Analogic Corporation
ANALOGIC CORP (Form: 10-Q, Received: 03/11/2010 14:40:57)
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended January 31, 2010

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   x     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, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨      Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares of common stock outstanding at February 26, 2010 was 12,890,426.

 

 

 


Table of Contents

ANALOGIC CORPORATION

TABLE OF CONTENTS

 

          Page No.

Part I. Financial Information

  

Item 1.

  

Financial Statements

  
  

Unaudited Consolidated Balance Sheets as of January 31, 2010 and July 31, 2009

   3
  

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended
January 31, 2010 and 2009

   4
  

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
January 31, 2010 and 2009

   5
  

Notes to Unaudited Consolidated Financial Statements

   6

Item 2.

  

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

   21

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   30

Item 4.

  

Controls and Procedures

   30

Part II. Other Information

  

Item 1A.

  

Risk Factors

   31

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   31

Item 6.

  

Exhibits

   32

Signatures

   33

Exhibit Index

   34

 

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Table of Contents

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ANALOGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)

 

     January 31,
2010
       July 31,
2009
Assets        

Current assets:

       

Cash and cash equivalents

   $ 162,280        $ 119,855  

Marketable securities

     -          40,438  

Accounts receivable, net of allowance for doubtful accounts of $517 and $728 at January 31, 2010 and July 31, 2009, respectively

     66,761          64,874  

Inventories

     82,712          79,011  

Refundable and deferred income taxes

     8,427          11,131  

Other current assets

     12,526            8,982  

Total current assets

     332,706          324,291  

Property, plant, and equipment, net

     81,316          83,688  

Capitalized software, net

     4,232          5,037  

Intangible assets, net

     39,326          40,792  

Goodwill

     1,849          2,043  

Other assets

     3,297          328  

Deferred income tax assets

     7,892            7,935  

Total Assets

   $ 470,618          $ 464,114  
Liabilities and Stockholders’ Equity        

Current liabilities:

       

Accounts payable

   $ 24,928        $ 22,064  

Accrued liabilities

     28,733          30,868  

Advance payments and deferred revenue

     10,583            7,219  

Total current liabilities

     64,244          60,151  

Long-term liabilities:

       

Accrued income taxes

     6,295          5,541  

Other long-term liabilities

     966            903  

Total long-term liabilities

     7,261          6,444  

Commitments and guarantees (Note 14)

       

Stockholders’ equity:

       

Common stock, $.05 par value

     652          640  

Capital in excess of par value

     73,200          70,704  

Retained earnings

     317,195          316,079  

Accumulated other comprehensive income

     8,066            10,096  

Total stockholders’ equity

     399,113            397,519  

Total Liabilities and Stockholders’ Equity

   $         470,618          $         464,114  

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

 

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Table of Contents

ANALOGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
January 31,
       Six Months Ended
January 31,
     2010        2009        2010        2009

Net revenue:

                 

Product

   $       98,619        $       94,444        $     188,073        $     189,391  

Engineering

     2,914          6,208          6,266          9,701  

Other

     1,731            2,063            4,302            5,175  

Total net revenue

     103,264            102,715            198,641            204,267  

Cost of sales:

                 

Product

     60,007          61,822          119,784          127,100  

Engineering

     3,505          6,293          6,672          9,483  

Other

     1,550            1,697            3,121            3,486  

Total cost of sales

     65,062            69,812            129,577            140,069  

Gross margin

     38,202            32,903            69,064            64,198  

Operating expenses:

                 

Research and product development

     12,134          11,358          23,589          23,925  

Selling and marketing

     9,616          9,728          18,924          19,412  

General and administrative

     10,718          9,836          20,813          20,464  

Restructuring charge

     764            3,488            764            3,488  

Total operating expenses

     33,232            34,410            64,090            67,289  

Income (loss) from operations

     4,970            (1,507)           4,974            (3,091) 

Other income (expense):

                 

Interest income, net

     150          767          326          1,775  

Other

     (274)           464            (417)           897  

Total other income (expense), net

     (124)           1,231            (91)           2,672  

Income (loss) before income taxes

     4,846          (276)         4,883          (419) 

Provision for (benefit from) income taxes

     1,222            (1,695)           1,233            (2,158) 

Net income

   $ 3,624          $ 1,419          $ 3,650          $ 1,739  

Net income per share:

                                       

Basic

   $ 0.29          $ 0.11          $ 0.29          $ 0.13  

Diluted

   $ 0.29          $ 0.11          $ 0.29          $ 0.13  

Weighted-average shares outstanding:

                 

Basic

     12,574          12,829          12,567          13,030  

Diluted

     12,593          12,876          12,586          13,125  

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

 

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ANALOGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Six Months Ended
January 31,
     2010        2009

OPERATING ACTIVITIES:

       

Net income

   $ 3,650        $ 1,739  

Adjustments to reconcile net income to net cash provided by operating activities:

       

Benefit from deferred income taxes

     (124)         (2,032) 

Depreciation and amortization

     8,863          8,783  

Allowance for (recoveries of) doubtful accounts and notes receivable

     10          94  

Net loss (gain) on sale of property, plant, and equipment

     67          (19) 

Share-based compensation expense

     2,438          2,698  

Excess tax provision from share-based compensation

     74          13  

Restructuring charge

     764          3,488  

Net changes in operating assets and liabilities (Note 11)

     (5,566)           (14,118) 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     10,176            646  

INVESTING ACTIVITIES:

       

Additions to property, plant, and equipment

     (4,691)         (5,905) 

Capitalized software development costs

     (304)         (1,183) 

Purchase of short-term held-to-maturity marketable securities

     -          (115,957) 

Maturities of short-term held-to-maturity marketable securities

     40,438          62,787  

Proceeds from the sale of property, plant, and equipment

     111          25  

Investments in and advances to affiliated companies

     -            (2) 

NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES

     35,554            (60,235) 

FINANCING ACTIVITIES:

       

Net issuance of stock pursuant to exercise of stock options and employee stock purchase plan

     144          136  

Excess tax provision from share-based compensation

     (74)         (13) 

Purchase of common stock

     -          (25,022) 

Dividends paid to stockholders

     (2,534)           (2,656) 

NET CASH USED FOR FINANCING ACTIVITIES

     (2,464)           (27,555) 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     (841)           (4,620) 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   $ 42,425          $ (91,764) 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     119,855            173,912  

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $     162,280          $       82,148  

Supplemental disclosures of cash flow information:

       

Refunds received for income taxes, net

   $ 2,614        $ 4,951  

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

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

1. Basis of presentation:

Company

Analogic Corporation (“Analogic” or the “Company”) is a high technology company that designs and manufactures advanced medical imaging and security systems and subsystems sold to Original Equipment Manufacturers (“OEMs”) and end users in the healthcare and homeland security markets. The Company is recognized worldwide for advancing state-of-the-art technology in the areas of medical Computed Tomography (“CT”), Magnetic Resonance Imaging (“MRI”), Digital Mammography, Specialized Ultrasound, and Automatic Explosives Detection Systems for airport security. The Company’s OEM customers incorporate its technology into systems they in-turn sell for various medical and security applications. The Company also sells its ultrasound products directly to hospitals and clinics through its direct worldwide sales force under the business name B-K Medical ApS (“B-K Medical”). The Company’s top ten customers combined for approximately 64% and 68% of the Company’s total product and engineering revenue for the three months ended January 31, 2010 and 2009, respectively, and 66% and 69% of the Company’s total product and engineering revenue for the six months ended January 31, 2010 and 2009, respectively. The Company had three customers, as set forth in the table below, which individually accounted for 10% or more of the Company’s net product and engineering revenue during the three or six months ended January 31, 2010 or 2009.

 

        Three Months Ended January 31,                   Six Months Ended January 31,        
    2010            2009           2010            2009    

Toshiba Corporation

  14%          18%         14%          15%    

Koninklijke Philips Electronics N.V. (“Philips”)

  12%          14%         14%          16%    

L-3 Communications Corporation (“L-3”)

  11%          (*)         (*)          (*)    

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

Philips accounted for 13% and 12% of net accounts receivable at January 31, 2010 and July 31, 2009, respectively, while L-3 accounted for 16% and 13% of net accounts receivable at January 31, 2010 and July 31, 2009, respectively.

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Investments in companies in which ownership interests range from 20% to 50%, and the Company exercises significant influence over operating and financial policies, are accounted for using the equity method. Other investments are accounted for using the cost method.

General

The unaudited consolidated financial statements of the Company presented herein have been prepared pursuant to the rules of the United States Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair statement of the results for all interim periods presented. The results of operations for the three and six months ended January 31, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2010 (“fiscal year 2010”), or any other interim period. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended July 31, 2009 (“fiscal year 2009”) included in the Company’s Annual Report on Form 10-K as filed with the SEC on September 29, 2009. The accompanying Consolidated Balance Sheet as of July 31, 2009 contains data derived from audited financial statements.

Reclassification

In the fourth quarter of fiscal year 2009, the Company identified certain amounts totaling $1,654 recorded within “Effect of exchange rate on cash” in its unaudited Consolidated Statements of Cash Flows for the six months ended January 31, 2009 that more appropriately should have been classified within cash flow from operating activities and investing activities. The Company determined that this change in classification was not material to its unaudited Consolidated Statements of Cash Flows for fiscal year 2009 and corrected the classification in the accompanying unaudited Consolidated Statements of Cash Flows.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

2. Recent accounting pronouncements:

Recently adopted

Hierarchy of generally accepted accounting principles

In June 2009, the Financial Accounting Standards Board (“FASB”) released the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”), effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP, but does significantly change the way in which the accounting literature is organized, combining all authoritative standards in a comprehensive, topically organized database. All existing accounting standards documents were superseded and all other accounting literature not included in the Codification is considered nonauthoritative, other than guidance issued by the SEC. The Company adopted the provisions of this guidance during the quarter ended October 31, 2009, which had no impact on the Company’s financial position, results of operations, or cash flows.

Business combinations and noncontrolling interests

Effective August 1, 2009, the Company adopted FASB guidance that requires an acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. This guidance also requires additional disclosure of information surrounding a business combination, such that users of the entity’s financial statements can more fully understand the nature and financial impact of the business combination. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is the Company’s fiscal year 2010. An entity may not apply it before that date. The provisions of this guidance will only impact the Company if the Company is a party to a business combination after July 31, 2009.

Effective August 1, 2009, the Company adopted FASB guidance that establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance was effective as of the beginning of the first annual reporting period that began after December 15, 2008. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

Effective August 1, 2009, the Company adopted FASB guidance amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and requiring enhanced related disclosures. The guidance improves the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This guidance must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008. Although future transactions involving intangible assets may be affected by this guidance, it did not impact the Company’s financial position, results of operations, or cash flows, as the Company did not acquire any intangible assets during the six months ended January 31, 2010.

Effective August 1, 2009, the Company adopted FASB guidance that amends and clarifies the initial recognition and measurement, subsequent measurement and accounting, and related disclosures of assets and liabilities arising from contingencies in a business combination. The impact of the adoption on the Company’s consolidated financial statements will largely depend on the size and nature of any business combinations. The provisions of this amendment will only impact the Company if the Company is a party to a business combination after July 31, 2009.

 

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Table of Contents

ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Fair value

Effective August 1, 2009, the Company adopted FASB guidance requiring disclosures about fair value of financial instruments for interim and annual reporting periods and is effective for interim reporting periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In August 2009, the FASB issued an update, which provides clarification and guidance regarding how to value a liability when a quoted price in an active market is not available for that liability. The changes as a result of this update were effective for the Company on November 1, 2009. The Company’s adoption of these changes did not have a material effect on its financial position, results of operations, or cash flows.

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect adoption of the updated guidance to have a material impact on its financial position, results of operations, or cash flows.

Earnings per share

Effective August 1, 2009, the Company adopted FASB guidance that classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method. The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented are to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with this guidance, with early application not permitted. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

Revenue recognition

In October 2009, the FASB issued an amendment which eliminates the residual method of allocation for multiple-deliverable revenue arrangements and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The amendment also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor specific objective evidence (“VSOE”) if available; (2) third-party evidence (“TPE”) if VSOE evidence is not available; and (3) estimated selling (“ESP”) price if neither VSOE nor TPE is available. Additionally, the amendment expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements. This amendment is effective for the Company on August 1, 2010; however, the Company has elected to early adopt as permitted by the amendment and will prospectively apply the provisions of the amendment to all revenue arrangements entered into or materially modified after July 31, 2009. The adoption of the amendment did not have a material impact on the Company’s financial position, results of operations, or cash flows. See Note 3 for further discussion.

In October 2009, the FASB issued an amendment to the accounting model for revenue arrangements that include both tangible products and software elements, such that tangible products containing both software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. This amendment is effective for the Company on August 1, 2010; however, the Company has elected to early adopt as permitted by the amendment and will prospectively apply the provisions of the amendment to all revenue arrangements entered into or materially modified after July 31, 2009. The adoption of the amendment did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Not yet effective

Special purpose entities

In June 2009, the FASB issued guidance that eliminates the concept of a qualified special-purpose entity and related guidance, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. The Company is currently evaluating the effect, if any, that adoption of this guidance will have on its financial position, results of operations, and cash flows.

In June 2009, the FASB issued guidance that requires former qualified special-purpose entities to be evaluated for consolidation, changes the approach to determining a variable interest entity’s (“VIE”) primary beneficiary, and requires companies to more frequently reassess whether they must consolidate VIEs. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. The Company is currently evaluating the effect, if any, that adoption of this guidance will have on its financial position, results of operations, and cash flows.

3. Significant accounting policies

The Company has had no changes to its significant accounting policies from those described in the notes to its consolidated financial statements for fiscal year 2009 that were included in the Company’s Annual Report on Form 10-K as filed with the SEC on September 29, 2009, except for allocation of consideration in multiple element revenue arrangements.

As discussed in Note 2, the Company early adopted guidance on August 1, 2009 that eliminates the residual method of allocation for multiple-deliverable revenue arrangements and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method.

Per the provisions of this guidance, the Company allocates arrangement consideration to each deliverable qualifying as a separate unit of accounting in an arrangement based on its relative selling price. The Company determines selling price using VSOE, if it exists, and otherwise TPE. If neither VSOE nor TPE of selling price exists for a unit of accounting, the Company uses ESP. The Company generally expects that it will not be able to establish TPE due to the nature of the markets in which the Company competes, and, as such, the Company typically will determine selling price using VSOE or if not available, ESP.

VSOE is generally limited to the price charged when the same or similar product or service is sold separately or, if applicable, the stated substantive renewal rate in the agreement. If a product or service is seldom sold separately, it is unlikely that the Company can determine VSOE for the product or service. The Company defines VSOE as a median price of recent standalone transactions that are priced within a narrow range, as defined by the Company, or stated renewal rates in contracts.

TPE is determined based on the prices charged by competitors of the Company for a similar deliverable when sold separately. As noted above, the Company typically is not able to use TPE, as the Company is usually not able to obtain sufficient information on competitor pricing to substantiate TPE.

If the Company is unable to establish selling price using VSOE or TPE, and the order was received or materially modified after July 31, 2009, the Company will use ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact if the product or service were sold by the Company on a standalone basis.

The Company’s determination of ESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. Specifically, the Company will consider the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts and the Company’s ongoing pricing strategy and policies.

The Company will determine ESP for deliverables in future agreements based on the specific facts and circumstances of the arrangement. The Company plans to analyze the selling prices used in its allocation of arrangement consideration at least annually. Selling prices will be analyzed on a more frequent basis if a significant change in the Company’s business necessitates a more timely analysis or if the Company experiences significant variances in its selling prices.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4. Share-based payment:

The Company estimates the fair value of stock options using the Black-Scholes valuation model and the fair value of the Company’s restricted stock awards, which include shares of restricted stock and restricted stock units, based on the quoted market price of its common stock or the use of a Monte-Carlo Simulation Model. For time or service based awards the Company recognizes the associated share-based compensation expense on a straight-line basis over the vesting periods of the awards, net of estimated forfeitures. Forfeiture rates are estimated based on historical pre-vesting forfeitures and are updated on the vesting dates to reflect actual forfeitures. For performance-based awards with an earnings per share related target, management evaluates the probability of meeting the performance criteria at each balance sheet date and related compensation cost is amortized over the performance period on a straight-line basis because such awards vest only at the end of the measurement period. Changes to the probability assessment and the estimate of shares expected to vest will result in adjustments to the related share-based compensation expense that will be recorded in the period of the change. If the performance is not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed. For performance-based awards with a market condition related target, related compensation cost is amortized over the performance period on a straight-line basis regardless of whether the awards are ultimately earned.

On January 29, 2010, the stockholders’ approved a new share-based compensation plan named the “2009 Stock Incentive Plan”. Under the Company’s 2009 Stock Incentive Plan, up to 1,600,000 shares of the Company’s common stock, $.05 par value per share, may be awarded. Awards may be in the form of stock options, stock appreciation rights (“SARs”), shares of restricted stock, restricted stock units or other stock-based awards. Stock options granted under the 2009 Stock Incentive Plan may not be granted at an exercise price less than 100% of the fair market value of the common stock on the date of grant. Options may not be granted for a term in excess of ten years. Except in certain circumstances, options that vest based on continued service of the optionee may not vest earlier than one year from the date of grant. SARs granted under the 2009 Stock Incentive Plan must have a measurement price not less than 100% of the fair market value on the date of grant. SARs may not be granted for a term in excess of ten years. Restricted stock may be granted subject to the Company’s right to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture if such shares are issued at no cost) from the recipient in the event that conditions of the grant are not satisfied prior to the end of the restriction period. Such conditions may include the achievement of performance goals or continued service with the Company. Except in certain circumstances, restricted stock that vests solely based on the passage of time will be zero percent vested prior to the first anniversary of the date of grant, no more than one-third vested prior to the second anniversary of the date of grant, and no more than two-thirds vested prior to the third anniversary of the date of grant.

The following table presents share-based compensation expenses included in the Company’s unaudited Consolidated Statements of Operations:

 

     Three Months Ended
January 31,
       Six Months Ended
January 31,
     2010            2009            2010            2009    

    Cost of product sales

   $ 81        $ 64        $ 165        $ 145  

    Research and product development

     351          228          595          595  

    Selling and marketing

     145          121          265          295  

    General and administrative

     706            623            1,413            1,663  

    Share-based compensation expense before tax

           1,283                1,036          2,438          2,698  

    Income tax effect

     426            152            801            620  

    Net share-based compensation expense

   $ 857          $ 884          $       1,637          $       2,078  

In the fiscal year ended July 31, 2008 (“fiscal year 2008”) and fiscal year 2009, the Company’s Compensation Committee (the “Committee”) granted performance contingent restricted stock awards (“performance awards”) in the form of shares, which will vest if specific pre-established levels of performance are achieved at the end of a three-year performance cycle, which is July 31, 2010 for 89,544 shares granted in fiscal year 2008 and July 31, 2011 for 42,314 shares granted in fiscal year 2009. The performance goal for the performance awards is based solely on the compound annual growth of an adjusted earnings per share metric. The actual number of shares to be issued will be determined at the end of each three-year performance cycle and can range from zero to, in most cases, 200% of the target award, or up to 263,716 shares. The actual number of shares to be issued will also include the payment of accumulated dividends on the actual number of shares earned. The maximum compensation expense for the performance awards is $15,422 based on a weighted average grant date fair value of $58.48 per share. Compensation expense is being recognized over the performance period based on the number of shares that is deemed to be probable of vesting at the end of each three-year performance

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

cycle. As of January 31, 2010, the Company estimated that total awards covering 16,059 shares with a value of $944 were deemed probable of vesting out of awards totaling 131,858 outstanding shares. During the three months ended January 31, 2010 and 2009, compensation expense of $220 and $0, respectively, was recognized for the performance awards based on the number of shares deemed probable of vesting. During the six months ended January 31, 2010 and 2009, compensation expense of $83 and $420, respectively, was recognized for the performance awards based on the number of shares deemed probable of vesting.

In the six months ended January 31, 2010, the Committee granted performance awards in the form of shares of restricted stock and restricted stock units, of which 50%, or 110,530, will vest based upon achievement of certain targets over the three-year period ending July 31, 2012 with respect to the Company’s cumulative non-GAAP earnings per share and 50%, or 110,523, will vest based upon achievement of certain targets over the three-year period ending July 31, 2012 with respect to the Company’s relative total shareholder return (“TSR”) as determined against a specified peer group. The actual number of shares to be issued will be determined at the end of each three-year performance cycle and can range from zero to, in most cases, 200% of the target award, or up to 442,106 shares. The issuance of the shares will be accompanied by the payment of accumulated dividends on the actual number of shares earned. The maximum compensation expense for the performance awards with the non-GAAP earnings per share target is $8,852 based on a weighted average grant date fair value of $40.04 per share as determined by the closing stock price on the date of grant. Compensation expense is being recognized over the performance period for the performance awards with the non-GAAP earnings per share target based on the number of shares that are deemed to be probable of vesting at the end of each three-year performance cycle. As of January 31, 2010, the Company estimated that total non-GAAP earnings per share awards covering 48,183 shares and units with a value of $1,929 were deemed probable of vesting out of awards totaling outstanding shares and units. During the three and six months ended January 31, 2010, the Company recognized compensation expense of $67 for the performance awards with the non-GAAP earnings per share target based on the number of shares deemed probable of vesting. The compensation expense for the performance awards with the TSR target is $4,574, which will be recognized on a straight-line basis, net of estimated forfeitures, over a derived service period of 2.7 years. The weighted average grant date fair values of awards granted with a TSR target were $46.65 and $47.47 per share during the three and six months ended January 31, 2010, respectively. The fair value of awards with a TSR target at date of grant was estimated using a Monte-Carlo Simulation Model with the following assumptions:

 

         Three Months Ended        
    January 31,        
                Six Months Ended        
    January 31,        
         2010                     2010        

Stock Price (1)

   $      40.00           $      40.04    

Expected volatility factor (2)

   52%           51%    

Risk-free interest rate (3)

   1.10%           1.19%    

Expected annual dividend yield

   0.0%           0.0%    

 

    (1) The stock price is the weighted average closing price of the Company’s common stock on the dates of grant.
    (2) The stock volatility for each grant is determined based on the historical volatility for the peer group companies over a period equal to the remaining term of the performance period from the date of grant for all awards.
    (3) The risk-free interest rate for periods equal to the performance period is based on the U.S. Treasury yield curve in effect at the time of grant.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s common stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s outstanding stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity-based awards.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The weighted average grant date fair values of options granted were $14.56 and $11.83 per share during the three months ended January 31, 2010 and 2009, respectively, and $14.56 and $19.70 per share during the six months ended January 31, 2010 and 2009, respectively. The fair value of options at date of grant was estimated using the Black-Scholes valuation model with the following assumptions:

 

         Three Months Ended        
    January 31,        
            Six Months Ended        
    January 31,        
         2010                   2009                   2010                   2009      

Expected option term (1)

   4.8 years           4.7 years           4.8 years           4.7 years    

Expected volatility factor (2)

   43%           34%           43%           34%    

Risk-free interest rate (3)

   2.20%           3.04%           2.20%           3.04%    

Expected annual dividend yield

   1.0%           0.6%           1.0%           0.6%    

 

(1) The option life was determined by estimating the expected option life using historical data.
(2) The stock volatility for each grant is determined based on the review of the weighted average of historical daily price changes of the Company’s common stock over the most recent five years, which approximates the expected option life of the grant.
(3) The risk-free interest rate for periods equal to the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average fair values of the options granted under the employee stock purchase plan was $8.20 per share for each of the three and six months ended January 31, 2010 and $5.80 per share during each of the three and six months ended January 31, 2009. The fair value of options at the date of grant was estimated using the Black-Scholes valuation model with the following assumptions:

 

         Three and Six Months Ended        
    January 31,        
     2010            2009    

Expected option term

   0.5 years          0.5 years    

Expected volatility factor

   50%          50%    

Risk-free interest rate

   2.54%          1.45%    

Expected annual dividend yield

   1.1%          1.5%    

The following table sets forth the stock option and restricted stock award transactions from July 31, 2009 to January 31, 2010:

 

   

Stock Options Outstanding

 

     

Time-Based

Unvested Restricted

Stock Awards

 

     

Performance-Based
Unvested Restricted

Stock Awards

 

    Number  
of Shares  
            Weighted    
    Average    
    Exercise    
    Price    
      Weighted    
Average    
Remaining    
Contractual    
Term    
(years)    
      Aggregate    
Intrinsic    
Value    
      Number 
of Shares/Units 
        Weighted    
Average    
Grant Date    
Fair Value    
      Number 
of Shares/Units 
        Weighted    
Average    
Grant Date    
Fair Value    

Outstanding at July 31, 2009

  415,021          $         53.84       4.55         $         167       113,309        $ 55.62       137,909            $         58.55  

Granted

  6,000          39.61             4,000          39.61       221,527          43.76  

Exercised

  (5,000 )          36.00             -            -         -            -    

Vesting of restricted stock awards

  -            -               (19,658 )          49.37       -            -    

Cancelled (forfeited and expired)

  (34,496 )          52.48               (3,692 )          55.15       (6,525 )          58.87  

Outstanding at January 31, 2010

  381,525          54.01       4.58         299       93,959          56.18       352,911          49.26  

Options vested or expected to

vest at January 31, 2010 (1)

  356,714          53.79       4.48         268                  

Options exercisable at
January 31, 2010

  166,025          49.60       2.67         18                  

 

    (1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

5. Marketable securities and fair value:

The Company measures the fair value of its financial assets and liabilities and non-financial assets and liabilities at least annually using a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

   

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 Company’s cash equivalents and marketable securities are comprised primarily of certificates of deposit and U.S. government and agency discount notes.

The Company did not have any financial assets or liabilities measured at fair value at January 31, 2010 or July 31, 2009.

The Company did not have any marketable securities at January 31, 2010. The following table summarizes the composition of the Company’s marketable securities at July 31, 2009.

 

             Gross Unrealized             
    Cost            Gain            Loss            Fair Value    

July 31, 2009

                

Held-to-Maturity Securities

                

Certificates of Deposits

      $     40,438              $     -              $     -              $     40,438  

There were no realized gains or losses on marketable securities in the three and six months ended January 31, 2010 and 2009, as the cost approximated fair value.

6. Goodwill and other intangible assets:

The carrying amount of the goodwill at January 31, 2010 and July 31, 2009 was $1,849 and $2,043, respectively. The decrease in goodwill of $194 from July 31, 2009 to January 31, 2010 was due to an adjustment to the purchase price of Copley Controls Corporation (“Copley”), which was released to the Company from escrow in the first quarter of fiscal year 2010.

Intangible assets at January 31, 2010 and July 31, 2009 consisted of the following:

 

     January 31, 2010         July 31, 2009
     Cost             Accumulated    
Amortization    
        Net             Cost             Accumulated    
Amortization    
        Net    

Developed technology

   $     11,771         $     2,014         $     9,757         $     11,771         $     1,450         $     10,321  

Customer relationships

     25,200           3,238           21,962           25,200           2,336           22,864  

Tradename

     7,607           -           7,607           7,607           -           7,607  

Backlog

     2,063             2,063             -             2,063             2,063             -  

Total

   $ 46,641           $ 7,315           $ 39,326           $ 46,641           $ 5,849           $ 40,792  

Amortization expense related to acquired intangible assets was $733 and $737 for the three months ended January 31, 2010 and 2009, respectively, and $1,466 and $2,332 for the six months ended January 31, 2010 and 2009, respectively.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The estimated future amortization expenses related to intangible assets for each of the five succeeding fiscal years is expected to be as follows:

 

2010 (Remaining six months)

   $ 1,465

2011

    2,931

2012

    2,931

2013

    2,931

2014

    2,931
   $         13,189

The Company tests goodwill and indefinite lived intangible assets for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. Goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by the Company in connection with the acquisition of Copley on April 14, 2008. The tradename represents the value allocated to the Copley tradename in connection with the acquisition of Copley. The goodwill and Copley tradename are part of the OEM reporting unit, which the Company tests for goodwill impairment during the second quarter of each fiscal year.

In the second quarter of fiscal year 2010, the Company performed the first step of the two-step impairment test for goodwill and tradename. For the goodwill, the Company compared the fair value of the OEM reporting unit to its carrying value during the second quarter of fiscal year 2010. The Company’s approach considered both the market approach and income approach. Equal weighting was given to each approach. Under the market approach, the fair value of the reporting unit is based on trading multiples. In the market approach, the Company assumed a control premium of 15% for the reporting unit, which was determined based on an analysis of control premiums for relevant recent acquisitions. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including estimates of future sales, future gross margin percentage, and discount rates. The discount rate of 15.7% 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 reporting unit. The Company determined that the fair value of the reporting unit was more than the carrying value of the net assets of the reporting unit, and thus it was not necessary for the Company to perform step two of the impairment test for the goodwill.

For the tradename, the Company compared the fair value of the Copley tradename using the relief from royalty approach to its carrying value during the second quarter of fiscal year 2010. The relief from royalty approach utilized a 1.3% aftertax royalty rate and a discount rate of 17.7%. The aftertax 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 Copley tradename. The Company determined that the fair value of the Copley tradename was more than its carrying value.

Given the current economic environment and the uncertainties regarding its impact on the Company’s business, there can be no assurance that the Company’s estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of its goodwill and tradename impairment testing during the second quarter of fiscal year 2010 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or margin growth rates of the reporting unit and tradename are not achieved, the Company may be required to record an impairment charge for the goodwill and tradename in future periods, whether in connection with the Company’s next annual impairment testing in the second quarter of fiscal year ending July 31, 2011, or prior to that if any such change constitutes a triggering event outside of the quarter from when the annual goodwill and tradename impairment test is performed. 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.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

7. Restructuring and voluntary retirement charges:

In the second quarter of fiscal year 2010, the Company reduced its workforce by 17 employees worldwide. The total costs of this plan, including severance and personnel related costs, was $764 and was recorded as a restructuring charge during the three and six months ended January 31, 2010.

In the second quarter of fiscal year 2009, the Company reduced its workforce by 145 employees worldwide and recorded a restructuring charge of $3,488 for severance and personnel related costs during the three and six months ended January 31, 2009. Included in this restructuring were 29 employees from Copley. The severance and personnel related costs for the Copley employees of $323 were accrued for in fiscal year 2008 in connection with the acquisition.

The following table summarizes accrued restructuring and voluntary retirement charges activity from July 31, 2008 through January 31, 2010:

 

         Involuntary     
     Employee     
     Severance     
       

     Facility     
     Exit     

     Costs     

             Voluntary     
     Retirement     
     Program     
              Copley      
      Acquisition      
             Total       

    Balance at July 31, 2008

  $ 309        $ -          $ 3,395        $ 1,376        $ 5,080   

Cash payments

    (266 )           -              (3,287 )           (113 )           (3,666 )  

    Balance at October 31, 2008

    43          -            108          1,263          1,414   

Restructuring charge

    3,488          -            -            -            3,488   

Cash payments

    (96 )         -            (83 )         (351 )         (530 )  

Foreign exchange

    (39 )           -              -              -              (39 )  

    Balance at January 31, 2009

    3,396          -            25          912          4,333   

Cash payments

    (1,559 )         -            (25 )         (305 )         (1,889 )  

Foreign exchange

    26            -              -              -              26   

    Balance at April 30, 2009

    1,863          -            -            607          2,470   

Restructuring charge

    2,073          1,058          -            -            3,131   

Cash payments

    (1,250 )         -            -            (206 )         (1,456 )  

Reversal through goodwill

    -            -            -            (375 )         (375 )  

Foreign exchange

    42            -              -              -              42   

    Balance at July 31, 2009

    2,728          1,058          -            26          3,812   

Cash payments

    (1,211 )         (189 )         -            (26 )         (1,426 )  

Foreign exchange

    16            -              -              -              16   

    Balance at October 31, 2009

    1,533          869          -            -            2,402   

Restructuring charge

    764          -            -            -            764   

Cash payments

    (803 )         (189 )         -            -            (992 )  

Foreign exchange

    (7 )           -              -              -              (7 )  

    Balance at January 31, 2010

      $ 1,487              $ 680              $ -                $ -                $ 2,167   

The remaining cash expenditures as of January 31, 2010 consist of approximately $1,487 in employee severance that will be paid within the next twelve months and facility exit costs of $680 that will be paid within the next twelve months.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

8. Balance sheet information:

Additional information for certain balance sheet accounts is as follows for the dates indicated:

 

     January 31,    
2010    
       

July 31,    

2009    

Inventories:

        

Raw materials

   $ 52,053         $         49,828

Work-in-process

     11,560           13,194

Finished goods

     19,099             15,989
   $ 82,712           $ 79,011

Accrued liabilities:

        

Accrued employee compensation and benefits

   $ 14,367         $ 12,076

Accrued restructuring charges

     2,167           3,812

Accrued warranty

     6,362           6,456

Other

     5,837             8,524
   $ 28,733           $ 30,868

Advance payments and deferred revenue:

        

Deferred revenue

   $ 5,510         $ 5,647

Customer deposits

     5,073             1,572
   $ 10,583           $ 7,219

9. Net income per share:

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic net income per share. Diluted net income per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including unvested restricted stock awards and the assumed exercise of stock options using the treasury stock method.

 

     Three Months Ended
January 31,    
        Six Months Ended
January 31,    
     2010         2009         2010         2009

    Net income

   $ 3,624         $ 1,419       $ 3,650         $ 1,739

    Weighted average number of common shares outstanding-basic

     12,574         12,829         12,567         13,030

    Effect of dilutive securities:

                    

    Stock options and restricted stock awards

     19           47           19           95

    Weighted average number of common shares outstanding-diluted

     12,593           12,876           12,586           13,125

    Net income per share:

                    

    Basic

   $ 0.29         $ 0.11         $ 0.29         $ 0.13

    Diluted

   $ 0.29         $ 0.11         $ 0.29         $ 0.13

    Anti-dilutive shares related to outstanding stock options and unvested restricted stock

     378         533         394         361

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

10. Comprehensive income (loss):

Components of comprehensive income (loss) include net income and certain transactions that have generally been reported as a component of stockholders’ equity. The following table presents the calculation of total comprehensive income (loss) and its components:

 

    

Three Months Ended  

January 31,  

       

Six Months Ended  

January 31,  

     2010           2009           2010           2009  

    Net Income

   $     3,624         $     1,419         $     3,650         $ 1,739  

    Other comprehensive income, net of taxes:

                    

Pension adjustment, net of tax provisions of $111 and $1 for the three months ended January 31, 2010 and 2009, respectively, and tax provisions of $117 and $10 for the six months ended January 31, 2010 and 2009, respectively.

     (151)          1           (143)          16  

Foreign currency translation adjustment, net of a tax provision of $185 and a tax benefit of $103 for the three months ended January 31, 2010 and 2009, respectively, and a tax provision of $214 and a tax benefit of $1,286 for the the six months ended January 31, 2010 and 2009, respectively.

     (3,816)            (440)            (1,887)            (15,624) 

    Total comprehensive income (loss)

   $ (343)          $ 980           $ 1,620           $     (13,869) 

The components of accumulated other comprehensive income, net of taxes, at January 31, 2010 and July 31, 2009 are as follows:

 

     January 31, 2010             July 31, 2009    

Pension adjustment

   $ (2,238)        $ (2,095) 

Foreign currency translation adjustment

         10,304             12,191  

Total

   $ 8,066           $     10,096  

11. Supplemental disclosure of cash flow information:

The changes in operating assets and liabilities were as follows:

 

    

Six Months Ended

January 31,

         2010            2009    

Accounts receivable

   $ (1,904)    $ 759 

Inventories

     (3,882)      (5,426)

Other assets

     (6,531)      (736)

Refundable income taxes

     3,032       4,253 

Accounts payable

     2,968       (1,973)

Accrued liabilities

     (4,158)      (11,484)

Advance payments and deferred revenue

     3,473       836 

Other liabilities

     63       (171)

Accrued income taxes

     1,373       (176)

Net changes in operating assets and liabilities

   $         (5,566)    $         (14,118)

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

12. Taxes:

The following table presents the provision (benefit) for income taxes and the effective income tax rates:

 

     Three Months Ended
January 31,
        Six Months Ended
January 31,
     2010         2009         2010         2009

Provision (benefit) for income taxes

   $ 1,222        $ (1,695)        $ 1,233        $ (2,158) 

Effective tax rate

     25%          614%          25%          515% 

The effective income tax rate is based upon the estimated income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.

The effective tax rate of 25% for the three and six months ended January 31, 2010 was due primarily to lower foreign tax rates as compared to the statutory rate of 35% and a discrete benefit for the reversal of tax reserves as a result of the expiration of the statute of limitations for the fiscal year ended July 31, 2004.

The Company’s income tax benefits of $1,695 and $2,158 for the three and six months ended January 31, 2009, respectively, were due primarily to the Internal Revenue Service (“IRS”) income tax refund of $6,459 received in December 2008. The refund, which included $1,065 of interest, was for the carryback of loss and research and development credits from the fiscal year ended July 31, 2004 and from additional research and development tax credits claimed on amended income tax returns for the fiscal years ended July 31, 2001 through 2003. The impact of this refund and related interest was a reduction of unrecognized tax benefits by approximately $3,280, of which $1,232 was recorded as a tax benefit in both the three and six months ended January 31, 2009. Also contributing to the income tax benefits for the three and six months ended January 31, 2009 were discrete benefits of $391 for previously unrecognized tax benefits resulting from the settlement of the IRS audit, partially offset by additional provisions for agreed federal and state adjustments. The income tax benefit for the six months ended January 31, 2009 also includes a discrete tax benefit of $404 for the reinstatement of the federal research and experimentation credit back to January 1, 2008.

The total amount of gross unrecognized tax benefits, which excludes interest and penalties discussed below, were as follows for the dates indicated.

 

January 31, 2010        July 31, 2009

$                12,523

     $            12,877

 

These unrecognized tax benefits, if recognized in a future period, the timing of which is not estimable, would impact the Company’s effective tax rate.

The Company is subject to U.S. Federal income tax as well as the income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. Federal income tax matters through the fiscal year ended July 31, 2002 and for the fiscal years ended July 31, 2004 and 2005. In the next four fiscal quarters, the statute of limitations may close on the Federal and state income tax returns for the fiscal years ended July 31, 2003 and 2006 and on the tax returns filed in various foreign jurisdictions for the fiscal years ended July 31, 2004 and 2005. It is reasonably expected that net unrecognized benefits of $1,711 from these jurisdictions may be recognized within the next four quarters.

The Company accrues interest and, if applicable, penalties for any uncertain tax positions. This interest and penalty expense is a component of income tax expense. At January 31, 2010, the Company had approximately $1,393 accrued for interest on unrecognized tax benefits.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

13. Segment information:

The Company operates primarily within two major markets: Medical Technology and Security Technology. During the first quarter of fiscal year 2010, as part of a strategic review, the Company evaluated the appropriateness and naming of its segments. The Company decided to retain the composition of its reporting segments but change the names to more accurately depict the nature of those segments. Medical Technology consists of three reporting segments: CT and MRI (formerly Medical Imaging Products), which consists primarily of electronic systems and subsystems for CT and MRI medical imaging equipment; Digital Radiography, which consists primarily of state-of-the-art, direct conversion amorphous selenium-based, digital, flat-panel, x-ray detectors for diagnostic and interventional applications in mammography; and Specialized Ultrasound (formerly B-K Medical), which consists of ultrasound systems and probes for the urology, surgery, and radiology markets. Security Technology consists of advanced weapon and threat detection aviation security systems and subsystems. The Company’s Other segment represents the Company’s hotel business and general corporate income and expenses. The accounting policies of the segments are the same as those described in the summary of Significant Accounting Policies included in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for fiscal year 2009.

The table below presents information about the Company’s reportable segments.

 

     Three Months Ended  
January 31,  
         Six Months Ended  
January 31,  
 
         2010                   2009                   2010                   2009       

Revenue:

                 

Medical Technology from external customers:

                 

CT and MRI

   $ 55,342         $ 61,792         $ 113,001         $ 121,036   

Digital Radiography

     8,553           6,772           16,757           14,226   

Specialized Ultrasound

     24,844             20,848             44,857             39,736   

Total Medical Technology

     88,739           89,412           174,615           174,998   

Security Technology from external customers

     12,794           11,240           19,724           24,094   

Other

     1,731             2,063             4,302             5,175   

Total

   $     103,264           $     102,715           $     198,641           $     204,267   

Income (loss) before income taxes

 

                 

Medical Technology:

                 

CT and MRI (A)

   $ 2,423         $ (1,213      $ 3,693         $ (2,664

Digital Radiography (B)

     247           (19        886           540   

Specialized Ultrasound (C)

     1,371             827             708             (1,278

Total Medical Technology

     4,041           (405        5,287           (3,402

Security Technology (D)

     1,478           383           (193        1,930   

Other

     (673          (254          (211          1,053   

Total

   $ 4,846           $ (276        $ 4,883           $ (419

 

     January 31, 2010             July 31, 2009    

Identifiable assets:

        

CT and MRI

   $ 135,156         $ 134,202  

Digital Radiography

     29,799           28,562  

Specialized Ultrasound

     87,988           92,551  

Security Technology

     17,211           11,849  

Other (E)

     200,464             196,950  

Total

   $     470,618           $ 464,114  

 

(A) Includes restructuring charges of $557 in the three and six months ended January 31, 2010 and $2,280 in the three and six months ended January 31, 2009.
(B) Includes restructuring charges of $44 in the three and six months ended January 31, 2010 and $21 in the three and six months ended January 31, 2009.

 

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ANALOGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

(C) Includes restructuring charges of $761 in the three and six months ended January 31, 2009.
(D) Includes restructuring charges of $163 in the three and six months ended January 31, 2010 and $426 in the three and six months ended January 31, 2009.
(E) Includes cash and cash equivalents and marketable securities of $133,987 and $131,084 at January 31, 2010 and July 31, 2009, respectively.

14. Commitments and guarantees:

The Company’s standard OEM and supply agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States patent, or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments the Company could be required to make under these indemnification provisions is, in some instances, unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes that its estimated exposure on these agreements is currently minimal. Accordingly, the Company has no liabilities recorded for these agreements as of January 31, 2010.

Generally, the Company warrants that its products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the products to the customer for a period ranging from 12 to 24 months from the date of delivery. The Company provides for the estimated cost of product and service warranties based on specific warranty claims, claim history and engineering estimates, where applicable.

 

    

Three Months Ended

January 31,

       

Six Months Ended

January 31,

     2010         2009         2010         2009

Balance at the beginning of the period

   $         6,600         $         4,884         $         6,456         $         5,403  

Accrual

     1,292           973           2,769           1,695  

Settlements made in cash or in kind during the period

     (1,530)            (848)            (2,863)            (2,089) 

Balance at the end of the period

   $ 6,362           $ 5,009           $ 6,362           $ 5,009  

 

The Company currently has approximately $22,500 in revolving credit facilities with banks available for direct borrowings. The Company’s revolving credit facility agreements contain a number of covenants, including a covenant requiring the Company to maintain a tangible net worth (as defined in the revolving credit facility agreement) of no less than $255,000 as of the end of any fiscal quarter. The Company was in compliance with this covenant at January 31, 2010 with a tangible net worth of approximately $353,700. As of January 31, 2010, there were no direct borrowings or off-balance sheet arrangements.

15. Common stock repurchase:

On October 13, 2008, the Company’s Board of Directors authorized the repurchase of up to $25,000 of the Company’s common stock. The Company completed the repurchase program, which was funded using the Company’s available cash, in the second quarter of fiscal year 2009. During the three months ended January 31, 2009, the Company repurchased 648,020 shares of common stock at an average purchase price per share of $33.21. During the six months ended January 31, 2009, the Company repurchased 736,694 shares of common stock under this repurchase program for $25,022 at an average purchase price per share of $33.97. Included in the $25,022 paid for the common stock under this program was $22 of commissions and fees to the Company’s broker.

16. Subsequent event

The Company declared a dividend of $0.10 per share of common stock on March 5, 2010, which will be paid on April 1, 2010 to stockholders of record on March 19, 2010.

 

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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 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, without limitation, statements about product development, market and industry trends, strategic initiatives, regulatory approvals, sales, profits, expenses, price trends, research and development expenses and trends, and capital expenditures, we make in this document or in any document incorporated by reference are forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to differ from the projected results. See “Risk Factors” in Part I, Item 1A. of our Annual Report on Form 10-K for fiscal year 2009 as filed with the U.S Securities and Exchange Commission (the “SEC”) on September 29, 2009 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 January 31, 2010 and 2009 represent the second quarters of fiscal years 2010 and 2009, respectively. All dollar amounts in this Item 2 are in thousands except per share data.

Summary

Analogic is a high technology company that designs and manufactures advanced medical imaging and security systems and subsystems sold to Original Equipment Manufacturers (“OEMs”) and end users in the healthcare and homeland security markets. We are recognized worldwide for advancing state-of-the-art technology in the areas of medical Computer Tomography (“CT”), Magnetic Resonance Imaging (“MRI”), Digital Mammography, Specialized Ultrasound, and Automated Explosive Detection Systems for airport security. Our OEM customers incorporate our technology into systems they in turn sell for various medical and security applications. We also sell our ultrasound products directly to hospitals and clinics through our direct worldwide sales force under the business name B-K Medical ApS (“B-K Medical”).

We operate primarily within two major markets: Medical Technology and Security Technology. Medical Technology consists of three reporting segments: CT and MRI (formerly Medical Imaging Products), which consists primarily of electronic systems and subsystems for CT and MRI medical imaging equipment; Digital Radiography, which consists primarily of state-of-the-art, direct conversion amorphous selenium-based, digital, flat-panel, x-ray detectors for diagnostic and interventional applications in mammography; and Specialized Ultrasound (formerly B-K Medical), which consists of ultrasound systems and probes for the urology, surgery, and radiology markets. Security Technology consists of advanced weapon and threat detection aviation security systems and subsystems.

A significant portion of our products are sold to OEMs, whose purchasing dynamics have an impact on our reported sales. OEMs that purchase our CT, MRI, and Digital Radiography products generally incorporate those products as components in their systems, which are in turn sold to end users, primarily hospitals and medical clinics. In our Security Technology business, a major OEM customer purchases and resells our products to end users including domestic and foreign airports as well as the Transportation Security Administration (“TSA”). In Security Technology, our customers’ purchasing dynamics are affected by the level of government funding, the expansion of airport terminals, and fluctuations in airline passenger volume.

In the second quarter of fiscal year 2010, we reduced our workforce by 17 employees worldwide. The total cost of this plan, including severance and personnel related costs, was $764 and was recorded as a restructuring charge during the three and six months ended January 31, 2010. The savings from the termination of the 17 employees on an annual basis is expected to be approximately $1,000.

The following table sets forth key financial data from our unaudited Consolidated Statements of Operations for the three months ended January 31, 2010 and 2009.

 

    

Three Months Ended    

January 31,    

       

Percentage      

Change      

 
     2010         2009            

Total net revenue

   $     103,264         $     102,715         0.5 %  

Income (loss) from operations

     4,970           (1,507)       N/A    

Net income

     3,624           1,419         155.4 %  

Diluted net income per share

     0.29           0.11         154.5 %  

Total net revenue remained relatively consistent with the prior year comparable period. Income from operations increased in the three months ended January 31, 2010 as compared to the prior year comparable period due primarily to

 

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improved product gross margins and a decline in operating expenses. Net income and diluted net income per share increased due primarily to improved product gross margins and lower operating expenses, which were partially offset by lower interest income and less tax benefits.

The following table sets forth an overview of cash flows for the six months ended January 31, 2010 and 2009.

 

    

Six Months Ended    

January 31,    

       2010             2009  

    Net cash provided by operating activities

   $ 10,176        $ 646  

    Net cash provided by (used for) investing activities

     35,554           (60,235) 

    Net cash used for financing activities

     (2,464)          (27,555) 

    Effect of exchange rate changes on cash

     (841)            (4,620) 

    Net increase (decrease) in cash and cash equivalents

   $     42,425           $     (91,764) 

During the six months ended January 31, 2010, we continued to generate cash from our operating activities. The most significant adjustments to reconcile net income to net cash provided by operating activities in fiscal year 2010 were depreciation and amortization of $8,863 and share-based compensation expense of $2,438, partially offset by a net change in operating assets and liabilities of $5,566.

Over the past several years, we have had significant cash and marketable securities balances, which over the past year have continued to be impacted by a reduction in interest rates. We have historically invested in U.S government backed securities, bonds, and certificates of deposit, the interest rates of which have declined significantly over the last year.

The net cash provided by investing activities in the six months ended January 31, 2010 was due primarily to the maturity of $40,438 of short-term held-to-maturity marketable securities, partially offset by property, plant, and equipment additions of $4,691.

The net cash used for financing activities in the six months ended January 31, 2010 was due primarily to $2,534 of dividends paid to stockholders.

Results of operations

Net revenue

Product revenue

Product revenue is summarized in the table below.

 

    

Three Months Ended  

January 31,  

       

Percentage

Change

       

Six Months Ended  

January 31,  

       

Percentage

Change

     2010         2009               2010         2009        

Product Revenue:

                                

Medical Technology:

                                

CT and MRI

   $       54,199         $       58,272         -7.0%         $       109,181         $       116,253         -6.1%  

Digital Radiography

     8,453           6,508         29.9%           16,582           13,962         18.8%  

Specialized Ultrasound

     24,844             20,848           19.2%             44,857             39,736           12.9%  

Total Medical Technology

     87,496           85,628         2.2%           170,620           169,951         0.4%  

Security Technology

     11,123             8,816           26.2%             17,453             19,440           -10.2%  

Total

   $ 98,619           $ 94,444           4.4%           $ 188,073           $ 189,391           -0.7%  

CT and MRI

The decreases in product revenue for the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to declines in demand by one of our OEM customers for MRI gradient amplifiers as well as a decline in hospital spending reflecting the global economic slowdown. Product revenue has improved from the last six months of fiscal year 2009 to the first six months of fiscal year 2010.

 

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Digital Radiography

The increases in product revenue for the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to increased shipments of mammography detectors to OEM customers. Partially offsetting this growth was a decline in older generation, non-mammography detectors that are being phased out.

Specialized Ultrasound

The increases in product revenue in the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to increases in demand for our new product lines, the Flex Focus and Pro Focus UltraView portable ultrasound scanners, which were introduced late in the second and third quarters of fiscal year 2009, respectively.

Security Technology

The increase in Security Technology Products revenue in the three months ended January 31, 2010 versus the prior year comparable period was due to an increase in baggage scanners being shipped to our OEM customer and an increase in sales of spare parts and accessories.

The decrease in Security Technology Products revenue in the six months ended January 31, 2010 versus the prior year comparable period was due to fewer baggage scanners being shipped to our OEM customer. This decrease was partially offset by an increase in sales of spare parts and accessories.

Engineering revenue

Engineering revenue is summarized in the table below.

 

     Three Months Ended     
January 31,     
      

Percentage  

Change  

       Six Months Ended     
January 31,     
      

Percentage  

Change  

     2010           2009                  2010           2009          

Engineering Revenue:

                           

Medical Technology:

                           

CT and MRI

   $     1,143        $     3,520        -67.5%      $     3,820        $     4,783        -20.1%

Digital Radiography

     100            264          -62.1%          175            264          -33.7%

Total Medical Technology

     1,243          3,784        -67.2%        3,995          5,047        -20.8%

Security Technology

     1,671            2,424          -31.1%          2,271            4,654          -51.2%

Total

   $ 2,914          $ 6,208          -53.1%        $ 6,266          $ 9,701          -35.4%

CT and MRI

The decrease in engineering revenue for the three months ended January 31, 2010 versus the prior year comparable period was due primarily to a decrease in activity on customer funded engineering projects. The decrease in engineering revenue for the six months ended January 31, 2010 versus the prior year comparable period was due primarily to the timing of completed milestones on various projects for OEM customers.

Digital Radiography

The decreases in engineering revenue for the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to the timing of completed milestones on a project for an OEM customer in the three and six months ended January 31, 2010 as compared to the same periods of the prior year.

Security Technology

The decreases in engineering revenue in the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to a decrease in engineering revenue on a time and materials project with our OEM customer to transition the eXaminer XLB from a prototype into a manufacturable product. This effort was ramping up in the first quarter of fiscal year 2009 and began winding down in the fourth quarter of fiscal year 2009, which caused the decrease in the fiscal year 2010 periods. The eXaminer XLB was certified by the TSA in the first quarter of fiscal year 2010. The decreases were partially offset by a project that began in December 2009 for a new OEM customer.

 

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Other revenue

Other revenue is summarized in the table below.

 

             Three Months Ended          
January 31,  
       

      Percentage      

    Change    

                Six Months Ended          
January 31,  
       

      Percentage      

    Change    

     2010          2009                 2010          2009          

Other Revenue:

                              

Hotel

   $         1,731       $         2,063        -16.1%        $         4,302       $         5,175        -16.9% 

The decreases in the three months and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to lower occupancy of the hotel due to lower business and personal travel as a result of the continuing economic slowdown.

Gross margin

Product gross margin

Product gross margin is summarized in the table below.

 

    

        Three Months Ended         

January 31,  

        Percentage   
Change   
                Six Months Ended         
January 31,  
        Percentage   
Change   
     2010           2009                     2010           2009            

Product gross margin

   $         38,612        $         32,622        18.4%       $         68,289        $         62,291        9.6%

Product gross margin %

     39.2%         34.5%               36.3%         32.9%      

Product gross margin percentage increased in the three and six months ended January 31, 2010 versus the prior year comparable periods. For the three months ended January 31, 2010, the gross margin improvement was primarily due to higher margin products, such as Specialized Ultrasound and Security Technology products, making up a higher percentage of the consolidated product revenue. Also contributing to the increase in product gross margin percentage were lower component pricing from our vendors, lower labor costs as a result of restructuring , and improved manufacturing efficiency as a result of higher production throughput. For the six months ended January 31, 2010, the gross margin improvement was primarily due higher margin products, such as Specialized Ultrasound products, making up a higher percentage of the consolidated product revenue. Also contributing to the increase in product gross margin percentage were lower labor costs as a result of restructuring, and a decrease in amortization of intangible assets from the acquisition of Copley, partially offset by lower production throughput.

Engineering gross margin

Engineering gross margin is summarized in the table below.

 

    

    Three Months Ended       

January 31,   

            Percentage       
Change   
       

    Six Months Ended       

January 31,   

            Percentage       
Change   
     2010         2009                   2010         2009          

Engineering gross margin

   $         (591)       $         (85)       -595.3%       $         (406)       $         218       -286.2%

Engineering gross margin %

     -20.3%         -1.4%               -6.5%         2.2%      

The decreases in the engineering gross margin in the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to an increase in costs incurred in excess of revenue on certain customer funded CT and MRI projects.

 

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Operating expenses

Operating expenses are summarized in the table below.

 

     Three Months Ended    
January 31,    
       

Six Months Ended    

January 31,    

     2010             2009             2010             2009    

Research and product development

   $     12,134         $     11,358         $     23,589         $     23,925  

Selling and marketing

     9,616           9,728           18,924           19,412  

General and administrative

     10,718           9,836           20,813           20,464  

Restructuring charge

     764             3,488           764             3,488  
   $ 33,232           $ 34,410         $ 64,090           $ 67,289  

Operating expenses as a percentage of total net revenue are summarized in the table below.

 

     Three Months Ended    
January 31,    
         Six Months Ended    
January 31,    
 
         2010                  2009                  2010                  2009      

Research and product development

           11.8                  11.1              11.9                  11.7

Selling and marketing

   9.3      9.4      9.5      9.5

General and administrative

   10.4      9.6      10.5      10.0

Restructuring charge

   0.7        3.4      0.4        1.7
   32.2        33.5      32.3        32.9

Operating expenses decreased $1,178 for the three months ended January 31, 2010 from the three months ended January 31, 2009 due primarily to a decrease in restructuring charges of $2,724, which was partially offset by an increase in research and product development expenses and general and administrative expenses. The increase in research and product development costs was due primarily to a less work on customer funded engineering projects, the costs of which are recorded in cost of engineering revenues rather than within operating expenses. Total engineering spending on customer funded and internally funded projects decreased in the period as a result of workforce reductions in the second half of fiscal year 2009. The increase in general and administrative expenses was due primarily to increases in variable cash and share-based compensation expense as well as legal costs. These increases in general and administrative expenses are partially offset by $688 of contingent professional fees incurred in the three months ended January 31, 2009 related to an income tax refund and related interest of $6,459 received from the Internal Revenue Service (“IRS”) in December 2008.

Operating expenses decreased $3,199 for the six months ended January 31, 2010 from the six months ended January 31, 2009 due primarily to a decrease in restructuring charges of $2,724. Also contributing to the decrease were decreases in research and product development expense and selling and marketing expenses as a result of the workforce reductions in the second half of fiscal year 2009. These decreases were partially offset by an increase in general and administrative expenses due primarily to an increase in variable cash compensation expense.

Other income (expense), net

Other income (expense), net is summarized in the table below.

 

    

Three Months Ended

January 31,

       

Six Months Ended

January 31,

         2010                 2009                 2010                 2009    

Interest income, net

   $         150         $         767         $         326         $         1,775  

Other income (expense), net

     (274)           464           (417)           897  

The decreases in net interest income in the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to a decline in interest rates.

Net other income (expense) during the three and six months ended January 31, 2010 and 2009 consisted predominantly of foreign currency exchange gains and losses by our foreign subsidiaries.

 

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Provision (benefit) for income taxes

The provision (benefit) for income taxes and the effective tax rates are summarized in the table below.

 

    

Three Months Ended

January 31,

       

Six Months Ended

January 31,

     2010             2009             2010             2009    

Provision (benefit) for income taxes

   $         1,222         $         (1,695)         $         1,233         $         (2,158)  

Effective tax rate

     25%           614%           25%           515%  

The effective income tax rate is based upon the estimated income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.

For the three and six months ended January 31, 2010, the effective tax rate benefited primarily from lower foreign tax rates as compared to the statutory rate of 35%, and a discrete benefit for the reversal of tax reserves as a result of the expiration of the statute of limitations for the fiscal year ended July 31, 2004. For the three and six months ended January 31, 2009, the effective tax rate benefit was due primarily to the IRS refund of $6,459 received in December 2008. The refund, which included $1,065 of interest, was for the carryback of loss and research and development credits from fiscal year 2004 and from additional research and development tax credits claimed on amended income tax returns for fiscal years 2001 through 2003. The impact of this refund and related interest was a reduction of unrecognized tax benefits by approximately $3,280, of which $1,232 was recorded as a tax benefit in the three months ended January 31, 2009. Also contributing to the effective tax rate benefit for the three and six months ended January 31, 2009 were discrete benefits of $391 for previously unrecognized tax benefits resulting from the settlement of the IRS audit, partially offset by additional provisions for agreed federal and state adjustments. The effective tax rate benefit for the six months ended January 31, 2009 also includes a discrete tax benefit of $404 for the reinstatement of the federal research and experimentation credit back to January 1, 2008.

Net income per share

Net income and diluted net income per share for the three and six months ended January 31, 2010 and 2009 are as follows:

 

             Three Months Ended          
January 31,  
                Six Months Ended          
January 31,  
     2010           2009           2010           2009  

Net income

   $ 3,624        $ 1,419        $ 3,650        $ 1,739 

% of net revenue

     3.5%         1.4%         1.8%         0.9%

Diluted net income per share

   $ 0.29        $ 0.11        $ 0.29        $ 0.13 

Diluted weighted average shares outstanding

             12,593                  12,876                  12,586                  13,125 

The increases in net income and diluted net income per share for the three and six months ended January 31, 2010 versus the prior year comparable periods were due primarily to increases in gross margins and a decline in operating expenses, partially offset by reduced interest income and lower tax benefits.

Liquidity and capital resources

Key liquidity and capital resource information is summarized in the table below.

 

      January 31, 2010           July 31, 2009 

Cash and cash equivalents and marketable securities

   $               162,280         $               160,293  

Working capital

     268,462           264,140  

Short and long term debt

     -             -    

Stockholders’ equity

     399,113           397,519  

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary source of liquidity has been and continues to be internally generated cash flows and access to cash and cash investments. While we have no outstanding debt obligations, we have access to $22,500 in revolving credit facilities with banks available for direct borrowings.

 

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Cash equivalents totaled $162,280 at January 31, 2010 and consist solely of highly liquid investments with maturities of three months or less from the time of purchase. At January 31, 2010, we did not have any held-to-maturity marketable securities having maturities from the time of purchase in excess of three months, which would be stated at amortized cost, approximating fair value. The carrying amounts reflected in the Consolidated Balance Sheets of cash and cash equivalents, trade receivables, and trade payables approximate fair value at January 31, 2010, due to the short maturities of these instruments.

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 are appropriately valued at January 31, 2010 and are not aware of any market events to date that would impact their valuation. This could change in the future should new developments arise in the credit markets.

We face limited exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures can change over time as business practices evolve and could have a material adverse impact on our financial results. Our primary exposure is related to fluctuations between the U.S. dollar and local currencies for our subsidiaries in Canada and Europe. Our investment in international subsidiaries is sensitive to fluctuations in currency exchange rates. The effect of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the “accumulated other comprehensive income” component of stockholders’ equity. A 10% depreciation in the January 31, 2010 and July 31, 2009 functional currencies, relative to the U.S. dollar, would result in a reduction of stockholders’ equity of approximately $9,300 and $9,400, respectively.

Cash flows

The following table summarizes our sources and uses of cash over the periods indicated:

 

      

Six Months Ended    

January 31,    

   2010        2009    

    Net cash provided by operating activities

   $ 10,176     $ 646 

    Net cash provided by (used for) investing activities

     35,554       (60,235)

    Net cash used for financing activities

     (2,464)      (27,555)

    Effect of exchange rate changes on cash

     (841)      (4,620)

    Net increase (decrease) in cash and cash equivalents

   $       42,425     $         (91,764)

The cash flows provided by operating activities in the six months ended January 31, 2010 were due primarily to the adjustments to reconcile net income, which consisted of depreciation and amortization, share-based compensation expense, and a restructuring charge of $8,863, $2,438, and $764, respectively, partially offset by a net change in operating assets and liabilities of $5,566. The net change in operating assets and liabilities was due primarily to increases in other assets, inventories, and accounts receivable of $6,531, $3,882, and $1,904, respectively, as well as decreases in accrued liabilities of $4,158. These changes were partially offset by an increase in advanced payments and deferred revenue, accounts payable, and accrued income taxes of $3,473, $2,968, and $1,373, respectively, as well a decrease in refundable income taxes of $3,032.

The increase in other assets of $6,531 was due primarily to an advance of $2,000 paid as part of a technology development arrangement, which is expected to be repaid over the next 15 months according to the development plan and milestones and increases in deferred engineering costs. The increase in accounts receivable of $1,690 was due primarily to timing of customer collections. The increase in inventories of $3,882 was due primarily to an increase in demand. The decrease in refundable income taxes of $3,032 was due primarily to income tax refunds that were received in the six months ended January 31, 2010.

The decrease in accrued liabilities of $4,158 was due primarily to the payment of restructuring charge severance and benefit costs and of accrued sales taxes. The increase in advance payments and deferred revenue of $3,473 was due primarily to an advance payment from one of our customers of $4,000 received in the six months ended January 31, 2010. The increase in accounts payable of $2,968 was due primarily to the timing of vendor payments. The increase in accrued income taxes is due to income in the six months ended January 31, 2010.

Net cash provided by investing activities in the six months ended January 31, 2010 was due primarily to the maturity of $40,438 of short-term held-to-maturity marketable securities, which was partially offset by property, plant, and equipment additions of $4,691.

The net cash used for financing activities in the six months ended January 31, 2010 was due primarily to $2,534 of dividends paid to stockholders.

 

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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 January 31, 2010, and the effect such obligations are expected to have on liquidity and cash flows in future periods, are as follows:

 

  Contractual Obligation        Total         

Less than

1  year  

        1 - 3 years          

More than

3 years - 5 years

       

More than   

5 years  

    Operating leases

     $       9,767         $         2,933           $       2,583         $ 1,338         $ 2,913  

    Purchasing obligations

       47,870             44,488             3,382             -             -  
     $ 57,637           $ 47,421           $ 5,965           $ 1,338           $ 2,913  

As of January 31, 2010, the total liabilities associated with uncertain tax positions were $7,630. Due to the complexity associated with our tax uncertainties, we cannot make a reasonably reliable estimate of the period in which we expect to settle the non-current liabilities associated with these uncertain tax positions. Therefore, these amounts have not been included in the contractual obligations table.

We currently have approximately $22,500 in revolving credit facilities with banks available for direct borrowings. Our revolving credit facility agreements contain a number of covenants, including a covenant requiring us to maintain a tangible net worth (as defined in the revolving credit facility agreement) of no less than $255,000 as of the end of any fiscal quarter. We were in compliance with this covenant at January 31, 2010 with a tangible net worth of approximately $353,700. As of January 31, 2010, there were no direct borrowings or off-balance sheet arrangements.

Recent accounting pronouncements

Recently adopted

Hierarchy of generally accepted accounting principles

In June 2009, the Financial Accounting Standards Board (“FASB”) released the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”), effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change accounting principles generally accepted in the United States of America (“GAAP”), but does significantly change the way in which the accounting literature is organized, combining all authoritative standards in a comprehensive, topically organized database. All existing accounting standards documents were superseded and all other accounting literature not included in the Codification is considered nonauthoritative, other than guidance issued by the SEC. We adopted the provisions of this guidance during the quarter ended October 31, 2009, which had no impact on our financial position, results of operations, or cash flows.

Business combinations and noncontrolling interests

Effective August 1, 2009, we adopted FASB guidance that requires an acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. This guidance also requires additional disclosure of information surrounding a business combination, such that users of the entity’s financial statements can more fully understand the nature and financial impact of the business combination. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is our fiscal year 2010. An entity may not apply it before that date. The provisions of this guidance will only impact us if we are a party to a business combination after July 31, 2009.

Effective August 1, 2009, we adopted FASB guidance that establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance was effective as of the beginning of the first annual reporting period that began after December 15, 2008. The adoption of this guidance did not have a material impact on our financial position, results of operations, or cash flows.

 

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Effective August 1, 2009, we adopted FASB guidance amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and requiring enhanced related disclosures. The guidance improves the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This guidance must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008. Although future transactions involving intangible assets may be affected by this guidance, it did not impact our financial position, results of operations, or cash flows, as we did not acquire any intangible assets during the six months ended January 31, 2010.

Effective August 1, 2009, we adopted FASB guidance that amends and clarifies the initial recognition and measurement, subsequent measurement and accounting, and related disclosures of assets and liabilities arising from contingencies in a business combination. The impact of the adoption on our consolidated financial statements will largely depend on the size and nature of any business combinations. The provisions of this amendment will only impact us if we are a party to a business combination after July 31, 2009.

Fair value

Effective August 1, 2009, we adopted FASB guidance requiring disclosures about fair value of financial instruments for interim and annual reporting periods and is effective for interim reporting periods ending after June 15, 2009. The adoption did not have a material impact on our financial position, results of operations, or cash flows.

In August 2009, the FASB issued an update, which provides clarification and guidance regarding how to value a liability when a quoted price in an active market is not available for that liability. The changes as a result of this update were effective for us on November 1, 2009. Our adoption of these changes did not have a material effect on our financial position, results of operations, or cash flows.

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We do not expect adoption of the updated guidance to have a material impact on our financial position, results of operations, or cash flows.

Earnings per share

Effective August 1, 2009, we adopted FASB guidance that classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method. The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented are to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with this guidance, with early application not permitted. The adoption of this guidance did not have a material impact on our financial position, results of operations, or cash flows.

Revenue recognition

In October 2009, the FASB issued an amendment which eliminates the residual method of allocation for multiple-deliverable revenue arrangements and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The amendment also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor specific objective evidence (“VSOE”) if available; (2) third-party evidence (“TPE”) if VSOE is not available; and (3) estimated selling price if neither VSOE nor TPE is available. Additionally, the amendment expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements. This amendment is effective for us on August 1, 2010; however, we elected to early adopt as permitted by the amendment and will prospectively apply the provisions of the amendment to all revenue arrangements entered into or materially modified after July 31, 2009. The adoption of the amendment did not have a material impact on our financial position, results of operations, or cash flows. See Note 3 in the Notes to the unaudited Consolidated Financial Statements for further discussion.

In October 2009, the FASB issued an amendment to the accounting model for revenue arrangements that include both tangible products and software elements, such that tangible products containing both software and non-software components

 

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that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. This amendment is effective for us on August 1, 2010; however, we elected to early adopt as permitted by the amendment and will prospectively apply the provisions of the amendment to all revenue arrangements entered into or materially modified after July 31, 2009. The adoption of the amendment did not have a material impact on our financial position, results of operations, or cash flows.

Not yet effective

Special purpose entities

In June 2009, the FASB issued guidance that eliminates the concept of a qualified special-purpose entity and related guidance, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. We are currently evaluating the effect, if any, that the adoption of this guidance will have on our financial position, results of operations, and cash flows.

In June 2009, the FASB issued guidance that requires former qualified special-purpose entities to be evaluated for consolidation, changes the approach to determining a variable interest entity’s (“VIE”) primary beneficiary, and requires companies to more frequently reassess whether they must consolidate VIEs. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. We are currently evaluating the effect, if any, that the adoption of this guidance will have on our financial position, results of operations, and cash flows.

Critical accounting policies

The accompanying discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. Our most critical accounting policies have a significant impact on the preparation of these consolidated financial statements. These policies include estimates and significant judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. Except for the allocation of consideration in multiple element revenue arrangements (which is described in our Quarterly Report on Form 10-Q for the quarter ended October 31, 2009), we continue to have the same critical accounting policies as are described in Item 7, beginning on page 36, in our Annual Report on Form 10-K for fiscal year 2009 filed with the SEC on September 29, 2009. Those policies and the estimates involved in their application relate to revenue recognition; inventory reserves; share-based compensation; warranty reserves; purchase price allocation for business combinations; impairment of goodwill and indefinite lived intangible assets; income tax contingencies; and deferred tax valuation allowances. We continue to evaluate our estimates and judgments on an on-going basis. By their nature, these policies require management to make difficult and subjective judgments, often on matters that are inherently uncertain. Our estimates and judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

All dollar amounts in this Item 3 are in thousands.

We place our cash investments in high-credit-quality financial instruments and, by policy, limit the amount of credit exposure to any one financial institution. We face limited exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures can change over time as business practices evolve and could have a material adverse impact on our financial results. Our primary exposure is related to fluctuations between the U.S. dollar and local currencies for our subsidiaries in Canada and Europe.

Our cash and investments include cash equivalents, which we consider to be investments purchased with original maturities of three months or less. At January 31, 2010, we did not have any held-to-maturity marketable securities having maturities from the time of purchase in excess of three months, which would be stated at amortized cost, approximating fair value. Total interest income for the three and six months ended January 31, 2010 was $150 and $326, respectively. An interest rate change of 10% would not have a material impact on the fair value of our investment portfolio or on future earnings.

 

Item 4. Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2010. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the

 

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“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions to be made regarding required disclosure. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of January 31, 2010, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

There were no changes to our internal control over financial reporting during the quarter ended January 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for fiscal year 2009, which could materially affect our business, financial condition, and future operating results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for fiscal year 2009.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

The following table contains information about purchases by us of our equity securities during the three months ended January 31, 2010. All of the shares shown as purchased in the table below were surrendered by our employees in order to meet tax withholding obligations in connection with the vesting of restricted stock awards. These transactions were not part of a publicly announced program to repurchase shares of our common stock.

 

Period      

         Total Number         

of Shares

Purchased

     

     Average Price Paid     

per Share (1)

      Total Number of
Shares Purchased
as Part of Publicly
     Announced Plans or     
Programs
     

Maximum Number

(or Approximate

Dollar Value) of

Shares that May

Yet Be Purchased
     Under the Plans or     
Programs

    11/1/09-11/30/09

    1,238       $ 37.42       —         $ —    

    12/1/09-12/31/09

    707         37.59       —           —    

    1/1/10-1/31/10

    501         38.94       —           —    

    Total

    2,446       $ 37.78       —         $ —    

 

(1) For purposes of determining the number of shares to be surrendered, the price per share deemed to be paid was the closing price of our common stock on the NASDAQ Global Select Market on the vesting date.

 

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Item 6.    Exhibits

 

Exhibit    

Description

10.1   2009 Stock Incentive Plan (Incorporated by reference to the Current Report on Form 8-K filed by Analogic Corporation on February 3, 2010)
10.2   Form of Performance-Based Restricted Stock Unit Agreement for 2009 Stock Incentive Plan (Incorporated by reference to the Current Report on Form 8-K filed by Analogic Corporation on February 3, 2010)
10.3   Form of Time-Based Restricted Stock Unit Agreement for 2009 Stock Incentive Plan
10.4   Form of Nonstatutory Stock Option Agreement for 2009 Stock Incentive Plan
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended
32.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ANALOGIC CORPORATION
Date: March 11, 2010   /s/ James W. Green
   
  James W. Green
  President and
  Chief Executive Officer
  (Principal Executive Officer)
Date: March 11, 2010   /s/ Michael L. Levitz
   
  Michael L. Levitz
  Vice President,
  Chief Financial Officer and Treasurer
  (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit    

Description

10.1   2009 Stock Incentive Plan (Incorporated by reference to the Current Report on Form 8-K filed by Analogic Corporation on February 3, 2010)
10.2   Form of Performance-Based Restricted Stock Unit Agreement for 2009 Stock Incentive Plan (Incorporated by reference to the Current Report on Form 8-K filed by Analogic Corporation on February 3, 2010)
10.3   Form of Time-Based Restricted Stock Unit Agreement for 2009 Stock Incentive Plan
10.4   Form of Nonstatutory Stock Option Agreement for 2009 Stock Incentive Plan
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended
32.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended

 

34

Exhibit 10.3

ANALOGIC CORPORATION

Restricted Stock Unit Agreement (Time-based Vesting)

2009 Stock Incentive Plan

This Restricted Stock Unit Agreement is made as of the Agreement Date between Analogic Corporation (the “ Company ”), a Massachusetts corporation, and the Participant.

 

I. Agreement Date

 

Date:

    

 

II. Participant Information

 

Participant:

    

Participant Address:

    

 

III. Grant Information

 

Grant Date:

    

Number:

  

_____ restricted stock units

IV. Vesting Table

 

Vesting Date

  

Percentage of RSUs that Vests

   
      
   
      
   
      
   
      
   
      

This Agreement includes this cover page and the following Exhibit, which is expressly incorporated by reference in its entirety herein:

Exhibit A – General Terms and Conditions

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Agreement Date.

 

ANALOGIC CORPORATION     PARTICIPANT
           

Name:

Title:

    Name:

 

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ANALOGIC CORPORATION

Restricted Stock Unit Agreement (Time-based Vesting)

Exhibit A – General Terms and Conditions

For valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows:

1. Grant of RSUs . In consideration of services rendered to the Company by the Participant, the Company has granted to the Participant, subject to the terms and conditions set forth in this Agreement and in the Company’s 2009 Stock Incentive Plan (the “ Plan ”), an award of time-based Restricted Stock Units (the “ RSUs ”), representing the number of RSUs set forth on the cover page of this Agreement. The RSUs entitle the Participant to receive, upon and subject to the vesting of the RSUs (as described in Section 2 below), one share of common stock, $.05 par value per share, of the Company (the “ Common Stock ”) for each RSU that vests. The shares of Common Stock that are issuable upon vesting of the RSUs are referred to in this Agreement as the “ Shares ”.

2. Vesting of RSUs and Issuance of Shares .

(a) General . Subject to the other provisions of this Section 2, the RSUs shall vest in accordance with the vesting table set forth on the cover page of this Agreement (the “ Vesting Table ”). Any fractional RSU resulting from the application of the percentages in the Vesting Table shall be rounded to the nearest whole number of RSUs. Subject to Section 4, as soon as administratively practicable after each vesting date shown in the Vesting Table (the “ Vesting Dates ”), the Company will issue to the Participant, in certificated or uncertificated form, such number of Shares as is equal to the number of RSUs that vested on such Vesting Date. In no event shall the Shares be issued to the Participant later than the later of (i) 2  1 / 2 months after the end of the Company’s tax year in which the Vesting Date occurs and (ii) 2  1 / 2 months after the end of the Participant’s tax year in which the Vesting Date occurs.

(b) Employment Termination .

(1) If the Participant ceases to be employed by the Company as a result of (i) a termination by the Company without Cause (as defined below), (ii) death, (iii) Disability (as defined below), or Retirement (as defined below), then the Additional Pro Rata RSUs (as defined below) shall vest as of such employment termination. The “Additional Pro Rata RSUs” shall mean (i) the number of RSUs that would have vested on the next Vesting Date multiplied by (ii) a fraction, the numerator of which is the number of full months elapsed since the most recent Vesting Date (or the Grant Date, if termination occurs prior to the first Vesting Date) and the denominator of which is the number of months between the most recent Vesting Date and the next Vesting Date. Any unvested RSUs (after giving effect to the vesting of the Additional Pro Rata RSUs) shall be automatically forfeited as of such employment termination. For purposes of this Agreement, employment with the Company shall include employment with a parent or subsidiary of the Company, or any successor to the Company.

(2) If the Participant ceases to be employed by the Company as a result of the termination of his or her employment by the Company for Cause or as a result of his

 

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or her voluntary resignation (other than in the case of Retirement), all unvested RSUs shall be automatically forfeited as of such employment termination.

(c) Change in Control Event . All RSUs shall become fully vested effective immediately prior to a Change in Control Event (as defined in the Plan).

(d) Definitions.

(1) For purposes of this Agreement, “ Cause ” shall mean any intentional dishonest, illegal, or insubordinate conduct which is materially injurious to the Company or a subsidiary, or a breach of any provision of any employment, nondisclosure, non-competition or similar agreement between the Participant and the Company.

(2) For purposes of this Agreement, “ Disability ” shall mean a disability that entitles the Participant to receive benefits under a Company-sponsored disability program. If no program is in effect for the Participant, Disability will apply if the Participant has become totally and permanently disabled within the meaning of Section 22(e)(3) of the Code.

(3) For purposes of this Agreement, “ Retirement ” shall mean the Participant voluntarily leaving the employment of the Company with a combination of years of age and years of service of at least 75 and at least 10 years of service; provided that a Participant will not be deemed to have retired in any situation involving a termination for Cause, as determined by the Company.

3. Dividends . At the time of the issuance of Shares to the Participant pursuant to Section 2, the Company shall also pay to the Participant an amount of cash equal to the aggregate amount of all dividends paid by the Company, between the Grant Date and the issuance of such Shares, with respect to the number of Shares so issued to the Participant.

4. Withholding Taxes . The Company shall deduct and hold back from the number of Shares issuable to the Participant as a result of the vesting of any RSUs pursuant to Section 2, such number of Shares as have a Fair Market Value (as defined in the Plan) equal to the Company’s federal, state, and local or other income and employment tax withholding obligations with respect to the income recognized by the Participant as a result of such vesting (based on minimum statutory withholding rates for all tax purposes, including payroll and social security taxes, that are applicable to such income).

5. Restrictions on Transfer . The RSUs, and any interest therein (including the right to receive dividend payments in accordance with Section 3), are subject to the restrictions on transfer set forth in Section 11(a) of the Plan.

6. Non-Competition Covenant . The Participant’s execution and delivery of this Agreement shall constitute an agreement between the Participant and the Company that, during the one-year period following the termination of the Participant’s employment with the Company, whether voluntarily or involuntarily, the Participant may not accept an identical or substantially similar position to that held by the Participant at the Company immediately prior to termination with any business that is directly competitive with the business of the Company, or otherwise has any material investment or interest in any such a competitive business.

 

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7. Provisions of the Plan . This Agreement is subject to the provisions of the Plan. The Participant acknowledges receipt of the Plan, along with the Prospectus relating to the Plan.

8. Miscellaneous .

(a) No Rights to Employment . The Participant acknowledges and agrees that the grant of the RSUs and their vesting pursuant to Section 2 do not constitute an express or implied promise of continued employment for the vesting period, or for any period.

(b) Entire Agreement . This Agreement and the Plan constitute the entire agreement between the parties, and supersede all prior agreements and understandings, relating to the subject matter of this Agreement; provided that any separate employment or severance agreement between the Company and the Participant that includes terms relating to the acceleration of vesting of equity awards shall not be superseded by this Agreement.

(c) Governing Law . This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the Commonwealth of Massachusetts, without regard to any applicable conflict of law principles.

(d) Interpretation . The interpretation and construction of any terms or conditions of the Plan or this Agreement by the Compensation Committee shall be final and conclusive.

 

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Exhibit 10.4

ANALOGIC CORPORATION

Nonstatutory Stock Option Agreement

2009 Stock Incentive Plan

This Nonstatutory Stock Option Agreement is made as of the Agreement Date between Analogic Corporation (the “ Company ”), a Massachusetts corporation, and the Participant.

 

I. Agreement Date

 

Date:

   

 

II. Participant Information

 

Participant:

    

Participant Address:

    

 

III. Option Information

 

Grant Date:

    

Number of Shares:

    

Exercise Price 1 :

    

IV. Vesting Table

 

Vesting Date

  

Percentage of Option Shares that Vests

   
      
   
      
   
      
   
      

This Agreement includes this cover page and the following Exhibit, which is expressly incorporated by reference in its entirety herein:

Exhibit A – General Terms and Conditions

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Agreement Date.

 

ANALOGIC CORPORATION     PARTICIPANT
           

Name:

Title:

    Name:

 

1

Closing price of the common stock on the Grant Date should generally be used.

 

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ANALOGIC CORPORATION

Nonstatutory Stock Option Agreement

Exhibit A – General Terms and Conditions

For valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows:

1. Grant of Option .

(a) In consideration of services rendered to the Company by the Participant, the Company has granted to the Participant as of the Grant Date set forth on the cover page of this Agreement, subject to the terms and conditions set forth in this Agreement and in the Company’s 2009 Stock Incentive Plan (the “ Plan ”), an option to purchase up to the number of shares set forth on the cover page of this Agreement (the “ Shares ”) of common stock, $.05 par value per share, of the Company (the “ Common Stock ”), at the exercise price per Share set forth on the cover page of this Agreement. Unless earlier terminated, this option shall expire at 5:00 p.m., Eastern time, on the seventh anniversary of the Grant Date (the “ Final Exercise Date ”).

(b) It is intended that the option evidenced by this agreement shall not be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “ Code ”). Except as otherwise indicated by the context, the term “ Participant ”, as used in this Agreement, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

2. Vesting Schedule .

(a) This option will become exercisable (“ vest ”) in accordance with the Vesting Table set forth on the cover page of this Agreement, except to the extent provided otherwise in Section 3.

(b) The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 or under the Plan.

3. Exercise, Acceleration and Termination of Option .

(a) Form of Exercise . To exercise this option, the Participant shall deliver to the Company a notice of exercise in a form (which may be in electronic form) approved by the Company, along with payment in full of the exercise price in the manner provided in the Plan, including without limitation “net exercise” as provided in Section 5(g)(4) of the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

(b) Continuous Relationship with the Company Required . Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at

 

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the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee of the Company. For purposes of this Agreement, employment with the Company shall include employment with a parent or subsidiary of the Company, or any successor to the Company.

(c) Effect of Termination of Employment with the Company .

(1) If the Participant ceases to be employed by the Company for any reason other than death, Disability (as defined below), termination for Cause (as defined below), Retirement (as defined below) or voluntary resignation, then the portion of this option that is vested as of the date of such termination of employment, plus a portion covering the Additional Pro Rata Shares (as defined below), shall be exercisable by the Participant until the end of the 90-day period following the date of such termination of employment (or, if earlier, until the Final Exercise Date) and shall terminate at the end of such period. The “Additional Pro Rata Shares” shall mean (i) the number of Shares that would have vested on the next vesting date (as set forth on the cover page of this Agreement) multiplied by (ii) a fraction, the numerator of which is the number of full months elapsed since the most recent Vesting Date (or the Grant Date, if termination occurs prior to the first Vesting Date) and the denominator of which is the number of months between the most recent Vesting Date and the next Vesting Date. Any unvested portion of this option (after giving effect to the vesting of the Additional Pro Rata Shares) shall terminate as of the date of such termination of employment.

(2) If the Participant ceases to be employed by the Company as a result of his or her death, then the portion of this option that is vested as of the date of such termination of employment, plus a portion covering the Additional Pro Rata Shares, shall be exercisable by the Designated Beneficiary (as defined in the Plan) of the Participant until the end of the one-year period following the date of death (or, if earlier, until the Final Exercise Date) and shall terminate at the end of such period. Any unvested portion of this option (after giving effect to the vesting of the Additional Pro Rata Shares) shall terminate as of his or her death.

(3) If the Participant ceases to be employed by the Company as a result of his or her Disability, then the portion of this option that is vested as of the date of such termination of employment, plus a portion covering the Additional Pro Rata Shares, shall be exercisable by the Participant (or his or her legal representatives) until the end of the one-year period following the date of such employment termination (or, if earlier, until the Final Exercise Date) and shall terminate at the end of such period. Any unvested portion of this option (after giving effect to the vesting of the Additional Pro Rata Shares) shall terminate as of such employment termination.

(4) If the Participant ceases to be employed by the Company as a result of the termination of his or her employment by the Company for Cause, this option shall terminate upon the effective date of such termination of employment. If the Participant is given notice by the Company of the termination of his or her employment by the Company for Cause, and the effective date of such employment termination is subsequent to the date of the delivery of such notice, the right to exercise this option shall be suspended from the time of the delivery of such notice until the earlier of (i) such time as it is determined or otherwise agreed that the Participant’s employment shall not be terminated for Cause as provided in such notice or (ii) the

 

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effective date of such termination of employment (in which case this option shall, pursuant to the preceding sentence, terminate immediately upon the effective date of such termination of employment).

(5) If the Participant ceases to be employed by the Company as a result of his or her Retirement, then the portion of this option that is vested as of the date of such termination of employment, plus a portion covering the Additional Pro Rata Shares, shall be exercisable by the Participant until the end of the one-year period following the date of such Retirement (or, if earlier, until the Final Exercise Date) and shall terminate at the end of such period. Any unvested portion of this option (after giving effect to the vesting of the Additional Pro Rata Shares) shall terminate as of such Retirement.

(6) If the Participant ceases to be employed by the Company as a result of his or her voluntary resignation (other than in the case of Retirement), this option shall terminate upon the effective date of such termination of employment.

(d) Change in Control Event . This option shall become fully vested effective immediately prior to a Change in Control Event (as defined in the Plan).

(e) Definitions .

(1) For purposes of this Agreement, “ Cause ” shall mean any intentional dishonest, illegal, or insubordinate conduct which is materially injurious to the Company or a subsidiary, or a breach of any provision of any employment, nondisclosure, non-competition or similar agreement between the Participant and the Company.

(2) For purposes of this Agreement, “ Disability ” shall mean a disability that entitles the Participant to receive benefits under a Company-sponsored disability program. If no program is in effect for the Participant, Disability will apply if the Participant has become totally and permanently disabled within the meaning of Section 22(e)(3) of the Code.

(3) For purposes of this Agreement, “ Retirement ” shall mean the Participant voluntarily leaving the employment of the Company with a combination of years of age and years of service of at least 75 and at least 10 years of service; provided that a Participant will not be deemed to have retired in any situation involving a termination for Cause, as determined by the Company.

4. Withholding Taxes . No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company, in the manner permitted in the Plan, for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

5. Restrictions on Transfer . This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution.

6. Provisions of the Plan . This Agreement is subject to the provisions of the Plan. The Participant acknowledges receipt of the Plan, along with the Prospectus relating to the Plan.

 

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7. Miscellaneous .

(a) No Rights to Employment . The Participant acknowledges and agrees that the grant of this option and its vesting pursuant to Section 2 do not constitute an express or implied promise of continued employment for the vesting period, or for any period.

(b) Entire Agreement . This Agreement and the Plan constitute the entire agreement between the parties, and supersede all prior agreements and understandings, relating to the subject matter of this Agreement; provided that any separate employment or severance agreement between the Company and the Participant that includes terms relating to the acceleration of vesting of equity awards shall not be superseded by this Agreement.

(c) Governing Law . This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the Commonwealth of Massachusetts, without regard to any applicable conflict of law principles.

(d) Interpretation . The interpretation and construction of any terms or conditions of the Plan or this Agreement by the Compensation Committee shall be final and conclusive.

 

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Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, James W. Green, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of Analogic Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

    /s/ James W. Green
     
Date: March 11, 2010     James W. Green
   

President and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Michael L. Levitz, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of Analogic Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

    /s/ Michael L. Levitz
     
Date: March 11, 2010     Michael L. Levitz
   

Vice President, Chief Financial Officer, and Treasurer

(Principal Financial Officer)

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(b)/RULE 15d-14(b)

OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

In connection with the Quarterly Report on Form 10-Q of Analogic Corporation (the “Company”) for the quarter ended January 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, James W. Green, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that, to the best of his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 11, 2010

 

    /s/ James W. Green
     
    James W. Green
    President and Chief Executive Officer
    (Principal Executive Officer)

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(b)/RULE 15d-14(b)

OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

In connection with the Quarterly Report on Form 10-Q of Analogic Corporation (the “Company”) for the quarter ended January 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Michael L. Levitz, Vice President, Chief Financial Officer, and Treasurer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that, to the best of his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 11, 2010

 

    /s/ Michael L. Levitz
     
    Michael L. Levitz
    Vice President, Chief Financial Officer, and Treasurer
    (Principal Financial Officer)