | | | $ | 63.9 | | | $ | 205.4 | | | $ | 179.4 | |
| Breast Health | 16.9 | | | 13.6 | | | 45.5 | | | 39.7 | |
| GYN Surgical | 24.7 | | | 23.2 | | | 72.1 | | | 69.5 | |
| Skeletal Health | 0.2 | | | 0.2 | | | 0.5 | | | 0.5 | |
| | | | | | | |
| $ | 109.6 | | | $ | 100.9 | | | $ | 323.5 | | | $ | 289.1 | |
| Capital expenditures: | | | | | | | |
| Diagnostics | $ | 19.8 | | | $ | 35.7 | | | $ | 77.3 | | | $ | 113.2 | |
| Breast Health | 2.2 | | | 4.5 | | | 9.2 | | | 10.1 | |
| GYN Surgical | 2.8 | | | 3.0 | | | 6.9 | | | 9.5 | |
| Skeletal Health | 0.1 | | | 0.2 | | | 0.3 | | | 0.2 | |
| | | | | | | |
| Corporate | 0.8 | | | — | | | 1.9 | | | 1.0 | |
| $ | 25.7 | | | $ | 43.4 | | | $ | 95.6 | | | $ | 134.0 | |
| | | | | | | | | | | |
| June 25,
2022 | | September 25,
2021 |
| Identifiable assets: | | | |
| Diagnostics | $ | 3,029.8 | | | $ | 3,348.8 | |
| Breast Health | 1,244.0 | | | 1,233.9 | |
| GYN Surgical | 1,488.2 | | | 1,369.7 | |
| | | |
| Skeletal Health | 25.8 | | | 31.9 | |
| Corporate | 3,569.6 | | | 2,935.6 | |
| $ | 9,357.4 | | | $ | 8,919.9 | |
The Company had no customers that represented greater than 10% of consolidated revenues during the three and nine months ended June 25, 2022 and June 26, 2021.
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 France, the United Kingdom and Germany. The Company’s sales in Asia-Pacific are predominantly derived from China, Australia and Japan. The “Rest of World” designation includes Canada, Latin America and the Middle East.
Revenues by geography as a percentage of total revenues were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | June 25,
2022 | | June 26,
2021 | | June 25,
2022 | | June 26,
2021 |
| United States | 73.3 | % | | 64.2 | % | | 70.1 | % | | 68.4 | % |
| Europe | 16.4 | % | | 24.7 | % | | 19.2 | % | | 22.3 | % |
| Asia-Pacific | 7.1 | % | | 7.7 | % | | 7.7 | % | | 6.2 | % |
| Rest of World | 3.2 | % | | 3.4 | % | | 3.0 | % | | 3.1 | % |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(15) 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.
The Company’s effective tax rates for the three and nine months ended June 25, 2022 were 8.1% and 18.1%, respectively, compared to 20.6% and 21.0%, respectively, for the corresponding periods in the prior year.
The effective tax rates for the three and nine months ended June 25, 2022 were lower than the U.S. statutory tax rate primarily due to the impact of the U.S. deduction for foreign derived intangible income, reserve releases resulting from statute of limitations expirations, and the geographic mix of income earned by our international subsidiaries, which are taxed at rates lower than the U.S. statutory tax rate, partially offset by state income taxes.
The effective tax rate for the three months ended June 26, 2021 was lower than the U.S. statutory tax rate primarily due to the impact of the U.S. deduction for foreign derived intangible income, the geographic mix of income earned by our international subsidiaries, which are taxed at rates lower than the U.S. statutory tax rate, and federal and state tax credits, partially offset by state income taxes. The effective tax rate for the nine months ended June 26, 2021 was equal to the U.S. statutory tax rate as the impact of the U.S. deduction for foreign derived intangible income and the geographic mix of income earned by our international subsidiaries, which are taxed at rates lower than the U.S. statutory tax rate, was offset by state income taxes.
Through the third quarter of fiscal 2022, the Company received $422.6 million in refunds related to federal and state carryback claims, including interest.
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. 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. Pursuant to ASC 450, the Company has recorded loss contingencies with respect to some of these positions. While the Company believes its estimated losses recorded are reasonable, certain audits are still ongoing and additional charges could be recorded in the future.
In January 2022, the Company settled a state non-income tax audit for fiscal years 2016-2017 for $5.4 million, which was previously accrued. In the third quarter of fiscal 2022, the Company reversed $5.2 million in non-income tax reserves related to tax credits received for research and development expenditures for calendar years 2018-2020 as a result of a foreign non-income tax audit settlement finalized in July 2022.
(16) Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Description | As of June 25, 2022 | | As of September 25, 2021 |
Gross
Carrying
Value | | Accumulated
Amortization | | Gross
Carrying
Value | | Accumulated
Amortization |
| Acquired intangible assets: | | | | | | | |
| Developed technology | $ | 4,605.7 | | | $ | 3,389.8 | | | $ | 4,597.7 | | | $ | 3,184.2 | |
| In-process research and development | 64.5 | | | — | | | 71.6 | | | — | |
| Customer relationships | 607.9 | | | 530.9 | | | 591.7 | | | 510.1 | |
| Trade names | 267.1 | | | 200.0 | | | 268.1 | | | 191.8 | |
| | | | | | | |
| Non-competition agreements | 1.4 | | | 1.4 | | | 1.5 | | | 1.5 | |
| Business licenses | 2.4 | | | 2.4 | | | 2.5 | | | 2.5 | |
| Total acquired intangible assets | $ | 5,549.0 | | | $ | 4,124.5 | | | $ | 5,533.1 | | | $ | 3,890.1 | |
| | | | | | | |
| Internal-use software | 23.6 | | | 17.5 | | | 23.5 | | | 17.2 | |
| Capitalized software embedded in products | 26.1 | | | 20.2 | | | 25.5 | | | 15.6 | |
| Total intangible assets | $ | 5,598.7 | | | $ | 4,162.2 | | | $ | 5,582.1 | | | $ | 3,922.9 | |
The estimated remaining amortization expense of the Company's acquired intangible assets as of June 25, 2022 for each of the five succeeding fiscal years was as follows:
| | | | | |
| Remainder of Fiscal 2022 | $ | 86.2 | |
| Fiscal 2023 | $ | 236.6 | |
| Fiscal 2024 | $ | 227.6 | |
| Fiscal 2025 | $ | 213.1 | |
| Fiscal 2026 | $ | 178.8 | |
(17) Product Warranties
Product warranty activity was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at
Beginning of
Period | | Provisions | | Acquired | | | | Settlements/
Adjustments | | Balance at
End of Period |
| Nine Months Ended: | | | | | | | | | | | |
| June 25, 2022 | $ | 8.8 | | | $ | 5.1 | | | $ | — | | | | | $ | (5.3) | | | $ | 8.6 | |
| June 26, 2021 | $ | 9.9 | | | $ | 6.1 | | | $ | 0.3 | | | | | $ | (6.7) | | | $ | 9.6 | |
(18) Accumulated Other Comprehensive Loss
The following tables summarize the changes in accumulated balances of other comprehensive loss for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 25, 2022 | | Nine Months Ended June 25, 2022 |
| Foreign Currency Translation | | Pension Plans | | | | Hedged Interest Rate Swaps | | Total | | Foreign Currency Translation | | Pension Plans | | | | Hedged Interest Rate Swaps | Total |
| Beginning Balance | $ | (115.4) | | | $ | (1.3) | | | | | $ | 12.6 | | | $ | (104.1) | | | $ | (43.1) | | | $ | (1.3) | | | | | $ | (14.7) | | $ | (59.1) | |
| Other comprehensive income (loss) before reclassifications | (52.0) | | | — | | | | | 8.4 | | | (43.6) | | | (124.3) | | | — | | | | | 35.7 | | (88.6) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Ending Balance | $ | (167.4) | | | $ | (1.3) | | | | | $ | 21.0 | | | $ | (147.7) | | | $ | (167.4) | | | $ | (1.3) | | | | | $ | 21.0 | | $ | (147.7) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 26, 2021 | | Nine Months Ended June 26, 2021 |
| Foreign Currency Translation | | | | Pension Plans | | | | Hedged Interest Rate Swaps | | Total | | Foreign Currency Translation | | Pension Plans | | Hedged Interest Rate Caps | | Hedged Interest Rate Swaps | Total |
| Beginning Balance | $ | (14.5) | | | | | $ | (1.8) | | | | | $ | (19.5) | | | $ | (35.8) | | | $ | (22.9) | | | $ | (1.8) | | | $ | (0.9) | | | $ | (24.1) | | $ | (49.7) | |
| Other comprehensive income (loss) before reclassifications | (9.4) | | | | | — | | | | | 3.0 | | | (6.4) | | | (1.0) | | | — | | | 0.4 | | | 7.6 | | 7.0 | |
| Amounts reclassified to statement of income | — | | | | | — | | | | | — | | | — | | | — | | | — | | | 0.5 | | | — | | 0.5 | |
| Ending Balance | $ | (23.9) | | | | | $ | (1.8) | | | | | $ | (16.5) | | | $ | (42.2) | | | $ | (23.9) | | | $ | (1.8) | | | $ | — | | | $ | (16.5) | | $ | (42.2) | |
(19) Share Repurchase
On December 9, 2020, the Company's Board of Directors authorized a new five-year share repurchase plan to repurchase up to $1.0 billion of the Company's outstanding common stock. The prior plan was terminated in connection with this new authorization. During the nine month ended June 25, 2022, the Company repurchased 5.2 million shares of its common stock for total consideration of $367.0 million. There were no share repurchases in the third quarter of fiscal 2022. As of June 25, 2022, $324.7 million remained available under this authorization.
(20) New Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The FASB issued this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and are applicable to the Company in fiscal 2022. The adoption of ASU No. 2019-12 did not have a material impact on the Company's consolidated financial position and results of operations.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The FASB issued this Update to clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815. This update could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. For entities that have adopted the amendments in Update 2020-01, the updated guidance is effective for annual periods beginning after December 15, 2020, and is applicable to the Company in fiscal 2022. The adoption of ASU No. 2020-01 did not have a material impact on the Company's consolidated financial position and results of operations.
In January 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The FASB issued this Update as optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. This update will provide optional expedients and exceptions for applying GAAP to only contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. For entities that have adopted the amendments in Update 2020-04, the updated guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 in the first quarter of fiscal 2022, which did not have a material impact on the Company's consolidated financial position and results of operations.
In January 2021, FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) Scope. The FASB issued this Update in response to stakeholder concerns about potential diversity in practice. The FASB decided to clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. This update provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to only contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. For entities that have adopted the amendments in Update 2021-01, the updated guidance is effective for all entities immediately as of January 2021. The Company adopted ASU 2021-01 in the first quarter of fiscal 2022, which did not have a material impact on the Company's consolidated financial position and results of operations.
In May 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842), Lessors - Certain Leases with Variable Lease Payments. This Update addresses an issue related to a lessor's accounting for certain leases with variable lease payments. The amendments in this Update affect lessors with lease contracts that (1) have variable lease payments that do not depend on a reference index or a rate and (2) would have resulted in the recognition of a selling loss at lease commencement if classified as a sales-type lease or a direct financing lease. The Company adopted the amendments in ASU No. 2021-05 in the first quarter of fiscal 2022, which did not have a material effect on the Company's consolidated financial statements.