alog-10q_20180430.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 April 30, 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 May 30, 2018, there were 12,501,638 shares of common stock outstanding.

 

 

 


 

ANALOGIC CORPORATION

Form 10Q – Quarterly Report

For the Quarterly Period Ended April 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page No.

Part I. Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of  April 30, 2018 and July 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended April 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2018 and 2017

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

 

 

 

 

 

Item 6.

 

Exhibits

 

36

 

 

 

 

 

Signatures

 

40

 

2


 

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

ANALOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

April 30,

 

 

July 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

123,939

 

 

$

129,298

 

Short-term marketable securities

 

 

62,587

 

 

 

18,797

 

Accounts receivable, net of allowance for doubtful accounts of $346 and

   $752 as of April 30, 2018 and July 31, 2017, respectively

 

 

84,865

 

 

 

77,587

 

Inventory

 

 

132,240

 

 

 

130,575

 

Income tax receivable

 

 

2,649

 

 

 

4,686

 

Prepaid expenses and other current assets

 

 

8,751

 

 

 

9,762

 

Total current assets

 

 

415,031

 

 

 

370,705

 

Long-term marketable securities

 

 

35,765

 

 

 

26,171

 

Property, plant, and equipment, net

 

 

97,076

 

 

 

102,676

 

Intangible assets, net

 

 

22,010

 

 

 

25,925

 

Goodwill

 

 

2,344

 

 

 

2,344

 

Deferred income taxes

 

 

1,925

 

 

 

5,168

 

Other assets

 

 

5,918

 

 

 

5,094

 

Total assets

 

$

580,069

 

 

$

538,083

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

37,738

 

 

$

27,179

 

Accrued employee compensation and benefits

 

 

21,711

 

 

 

18,171

 

Accrued income tax

 

 

877

 

 

 

708

 

Accrued warranty

 

 

5,081

 

 

 

5,306

 

Accrued restructuring charges

 

 

355

 

 

 

2,786

 

Deferred revenue

 

 

6,606

 

 

 

4,774

 

Customer deposits

 

 

3,068

 

 

 

3,538

 

Other current liabilities

 

 

5,144

 

 

 

4,648

 

Total current liabilities

 

 

80,580

 

 

 

67,110

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Accrued income taxes, net of current portion

 

 

5,508

 

 

 

734

 

Other long-term liabilities

 

 

10,793

 

 

 

9,745

 

Total long-term liabilities

 

 

16,301

 

 

 

10,479

 

Guarantees, commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

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

   12,503,411 shares issued and outstanding as of April 30, 2018;

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

   outstanding as of July 31, 2017

 

 

624

 

 

 

622

 

Capital in excess of par value

 

 

162,607

 

 

 

157,907

 

Retained earnings

 

 

322,664

 

 

 

307,104

 

Accumulated other comprehensive loss

 

 

(2,707

)

 

 

(5,139

)

Total stockholders’ equity

 

 

483,188

 

 

 

460,494

 

Total liabilities and stockholders’ equity

 

$

580,069

 

 

$

538,083

 

 

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

3


 

ANALOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

 

Three Months Ended April 30,

 

 

Nine Months Ended April 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

117,156

 

 

$

120,791

 

 

$

349,599

 

 

$

371,373

 

Engineering

 

 

2,815

 

 

 

1,371

 

 

 

6,419

 

 

 

3,448

 

Total net revenue

 

 

119,971

 

 

 

122,162

 

 

 

356,018

 

 

 

374,821

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

64,576

 

 

 

68,667

 

 

 

192,904

 

 

 

210,149

 

Engineering

 

 

2,466

 

 

 

1,334

 

 

 

5,554

 

 

 

3,180

 

Total cost of sales

 

 

67,042

 

 

 

70,001

 

 

 

198,458

 

 

 

213,329

 

Gross profit

 

 

52,929

 

 

 

52,161

 

 

 

157,560

 

 

 

161,492

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and product development

 

 

15,285

 

 

 

14,900

 

 

 

45,927

 

 

 

46,962

 

Selling and marketing

 

 

13,530

 

 

 

16,356

 

 

 

39,131

 

 

 

51,894

 

General and administrative

 

 

16,824

 

 

 

10,377

 

 

 

40,864

 

 

 

27,978

 

Restructuring

 

 

(21

)

 

 

2,080

 

 

 

710

 

 

 

2,379

 

Asset impairment charges

 

 

-

 

 

 

73,051

 

 

 

-

 

 

 

83,474

 

Total operating expenses

 

 

45,618

 

 

 

116,764

 

 

 

126,632

 

 

 

212,687

 

Income (loss) from operations

 

 

7,311

 

 

 

(64,603

)

 

 

30,928

 

 

 

(51,195

)

Other income (expense), net

 

 

328

 

 

 

57

 

 

 

1,504

 

 

 

(357

)

Income (loss) before income taxes

 

 

7,639

 

 

 

(64,546

)

 

 

32,432

 

 

 

(51,552

)

Provision (benefit) for income taxes

 

 

529

 

 

 

(4,882

)

 

 

13,115

 

 

 

(1,934

)

Net income (loss)

 

$

7,110

 

 

$

(59,664

)

 

$

19,317

 

 

$

(49,618

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.57

 

 

$

(4.78

)

 

$

1.55

 

 

$

(3.98

)

Diluted

 

$

0.56

 

 

$

(4.78

)

 

$

1.53

 

 

$

(3.98

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,503

 

 

 

12,486

 

 

 

12,489

 

 

 

12,457

 

Diluted

 

 

12,633

 

 

 

12,486

 

 

 

12,617

 

 

 

12,457

 

Dividends declared and paid per share

 

$

0.10

 

 

$

0.10

 

 

$

0.30

 

 

$

0.30

 

 

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

4


 

ANALOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

 

 

 

Three Months Ended April 30,

 

 

Nine Months Ended April 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

7,110

 

 

$

(59,664

)

 

$

19,317

 

 

$

(49,618

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

(1,703

)

 

 

178

 

 

 

3,038

 

 

 

(2,415

)

Unrecognized gain on pension benefits, net of tax

 

 

41

 

 

 

58

 

 

 

114

 

 

 

167

 

Unrealized (loss) on foreign currency forward contracts,

   net of tax

 

 

(466

)

 

 

(324

)

 

 

(571

)

 

 

(153

)

Unrealized (loss) on available-for-sale securities,

   net of tax

 

 

(33

)

 

 

-

 

 

 

(150

)

 

 

-

 

Total other comprehensive (loss) income, net of tax

 

 

(2,161

)

 

 

(88

)

 

 

2,431

 

 

 

(2,401

)

Total comprehensive income (loss)

 

$

4,949

 

 

$

(59,752

)

 

$

21,748

 

 

$

(52,019

)

 

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

5


 

ANALOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

Nine Months Ended

 

 

 

April 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

19,317

 

 

$

(49,618

)

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Provision for (benefit from) deferred income taxes

 

 

4,209

 

 

 

(8,402

)

Depreciation and amortization

 

 

16,151

 

 

 

19,221

 

Asset impairment charges

 

 

-

 

 

 

83,474

 

Share-based compensation expense

 

 

6,128

 

 

 

6,450

 

Amortization of demo equipment

 

 

2,133

 

 

 

1,557

 

Provision for excess and obsolete inventory

 

 

4,133

 

 

 

287

 

Excess tax benefit from share-based compensation

 

 

-

 

 

 

(158

)

Change in fair value of contingent consideration

 

 

-

 

 

 

(10,238

)

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

 

 

(406

)

 

 

88

 

Gain/(Loss) on sale of property, plant and equipment

 

 

70

 

 

 

(57

)

Net changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,367

)

 

 

18,295

 

Inventory

 

 

(6,163

)

 

 

(5,547

)

Prepaid expenses and other assets

 

 

282

 

 

 

596

 

Accounts payable

 

 

9,259

 

 

 

608

 

Accrued liabilities

 

 

327

 

 

 

(2,845

)

Deferred revenue

 

 

1,807

 

 

 

(641

)

Customer deposits

 

 

(469

)

 

 

554

 

Accrued income taxes and income taxes receivable

 

 

6,228

 

 

 

1,174

 

Other liabilities

 

 

1,060

 

 

 

(1,423

)

Cash paid for contingent consideration

 

 

-

 

 

 

(100

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

57,699

 

 

 

53,275

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(4,235

)

 

 

(7,741

)

Purchases of marketable securities

 

 

(91,942

)

 

 

-

 

Proceeds from maturities of marketable securities

 

 

28,900

 

 

 

-

 

Proceeds from sales of marketable securities

 

 

9,254

 

 

 

-

 

Proceeds from the sale of property, plant, and equipment

 

 

1

 

 

 

30

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(58,022

)

 

 

(7,711

)

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

)

 

 

(1,584

)

Shares repurchased for taxes for vested employee restricted

   stock grants

 

 

(1,086

)

 

 

(1,128

)

Excess tax benefit from share-based compensation

 

 

-

 

 

 

158

 

Dividends paid to shareholders

 

 

(3,747

)

 

 

(3,771

)

Contingent consideration paid for business acquisitions

 

 

-

 

 

 

(1,900

)

NET CASH USED IN FINANCING ACTIVITIES

 

 

(4,953

)

 

 

(5,135

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(83

)

 

 

(493

)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(5,359

)

 

 

39,936

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

129,298

 

 

 

118,697

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

123,939

 

 

$

158,633

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Non-cash transfer of demonstration inventory to fixed asset

 

$

2,263

 

 

$

3,506

 

 

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 April 30, 2018 and 2017 represent the third 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 April 30, 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. 

7


 

Accounting pronouncements issued and not yet effective

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220)”. The standard allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”). The new guidance (revised in March 2018), also requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. Early adoption is permitted. The standard will be effective for us in the first quarter of our fiscal year beginning August 1, 2019. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

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 beginning August 1, 2019. 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 Beginning August 1, 2018. 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 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

8


 

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 beginning August 1, 2018. 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 1, 2020. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

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 beginning August 1, 2019. 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. The

9


 

Company has substantially completed the impact assessment phase of its evaluation of ASU No. 2014-09.  Two areas the Company expects to be impacted are engineering revenues and commissions expense, though not in a manner material to the consolidated financial statements.  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.  Accordingly, the Company has identified certain engineering projects for which the timing of when the Company recognizes revenue may be impacted.  Due to the complexity of these engineering projects, revenue recognition under the new standard is highly dependent on the specific contract terms.  Additionally, the new standard will require certain costs, primarily sales-related commissions on contracts greater than one year in duration, to be capitalized and amortized over the term of the contract rather than expensed when paid.  The Company continues to assess the impact of the new standard, but based on preliminary analysis does not expect the adoption to be material to the consolidated financial statements.  The Company also expects to implement additional processes and controls, as well as additional disclosures to comply with the new standard.

3. Agreement and Plan of Merger

On April 10, 2018, Analogic entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ANLG Holding Company, Inc., a Delaware corporation (the “Parent”), and AC Merger Sub, Inc., a Massachusetts corporation and a wholly owned subsidiary of the Parent (the “Merger Sub”).  The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by the Parent at a price of $84.00 per share of the Company’s common stock, par value $0.05 (each, a “Share”), in cash, without interest and subject to deduction for any required withholding tax (the “Merger Consideration”), through the merger of the Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of the Parent. The Parent and the Merger Sub are owned by funds affiliated with Altaris Capital Partners, LLC (collectively, the “Sponsor”). 

Completion of the Merger is subject to the Company obtaining stockholder approval and other customary closing conditions. The Company will hold a stockholders meeting on June 21, 2018 to submit the Merger Agreement to its stockholders for their consideration. On April 27, 2018, the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) with respect to the pending Merger. The termination of the waiting period satisfies one of the conditions to the closing, which remains subject to other customary closing conditions.

Effective as of immediately prior to the effective time of the Merger, each then-outstanding and unexercised Company stock option with an exercise price less than the per share Merger Consideration will automatically be canceled and converted into the right to receive from the surviving corporation an amount of cash equal to the product of (i) the total number of shares of Company common stock then underlying such Company stock option multiplied by (ii) the excess of the Merger Consideration over the exercise price per share of such Company stock option, on the terms set forth in the Merger Agreement. All Company stock options are fully vested. In the event that the exercise price of any Company stock option is equal to or greater than the Merger Consideration, such Company stock option will be canceled, without any consideration being payable in respect thereof, and have no further force or effect.  Effective as of immediately prior to the effective time of the Merger, each Company restricted stock unit award that is then outstanding and unvested will vest in full and automatically be canceled and converted into the right to receive an amount of cash equal to the product of the total number of shares of Company common stock then underlying such Company restricted stock unit award multiplied by the Merger Consideration, on the terms set forth in the Merger Agreement.  Effective as of immediately prior to the effective time of the Merger, each Company performance-based share unit award that is then outstanding and unvested will vest with respect to the number of shares of Company common stock that would have been earned in accordance with the methodology set forth in the applicable award agreement (as in effect on the date of the Merger Agreement) or previously established by the Compensation Committee of the Board and will automatically be canceled and converted into the right to receive from the Company an amount of cash equal to the product of the total number of shares of Company common stock that vest under such performance-based share unit award multiplied by the Merger Consideration, on the terms set forth in the Merger Agreement.  See Note 12 – Share-based compensation for more information.

   The Merger Agreement includes customary termination provisions. If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, the Company will be required to pay the Parent a termination fee of $34.8 million (including under specified circumstances in connection with the Company’s entry into an agreement with respect to a superior proposal). The Merger Agreement also provides that the Parent will be required to pay the Company a reverse termination fee of $64.2 million or reimburse certain Company expenses under certain specified circumstances set forth in the Merger Agreement. The Sponsor has provided the Company with a limited guarantee in favor of the Company guaranteeing the Parent’s obligation to pay the reverse termination fee and certain other payment obligations of the Parent and the Merger Sub pursuant to the Merger Agreement.

In connection with the pending transaction, the Company has agreed to suspend the payment of its regular quarterly dividend. Also in connection with the pending transaction, if the effective time of the Merger occurs on or before the last business day of the offering period currently in effect under the Company’s employee stock purchase plan (“ESPP” ) and there are purchase options then outstanding with respect to such offering period, then each such outstanding option will be exercised in full on the closing date of the

10


 

Merger (or,if not practicable, on the business day immediately preceding the closing date of the Merger) to the  extent of payroll deductions credited to the purchase option holder’s account as of the date that is 10 days  before the closing date of the Merger. Each share of Company common stock received upon exercise of a purchase option granted under the ESPP will be converted into the right to receive the per share Merger Consideration. If the effective time of the Merger occurs after the last business day of the offering period currently in effect under the Employee Stock Purchase Plan (“ESPP”), the Board will terminate the ESPP as of the date immediately prior to the closing date and, as promptly as reasonably practicable following such termination, all outstanding payroll deductions pursuant to the ESPP will be refunded to the participating employees under the ESPP. In all events, the ESPP will be terminated as of immediately prior to the effective time of the Merger.

In the third quarter of 2018, in connection with the Merger the Company incurred pre-tax expenses of approximately $4.1 million related to professional fees. Other than the expenses incurred noted above, no effect has been given in the financial statements to the proposed Merger.

For additional information, see the Proxy Statement filed by the Company with the SEC on May 16,2018

The Parent expects to fund the purchase price through a combination of unrestricted cash-on-hand held by the Company as of the closing of the merger, cash equity contributions and debt financing. The Parent has obtained commitments for $575 million of debt financing consisting of a combination of a senior secured first lien term loan facility and a senior secured first lien revolving credit facility. The proceeds of the debt financing are expected to be used to finance, in part, the Merger, pay related fees and expenses, and for ongoing working capital requirements, capital expenditures and other general corporate purposes. The debt financing is conditioned upon consummation of the Merger, as well as other customary conditions.

4. 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 54% and 61% of our total net revenue for each of the three months ended April 30, 2018 and 2017, respectively and 53% and 63% of our total net revenue for the nine months ended April 30, 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

 

 

Nine Months Ended

 

 

 

April 30,

 

 

April 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Koninklijke Philips Electronics N.V., or Philips

 

 

14

%

 

 

14

%

 

 

13

%

 

 

14

%

Siemens AG

 

 

10

%

 

 

11

%

 

 

11

%

 

 

12

%

L-3 Communications Corporation, or L-3

 

*

 

 

 

11

%

 

*

 

 

 

10

%

 

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

 

 

 

April 30,

 

 

July 31,

 

 

 

2018

 

 

2017

 

Philips

 

 

17

%

 

 

14

%

L-3 Communications Corporation, or L-3

 

 

11

%

 

*

 

GE

 

*

 

 

 

11

%

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

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5. Inventory

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

 

 

 

As of

 

 

As of

 

 

 

April 30,

 

 

July 31,

 

(in millions)

 

2018

 

 

2017

 

Raw materials

 

$

63.4

 

 

$

62.8

 

Work in process

 

 

44.0

 

 

 

41.8

 

Finished goods

 

 

24.8

 

 

 

26.0

 

Total inventory

 

$

132.2

 

 

$

130.6

 

 

6. 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 April 30, 2018 and July 31, 2017.

Finite-lived intangible assets are summarized as follows:

 

 

 

 

 

As of April 30, 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

 

 

$

15.6

 

 

$

2.1

 

 

$

17.7

 

 

$

14.4

 

 

$

3.3

 

Customer relationships

 

13 years

 

 

43.7

 

 

 

31.4

 

 

 

12.3

 

 

 

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

 

 

$

47.9

 

 

$

14.4

 

 

$

62.3

 

 

$

44.0

 

 

$

18.3

 

 

Amortization expense related to acquired intangible assets was $1.3 million and $3.9 million for the three and nine months ended April 30, 2018, respectively. Amortization expense related to acquired intangible assets was $1.9 million and $5.9 million for the three and nine months ended April 30, 2017, respectively.

 

Goodwill

We had goodwill balances of $2.3 million at April 30, 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 for the nine months ended April 30, 2018 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 April 30, 2018

 

$

1.8

 

 

$

-

 

 

$

-

 

 

$

0.5

 

 

$

2.3

 

 

The following is a roll forward 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 April 30, 2018

 

$

-

 

 

$

(55.2

)

 

$

(16.4

)

 

$

-

 

 

$

(71.6

)

12


 

 

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.

 

13


 

7. 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 April 30, 2018 and July 31, 2017:  

 

 

 

Fair Value Measurement as of April 30, 2018

 

(in millions)

 

Adjusted

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Cash and

Cash

Equivalents

 

 

Marketable

Securities

 

Cash

 

$

103.6

 

 

$

-

 

 

$

-

 

 

$

103.6

 

 

$

103.6

 

 

$

-

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

9.0

 

 

 

-

 

 

 

-

 

 

 

9.0

 

 

 

9.0

 

 

 

-

 

Subtotal

 

$

112.6

 

 

$

-

 

 

$

-

 

 

$

112.6

 

 

$

112.6

 

 

$

-

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

$

4.0

 

 

$

-

 

 

$

-

 

 

$

4.0

 

 

$

-

 

 

$

4.0

 

Non-U.S. government securities

 

 

9.7

 

 

 

-

 

 

 

-

 

 

 

9.7

 

 

 

-

 

 

 

9.7

 

Commercial paper

 

 

21.4

 

 

 

-

 

 

 

-

 

 

 

21.4

 

 

 

10.8

 

 

 

10.6

 

Corporate securities

 

 

53.1

 

 

 

-

 

 

 

 

 

 

 

53.1

 

 

 

0.5

 

 

 

52.6

 

Asset-backed securities

 

 

21.6

 

 

 

-