HOLOGIC, INC. CAUTIONARY STATEMENT
Some of the statements contained in this report and documents incorporated by reference herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements may include, but are not limited to, statements regarding: •the ongoing and possible future effects of global challenges, including macroeconomic uncertainties, the war inUkraine , other economic disruptions andU.S. and global recession concerns, on our customers and suppliers and on our business, financial condition, results of operations and cash flows and our ability to draw down our revolver; •the effect of the worldwide political and social uncertainty and divisions, including the impact on trade regulation and tariffs, that may adversely impact the cost and sale of our products in certain countries, or increase the costs we may incur to purchase materials, parts and equipment from our suppliers;
•the ongoing and possible future effects of supply chain constraints, including the availability of critical raw materials and components, including semiconductor chips, as well as cost inflation in materials, packaging and transportation;
•the possibility of interruptions or delays at our manufacturing facilities, or the failure to secure alternative suppliers if any of our sole source third-party manufacturers fail to supply us;
•the development of new competitive technologies and products;
•our ability to predict accurately the demand for our products, and products under development and to develop strategies to address markets successfully;
•continued demand for our COVID-19 assays;
•the timing, scope and effect of further
•potential cybersecurity threats and targeted computer crime;
•the ability to execute acquisitions and the impact and anticipated benefits of completed acquisitions and acquisitions we may complete in the future;
•the ability to consolidate certain of our manufacturing and other operations on a timely basis and within budget, without disrupting our business and to achieve anticipated cost synergies related to such actions;
•the ability to successfully manage ongoing organizational and strategic changes, including our ability to attract, motivate and retain key employees and maintain engagement and efficiency in remote work environments;
•our ability to obtain regulatory approvals and clearances for our products, including the implementation of the European Union Medical Device Regulations, and maintain compliance with complex and evolving regulations;
•the coverage and reimbursement decisions of third-party payors;
•the uncertainty of the impact of cost containment efforts and federal healthcare reform legislation on our business and results of operations;
•the guidelines, recommendations, and studies published by various organizations relating to the use of our products;
•the effect of consolidation in the healthcare industry;
•our ability to meet production and delivery schedules for our products;
•our ability to protect our intellectual property rights;
•the possibility that products may contain undetected errors or defects or otherwise not perform as anticipated;
•the anticipated development of markets we sell our products into and the success of our products in these markets;
•the anticipated performance and benefits of our products;
•business strategies;
•anticipated trends relating to our financial condition or results of operations, including the impact of interest rate and foreign currency exchange fluctuations;
•estimated asset and liability values;
•the impact of future tax legislation;
•conducting business internationally;
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•the impact and costs and expenses of any litigation we may be subject to now or in the future;
•our compliance with covenants contained in our debt agreements; and
•our liquidity, capital resources and the adequacy thereof.
In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "intends," "anticipates," "believes," "estimates," "projects," "predicts," "likely," "future," "strategy." "potential," "seeks," "goal" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include the cautionary statements set forth herein and in our other filings with theSecurities and Exchange Commission , including the "Risk Factors" set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those described in our Annual Report on Form 10-K for the fiscal year endedSeptember 24, 2022 or any other of our subsequently filed reports. We qualify all of our forward-looking statements by these cautionary statements.
OVERVIEW
We are a developer, manufacturer and supplier of premium diagnostics products, medical imaging systems, and surgical products focused on women's health and well-being through early detection and treatment. We sell and service our products through a combination of direct sales and service personnel and a network of independent distributors and sales representatives. We operate in four segments: Diagnostics,Breast Health ,GYN Surgical and Skeletal Health . Through our Diagnostics segment, we offer a wide range of diagnostic products, which are used primarily to aid in the screening and diagnosis of human diseases. Our primary Diagnostics products include our molecular diagnostic assays, which run on our advanced instrumentation systems (Panther, Panther Fusion and Tigris), our ThinPrep cytology system, and the Rapid Fetal Fibronectin Test. OurAptima family of molecular diagnostic assays is used to detect, among other things, the infectious microorganisms that cause common sexually transmitted diseases, or STDs, such as chlamydia and gonorrhea, or GTGC; certain high-risk strains of human papillomavirus, or HPV; Trichomonas vaginalis, the parasite that causes trichomoniasis; Mycoplasma genitalium; and Herpes Simplex viruses 1 and 2. We also offer viral load tests for the quantitation of Hepatitis B virus, Hepatitis C virus, human immunodeficiency virus, or HIV, and human cytomegalo virus, or CMV, for use on our Panther instrument system. In addition, we offer bacterial vaginosis and candida vaginitis assays for the diagnosis of vaginitis, a common and complex ailment affecting millions of women a year. Our assay portfolio also includes diagnostic tests for a range of acute respiratory infections, including SARS-CoV-2, various strains of influenza and parainfluenza, and respiratory syncytial virus that are run on the Panther Fusion system, a field upgradeable instrument addition to the base Panther system. In response to the COVID-19 pandemic, we developed and launched the Aptima SARS-CoV-2 assay and the Aptima SARS-CoV-2/Flu assay (each of which runs on our standard Panther system) and the Panther Fusion SARS-CoV-2 assay (which runs on our Panther Fusion system). InMay 2022 , we CE-marked two new molecular assays, Panther Fusion EBV Quant assay for quantitation of Epstein-Barr virus, and the Panther Fusion BKV Quant assay for quantitation of the BK virus. These two new assays are the first quantitative real-time PCR assays on the Panther Fusion system. These assays, along with the Aptima CMV Quant assay already available inEurope , expand our Panther Fusion menu of transplant monitoring assays. The ThinPrep System is primarily used in cytology applications, such as cervical cancer screening, and the Rapid Fetal Fibronectin Test assists physicians in assessing the risk of pre-term birth. We also generate service revenues from our CLIA-certified laboratory for testing related to breast cancer and all metastatic cancers. OurBreast Health segment offers a broad portfolio of solutions for breast cancer care primarily in the areas of radiology, breast surgery, pathology and treatment. These solutions include 3D digital mammography systems, image analytics software utilizing artificial intelligence, reading workstations, ultrasound imaging, minimally invasive breast biopsy guidance systems, breast biopsy site markers, localization, specimen radiology, connectivity solutions and breast conserving surgery products. Our most advanced breast imaging platforms, Selenia Dimensions and 3Dimensions, utilize tomosynthesis to produce 3D images that show multiple contiguous slice images of the breast, which we refer to as the Genius 3D Mammography exam. Our GYN Surgical products include our NovaSure Endometrial Ablation System, or NovaSure, our MyoSure Hysteroscopic Tissue Removal System, or MyoSure, our Fluent Fluid Management system, or Fluent, our Acessa ProVu laparoscopic radiofrequency ablation system, or Acessa ProVu system, as well as our CoolSeal vessel sealing portfolio and our 29 -------------------------------------------------------------------------------- JustRight surgical stapler. The NovaSure portfolio is comprised of the NovaSure CLASSIC and NovaSure ADVANCED devices and most recently, the NovaSure V5 device for the treatment of abnormal uterine bleeding. The MyoSure suite of devices offers four options to provide incision-less removal of fibroids, polyps, and other pathology within the uterus. The Fluent system is a fluid management system that provides liquid distention during diagnostic and operative hysteroscopic procedures. The Acessa ProVu system is a fully integrated system that uses laparoscopic ultrasound, guidance mapping and radio frequency ablation to treat nearly all types of fibroids. The CoolSeal portfolio includes the Trinity, Reveal, and Mini advanced bipolar vessel sealing devices. The JustRight 5 mm stapler features a smaller instrument profile and is used for laparoscopic general and pediatric surgery.
Our
Unless the context otherwise requires, references to we, us, Hologic or our
company refer to
Supply Chain Considerations
The current worldwide supply chain shortages and constraints are impacting our ability to obtain certain critical raw materials and components used primarily in ourBreast Health capital equipment products. The supply chain shortages and disruptions primarily affecting ourBreast Health manufacturing lines are related to electronic components, primarily semiconductor chips. We are dependent on a small number of semiconductor manufacturers and their allocation of chips to us. Based on our current understanding of their allocation of chips to us we expect we will be able to increase production on a sequential quarterly basis throughout fiscal 2023. If such allocation does not meet our expectations or we are not able to obtain alternative sources of chips, we believe we will not be able to manufacture sufficient quantities of our capital equipment products, primarily 3D Dimension systems, Trident specimen radiography systems and Affirm Prone biopsy systems to meet customer demand. As a result, if we are unable to obtain sufficient quantities of chips, sales of these products may decline or will not increase in fiscal 2023 compared to fiscal 2022 levels. In addition, the prices of raw materials and components, as well as freight, have been rising and continued supply chain shortages could increase the costs further. These factors may result in a lower gross margin forBreast Health in fiscal 2023 for our affected products. Our procurement team has and will continue to expend significant time and resources to try to secure sufficient quantities to meet demand. Trademark Notice Hologic is a trademark ofHologic, Inc. Other trademarks, logos, and slogans registered or used by Hologic and its divisions and subsidiaries inthe United States and other countries include, but are not limited to, the following: 3Dimensions, 3D Mammography, Acessa, Acessa ProVu, Affirm, Amplidiag,Aptima , ATEC,Biotheranostics , Brevera, CoolSeal, Diagenode,Eviva , Faxitron, Fluent, Fluoroscan, Focal, Genius 3D, Genius 3D Mammography, Horizon , InSight, JustRight, Mobidiag, MyoSure, Novodiag, NovaSure, Panther, Panther Fusion, Rapid fFN, Selenia, Selenia Dimensions, Somatex, SuperSonic Imagine, ThinPrep, Tigris, Trident, and Tumark. All other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Hologic's use or display of other parties' trademarks, trade dress or products in this Quarterly Report does not imply that Hologic has a relationship with, or endorsement or sponsorship of, the trademark or trade dress owners.
ACQUISITIONS
Bolder Surgical
OnNovember 29, 2021 , we completed the acquisition ofBolder Surgical Holdings, Inc. , or Bolder, for a purchase price of$160.1 million . Bolder, located inLouisville, Colorado , is a developer and manufacturer of energy vessel sealing surgical devices used in both laparoscopic and open procedures. Based on our valuation, we allocated$96.7 million of the purchase price to the value of intangible assets and$68.8 million to goodwill. Bolder's results of operations are reported in our GYN Surgical segment. RESULTS OF OPERATIONS 30
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All dollar amounts in tables are presented in millions.
Product Revenues
Three Months Ended
December 25,
December 31, 2022 2021 Change
% of % of
Total Total
Amount Revenue Amount Revenue Amount %
Product Revenues
Diagnostics $ 532.1 49.5 % $ 929.3 63.2 % $ (397.2) (42.7) %
Breast Health 182.7 17.0 % 220.3 15.0 % (37.6) (17.1) %
GYN Surgical 153.4 14.3 % 134.1 9.1 % 19.3 14.4 %
Skeletal Health 18.1 1.7 % 19.6 1.3 % (1.5) (7.7) %
$ 886.3 82.5 % $ 1,303.3 88.6 % $ (417.0) (32.0) %
We had a decrease in product revenues in the current quarter compared to the
corresponding period in the prior year primarily due to the decrease in revenues
in the Diagnostics business as COVID-19 assay sales declined significantly and a
decrease in Breast Health revenue primarily due to supply chain constraints.
These decreases were partially offset by an increase in GYN Surgical revenues as
well as an extra week of activity in the current quarter compared to the
corresponding period in the prior year due to our fiscal calendar.
Diagnostics product revenues decreased $397.2 million or 42.7% in the current
quarter compared to the corresponding period in the prior year primarily due to
a decrease in Molecular Diagnostics of $394.4 million and a decrease in Cytology
& Perinatal revenue of $3.8 million , partially offset by an increase in Blood
Screening of $1.0 million . Molecular Diagnostics product revenue was $400.4
million in the current quarter compared to $794.8 million in the corresponding
period in the prior year. The decrease was primarily attributable to a decrease
of $395.9 million in sales from our SARS-CoV-2 assays (primarily the Aptima
SARS-CoV-2 assay and to a lesser extent the Panther Fusion SARS-CoV-2 assay) due
to lower volumes which we primarily attribute to lower demand from an
improvement in the COVID-19 pandemic, the impact of at-home testing
alternatives, and lower average selling prices in the international markets. We
expect sales of our SARS-CoV-2 assays to be significantly lower in fiscal 2023
compared to fiscal 2022. We also had a decrease in sales of collection devices
as a result of lower assay sales, and lower Panther instruments sales as demand
for those instruments has decreased, which we primarily attribute to our
significantly expanded install base and the decline in the COVID-19 pandemic in
the current year period compared to the corresponding period in the prior year.
In addition, revenue from our Mobidiag and Diagenode businesses declined in the
current quarter compared to the corresponding period in the prior year primarily
driven by a decrease in demand for respiratory assays in Europe . These decreases
were partially offset by an increase in sales of $20.8 million for our Aptima
assays (exclusive of our Aptima SARS-CoV-2 assays), which primarily consisted of
our Bacterial Vaginosis and CV Candida assays. This increase was primarily due
to expanded adoption by our laboratory customers. In addition, we had an
increase in sales from our Quant Viral assays, primarily HIV assays sold in
Africa , and Fusion flu assays. The decrease in Cytology & Perinatal was
primarily due to a decrease in sales in China from COVID-19 related shutdowns.
We also experienced a decrease in revenue from international sales denominated
in foreign currencies from the unfavorable foreign currency exchange impact of
the strengthened U.S. dollar against a number of currencies.
Breast Health product revenues decreased $37.6 million or 17.1% in the current
quarter compared to the corresponding period in the prior year primarily due to
a decrease in volumes of our digital mammography systems, primarily 3D
Dimensions systems and related workflow and workstation products and Affirm
biopsy systems. The decrease in volume was primarily driven by supply chain
constraints related to electronic components, primarily semiconductor chips,
which impacted our ability to manufacture sufficient quantities to meet customer
demand, which was partially offset by an increase in average selling prices for
our 3Dimensions systems and related workflow products. In addition, we had a
decrease in sales of our interventional breast solutions products, primarily
driven by ATEC and Eviva devices as customers had previously built up inventory
levels and staffing constraints impacted procedure volumes, partially offset by
an increase in sales of Brevera devices. We also experienced a decrease in
revenue from international sales denominated in foreign currencies from the
unfavorable foreign currency exchange impact of the strengthened U.S. dollar
against a number of currencies.
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GYN Surgical product revenues increased $19.3 million or 14.4% in the current
quarter compared to the corresponding period in the prior year primarily due to
increases in the sales volume of our Fluent Fluid Management products, MyoSure
system sales, CoolSeal vessel sealers, NovaSure systems sales, and Acessa ProVu
systems. These increases were partially offset by a decrease in revenue from
international sales denominated in foreign currencies from the unfavorable
foreign currency exchange impact of the strengthened U.S. dollar against a
number of currencies.
Skeletal Health product revenues decreased $1.5 million or 7.7% in the current
quarter compared to the corresponding period in the prior year primarily due to
a decrease in sales volume of our Horizon DXA systems and InSight FD Fluoroscan
systems. The sales volume decrease was largely associated with supply chain
constraints. We also experienced a decrease in revenue from international sales
denominated in foreign currencies from the unfavorable foreign currency exchange
impact of the strengthened U.S. dollar against a number of currencies.
Product revenues by geography as a percentage of total product revenues were as
follows:
Three Months Ended
December 31, 2022 December 25, 2021
United States 75.1 % 67.0 %
Europe 14.8 % 21.4 %
Asia-Pacific 6.1 % 8.5 %
Rest of World 4.0 % 3.1 %
100.0 % 100.0 %
In the current quarter compared to the corresponding period in the prior year,
the percentage of product revenue derived from the U.S. increased while Europe
and Asia-Pacific decreased, which we primarily attributed to a greater increase
in the U.S. for Aptima and Fusion assay sales (exclusive of our Aptima
SARS-CoV-2 assays), as well as a lesser decline in SARS-CoV-2 assay volume
compared to Europe and Asia-Pacific . Product revenue decreased in China , which
we primarily attribute to continued city-wide shutdowns as a result of COVID-19.
These shutdowns primarily impacted the sale of our Diagnostics products and to a
lesser extent our digital mammography systems. The U.S. also experienced a
lesser decline in sales of our digital mammography systems compared to Europe
and Asia-Pacific . In addition, the strengthening of the U.S. Dollar against a
number of currencies contributed to the increase in the percentage of revenue
derived from the U.S. compared to revenue derived from the other geographic
regions.
Service and Other Revenues
Three Months Ended
December 31, 2022 December 25, 2021 Change
% of % of
Total Total
Amount Revenue Amount Revenue Amount %
Service and Other Revenues $ 187.9 17.5 % $ 167.8 11.4 % $ 20.1 12.0 %
Service and other revenues consist primarily of revenue generated from our field
service organization to provide ongoing service, installation, and repair of our
products. The majority of these revenues are generated within our Breast Health
segment. The increase in service and other revenue in the current quarter
compared to the corresponding period in the prior year was primarily due to an
increase in Breast Health service contract revenue primarily due to the extra
week in the quarter, resulting in incremental revenue of $7.9 million from
service contracts, and to a lesser extent continued conversion of a high
percentage of our installed base of digital mammography systems to service
contracts upon expiration of the warranty period. In our Diagnostics business,
lab testing revenue from Biotheranostics increased $6.4 million in the current
quarter compared to the corresponding period in the prior year.
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Cost of Product Revenues
Three Months Ended
December 31, 2022 December 25, 2021 Change
% of % of
Product Product
Amount Revenue Amount Revenue Amount %
Cost of Product Revenues $ 296.2 33.4 % $ 318.1 24.4 % $ (21.9) (6.9) %
Amortization of Intangible Assets 55.6 6.3 % 74.9 5.7 % (19.3) (25.8) %
$ 351.8 39.7 % $ 393.0 30.1 % $ (41.2) (10.5) %
Cost of Product Revenues. The cost of product revenues as a percentage of
product revenues was 33.4% in the current quarter compared to 24.4% in the
corresponding period in the prior year. Cost of product revenues as a percentage
of revenue increased in the current quarter primarily due to a decrease in sales
of our SARS-CoV-2 assays, which have higher gross margins compared to our other
diagnostic products, and comprised 14.3% of total product revenue in the current
quarter compared to 40.1% in the corresponding period in the prior year. Lower
digital mammography system sales and higher product costs from supply chain
constraints and inflation also contributed to the increase in cost of product
revenues.
Diagnostics' product costs as a percentage of revenue increased in the current
quarter compared to the corresponding period in the prior year primarily due to
lower sales of our SARS-CoV-2 assays, an increase in unfavorable manufacturing
variances, higher field service costs and freight, partially offset by an
increase in core Aptima , Fusion, and Quant Viral assay volume.
Breast Health's product costs as a percentage of revenue increased in the
current quarter compared to the corresponding period in the prior year primarily
due to supply chain constraints resulting in lower sales volumes of our higher
margin products, higher prices of raw materials and components from supply chain
constraints and inflation, an increase in inventory reserves and higher freight
internationally, partially offset by a slight increase in average selling prices
of our 3Dimensions systems and related workflow products.
GYN Surgical's product costs as a percentage of revenue increased in the current
quarter compared to the corresponding periods in the prior year primarily due to
product mix of higher volumes of lower margin products, mostly attributable to
sales of our Fluent Fluid Management systems and CoolSeal vessel sealers,
partially offset by higher average selling prices of our NovaSure V5 device.
Amortization of Intangible Assets. Amortization of intangible assets relates to acquired developed technology, which is generally amortized over its estimated useful life of between 5 and 15 years using a straight-line method or, if reliably determinable, based on the pattern in which the economic benefits of the assets are expected to be consumed. Amortization expense decreased in the current quarter compared to the corresponding period in the prior year primarily due to lower amortization of intangible assets acquired in theCytyc acquisition which became fully amortized in the beginning of the first quarter of fiscal 2023 and lower amortization of intangible assets acquired in the Focal and Faxitron acquisitions due to impairments in the prior year, partially offset by an increase from developed technology intangible assets acquired in the Bolder acquisition. 33
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Cost of Service and Other Revenues
Three Months Ended
December 31, 2022 December 25, 2021 Change
% of % of
Service Service
Amount Revenue Amount Revenue Amount %
Cost of Service and Other Revenue $ 104.5 55.6 % $ 91.8 54.7 % $ 12.7 13.8 %
Service and other revenues gross margin decreased to 44.4% in the current
quarter compared to 45.3% in the corresponding period in the prior year. The
decrease in the current quarter was primarily due to higher field service costs
from increased labor and spare parts costs for our expanded Breast Health
install base. This decrease was partially offset by the inclusion of lab testing
revenue from Biotheranostics , which has higher margins than our legacy service
business, and by an increase in Breast Health service contract revenue.
Operating Expenses
Three Months Ended
December 31, 2022 December 25, 2021 Change
% of % of
Total Total
Amount Revenue Amount Revenue Amount %
Operating Expenses
Research and development $ 74.8 7.0 % $ 72.8 4.9 % $ 2.0 2.7 %
Selling and marketing 163.5 15.2 % 147.4 10.0 % 16.1 10.9 %
General and administrative 108.5 10.1 % 117.9 8.0 % (9.4) (8.0) %
Amortization of intangible assets 7.6 0.7 % 10.8 0.7 % (3.2) (29.6) %
Contingent consideration - fair value
adjustment - - % (4.1) (0.3) % 4.1 (100.0) %
Restructuring and Divestiture charges 1.1 0.1 % 0.2 - % 0.9 450.0 %
$ 355.5 33.1 % $ 345.0 23.5 % $ 10.5 3.0 %
Research and Development Expenses. Research and development expenses increased
2.7% in the current quarter compared to the corresponding period in the prior
year primarily due to higher compensation and benefits from the extra week in
the quarter, and the inclusion of incremental expenses from the Bolder
acquisition. Partially offsetting these increases was a higher credit in the
current quarter of $1.6 million recorded to research and development expenses
for funds received from the Biomedical Advanced Research and Development
Authority (BARDA) grant to obtain FDA approval of our SARS-CoV-2 assays, a
reduction in spend to implement the European Medical Device Regulation (MDR) and
In Vitro Diagnostic Regulation (IVDR) requirements, and lower headcount
primarily in Diagnostics. At any point in time, we have a number of different
research projects and clinical trials being conducted and the timing of these
projects and related costs can vary from period to period.
Selling and Marketing Expenses. Selling and marketing expenses increased 10.9%
in the current quarter compared to the corresponding period in the prior year.
The increase was due to higher compensation and benefits primarily from the
extra week in the quarter, and to a lesser extent an increase in headcount, an
increase in meetings and travel that were lower in the prior year primarily due
to curtailed events as a result of the COVID-19 pandemic, higher severance
expense, net increased spend on marketing initiatives primarily from our
sponsorship of the Women's Tennis Association and the inclusion of incremental
expenses from the Bolder acquisition of $1.6 million .
General and Administrative Expenses. General and administrative expenses
decreased 8.0% in the current quarter compared to the corresponding period in
the prior year. The decrease was primarily due to a decrease in charitable
donations of $10.0 million , a $7.4 million credit from the Minerva litigation
settlement received in the quarter, lower tax project and legal expenses, and a
decrease in bad debt expense, partially offset by an $8.9 million charge to
settle a business dispute in connection with terminating the Mobidiag joint
venture agreement in China , an increase in reserves for sales and use tax
matters and higher compensation and benefits from the extra week in the quarter.
Amortization of Intangible Assets. Amortization of intangible assets primarily
results from customer relationships and trade names related to our acquisitions.
These intangible assets are generally amortized over their estimated useful
lives of between 5 and 30 years using a straight-line method or, if reliably
determinable, based on the pattern in which the economic
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benefits of the assets are expected to be consumed utilizing expected
undiscounted future cash flows. Amortization expense decreased in the current
year period due to assets from our Cytyc acquisition becoming fully amortized at
the beginning of the first quarter of fiscal 2023.
Contingent Consideration Fair Value Adjustments. In connection with the
acquisition of Acessa Health, Inc. ("Acessa"), we are obligated to make
contingent earn-out payments. The payments are based on achieving incremental
revenue growth over a three-year period ending annually in December of each of
2021, 2022, and 2023. As of the acquisition date, we recorded a contingent
consideration liability for the estimated fair value of the amount we expected
to pay to the former shareholders of the acquired business. This liability is
not contingent on future employment, and we recorded our estimate of the fair
value of the contingent consideration liability utilizing the Monte Carlo
simulation based on future revenue projections of Acessa, comparable company
revenue growth rates, implied volatility and applying a risk adjusted discount
rate. Increases or decreases in the fair value of contingent consideration
liability can result from the passage of time, changes in discount rates, and
changes in the timing, probabilities and amount of revenue estimates. There was
no change in the fair value of the liability in the current quarter. In the
first quarter of fiscal 2022, we recorded a gain of $4.1 million based on actual
amounts owed for the first earn-out period being lower than the amount accrued
as of September 25, 2021 .
Interest Expense
Three Months Ended
December 31, December 25,
2022 2021 Change
Amount Amount Amount %
Interest Expense $ (28.1) $ (25.7) $ (2.4) 9.3 %
Interest expense consists primarily of the cash interest costs and the related
amortization of the debt discount and deferred issuance costs on our outstanding
debt. Interest expense increased in the current quarter compared to the
corresponding period in the prior year primarily due to an increase in the
variable interest rate, SOFR, under our 2021 Credit Agreement partially offset
by amounts received under our interest rate swap, which hedges the benchmark
interest rate, versus payments made under the interest rate swap in the prior
year period. In addition, the prior year interest expense included debt
refinancing costs for our 2021 Credit Agreement, and interest expense related to
debt from the Mobidiag acquisition that was paid off in the prior year.
Debt Extinguishment Loss
Three Months Ended
December 31, December 25,
2022 2021 Change
Amount Amount Amount %
Debt Extinguishment Loss $ - $ (0.7) $ 0.7 - %
In the first quarter of fiscal 2022, we entered into a Refinancing Amendment No.
2 to our 2021 Credit Agreement with Bank of America, N.A . The proceeds were used
to pay off the term loan outstanding under our 2018 Credit Agreement. In
connection with this transaction we recorded a debt extinguishment charge of
$0.7 million .
Other Income (Expense), net
Three Months Ended
December 31, December 25,
2022 2021 Change
Amount Amount Amount %
Other Income (Expense), net
$ (22.3) ** **Percentage not meaningful For the current quarter, this account primarily consisted of net foreign currency exchange losses of$18.1 million , primarily from the mark-to-market of foreign currency contracts used to hedge operating results, partially offset by a gain of 35 -------------------------------------------------------------------------------- Table of Contents$2.5 million from the change in cash surrender value of life insurance contracts related to our deferred compensation plan driven by stock market gains. For the first quarter of fiscal 2022, this account primarily consisted of net foreign currency exchange gains of$9.3 million , primarily from settling transactions, and a gain of$1.3 million from the change in cash surrender value of life insurance contracts related to our deferred compensation plan driven by stock market gains, partially offset by a charge of$4.3 million to write off an equity method investment acquired in the Mobidiag acquisition. Provision for Income Taxes Three Months Ended December 31, December 25, 2022 2021 Change Amount Amount Amount %
Provision for Income Taxes
Our effective tax rate for the three months ended
Our effective tax rate for the three months endedDecember 31, 2022 was higher than theU.S. statutory tax rate primarily due to income tax reserves, the global intangible low-taxed income inclusion, and state income taxes, partially offset by the impact of theU.S. deduction for foreign derived intangible income, the geographic mix of income earned by our international subsidiaries, which are taxed at rates lower than theU.S. statutory tax rate, and federal and state tax credits. Our effective tax rate for the three months endedDecember 25, 2021 was lower than theU.S. statutory tax rate primarily due to the impact of theU.S. deduction for foreign derived intangible income, the geographic mix of income earned by our international subsidiaries, which are taxed at rates lower than theU.S. statutory tax rate, and federal and state tax credits, partially offset by state income taxes, and unbenefited foreign losses.
Segment Results of Operations
We operate in four segments: Diagnostics,Breast Health ,GYN Surgical and Skeletal Health . The accounting policies of the segments are the same as those described in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedSeptember 24, 2022 . We measure segment performance based on total revenues and operating income. Revenues from product sales of each of these segments are described in further detail above. The discussion that follows is a summary analysis of total revenues and the primary changes in operating income or loss by segment. Diagnostics Three Months Ended December 31, December 25, 2022 2021 Change Amount Amount Amount % Total Revenues$ 559.3 $ 950.4 $ (391.1) (41.1) % Operating Income$ 151.1 $ 531.8 $ (380.7) (71.6) % Operating Income as a % of Segment Revenue 27.0 % 55.9 % Diagnostics revenues decreased in the current quarter compared to the corresponding period in the prior year primarily due to a decrease in sales of our SARS-CoV-2 assays, a decrease in our Mobidiag and Diagenode businesses and a decrease in sales of our Cytology & Perinatal products, partially offset by an increase in sales of ourAptima , Fusion and Quant Viral assays (exclusive of our Aptima SARS-CoV-2 assays) and lab testing revenue from ourBiotheranostics acquisition.
Operating income for this business segment decreased in the current quarter compared to the corresponding period in the prior year due to a decrease in gross profit from lower COVID-19 assay sales and an increase in operating expenses. Gross margin was 57.9% in the current quarter, compared to 72.9% in the corresponding period in the prior year. The decrease in
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gross profit in the current quarter was primarily due to lower sales volume of
our SARS-CoV-2 assays which have a higher margin, higher field service costs for
our expanded instrument install base, an increase in freight charges and
unfavorable manufacturing variances, partially offset by increases in core
Aptima and Quant Viral assay volumes and higher lab testing revenue and a
decrease in intangible asset amortization expense.
Operating expenses increased in the current quarter compared to the
corresponding period in the prior year primarily due to a settlement charge of
$8.9 million related to the termination of the Mobidiag joint venture in China ,
an increase in non-income tax charges, an increase in compensation and benefits
due to the extra week in the quarter, and higher severance expense and an
increase in meeting expense partially offset by a decrease in marketing
initiatives and allocated advertising and charitable contributions, and an
increase in the BARDA credit.
Breast Health
Three Months Ended
December 31, December 25,
2022 2021 Change
Amount Amount Amount %
Total Revenues $ 334.2 $ 359.3 $ (25.1) (7.0) %
Operating Income $ 60.5 $ 81.7 $ (21.2) (25.9) %
Operating Income as a % of Segment
Revenue 18.1 % 22.7 %
Breast Health revenues decreased in the current quarter compared to the
corresponding period in the prior year due to a decrease of $37.6 million in
product revenue primarily due to the decrease in volume driven by supply chain
constraints discussed above. This decrease was partially offset by an increase
of $12.4 million in service revenue primarily driven by an increase in service
contract revenue from the extra week in the quarter and the continued conversion
of our digital mammography systems to service contracts.
Operating income for this business segment decreased in the current quarter
compared to the corresponding period in the prior year primarily due to a
decrease in product sales and an increase in operating expenses, partially
offset by an increase in service gross profit. Gross margin was 54.0% in the
current quarter compared to 55.6% in the corresponding period in the prior year.
The decrease in gross margin is primarily due to lower volumes of capital
equipment sales and interventional breast solutions devices, higher costs for
raw materials and components from supply chain constraints, and an increase in
inventory reserves, partially offset by an increase in service margin from the
extra week in the quarter and continued conversion of digital mammography
systems to service contracts.
Operating expenses increased in the current quarter compared to the corresponding period in the prior year primarily due to an increase in compensation and benefits from the extra week in the quarter and an increase in meeting and travel expense, partially offset by a decrease in allocated advertising and charitable contributions and lower headcount.
GYN Surgical
Three Months Ended
December 31, December 25,
2022 2021 Change
Amount Amount Amount %
Total Revenues $ 154.1 $ 134.3 $ 19.8 14.7 %
Operating Income $ 48.8 $ 26.6 $ 22.2 83.5 %
Operating Income as a % of Segment Revenue 31.6 % 19.8 %
GYN Surgical revenues increased in the current quarter compared to the corresponding period in the prior year primarily due to the increase in product revenues discussed above.
Operating income for this business segment increased in the current quarter
compared to the corresponding period in the prior year primarily due to an
increase in gross profit. Gross margin was 68.6% in the current quarter compared
to 62.3% in the corresponding period in the prior year. The increase in gross
margin was primarily due to a decrease in intangible asset amortization expense
partially offset by higher volume sales of lower margin products discussed
above.
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Operating expenses were flat in the current quarter compared to the corresponding period in the prior year primarily due to a$7.4 million credit from the Minerva litigation settlement, offset by an increase in compensation and benefits from the extra week in the quarter, a gain of$4.1 million recorded in the prior period to decrease the contingent consideration liability to fair value related to the Acessa acquisition, the inclusion of expenses from Bolder and higher research and development project spend and an increase in meeting and travel expenses.Skeletal Health Three Months Ended December 31, December 25, 2022 2021 Change Amount Amount Amount % Total Revenues$ 26.6 $ 27.1 $ (0.5) (1.8) % Operating Income$ 2.0 $ 1.2 $ 0.8 66.7 % Operating Income as a % of Segment Revenue 7.7 % 4.4 %Skeletal Health revenues decreased in the current quarter compared to the corresponding period in the prior year primarily due to the decrease in product revenues discussed above partially offset by an increase in service contract revenue from the extra week in the quarter.
Operating income for this business segment increased in the current quarter compared to the corresponding period in the prior year primarily due to a decrease in operating expenses partially offset by a decrease in gross profit. Gross margin was 29.8% in the current quarter compared to 35.8% in the corresponding period in the prior year. The decrease in gross margin was primarily due to increased costs from supply chain constraints and inflation.
Operating expenses decreased in the current quarter compared to the corresponding period in the prior year primarily due to a decrease in commissions.
LIQUIDITY AND CAPITAL RESOURCES
AtDecember 31, 2022 , we had$3,065.0 million of working capital and our cash and cash equivalents totaled$2,441.3 million . Our cash and cash equivalents increased by$101.8 million during the first three months of fiscal 2023 primarily due to cash generated from operating activities, partially offset by cash used in investing and financing activities primarily related to repurchases of our common stock and capital expenditures. In the first three months of fiscal 2023, our operating activities provided cash of$253.4 million , primarily due to net income of$187.4 million , non-cash charges for depreciation and amortization aggregating$85.9 million , and stock-based compensation expense of$20.5 million . These adjustments to net income were partially offset by a decrease in deferred taxes of$26.2 million primarily due to the capitalization of research expenditures and to a lesser extent the amortization of intangible assets. Cash provided by operations included a net cash outflow of$43.3 million from changes in our operating assets and liabilities. The net cash outflow was primarily driven by an increase in inventory of$47.0 million principally due to the continued strategic buildup of emergency sourced components for ourBreast Health business to hedge against the continuing worldwide supply constraints, and a$45.0 million increase in accounts receivable due to higher sales in the first quarter of fiscal 2023 in ourBreast Health and Surgical divisions compared to the fourth quarter of fiscal 2022. These cash outflows were partially offset by a decrease in prepaid expenses and other assets of$26.2 million primarily due to normal amortization related to theWomen's Tennis Association sponsorship and service and software subscriptions and a decrease in prepaid income taxes of$17.9 million primarily due to timing of tax payments relative to the provision for income taxes. In the first three months of fiscal 2023, our investing activities used cash of$41.0 million primarily due to capital expenditures of$29.1 million , which primarily consisted of the placement of equipment under customer usage agreements and purchase of manufacturing equipment and to a lesser extent building improvements to certain facilities, and$10.0 million for the purchase of an equity investment. In the first three months of fiscal 2023, our financing activities used cash of$113.5 million primarily due to$100.0 million for repurchases of our common stock and$23.0 million for the payment of employee taxes withheld for the net share 38 -------------------------------------------------------------------------------- settlement of vested restricted stock units. Partially offsetting these uses of cash were$15.1 million from our equity plans, primarily from the exercise of stock options. Debt We had total recorded debt outstanding of$2.83 billion atDecember 31, 2022 , which was comprised of amounts outstanding under our 2021 Credit Agreement of$1.49 billion (principal of$1.50 billion ), 2029 Senior Notes of$937.2 million (principal of$950.0 million ), and 2028 Senior Notes of$396.3 million (principal of$400.0 million ).
2021 Credit Agreement
OnSeptember 27, 2021 , we refinanced our existing term loan and revolving credit facility withBank of America, N.A . in its capacity as Administrative Agent, SwingLine Lender and L/C Issuer, and certain other lenders from time to time party thereto (the "2018 Credit Agreement") by entering into a Refinancing Amendment (the "2021 Credit Agreement"). Borrowings under the 2021 Credit Agreement are secured by first-priority liens on, and a first priority security interest in, substantially all of our and our Subsidiary Guarantors'U.S. assets. The credit facilities (the "2021 Credit Facilities") under the 2021 Credit Agreement consist of:
•A
•A secured revolving credit facility (the "2021 Revolver") under which the Borrowers may borrow up to$2.0 billion , subject to certain sublimits, with a stated maturity date ofSeptember 25, 2026 . As ofDecember 31, 2022 , the principal amount outstanding under the 2021 Term Loan was$1.5 billion , no amounts were outstanding under the 2021 Revolver, and the full amount of the 2021 Revolver was available to be borrowed by the Company. OnAugust 22, 2022 , the Company and its subsidiaries further amended the 2021 Credit Agreement by entering into an amendment to address the planned phase out of LIBOR by theUK Financial Conduct Authority . Under this amendment, the interest rate applicable to the loans under the 2021 Credit Agreement denominated inU.S. Dollars were converted to a variant of the secured overnight financing rate ("SOFR"), as established from time to time by theFederal Reserve Bank of New York , plus an applicable spread. As ofDecember 31, 2022 , the interest rate under the 2021 Term Loan was 5.43% per annum. We are also required to pay a quarterly commitment fee calculated on a daily basis equal to the Applicable Rate as of such day multiplied by the undrawn committed amount available under the 2021 Revolver. As ofDecember 31, 2022 , this commitment fee was 0.15% per annum. We are 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 ended onDecember 29, 2022 to$18.75 million per three-month period commencing with the three-month period ending onDecember 26, 2025 . The remaining scheduled balance of$1.335 billion (or such lesser aggregate principal amount then outstanding) on the 2021 Term Loan and any amounts outstanding under the 2021 Revolver are due at their respective maturities. In addition, subject to the terms and conditions set forth in the 2021 Credit Agreement, we may be required to make certain mandatory prepayments from the net proceeds of specified types of asset sales (subject to certain reinvestment rights), debt issuances (excluding permitted debt) and insurance recoveries (subject to certain reinvestment rights). Certain of the mandatory prepayments are subject to reduction or elimination if certain financial covenants are met. Subject to certain limitations, we may voluntarily prepay any of the 2021 Credit Facilities without premium or penalty.
The 2021 Credit Agreement contains affirmative and negative covenants
customarily applicable to senior secured credit facilities, including the
requirement that we maintain certain financial ratios. As of
2028 Senior Notes
The total aggregate principal balance of the 2028 Senior Notes is$400.0 million . The 2028 Senior Notes are general senior unsecured obligations and are guaranteed on a senior unsecured basis by certain of our domestic subsidiaries. The 2028 Senior Notes mature onFebruary 1, 2028 and bear interest at the rate of 4.625% per year, payable semi-annually onFebruary 1 andAugust 1 of each year. We may redeem the 2028 Senior Notes at any time prior toFebruary 1, 2023 at a price equal to 100% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date and a 39 -------------------------------------------------------------------------------- make-whole premium set forth in the indenture. We also have the option to redeem the 2028 Senior Notes on or after:February 1, 2023 throughFebruary 1, 2024 at 102.312% of par;February 1, 2024 throughFebruary 1, 2025 at 101.541% of par;February 1, 2025 throughFebruary 1, 2026 at 100.770% of par; andFebruary 1, 2026 and thereafter at 100% of par. In addition, if there is a change of control coupled with a decline in ratings, as provided in the indenture, we will be required to make an offer to purchase each holder's 2028 Senior Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
2029 Senior Notes
The total aggregate principal balance of the 2029 Senior Notes is$950.0 million . The 2029 Senior Notes are general senior unsecured obligations and are guaranteed on a senior unsecured basis by certain domestic subsidiaries. The 2029 Senior Notes mature onFebruary 15, 2029 and bear interest at the rate of 3.250% per year, payable semi-annually onFebruary 15 andAugust 15 of each year. We may redeem the 2029 Senior Notes at any time prior toSeptember 28, 2023 at a price equal to 100% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium set forth in the indenture. We may also redeem up to 40% of the aggregate principal amount of the 2029 Senior Notes with the net cash proceeds of certain equity offerings at any time and from time to time beforeSeptember 28, 2023 , at a redemption price equal to 103.250% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date. We have the option to redeem the 2029 Senior Notes on or after:September 28, 2023 throughSeptember 27, 2024 at 101.625% of par;September 28, 2024 throughSeptember 27, 2025 at 100.813% of par; andSeptember 28, 2025 and thereafter at 100% of par. In addition, if there is a change of control coupled with a decline in ratings, as provided in the indenture, we will be required to make an offer to purchase each holder's 2029 Senior Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
Accounts Receivable Securitization Program
OnJune 10, 2022 , we amended the Credit and Security agreement and temporarily suspended the ability to borrow and the need to comply with covenants for up to a year. As ofDecember 31, 2022 , we did not have any borrowings under this program.
Contingent Consideration Earn-Out Payments
Currently, our only contingent consideration liability is related to our Acessa acquisition. We have an obligation to the former Acessa shareholders to make contingent payments based on a multiple of annual incremental revenue growth over a three-year period ending annually in December. There is no maximum earnout. Pursuant to ASC 805, the contingent consideration was deemed to be part of the purchase price, and we recorded our estimate of the fair value of the contingent consideration liability utilizing the Monte Carlo simulation based on future revenue projections of the business, comparable companies revenue growth rates, implied volatility and applying a risk adjusted discount rate. The first earn-out period was completed inDecember 2021 , and we paid$12.2 million to the former shareholders in the second quarter of fiscal 2022. The second earn-out period was completed inDecember 2022 , resulting in an estimated amount of$7.2 million , and payment is expected to be made in the second quarter of fiscal 2023. As ofDecember 31, 2022 , the contingent consideration liability was recorded at its fair value of$23.4 million .
Stock Repurchase Program
OnSeptember 22 2022 , the Board of Directors authorized a new 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 tradingSeptember 23, 2022 . This new repurchase program replaced the previous$1.0 billion authorization. During the three months endedDecember 31, 2022 , the Company repurchased 1.5 million shares of its common stock for total consideration of$100.0 million . As ofDecember 31, 2022 ,$900.0 million remained available under this authorization. The timing of the share repurchases will be based upon our continuing analysis of market, financial, and other factors. Repurchases under the authorized share repurchase plan may be made using a variety of methods, which may include, but are not limited to, open market purchases, privately negotiated transactions, accelerated share repurchase agreements, or purchases pursuant to a Rule 10b5-1 plan under the Exchange Act. The authorized share repurchase plan may be suspended, delayed or discontinued at any time. Legal Contingencies 40
-------------------------------------------------------------------------------- We are currently involved in several legal proceedings and claims. In connection with these legal proceedings and claims, management periodically reviews estimates of potential costs to be incurred by us in connection with the adjudication or settlement, if any, of these proceedings. These estimates are developed, as applicable in consultation with outside counsel, and are based on an analysis of potential litigation outcomes and settlement strategies. In accordance with ASC 450, Contingencies, loss contingencies are accrued if, in the opinion of management, an adverse outcome is probable and such financial outcome can be reasonably estimated. It is possible that future results for any particular quarter or annual period may be materially affected by changes in our assumptions or the effectiveness of our strategies relating to these proceedings. Information with respect to this disclosure may be found in Note 10 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Future Liquidity Considerations
We expect to continue to review and evaluate potential strategic transactions that we believe will complement our current or future business. Subject to the "Risk Factors" set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedSeptember 24, 2022 or any other of our subsequently filed reports, and the general disclaimers set forth in our "Cautionary Statement" regarding forward-looking statements at the outset of this Item 2, we believe that our cash and cash equivalents, cash flows from operations, and the cash available under our 2021 Revolver will provide us with sufficient funds in order to fund our expected normal operations and debt payments over the next twelve months. Our longer-term liquidity is contingent upon future operating performance. We may also require additional capital in the future to fund capital expenditures, repayment of debt, acquisitions, strategic transactions or other investments. As described above, we have significant indebtedness outstanding under our 2021 Credit Agreement, 2028 Senior Notes, and 2029 Senior Notes. These capital requirements could be substantial. For a description of risks to our operating performance and our indebtedness, see the "Risk Factors" set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedSeptember 24, 2022 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our interim consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition for multiple element arrangements, allowance for doubtful accounts, reserves for excess and obsolete inventories, valuations, purchase price allocations and contingent consideration related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, warranty reserves, certain accrued expenses, restructuring and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of our net deferred tax assets and related valuation allowances. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Any differences may have a material impact on our financial condition and results of operations. For a discussion of how these and other factors may affect our business, see the "Cautionary Statement" regarding forward-looking statements set forth at the outset of this Item 2 and the "Risk Factors" set forth or incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q as well as those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedSeptember 24, 2022 or any other of our subsequently filed reports. The critical accounting estimates that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedSeptember 24, 2022 . There have been no material changes to our critical accounting policies or estimates from those set forth in our Annual Report on Form 10-K for the fiscal year endedSeptember 24, 2022 .
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