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ALOG > SEC Filings for ALOG > Form 10-K on 30-Sep-2013All Recent SEC Filings

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Form 10-K for ANALOGIC CORP


30-Sep-2013

Annual Report


Item 7. 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 audited Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. 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, R&D 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. Refer to "Risk Factors" in Item 1A for a discussion of the primary risks and uncertainties known to us at this time.

Our Management's Discussion and Analysis is presented in six sections as follows:

Business Overview

Fiscal Year 2013 Financial Highlights

Results of Operations

Liquidity and Capital Resources

Recent Accounting Pronouncements

Critical Accounting Policies


Table of Contents

We report our financial condition and results of operations on a fiscal year basis ending July 31. All dollar amounts in this Item 7 are in thousands except per share data.

Business Overview

Analogic is a high technology company that designs and manufactures advanced medical imaging, ultrasound and security systems and subsystems sold to original equipment manufacturers, or OEMs, and end users primarily in the healthcare and airport security markets.

Our business is strategically aligned into three segments: Medical Imaging, Ultrasound, and Security Technology. Our business segments are described as follows:

Medical Imaging primarily includes systems and subsystems for CT and MRI medical imaging equipment as well as state-of-the-art, selenium-based detectors for screening of breast cancer and other diagnostic applications in mammography.

Ultrasound includes ultrasound systems and transducers primarily in the urology, surgery (including robotic assisted surgery), anesthesia, and point-of-care markets.

Security Technology includes advanced threat detecting CT systems utilizing our expertise in advanced imaging technology and primarily used in the checked baggage screening at airports worldwide.

The following table sets forth the percentage of total net revenue by reporting segment for fiscal years 2013 and 2012.

                                           Year Ended July 31,
                                           2013             2012
                   Medical Imaging              58 %           59 %
                   Ultrasound                   27 %           29 %
                   Security Technology          15 %           12 %

                   Total net revenue           100 %          100 %

Fiscal Year 2013 Financial Highlights

The following table is a summary of our financial results for the fiscal years
ended July 31, 2013 and 2012. This summary is not a substitute for the detail
provided in the following pages or for the audited Consolidated Financial
Statements and notes that appear elsewhere in this document.



                                         Year Ended July 31,          Percentage
                                         2013           2012            Change
        Total net revenue              $ 550,363      $ 516,571                 7 %
        Gross profit                   $ 216,679      $ 193,184                12 %
        Gross margin                          39 %           37 %
        Income from operations         $  45,375      $  39,963                14 %
        Operating margin                       8 %            8 %
        Net income                     $  31,121      $  43,071               -28 %
        Diluted net income per share   $    2.48      $    3.42               -27 %

During fiscal year 2013 our total net revenue increased by 7% as compared to the prior year due primarily to growth in sales in our Medical Imaging and Security Technology segments of 6% and 29% respectively, offset in part by Ultrasound revenues which decreased 1% in fiscal year 2013.

Gross margin improved in fiscal year 2013 versus the prior year was due to higher volume, more efficient global manufacturing processes and cost reductions.


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Income from operations increased 14% in fiscal year 2013 from the prior year due primarily to our revenue growth and gross margin improvement along with overall cost control. These results included expenses related to our acquisition of Ultrasonix as well as restructuring expenses.

During March 2013, we completed our acquisition of (i) all of the issued and outstanding shares of capital stock of Ultrasonix Medical Corporation, a Nevada corporation, and customer lists and intangibles related solely to sales destined to the U.S. and (ii) all of the outstanding equity securities of Ultrasonix Medical Corporation ("Ultrasonix"), a privately held company located in Vancouver, Canada, 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 with over 5,000 systems installed worldwide. We undertook the acquisition to accelerate our expansion into the point-of-care ultrasound market. The purchase price, net of cash acquired, of $79,932, was finalized in July 2013. The acquisition was funded from our existing cash on hand and has been accounted for as an acquisition of a business.

During fiscal year 2013, we incurred pre-tax charges of $3,519, primarily relating to severance and personnel related costs of 137 involuntarily terminated employees, as well as for facility exit costs associated with restructuring activities, including the consolidation of manufacturing and certain support activities currently conducted at the Ultrasonix facility in Vancouver, into operations at our existing facilities, closure of the Ultrasonix sales subsidiary in Paris, France, the transition costs associated with the planned closure of our Englewood, Colorado facility, as we consolidate manufacturing and development activities into our State College, Pennsylvania facility, and optimization of our operations in Montreal, Canada and Peabody Massachusetts, all of which were recognized in our Consolidated Statement of Operation under restructuring. Our pre-tax charges were included in our operating results of our Medical Imaging segment, Ultrasound segment and Security Technology segment. We expect to record additional pre-tax restructuring charges of up to approximately $1,500 as we complete the transitions associated with these other restructuring activities by the fourth quarter of our fiscal year 2014.

Results of Operations

Fiscal Year 2013 Compared to Fiscal Year 2012

Net Revenue

Product Revenue

Product revenue for fiscal year 2013 as compared with fiscal year 2012 is
summarized in the table below.



                                      Year Ended July 31,         Percentage
                                       2013          2012           Change
            Product Revenue:
            Medical Imaging         $  305,573     $ 290,665                5 %
            Ultrasound                 149,597       151,201               -1 %
            Security Technology         71,555        52,809               35 %

            Total product revenue   $  526,725     $ 494,675                6 %

Medical Imaging

During fiscal year 2013, as compared to the prior year, product revenue increased largely due to growing global demand for high-power MRI subsystems. Product revenue from our other product lines in this segment was flat overall compared to the prior year, as a slight decrease in CT sales was offset by increased sales of our mammography detectors.


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Ultrasound

During fiscal year 2013, as compared to the prior year, product revenue decreased slightly on lower OEM transducer sales, partially offset by higher sales through our direct sales channel. Sales in our direct channel included $10,095 of revenue from our Ultrasonix products following the March 2013 acquisition of Ultrasonix. Apart from the incremental revenues following the Ultrasonix acquisition, revenue in our direct channel was lower as compared to the prior year due to weakness in the ultrasound market as well as the temporary disruption in our sales force related to our continued sales force expansion and channel integration following the acquisition of Ultrasonix.

Security Technology

During fiscal year 2013, as compared to the prior year, product revenue increased significantly due to strong shipments of high-speed threat detection systems as demand for CT-based explosives threat detection grew outside the U.S. These shipments included both increased sales of high-speed systems to L-3 as well as initial shipments of high-speed systems to Smiths following regulatory approval in fiscal year 2013 of their high-speed system incorporating our CT-based detection technology.

Engineering Revenue

Engineering revenue for fiscal year 2013 as compared with fiscal year 2012 is
summarized in the table below.



                                        Year Ended July 31,         Percentage
                                         2013           2012          Change
          Engineering Revenue:
          Medical Imaging             $    12,974     $ 11,101               17 %
          Ultrasound                          206           -               n/a
          Security Technology              10,458       10,795               -3 %

          Total engineering revenue   $    23,638     $ 21,896                8 %

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

Medical Imaging

The increase for fiscal year 2013 versus the prior year was primarily due to increased work on customer-funded engineering projects.

Ultrasound

The increase for fiscal year 2013 versus the prior year was primarily due to work on a customer-funded engineering project.

Security Technology

The decrease for fiscal year 2013 versus the prior year was due primarily to the timing of work performed on our Security Technology development projects.


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Gross Margin

Product Gross Margin

Product gross margin for fiscal year 2013, as compared with fiscal year 2012, is
summarized in the table below.



                                     Year Ended July 31,         Percentage
                                     2013           2012           Change
            Product gross profit   $ 213,267      $ 192,387             10.9 %
            Product gross margin        40.5 %         38.9 %

Product gross profit increased significantly in fiscal year 2013, versus the prior year, due to higher volume along with global manufacturing process and cost improvements in all three of our business segments. The increased product gross profit was driven by increased gross profit on higher product revenue of approximately $12,500, lower scrap and production rework costs from improved vendor component quality inspection process in our digital mammography product line of approximately $4,100, lower manufacturing costs following the consolidation of our manufacturing operations of approximately $3,900, and cost savings of approximately $3,000 as we ramp up production at our Shanghai operation, which opened in the latter half of fiscal 2012. Partially offsetting the lower costs were the amortization of intangible assets and the fair value inventory step-up adjustment of $3,033 relating to our acquisition of Ultrasonix.

Engineering Gross Margin

Engineering gross margin for fiscal year 2013, as compared with fiscal year
2012, is summarized in the table below.



                                       Year Ended July 31,             Percentage
                                      2013               2012            Change
       Engineering gross profit   $      3,412         $     797             328.1 %
       Engineering gross margin           14.4 %             3.6 %

The increase in the engineering gross margin in fiscal year 2013, versus the prior year was primarily due to the mix of engineering projects worked on during each period as well as the impact of cash incentive compensation, directly related to changes in operating results.

Operating Expenses

Operating expenses increased $18,083, or 11.8%, in fiscal year 2013 as compared
with fiscal year 2012 as shown in the table below.



                                         Year Ended July 31,                 Percentage of Net Revenue
                                         2013            2012               2013                    2012
Operating Expenses:
Research and product development      $   63,990       $  57,230                 11.6 %                  11.1 %
Selling and marketing                     51,268          44,238                  9.3 %                   8.6 %
General and administrative                52,527          51,753                  9.5 %                  10.0 %
Restructuring                              3,519              -                   0.6 %                   0.0 %

Total operating expenses              $  171,304       $ 153,221                 31.1 %                  29.7 %

Research and product development expenses increased in fiscal year 2013, versus the prior year primarily due to approximately $5,300 of incremental internal and contract personnel related expenses on internally-funded research and product development projects, and the addition of approximately $1,500 of research and development costs from Ultrasonix following the March 2013 acquisition.


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Selling and marketing expenses increased in fiscal year 2013, versus the prior year primarily as a result of the acquisition of Ultrasonix in March 2013. The acquisition of Ultrasonix added approximately $5,300 of selling and marketing expenses in fiscal year 2013. We also added selling and marketing expenses of approximately $1,700 related to expansion of our existing sales force in North America.

General and administrative expenses increased in fiscal year 2013, versus the prior year due primarily to approximately $1,100 of partial-year operating expenses in the Ultrasonix Vancouver, Canada facility following the March 2013 acquisition, $1,210 of acquisition-related expenses, $1,000 of incremental audit costs, and $400 associated with the medical device tax under the Patient Protection and Affordable Care Act that went into effect in fiscal year 2013, partially offset, by a decrease of approximately $2,700 in contingent consulting related to the income tax refund received in fiscal year 2012.

Please refer to the Fiscal Year 2013 Financial Highlights section above for further information regarding the restructuring charge for our manufacturing consolidation and other restructuring efforts as we seek to optimize our overall operational footprint.

During March 2013, we completed our acquisition of (i) all of the issued and outstanding shares of capital stock of Ultrasonix Medical Corporation, a Nevada corporation, and customer lists and intangibles related solely to sales destined to the U.S. and (ii) all of the outstanding equity securities of Ultrasonix Medical Corporation, which we refer to as Ultrasonix, a privately held company located in Vancouver, Canada, 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 with over 5,000 systems installed worldwide. We undertook the acquisition to accelerate our expansion into the point-of-care ultrasound market. The purchase price, net of cash acquired, of $79,932, was finalized in July 2013. During fiscal year 2013, we incurred pre-tax charges of $3,519, primarily relating to severance and personnel related costs of 137 involuntarily terminated employees, as well as for facility exit costs associated with restructuring activities, including the consolidation of manufacturing and certain support activities currently conducted at the Ultrasonix facility in Vancouver, into operations at our existing facilities, closure of the Ultrasonix sales subsidiary in Paris, France, the transition costs associated with the planned closure of our Englewood, Colorado facility, as we consolidate manufacturing and development activities into our State College, Pennsylvania facility, and optimization of our operations in Montreal, Canada and Peabody Massachusetts, all of which were recognized in our Consolidated Statement of Operation under restructuring. Our pre-tax charges were included in our operating results of our Medical Imaging segment, Ultrasound segment and Security Technology segment.

Restructuring and related charges, including actions associated with acquisitions, by segment are as follows:

                                                   Year Ended July 31,
                                                     2013           2012
             Medical Imaging                     $      1,099       $  -
             Ultrasound                                 2,209          -
             Security Technology                          211          -

             Restructuring and related charges   $      3,519       $  -

We expect to record additional pre-tax restructuring charges of up to approximately $1,500 as we complete the transitions associated with these other restructuring activities by the fourth quarter of our fiscal year 2014. Of the total pre-tax charges of up to approximately $1,500, we expect approximately $1,300, $130, and $0 will be included in the operating results of our Ultrasound, Medical Imaging and Security Technology segments, respectively.


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Other (Expense) Income, Net



                                                   Year Ended July 31,
                                                    2013           2012
             Other (expense) income, net:
             Interest income, net                $       371      $   532
             Gain on sale of investments                  -         2,500
             Other                                    (1,649 )      1,204

             Total other (expense) income, net   $    (1,278 )    $ 4,236

Total other (expense) income, net in fiscal year 2013 consisted primarily of foreign currency transaction exchange losses by our foreign subsidiaries of $1,546.

Total other income (expense), net in fiscal year 2012 consisted of income of approximately $350 from the resolution of obligations for a former facility in the third quarter of fiscal year 2012. The gain on sale of other investments in fiscal year 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 ended July 31, 2006, which we refer to as our fiscal year 2006. The other income of $1,204 consisted primarily of foreign currency transaction exchange gains by our foreign subsidiaries.

Provision for Income Taxes



                                               Year Ended July 31,
                                                2013           2012
                Provision for income taxes   $    12,976      $ 1,128
                Effective tax rate                    29 %          3 %

The effective tax rate for fiscal year 2013 was lower than the statutory rate of 35% due primarily to the reversal of tax reserves on U.S. federal and state tax returns as a result of the expiration of applicable statutes of limitations of $638 including interest, the impact from retroactive extension of the U.S. R&D credit of $466, ongoing benefits of U.S. R&D credits, U.S. deductions for manufacturing activity, and lower foreign tax rates as compared to the U.S. statutory rate of 35%.

The effective tax rate for fiscal year 2012 of 3% was due primarily to a discrete benefit of $10,025 from the completion of an IRS tax audit that resulted in a refund, including the related interest, and reversal and re-measurement of related tax reserves of $2,308. The decrease in the effective rate in fiscal year 2012 from these benefits was partially offset by the unfavorable impact of the expiration of the U.S. R&D credit on December 31, 2011.

Income from Continuing Operations and Diluted Net Income Per Share From
Continuing Operations

Income from operations and diluted net income per share from operations for
fiscal years 2013 and 2012 were as follows:



                                                             Year Ended July 31,
                                                              2013           2012
 Income from continuing operations                         $   31,121      $ 43,071
 % of net revenue                                                 5.7 %         8.3 %
 Diluted net income per share from continuing operations   $     2.48      $   3.42

The decrease in net income for fiscal year 2013 versus the prior year was primarily due to income in fiscal year 2012 related to the benefit from an IRS refund of $7,311, net of associated costs, and a pre-tax gain of $2,500 from sale of an equity investment in fiscal year 2012, which offset improvements in our operating results in fiscal year 2013.


Table of Contents

Fiscal Year 2012 Compared to Fiscal Year 2011

Net Revenue

Product Revenue

Product revenue for fiscal year 2012 as compared with fiscal year 2011 is
summarized in the table below.



                                      Year Ended July 31,         Percentage
                                       2012          2011           Change
            Product Revenue:
            Medical Imaging         $  290,665     $ 283,615                2 %
            Ultrasound                 151,201       129,313               17 %
            Security Technology         52,809        34,694               52 %

            Total product revenue   $  494,675     $ 447,622               11 %

Medical Imaging

The increase for fiscal year 2012 versus the prior year primarily reflects growth in our MRI and digital mammography product lines driven by higher sales volume of existing products. This increase was offset in part by fewer shipments in our CT product line due primarily to customer ordering patterns and lower sales of our motion control products, reflecting a decline in the semiconductor market and the sale of a subsidiary of our motion control business in the fourth quarter of fiscal year 2011.

Ultrasound

The increase for fiscal year 2012 versus the prior year was due primarily to increased sales of our Flex Focus platform of products in the U.S. through our expanded sales force and internationally through both our direct sales force and our distributor network. Also contributing to the increase was the acquisition of an OEM ultrasound transducer business in the second quarter of fiscal year 2011.

Security Technology

The increase for fiscal year 2012 versus the prior year was due primarily to increased sales of baggage scanners, driven by demand for our new high speed and small footprint systems as well as growth in demand for our medium speed systems.

Engineering Revenue

Engineering revenue for fiscal year 2012 as compared with fiscal year 2011 is
summarized in the table below.



                                        Year Ended July 31,        Percentage
                                         2012           2011         Change
          Engineering Revenue:
          Medical Imaging             $    11,101     $  9,417              18 %
          Ultrasound                           -           124            -100 %
          Security Technology              10,795       16,432             -34 %

          Total engineering revenue   $    21,896     $ 25,973             -16 %

Medical Imaging

The increase in fiscal year 2012 versus the prior year was due primarily to increased work on customer funded engineering projects and the timing of project milestones being completed.


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Security Technology

The decrease for fiscal year 2012 versus the prior year was due primarily to the timing of work performed on a significant development project for a large OEM customer.

Gross Margin

Product Gross Margin

Product gross margin for fiscal year 2012 as compared with fiscal year 2011 is
summarized in the table below.



                                     Year Ended July 31,         Percentage
                                     2012           2011           Change
            Product gross profit   $ 192,387      $ 169,469             13.5 %
            Product gross margin        38.9 %         37.9 %

Product gross margin increased in fiscal year 2012 versus the prior year due primarily to improved gross margin in our Ultrasound and Security Technology segments, partially offset by a decline in gross margin in our Medical Imaging segment. The improvement in our Ultrasound segment was driven by cost savings following consolidation of our manufacturing operations at the end of fiscal year 2011, growth in overall sales volume, as well as an increase in shipments of higher-margin premium systems, while the improvement in our Security Technology segment was driven by favorable product mix and higher sales volume. The Medical Imaging segment decline was driven by vendor component quality . . .

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