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ALOG > SEC Filings for ALOG > Form 10-Q on 12-Mar-2013All Recent SEC Filings

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Form 10-Q for ANALOGIC CORP


12-Mar-2013

Quarterly Report


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

The following discussion provides an analysis of our financial condition and results of operations and should be read in conjunction with the unaudited condensed Consolidated Financial Statements and Notes thereto included elsewhere in this report. The discussion contains statements, which, to the extent that they are not a recitation of historical facts, constitute "forward-looking statements" pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including, statements about product development, market and industry trends, strategic initiatives, regulatory approvals, sales, profits, expenses, price trends, research and development expenses and trends, and capital expenditures, we make in this document or in any document incorporated by reference are forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to differ from the projected results. See "Risk Factors" in Part I, Item 1A. of our Annual Report on Form 10-K for fiscal year 2012 as filed with the U.S Securities and Exchange Commission, or the "SEC" on October 4, 2012 for a discussion of the primary risks and uncertainties known to us.

We report our financial condition and results of operations on a fiscal year basis ending July 31. The three months ended January 31, 2013 and 2012 represent the second quarters of fiscal years 2013 and 2012, respectively. All dollar amounts in this Item 2 are in thousands except per share data.

Executive Summary

Introduction

We are a high technology company that designs and manufactures advanced medical imaging and security systems and subsystems sold to OEMs, and end users primarily in the healthcare and airport security markets. We are recognized worldwide for advancing state-of-the-art technology in the areas of CT, ultrasound, magnetic resonance imaging, digital mammography, and CT-based automated threat detection systems for airport security. Our OEM customers incorporate our technology into systems they in turn sell for various medical and security applications. We also sell our ultrasound products directly into clinical end-user markets through our direct worldwide sales force under the brand name BK Medical.

We have three reportable segments: Medical Imaging, Ultrasound, and Security Technology. Our Medical Imaging segment consists primarily of systems and subsystems used in CT and MRI medical imaging equipment and direct conversion digital x-ray detectors for mammography sold primarily through OEM customers. Our Ultrasound segment consists of ultrasound systems and transducers for the urology, ultrasound-guided surgery and point of care markets sold primarily through our direct sales force and ultrasound transducers sold primarily through OEM customers. Our Security Technology segment consists of advanced threat detection aviation security systems and subsystems sold primarily through OEM customers.

Financial Highlights

The following table is a summary of our financial results for the three and six
months ended January 31, 2013 and 2012:



                                           Three Months Ended January 31,              Percentage             Six Months Ended January 31,              Percentage
                                           2013                     2012                 Change                2013                   2012                Change
Total net revenue                     $       138,554          $       126,433                  10 %      $      258,421         $      244,290                   6 %
Gross profit                          $        55,399          $        46,845                  18 %      $      100,485         $       89,871                  12 %
Gross margin                                       40 %                     37 %                                      39 %                   37 %
Income from operations                $        13,803          $         7,791                  77 %      $       21,238         $       13,375                  59 %
Operating margin                                   10 %                      6 %                                       8 %                    5 %
Net income                            $         9,809          $        19,615                 -50 %      $       14,190         $       23,641                 -40 %
Diluted net income per share          $          0.78          $          1.59                 -51 %      $         1.13         $         1.88                 -40 %

Outlook

Our business performance for the six months ending January 31, 2013 exhibited 6% revenue growth as compared to the six months ended January 31, 2012. Our outlook for the year remains strong as we expect upper single-digit revenue growth organically, and combined with the acquisition of Ultrasonix, we are targeting 10% revenue growth this fiscal year over last year.

Subsequent to the end of our second quarter, on March 2, 2013, we completed our acquisition of all the outstanding stock of Ultrasonix Medical Corporation, which we refer to as Ultrasonix, a privately held company located in Vancouver, Canada. Ultrasonix is a supplier of advanced ultrasound systems for point-of-care and general imaging applications with over 5,000 systems installed worldwide. The acquisition was undertaken by us in order to accelerate our expansion into the point-of-care ultrasound market. The net purchase price is comprised of a cash payment of approximately $83,000 from our existing cash on hand, subject to a final adjustment as provided in the purchase agreement.


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Results of operations

Three and six months ended January 31, 2013 compared to three and six months ended January 31, 2012

Net revenue

Product revenue

Product revenue by segment is summarized as follows:

                                          Three months ended January 31,          Dollar        Percentage          Six months ended January 31,          Dollar        Percentage
                                            2013                  2012            Change          Change              2013                 2012           Change          Change
Product Revenue:
Medical Imaging                        $        77,531       $        73,234     $  4,297                 6 %    $      149,640       $      143,534     $  6,106                 4 %
Ultrasound                                      40,450                41,078         (628 )              -2 %            72,144               75,679       (3,535 )              -5 %
Security Technology                             14,782                 7,877        6,905                88 %            23,526               16,983        6,543                39 %
Total                                  $       132,763       $       122,189     $ 10,574                 9 %    $      245,310       $      236,196     $  9,114                 4 %

Medical Imaging

During the three and six months ended January 31, 2013 as compared to the prior year comparable periods, product revenue increased largely due to increasing demand for high-power MRI and CT subsystems. These increases were offset in part by lower shipments of digital mammography detectors.

Ultrasound

During the three months ended January 31, 2013, as compared to the prior year comparable period, product revenue decreased primarily due to our transition to new distributors in Eastern Europe and lower OEM transducers sales, which offset higher direct sales in North America and Europe.

During the six months ended January 31, 2013, as compared to the prior year comparable period, product revenue was unfavorably impacted by hospital purchasing hesitancy in the U.S., the impact of U.S. sales territory adjustments as we expanded sales force coverage, foreign currency fluctuation, lower OEM transducers sales, and the transition to new distributors in Eastern Europe.

Security Technology

During the three and six months ended January 31, 2013, as compared to the prior year comparable periods, product revenue increased primarily due to strong shipments of high-speed threat detection systems as demand continues to grow outside the U.S.

Engineering revenue

Engineering revenue by segment is summarized as follows:

                                                                                                                              Six months
                                          Three months ended January 31,           Dollar        Percentage                ended January 31,              Dollar        Percentage
                                           2013                    2012            Change          Change               2013               2012           Change          Change
Engineering Revenue:
Medical Imaging                       $         3,137         $         2,029      $ 1,108                55 %     $        7,036      $       4,403      $ 2,633                60 %
Security Technology                             2,654                   2,215          439                20 %              6,075              3,691        2,384                65 %
Total                                 $         5,791         $         4,244      $ 1,547                36 %     $       13,111      $       8,094      $ 5,017                62 %

Medical Imaging

The increase for the three and six months ended January 31, 2013, versus the prior year comparable periods was due primarily to increased work on customer-funded engineering projects in our CT product line.

Security Technology

The increase for the three and six months ended January 31, 2013, versus the prior year comparable periods was due primarily to the timing of work performed on a new customer funded-engineering project that began in the second quarter of fiscal year 2012.


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Gross margin

Product gross margin

Product gross profit and gross margin are summarized as follows:

                                            Three Months Ended                                           Six Months Ended
                                               January 31,                    Percentage                    January 31,                   Percentage
                                        2013                  2012              Change               2013                 2012              Change
Product gross profit               $        55,423       $       46,484              19.2 %     $       99,296       $       89,260              11.2 %
Product gross margin                          41.7 %               38.0 %                                 40.5 %               37.8 %

Product gross margin increased in the three and six months ended January 31, 2013, versus the prior year comparable period due to overall material cost reductions and improved gross margin in our Medical Imaging and Ultrasound segments. The improvement in our Ultrasound segment was driven by the continued cost savings following consolidation of our manufacturing operations. The Medical Imaging segment increase was driven by an improvement in the vendor component quality inspection process of our digital mammography business, cost savings as we begin to realize benefits from our lower cost Shanghai operation, and favorable product mix. These increases were offset by lower gross margins in the Security Technology segment due to the production ramp up of our first generation high speed threat detection systems.

Engineering gross margin

Engineering gross profit and gross margin are summarized as follows:

                                              Three Months Ended                                              Six Months Ended
                                                 January 31,                      Percentage                     January 31,                    Percentage
                                         2013                   2012                Change                2013                 2012               Change
Engineering gross profit             $         (24 )       $          361              -106.6 %      $        1,189        $         611               94.6 %
Engineering gross margin                      -0.4 %                  8.5 %                                     9.1 %                7.5 %

The decrease in the engineering gross profit and gross margin in the three months ended January 31, 2013 versus the prior year comparable period was due to primarily the winding down of higher margin projects in our Security Technology segment throughout fiscal year 2012.

The increases in the engineering gross profit and gross margin in the six months ended January 31, 2013 versus the prior year comparable period were due primarily to a reduction in a loss accrual in the first quarter of fiscal year 2013 on a Security Technology project resulting from lower projected costs than originally estimated.

Operating expenses

Operating expenses are summarized as follows:

                                             Three Months Ended
                                                 January 31,                  Dollar        Percentage              Percentage of Net Revenue
                                          2013                 2012           Change          Change               2013                   2012
Operating Expenses:
Research and product development     $        16,123      $       13,940      $ 2,183              15.7 %               11.6 %                 11.0 %
Selling and marketing                         11,867              10,605        1,262              11.9 %                8.6 %                  8.4 %
General and administrative                    13,606              14,509         (903 )            -6.2 %                9.8 %                 11.5 %
Total                                $        41,596      $       39,054      $ 2,542               6.5 %               30.0 %                 30.9 %

                                              Six Months Ended
                                                 January 31,                  Dollar        Percentage              Percentage of Net Revenue
                                          2013                 2012           Change          Change               2013                   2012
Operating Expenses:
Research and product development     $        30,197      $       29,207      $   990               3.4 %               11.7 %                 12.0 %
Selling and marketing                         23,522              21,070        2,452              11.6 %                9.1 %                  8.6 %
General and administrative                    25,528              26,219         (691 )            -2.6 %                9.9 %                 10.7 %
Total                                $        79,247      $       76,496      $ 2,751               3.6 %               30.7 %                 31.3 %


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Research and product development expenses are related to projects undertaken by us which are not funded by our customers. These expenses increased in the three months and six months ended January 31, 2013, versus the prior year comparable periods due primarily to increased employee compensation and benefits partially offset by increased work performed on customer funded engineering projects. The increase in employee compensation and benefits of $5,087 and $2,776 during the three and six months ended January 31, 2013, respectively, was due primarily to an increase in contract labor, annual merits increases and increase in headcount.

Selling and marketing expenses increased in the three and six months ended January 31, 2013, versus the prior year comparable period due primarily to an increase in market related expenses of $550 and $1,067, outside professional fees of $257 and $281, travel expenses of $52 and $359, and employee compensation and benefits of $314 and $232, respectively, in the Ultrasound segment as we expand our sales force and product offerings in existing and adjacent markets.

General and administrative expenses decreased in the three and six months ended January 31, 2013 versus the prior year comparable periods due primarily to the reduction of contingent consulting fees of $2,714 in the three and six months ended January 31, 2012 related to the income tax refund and related interest received in the period. These decreases were partially offset by acquisition related expenses for Ultrasonix of $662 as well as increased compensation costs driven by annual merit increases. Also offsetting these decreases were increased depreciation from additional investments made in our information technology infrastructure.

Other income (expense), net

Other income (expense), net is summarized as follows:

                                               Three Months Ended                         Six Months Ended
                                                  January 31,                                January 31,
                                           2013                  2012                 2013                 2012
Other income (expense), net:
Interest income, net                  $           95         $         133       $          208        $         269
Gain on sale of other investments                  -                 2,500                    -                2,500
Other, net                                      (497 )                 322               (1,516 )                497
Total                                 $         (402 )       $       2,955       $       (1,308 )      $       3,266

Other income (expense), net during the three and six months ended January 31, 2013, consisted predominantly of foreign currency transaction exchange losses by our foreign subsidiaries in Denmark and China due primarily to the strengthening US dollar in the current period.

Other income (expense), net during the three and six months ended January 31, 2012, consisted predominantly of a gain from the sale of our 25% equity interest in our China-based affiliate for $2,500, the book value of which was written off in fiscal year 2006.

Provision for income taxes

The provision (benefit) for income taxes and the effective tax rates are summarized as follows:

                                           Three Months Ended                             Six Months Ended
                                               January 31,                                  January 31,
                                       2013                   2012                  2013                   2012
Provision for income taxes        $        3,592         $       (8,869 )       $       5,740         $       (7,000 )
Effective tax rate                            27 %                  -83 %                  29 %                  -42 %

The effective income tax rate on continuing operations is based upon the estimated income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.

The effective tax rates for the three and six months ended January 31, 2013 were lower than the statutory rate of 35% due primarily to a discrete tax benefit of $466 for the reinstatement of the federal research and experimentation credit back to January 1, 2012 from the American Taxpayer Relief Act of 2012 and the lower foreign tax rates as compared to the statutory rate of 35%.

The effective tax rates for the three and six months ended January 31, 2012 were lower than the statutory rate of 35% due primarily to a refund of $12,007 in the second quarter of fiscal year 2012 as the result of the completion of an Internal Revenue Service, or IRS, audit of federal income tax returns for the fiscal years ended July 31, 2003, 2005, and 2008. The refund was largely the result of Federal research and experimentation credits that carryover from the fiscal years 1991 through 2000 into the audited returns. We recorded a tax benefit for this refund, including the related interest, in the unaudited consolidated statement of operations of $10,025 in the three and six months ended January 31, 2012. Related to the refund and interest were contingent professional fees of $2,714 that were recorded in general and administrative expenses in the unaudited condensed consolidated statement of operations in the three and six months ended January 31, 2012. In connection with the conclusion of the IRS audit, we recorded a benefit from the reversal and re-measurement of related tax reserves of $2,308 in the unaudited condensed consolidated statement of operations in the three and six months ended January 31, 2012.


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Net income and diluted net income per share

Net income and diluted net income per share for the three and six months ended January 31, 2013 and 2012 were as follows:

                                      Three Months Ended            Six Months Ended
                                          January 31,                 January 31,
                                      2013           2012          2013          2012
     Net income                     $   9,809      $ 19,615      $ 14,190      $ 23,641
     % of net revenue                     7.1 %        15.5 %         5.5 %         9.7 %
     Diluted net income per share   $    0.78      $   1.59      $   1.13      $   1.88

The decrease in net income and diluted net income per share for the three and six months ended January 31, 2013 versus the prior year comparable period was due primarily to a refund of $12,007 in the second quarter of fiscal year 2012 as the result of the completion of an IRS audit of federal income tax returns for the fiscal years ended July 31, 2003, 2005, and 2008 as well as the gain from the sale of our 25% equity interest in our China-based affiliate for $2,500. We recorded a tax benefit for the refund, including the related interest, in the unaudited condensed consolidated statement of operations of $10,025 in the three and six months ended January 31, 2012. These decreases were offset by improvement in our operating results during the three and six months ended January 31, 2013.

Liquidity and capital resources

Key liquidity and capital resource information are summarized as follows.

                                      January 31, 2013       July 31, 2012
          Cash and cash equivalents   $         175,125     $       187,011
          Working capital                       320,991             308,856
          Long-term debt                              -                   -

Cash and cash equivalents at January 31, 2013 primarily consisted of demand deposits at highly rated banks and financial institutions. We periodically review our investment portfolio to determine if any investments are impaired due to changes in credit risk or other potential valuation concerns. We believe that our cash equivalents were appropriately valued at January 31, 2013 and July 31, 2012 and we are not aware of any market events that would impact their valuation. This could change in the future should new developments arise in the credit markets.

Subsequent to the end of our fiscal second quarter, on March 2, 2013, we reduced our cash and cash equivalents by approximately $83,000 in connection with our acquisition of Ultrasonix.

The carrying amounts reflected in the unaudited condensed consolidated balance sheets of cash and cash equivalents, trade receivables, and trade payables approximate fair value at January 31, 2013, due to the short term maturities of these instruments.

We face exposure to financial market risks, including adverse movements in foreign currency exchange rates, and changes in interest rates. These exposures can change over time as business practices evolve and could have a material adverse impact on our financial results. Our primary exposure is related to fluctuations between the U.S. dollar and local currencies for our subsidiaries in Canada, Europe, and China. Our investment in international subsidiaries is sensitive to fluctuations in currency exchange rates. The effect of the change in currency exchange rates on our net investment in international subsidiaries is reflected in the "accumulated other comprehensive income" component of stockholders' equity.

Cash flows

Sources and uses of cash flows are summarized as follows:

                                                                   Six months ended
                                                                     January 31,
                                                              2013                  2012
Net cash provided by operating activities                $        7,328        $       38,169
Net cash used for investing activities                          (12,914 )             (14,750 )
Net cash used for financing activities                           (7,466 )             (17,720 )
Effect of exchange rate changes on cash                           1,166                (1,049 )
Net (decrease) increase in cash and cash equivalents     $      (11,886 )      $        4,650

The cash flows provided by operating activities in the six months ended January 31, 2013 decreased from the six months ended January 31, 2012 due primarily to the receipts of the tax refund of $12,007 during the second quarter of 2012 and an increase in inventories of $16,377 during the six months ended January 31, 2013 primarily due to demand related inventory purchases.


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The cash flows provided by operating activities in the six months ended January 31, 2013 primarily reflects our income from operations of $21,238, non-cash charges for depreciation and amortization expenses and share based compensation of $8,043, and $5,954, respectively. Also contributing to the cash provided by operating activities was a decrease in accounts receivable of $10,168. The cash provided by operating activities was largely offset by increases in inventory, other current assets and refundable income taxes of $16,377, $3,055, and $1,150, as well as decreases in accrued liabilities and accrued income taxes of $9,045 and $2,767, respectively. The decrease in accounts receivable was due primarily to lower sales volumes in the three months ended January 31, 2013 as compared to the fourth quarter of fiscal year 2012. The increase in inventory was due primarily to demand related inventory purchases. The decrease in accrued liabilities was due primarily to the payment of bonuses and severance. The decrease in accrued income taxes was due primarily to tax payments made in the first and second quarter of fiscal year 2013. The decrease in advance payments and deferred revenue was due primarily to timing of when our obligations to our customers were completed and revenue was earned.

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