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

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Form 10-Q for ANALOGIC CORP


10-Dec-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 materially from the projected results. See Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for fiscal year 2013 as filed with the U.S Securities and Exchange Commission ("SEC") on September 30, 2013 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 October 31, 2013 and 2012 represent the first quarters of fiscal years 2014 and 2013, respectively.

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

Executive Summary

Results of Operations

Liquidity and Capital Resources

Commitments, Contractual Obligations, and Off-balance Sheet Arrangements

Recent Accounting Pronouncements

Critical Accounting Policies

Executive Summary

Introduction

We are a high technology company that designs and manufactures advanced medical imaging, ultrasound and security systems and subsystems sold to original equipment manufacturers ("OEM") 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, which 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, which includes ultrasound systems and transducers used primarily in the urology, surgery (including robotic assisted surgery), anesthesia, and point-of-care markets.

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


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Financial Results

The following table summarizes our financial results achieved:



                                             For the Three Months Ended
                                                     October 31                  Percentage
(in millions, except per share amounts)       2013                 2012            Change
Total net revenue                         $      110.1         $      119.9               -8 %
Gross profit                              $       42.9         $       45.1               -5 %
Gross margin                                        39 %                 38 %
(Loss) income from operations             $       (5.4 )       $        7.4             -172 %
Operating margin                                    -5 %                  6 %
Net (loss) income                         $       (3.8 )       $        4.4             -186 %
Diluted net (loss) income per share       $      (0.30 )       $       0.35             -186 %

Outlook

Despite the decline in first quarter fiscal year 2014 revenue, as compared to fiscal year 2013, we expect upper-single digit revenue growth on a full year basis in fiscal year 2014, as compared with fiscal year 2013, as well as continued operating margin improvement.

For a discussion of seasonal aspects of our business please refer to Part 1, Item 1. Business of our fiscal year 2013 Form 10-K filed with SEC on September 30, 2013.

Results of Operations

Three months ended October 31, 2013 compared to the three months ended October 31, 2012

Net revenue

Product revenue

Product revenue by segment is summarized as follows:

                                  For the Three Months Ended
                                          October 31                  Percentage
       (in millions)               2013                2012             Change
       Medical Imaging         $        59.2       $        72.1              -18 %
       Ultrasound                       34.7                31.7                9 %
       Security Technology              14.6                 8.8               66 %
       Total product revenue   $       108.5       $       112.6               -4 %

Medical Imaging

Medical Imaging revenue decreased during the quarter due largely to the end of life of an older generation CT subsystem, the exit of our legacy patient monitoring product line, and timing of OEM customer purchases.

Ultrasound

Ultrasound revenue improved during the quarter primarily driven by increased sales in our direct sales channel, including growth in our primary markets of urology and surgery as well as further expansion in the point-of-care market following our March 2013 acquisition of Ultrasonix. These revenues included sales of Ultrasonix products totaling $5.3 million for the three months ended October 31, 2013. These increases were partially offset by lower OEM ultrasound probe sales.

Security Technology

Security revenue growth was driven by increased volume of high-speed threat detection systems as demand for CT-based explosives threat detection continues to grow outside the U.S.


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Engineering revenue

Engineering revenue by segment is summarized as follows:

                                    For the Three Months Ended
                                            October 31                  Percentage
                                     2013                 2012            Change
     (in millions)
     Medical Imaging             $        1.0         $        3.9              -74 %
     Security Technology                  0.6                  3.4              -82 %
     Total engineering revenue   $        1.6         $        7.3              -78 %

Medical Imaging

The decrease for the three months ended October 31, 2013 versus the prior year comparable period was due primarily to winding down of certain customer-funded engineering projects as products complete the development phase prior to movement into production. Customer-funded engineering projects can vary substantially from period to period in terms of resource requirements, type, size, length of project, and profitability.

Security Technology

The decrease for the three months ended October 31, 2013 versus the prior year comparable period was due primarily to the timing of customer-funded engineering projects. Customer-funded engineering projects can vary substantially from period to period in terms of resource requirements, type, size, length of project, and profitability.

Gross margin

Product gross margin

Product gross margin is summarized as follows:

                                 For the Three Months Ended
                                         October 31                  Percentage
        (in millions)             2013                2012             Change
        Product gross profit   $      42.8         $      43.9                -2 %
        Product gross margin          39.5 %              39.0 %

The improvement in product gross margin during the three months ended October 31, 2013 versus the prior year comparable period was due primarily to a shift in product mix from lower margin OEM sales to higher margin direct sales within the Ultrasound business, cost savings efforts including a ramp up of our manufacturing operation in Shanghai, China, and a favorable adjustment within our Montreal based diagnostic mammography detection business related to the quality control inspection process. These gross margin improvements were partially offset by purchase accounting fair value adjustments to inventory associated with our March 2013 acquisition of Ultrasonix and the deferral of revenue associated with collection issues from certain customers.


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Engineering gross margin

Engineering gross margin is summarized as follows:

                                   For the Three Months Ended
                                           October 31                    Percentage
    (in millions)                 2013                   2012              Change
    Engineering gross profit   $       0.1           $         1.2               -91 %

Engineering gross margin 6.7 % 16.6 %

The decrease in the engineering gross profit and engineering gross margin in the three months ended October 31, 2013 versus the prior year comparable period was primarily due to fewer customer-funded engineering projects in the period and the reduction of a loss accrual that favorably impacted gross margin in the three months ended October 31, 2012.

Operating expenses

Operating expenses are summarized as follows:

                                          For the Three Months Ended                                    Percentage of Net
                                                  October 31                    Percentage                   Revenue
(in millions)                             2013                  2012              Change             2013                2012
Research and product development      $        18.9         $        14.1                34 %              17 %               12 %
Selling and marketing                          14.6                  11.7                25 %              13 %               10 %
General and administrative                     14.8                  11.9                24 %              14 %               10 %
Total operating expenses              $        48.3         $        37.7                28 %              44 %               31 %

Operating expenses for the three months ended October 31, 2013 increased by $10.6 million, or 28%, versus the prior year comparable period.

Research and product development expenses are related to projects not funded by our customers. These expenses increased by $4.8 million during the three months ended October 31, 2013 versus the prior comparable period due primarily to the reduction in customer-funded engineering projects, which resulted in an increase of $3.3 million in expenses. Additionally, $0.9 million is attributable to incremental product engineering resources resulting from our March 2013 acquisition of Ultrasonix, and $0.6 million is due to higher merit-based compensation.

Selling and marketing expenses increased by $2.9 million during the three months ended October 31, 2013, versus the prior year comparable period due primarily to $3.7 million of incremental point-of-care sales and marketing expenses resulting from our March 2013 acquisition of Ultrasonix, offset by lower incentive compensation.

General and administrative expenses increased by $2.9 million during the three months ended October 31, 2013 versus the prior year comparable period primarily due to approximately $0.8 million in incremental audit and legal fees (including $0.3 million of BK Medical inquiry costs), general and administrative expenses of $0.7 million attributable to the inclusion of Ultrasonix in our operating results in the current period, $0.3 million of incremental depreciation expense, and $0.3 million of higher merit-based compensation costs.

During fiscal year 2013, we implemented a restructuring plan that involved the involuntary termination of 126 employees, as well as consolidation of manufacturing and certain support activities conducted at the Ultrasonix facility in Vancouver, into operations at our existing facilities, closure of the Ultrasonix sales subsidiary in Paris, France, 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. There was no restructuring expense for the same period of fiscal year 2013. We expect to incur an additional $0.8 million restructuring expense to complete this program by the fourth quarter of fiscal year 2014. Expense incurred during the period was a favorable adjustment of less than $0.1 million and total payments during the three months ended October 31, 2013 were $0.6 million.


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Other income (expense), net

Other expense, net is summarized as follows:

                                          For the Three Months Ended
                                                  October 31
          (in millions)                   2013                   2012
          Interest income, net       $          0.1         $          0.1
          Other                                (0.5 )                 (1.0 )
          Total other expense, net   $         (0.4 )       $         (0.9 )

Net other expense during the three months ended October 31, 2013 was predominantly impacted by the recognition of a $0.5 million loss related to our 10% pre-acquisition equity interest in PocketSonics during the three months ended October 31, 2013. Please refer to Note 3. Business Combinations for further information about this acquisition.

(Benefit from) provision for income taxes

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

                                                       Three Months Ended
                                                           October 31,
   (in millions)                                    2013                 2012
   (Benefit from) Provision for income taxes            $(2.0 )     $          2.1
   Effective tax rate                                      35 %                 33 %

Our effective tax rate for the three months ended October 31, 2013 approximates the statutory rate of 35%. As a result of the net loss reported during the quarter, the rate represents a tax benefit. For the quarter, the tax benefit was increased by certain discrete benefits, consisting primarily of a reduction in valuation allowance associated with the Massachusetts research and development credits. Our effective tax rate was further increased by a recognized book loss on the acquisition of PocketSonics, which is not deductible for tax purposes. These increases in the effective tax rate during the period were offset by the impact of lower tax rates in foreign jurisdictions, as well as the tax benefits of the domestic production deduction and research and development credits, both in the U.S. and Canada.

We do not provide for U.S. Federal income taxes on undistributed earnings of consolidated foreign subsidiaries, as such earnings are intended to be indefinitely reinvested in those operations. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations would be the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to use foreign tax credits.

Net (loss) income and diluted net (loss) income per share

Net (loss) income and diluted net (loss) income per share are summarized as follows:

                                                           For the Three Months Ended
                                                                   October 31
(in millions)                                           2013                       2012
(Loss) income from operations                       $        (3.8 )           $          4.4
% of net revenue                                               -3 %                        4 %
Diluted net (loss) income per share from
operations                                          $       (0.30 )           $         0.35

The decrease in net income and diluted net income per share for the three months ended October 31, 2013 versus the prior year comparable period were due primarily to lower net revenue.

Liquidity and Capital Resources

Key liquidity and capital resource information are summarized as follows:



                                        As of               As of
                                      October 31           July 31         Percentage
   (in millions)                         2013               2013             Change
   Cash and cash equivalents (A)   $          105.1     $       113.0               -7 %
   Working capital                 $          256.7     $       269.5               -5 %
   Stockholders' equity            $          482.1     $       486.4               -1 %

(A) Includes approximately $43.7 million and $49.7 million of cash and cash equivalents held outside the U.S. at October 31, 2013 and July 31, 2013, respectively.


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The decrease in cash and cash equivalents from July 31, 2013 to October 31, 2013 was due primarily to the net cash payment of $10.6 million for the acquisition of PocketSonics in September 2013 from existing cash on hand. The decrease in working capital from July 31, 2013 to October 31, 2013 was also primarily driven by the acquisition of PocketSonics. The decrease in stockholder's equity from July 31, 2013 to October 31, 2013 was primarily driven by the recorded net loss in the period.

Cash and cash equivalents at October 31, 2013 and July 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 October 31, 2013 and July 31, 2013 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.

Cash flows

Sources and uses of cash flows are summarized as follows:

                                                For the Three Months Ended
                                                        October 31                      Percentage
(in million except percentages)                 2013                   2012               Change
Net cash provided by (used in)
operating activities                        $       10.6           $       (6.7 )              -258 %
Net cash used in investing activities              (14.7 )                 (5.6 )               162 %
Net cash used in financing activities               (4.1 )                 (4.3 )                -2 %
Effect of exchange rate changes on
cash                                                 0.2                    0.5                 -60 %
Net decrease in cash and cash
equivalents                                 $       (8.0 )         $      (16.1 )               -50 %

Operating activities

The cash flows provided by continuing operations for operating activities during the three months ended October 31, 2013 primarily reflects collections of accounts receivable, which decreased by $26.6 million, as well as a benefit from deferred income taxes of $2.7 million. This was partially offset by an increase in refundable taxes of $8.5 million, a decrease in accrued liabilities of $9.7 million and an increase in inventory of $2.6 million.

The cash flows used by continuing operations for operating activities during the three months ended October 31, 2012 primarily reflects our income from operations of $4.4 million, non-cash charges for depreciation and amortization expenses of $4.0 million, share based compensation expense of $2.6 million and decrease in accounts receivable of $18.3 million. This was largely offset by an increase in inventory of $15.0 million, a decrease in accrued liabilities of $12.0 million, an increase in refundable income taxes of $5.9 million and a decrease in deferred revenue of $3.8 million.

Investing activities

The net cash used by continuing operations for investing activities during the three months ended October 31, 2013 was primarily driven by the acquisition of PocketSonics, net of cash acquired, of $10.6 million as well as purchases of property, plant and equipment of $4.2 million.

The net cash used by continuing operations for investing activities during the three months ended October 31, 2012 was primarily driven by purchases of property, plant and equipment of $5.6 million.

Financing activities

The net cash used for financing activities during the three months ended October 31, 2013 primarily reflected $6.1 million of shares surrendered for taxes paid related to vested employee restricted stock, $3.7 million used to repurchase common stock, and $1.2 million of dividends paid to stockholders. This was partially offset by the issuance of stock of $3.8 million associated with share-based compensation.


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The net cash used for financing activities during the three months ended October 31, 2012 primarily reflected $3.9 million used to repurchase common stock, $3.8 million of shares surrendered for taxes paid related to vested employee restricted stock and $1.4 million of dividends paid to shareholders. This was largely offset by the issuance of stock of $3.1 million associated with share-based compensation.

We believe that our balances of cash and cash equivalents and cash flows expected to be generated by future operating activities will be sufficient to meet our cash requirements for at least the next 12 months.

Commitments, Contractual Obligations, and Off-balance Sheet Arrangements

Our contractual obligations at October 31, 2013, and the effect such obligations
are expected to have on liquidity and cash flows in future periods are as
follows:



Contractual Obligations                   Total             2014            2015            2016            2017            2018             Thereafter
Operating leases                       $       7.6       $      2.7       $     1.5       $     1.0       $     0.8       $     0.6       $            1.0
Purchase obligations                          42.8             42.8               -               -               -               -                      -
Pension                                        4.0              0.3             0.3             0.3             0.3             0.3                    2.5
Total contractual obligations          $      54.4       $     45.8       $     1.8       $     1.3       $     1.1       $     0.9       $            3.5

Financing Arrangements

On October 11, 2011, we entered into a $100 million five-year, revolving credit agreement ("Credit Agreement") with the financial institutions identified therein as lenders, which included Santander Bank, TD Bank, N.A., and HSBC Bank USA, National Association. Borrowings under the Credit Agreement may be used for general corporate purposes, including permitted acquisitions. The amount of the facility can be increased under specified circumstances up to $150 million in aggregate. We are the sole borrower under the Credit Agreement. We did not have any borrowings outstanding under this Credit Agreement as of October 31, 2013. Please refer to Note 18. Guarantees, Commitments and Contingencies for details.

We currently also have approximately $4.2 million in other revolving credit facilities with banks available for direct borrowings.

Contingent Consideration

In connection with the acquisition of PocketSonics, during the three months ended October 31, 2013, we recognized contingent consideration of $1.9 million. Please refer to Note 3. Business Combinations for more information.

Tax Related Obligations

We have $7.2 million of unrecognized tax benefits for uncertain tax positions and $0.7 million of related accrued interest and penalties. We are unable to reasonably estimate the amount and period in which these liabilities might be paid. Please refer to Note 15. Income Taxes to our condensed consolidated financial statements for additional information regarding matters relating to income taxes, including unrecognized tax benefits.

Impact of Investigation Regarding our Danish Subsidiary

As initially disclosed in our annual report on Form 10-K for the fiscal year ended July 31, 2011, we identified certain transactions involving BK Medical and certain of its foreign distributors, with respect to which we have raised questions concerning compliance with law, including Danish law and the U.S. Foreign Corrupt Practices Act, and our business policies. These have included transactions in which the distributors paid BK Medical amounts in excess of amounts owed and BK Medical transferred the excess amounts, at the direction of the distributors, to third parties identified by the distributors. We have been unable to ascertain with certainty the ultimate beneficiaries or the purpose of these transfers. We have voluntarily disclosed this matter to the Danish Government, the U.S. Department of Justice, which we refer to as the DOJ, and the SEC and are cooperating with inquiries by the Danish Government, the DOJ and the SEC. We are unable to estimate the potential penalties and/or sanctions, if any, that might be assessed in connection with these matters. We have concluded that the transactions identified to date have been properly accounted for in our reported financial statements in all material respects.

During three months ended October 31, 2013, we incurred inquiry-related costs of approximately $0.3 million in connection with this matter.


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Recent Accounting Pronouncements

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