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

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Form 10-Q for ANALOGIC CORP


10-Jun-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 April 30, 2013 and 2012 represent the third 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 names BK Medical and Ultrasonix.

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 nine
months ended April 30, 2013 and 2012:



                                         Three Months Ended April 30,              Percentage             Nine Months Ended April 30,             Percentage
                                          2013                   2012                Change               2013                  2012                Change
Total net revenue                    $      125,765         $      121,270                   4 %      $     384,186         $     365,560                   5 %
Gross profit                         $       49,140         $       44,752                  10 %      $     149,625         $     134,623                  11 %
Gross margin                                     39 %                   37 %                                     39 %                  37 %
Income from operations               $        6,712         $        9,873                 -32 %      $      27,950         $      23,248                  20 %
Operating margin                                  5 %                    8 %                                      7 %                   6 %
Net income                           $        5,224         $        7,330                 -29 %      $      19,414         $      30,971                 -37 %
Diluted net income per share         $         0.41         $         0.59                 -31 %      $        1.54         $        2.45                 -37 %

On March 1, 2013, we completed our acquisition of all of the outstanding equity securities of Ultrasonix Medical Corporation, a Nevada Corporation, whose principal assets included customer lists and intangibles related solely to sales destined to the U.S. On March 2, 2013, we completed our acquisition of all the outstanding equity securities of Ultrasonix Medical Corporation, a Canadian Corporation, pursuant to a "plan of arrangement" under Canadian law. Ultrasonix is a supplier of advanced ultrasound systems for point-of-care and general imaging applications. The acquisition was undertaken by us in order to accelerate our expansion into the point-of-care ultrasound market. The estimated purchase price, net of cash acquired, is $79,932, which consists of cash of approximately $79,273 paid at closing and an estimate of $659 remaining to be paid to former shareholders of Ultrasonix, primarily due to the sale of U.S. assets to us. The net purchase price has not been finalized and is subject to a final working capital adjustment as provided in the purchase agreement. The acquisition was funded from our existing cash on hand and has been accounted for as an acquisition of a business.


Table of Contents

During the third quarter of fiscal year 2013, we commenced the process of consolidating manufacturing and certain support activities currently conducted at Ultrasonix with operations at our existing facilities, which we refer to as the Ultrasonix manufacturing consolidation.

In addition to the Ultrasonix manufacturing consolidation initiated during the third quarter of fiscal year 2013, subsequent to our third quarter of fiscal year 2013, we approved a plan of restructuring to streamline our business and realize synergies and to further optimize our overall operational footprint. As part of the plan, we will close our ultrasound transducer operation in Englewood, Colorado. Activities at the Englewood facility will be consolidated with our existing ultrasound transducer operation in State College, Pennsylvania.

We expect to complete the Ultrasonix manufacturing consolidation and these other restructuring activities by the fourth quarter of our fiscal year ending July 31, 2014, which we refer to as fiscal year 2014. We expect to incur total pre-tax charges of approximately $5,000, consisting of (i) $496 in total pre-tax charges primarily relating to the Ultrasonix manufacturing consolidation which were recognized in our condensed consolidated statement of operations under restructuring in the third quarter of fiscal year 2013; (ii) facility-related charges, including charges in connection with the closure of the Englewood facility, of approximately $500; and (iii) employee termination charges, including charges in connection with the closure of the Englewood facility and optimization of our global operations, of approximately $4,000. Of the $4,500 to be incurred subsequent to the third quarter of fiscal year 2013, we expect to incur $3,500 in the fourth quarter of fiscal year 2013, and $1,000 in fiscal year 2014. Of the total pre-tax charges of approximately $5,000, we expect approximately $3,600, $1,200, and $200 will be included in the operating results of our Ultrasound segment, Medical Imaging segment, and Security Technology segment, respectively. The restructuring plan is expected to result in annual savings of over $6,000, a portion of which we expect beginning in fiscal year 2014.

Outlook

Our business performance for the nine months ending April 30, 2013 exhibited 5% revenue growth as compared to the nine months ended April 30, 2012. For this fiscal year, we expect mid to upper single digit revenue growth over last year.

Results of operations

Three and nine months ended April 30, 2013 compared to three and nine months ended April 30, 2012

Net revenue

Product revenue

Product revenue by segment is summarized as follows:

                                          Three Months Ended April 30,          Dollar        Percentage           Nine Months Ended April 30,          Dollar        Percentage
                                            2013                 2012           Change          Change              2013                 2012           Change          Change
Product Revenue:
Medical Imaging                        $       68,818       $       70,469     $ (1,651 )              -2 %    $      218,458       $      214,003     $  4,455                 2 %
Ultrasound                                     33,884               33,889           (5 )               0 %           106,028              109,568       (3,540 )              -3 %
Security Technology                            18,486               10,736        7,750                72 %            42,012               27,719       14,293                52 %
Total                                  $      121,188       $      115,094     $  6,094                 5 %    $      366,498       $      351,290     $ 15,208                 4 %

Medical Imaging

During the three months ended April 30, 2013 as compared to the prior year comparable period, product revenue decreased largely due to timing of shipments for high-power MRI subsystems. These decreases were offset in part by higher shipments of digital mammography detectors due to the timing of such shipments.


Table of Contents

During the nine months ended April 30, 2013 as compared to the prior year comparable period, 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 due to the timing of such shipments.

Ultrasound

During the three months ended April 30, 2013, as compared to the prior year comparable period, product revenue remained flat. Lower OEM transducer sales were offset by revenues of $3,452 from sales of our Ultrasonix products following our acquisition of Ultrasonix Corporation on March 2, 2013. Organic revenues in our direct business were flat, as compared to the prior year comparable period, due to global market headwinds and temporary salesforce disruption as a result of our salesforce expansion and channel integration following the acquisition of Ultrasonix in fiscal year 2013.

During the nine months ended April 30, 2013, as compared to the prior year comparable period, product revenue was unfavorably impacted by hospital purchasing hesitancy in the U.S. and the European Union, 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. These decreases were partially offset by revenue of $3,452 from sales of our Ultrasonix products following our acquisition of Ultrasonix.

Security Technology

During the three and nine months ended April 30, 2013, as compared to the prior year comparable periods, product revenue increased primarily due to strong shipments of our new product introductions 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:

                                                                                                                              Nine Months
                                           Three Months Ended April 30,           Dollar         Percentage                 Ended April 30,                Dollar        Percentage
                                            2013                 2012             Change           Change               2013                2012           Change          Change
Engineering Revenue:
Medical Imaging                         $       2,816       $         2,291      $    525                 23 %     $        9,852      $        6,694      $ 3,158                47 %
Ultrasound                                        106                     -           106                100 %                106                   -          106               100 %
Security Technology                             1,655                 3,885        (2,230 )              -57 %              7,730               7,576          154                 2 %
Total                                   $       4,577       $        $6,176      $ (1,599 )              -26 %     $       17,688      $       14,270      $ 3,418                24 %

Our business model includes customer-funded engineering projects that integrate our core technologies within our customer's product portfolios. These projects may vary substantially period to period in terms of resource requirements, type, size, length of project, and profitability.

Medical Imaging

The increase for the three months ended April 30, 2013, versus the prior year comparable periods was primarily due to increased work on customer-funded engineering projects in our MRI product line.

The increase for the nine months ended April 30, 2013, versus the prior year comparable periods was primarily due to increased work on customer-funded engineering projects in our CT product line.

Security Technology

The decrease for the three months ended April 30, 2013, versus the prior year comparable period was primarily due to the timing of work performed on a new customer funded-engineering project that began in the second quarter of fiscal year 2012.

Gross margin

Product gross margin

Product gross profit and gross margin are summarized as follows:

                                           Three Months Ended                                           Nine Months Ended
                                               April 30,                     Percentage                     April 30,                    Percentage
                                       2013                  2012              Change               2013                 2012              Change
Product gross profit              $        48,847       $       43,481              12.3 %     $      148,143       $      132,741              11.6 %
Product gross margin                         40.3 %               37.8 %                                 40.4 %               37.8 %


Table of Contents

Product gross margin increased in the three months ended April 30, 2013, versus the prior year comparable period due to overall material cost reductions and improved gross margin in our Medical Imaging and Security Technology segments. The Medical Imaging segment increase was driven by lower scrap and production rework costs due to 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. The Security Technology segment increase was driven by a higher volume of sales of high speed threat detection systems and overall cost reduction efforts. These increases were offset in part by lower gross margins in our Ultrasound segment due to the amortization of intangible assets and the fair value inventory step-up adjustment of approximately $1,000 relating to our acquisition of Ultrasonix and lower volume in our OEM transducer business.

Product gross margin increased in the nine months ended April 30, 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 partially offset by the amortization of intangible assets and the fair value inventory step-up adjustment of approximately $1,000 relating to our acquisition of Ultrasonix. 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                                             Nine Months Ended
                                                 April  30,                      Percentage                     April  30,                     Percentage
                                         2013                  2012                Change               2013                 2012                Change
Engineering gross profit            $          293         $       1,271               -76.9 %      $       1,482        $       1,882               -21.3 %
Engineering gross margin                       6.4 %                20.6 %                                    8.4 %               13.2 %

The decrease in the engineering gross profit and gross margin in the three and nine months ended April 30, 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.

Operating expenses

Operating expenses are summarized as follows:

                                             Three Months Ended
                                                  April 30,                     Dollar         Percentage               Percentage of Net Revenue
                                          2013                 2012             Change           Change                2013                    2012
Operating Expenses:
Research and product development     $       16,127       $       13,106       $  3,021               23.1 %                12.8 %                  10.9 %
Selling and marketing                        13,540               10,925          2,615               23.9 %                10.8 %                   9.0 %
General and administrative                   12,265               10,848          1,417               13.1 %                 9.8 %                   8.9 %
Restructuring                                   496                    -            496              100.0 %                 0.4 %                   0.0 %
Total                                $       42,428       $       34,879       $  7,549               21.6 %                33.8 %                  28.8 %

                                              Nine Months Ended
                                                  April 30,                     Dollar         Percentage               Percentage of Net Revenue
                                          2013                 2012             Change           Change                2013                    2012
Operating Expenses:
Research and product development     $       46,324       $       42,313       $  4,011                9.5 %                12.1 %                  11.6 %
Selling and marketing                        37,062               31,995          5,067               15.8 %                 9.6 %                   8.8 %
General and administrative                   37,793               37,067            726                2.0 %                 9.8 %                  10.1 %

Restructuring 496 - 496 100.0 % 0.1 % 0.0 % Total $ 121,675 $ 111,375 $ 10,300 9.2 % 31.6 % 30.5 %

Research and product development expenses are related to projects undertaken by us which are not funded by our customers. Research and product development expenses increased in the three months ended April 30, 2013, versus the prior year comparable period due primarily to an increase in salaries and wages of $1,393 primarily due to an increase in headcount and annual merit increases, as well as decreased work performed on customer funded engineering projects. These increases were offset by a decrease in cash incentive based compensation of $833.


Table of Contents

Research and product development expenses increased in the nine months ended April 30, 2013, versus the prior year comparable period primarily due to increased salaries and wages of $3,923 as a result of an increase in headcount and annual merit increases, primarily offset by a decrease in cash incentive based compensation of $563 and increased work performed on customer funded engineering projects during the first nine months of fiscal year 2013.

Selling and marketing expenses increased in the three and nine months ended April 30, 2013, versus the prior year comparable period primarily due to an increase in salaries and wages of $718 and $998, cash incentive based compensation of $521 and $794, and marketing related expenses of $499 and $1,645, respectively. The increases in salaries and wages were primarily due to an increase in headcount as a result of our acquisition of Ultrasonix and expansion of our core salesforce in North America. Also, impacting salaries and wages were annual merit increases. The increase in marketing related expenses was due primarily to increased attendance at trade shows and related expenses in the Ultrasound segment as we expand our sales force and product offerings in existing and adjacent markets.

General and administrative expenses increased in the three months ended April 30, 2013 versus the prior year comparable period primarily due to an increase in outside professional fees and salaries and wages of $1,615 and $428, respectively, partially offset by a decrease in cash incentive based compensation and share-based compensation of $952 and $169, respectively. The increase in outside professional fees was primarily due to an increase in acquisition related expenses as a result of our acquisition of Ultrasonix, audit fees and inquiry related costs associated with our investigation of our Danish subsidiary. The decrease in cash incentive based compensation and share-based compensation was primarily due to a decrease in operating results.

General and administrative expenses increased in the nine months ended April 30, 2013 versus the prior year comparable period due primarily to increases in acquisition related expenses of $1,142 relating to our March 2, 2013 acquisition of Ultrasonix, salaries and wages of $923, audit fees of $852, depreciation and amortization of $773, and consulting fees of $550, offset in part by a decrease in contingent consulting fees of $2,714 related to the income tax refund and related interest received during the nine months ended April 30, 2012 and cash based incentive compensation of $684. The increase in salaries and wages is primarily due to an increase in headcount and annual merit increases. The increase in depreciation and amortization was primarily due to purchases of software and computer hardware placed in service during fiscal year 2012.

Please see the executive summary under Management's Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the restructuring charge for the Ultrasonix manufacturing consolidation.

Other income (expense), net

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

                                          Three Months Ended                           Nine Months Ended
                                               April 30,                                   April 30,
                                      2013                  2012                  2013                   2012
Other income (expense), net:
Interest income, net              $          76         $          98        $           284         $         367
Gain on sale of investments                   -                     -                      -                 2,500
Other, net                                  114                   325                 (1,402 )                 822
Total                             $         190         $         423        $        (1,118 )       $       3,689

Total other income (expense), net during the three and nine months ended April 30, 2013, consisted predominantly of foreign currency transaction exchange gains (losses) for the U.S. dollar by our foreign subsidiaries in Denmark and China.

Total other income (expense), net during the three months ended April 30, 2012 consisted predominantly of income of approximately $350 from the resolution of obligations for the fit out of a former facility in the third quarter of fiscal year 2012. The gain on sale of other investments for the nine months ended April 30, 2012 was due to $2,500 from the sale of our 25% equity interest in our China-based affiliate. The book value of this investment was written down to $0 in fiscal year 2006.

Provision for income taxes

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

                                           Three Months Ended                            Nine Months Ended
                                               April  30,                                    April 30,
                                      2013                   2012                   2013                    2012
Provision for (benefit from)

income taxes $ 1,678 $ 2,966 $ 7,418 $ (4,034 ) Effective tax rate 24 % 29 % 28 % (15 %)

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.


Table of Contents

The effective tax rates for the three and nine months ended April 30, 2013 were lower than the statutory rate of 35% due primarily to the reversal of tax reserves on U.S. federal and state tax returns due to expiration of statutes of limitations, and due to deductions available in the U.S. for manufacturing activity, U.S. R&D credits, and lower foreign tax rates as compared to the U.S. statutory rate of 35%.

The effective tax rate for the three months ended April 30, 2012 was due primarily to lower foreign tax rates as compared to the statutory tax rate of 35%, and the reversal of a valuation allowance on China operations.

The effective tax rate for the nine months ended April 30, 2012 was due . . .

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