Stockholders' Equity and Stock-Based Compensation

Stockholder Rights Agreement

On November 20, 2013, the Company’s Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share, of the Company, to purchase from the Company one ten-thousandth of a share of newly designated Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”) at a price of $107.00 per one ten-thousandth of a share of Preferred Stock, subject to adjustment as provided in the Rights Agreement. The dividend was payable to stockholders of record at the close of business on December 2, 2013 (the “Record Date”). The Rights Agreement became effective on November 21, 2013.

On June 24, 2014, the Company entered into Amendment No. 1 (the “Amendment”) to the Rights Agreement by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The Amendment accelerated the expiration of the Rights from November 20, 2014 to June 24, 2014, and had the effect of terminating the Rights Agreement on that date. At the time of the termination of the Rights Agreement, all of the Rights distributed to holders of the Company’s common stock pursuant to the Rights Agreement expired.

Stock Repurchase Program

On November 11, 2013, the Company announced that its Board of Directors authorized the repurchase of up to $250 million of the Company’s outstanding common stock over a three-year period. Under the stock repurchase program, the Company is authorized to repurchase, from time-to-time, shares of its outstanding common stock on the open market or in privately negotiated transactions in the United States. As of September 27, 2014, the Company had not repurchased any shares under this program.

Stock-Based Compensation

Equity Compensation Plans

The Company has one share-based compensation plan pursuant to which awards are currently being made—the 2008 amended and restated Equity Incentive Plan (“2008 Equity Plan”). The Company has four share-based compensation plans pursuant to which outstanding awards have been made, but from which no further awards can or will be made—i) the 1995 Combination Stock Option Plan; ii) the 1997 Employee Equity Incentive Plan; iii) the 1999 Equity Incentive Plan; and iv) the 2000 Acquisition Equity Incentive Plan.

The purpose of the 2008 Equity Plan is to provide stock options, restricted stock units and other equity interests in the Company to employees, officers, directors, consultants and advisors of the Company and any other person who is determined by the Board of Directors to have made (or is expected to make) contributions to the Company. The 2008 Equity Plan is administered by the Board of Directors of the Company, and a total of 31.5 million shares were reserved for issuance under this plan. As of September 27, 2014, the Company had 10.7 million shares available for future grant under the 2008 Equity Plan.

The following presents stock-based compensation expense in the Company’s Consolidated Statements of Operations in fiscal 2014, 2013 and 2012:



	2014		2013		2012
Cost of revenues	$	7.3	$	7.0	$	5.7
Research and development	8.4		7.2		5.3
Selling and marketing	8.2		8.9		7.4
General and administrative	19.5		20.2		18.7
Restructuring and divestiture	6.6		9.0		3.5
	$	50.0	$	52.3	$	40.6

Grant-Date Fair Value

The Company uses a binomial model to determine the fair value of its stock options. The Company considers a number of factors to determine the fair value of options including the assistance of an outside valuation adviser. Information pertaining to stock options granted during fiscal 2014, 2013 and 2012 and related assumptions are noted in the following table:



	Years ended
	September 27, 2014			September 28, 2013			September 29, 2012
Options granted (in millions)	2.4			2.6			2.3
Weighted-average exercise price	$	22.01		$	20.29		$	17.21
Weighted-average grant date fair value	$	7.67		$	7.03		$	6.48
Assumptions:
Risk-free interest rates	1.2		%	0.5		%	0.7		%
Expected life (in years)	4.4			4.4			4.3
Expected volatility	41.4		%	43.7		%	46.9		%
Dividend yield	—			—			—

The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. In projecting expected stock price volatility, the Company uses a combination of historical stock price volatility and implied volatility from observable market prices of similar equity instruments. The Company estimated the expected life of stock options based on historical experience using employee exercise and option expiration data.

In connection with appointing Stephen P. MacMillan as its new President and Chief Executive Officer in December 2013, the Company granted approximately 0.1 million market stock units ("MSUs"). The MSUs vest in three separate tranches in an amount of 1/3rd of the total amount of the award based on the Company’s stock price meeting certain defined average stock prices for 30 consecutive trading days. These MSUs were valued at an average of $18.65 per share using the Monte Carlo simulation model and each tranche has its own derived service period. The Company is recognizing compensation expense under the accelerated method as prescribed by ASC 718. In addition, per the terms of his employment agreement, the Company granted 0.2 million restricted stock units ("RSUs") to match Mr. MacMillan’s purchase of 0.2 million shares of the Company’s common stock on the open market in the second quarter of fiscal 2014. The RSUs cliff vest three years from the date of grant, and the Company is accounting for this grant as a liability award pursuant to ASC 718 because this RSU award contains an additional vesting condition (the requirement that Mr. MacMillan retain the matching shares during the vesting period) that is not service, performance or market based.

Stock-Based Compensation Expense Attribution

The Company uses the straight-line attribution method to recognize stock-based compensation expense for stock options and RSUs. The vesting term of stock options is generally five years with annual vesting of 20% per year on the anniversary of the grant date, and RSUs generally vest over four years with annual vesting at 25% per year on the anniversary of the grant date. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time granted and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on an analysis of historical forfeitures, the Company has determined a specific forfeiture rate for certain employee groups and has applied forfeiture rates ranging from 0% to 6.5% as of September 27, 2014 depending on the specific employee group. This analysis is re-evaluated annually and the forfeiture rate will be adjusted as necessary. Ultimately, the actual stock-based compensation expense recognized will only be for those stock options and RSUs that vest.

Stock-based compensation expense related to stock options was $16.3 million, $23.7 million, and $18.7 million in fiscal 2014, 2013 and 2012, respectively. Stock compensation expense related to stock units, including RSUs, performance stock units ("PSUs") and MSUs, was $30.6 million, $26.0 million, and $21.4 million in fiscal 2014, 2013 and 2012, respectively. The related tax benefit recorded in the Consolidated Statements of Operations was $15.3 million, $17.2 million and $12.2 million in fiscal 2014, 2013 and 2012, respectively. Included within stock-based compensation expense in fiscal 2014, 2013 and 2012 is $6.6 million, $7.9 million and $3.5 million, respectively, related to modification accounting, the acceleration of vesting of certain retention RSUs provided under their original terms upon termination, and the acceleration of vesting for certain options assumed in the Gen-Probe acquisition related to employees who were terminated in connection with the Company’s restructuring action to consolidate its Diagnostics operations. The original terms of the stock options assumed in the Gen-Probe acquisition provided for acceleration upon a change-in-control and termination within 18 months of the change-in-control. At September 27, 2014, there was $24.4 million and $62.1 million of unrecognized compensation expense related to stock options and RSUs, respectively, to be recognized over a weighted average period of 3.0 years and 2.6 years, respectively.

Share Based Payment Activity

The following table summarizes all stock option activity under the Company’s stock option plans for the year ended September 27, 2014:



	Number of Shares (in millions)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value (in millions)
Options outstanding at September 28, 2013	14.9		$	18.92	3.9	$	55.0
Granted	2.4		22.01
Canceled/ forfeited	(2.8	)	22.27
Exercised	(4.7	)	15.03			$	34.7
Options outstanding at September 27, 2014	9.8		$	20.59	4.1	$	46.4
Options exercisable at September 27, 2014	4.8		$	21.49	2.9	$	23.1
Options vested and expected to vest at September 27, 2014 (1)	9.3		$	20.65	4.0	$	44.0


(1)	This represents the number of vested stock options as of September 27, 2014 plus the unvested outstanding options at September 27, 2014 expected to vest in the future, adjusted for estimated forfeitures.

During fiscal 2013 and 2012, the total intrinsic value of options exercised (i.e., the difference between the market price on the date of exercise and the price paid by the employee to exercise the options) was $37.6 million and $20.4 million, respectively.

A summary of the Company’s RSU activity during the year ended September 27, 2014 is presented below:



Non-vested Shares	Number of Shares (in millions)		Weighted-Average Grant-Date Fair Value
Non-vested at September 28, 2013	3.5		$	18.51
Granted	2.5		22.00
Vested	(1.2	)	18.13
Forfeited	(0.7	)	19.29
Non-vested at September 27, 2014	4.1		$	20.67

The number of RSUs vested includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. The Company pays the minimum statutory tax withholding requirement on behalf of its employees. During fiscal 2014, 2013 and 2012 the total fair value of RSUs vested was $22.6 million, $27.3 million and $15.7 million, respectively.

The Company also granted approximately 0.5 million PSUs during fiscal 2014 to members of its senior management team, which have a weighted-average grant date fair value of $21.69. Each recipient of the PSUs is eligible to receive between zero and 200% of the target number of shares of the Company’s common stock at the end of three years provided the Company’s defined Return on Invested Capital metrics are achieved. The Company is recognizing compensation expense ratably over the required service period based on its estimate that it is probable the targeted number of shares will vest. 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.

Employee Stock Purchase Plan

In March 2012, the Company’s stockholders approved the Hologic, Inc. 2012 Employee Stock Purchase Plan (“2012 ESPP”), which provides for the granting of up to 2.5 million shares of the Company’s common stock to eligible employees. The 2012 ESPP plan period is semi-annual and allows participants to purchase the Company’s common stock at 85% of the lower of (i) the market value per share of the common stock on the first day of the offering period or (ii) the market value per share of the common stock on the purchase date. The first plan period began on July 1, 2012. Stock-based compensation expense in fiscal 2014, 2013 and 2012 was $3.1 million, $2.7 million and $0.4 million, respectively.

The Company uses the Black-Scholes model to estimate the fair value of shares to be issued as of the grant date using the following weighted average assumptions:



	September 27, 2014		September 28, 2013		September 29, 2012
Assumptions:
Risk-free interest rates	0.08	%	0.11	%	0.16	%
Expected life (in years)	0.5		0.5		0.5
Expected volatility	30.0	%	32.0	%	35.0	%
Dividend yield	—		—		—