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HOLX > SEC Filings for HOLX > Form 10-Q on 6-Feb-2014All Recent SEC Filings

Show all filings for HOLOGIC INC

Form 10-Q for HOLOGIC INC


6-Feb-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT

Some of the statements contained in this report 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. 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 include, but are not limited to, statements regarding:

the effect of the continuing worldwide macroeconomic uncertainty on our business and results of operations;

the coverage and reimbursement decisions of third-party payors and the guidelines, recommendations, and studies published by various organizations relating to the use of our products and treatments;

the uncertainty of the impact of cost containment efforts and federal healthcare reform legislation on our business and results of operations;

the ability to successfully manage ongoing organizational and strategic changes, including our ability to attract, motivate and retain key employees;

the impact and anticipated benefits of recently 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 in connection therewith;

our goal of expanding our market positions;

the development of new competitive technologies and products;

regulatory approvals and clearances for our products;

production schedules for our products;

the anticipated development of our markets and the success of our products in these markets;

the anticipated performance and benefits of our products;

business strategies;

estimated asset and liability values;

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 indebtedness;

anticipated trends relating to our financial condition or results of operations; and

our 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," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include the cautionary statements set forth herein and in our other filings with the Securities and Exchange Commission, including those set forth under Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 28, 2013. We qualify all of our forward-looking statements by these cautionary statements.

OVERVIEW

We are a leading developer, manufacturer and supplier of premium diagnostics products, medical imaging systems and surgical products with an emphasis on serving the healthcare needs of women. Our core business units are focused on diagnostics, breast health, GYN surgical and skeletal health. We sell and service our products through a combination of direct sales and service forces and a network of independent distributors and sales representatives.


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We offer a wide range of diagnostic products which are used primarily to aid in the diagnosis of human diseases and screen donated human blood. Our molecular diagnostic products include our Aptima family of assays based on our Transcription-Mediated-Amplification, or TMA, technology, our Cervista products based on our proprietary Invader chemistry and our advanced instrumentation (Panther and Tigris). The Aptima family of assays is used to detect the infectious microorganisms that cause the common sexually transmitted diseases, or STDs, chlamydia and gonorrhea, certain high-risk strains of human papillomavirus, or HPV, and Trichomonas vaginalis, the parasite that causes trichomoniasis. Our Invader chemistry is comprised of molecular diagnostic reagents used for a variety of DNA and RNA analysis applications, including our Cervista HPV high risk, or HR, and Cervista HPV 16/18 products to assist in the diagnosis of HPV, as well as other products to diagnose cystic fibrosis, cardiovascular risk and other diseases. Our diagnostics products also include the ThinPrep System, which is primarily used in cytology applications such as cervical cancer screening, and the Rapid Fetal Fibronectin Test, which assists physicians in assessing the risk of pre-term birth. In blood screening, we develop and manufacture the Procleix family of assays, which are used to detect Human Immunodeficiency Virus, or HIV, the Hepatitis C Virus, or HCV, the Hepatitis B Virus, or HBV, the West Nile Virus, or WNV, the Hepatitis A Virus, or HAV, and Parvovirus, in donated human blood. These blood screening products are marketed worldwide by our blood screening collaborator, Grifols, S.A., or Grifols, under Grifols' trademarks. In January 2014, Grifols completed its acquisition of the blood screening business of Novartis Vaccines and Diagnostics, Inc.

Our breast health products include a broad portfolio of breast imaging and related products and accessories, including digital and film-based mammography systems, magnetic resonance imaging, or MRI, breast coils, computer-aided detection, or CAD, for mammography and minimally invasive breast biopsy devices, breast biopsy site markers, breast biopsy guidance systems, breast imaging comfort pads, and breast brachytherapy products. Our most advanced breast imaging platform, Dimensions, utilizes a new technology called tomosynthesis to produce 3D images, as well as conventional 2D full field digital mammography images.

Our GYN surgical products include our NovaSure Endometrial Ablation System, or NovaSure, and our MyoSure Hysteroscopic Tissue Removal System, or MyoSure. The NovaSure system involves a trans-cervical procedure for the treatment of abnormal uterine bleeding. The MyoSure system is a tissue removal device that is designed to provide incision-less removal of fibroids and polyps within the uterus.

Our skeletal health products include dual-energy X-ray bone densitometry systems, an ultrasound-based osteoporosis assessment product, and our Fluoroscan mini C-arm imaging products.

Unless the context otherwise requires, references to we, us, Hologic or our company refer to Hologic, Inc. and its consolidated subsidiaries.

Trademark Notice

Hologic is a trademark of Hologic, Inc. Other trademarks, logos, and slogans registered or used by Hologic and its divisions and subsidiaries in the United States and other countries include, but are not limited to, the following:
Affirm, Aptima, Aptima Combo 2, Aquilex, ATEC, Celero, Cervista, Contura, C-View, Dimensions, Eviva, Fluoroscan, Gen-Probe, Healthcome, HTA, Interlace, Invader, LORAD, MammoPad, MammoSite, MultiCare, MyoSure, NovaSure, Panther, PreservCyt, QDR, Rapid fFN, Sahara, SecurView, Selenia, Sentinelle, Serenity, StereoLoc, TCT, ThinPrep, THS, Tigris, TLI IQ, and Trident.

RESULTS OF OPERATIONS

All dollar amounts in tables are presented in thousands.

Product Sales



                                                                         Three Months Ended
                                            December 28, 2013                December 29, 2012                  Change
                                                           % of                             % of
                                                           Total                            Total
                                          Amount          Revenue          Amount          Revenue        Amount          %
Product Sales
Diagnostics                            $     278,354            45 %    $     294,590            47 %    $ (16,236 )       (6 )%
Breast Health                                140,984            23 %          141,277            22 %         (293 )        0 %
GYN Surgical                                  78,511            13 %           80,556            13 %       (2,045 )       (3 )%
Skeletal Health                               14,533             2 %           16,831             3 %       (2,298 )      (14 )%

                                       $     512,382            84 %    $     533,254            84 %    $ (20,872 )       (4 )%


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Diagnostics product sales decreased 6% in the current quarter compared to the corresponding period in the prior year. This decrease was primarily due to the divestiture of our Lifecodes business in the second quarter of fiscal 2013, which had contributed $12.6 million in the first quarter of fiscal 2013, a reduction in ThinPrep revenues of $12.7 million, and a reduction in Prodesse revenues of $3.2 million. Partially offsetting this decline was an increase in blood screening revenues of $9.3 million and a $7.2 million increase from our molecular diagnostics products, primarily our Aptima family of assays. We attribute the reduction in ThinPrep revenues primarily to lower sales volumes domestically resulting from an increase in screening intervals based on guidelines released in 2012 by the American Congress of Obstetrics and Gynecologists and the U.S. Preventative Services Task Force and lower average sales prices internationally, primarily in China where we have transitioned to selling more of our products through distributors, partially offset by higher volumes internationally. Prodesse revenues decreased in the current quarter primarily due to a milder flu season this year compared to the corresponding period in the prior year. Our blood screening revenues increased primarily due to the inclusion of contingent revenue under our blood screening collaboration that was not recognized in the first quarter of fiscal 2013 due to unbilled accounts receivable being recorded as a fair value adjustment in purchase accounting. Under the collaboration, a portion of our blood screening revenue is contingent on donations testing revenue earned by our blood screening collaborator. As a result, amounts to be received for this contingent revenue related to inventory on hand and not yet utilized by Novartis' (our blood screening collaborator at the time) customers as of the date we acquired Gen-Probe were recorded as unbilled accounts receivable on the balance sheet in purchase accounting and were not recorded as revenue in our results of operations in the first quarter of fiscal 2013. This increase in blood screening revenues was partially offset by lower WNV assay sales compared to the corresponding period in fiscal 2013 as last year generally had a much higher incidence of the WNV resulting in a restocking order that did not recur in the current quarter. The increase in revenues related to our Aptima family of assays was primarily due to increased volumes from our strategic alliance with Quest Diagnostics Incorporated executed in the third quarter of fiscal 2013, increased Tigris instrument sales, and increased sales volumes of our HPV screening assay, which was FDA approved for use on our Panther system in the fourth quarter of fiscal 2013. These increase were partially offset by slightly lower average sales prices.

Breast Health product sales were relatively flat in the current quarter compared to the corresponding period in the prior year. In the current quarter, our digital mammography systems revenue increased $1.9 million compared to the corresponding period in the prior year primarily due to the increase in 3D Dimensions revenue of $8.2 million as we sold more units with slightly higher average sales prices in the United States, partially offset by lower average sales prices internationally. As expected, we continue to experience a decline in the number Selenia units sold as well as slightly lower average sales prices for our 2D Dimensions products partially due to configuration differences. In addition, our breast biopsy products revenue increased $1.7 million in the current quarter compared to the corresponding period in the prior year primarily due to the increase in the number of Eviva biopsy devices sold worldwide. Recent adverse changes in the reimbursement for our breast biopsy products may result in lower sales prices of such products in the future.

GYN Surgical product sales decreased 3% in the current quarter compared to the corresponding period in the prior year primarily due to a decline in sales of NovaSure devices of $7.3 million, partially offset by a $5.4 million increase in MyoSure system sales, including our new Aquilex fluid management system used with our MyoSure devices. We experienced a decrease in the number of NovaSure devices sold in the United States, which we continue to believe is primarily attributable to patients delaying surgery or opting for lower cost and generally less effective alternatives. The MyoSure system continues to gain strong market acceptance as unit sales increase.

Skeletal Health product sales decreased 14% in the current quarter compared to the corresponding period in the prior year primarily due to a decrease of $1.2 million in our osteoporosis assessment product sales due to lower volumes and pricing pressures on a worldwide basis as competition increases and a decrease in mini C-arm system sales of $0.9 million primarily in the United States.

Product sales by geography as a percentage of total product sales were as follows:

                                         Three Months Ended
                            December 28, 2013           December 29, 2012
           United States                    74 %                        71 %
           Europe                           15 %                        16 %
           Asia-Pacific                      7 %                         9 %
           All others                        4 %                         4 %

                                           100 %                       100 %

The increase in product sales in the United States as a percentage of consolidated product sales is primarily due to higher sales of our 3D Dimensions systems and higher sales from our blood screening business as described above. The decrease in product sales in Asia-Pacific as a percentage of consolidated product sales is primarily driven by a reduction in ThinPrep revenues in China year over year.


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Service and Other Revenues



                                                                         Three Months Ended
                                               December 28, 2013                December 29, 2012               Change
                                                              % of                             % of
                                                              Total                            Total
                                             Amount          Revenue          Amount          Revenue       Amount       %
Service and Other Revenues                $     100,066            16 %    $     98,108             16 %    $ 1,958       2 %

Service and other revenues are primarily comprised of revenue generated from our field service organization to provide ongoing service, installation and repair of our products. Service and other revenues increased 2% in the current quarter compared to the corresponding period in the prior year primarily in our Breast Health business due to an increase in the number of service contracts driven by an increase in our installed base of our digital mammography systems, and higher training revenues on our digital mammography systems.

Cost of Product Sales



                                                                         Three Months Ended
                                            December 28, 2013                December 29, 2012                  Change
                                                           % of                             % of
                                                          Product                          Product
                                          Amount          Revenue          Amount          Revenue        Amount          %
Cost of Product Sales                  $     176,878            35 %    $     222,327            42 %    $ (45,449 )      (20 )%
Cost of Product Sales - Amortization
of Intangible Assets                          76,666            15 %           75,287            14 %        1,379          2 %


                                       $     253,544            49 %    $     297,614            56 %    $ (44,070 )      (15 )%

Product sales gross margin improved to 51% in the current quarter compared to 44% in the corresponding period in the prior year.

Cost of Product Sales. The cost of product sales, excluding amortization of intangible assets, as a percentage of product sales was 35% in the current quarter compared to 42% in the corresponding period in the prior year. Cost of product sales as a percentage of product sales in the current quarter decreased in Diagnostics, Breast Health, and GYN Surgical and increased in Skeletal Health compared to the corresponding period in the prior year, resulting in an overall improved gross margin rate.

Diagnostics' gross margin rate in the current quarter increased compared to the corresponding period in the prior year primarily due to the inclusion in the first quarter of fiscal 2013 of $29.9 million of additional costs related to the sale of acquired inventory written up to fair value in purchase accounting, and we were able to recognize contingent revenue under the blood screening collaboration in fiscal 2014 that we were not able to recognize in the first quarter of fiscal 2013 as described above. In addition, we experienced favorable manufacturing variances across our products and lower royalty costs for ThinPrep, partially offset by unfavorable pricing on ThinPrep sales.

Breast Health's gross margin rate improved in the current quarter compared to the corresponding period in the prior year primarily due to the increase in 3D Dimensions sales on both a unit basis and as a percentage of total digital mammography systems sales compared to our 2D systems. Our 3D Dimensions systems have higher average sales prices than our 2D systems resulting in higher gross margins. We also experienced favorable manufacturing variances in the current quarter.

GYN Surgical's gross margin rate for the current quarter was relatively flat with the corresponding period in the prior year as product costs decreased slightly but were offset by higher amortization expenses as a percentage of revenue. Product costs as a percentage of revenue declined slightly primarily due to lower overhead at the Costa Rica facility allocated to these products as a result of the transfer of our breast biopsy products from our Indianapolis, Indiana facility during fiscal 2013. In addition, we experienced favorable manufacturing variances in the current quarter, partially offset by the impact of lower NovaSure volumes and higher MyoSure volumes. Our NovaSure systems have a higher gross margin than our MyoSure products.

Skeletal Health's gross margin rate decreased primarily due to lower unit sales and increased pricing pressures compared to the prior year period.

Cost of Product Sales-Amortization of Intangible Assets. Amortization of intangible assets relates to acquired developed technology. These intangible assets are generally amortized over their estimated useful lives of between 8.5 and 20 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. The economic pattern is based on undiscounted future cash flows. The increase in amortization expense in the current


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quarter compared to the corresponding period in the prior year is primarily due to certain in-process research and development projects recorded as assets in the Gen-Probe acquisition receiving FDA approval in fiscal 2013. As a result, these approved projects are now being amortized.

Cost of Service and Other Revenues



                                                                          Three Months Ended
                                                December 28, 2013                December 29, 2012               Change
                                                               % of                             % of
                                                              Service                          Service
                                              Amount          Revenue          Amount          Revenue       Amount       %
Cost of Service and Other Revenue          $     53,308             53 %    $     52,075             53 %    $ 1,233       2 %

Service and other revenues gross margin was 47% in both the current quarter and the corresponding period in the prior year. Within our Breast Health segment, the continued conversion of a high percentage of our domestic installed base of digital mammography systems to service contracts upon expiration of the warranty period without a corresponding increase in costs to service such contracts has resulted in higher gross margins, partially offset by increased costs in our Diagnostics segment for additional expenses incurred related to our international expansion efforts.

Operating Expenses



                                                                         Three Months Ended
                                           December 28, 2013                December 29, 2012                   Change
                                                          % of                             % of
                                                          Total                            Total
                                         Amount          Revenue          Amount          Revenue         Amount          %
Research and development              $      48,669             8 %    $     51,509              8 %     $  (2,840 )        (6 )%
Selling and marketing                        83,257            14 %          94,443             15 %       (11,186 )       (12 )%
General and administrative                   67,819            11 %          54,391              9 %        13,428          25 %
Amortization of intangible assets            26,216             4 %          28,526              5 %        (2,310 )        (8 )%
Contingent consideration -
compensation expense                             -             -  %          29,486              5 %       (29,486 )      (100 )%
Contingent consideration - fair
value adjustments                                -             -  %          10,040              2 %       (10,040 )      (100 )%
Gain on sale of intellectual
property                                         -             -  %         (53,884 )           (9 )%       53,884        (100 )%
Restructuring and divestiture
charges                                      18,350             3 %           3,933              1 %        14,417         367 %

                                      $     244,311            40 %    $    218,444             35 %     $  25,867          12 %

Research and Development Expenses. Research and development expenses decreased 6% in the current quarter compared to the corresponding period in the prior year primarily due to lower headcount and reductions to certain development programs, primarily in the GYN Surgical business. These decreases were primarily due to our cost containment measures implemented in fiscal 2013 and the beginning of the first quarter of fiscal 2014. In addition, we divested our Lifecodes business in the second quarter of fiscal 2013, and as such we had no expenses in fiscal 2014 related to the Lifecodes business compared to $2.2 million in the first quarter of fiscal 2013. Partially offsetting these decreases was additional program spend for our virology product line. Research and development primarily reflects spending on new product development programs, regulatory compliance and clinical research and trials. At any point in time, we have a number of different research projects and clinical trials being conducted and the timing of these projects and related costs can vary from period to period.

Selling and Marketing Expenses. Selling and marketing expenses decreased 12% in the current quarter compared to the corresponding period in the prior year primarily due to lower headcount and lower spend for certain marketing directives, such as trade shows, seminars, and medical education, primarily as a result of our cost containment measures implemented in fiscal 2013 and the beginning of the first quarter of fiscal 2014. In addition, in the first quarter of fiscal 2013, we incurred $2.3 million of expenses related to the Lifecodes business that we divested in the second quarter of fiscal 2013.

General and Administrative Expenses. General and administrative expenses increased 25% in the current quarter compared to the corresponding period in the prior year primarily due to the $5.4 million impact of the medical device excise tax, which became effective in the second quarter of fiscal 2013, an increase in legal and consulting services of $4.7 million to assist us in our negotiation and response to shareholder activism, and higher international bad debt expense, partially offset by lower compensation and benefit costs due to lower headcount from our cost containment measures and lower integration costs related to the Gen-Probe acquisition. In addition, the first quarter of fiscal 2013 included a legal settlement benefit.


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Amortization of Intangible Assets. Amortization of intangible assets results from customer relationships, trade names, business licenses and non-compete agreements related to our acquisitions. These intangible assets are generally amortized over their estimated useful lives of between 2 and 30 years using a straight-line method or, if reliably determinable, based on the pattern in which the economic benefits of the assets are expected to be consumed utilizing expected undiscounted future cash flows. The decrease in the current quarter compared to the corresponding period in the prior year is primarily due to lower . . .

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