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 24, 2022 included in the Company’s annual report on Form 10-K filed with the SEC on November 15, 2022. 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 six months ended April 1, 2023 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending September 30, 2023. Fiscal 2023 is a 53-week fiscal year, and the additional week is included in the first quarter of fiscal 2023 consistent with the Company’s historical fiscal calendar.
Subsequent Events Consideration
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that may require additional disclosure. Subsequent events have been evaluated as required. There were no material recognized or unrecognized subsequent events affecting the unaudited consolidated financial statements as of and for the three and six months ended April 1, 2023.
(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 through its Biotheranostics CLIA laboratory, which is included in its Molecular Diagnostics business. The Company’s products are sold primarily through a direct sales force, and within international markets, there is more reliance on distributors and resellers. Revenue is recorded net of sales tax. The following tables provide revenue from contracts with customers by business and geographic region on a disaggregated basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 1, 2023 | | Three Months Ended March 26, 2022 |
Business (in millions) | United States | International | Total | | United States | International | Total |
Diagnostics: | | | | | | | |
| Cytology & Perinatal | $ | 69.0 | | $ | 42.9 | | $ | 111.9 | | | $ | 72.1 | | $ | 43.3 | | $ | 115.4 | |
| Molecular Diagnostics | 263.0 | | 79.2 | | 342.2 | | | 563.8 | | 298.7 | | 862.5 | |
| Blood Screening | 10.6 | | — | | 10.6 | | | 9.2 | | — | | 9.2 | |
Total | $ | 342.6 | | $ | 122.1 | | $ | 464.7 | | | $ | 645.1 | | $ | 342.0 | | $ | 987.1 | |
| | | | | | | | |
Breast Health: | | | | | | | |
| Breast Imaging | $ | 233.5 | | $ | 78.0 | | $ | 311.5 | | | $ | 187.4 | | $ | 57.6 | | $ | 245.0 | |
| Interventional Breast Solutions | 59.8 | | 14.1 | | 73.9 | | | 52.1 | | 13.3 | | 65.4 | |
| | | | | | | | |
Total | $ | 293.3 | | $ | 92.1 | | $ | 385.4 | | | $ | 239.5 | | $ | 70.9 | | $ | 310.4 | |
| | | | | | | | |
GYN Surgical | $ | 113.6 | | $ | 31.2 | | $ | 144.8 | | | $ | 94.0 | | $ | 23.3 | | $ | 117.3 | |
| | | | | | | |
Skeletal Health | $ | 19.2 | | $ | 12.4 | | $ | 31.6 | | | $ | 13.8 | | $ | 7.1 | | $ | 20.9 | |
| | $ | 768.7 | | $ | 257.8 | | $ | 1,026.5 | | | $ | 992.4 | | $ | 443.3 | | $ | 1,435.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended April 1, 2023 | | Six Months Ended March 26, 2022 |
Business (in millions) | United States | International | Total | | United States | International | Total |
Diagnostics: | | | | | | | |
| Cytology & Perinatal | $ | 147.1 | | $ | 91.5 | | $ | 238.6 | | | $ | 153.0 | | $ | 92.9 | | $ | 245.9 | |
| Molecular Diagnostics | 591.3 | | 176.2 | | 767.5 | | | 1,091.8 | | 584.2 | | 1,676.0 | |
| Blood Screening | 17.9 | | — | | 17.9 | | | 15.6 | | — | | 15.6 | |
Total | $ | 756.3 | | $ | 267.7 | | $ | 1,024.0 | | | $ | 1,260.4 | | $ | 677.1 | | $ | 1,937.5 | |
| | | | | | | | |
Breast Health: | | | | | | | |
| Breast Imaging | $ | 445.8 | | $ | 130.1 | | $ | 575.9 | | | $ | 396.3 | | $ | 131.0 | | $ | 527.3 | |
| Interventional Breast Solutions | 117.5 | | 26.1 | | 143.6 | | | 114.3 | | 28.3 | | 142.6 | |
| | | | | | | | |
Total | $ | 563.3 | | $ | 156.2 | | $ | 719.5 | | | $ | 510.6 | | $ | 159.3 | | $ | 669.9 | |
| | | | | | | | |
GYN Surgical | $ | 236.7 | | $ | 62.2 | | $ | 298.9 | | | $ | 203.3 | | $ | 48.3 | | $ | 251.6 | |
| | | | | | | |
Skeletal Health | $ | 36.0 | | $ | 22.3 | | $ | 58.3 | | | $ | 30.5 | | $ | 17.4 | | $ | 47.9 | |
| | $ | 1,592.3 | | $ | 508.4 | | $ | 2,100.7 | | | $ | 2,004.8 | | $ | 902.1 | | $ | 2,906.9 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
Geographic Regions (in millions) | | April 1, 2023 | March 26, 2022 | | April 1, 2023 | March 26, 2022 |
United States | | $ | 768.7 | | $ | 992.4 | | | $ | 1,592.3 | | $ | 2,004.8 | |
Europe | | 151.5 | | 291.2 | | | 298.8 | | 586.3 | |
Asia-Pacific | | 65.2 | | 109.7 | | | 129.1 | | 229.4 | |
Rest of World | | 41.1 | | 42.4 | | | 80.5 | | 86.4 | |
| | $ | 1,026.5 | | $ | 1,435.7 | | | $ | 2,100.7 | | $ | 2,906.9 | |
The following table provides revenue recognized by source:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
Revenue by type (in millions) | | April 1, 2023 | March 26, 2022 | | April 1, 2023 | March 26, 2022 |
Disposables | | $ | 626.5 | | $ | 1,111.1 | | | $ | 1,354.3 | | $ | 2,217.5 | |
Capital equipment, components and software | | 210.9 | | 157.1 | | | 369.5 | | 354.1 | |
Service | | 183.0 | | 162.6 | | | 366.2 | | 325.4 | |
Other | | 6.1 | | 4.9 | | | 10.7 | | 9.9 | |
| | $ | 1,026.5 | | $ | 1,435.7 | | | $ | 2,100.7 | | $ | 2,906.9 | |
The Company considers revenue to be earned when all of the following criteria are met: the Company has a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the amount the Company expects to receive, including an estimate of uncertain amounts subject to a constraint to ensure revenue is not recognized in an amount that would result in a significant reversal upon resolution of the uncertainty, is determinable; and the Company has transferred control of the promised items to the customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the contract. The transaction price for the contract is measured as the amount of consideration the Company expects to receive in exchange for the goods and services expected to be transferred. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control of the distinct good or service is transferred. Transfer of control for the Company’s products is generally at shipment or delivery, depending on contractual terms, but occurs when title and risk of loss transfers to the customer which represents the point in time when the customer obtains the use of and substantially all of the remaining benefits of the product. As such, the Company’s performance obligation related to product sales is satisfied at a point in time. Revenue from support and maintenance contracts, extended warranty, and professional services for installation, training and repairs is recognized over time based on the period contracted or as the services are performed as these methods represent a faithful depiction of the transfer of goods and services.
The Company recognizes a receivable when it has an unconditional right to payment, which represents the amount the Company expects to collect in a transaction and is most often equal to the transaction price in the contract. Payment terms are typically 30 days in the U.S. but may be longer in international markets. The Company treats shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost and records these costs within costs of product revenue when the corresponding revenue is recognized.
The Company also places instruments (or equipment) at customer sites but retains title to the instrument. The customer has the right to use the instrument for a period of time, and the Company recovers the cost of providing the instrument through the sales of disposables, namely tests and assays in Diagnostics and handpieces in GYN Surgical. These types of agreements include an embedded lease, which is generally an operating lease, for the right to use an instrument and no instrument revenue is recognized at the time of instrument delivery. The Company recognizes a portion of the revenue allocated to the embedded lease concurrent with the sale of disposables over the term of the agreement.
Revenue from laboratory testing services, which is generated by the Company’s Biotheranostics business, is recognized based upon contracted amounts with payors and historical cash collection experience for the same test or same payor group. Revenue is recognized once the laboratory services have been performed, the results have been delivered to the ordering physician, the payor has been identified, and insurance has been verified. The estimated timeframes for cash collection are three months for Medicare payors, six months for Medicare Advantage payors, and nine months for commercial payors.
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 and sales rebates on historical information to the extent it is reasonable to be used as a predictive tool of expected future rebates. To the extent the transaction price includes variable consideration, the Company applies judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. The Company evaluates constraints based on its historical and projected experience with similar customer contracts. The Company’s contracts for the sale of capital equipment and related components, and assays and tests typically do not provide the right to return product, however, its contracts for the sale of its GYN Surgical and Interventional Breast Solutions surgical handpieces provide for a right of return for a limited period of time. In general, estimates of variable consideration and constraints are not material to the Company’s financial statements.
Remaining Performance Obligations
As of April 1, 2023, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $857.4 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 26% of this amount as revenue in fiscal 2023, 36% in fiscal 2024, 23% in fiscal 2025, 11% in fiscal 2026, and 4% thereafter. As permitted, the Company does not include remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.
Contract Assets and Liabilities
The Company discloses accounts receivable separately in the Consolidated Balance Sheets at their net realizable value. Contract assets primarily relate to the Company’s conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were immaterial.
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. The Company records a contract liability, or deferred revenue, when it has an obligation to provide service, and to a much lesser extent product, to the customer and payment is received or due in advance of performance. Deferred revenue primarily relates to support and maintenance contracts and extended warranty obligations within the Company’s Breast Health and Skeletal Health reportable segments. Contract liabilities are classified as other current liabilities and other long-term liabilities in the Consolidated Balance Sheets. The Company recognized revenue of $34.5 million and $101.3 million in the three and six months ended April 1, 2023, respectively, that was included in the contract liability balance at September 24, 2022. The Company recognized $30.9 million and $87.3 million in the three and six months ended March 26, 2022, respectively, that was included in the contract liability balance at September 25, 2021.
Practical Expedients
The Company applies a practical expedient to expense costs to obtain a contract with a customer as incurred when the amortization period would have been one year or less. These costs solely comprise sales commissions and typically the commissions are incurred at the time of shipment of product and upon billings for support and maintenance contracts.
(3) Leases
Lessor Activity - Leases where Hologic is the Lessor
Certain assets, primarily diagnostics instruments, are leased to customers under contractual arrangements that typically include an operating lease and performance obligations for disposables, reagents and other consumables. These contractual arrangements are subject to termination provisions which are evaluated in determining the lease term for lease accounting purposes. Contract terms vary by customer and may include options to terminate the contract or options to extend the contract. Where instruments are provided under operating lease arrangements, some portion or the entire lease revenue may be variable and subject to subsequent non-lease component (e.g., reagent) sales. Sales-type leases are immaterial. The allocation of revenue between the lease and non-lease components is based on stand-alone selling prices. Lease revenue represented less than 3% of the Company’s consolidated revenue for all periods presented.
(4) Fair Value Measurements
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company has investments in derivative instruments comprised of interest rate swaps, forward foreign currency contracts and foreign currency option contracts, which are valued using analyses obtained from independent third-party valuation specialists based on market observable inputs, representing Level 2 assets. The fair values of these derivative contracts represent the estimated amounts the Company would receive or pay to terminate the contracts. Refer to Note 9 for further discussion and information on derivative contracts. In addition, the Company has a contingent consideration liability that is recorded at fair value, which is based on Level 3 inputs. The contingent consideration liability as of April 1, 2023 and March 26, 2022 was related to the Acessa acquisition.
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following at April 1, 2023:
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| | | Fair Value at Reporting Date Using |
| Balance as of April 1, 2023 | | Quoted Prices in Active Market for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
| | | | | | | |
Interest rate swaps | $ | 27.2 | | | $ | — | | | $ | 27.2 | | | $ | — | |
| | | | | | | |
Forward foreign currency contracts | 2.5 | | | — | | | 2.5 | | | — | |
Foreign currency option contracts | 0.3 | | | — | | | 0.3 | | | — | |
Total | $ | 30.0 | | | $ | — | | | $ | 30.0 | | | $ | — | |
Liabilities: | | | | | | | |
Contingent consideration | $ | 3.4 | | | $ | — | | | $ | — | | | $ | 3.4 | |
Interest rate swap | 0.4 | | | — | | | 0.4 | | | — | |
Forward foreign currency contracts | 0.5 | | | — | | | 0.5 | | | — | |
Total | $ | 4.3 | | | $ | — | | | $ | 0.9 | | | $ | 3.4 | |
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 six month periods ended April 1, 2023 and March 26, 2022 were as follows:
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| | Three Month Ended | | Six Months Ended |
| | April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Balance at beginning of period | $ | 23.4 | | | $ | 71.0 | | | $ | 23.4 | | | $ | 75.1 | |
| Contingent consideration recorded at acquisition | — | | | — | | | — | | | — | |
| Fair value adjustments | (12.4) | | | — | | | (12.4) | | | (4.1) | |
| Payments | (7.6) | | | (12.2) | | | (7.6) | | | (12.2) | |
Balance at end of period | $ | 3.4 | | | $ | 58.8 | | | $ | 3.4 | | | $ | 58.8 | |
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, and goodwill. During the first quarter of fiscal 2022, the Company recorded a $4.3 million charge to write-off an equity method investment acquired in the Mobidiag acquisition. There were no other remeasurements in the three and six months ended April 1, 2023 and March 26, 2022.
Disclosure of Fair Value of Financial Instruments
The Company’s financial instruments mainly consist of cash and cash equivalents, accounts receivable, equity investments, interest rate swaps, forward foreign currency contracts, foreign currency option 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 swaps, forward foreign currency contracts and foreign currency option contracts are recorded at fair value. The carrying amount of the insurance contracts are recorded at the cash surrender value, as required by U.S. GAAP, which approximates fair value. The Company believes the carrying amounts of its equity investments approximate fair value.
Amounts outstanding under the Company’s 2021 Credit Agreement of $1.5 billion aggregate principal as of April 1, 2023 are subject to variable rates of interest based on current market rates, and as such, the Company believes the carrying amount of these obligations approximates fair value. The Company’s 4.625% Senior Notes due 2028 (the “2028 Senior Notes”) and 3.250% Senior Notes due 2029 (the “2029 Senior Notes”) had fair values of $388.9 million and $848.4 million, respectively, as of April 1, 2023 based on their trading prices, representing a Level 1 measurement. Refer to Note 7 for the carrying amounts of the various components of the Company’s debt.
(5) Business Combinations
Fiscal 2022 Acquisition
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 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 | (11.7) | |
Goodwill | 68.8 | |
Purchase Price | $ | 160.1 | |
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 Bolder’s business.
As part of the purchase price allocation, the Company determined the identifiable intangible assets were developed technology, 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 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 estimate of the weighted average life for the developed technology, customer relationship, and trade name assets is 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 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.
Contingent Consideration
The Company has a contingent consideration liability related to its acquisition of Acessa Health, Inc. (“Acessa”), which was acquired in August 2020. Acessa developed the ProVu laparoscopic radiofrequency ablation system. The Company estimated the fair value of this liability to be $81.8 million as of the acquisition date. The contingent payments 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 gains. During the year ended September 24, 2022, the Company remeasured the contingent consideration and recorded a gain of $39.5 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 and to a much lesser extent an increase in the discount rate driven by market rates. 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. During the three months ended December 31, 2022, the second measurement period was completed, resulting in a payment of $7.6 million, which was made in the second quarter of fiscal 2023. During the second quarter of fiscal 2023, the Company updated its forecasted revenue and recorded a gain of $12.4 million to record the liability to fair value. The reduction in fair value was due to a decrease in forecasted revenues over the remaining measurement period. As of April 1, 2023, the contingent consideration liability was $3.4 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 informed of their termination and related severance 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 severance benefits are being expensed ratably over the required service period. As a result, the Company recorded severance charges of $0.3 million and $1.0 million during the three and six months ended April 1, 2023, respectively, and $1.6 million in fiscal 2022. The Company estimates that total severance charges, including retention, will be approximately $5.5 million.
During the first and second quarters of fiscal 2023, the Company made various decisions to consolidate and close certain offices in Germany and in connection with such actions to terminate certain individuals across all divisions in multiple departments. For the three and six months ended April 1, 2023, the Company recorded $1.5 million and $1.9 million, respectively, primarily for severance benefits related to these actions. These charges were recorded pursuant to ASC 712, Compensation-Nonretirement Postemployment Benefits (ASC 712) or ASC 420, depending on the employee. The Company estimates that total severance charges will be approximately $3.9 million, and the actions will be completed by September 2023.
(7) Borrowings and Credit Arrangements
The Company’s borrowings consisted of the following:
| | | | | | | | | | | |
| April 1, 2023 | | September 24, 2022 |
Current debt obligations, net of debt discount and deferred issuance costs: | | | |
Term Loan | $ | 26.2 | | | $ | 15.0 | |
| | | |
| | | |
| | | |
Total current debt obligations | $ | 26.2 | | | $ | 15.0 | |
Long-term debt obligations, net of debt discount and issuance costs: | | | |
Term Loan | 1,463.6 | | | 1,475.7 | |
| | | |
2028 Senior Notes | 396.4 | | | 396.1 | |
2029 Senior Notes | 937.7 | | | 936.6 | |
| | | |
Total long-term debt obligations | $ | 2,797.7 | | | $ | 2,808.4 | |
Total debt obligations | $ | 2,823.9 | | | $ | 2,823.4 | |
2021 Credit Agreement
On September 27, 2021, the Company refinanced its then existing term loan and revolving credit facility with Bank of America, N.A. in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, and certain other lenders (the “2018 Credit Agreement”) by entering into a Refinancing Amendment (the “2021 Credit Agreement”). On August 22, 2022, the Company further amended the 2021 Credit Agreement to address the planned phase out of LIBOR by the UK Financial Conduct Authority. Under this amendment, the interest rates applicable to the loans under the 2021 Credit Agreement denominated in U.S. dollars were converted to a variant of the secured overnight financing rate (“SOFR”), as established from time to time by the Federal Reserve Bank of New York, plus a corresponding spread.
The 2021 Credit Agreement provided a $1.5 billion secured term loan facility (the “2021 Term Loan”) and a $2.0 billion revolving credit facility (the “2021 Revolver”). As of April 1, 2023, the principal amount outstanding under the 2021 Term Loan was $1.5 billion, and the interest rate was 5.91% per annum. No amounts were outstanding under the 2021 Revolver, and the full amount was available to be borrowed by the Company.
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 Credit Agreement were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Interest expense | $ | 22.5 | | | $ | 5.7 | | | $ | 42.9 | | | $ | 11.0 | |
Weighted average interest rate | 5.74 | % | | 1.13 | % | | 5.39 | % | | 1.11 | % |
Interest rate at end of period | 5.91 | % | | 1.46 | % | | 5.91 | % | | 1.46 | % |
The Company’s currently effective interest rate swap agreement, which fixes the floating rate on $1.0 billion of aggregate principal under the 2021 Term Loan at 1.23%, resulted in the Company receiving $8.6 million and $15.2 million in the three and six months ended April 1, 2023, respectively, which was recorded as a reduction to interest expense.
The 2021 Credit Agreement contains two financial covenants; a total leverage ratio and an interest coverage ratio, both of which are measured as of the last day of each fiscal quarter. These terms, and calculations thereof, are defined in further detail in the 2021 Credit Agreement. As of April 1, 2023, the Company was in compliance with these covenants.
2028 Senior Notes
As of April 1, 2023, the Company had 4.625% Senior Notes due 2028 (the “2028 Senior Notes”) outstanding in the aggregate principal balance of $400 million. The 2028 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company’s domestic subsidiaries and mature on February 1, 2028.
2029 Senior Notes
As of April 1, 2023, the Company had 3.250% Senior Notes due 2029 (the “2029 Senior Notes”) outstanding in the aggregate principal balance of $950 million. The 2029 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company’s domestic subsidiaries and mature on February 15, 2029.
Interest expense for the 2029 Senior Notes and 2028 Senior Notes was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| Interest Rate | | April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
2028 Senior Notes | 4.625 | % | | 4.8 | | | 4.8 | | | 10.0 | | | 9.6 | |
2029 Senior Notes | 3.250 | % | | 8.2 | | | 8.2 | | | 17.1 | | | 16.4 | |
Total | | | $ | 13.0 | | | $ | 13.0 | | | $ | 27.1 | | | $ | 26.0 | |
Accounts Receivable Securitization Program
During April 2022, the Company repaid the outstanding balance of $248.5 million under its accounts receivable securitization program (the “Securitization Program”). On June 10, 2022, the Company amended the agreement governing the Securitization Program temporarily suspending its ability to borrow and the need to comply with covenants for up to a year. On March 31, 2023, the Company terminated the Securitization Program.
(8) Trade Receivables and Allowance for Credit Losses
The Company applies ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) to its trade receivables and allowances for credit losses, which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The expected credit losses are developed using an estimated loss rate method that considers historical collection experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The estimated loss rates are applied to trade receivables with similar risk characteristics such as the length of time the balance has been outstanding and the location of the customer. In certain instances, the Company may identify individual trade receivable assets that do not share risk characteristics with other trade receivables, in which case the Company records its expected credit losses on an individual asset basis. For example, potential adverse changes to customer liquidity from new macroeconomic events, such as the COVID-19 pandemic and inflation, must be taken into consideration. To date, the Company has not experienced significant customer payment defaults, or identified other significant collectability concerns. In connection with assessing credit losses for individual trade receivable assets, the Company considers significant factors relevant to collectability including those specific to the customer such as bankruptcy, length of time an account is outstanding, and the liquidity and financial position of the customer. If a trade receivable asset is evaluated on an individual basis, the Company excludes those assets from the portfolios of trade receivables evaluated on a collective basis.
The following is a rollforward of the allowance for credit losses as of April 1, 2023 compared to March 26, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Credit Loss | | | | Write-offs, Payments and Foreign Exchange | | Balance at End of Period |
Six Months Ended | | | | | | | | | | |
April 1, 2023 | | $ | 37.7 | | | $ | 1.9 | | | | | $ | (0.2) | | | $ | 39.4 | |
March 26, 2022 | | $ | 40.5 | | | $ | 3.7 | | | | | $ | (2.1) | | | $ | 42.1 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(9) Derivatives
Interest Rate Swaps - Cash Flow Hedge
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposure to some of its interest rate risk through the use of interest rate swaps, which are derivative financial instruments. The Company does not use derivatives for speculative purposes. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in accumulated other comprehensive income (“AOCI”) to the extent the derivative is effective at offsetting the changes in the cash flows being hedged until the hedged item affects earnings.
In fiscal 2019, the Company entered into an interest rate swap contract with an effective date of December 23, 2020 and a termination date of December 17, 2023 to hedge a portion of its variable rate debt. On August 25, 2022, the interest rate swap agreement was restructured (consistent with the 2021 Credit Agreement) to convert the benchmark interest rate from LIBOR to the SOFR rate effective September 23, 2022 with a termination date of December 17, 2023. The Company applied the practical and optional expedients in ASC 848, Reference Rate Reform, to evaluate the impact of modifying the contract, which resulted in no change to the accounting for this derivative contract. The notional amount of this swap is $1.0 billion. The restructured interest rate swap fixes the SOFR component of the variable interest rate on $1.0 billion of the notional amount under the 2021 Credit Agreement at 1.23%. The critical terms of the restructured interest rate swap are designed to mirror the terms of the Company’s SOFR-based borrowings under the 2021 Credit Agreement and therefore are highly effective at offsetting the cash flows being hedged. The Company designated this derivative as a cash flow hedge of the variability of the SOFR-based interest payments on $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 $26.0 million as of April 1, 2023.
On March 23, 2023, the Company entered into two consecutive interest rate swap contracts with the first contract having an effective date of December 17, 2023 and terminating on December 27, 2024, and the second contract having an effective date of December 27, 2024 and terminating on September 25, 2026. The notional amount of these swaps is $500 million, and the first interest rate swap fixes the SOFR component of the variable interest rate at 3.46%, and the second interest rate swap fixes the SOFR component of the variable interest rate at 2.98%. The critical terms of the interest rate swaps are designed to mirror the terms of the Company’s SOFR-based borrowings under the 2021 Credit Agreement and therefore are highly effective at offsetting the cash flows being hedged. The Company designated this derivative as a cash flow hedge of the variability of the SOFR-based interest payments on $500 million of principal. Therefore, changes in the fair value of the swap are recorded in AOCI. The fair value of these swaps was an asset position of $1.2 million and a liability position of $0.4 million, respectively, as of April 1, 2023.
Forward Foreign Currency Exchange Contracts and Foreign Currency Option Contracts
The Company enters into forward foreign currency exchange contracts and foreign currency option contracts to mitigate certain operational exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s cash and operations that are denominated in currencies other than the U.S. dollar, primarily the Euro, the UK Pound, the Australian dollar, the Canadian dollar, the Chinese Yuan and the Japanese Yen. These foreign currency contracts are entered into to support transactions made in the ordinary course of business and are not speculative in nature. The contracts are generally for periods of one year or less. The Company did not elect hedge accounting for these contracts and as of April 1, 2023 the notional amount was $200.3 million. The change in the fair value of these contracts is recognized directly in earnings as a component of other income (expense), net.
Realized and unrealized gains and losses from these contracts, which were the only derivative contracts not designated for hedge accounting, for the three and six months ended April 1, 2023 and March 26, 2022, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Amount of realized gain (loss) recognized in income | | | | | | | |
Forward foreign currency contracts | $ | (0.3) | | | $ | 10.4 | | | $ | (2.7) | | | $ | 22.8 | |
Foreign currency option contracts | (1.3) | | | — | | | (1.5) | | | — | |
| $ | (1.6) | | | $ | 10.4 | | | $ | (4.2) | | | $ | 22.8 | |
Amount of unrealized gain (loss) recognized in income | | | | | | | |
Forward foreign currency contracts | $ | — | | | $ | (0.1) | | | $ | (13.8) | | | $ | 6.7 | |
Foreign currency option contracts | 0.5 | | | — | | | (7.8) | | | — | |
| $ | 0.5 | | | $ | (0.1) | | | $ | (21.6) | | | $ | 6.7 | |
Amount of gain (loss) recognized in income | | | | | | | |
Total | $ | (1.1) | | | $ | 10.3 | | | $ | (25.8) | | | $ | 29.5 | |
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 April 1, 2023:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | April 1, 2023 | | September 24, 2022 |
Assets: | | | | | |
Derivative instruments designated as a cash flow hedge: | | | | | |
| | | | | |
| | | | | |
Interest rate swap contracts | Prepaid expenses and other current assets | | $ | 27.1 | | | $ | 31.9 | |
Interest rate swap contracts | Other assets | | 0.1 | | | 7.0 | |
| | | $ | 27.2 | | | $ | 38.9 | |
| | | | | |
Derivatives not designated as hedging instruments: | | | | | |
Forward foreign currency contracts | Prepaid expenses and other current assets | | $ | 2.5 | | | $ | 15.8 | |
Foreign currency option contracts | Prepaid expenses and other current assets | | 0.3 | | | 10.6 | |
| | | $ | 2.8 | | | $ | 26.4 | |
| | | | | |
Liabilities: | | | | | |
Derivative instruments designated as a cash flow hedge: | | | | | |
| | | | | |
Interest rate swap contract | Other long-term liabilities | | $ | 0.4 | | | $ | — | |
| | | | | |
Derivatives not designated as hedging instruments: | | | | | |
Forward foreign currency contracts | Accrued expenses | | $ | 0.5 | | | $ | — | |
The following table presents the unrealized gain (loss) recognized in AOCI related to the interest rate swap for the following reporting periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Amount of (loss) gain recognized in other comprehensive income, net of taxes: | | | | | | | |
Interest rate swaps | $ | (6.4) | | | $ | 19.4 | | | $ | (9.3) | | | $ | 27.3 | |
| | | | | | | |
Total | $ | (6.4) | | | $ | 19.4 | | | $ | (9.3) | | | $ | 27.3 | |
| | | | | | | |
(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. On August 11, 2022, the Court of Appeals affirmed the district court ruling on the issue of assignor estoppel, which barred Minerva from challenging the validity of the patent rights it assigned to the Company and reinstated its earlier judgment against Minerva on infringement. On September 11, 2022, Minerva petitioned for en banc review of the Court of Appeals decision. The Company filed its response on October 25, 2022, and on November 10, 2022, the Court of Appeals denied Minerva's petition ending the appeals process. During the first quarter of 2023, the Company received a payment for infringement damages in the amount of $7.4 million, which included the original award of $4.8 million plus post-trial damages and interest. This amount was recorded as a credit to general and administrative expenses in the first quarter of fiscal 2023.
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. On February 15, 2023, the Court of Appeals affirmed the district court’s judgment in favor of the Company and dismissed the other rulings Minerva appealed as moot. On April 18, 2023, the Company entered into a settlement agreement with Minerva to resolve all remaining patent litigation matters, the impact of which was immaterial.
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 | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Basic weighted average common shares outstanding | 247,730 | | | 251,574 | | | 247,524 | | | 252,537 | |
Weighted average common stock equivalents from assumed exercise of stock options and issuance of restricted stock units | 2,063 | | | 2,084 | | | 2,013 | | | 2,327 | |
| | | | | | | |
Diluted weighted average common shares outstanding | 249,793 | | | 253,658 | | | 249,537 | | | 254,864 | |
Weighted-average anti-dilutive shares related to: | | | | | | | |
Outstanding stock options and restricted stock units | 792 | | | 1,129 | | | 1,211 | | | 999 | |
| | | | | | | |
(12) Stock-Based Compensation
The following presents stock-based compensation expense in the Company’s Consolidated Statements of Income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Cost of revenues | $ | 2.7 | | | $ | 2.6 | | | $ | 5.6 | | | $ | 4.9 | |
Research and development | 3.1 | | | 2.8 | | | 6.5 | | | 5.5 | |
Selling and marketing | 3.0 | | | 2.8 | | | 6.3 | | | 5.4 | |
General and administrative | 14.4 | | | 9.6 | | | 25.3 | | | 20.7 | |
| | | | | | | |
| $ | 23.2 | | | $ | 17.8 | | | $ | 43.7 | | | $ | 36.5 | |
The Company granted options to purchase 0.5 million and 0.6 million shares of the Company’s common stock during the six months ended April 1, 2023 and March 26, 2022, respectively, with weighted-average exercise prices of $74.59 and $71.10, respectively. There were 4.3 million options outstanding at April 1, 2023 with a weighted-average exercise price of $51.87.
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 | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Risk-free interest rate | 4.3 | % | | 1.1 | % | | 4.3 | % | | 1.1 | % |
Expected volatility | 33.9 | % | | 34.2 | % | | 33.9 | % | | 34.2 | % |
Expected life (in years) | 4.8 | | 4.8 | | 4.8 | | 4.8 |
Dividend yield | — | | | — | | | — | | | — | |
Weighted average fair value of options granted | $ | 27.42 | | | $ | 20.80 | | | $ | 25.92 | | | $ | 21.02 | |
The Company granted 0.6 million and 0.6 million restricted stock units (“RSUs”) during the six months ended April 1, 2023 and March 26, 2022, respectively, with weighted-average grant date fair values of $74.44 and $71.15 per unit, respectively. In addition, the Company granted 0.1 million and 0.1 million performance stock units (“PSUs”) during the six months ended April 1, 2023 and March 26, 2022, respectively, to members of its senior management team, which have a weighted-average grant date fair value of $74.35 and $71.16 per unit, respectively. Each recipient of PSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of a three-year performance period, provided that the Company’s defined Return on Invested Capital metrics are achieved. The Company also granted 0.1 million and 0.1 million of FCF PSUs based on a three-year cumulative free cash flow measure (“FCF PSUs”) to members of its senior management team, which had a grant date fair value of $74.35 and $71.16 per unit during the six months ended April 1, 2023 and March 26, 2022, respectively. Each recipient of FCF PSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of the three-year measurement period. The PSUs and FCF PSUs cliff-vest three years from the date of grant, and the Company recognizes compensation expense ratably over the required service period based on its estimate of the probable number of shares that will vest upon achieving the measurement criteria. If there is a change in the estimate of the number of shares that are probable of vesting, the Company will cumulatively adjust compensation expense in the period that the change in estimate is made. The Company also granted 0.1 million and 0.1 million market-based awards (“MSUs”) to members of its senior management team during the six months ended April 1, 2023 and March 26, 2022, respectively. Each recipient of MSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of a three-year performance period based upon achieving a certain total shareholder return relative to a defined peer group. The MSUs were valued at $97.91 and $75.43 per share using the Monte Carlo simulation model in fiscal 2023 and 2022, 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 April 1, 2023, there was 1.7 million in aggregate unvested RSUs, PSUs, FCF PSUs and MSUs outstanding.
At April 1, 2023, there was $18.8 million and $77.3 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 2.2 and 1.9 years, respectively.
(13) Other Balance Sheet Information
| | | | | | | | | | | |
| April 1, 2023 | | September 24, 2022 |
Inventories | | | |
Raw materials | $ | 293.3 | | | $ | 252.9 | |
Work-in-process | 65.8 | | | 60.1 | |
Finished goods | 328.5 | | | 310.7 | |
| $ | 687.6 | | | $ | 623.7 | |
| | | | | | | | | | | |
Property, plant and equipment | | | |
Equipment | $ | 407.6 | | | $ | 394.8 | |
Equipment under customer usage agreements | 506.8 | | | 486.5 | |
Building and improvements | 206.2 | | | 196.0 | |
Leasehold improvements | 47.1 | | | 44.8 | |
Land | 41.1 | | | 40.9 | |
Furniture and fixtures | 19.2 | | | 16.7 | |
Finance lease right of use asset | 8.4 | | | 7.5 | |
| $ | 1,236.4 | | | $ | 1,187.2 | |
Less – accumulated depreciation and amortization | (738.5) | | | (705.6) | |
| $ | 497.9 | | | $ | 481.6 | |
In September 2020 and October 2020, the Company was awarded 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 were 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 has accounted for the funds received under these grants as a reimbursement of the purchased capital equipment. The Company procured and paid 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 reimbursed the Company upon it meeting certain requirements. However, the DOD retained title to the assets purchased under the agreement, and title was transferred to the Company upon meeting certain milestones of the manufacturing efforts and obtaining approval from the DOD that the respective milestone had been met. As of the end of fiscal 2022, the Company had completed all milestones under the agreement and was waiting for approval by the DOD. During the second quarter of fiscal 2023, the Company received the final DOD approvals and the final payment from the DOD of $20.5 million, which was recorded as a reduction of the cost basis of the purchased equipment. As of April 1, 2023, no other amounts were awaiting approval and all defined milestones were completed.
(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.
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 six months ended April 1, 2023 and March 26, 2022. Segment information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
Total revenues: | | | | | | | |
Diagnostics | $ | 464.7 | | | $ | 987.1 | | | $ | 1,024.0 | | | $ | 1,937.5 | |
Breast Health | 385.4 | | | 310.4 | | | 719.5 | | | 669.9 | |
GYN Surgical | 144.8 | | | 117.3 | | | 298.9 | | | 251.6 | |
Skeletal Health | 31.6 | | | 20.9 | | | 58.3 | | | 47.9 | |
| | | | | | | |
| $ | 1,026.5 | | | $ | 1,435.7 | | | $ | 2,100.7 | | | $ | 2,906.9 | |
Income from operations: | | | | | | | |
Diagnostics | $ | 105.3 | | | $ | 540.6 | | | $ | 256.4 | | | $ | 1,072.4 | |
Breast Health | 109.9 | | | 49.3 | | | 170.4 | | | 131.0 | |
GYN Surgical | 52.3 | | | 5.7 | | | 101.0 | | | 32.3 | |
Skeletal Health | 4.6 | | | (1.5) | | | 6.7 | | | (0.3) | |
| | | | | | | |
| $ | 272.1 | | | $ | 594.1 | | | $ | 534.5 | | | $ | 1,235.4 | |
Depreciation and amortization: | | | | | | | |
Diagnostics | $ | 56.1 | | | $ | 68.2 | | | $ | 116.0 | | | $ | 137.6 | |
Breast Health | 12.9 | | | 13.1 | | | 26.5 | | | 28.6 | |
GYN Surgical | 11.6 | | | 24.6 | | | 23.9 | | | 47.5 | |
Skeletal Health | 0.2 | | | 0.2 | | | 0.3 | | | 0.4 | |
| | | | | | | |
| $ | 80.8 | | | $ | 106.1 | | | $ | 166.7 | | | $ | 214.1 | |
Capital expenditures: | | | | | | | |
Diagnostics | $ | 20.2 | | | $ | 26.5 | | | $ | 36.1 | | | $ | 57.5 | |
Breast Health | 6.9 | | | 2.8 | | | 14.1 | | | 7.0 | |
GYN Surgical | 2.8 | | | 2.0 | | | 6.7 | | | 4.1 | |
Skeletal Health | 0.1 | | | 0.1 | | | 0.2 | | | 0.2 | |
| | | | | | | |
Corporate | 2.1 | | | 0.9 | | | 4.1 | | | 1.1 | |
| $ | 32.1 | | | $ | 32.3 | | | $ | 61.2 | | | $ | 69.9 | |
| | | | | | | | | | | |
| April 1, 2023 | | September 24, 2022 |
Identifiable assets: | | | |
Diagnostics | $ | 2,940.4 | | | $ | 2,881.7 | |
Breast Health | 1,250.9 | | | 1,245.8 | |
GYN Surgical | 1,464.2 | | | 1,461.5 | |
| | | |
Skeletal Health | 22.7 | | | 27.5 | |
Corporate | 3,770.5 | | | 3,454.7 | |
| $ | 9,448.7 | | | $ | 9,071.2 | |
The Company had no customers that represented greater than 10% of consolidated revenues during the three and six months ended April 1, 2023 and March 26, 2022.
The Company operates in the major geographic areas noted in the below chart. Revenue data is based upon customer location. Other than the United States, no single country accounted for more than 10% of consolidated revenues. The Company’s sales in Europe are predominantly derived from the United Kingdom, Germany, France, Spain, Italy and the Netherlands. The Company’s sales in Asia-Pacific are predominantly derived from China, Australia and Japan. The “Rest of World” designation includes Canada, Latin America and the Middle East.
Revenues by geography as a percentage of total revenues were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 1, 2023 | | March 26, 2022 | | April 1, 2023 | | March 26, 2022 |
United States | 74.9 | % | | 69.1 | % | | 75.8 | % | | 69.0 | % |
Europe | 14.8 | % | | 20.3 | % | | 14.2 | % | | 20.1 | % |
Asia-Pacific | 6.4 | % | | 7.6 | % | | 6.1 | % | | 7.9 | % |
Rest of World | 3.9 | % | | 3.0 | % | | 3.9 | % | | 3.0 | % |
| 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 six months ended April 1, 2023 were 21.8% and 21.7%, respectively, compared to 20.7% and 20.2%, respectively, for the corresponding periods in the prior year.
The effective tax rates for the three and six months ended April 1, 2023 were higher than the U.S. statutory tax rate primarily due to income tax reserves, the global intangible low-taxed income inclusion, and state income taxes, partially offset by the impact of the U.S. deduction for foreign derived intangible income, the geographic mix of income earned by the Company’s international subsidiaries, which are taxed at rates lower than the U.S. statutory tax rate, and federal and state tax credits.
The effective tax rates for the three and six months ended March 26, 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 and the geographic mix of income earned by the Company’s international subsidiaries, which are taxed at rates lower than the U.S. statutory tax rate, partially offset by state income taxes.
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. Such amounts were not material for the three and six months ended April 1, 2023 and March 26, 2022. While the Company believes its estimated losses recorded are reasonable, certain audits are still ongoing and additional charges could be recorded in the future.
(16) Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
Description | As of April 1, 2023 | | As of September 24, 2022 |
Gross Carrying Value | | Accumulated Amortization | | Gross Carrying Value | | Accumulated Amortization |
Acquired intangible assets: | | | | | | | |
Developed technology | $ | 4,607.5 | | | $ | 3,574.1 | | | $ | 4,565.6 | | | $ | 3,458.2 | |
In-process research and development | 36.8 | | | — | | | 33.0 | | | — | |
Customer relationships | 607.9 | | | 547.1 | | | 601.9 | | | 535.6 | |
Trade names | 267.6 | | | 209.3 | | | 265.2 | | | 203.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total acquired intangible assets | $ | 5,519.8 | | | $ | 4,330.5 | | | $ | 5,465.7 | | | $ | 4,197.1 | |
| | | | | | | |
Internal-use software | 28.5 | | | 21.4 | | | 26.0 | | | 19.9 | |
Capitalized software embedded in products | 27.5 | | | 21.7 | | | 26.5 | | | 20.6 | |
Total intangible assets | $ | 5,575.8 | | | $ | 4,373.6 | | | $ | 5,518.2 | | | $ | 4,237.6 | |
The estimated remaining amortization expense of the Company’s acquired intangible assets as of April 1, 2023 for each of the five succeeding fiscal years was as follows:
| | | | | |
Remainder of Fiscal 2023 | $ | 117.4 | |
Fiscal 2024 | $ | 225.2 | |
Fiscal 2025 | $ | 210.3 | |
Fiscal 2026 | $ | 177.9 | |
Fiscal 2027 | $ | 90.9 | |
(17) Product Warranties
Product warranty activity was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | | Provisions | | | | | | Settlements/ Adjustments | | Balance at End of Period |
Six Months Ended: | | | | | | | | | | | |
April 1, 2023 | $ | 8.0 | | | $ | 3.3 | | | | | | | $ | (3.8) | | | $ | 7.5 | |
March 26, 2022 | $ | 8.8 | | | $ | 3.7 | | | | | | | $ | (4.1) | | | $ | 8.4 | |
(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 April 1, 2023 | | Six Months Ended April 1, 2023 |
| Foreign Currency Translation | | Pension Plans | | | | Hedged Interest Rate Swaps | | Total | | Foreign Currency Translation | | Pension Plans | | | | Hedged Interest Rate Swaps | | Total |
Beginning Balance | $ | (153.4) | | | $ | (0.3) | | | | | $ | 26.4 | | | $ | (127.3) | | | $ | (267.2) | | | $ | (0.3) | | | | | $ | 29.3 | | | $ | (238.2) | |
Other comprehensive income (loss) before reclassifications | 15.3 | | | — | | | | | (6.4) | | | 8.9 | | | 129.1 | | | — | | | | | (9.3) | | | 119.8 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Ending Balance | $ | (138.1) | | | $ | (0.3) | | | | | $ | 20.0 | | | $ | (118.4) | | | $ | (138.1) | | | $ | (0.3) | | | | | $ | 20.0 | | | $ | (118.4) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 26, 2022 | | Six Months Ended March 26, 2022 |
| Foreign Currency Translation | | | | Pension Plans | | | | Hedged Interest Rate Swaps | | Total | | Foreign Currency Translation | | Pension Plans | | | | Hedged Interest Rate Swaps | | Total |
Beginning Balance | $ | (80.9) | | | | | $ | (1.3) | | | | | $ | (6.8) | | | $ | (89.0) | | | $ | (43.1) | | | $ | (1.3) | | | | | $ | (14.7) | | | $ | (59.1) | |
Other comprehensive income (loss) before reclassifications | (34.5) | | | | | — | | | | | 19.4 | | | $ | (15.1) | | | (72.3) | | | — | | | | | 27.3 | | | (45.0) | |
| | | | | | | | | | | | | | | | | | | | | |
Ending Balance | $ | (115.4) | | | | | $ | (1.3) | | | | | $ | 12.6 | | | $ | (104.1) | | | $ | (115.4) | | | $ | (1.3) | | | | | $ | 12.6 | | | $ | (104.1) | |
(19) Share Repurchase
On September 22, 2022, the Board of Directors authorized a stock repurchase program, with a five-year term, to repurchase up to $1.0 billion of the Company’s outstanding common stock, effective as of the close of trading September 23, 2022. This repurchase program replaced the previous $1.0 billion authorization. During the three and six months ended April 1, 2023, the Company repurchased 0.6 million and 2.2 million shares of its common stock for total consideration of $50.0 million and $150.0 million, respectively. As of April 1, 2023, $850.0 million remained available under this authorization.