alog-10q_20180131.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number 0-6715

 

 

ANALOGIC CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Massachusetts

 

04-2454372

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

8 Centennial Drive, Peabody, Massachusetts

 

01960

(Address of principal executive offices)

 

(Zip Code)

(978) 326-4000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes     No   

 As of February 27, 2018, there were 12,501,116 shares of common stock outstanding.

 

 

 


 

ANALOGIC CORPORATION

Form 10Q – Quarterly Report

For the Quarterly Period Ended January 31, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page No.

Part I. Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of  January 31, 2018 and July 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended January 31, 2018 and 2017

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three and Six Months Ended January 31, 2018 and 2017

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

31

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

31

 

 

 

 

 

Signatures

 

32

 

2


 

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

ANALOGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited in thousands, except share and per share data)

 

 

 

January 31,

 

 

July 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,863

 

 

$

129,298

 

Short-term marketable securities

 

 

63,772

 

 

 

18,797

 

Accounts receivable, net of allowance for doubtful accounts of $507 and

   $752 as of January 31, 2018 and July 31, 2017, respectively

 

 

84,555

 

 

 

77,587

 

Inventory

 

 

127,395

 

 

 

130,575

 

Income tax receivable

 

 

4,192

 

 

 

4,686

 

Prepaid expenses and other current assets

 

 

9,316

 

 

 

9,762

 

Total current assets

 

 

391,093

 

 

 

370,705

 

Long-term marketable securities

 

 

36,625

 

 

 

26,171

 

Property, plant, and equipment, net

 

 

100,399

 

 

 

102,676

 

Intangible assets, net

 

 

23,287

 

 

 

25,925

 

Goodwill

 

 

2,344

 

 

 

2,344

 

Deferred income taxes

 

 

2,558

 

 

 

5,168

 

Other assets

 

 

5,806

 

 

 

5,094

 

Total assets

 

$

562,112

 

 

$

538,083

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

28,431

 

 

$

27,179

 

Accrued employee compensation and benefits

 

 

16,838

 

 

 

18,171

 

Accrued income tax

 

 

2,092

 

 

 

708

 

Accrued warranty

 

 

5,223

 

 

 

5,306

 

Accrued restructuring charges

 

 

1,093

 

 

 

2,786

 

Deferred revenue

 

 

5,830

 

 

 

4,774

 

Customer deposits

 

 

3,127

 

 

 

3,538

 

Other current liabilities

 

 

4,462

 

 

 

4,648

 

Total current liabilities

 

 

67,096

 

 

 

67,110

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Accrued income taxes, net of current portion

 

 

7,093

 

 

 

734

 

Other long-term liabilities

 

 

10,582

 

 

 

9,745

 

Total long-term liabilities

 

 

17,675

 

 

 

10,479

 

Guarantees, commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, $0.05 par value; 30,000,000 shares authorized and

   12,493,837 shares issued and outstanding as of January 31, 2018;

   30,000,000 shares authorized and 12,467,824 shares issued and

   outstanding as of July 31, 2017

 

 

623

 

 

 

622

 

Capital in excess of par value

 

 

160,428

 

 

 

157,907

 

Retained earnings

 

 

316,836

 

 

 

307,104

 

Accumulated other comprehensive loss

 

 

(546

)

 

 

(5,139

)

Total stockholders’ equity

 

 

477,341

 

 

 

460,494

 

Total liabilities and stockholders’ equity

 

$

562,112

 

 

$

538,083

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


 

ANALOGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

 

Three Months Ended January 31,

 

 

Six Months Ended January 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

126,691

 

 

$

130,330

 

 

$

232,444

 

 

$

250,582

 

Engineering

 

 

2,481

 

 

 

1,204

 

 

 

3,604

 

 

 

2,077

 

Total net revenue

 

 

129,172

 

 

 

131,534

 

 

 

236,048

 

 

 

252,659

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

70,356

 

 

 

72,721

 

 

 

128,329

 

 

 

141,482

 

Engineering

 

 

1,952

 

 

 

1,123

 

 

 

3,088

 

 

 

1,846

 

Total cost of sales

 

 

72,308

 

 

 

73,844

 

 

 

131,417

 

 

 

143,328

 

Gross profit

 

 

56,864

 

 

 

57,690

 

 

 

104,631

 

 

 

109,331

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and product development

 

 

15,631

 

 

 

16,213

 

 

 

30,642

 

 

 

32,063

 

Selling and marketing

 

 

13,195

 

 

 

17,358

 

 

 

25,601

 

 

 

35,538

 

General and administrative

 

 

12,098

 

 

 

3,979

 

 

 

24,039

 

 

 

17,600

 

Restructuring

 

 

197

 

 

 

267

 

 

 

731

 

 

 

299

 

Asset impairment charges

 

 

-

 

 

 

10,423

 

 

 

-

 

 

 

10,423

 

Total operating expenses

 

 

41,121

 

 

 

48,240

 

 

 

81,013

 

 

 

95,923

 

Income from operations

 

 

15,743

 

 

 

9,450

 

 

 

23,618

 

 

 

13,408

 

Other income (expense), net

 

 

939

 

 

 

28

 

 

 

1,175

 

 

 

(414

)

Income before income taxes

 

 

16,682

 

 

 

9,478

 

 

 

24,793

 

 

 

12,994

 

Provision for income taxes

 

 

10,133

 

 

 

1,968

 

 

 

12,586

 

 

 

2,948

 

Net income

 

$

6,549

 

 

$

7,510

 

 

$

12,207

 

 

$

10,046

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.52

 

 

$

0.60

 

 

$

0.98

 

 

$

0.81

 

Diluted

 

$

0.52

 

 

$

0.59

 

 

$

0.97

 

 

$

0.79

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,490

 

 

 

12,466

 

 

 

12,482

 

 

 

12,442

 

Diluted

 

 

12,601

 

 

 

12,680

 

 

 

12,606

 

 

 

12,712

 

Dividends declared and paid per share

 

$

0.10

 

 

$

0.10

 

 

$

0.20

 

 

$

0.20

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


 

ANALOGIC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

 

 

 

Three Months Ended January 31,

 

 

Six Months Ended January 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

6,549

 

 

$

7,510

 

 

$

12,207

 

 

$

10,046

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

4,963

 

 

 

(1,019

)

 

 

4,741

 

 

 

(2,593

)

Unrecognized gain on pension benefits, net of tax

 

 

31

 

 

 

52

 

 

 

73

 

 

 

110

 

Unrealized gain (loss) on foreign currency forward contracts,

   net of tax

 

 

305

 

 

 

385

 

 

 

(104

)

 

 

171

 

Unrealized loss on available-for-sale securities,

   net of tax

 

 

(66

)

 

 

-

 

 

 

(118

)

 

 

-

 

Total other comprehensive income (loss), net of tax

 

 

5,233

 

 

 

(582

)

 

 

4,592

 

 

 

(2,312

)

Total comprehensive income

 

$

11,782

 

 

$

6,928

 

 

$

16,799

 

 

$

7,734

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


 

ANALOGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

Six Months Ended

 

 

 

January 31,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

12,207

 

 

$

10,046

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Provision for (benefit from) deferred income taxes

 

 

3,285

 

 

 

(194

)

Depreciation and amortization

 

 

10,913

 

 

 

12,871

 

Asset impairment charges

 

 

-

 

 

 

10,423

 

Share-based compensation expense

 

 

3,881

 

 

 

4,255

 

Amortization of demo equipment

 

 

1,768

 

 

 

969

 

Provision for excess and obsolescence inventory

 

 

658

 

 

 

1,329

 

Excess tax benefit from share-based compensation

 

 

-

 

 

 

(158

)

Change in fair value of contingent consideration

 

 

-

 

 

 

(8,103

)

(Benefit from) provision for doubtful accounts, net of recovery

 

 

(245

)

 

 

20

 

Loss on sale of property, plant and equipment

 

 

66

 

 

 

36

 

Net changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,681

)

 

 

20,223

 

Inventory

 

 

2,794

 

 

 

(4,180

)

Prepaid expenses and other assets

 

 

(87

)

 

 

641

 

Accounts payable

 

 

1,013

 

 

 

1,207

 

Accrued liabilities

 

 

(3,899

)

 

 

(5,699

)

Deferred revenue

 

 

986

 

 

 

(977

)

Customer deposits

 

 

(415

)

 

 

720

 

Accrued income taxes and income taxes receivable

 

 

7,552

 

 

 

(1,120

)

Other liabilities

 

 

836

 

 

 

(1,552

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

35,632

 

 

 

40,757

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(3,811

)

 

 

(5,743

)

Purchases of marketable securities

 

 

(73,906

)

 

 

-

 

Proceeds from maturities of marketable securities

 

 

15,826

 

 

 

-

 

Proceeds from sales of marketable securities

 

 

2,294

 

 

 

-

 

Proceeds from the sale of property, plant, and equipment

 

 

16

 

 

 

18

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(59,581

)

 

 

(5,725

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of stock pursuant to exercise of stock options,

   employee stock purchase plan, restricted stock plans, and

   non-employee director stock plan

 

 

832

 

 

 

3,090

 

Repurchase of common stock

 

 

(952

)

 

 

-

 

Shares repurchased for taxes for vested employee restricted

   stock grants

 

 

(1,061

)

 

 

(1,039

)

Excess tax benefit from share-based compensation

 

 

-

 

 

 

158

 

Dividends paid to shareholders

 

 

(2,497

)

 

 

(2,501

)

NET CASH USED IN FINANCING ACTIVITIES

 

 

(3,678

)

 

 

(292

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

192

 

 

 

(447

)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(27,435

)

 

 

34,293

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

129,298

 

 

 

118,697

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

101,863

 

 

$

152,990

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Non-cash transfer of demonstration inventory to fixed asset

 

 

1,669

 

 

 

1,764

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6


 

ANALOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in millions, except share and per share data)

1. Basis of presentation

Throughout this Quarterly Report on Form 10-Q, unless the context states otherwise, the words “we,” “us,” “our”, “the Company” and “Analogic” refer to Analogic Corporation and all of its subsidiaries taken as a whole, and “our board of directors” refers to the board of directors of Analogic Corporation.

Our unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the United States Securities and Exchange Commission, or SEC, for quarterly reports on Form 10-Q. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We report our financial condition and results of operations on a fiscal year basis ending on July 31st of each year. The three months ended January 31, 2018 and 2017 represent the second quarters of fiscal years 2018 and 2017, respectively.

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the results for all interim periods presented. The results of operations for the three months ended January 31, 2018 are not necessarily indicative of the operating results for the full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended July 31, 2017, or fiscal year 2017, included in our Annual Report on Form 10-K as filed with the SEC on September 26, 2017. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles, or GAAP, in the United States of America.

Consolidation

The unaudited consolidated financial statements presented herein include our accounts and those of our subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.

In determining whether we are the primary beneficiary of an entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. We have not been required to consolidate the activity of any entity due to these considerations.

2. Recent accounting pronouncements

Accounting pronouncements issued and recently adopted

None. 

Accounting pronouncements issued and not yet effective

Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815)”. The standard better aligns hedge accounting with an entity’s risk management activities and simplifies the requirement to qualify for hedge accounting. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The standard will be effective for us in the first quarter of our fiscal year ending July 31, 2020. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Scope of Modification Accounting

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718)”. The standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted. The standard will be effective for us in the first quarter of our fiscal year ending July 31, 2019. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715)”. The standard improves the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring that an employer that offers to its employees defined benefit pension or other postretirement benefit plans report the service cost component

7


 

in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard will be effective for us in the fiscal year beginning August 1, 2018. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Clarifying the Definition of a Business

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments provide the requirements needed for a set of transferred assets and activities to be a business and establish a practical way to determine when a set of transferred assets and activities is not a business. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. An output is the result of inputs and substantive processes that provide goods or services to customers, other revenue, or investment income, such as dividends and interest. The amendments narrow the definition of outputs and align it with how outputs are described in Topic 606 “Revenue from Contracts with Customers”. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The standard will be effective for us in the fiscal year beginning August 1, 2018. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Intra-Entity Transfers of Assets Other than Inventory

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740)”. The standard requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Two common examples of assets included in the scope of this amendment are intellectual property and property, plant, and equipment. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The standard will be effective for us in the fiscal year beginning August 1, 2018. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” The amendments provide guidance on the eight specific cash flow statement presentation and classification issues as follows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The standard will be effective for us in the first quarter of our fiscal year ending July 31, 2019. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)” The amendment modifies the measurement of expected credit losses of certain financial instruments. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The allowance for credit losses for purchased available-for-sale securities with a more-than-insignificant amount of credit deterioration since origination is determined in a similar manner to other available-for-sale debt securities; however, the initial allowance for credit losses is added to the purchase price rather than reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded in credit loss expense. Interest income should be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at acquisition. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The standard will be effective for us in the fiscal year beginning after August 01, 2020. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

8


 

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires lessees to recognize assets and liabilities for most leases on the balance sheet. For income statement purposes, the standard requires leases to be classified as either operating or finance. The standard is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The standard will be effective for us in the first quarter of our fiscal year ending July 31, 2020. Adoption requires application of the new guidance for all periods presented. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

Revenue from contracts with customers

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This update will supersede existing revenue recognition requirements and most industry-specific guidance. This update also supersedes some cost guidance, including revenue recognition guidance for construction-type and production-type contracts. The update’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This update should be applied either on a retrospective or modified retrospective basis. This update was originally effective for us in the first quarter of our fiscal year ending July 31, 2018. Early adoption was not permitted. In August 2015, the FASB approved a one year delay of the effective date of the new revenue standard for public entities. Therefore, this update would be effective for us in the first quarter of our fiscal year ending July 31, 2019. The standard permits entities to early adopt, but only as of the original effective date (i.e. one year earlier). We are expected to adopt the new standard in the first quarter of our fiscal year 2019 effective August 1, 2018, and anticipate using the modified retrospective method, which would result in a cumulative effect adjustment as of August 1, 2018. The comparative information would not be restated and continues to be reported under the accounting standards in effect for those periods. We established a project plan and an implementation team. Scoping and preliminary testing has been completed, with detail contract review underway for each revenue stream within each of the Company’s operating segments. A revenue stream likely to be impacted will be the timing of revenue recognition for certain project-based orders within our engineering revenue stream for which the Company currently applies the percentage-of-completion model. Under the new guidance, there are specific criteria to determine if a performance obligation should be recognized over time or at a point in time. The Company expects that in some cases the revenue recognition timing under the new guidance will change from the current practice based on applying the specific criteria under the new guidance. We are unable to quantify the impact the adoption of ASU No. 2014-09 will have on the consolidated financial statements.  The implementation team is continuing to assess potential impacts on the amount and timing of the revenue recognized in the Company’s consolidated financial statements and to apprise both management and the Audit Committee of project status on a recurring basis.

3. Accounts receivable, net

Our accounts receivable arise primarily from products sold and services provided in North America, Europe and Asia. The balance in accounts receivable represents the amount due from our domestic and foreign original equipment manufacturers, or OEM, customers, distributors and end users. We perform ongoing credit evaluations of our customers’ financial condition and continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon specific customer collection issues that have been identified. We accrue reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written off against the reserve. To date, our historical bad debts charged against the reserve have been minimal.

Our top ten customers combined accounted for approximately 55% and 63% of our total net revenue for each of the three months ended January 31, 2018 and 2017, respectively and 54% and 63% of our total net revenue for the six months ended January 31, 2018 and 2017, respectively.  Set forth in the table below are customers that individually accounted for 10% or more of our net revenue.  

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 31,

 

 

January 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Koninklijke Philips Electronics N.V., or Philips

 

 

13

%

 

 

14

%

 

 

13

%

 

 

13

%

Siemens AG

 

 

11

%

 

 

11

%

 

 

11

%

 

 

12

%

L-3 Communications Corporation, or L-3

 

*

 

 

 

10

%

 

*

 

 

 

10

%

Toshiba Corporation or Toshiba

 

*

 

 

 

11

%

 

*

 

 

 

10

%

 

9


 

Note (*): Total net revenue was less than 10% in this period.

The following table summarizes our customers with net accounts receivable balances greater than or equal to 10% of our total net accounts receivable balance:  

 

 

 

As of

 

 

As of

 

 

 

January 31,

 

 

July 31,

 

 

 

2018

 

 

2017

 

Philips

 

 

16

%

 

 

14

%

Smiths Detection

 

 

10

%

 

*

 

GE

 

*

 

 

 

11

%

Note (*): Total net accounts receivable balance was less than 10% in this period.

4. Inventory

The components of inventory, net of allowance for obsolete, unmarketable or slow-moving inventories, are summarized as follows:  

 

 

 

As of

 

 

As of

 

 

 

January 31,

 

 

July 31,

 

(in millions)

 

2018

 

 

2017

 

Raw materials

 

$

60.9

 

 

$

62.8

 

Work in process

 

 

42.7

 

 

 

41.8

 

Finished goods

 

 

23.8

 

 

 

26.0

 

Total inventory

 

$

127.4

 

 

$

130.6

 

 

5. Intangible assets and goodwill

Intangible assets

Intangible assets include the value assigned to intellectual property and other technology, patents, customer contracts and relationships, and trade names. The estimated useful lives for all of these intangible assets, excluding a trade name determined to have an indefinite life, range between 1 to 14 years. Indefinite-lived intangible assets consist of trade names acquired in business combinations. The carrying values of our indefinite-lived intangible assets were $7.6 million at both January 31, 2018 and July 31, 2017.

Finite-lived intangible assets are summarized as follows:

 

 

 

 

 

As of January 31, 2018

 

 

As of July 31, 2017

 

(in millions)

 

Weighted

Average

Amortization

Period

 

Cost

 

 

Accumulated

Amortization/

Write-Offs

 

 

Net

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Developed technologies

 

10 years

 

$

17.7

 

 

$

15.2

 

 

$

2.5

 

 

$

17.7

 

 

$

14.4

 

 

$

3.3

 

Customer relationships

 

13 years

 

 

43.7

 

 

 

30.5

 

 

 

13.2

 

 

 

43.7

 

 

 

28.7

 

 

 

15.0

 

Trade names

 

3 years

 

 

0.9

 

 

 

0.9

 

 

 

-

 

 

 

0.9

 

 

 

0.9

 

 

 

-

 

Total finite-lived intangible assets

 

 

 

$

62.3

 

 

$

46.6

 

 

$

15.7

 

 

$

62.3

 

 

$

44.0

 

 

$

18.3

 

 

10


 

Amortization expense related to acquired intangible assets was $1.3 million and $2.6 million for the three and six months ended January 31, 2018, respectively. Amortization expense related to acquired intangible assets was $2.0 million and $4.0 million for the three and six months ended January 31, 2017, respectively.

 

Goodwill

We had goodwill balances of $2.3 million at January 31, 2018 and July 31, 2017. We review periodically or more frequently if indicators are present or changes in circumstances suggest that it is more likely than not that impairment may exist and we perform a formal goodwill impairment test in the second quarter of each fiscal year.

The goodwill balance by reportable segments and reporting units at January 31, 2018 and July 31, 2017 are as follows:

 

 

 

Medical Imaging

 

 

Ultrasound

 

 

Security and Detection

 

 

 

 

 

(in millions)

 

(Medical Imaging

Reporting Unit)

 

 

(Ultrasound

Reporting Unit)

 

 

(Oncura

Reporting Unit)

 

 

(Security and

Detection

Reporting Unit)

 

 

Total

Goodwill

 

Balance as of July 31, 2017

 

$

1.8

 

 

$

-

 

 

$

-

 

 

$

0.5

 

 

$

2.3

 

Balance as of January 31, 2018

 

$

1.8

 

 

$

-

 

 

$

-

 

 

$

0.5

 

 

$

2.3

 

 

The following is a rollforward of accumulated goodwill impairment losses by reportable segment and reporting unit:

 

 

 

Medical Imaging

 

 

Ultrasound

 

 

Security and Detection

 

 

 

 

 

(in millions)

 

(Medical Imaging

Reporting Unit)

 

 

(Ultrasound

Reporting Unit)

 

 

(Oncura

Reporting Unit)

 

 

(Security and

Detection

Reporting Unit)

 

 

Total

 

Accumulated impairment losses as

   of July 31, 2017

 

$

-

 

 

$

(55.2

)

 

$

(16.4

)

 

$

-

 

 

$

(71.6

)

Accumulated impairment losses

   as of January 31, 2018

 

$

-

 

 

$

(55.2

)

 

$

(16.4

)

 

$

-

 

 

$

(71.6

)

 

We have two reporting units with goodwill—Medical Imaging and Security and Detection and three reportable segments—Medical Imaging, Ultrasound, and Security and Detection. We performed the annual impairment test for our goodwill and other intangible assets with indefinite lives as of December 31, 2017. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and as a basis for determining whether it is necessary to perform the quantitative impairment test. Alternatively, we may elect to bypass the qualitative assessment and proceed to the two-step quantitative impairment test. If we choose to perform a qualitative assessment and determine it is more likely than not that the carrying value of the net assets is more than the fair value of the related operations, the two-step impairment process is then performed; otherwise, no further testing is required. We performed a qualitative assessment on our Medical Imaging and Security and Detection reporting units, and concluded that there was no impairment.

 

We compared the fair value of a tradename that has an indefinite life using the relief from royalty approach to its carrying value as of December 31, 2017. The relief from royalty approach utilized an after-tax royalty rate and a discount rate. The after-tax royalty rate was determined based on royalty research and margin analysis, while the discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital, and the risk associated with achieving forecasted sales for the tradename. We determined that the fair value of the tradename was in excess of its carrying value.

The current economic environment and the uncertainties regarding its impact on our business and our estimates for forecasted revenue and spending levels made for purposes of our goodwill and trade name impairment testing may not be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates of each reporting unit and trade name are not achieved, we may be required to record an impairment charge for the goodwill and trade name in future periods, whether in connection with our next annual impairment testing in the second quarter of the fiscal year ending July 31, 2019, or prior to that if any such change constitutes a triggering event outside of the quarter from when the annual goodwill and trade name impairment test is performed.  Changes in our forecasts, or decreases in the value of our common stock could cause book values of certain operations to exceed their fair values which may result in goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

 

11


 

6. Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables provide the assets and liabilities carried at fair value and measured on a recurring basis at January 31, 2018 and July 31, 2017:  

 

 

 

Fair Value Measurement as of January 31, 2018

 

(in millions)

 

Adjusted

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Cash and

Cash

Equivalents

 

 

Marketable

Securities

 

Cash

 

$

53.5

 

 

$

-

 

 

$

-

 

 

$

53.5

 

 

$

53.5

 

 

$

-

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

34.2

 

 

 

-

 

 

 

-

 

 

 

34.2

 

 

 

34.2

 

 

 

-

 

Subtotal

 

$

87.7

 

 

$

-

 

 

$

-

 

 

$

87.7

 

 

$

87.7

 

 

$

-

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

$

4.0

 

 

$

-

 

 

$

-

 

 

$

4.0

 

 

$

-

 

 

$

4.0

 

Non-U.S. government securities

 

 

11.5

 

 

 

-

 

 

 

-

 

 

 

11.5

 

 

 

-

 

 

 

11.5

 

Commercial paper

 

 

23.6

 

 

 

-

 

 

 

-

 

 

 

23.6

 

 

 

13.2

 

 

 

10.4

 

Corporate securities

 

 

47.3

 

 

 

-

 

 

 

 

 

 

 

47.3

 

 

 

-

 

 

 

47.3

 

Asset-backed securities

 

 

28.3

 

 

 

-

 

 

 

(0.1

)

 

 

28.2

 

 

 

1.0

 

 

 

27.2

 

Subtotal

 

$

114.7

 

 

$

-

 

 

$

(0.1

)

 

$

114.6