Moody's Upgrades Hologic's (HOLX) Corporate Family Rating to 'Ba3'; Speculative Grade Liquidity Rating Affirmed

Moody's Investors Service upgraded the Corporate Family Rating (CFR) and the Probability of Default Rating (PDR) of Hologic (Nasdaq: HOLX) (Hologic) to Ba3 and Ba3-PD from B1 and B1-PD, respectively. Moody's also upgraded Hologic's senior secured credit facilities to Ba1 from Ba2 and unsecured notes to B1 from B2. Concurrently, Moody's affirmed the SGL-1 Speculative Grade Liquidity rating (signifying very good liquidity). The rating outlook is stable.

The upgrade of the ratings reflects Moody's increased confidence that the company will be able to sustainably grow its EBITDA following several consecutive quarters of improved revenue and earnings performance. Hologic's EBITDA growth will be driven by increased adoption of 3D imaging for breast mammography, increased volume of molecular diagnostics tests being run on Hologic's installed base of laboratory equipment, and international expansion. The upgrade also reflects Moody's view that the company remains committed to debt repayment and deleveraging.

Moody's took the following rating actions on Hologic, Inc.:

Ratings Upgraded:

Corporate Family Rating to Ba3 from B1

Probability of Default Rating to Ba3-PD from B1-PD

Senior secured revolving credit facility to Ba1 (LGD 2) from Ba2 (LGD 2)

Senior secured Term Loans to Ba1 (LGD 2) from Ba2 (LGD 2)

Senior unsecured notes to B1 (LGD 4) from B2 (LGD 4)

Ratings Affirmed:

Speculative Grade Liquidity Rating at SGL-1

Outlook Actions:

Outlook revised to stable from positive

RATINGS RATIONALE

The Ba3 rating incorporates Hologic's good scale, leading market positions within its core franchises and good revenue diversity by product and customer. The rating is also supported by the recurring nature of more than half of the revenues which are generated from service contracts and consumables. Further, the company generates good free cash flow, has strong interest coverage and a publicly stated commitment to deleverage.

The rating is constrained by Hologic's high, though improving, financial leverage stemming from the 2012 debt-financed acquisition of Gen-Probe. Moody's estimates adjusted debt to EBITDA was 4.2x for the twelve months ended March 28. 2015. However, this does not capture the premium over the principal or taxes associated with the convertible notes that Moody's expects the company will repay in FY17 and FY18. Including these obligations, leverage would approximate 4.9x. The ratings also reflect volatility that can occur in Hologic's financial performance because its businesses are sensitive to general medical utilization trends and hospital capital equipment spending trends. Further, activist investors including Carl Icahn own more than 15% of Hologic's shares, and Moody's believes event risk could rise if earnings growth does not continue to improve and the stock price becomes pressured.

Hologic's SGL-1 Speculative Grade Liquidity Rating reflects very good liquidity over the next 12-18 months supported by healthy cash balances and Moody's expectation of annual free cash flow in the $500 million range, which will be more than sufficient to satisfy its modest debt maturities and other cash needs.

Moody's could upgrade the ratings if Hologic can generate sustained organic revenue growth and continue to repay debt such that the rating agency expects adjusted debt to EBITDA to be sustained below 3.5 times.

Moody's could downgrade the ratings if market uptake of Hologic's newer products fails to offset declines in older products, resulting in declines in revenue and earnings. Specifically, ratings could be downgraded if Moody's expects adjusted debt to EBITDA to be sustained above 4.5x times, or if liquidity deteriorates meaningfully.

The principal methodology used in these ratings was Global Medical Product and Device Industry published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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