Analogic Corporation
ANALOGIC CORP (Form: 10-K, Received: 09/26/2017 14:18:24)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

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

For the fiscal year ended July 31, 2017

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

(I.R.S. Employer

incorporation or organization)

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)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $0.05 par value

NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

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

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant at January 31, 2017 was approximately $945,346,000. As of September 19, 2017, there were 12,455,756 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2017 Annual Meeting of Stockholders, are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page No.

PART I

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

2

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

13

 

 

 

 

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

22

 

 

 

 

 

 

 

 

 

Item 2.

 

Properties

 

23

 

 

 

 

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

23

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

23

 

 

 

 

 

 

 

 

 

 

 

Executive Officers of the Registrant

 

24

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

26

 

 

 

 

 

 

 

 

 

Item 6.

 

Selected Consolidated Financial Data

 

28

 

 

 

 

 

 

 

 

 

Item 7.

 

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

 

29

 

 

 

 

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

50

 

 

 

 

 

 

 

 

 

Item 8.

 

Consolidated Financial Statements and Supplementary Data

 

51

 

 

 

 

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

51

 

 

 

 

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

51

 

 

 

 

 

 

 

 

 

Item 9B.

 

Other Information

 

52

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

53

 

 

 

 

 

 

 

 

 

Item 11.

 

Executive Compensation

 

53

 

 

 

 

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

53

 

 

 

 

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

53

 

 

 

 

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

53

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

54

 

 

 

 

 

 

 

SIGNATURES

 

55

 

 

 

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

58

 

 

 

INDEX TO EXHIBITS

 

103

 

1


 

PART I  

Item 1.

Business

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

Description of Business

Analogic Corporation (NASDAQ:ALOG) designs, manufactures, and commercializes innovative real-time guidance, diagnostic imaging and threat detection technologies to advance the practice of medicine and save lives. We operate and report along three business segments:  Medical Imaging, Ultrasound and Security and Detection. Our Medical Imaging segment provides critical enabling medical imaging systems and subsystems for computed tomography, or CT, magnetic resonance imaging, or MRI and high-resolution digital mammography. We sell our Medical Imaging products primarily through longstanding relationships with well-known multinational medical original equipment manufacturers, or OEMs, and new entrants in emerging markets. Our Ultrasound business provides real-time ultrasound procedure guidance systems for the urology, surgery and point of care markets.  We sell our ultrasound products, under the BK Ultrasound brand, through our direct sales force in North America and Europe, as well as through a network of distributors to clinical practitioners throughout the world. Our Security and Detection segment designs and manufactures automated threat detection systems for aviation baggage inspection applications utilizing advanced medical CT technology and systems used for rapid DNA analysis for law enforcement and government agencies. We sell our aviation threat detection and rapid DNA systems through multinational partners. We were incorporated in the Commonwealth of Massachusetts in November 1967 and are headquartered in Peabody, Massachusetts.

Refer to Note 16 to the notes to Consolidated Financial Statements included in this Annual Report on Form 10-K as well as Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations for financial information regarding our segments. The following chart shows net revenue by segment in millions for fiscal years 2017, 2016 and 2015, respectively:

 

 

Medical Imaging

Our Medical Imaging segment, which accounted for approximately 57% of our net revenue in fiscal year 2017, consists primarily of systems and sub-systems for medical imaging that are sold globally to OEM producers of

2


 

CT, MRI, and digital mammography systems. Our products are designed and manufactured to achieve high reliability resulting in the lowest overall cost of ownership for our customers.

Computed Tomography

Analogic has been at the forefront of developments in computed tomography equipment technology from the introduction of the first single slice CT systems in the early 1970s to today’s multi-slice volumetric scanners. We are an industry leader in the development and sale of CT detector systems, data acquisition systems, or DAS, data management systems, or DMS, and fully integrated CT systems that drive the image processing in OEM CT imaging scanners sold around the world.

Our CT product portfolio consists primarily of the following:

 

1)

Detector Subsystems – These subsystems convert the x-ray energy in a CT machine to analog signals for further processing in the DAS. The detectors use state-of-the-art scintillator materials and photodiodes coupled with advanced semiconductor technology to process these highly precise signals. These signals are then fed to a computer through a DAS for image reconstruction.

 

2)

DAS – These subsystems are used to process the signals created by the detectors and feed them as a digital stream to a reconstruction computer to create high resolution images. The DAS is designed with many multi-channel circuit boards that process the analog signals from the detectors and convert them into digital signals through an array of analog to digital, or A/D converters.

 

3)

DMS – This is the most critical sub-system of the CT system and consists of both the detector array and the DAS in one package. This system provides our OEM customers a higher level of integration that allows for lower cost and faster time to market.

 

4)

Full Integrated CT Systems – The components of the CT system (detectors, DAS, x-ray tube and power supplies) are mounted on a rotating ring assembly called a gantry. The ring enables the components of the CT systems to rotate around the patient at speeds up to 300 revolutions per minute for high resolution imaging. We provide full integrated gantries with image and iterative reconstruction algorithms to our OEM customers as another level of integration to facilitate a smoother and faster time to market and improve manufacturing efficiency. Our Low Dose Imaging Software, or LISA, is available in our integrated CT systems to provide high quality imaging capability at up to 40% lower x-ray dose as compared with conventional image reconstruction. Low dose imaging in medical diagnostics is used to prevent damage to healthy tissue. Our designs also include non-contact power, data transfer and other innovative capabilities that provide high reliability, lower total cost of ownership and dose reduction/modulation.

 

Full Integrated CT Gantry

3


 

The detector, DAS and DMS products we sell are used in a wide range of CT systems, from dual slice count to the most advanced multi-slice (at least 256 slices) systems, enabling advanced diagnostics such as cardiac imaging. Our CT products are designed to allow our customers to remain at the forefront of this rapidly advancing field. By leveraging our experience in integrating CT components and technology, we have also developed higher-level integrated systems for the radiotherapy m arket primarily used for image guided radiation treatment of cancerous tumors.

Magnetic Resonance Imaging

For OEM producers of MRI equipment, we supply two key enabling sub-systems: gradient amplifiers and radio frequency, or RF amplifiers. We have developed a wide range of amplifier solutions for our customers ranging from low-magnetic-field systems (under 0.3 Tesla) to ultra-high-magnetic-field systems (> 7.0 Tesla). Our ability to provide very high power levels with fast response, low noise and industry-leading reliability enables our OEM customers to deliver innovative technologies such as new, wide-bore (i.e. larger opening) MRI scanners addressing growing requirements related to obesity and patient comfort.

Our MRI product portfolio consists primarily of the following:

 

1)

Gradient Amplifiers – These high power systems are used to drive a set of coils located inside the MRI system and around the patient. The coils energize the atomic structure of a patients’ anatomy in order to create tissue and structure images. Gradient amplifiers must be designed at specific power levels for different MRI field strengths ranging from under 0.3 Tesla to 7.0 Tesla and higher.

 

2)

RF Amplifiers – These power systems are used to control another set of the coils within the MRI system that are used to read-back the signals from the anatomy generated by the gradient coils. These signals are then processed in a reconstruction computer to create images. The RF amplifiers must have a very high signal-to-noise ratio to produce the cleanest images.

 

RF Amplifier

Digital Mammography

Our digital mammography products consist primarily of digital mammography selenium based detector plates, sold directly to OEM customers for breast cancer screening and diagnostic applications in mammography. These detector plates are used by OEMs in mammography systems to convert x-ray signals into high resolution 2-D and 3-D images of breast tissue to aid in the detection of breast cancer. Our detector plates for mammography applications are sold to medical OEMs for use in products worldwide. Our digital mammography product portfolio consists of the following:

 

1)

Large field of view (FOV) detector (AXS-2430 and AXS-ScreenPlus) – Our large field of view detector plate, based on selenium technology, is used primarily for European and U.S. markets. The plate and power supply is designed to be easily adapted to many types of mammography systems. This detector plate is also compatible with systems that can perform tomosynthesis, which creates 3-D images through a series of exposures to more accurately detect lesions in the breast.

4


 

 

2)

Small field of view (FOV) detector (AXS-1824) – Our small field of view detector plate uses the same selenium-based technology as the AXS-2430 detector and is manufactured primarily for the Asian markets.

 

 

Other Products

Within our Medical Imaging segment, we also design and manufacture motion control devices such as servo and stepper controllers, which we supply to OEM customers for use in computer-controlled automation systems primarily for the semiconductor, food and beverage and laboratory automation markets.

Competition

We are subject to competition based upon product design, performance, pricing, quality and service. We believe that our innovative engineering and product reliability have been important factors in our historical growth.

In our Medical Imaging segment, systems and subsystems are customized for the needs of our customers. In many cases, due to the limited number of companies with technology comparable to ours, we consider selection by our OEM customers for the design and manufacture of these products and our other medical products to be due more to the “make-or-buy” decision of the individual OEM customers than a function of other competitors in the field.

Marketing and Distribution

Our Medical Imaging segment directly sells to OEM customers, both domestically and abroad, primarily through our headquarters in the U.S. We also sell products through our subsidiaries in Canada, China, and the U.S.

Seasonal Aspect of Business

There are no material seasonal elements to our Medical Imaging segment, although holidays and plant closings in the summer, particularly in Europe, tend to decrease the procurement activities of certain customers during the first quarter of our fiscal year.  

Ultrasound

Our Ultrasound segment designs and manufactures medical ultrasound systems and transducers, principally for applications in urological and surgical procedure guidance.

Our BK Ultrasound brand products are sold to clinical end-users in urology, surgery, point-of-care and general imaging applications and accounted for approximately 30% of our net revenue in fiscal year 2017. Our ultrasound systems use acoustic waves to generate real-time images of the body’s internal anatomy that are used for interventional and medical diagnostic procedures, including guiding surgical procedures and guiding prostate cancer treatment employing procedures such as brachytherapy.

5


 

Our product portfolio under the BK Ultrasound bra nd name consists primarily of two main product families: BK and FlexFocus systems used primarily for guiding procedures in urology, surgery and regional anesthesia.

In 2017 we underwent a product portfolio optimization process to refocus our ultrasound products primarily in the urology, surgery and anesthesia markets. As a result of this process we decided to forgo further investment in the handheld Sonic Window product for the dialysis market, discountinue the sale of new ultrasound systems in the Oncura veterinary space transitioning to service only and end of life certain legacy Sonix products for the point of care market.  As a result the product portfolio optimization process, we will focus mainly on the bk3000 for urology, bk5000 for surgery and the bk3500 for anesthesia applications.  We also provide a general imaging ultrasound product through an agreement that we signed in mid-2014 with a technology partner for general radiology and OB/GYN applications.

 

 

The premium bk3000 and the bk5000, introduced in 2015, are based on our innovative TriCore technology that expands the portfolio of existing Flexfocus systems with high-end entries. The TriCore technology allows for high definition imaging by processing three times more information compared with traditional systems.  The bk3000 is primarily used for high-end urology and general imaging applications while the bk5000 is a premium system used for guiding surgical procedures.

The bk3500 is an advanced ultrasound solution for point of care (POC) applications such as for anesthesiology. The bk3500 combines high resolution imaging from our bk3000 and bk5000 products with unique workflow technology using a streamlined touchscreen interface. The system has four probe connectors, an integrated bar code reader and a streamlined touchscreen that guides the user through the procedure.

We also design and manufacture advanced ultrasound probes and transducers sold to OEM customers within our Ultrasound segment. Using our advanced acoustic design and manufacturing capability, we provide a variety of transducers to OEMs for both diagnostic and procedure driven applications such as cardiology, radiology, OB/GYN, surgery and interventional radiology.

Competition

We are subject to competition based upon product design, performance, pricing, quality and service. We believe that our innovative engineering and product reliability have been important factors in our historical growth. While we try to maintain competitive pricing on those products that are directly comparable to products

6


 

manufactured by others, in many instances, our products conform to more precise specifications and carry a higher price than similar products manufactured by others.

The Ultrasound segment participates in markets primarily focused in urology, surgery, anesthesia and other point-of-care markets. We compete in these markets based on image quality, ease of use, mobility, reliability and flexibility with a robust portfolio of specialized ultrasound transducers. Our competitors are companies and business units of large medical device companies, such as General Electric Corporation, or GE and Koninklijke Philips Electronics N.V., or Philips, that primarily focus on the conventional ultrasound markets, as well as smaller business units of large multi-national companies, such as Hitachi Medical Corporation and Fujifilm that sell under brands such as Aloka and SonoSite in our target markets. We also compete against newer global market entrants such as Mindray Medical International Limited, or Mindray.

Marketing and Distribution

Our Ultrasound segment globally distributes its products to end users both through a direct sales force and through a network of independent sales representatives and distributors located around the world. Our direct sales force, located in the U.S., Canada, Germany, Belgium, United Kingdom, Italy, and Scandinavia, accounted for approximately 64% of our Ultrasound revenue in fiscal year 2017, generated from product sales, service and application support. Our remaining Ultrasound revenue was generated through a network of generally non-exclusive, independent distributors in more than 60 other countries and sales of transducers to OEM customers both domestically and abroad.

Our global marketing department is responsible for defining future products, uncovering unmet needs and validating value propositions based on customer insights. Management of key opinion leaders and global reference sites is supervised by a team of clinical scientists and product applications specialists.  

Seasonal Aspect of Business

Customer purchases in our Ultrasound segment have historically been higher in the second and fourth quarters of our fiscal year due in part to the timing of customer budgeting cycles.

Security and Detection

Utilizing our advanced medical CT technology, the Security and Detection segment, which accounted for approximately 13% of our net revenue in fiscal year 2017, designs and manufactures airport baggage screening systems and subsystems. The airport screening systems generate 3-D images of objects contained within baggage and utilize highly sophisticated algorithms to provide threat analysis of materials contained within the bags. We also design and manufacture Rapid DNA analysis systems.

Our certified checked baggage screening systems and subsystems are sold through our OEM customers L-3 Communications Security and Detection Systems, or L-3 and Smiths Detection, or Smiths, to the Transportation Security Agency for U.S. airports and to international airport authorities and foreign governments for installation at airports around the world.

7


 

We sell the following checked baggage systems through L-3.

 

1)

eXaminer ® XLB (High Speed) – The XLB was the first certified explosives detection system, or EDS specifically optimized for high speed screening of checked baggage. Capable of scanning up to 1,200 bags per hour, the XLB keeps bags continuously moving through a meter-wide tunnel. Combining high-resolution helical CT with dual-energy imaging, the XLB offers superior detection capabilities and advanced 3-D imaging.

 

 

 

2)

eXaminer 3DX (Medium Speed) – Our CT technology is utilized in the 3DX, a medium speed EDS that scans up to 550 bags per hour in-line and up to 330 bags in standalone configuration. The enhanced speed 3DX-ES scans up to 750 bags per hour in the in-line configuration. Both systems are designed to provide high levels of reliability and low false-alarm rates. With over 1,200 systems installed since 2003, the 3DX is one of most widely used checked baggage systems in the U.S.

 

 

 

3)

eXaminer SX (Reduced Size) – The SX is a lower-cost, reduced size EDS designed for small and medium-sized airports. Able to scan up to 360 bags per hour in-line and up to 300 bags per hour in standalone configuration, the SX offers customers a reduced footprint system with high resolution 3-D imaging and low false-alarm rates.

eXaminer ® is a registered trademark of L-3.

The Smiths Detection HI-SCAN 10080 XCT, which incorporates Analogic CT technology, is capable of screening up to 1,800 bags per hour in its approved configuration with a belt speed of 0.5 meters per second. The system offers a large one meter wide tunnel that meets the requirements of high speed in-line baggage handling systems and allows rapid, efficient scanning of larger items. The system is well positioned for international sales as the market converts to CT level detection for checked baggage.

 

Smiths Detection HI-SCAN 10080 XCT

Our next generation ConneCT checkpoint CT system was launched in 2017 and has received European Civil Aviation Conference Standard-2 certification  and U.S. TSA certification for use in the U.S. The system uses medical CT technology to scan carry-on bags for explosives and weapons while allowing passengers to keep their electronics and liquids in their bags.  In June 2017, American Airlines announced a partnership with Analogic and

8


 

purchased multiple units of the ConneCT sys tem for enhanced aviation security after evaluating competitive systems.  

 

 

ConneCT Checkpoint CT System

 

Other Products

Within our Security and Detection segment, we also design and manufacture rapid DNA Analysis systems. These systems, which we supply to our OEM customer, are designed to rapidly analyze multiple human DNA samples to provide “DNA fingerprints”. The analysis process yields results in less than ninety minutes, a significant improvement over conventional laboratory technologies. Unlike conventional techniques, which require highly trained personnel working in a laboratory setting, our systems are designed for non-technical users with minimal training in a variety of environments. These systems have potential application in fields that benefit from the rapid identification of individuals, including law enforcement, defense, and immigration. In August 2017the rapid DNA ACT of 2017 was signed into law which allows the use of rapid DNA systems at law enforcement offices with the ability to query the FBI CODIS (Combined DNA Index System) database to identify criminals.

 

Rapid DNA Analysis System

Competition

We are subject to competition based upon product design, performance, pricing, quality and service. We believe that our innovative engineering and product reliability have been important factors in our historical growth.

In our Security and Detection segment, competition in baggage scanning is limited due to the high barriers of entry resulting from the cost of developing the capability to design and manufacture CT technology. Due to the degree of customization required and the limited number of companies with technology comparable to ours, we consider selection by our OEM customers to be due more to the “make-or-buy” decision of our customers than a function of other competitors in the field.

Principal entrants in the aviation baggage scanning market include L-3, Smiths Detection, Morpho Detection (acquired by Smiths Detection) and Rapiscan (a division of OSI systems).

9


 

Marketing and Distribution

Our Security and Detection segment sells its checked baggage systems and subsystems and its DNA analysis system to our OEM customers. We offer our checkpoint solutions directly to customers in the U.S. and internationally. Our Security and Detection segment conducts its sales and marketing activities primarily through our headquarters in the U.S.

Seasonal Aspect of Business

There are no material seasonal elements to our Security and Detection segment, although plant closings in the summer, particularly in Europe, tend to decrease the procurement activities of certain customers during the first quarter of our fiscal year.

Material Customers

We had two customers during fiscal year 2017, three customers during fiscal year 2016 and four customers during fiscal year 2015, as set forth in the table below, which accounted for 10% or more of our net revenue.

 

 

 

For the Year ended

 

 

 

July 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Koninklijke Philips Electronics N.V., or Philips

 

 

14

%

 

 

13

%

 

 

14

%

Siemens AG

 

 

12

%

 

 

12

%

 

 

11

%

Toshiba Corporation, or Toshiba

 

*

 

 

 

11

%

 

 

11

%

L-3 Communications Corporation, or L-3

 

*

 

 

*

 

 

 

13

%

 

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

Philips’, Siemens’ and Toshiba’s revenues were primarily in the Medical Imaging segment and L-3’s revenue was in the Security and Detection segment.

Our ten largest customers as a group accounted for 61%, 61% and 64% of our net revenue for fiscal years 2017, 2016 and 2015, respectively.

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

 

 

 

As of

 

 

As of

 

 

 

July 31,

 

 

July 31,

 

 

 

2017

 

 

2016

 

Philips

 

 

14

%

 

 

15

%

GE

 

 

11

%

 

*

 

L-3

 

*

 

 

 

17

%

 

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

Our OEM business involves large customers whose placement of large orders can vary based on timing. Our backlog, which consists of cancellable and non-cancellable orders primarily shippable within twelve months, was $108.4 million and $148.7 million as of July 31, 2017 and 2016, respectively. The decrease in backlog was primarily due to timing of customer orders in our Security and Detection segment and our Medical Imaging segment, and decreased orders in legacy OEM probes within our Ultrasound segment.

10


 

Go vernment Contracts

We do a significant amount of business with agencies of the U.S. Federal Government and in particular the Transportation Security Agency (TSA) through our Security and Detection segment, either directly or as a subcontractor. Our contracts with government agencies, and the government contracts of other parties under which we serve as a subcontractor, are subject to termination at the election of the government agency. While none of our government contracts or subcontracts provide for renegotiation of profits at the election of the government, it is possible that the government agency could request, and that we could under certain circumstances agree to, the renegotiation of the payments provided for under such contracts. However, we have not in the past renegotiated significant payment terms under our government contracts or subcontracts.

Sources of Raw Materials and Components

In general, our products are composed of internally-designed electronic and mechanical elements, including proprietary integrated circuits, printed circuit boards, detectors, power supplies, and displays manufactured by us and others in accordance with our specifications. We order raw materials and components to complete our customers’ orders, and some of these raw materials and components are ordered from sole-source suppliers. We believe that most items procured from third-party suppliers are available from more than one source. However, if a given component ceases to be available, it might become necessary for us to modify a product design to adapt to a substitute component, or to purchase new tooling to enable a new supplier to manufacture the component, either of which could result in additional expense and/or delay in product sales. Also, from time to time the availability of certain electronic components has been disrupted. Accordingly, we carry a safety stock of raw materials and components in an effort to ensure our ability to make timely delivery to our customers.

Intellectual Property

We rely on a combination of patent, trade secret, copyright and trademark laws, as well as contractual agreements, to safeguard our products, technologies, and processes. We hold patents of varying duration in the U.S. and in various foreign jurisdictions, which cover technologies that we have developed. We regularly file U.S. patent applications and, where appropriate, foreign patent applications. As of July 31, 2017, we hold approximately 370 patent families, including pending and issued patents, in various jurisdictions. In seeking to limit access to sensitive information, we routinely enter into confidentiality and assignment of invention agreements with each of our employees, and confidentiality agreements with our key customers and vendors.

We believe that,  the legal protections afforded by the intellectual property laws are an important factor in our ability to compete. Our future prospects also depend on the continuing level of excellence and creativity of our engineers in developing products that satisfy customer needs, and the marketing skills and managerial competence of our personnel in selling those products. Moreover, we believe that market positioning and rapid market entry are important to the success of our products. Our management believes that the loss of any individual patent would not have a material effect on our competitive position.

Research and Development

Research and development, or R&D is a significant element of our business. We maintain a constant and comprehensive R&D program directed toward the creation of new products, the improvement and refinement of our present products, and the expansion of their applications. Certain R&D projects are funded by our customers, typically OEM customers, and such funding is generally treated as engineering revenue, with the associated costs classified as engineering cost of sales. The costs of internally-funded R&D efforts are included within operating expenses.

We evaluate developing technologies in areas where we have technological or marketing expertise for possible investment or acquisition. We intend to continue to invest in R&D and focus our internal and external investments in fields that we believe will offer the greatest potential for near and long-term growth. We are committed to investing in products that have a demonstrable impact and value to the healthcare system and security markets, and through which we can benefit from our core competencies and global infrastructure.

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The cost of customer-funded R&D, which is classified as engineering cost of sales, amounted to:

 

 

 

For the Year ended

 

 

 

July 31,

 

(in millions)

 

2017

 

 

2016

 

 

2015

 

Customer-funded R&D

 

$

5.0

 

 

$

5.2

 

 

$

7.8

 

 

The cost of internally-funded R&D included in operating expenses amounted to:

 

 

 

For the Year ended

 

 

 

July 31,

 

(in millions)

 

2017

 

 

2016

 

 

2015

 

Internally-funded R&D

 

$

63.5

 

 

$

67.1

 

 

$

68.5

 

 

Environment

Our manufacturing facilities are subject to numerous environmental laws and regulations, particularly with respect to industrial waste and emissions. Compliance with these laws and regulations have not had a material impact on our capital expenditures, earnings, or competitive position.

Employees

As of July 31, 2017, we employed 1,510 employees. A limited number of employees at our Denmark facility are covered by a works council. We consider our relations with our employees to be generally good.

Financial Information about Foreign and Domestic Operations and Export Revenue

Revenues are attributed to countries based on the location of our customers. For OEM sales, our customer’s location may differ from the location of where the ultimate completed systems are sold by the OEM into the market.

 

 

 

For the Year ended

 

 

 

July 31,

 

(in millions)

 

2017

 

 

 

 

 

 

2016

 

 

 

 

 

 

2015

 

 

 

 

 

Net Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

183.5

 

 

 

38

%

 

$

192.3

 

 

 

38

%

 

$

215.3

 

 

 

40

%

Foreign

 

 

302.9

 

 

 

62

%

 

 

316.5

 

 

 

62

%

 

 

325.0

 

 

 

60

%

Total net revenue

 

$

486.4

 

 

 

 

 

 

$

508.8

 

 

 

 

 

 

$

540.3

 

 

 

 

 

 

Refer to Note 16 to the notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for financial information regarding our domestic and foreign revenue and long lived assets.

Available Information

Our website address is www.analogic.com . The information on our website is not incorporated by reference into this document and should not be considered to be a part of this document. Our website address is included in this document as an inactive textual reference only.

We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Annual Form SD and amendments to the reports as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission, or the SEC.

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Item  1A.

Ri sk Factors

This Annual Report on Form 10-K 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. In some cases these forward-looking statements can be identified by the use of words such as “may,” “could,” “should,” “would,” “expect,” “project,” “predict,” “potential” or the negative of these words or comparable words. Investors are cautioned that all forward-looking statements, including without limitation, statements about product development, market and industry trends, strategic initiatives, regulatory approvals, sales, profits, expenses, price trends, R&D expenses and trends, and capital expenditures, involve risk and uncertainties, and actual events and results may differ materially from those indicated in any forward-looking statement as a result of a number of important factors, including those discussed below and elsewhere in this Form 10-K.

In addition, any forward-looking statements represent management’s views only as of the date of this Annual Report on Form 10-K was filed with the SEC and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change, except as required by law.

You should carefully consider the risks described below before making an investment decision with respect to our common stock. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business. Any of these could have a material and negative effect on our business, financial condition, or results of operations.

Because a significant portion of our revenue currently comes from a small number of customers, any decrease in revenue from these customers could harm our operating results.

We depend on a small number of customers for a large portion of our business, and changes in our customers’ orders could have a significant impact on our operating results. If a major customer significantly reduces the amount of business it does with us, there would be an adverse impact on our operating results.

We had two customers during fiscal years 2017, three customers during fiscal year 2016 and four customers during fiscal year 2015, which accounted for 10% or more of our net revenue.  

Our ten largest customers as a group accounted for 61%, 61%, and 64% of our net revenue for fiscal years 2017, 2016, and 2015, respectively.

Although we seek to broaden our customer base, we will continue to depend on sales to a relatively small number of major customers. Because it often takes significant time to replace lost business, it is likely that our operating results would be adversely affected if one or more of our major customers were to cancel, delay, or reduce significant orders in the future. Our customer agreements typically permit the customer to discontinue future purchases after timely notice.

In addition, we generate significant accounts receivable in connection with the products we sell and the services we provide to our major customers. Although our major customers are large corporations, if one or more of our customers were to become insolvent or otherwise be unable to pay for our products and services, our operating results and financial condition could be adversely affected.

Competition from existing or new companies in the Medical Imaging and Security and Detection industries could cause us to experience downward pressure on prices, fewer customer orders, reduced margins, loss of new business opportunities, and the loss of market share.

We operate in highly competitive industries. We are subject to competition based on product design, performance, pricing, quality, and service offerings, and we believe our innovative engineering and product reliability have been important factors in our historical growth. While we try to maintain competitive pricing on those products which are comparable to products manufactured by others, in many instances our products conform to more precise specifications and may carry a higher price than analogous products manufactured by others. In addition, the trend of consolidation in the medical device industry and among our customers could result in greater competition and pricing pressures.

13


 

Our competitors include divisions of larger, more diversified organizations as well as specialized companies. Some of them have greater resources and larger staffs than we have. A number of our existing and potential OEM customers have the ability to desig n and manufacture internally the products that we manufacture for them. We face competition from the R&D groups and manufacturing operations of our existing and potential customers, who continually compare the benefits of internal research, product develop ment, and manufacturing with the costs and benefits of outsourcing.

We depend on our suppliers, some of which are the sole-source for certain components, and our production could be substantially curtailed if these suppliers were not able to meet our demands and alternative sources were not available.

We order raw materials and components to complete our customers’ orders, and some of these raw materials and components are ordered from sole-source suppliers. Although we work with our customers and suppliers to minimize the impact of shortages in raw materials and components, we sometimes experience short-term adverse effects due to price fluctuations and delayed shipments. In the past, there have been industry-wide shortages of electronics components. If a significant shortage of raw materials or components were to occur, we might have to delay shipments or pay premium pricing, which could adversely affect our operating results. In some cases, supply shortages of particular components could substantially curtail our production of products using these components. We are not always able to pass on price increases to our customers. Accordingly, some raw material and component price increases could adversely affect our operating results. We also depend on a small number of suppliers to provide many of the other raw materials and components that we use in our business. Some of these suppliers are affiliated with customers or competitors, and others are small companies. If we were unable to continue to purchase these raw materials and components from our suppliers, our operating results could be adversely affected. Because many of our costs are fixed, our margins depend on the volume of output at our facilities, and a reduction in volume could adversely affect our margins.

We rely on successful performance by and relationships with suppliers. This reliance could have a material adverse effect on our results of operations and financial condition.

We have formed arrangements with suppliers for various services and components. We have formed these arrangements because it is commercially more efficient to outsource these services and purchase these components than it would be for us to perform these services or manufacture these components, which in some cases require, among other things, a high degree of technical skill and advanced equipment that is not practical or cost-effective for us to develop or acquire. As a result, if one of our suppliers were to experience quality problems, capacity constraints, decreased yields, or delivery delays, or were to raise prices significantly, we could face product liability claims, product shortages, decreased revenues or lost customers, which could adversely affect our operating results.

If we were to be left with excess inventory, our operating results could be adversely affected.

Because of long lead times and specialized product designs, in certain cases we purchase components and manufacture products in anticipation of customer orders based on customer forecasts. For a variety of reasons, such as decreased end-user demand for our products, inadequate or inaccurate forecasts, or other issues that might impact production planning, our customers might not purchase all the products that we have manufactured or for which we have purchased components. In any such event, we would attempt to recoup material and manufacturing costs by means such as returning components to our vendors, disposing of excess inventory through other channels, or requiring our OEM customers to purchase or otherwise compensate us for such excess inventory. Some of our significant customer agreements do not give us the ability to require our OEM customers to do this. To the extent that we were unsuccessful in recouping our material and manufacturing costs, our gross margin and operating results could be adversely affected. Moreover, carrying excess inventory would reduce the working capital we have available to continue to operate and grow our business.

Uncertainties and adverse trends affecting our industry or any of our major customers could adversely affect our operating results.

Our business operates primarily within three business segments: Medical Imaging, Ultrasound, and Security and Detection. The Medical and Security and Detection equipment markets in which our segments operate are subject to changes in technology, pricing, and profit margins and have been historically subject to cyclical downturns characterized by diminished product demand, rapid declines in average selling prices, and production

14


 

over-ca pacity. In addition, changes in government policy and regulations relating to the purchase or use of medical and security-related capital equipment could also affect our sales. Our customers’ markets are also subject to economic cycles and are likely to ex perience periodic contractions. The economic conditions affecting our industry in general or any of our major customers in particular, might adversely affect our operating results.

In Security and Detection, our OEM customers’ purchasing dynamics are generally affected by the level of government funding, the expansion and/or upgrade of airport terminals, the timing of government tenders and fluctuations in airline passenger volume.

Our customers’ or our delay in obtaining or inability to obtain any necessary U.S. or foreign regulatory clearances or approvals for products could have a material adverse effect on our business.

Our products in the Medical Imaging and Ultrasound segments are finished medical devices or are components used by our customers in the production of finished medical devices that are subject to a high level of regulatory oversight. In our Security and Detection segment, our products and those of our customers are likewise subject to a high level of regulatory oversight. A delay in obtaining or inability to obtain any necessary U.S. or foreign regulatory clearances or approvals for products could have a material adverse effect on our business. The process of obtaining clearances and approvals can be costly and time-consuming. There is a further risk that any approvals or clearances, once obtained, might be withdrawn or modified or that we or our customers may be unable to meet evolving requirements.

Medical devices cannot be marketed in the U.S. without clearance from the U.S. Food and Drug Administration, or FDA. Medical devices sold in the U.S. must also be manufactured in compliance with FDA rules and regulations, which regulate the design, manufacturing, packaging, storage, and installation of medical devices. Moreover, medical devices are required to comply with FDA regulations relating to investigational research and labeling. States may also regulate the manufacturing, sale, and use of medical devices. In our Security and Detection segment, our products and those of our customers are likewise subject to government testing, certification, and approval requirements.

Our products are subject to approval and regulation by foreign regulatory and safety agencies. Our products must also meet the requirements of these governments and agencies for approval and distribution. As with the U.S., foreign governments or agencies can withdraw or modify their approvals.

Our business strategy includes the pursuit of acquisitions or business combinations, which, if consummated, could be difficult to integrate, disrupt our business, dilute stockholder value, or divert management attention.

As part of our business strategy, we may seek attractive acquisitions and other business combinations. Acquisitions are typically accompanied by a number of risks, including the difficulty of integrating the operations and personnel of the acquired companies, the potential disruption of our ongoing business and distraction of management, expenses related to the acquisition, and potential unknown or underestimated liabilities associated with acquired businesses. If we do not successfully complete acquisitions, we could incur substantial expenses and devote significant management time and resources without generating any benefit to us. In addition, substantial portions of our available cash might be utilized as consideration for these acquisitions.

 

Our review of strategic alternatives may not enhance shareholder value or result in any transaction being consummated, and speculation and uncertainty regarding the outcome of our review of strategic alternatives may adversely impact our business.

 

In June 2017, we announced that the Analogic Board had directed that all strategic options be considered to accelerate the pace of value creation for our stockholders. On September 19, 2017, we announced that the Board has engaged Citi as financial advisor and initiated a process for the sale of the entire Company. There is no certainty with regard to the terms, timing or structure of any transaction, or whether any such transaction will take place at all, and any such transaction is subject to risks and uncertainties. The process of reviewing strategic alternatives may involve significant resources and costs. In addition, the announced review of strategic alternatives may cause or result in:

15


 

 

disruption of our business;

 

difficulty in maintaining or negotiating and consummating new business or strategic relationships or transactions;

 

distraction to our management and employees;

 

increased stock price volatility; and

 

increased costs and advisory fees.

 

If we are unable to mitigate these or other potential risks related to the uncertainty caused by our exploration of strategic alternatives, it may disrupt our business or could have a material adverse effect on our results of operations and liquidity in future periods.

 

Our ability to complete a transaction, if our Board decides to pursue one, will depend on numerous factors, some of which are outside our control, including market conditions, interest of third parties in our business, industry trends, and the availability of financing to potential buyers on commercially acceptable terms. Even if a transaction is completed, there can be no assurance that it will be successful or have a positive effect on shareholder value. The Board of Directors may also determine that no transaction is in the best interests of shareholders. Further, it is not certain what impact any potential transaction, or a decision not to pursue any potential transaction, may have on our stock price, operating results, financial condition, liquidity or business prospects.

Our annual and quarterly operating results are subject to fluctuations, which could affect the market price of our common stock.

Our annual and quarterly results could vary significantly depending on various factors, many of which are beyond our control, and may not meet the expectations of securities analysts or investors. If this occurs, the price of our common stock could decline. These factors include:

 

variations in the timing and volume of customer orders;

 

introduction and market acceptance of our customers’ or our own new products;

 

changes in demand for our customers’ or our own existing products;

 

the timing of our expenditures in anticipation of future orders;

 

effectiveness in managing our manufacturing processes;

 

changes in competitive and economic conditions generally in our or our customers’ markets;

 

changes in the cost or availability of components or skilled labor;

 

changes in our effective tax rate;

 

fluctuations in manufacturing yields;

 

foreign currency and commodity price exposures;

 

investor and analyst perceptions of events affecting us, our competitors, and/or our industry;

 

changes in laws or regulatory requirements affecting the health care or aviation security industries or our products; and

 

changes in contingent consideration valuation.

A delay in anticipated sales beyond the end of a particular quarter could have a significant effect on our operating results for that quarter. In addition, most of our operating expenses do not vary directly with net revenue and are difficult to adjust in the short term. As a result, if revenue for a particular quarter was below our expectations, we could not proportionately reduce operating expenses for that quarter. Hence, the revenue shortfall could have a disproportionate adverse effect on our operating results for that quarter.

16


 

Loss of key personnel could hurt our business because of their industry experience and their technological expertise.

We operate in a highly competitive industry and depend on the services of our key senior executives and our technological experts. The loss of the services of one or several of our key personnel or an inability to attract, train, and retain qualified and skilled personnel, specifically engineering and operations personnel, could result in the loss of customers or otherwise inhibit our ability to operate and grow our business successfully.

If we fail to effectively manage our growth or, alternatively, our spending during economic downturns, our business could be disrupted, which could harm our operating results.

Our ability to offer our products and implement our business plan in evolving markets successfully requires an effective planning and management process. We must effectively manage our spending and operations to ensure our competitive position during economic downturns, and must preserve our future opportunities when the economy improves. A failure to manage our spending and operations effectively could disrupt our business and harm our operating results. A growth in sales, combined with the challenges of managing geographically dispersed operations, can place a significant strain on our management systems and resources, and growth in future operations could continue to place such a strain. The failure to manage our growth effectively could disrupt our business and harm our operating results.

If we are unable to maintain our expertise in research and product development, manufacturing processes, and marketing new products, we might not be able to compete successfully.

We believe that our future success depends upon our ability to provide research and product development, provide manufacturing services that meet the changing needs of our customers, and market new products. Technological changes may adversely impact orders and sales of our existing products, or make them less desirable or even obsolete. This requires that we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. As a result, we continually evaluate the advantages and feasibility of new product designs and manufacturing processes. We may not be able to develop and introduce new and improved products in a timely or efficient manner. New and improved products, if developed, may not achieve price and profitability targets or market acceptance. Commercialization of new products may prove challenging, and we may be required to invest more time and money than expected to introduce these products into the market successfully.

Major terrorist attacks and threats have increased financial expectations that may not materialize.

Major terrorist attacks and threats have created increased interest in our security and detection systems. However, the level of demand for our products is not predictable and may vary over time. We do not know what solutions will continue to be adopted by the U.S. Department of Homeland Security as a result of terrorism and whether our products will continue to be a part of the solutions. Additionally, should our products be considered as a part of future security solutions, it is unclear what the level of purchases may be and how quickly funding to purchase our products may be made available. These factors could adversely impact us and create unpredictability in our revenues and operating results.

We are exposed to risks associated with international operations and markets.

We source and manufacture certain components and systems outside the U.S., we market and sell products in international markets, and we have established offices and subsidiaries in Europe, Canada, and Asia. Our foreign revenue accounted for  62%, 62%, and 60% of our total net revenue for fiscal years 2017, 2016, and 2015, respectively. There are inherent risks in transacting business internationally, including:

 

changes in applicable laws and regulatory requirements;

 

export and import restrictions;

 

export controls relating to technology;

 

trade agreements, tariffs, and other trade barriers;

 

intellectual property laws that offer less protection for our proprietary rights;

17


 

 

difficulties in staffing and managing foreign operations;

 

problems in collecting accounts receivable and longer payment cycles;

 

political instability and changes in the international political environment;

 

fluctuations in currency exchange rates;

 

difficulties in managing employee relations, including differences in employment practices and works councils;

 

difficulties in maintaining uniform standards, controls, procedures and policies across our global operations, including inventory management and financial consolidation;

 

expatriation controls; and

 

potential adverse tax consequences.

There is significant uncertainty about the stability of global currency, credit and financial markets. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. Various macroeconomic factors such as sudden adverse changes to foreign exchange rates, unemployment rates, availability of credit, strength or weakness of real estate markets and other such factors may cause our customers to cancel, decrease or delay their existing or future orders for our products. We are unable to predict the impact of this instability and if economic conditions worsen, our business and results of operations could be materially and adversely affected.

We must comply with the U.S. Foreign Corrupt Practices Act and antitrust, competition and similar laws in other jurisdictions and our failure to do so could lead to substantial liability. We could also face investigations by one or more government agencies that could be costly to respond to and divert the attention of key personnel from our business operations. An adverse outcome from any such investigation could subject us to fines or other penalties, which could adversely affect our business, financial condition and results of operations.

Any one or more of these factors may have a material adverse effect on our future international activities and, consequently, on our business and results of operations.

There are risks associated with our operations in China.

We conduct certain manufacturing operations at, and are transitioning additional manufacturing operations to, our facility in Shanghai, China in order to reduce costs and streamline our manufacturing operations. There are administrative, legal, and governmental risks to operating in China that could result in increased operating expenses or could hamper us in the development of our operations in China. The risks from operating in China that could increase our operating expenses and adversely affect our operating results, financial condition and ability to deliver our products and grow our business include, without limitation:

 

difficulties in staffing and managing foreign operations, particularly in attracting and retaining personnel qualified to design, sell, test and support our products;

 

difficulties in managing employee relations;

 

material changes in the value of the Chinese Yuan, or CNY;

 

difficulties in coordinating our operations in China with those in the U.S., Canada, and Europe;

 

difficulties in enforcing contracts in China;

 

difficulties in protecting intellectual property;

 

diversion of management attention;

 

imposition of burdensome governmental regulations;

 

difficulties in maintaining uniform standards, controls, procedures and policies across our global operations, including inventory management and financial consolidation;

18


 

 

regional political and economic instab ility, which could have an adverse impact on foreign exchange rates in Asia and impair our ability to conduct our business in China; and

 

inadequacy of the local infrastructure to support our operations.

Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control, which would adversely affect our business.

Although we perform manufacturing in multiple locations, we generally do not have redundant manufacturing capabilities in place for any particular product or component. As a result, we depend on our current facilities for the continued operation of our business. A natural disaster, pandemic, terrorist act, act of war, or other natural or manmade disaster affecting any of our facilities could significantly disrupt our operations, or delay or prevent product manufacturing and shipment for the time required to repair, rebuild, or replace our manufacturing facilities. This delay could be lengthy and we could incur significant expenses to repair or replace the facilities. Any similar natural or manmade disaster that affects a key supplier or customer could lead to a similar disruption in our business.

Our business could be harmed if we are unable to protect our intellectual property or if we become subject to intellectual property infringement claims.

We rely on a combination of trade secrets, patents, trademarks, copyrights and confidentiality procedures to protect our technology. Despite our efforts, the steps we have taken to protect our technology may be inadequate. Existing trade secret, patent, trademark and copyright laws offer only limited protection. Our patents could be invalidated or circumvented. In addition, others may develop substantially equivalent or superseding proprietary technology, or competitors may offer similar competing products, thereby substantially reducing the value of our proprietary rights. The laws of some foreign countries in which our products are or may be manufactured or sold may not protect our products or intellectual property rights to the same extent as do the laws of the U.S. The steps we have taken to protect our intellectual property may not be adequate to prevent misappropriation of our technology. Our inability to protect our intellectual property could have a negative impact on our operations and financial results.

We may also become subject to claims that we infringe the intellectual property rights of others in the future. We cannot ensure that, if made, these claims will not be successful. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid, and could distract management from other business. Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products.

Technological advances and evolving industry and regulatory standards and certifications could reduce our future product sales, which could cause our revenues to grow more slowly or decline.

The markets for our products are characterized by rapidly changing technology, changing customer needs, evolving industry or regulatory standards and certifications and frequent new product introductions and enhancements. The emergence of new industry or regulatory standards and certification requirements in related fields may adversely affect the demand for our products. This could happen, for example, if new standards and technologies emerged that were incompatible with customer deployments of our applications. In addition, any products or processes that we develop may become obsolete or uneconomical before we recover any of the expenses incurred in connection with their development. We cannot provide assurance that we will succeed in developing and marketing product enhancements or new products that respond to technological change, new industry standards, changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if we are able to develop new products and product enhancements, we cannot provide assurance that they will be profitable or that they will achieve market acceptance.

We develop certain of our security inspection technologies to meet the certification requirements of various agencies worldwide, including the U.S. Transportation Safety Administration and the European Civil Aviation Conference among others. Such standards frequently change and there is a risk now and in the future that we may not ultimately be able to develop technologies, or develop in a timely way, solutions that are ultimately able to meet the new standards.

19


 

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology could harm our ability to operate our business effectively.

We rely extensively on information technology systems to interact with our employees and our customers and to run our business effectively. These interactions include ordering and managing materials from suppliers, converting materials to finished products, shipping product to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal and tax requirements, and other processes necessary to manage our business. Our systems could become damaged or cease to function properly due to any number of causes, including issues caused by ongoing projects to improve our information technology systems and the delivery of services, failures of third-party service providers, catastrophic events, power outages, and security breaches. Any failure or malfunctioning of our information technology systems, errors or misuse by system users, or inadequacy of the systems in addressing the needs of our operations, could disrupt our ability to timely and accurately manufacture and ship products, which could have a material adverse effect on our business, financial condition and results of operations. Any such failure, errors, misuse or inadequacy could also disrupt our ability to timely and accurately process, report and evaluate key operations metrics and key components of our results of operations, financial position and cash flows. Any such disruptions would likely divert our management and key employees’ attention away from other business matters. Any disruptions or difficulties that may occur in connection with our information technology systems could also adversely affect our ability to complete important business processes such as the evaluation of our internal control over financial reporting and attestation activities.

We face attempts by others to gain unauthorized access to our information technology systems and have been subject to information security breaches caused by illegal hacking, none of which, in the aggregate, have materially impacted our operations and financial condition to date. We may be subject to additional information security breaches caused by illegal hacking, computer viruses, or acts of vandalism or terrorism. We have implemented procedures to mitigate these risks. We monitor our data, information technology and personnel usage of our systems to reduce these risks and continue to do so on an ongoing basis for any current or potential threats; however, our security measures or those of our third-party service providers may not detect or prevent such breaches and, in some instances we, our customers, and the users of our products might be unaware of an incident or its magnitude and effect. These threats are constantly evolving, thereby increasing the difficulty of successfully defending against them or implementing adequate preventative measures. Any such compromise to our information security could result in an interruption in our operations, the unauthorized publication of our confidential business or proprietary information, the unauthorized release of customer, vendor, or employee data, the violation of privacy or other laws, and the exposure to litigation, any of which could harm our business and operating results.

If our security and detection systems fail to detect weapons, explosives or other devices that are used to commit a terrorist act, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage.

Our business exposes us to potential product liability risks that are inherent in the development, manufacturing, sale and service of security and detection systems. Our customers use our security and inspection systems to help them detect items that could be used in performing terrorist acts or other crimes. The training, reliability and competence of the customers’ operators are crucial to the detection of suspicious items. In addition, our security and detection systems are not designed to work under all circumstances or may otherwise fail to detect a threat. We test the reliability of our security and detection systems during both their development and manufacturing phases. We also perform such tests if we are requested to perform installation, warranty or post-warranty servicing. However, our security and detection systems are advanced mechanical and electronic devices and therefore can malfunction.

As a result of the September 11, 2001, and 1993 World Trade Center terrorist attacks, and the potential for future attacks, product liability insurance coverage for such threats is extremely difficult and costly to obtain. It is possible, subject to the applicability of the Support Anti-terrorism by Fostering Effective Technologies Act of 2002, or SAFETY Act, that if we were found liable following a major act of terrorism, our insurance might not fully cover the claims for damages.

The SAFETY Act is a Federal law in the U.S. enacted to provide certain legal liability protections for providers of certain anti-terrorism technologies. If applicable to claims against Analogic, the SAFETY Act could mitigate some of this risk.

20


 

Our Security and Detection segment depends in part on purchases of products and services by the U.S. Federal Gov ernment and its agencies, including the Transportation Security Agency (TSA) as well as foreign governments and their related agencies, which purchases may be only partially funded, and are subject to potential termination and reductions and delays in gove rnment spending.

As an indirect subcontractor or team member with prime contractors and in other cases directly to the U.S. Federal Government and its agencies, our security and detection systems are included in many different domestic programs. Over the lifetime of a program, the award of many different individual contracts and subcontracts could impact our products’ requirements. The funding of U.S. Federal Government programs are subject to Congressional appropriations. Although multiple-year contracts may be planned in connection with major procurements, Congress generally appropriates funds only on a single fiscal year basis. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations and prime contracts receive such funding. The reduction or delay in funding or termination of a government program in which we are involved could result in a loss of or delay in receiving anticipated future revenues attributable to that program and contracts or orders received. The U.S. Federal Government could reduce or terminate a prime contract under which we are a subcontractor or team member irrespective of the quality of our products or services. The termination of a program or reduction in, or failure to commit additional funds to, a program in which we are involved could negatively impact our revenue and have a material adverse effect on our financial condition and results of operations.

Changes in laws affecting the health care industry could adversely affect our business, operations and financial condition.

In recent years, the healthcare industry has undergone significant changes driven by various efforts to reduce costs, including increased levels of managed care, cuts in Medicare, consolidation of healthcare distribution companies and collective purchasing arrangements by office-based healthcare practitioners. In addition, numerous governments have undertaken efforts to control healthcare costs through legislation and regulation. In the U.S. in March 2010, President Obama signed into law health care reform legislation in the form of the Patient Protection and Affordable Care Act, or PPACA. The PPACA could meaningfully change the way healthcare is developed, marketed and delivered, and may materially impact numerous aspects of our business, results of operations, and financial conditions. The implementation of health care reform and medical cost containment measures in the U.S. and in foreign countries in which we operate could:

 

limit the use of our products and adversely affect the use of new therapies for which our products may be targeted;

 

reduce reimbursement available to our customers for using our products; and

 

decrease the price we might establish for our products and products that we may develop, which would result in lower product revenues to us.

In addition, because we operate in a highly regulated industry, other governmental actions may adversely affect our business, operations and financial condition, including:

 

changes in FDA and foreign regulations that may require additional safety monitoring, labeling changes, restrictions on product distribution or use, or other measures after the introduction of our products to market, which could increase our costs of doing business, or otherwise adversely affect the market for our products;

 

new laws, regulations and judicial decisions affecting pricing or marketing practices; and

 

changes in the tax laws relating to our operations.

Due to the nature of our business, we may be subject to legal proceedings that may divert management’s time and attention from our business and result in substantial damage awards.

 

Due to the nature of our business, we may be subject to various regulatory investigations, securities claims, civil claims, lawsuits and other proceedings in the ordinary course of our business, including those described in our annual reports on Form 10-K and our quarterly reports on Form 10-Q. The outcome of any particular action is subject to inherent uncertainty, and the actual costs that will or may be incurred will depend upon many unknown

21


 

factors. We may be forced to expend significant resources in the defense of these actions, and we may not prevail. Defending against these and other actions in the future may not only require us to incur significant legal fees and expenses, but may become time-consuming for us and detract from our ability to fully focus our internal resources on our business activities. The res ults of any legal proceeding cannot be predicted reliably due to the uncertainty inherent in litigation, the difficulty of predicting decisions of regulators, judges and juries and the possibility that decisions may be reversed on appeal. The outcome of an y of these actions could have a material adverse effect on our business, financial position or operating results. For a discussion of legal matters relating to the company as of July 31, 2017, please read Note 11 to the notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Compliance or the failure to comply with current and future environmental regulations could cause us significant expense.

We are subject to various environmental regulations. From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with environmental regulations as they are enacted. These regulations include, for example, the Registration, Evaluation, Authorization and Restriction of Chemical substances, or REACH, the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive, or RoHS and the Waste Electrical and Electronic Equipment Directive, or WEEE enacted in the European Union which regulate the use of certain hazardous substances in, and require the collection, reuse and recycling of waste from, certain products we manufacture. This and similar legislation that has been or is in the process of being enacted in Japan, China, Korea and various states of the U.S. may require us to redesign our products to ensure compliance with the applicable standards, for example by requiring the use of different types of materials. These redesigns or alternative materials may detrimentally impact the performance of our products, add greater testing lead-times for product introductions or have other similar effects. We believe we comply with all such legislation where our products are sold and we will continue to monitor these laws and the regulations being adopted under them to determine our responsibilities. In addition, we are monitoring legislation relating to the reduction of carbon emissions from industrial operations to determine whether we may be required to incur any material, additional material costs, or expenses associated with our operations. Our failure to comply with any of the foregoing regulatory requirements could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in the U.S. and foreign countries.

Item 1B.

Unresolved Staff Comments

None.

22


 

Item 2.

Pr operties

As of July 31, 2017, we owned or leased the primary facilities described below:

 

Location

 

Approximate Sq. Ft.

 

 

Principal Use(s)

 

Principal Segment(s)

Peabody, MA (1)

 

Owned

 

 

514,000

 

 

Executive and administrative offices, manufacturing, R&D, customer service, and sales

 

All segments

Peabody, MA (1 First Ave)

 

Leased

 

 

32,000

 

 

Warehousing

 

All segments

Shanghai, China (2)

 

Owned

 

 

145,000

 

 

Administrative offices, manufacturing, customer service, and sales

 

Medical Imaging and Ultrasound

Herlev, Denmark (3)

 

Owned

 

 

135,000

 

 

Administrative offices, R&D, customer service, and sales

 

Ultrasound

State College, PA

 

Owned

 

 

66,000

 

 

Administrative offices, manufacturing, R&D, customer service, and sales

 

Ultrasound

Montreal, Canada

 

Leased

 

 

54,000

 

 

Administrative offices, manufacturing, R&D, customer service, and sales

 

Medical Imaging

Canton, MA

 

Leased

 

 

33,000

 

 

R&D, customer service, and sales

 

Medical Imaging

Vancouver, Canada (4)

 

Leased

 

 

31,000

 

 

Administrative offices, manufacturing, R&D, customer service, and sales

 

Ultrasound

 

(1)

We own approximately 60 acres of land at this location, which can accommodate future expansion as required.

(2)

Our Shanghai, China facility, built on leased land, opened in April 2012.

(3)

We are not currently utilizing all the space of this facility. We have leased a portion of this facility and are currently in process of exploring various uses for the unused space.

(4)

This property was assumed as part of the acquisition of Ultrasonix Medical Corporation, which we refer to as Ultrasonix, acquired in March 2013.

We lease a number of other smaller facilities in the U.S. and locations such as, the United Kingdom, Germany, Italy, Sweden and Belgium.

We believe that our existing facilities are generally adequate to meet our current needs, and that suitable additional or substitute space will be available on commercially reasonable terms when needed. Refer to Note 12 to the Consolidated Financial Statements included in this report for further information concerning certain leases.

Item 3.

Legal Proceedings

For a discussion of legal matters as of July 31, 2017, please read Note 11 to the notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated into this item by reference.

Item  4.

Mine Safety Disclosure

None.

23


 

Executive Officers of the Registrant

Our current executive officers are:

 

Name

 

Age

 

Position

 

Date Since
Office Has
Been Held

Fred B. Parks

 

70

 

President and Chief Executive Officer

 

2016

Michael J. Bourque

 

54

 

Senior Vice President, Chief Financial Officer and Treasurer

 

2017

Mervat Faltas

 

65

 

Senior Vice President and General Manager, Medical Imaging Business

 

2010

John J. Fry

 

55

 

Senior Vice President, General Counsel and Secretary

 

2007

James P. Ryan

 

47

 

Senior Vice President and General Manager, Security Detection and Power Technologies

 

2015

Brooks West

 

47

 

Senior Vice President and General Manager, Global Ultrasound Business

 

2017

Our executive officers are elected annually by our board of directors and hold office until their successors are chosen and qualified, subject to earlier removal by the board of directors.

There are no arrangements or understandings between any of our executive officers and any other person(s) pursuant to which such executive officer was selected as an officer.

Dr.  Fred B. Parks is our President and Chief Executive Officer, and has served in this capacity since October 31, 2016. Dr. Parks has served on Analogic’s Board of Directors since 2007 as the company transitioned into a market leading, growth oriented medical technology company. Prior to joining Analogic, he served as the Executive Chairman and Chief Executive Officer of Enovate Medical since 2015. Dr. Parks served as Chief Executive Officer and Director of NDS Surgical Imaging, Inc., a provider of advanced medical visualization technology, from 2011 to 2013 and was Chairman of the Board and Chief Executive Officer of Urologix, Inc. from 2003 to 2008. Prior to joining Urologix, Dr. Parks  served as President and Chief Executive Officer of Marconi Medical Systems, a multi-modality provider of advanced CT, MRI, and nuclear medicine imaging equipment, and following its acquisition by Royal Philips Electronics in 2001, led its integration into the Philips medical business. Previously, Dr. Parks held positions as President, Chief Operating Officer, and board member of St. Jude Medical, Inc., a medical device company focusing on implantable cardiovascular products, and as President, Chief Operating Officer, and board member of EG&G, Inc. (now PerkinElmer), a diversified technology company. Dr. Parks became a Director of NuVectra Corporation, which is focused on the development and commercialization of neurostimulation technology, in March 2016. In addition to his past service on the boards of NDS, Urologix, EG&G, and St. Jude Medical, Dr. Parks served on the board of Steady State Imaging, LLC, a privately held developer of specialized magnetic resonance imaging technology, from 2010 to 2011.

Michael J. Bourque is our Senior Vice President, Chief Financial Officer and Treasurer, and has served in this capacity since July 13, 2017.  Mr. Bourque joined us in October 2014 as Vice President and Corporate Controller.  He served as the Company’s interim Chief Financial Officer from April 2015 through November 2015 before being named Chief Accounting Officer.  From July 2011 to October 2014 Mr. Bourque served as Vice President and Corporate Controller of Axcelis Technologies, Inc. (which we refer to as Axcelis), a publicly traded supplier of products for the semiconductor manufacturing industry worldwide. He served as a financial consultant to Axcelis from April 2011 to July 2011. From November 2002 through October 2010, he served in a variety of finance and accounting roles, including Director of Corporate Accounting and Assistant Corporate Controller, at Charles River Laboratories, Inc., a publicly traded provider of products and services to leading pharmaceutical, biotechnology, government and academic organizations around the world. Earlier in his career, Mr. Bourque held various positions of increasing responsibility in the audit practice at Ernst & Young, LLP and is a certified public accountant.

Mervat Faltas is our Senior Vice President and General Manager, Medical Imaging, and has served in this capacity since May 2010. She joined ANRAD Corporation, our Canadian subsidiary now known as Analogic Canada Corporation, in July 2005 as Vice President of Operations and was named President of ANRAD in January 2006. From May 2000 until June 2005, Mrs. Faltas served in various capacities at ITF Optical Technologies, a Montreal-based provider of fiber optic components for terrestrial and undersea communication networks, including as President and Chief Executive Officer. From 1990 to 2000, Mrs. Faltas held various positions at PerkinElmer Corporation, including General Manager of PerkinElmer’s Montreal operation.

24


 

John J. Fry is our Senior Vice President, General Counsel, an d Secretary. He joined us in November 2007. From April 2005 until joining us, Mr. Fry was a principal of the law firm Driggs, Hogg, & Fry Co., L.P.A., where his practice focused primarily on technology and intellectual property law. From August 1995 to Apr il 2005, he held various legal positions at Philips Medical Systems, including Senior Corporate Counsel and Intellectual Property Manager and counsel to Philips’ computed tomography business.

James P. Ryan is our Senior Vice President and General Manager, Security Detection and Power Technologies and has served in this capacity since February 2016. From August 2015 until February 2016 Mr. Ryan served as our Senior Vice President and General Manager, Global Operations, and from December 2008, when he joined us, until August 2015 served as our Senior Vice President, Global Operations. Mr. Ryan joined us in December 2008, as our Vice President of Global Operations. From 2000 until joining us, Mr. Ryan was a Principal in the Strategy Practice, focusing in the Healthcare and Consumer industries, for Booz & Company, a leading global management consulting firm. Before that, he worked for Ingersoll-Rand in both advanced engineering and manufacturing capacities.

Brooks West joined us as our Senior Vice President and General Manager, Global Ultrasound in March 2017.  From April 2011 until March 2017, he served as a Senior Research Analyst for Piper Jaffrey, a leading investment bank and asset management firm with lead coverage of the cardiovascular and diversified medical technology sectors.  Prior to joining Piper, Mr. West held leadership roles in marketing and business development at Urologix, a provider of medical devices for the urology market.

 

25


 

PART II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock trades on the NASDAQ Global Select Market under the symbol: ALOG. The following table sets forth the high and low sales prices per share of our common stock, as reported by the NASDAQ Global Select Market, for each quarterly period indicated in the table below:

 

Fiscal Year

 

High

 

 

Low

 

2017

 

 

 

 

 

 

 

 

First Quarter

 

$

94.39

 

 

$

80.05

 

Second Quarter

 

 

95.85

 

 

 

75.05

 

Third Quarter

 

 

84.75

 

 

 

69.65

 

Fourth Quarter

 

 

76.40

 

 

 

66.00

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

First Quarter

 

$

88.52

 

 

$

76.69

 

Second Quarter

 

 

90.70

 

 

 

71.74

 

Third Quarter

 

 

81.29

 

 

 

68.71

 

Fourth Quarter

 

 

86.55

 

 

 

77.26

 

 

As of August 31, 2017, there were approximately 530 holders of record of our common stock. Because many of the shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of individual stockholders represented by these holders of record. Our board of directors declared cash dividends of $0.10 per share for each of the quarters of fiscal years 2017 and 2016. We intend to pay a regular quarterly cash dividend subject to, among other things, our results of operations, cash balances, future cash requirements, financial condition, and other factors that our board of directors may deem relevant. Our policy is to retain sufficient earnings to provide funds for the operation and expansion of our business.

The following table contains information about our purchases of our equity securities during the three months ended July 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Approximate Dollar Value

 

 

 

 

 

 

 

 

 

 

 

Shares Purchased

 

 

of Shares that May Yet

 

 

 

Total Number

 

 

 

 

 

 

as Part of Publicly

 

 

Be Purchased Under the

 

 

 

of Shares

 

 

Average Price Paid

 

 

Announced Plans or

 

 

Plans or Programs

 

Period

 

Purchased (1)

 

 

per Share (1)

 

 

Programs (1) (2)

 

 

(000's)

 

5/1/2017-5/31/2017

 

 

16,518

 

 

$

72.96

 

 

 

17,165

 

 

$

13,216

 

6/1/2017-6/30/2017

 

 

17,486

 

 

$

69.39

 

 

 

17,969

 

 

$

12,002

 

7/1/2017-7/31/2017

 

 

5,614

 

 

$

71.52

 

 

 

19,553

 

 

$

11,600

 

Total

 

 

39,618

 

 

$

71.18

 

 

 

54,687

 

 

$

11,600

 

 

(1)

During the fourth quarter of fiscal year 2017, we repurchased 39,618 shares of our common stock in open-market transactions for $2.8 million at an average purchase price of $71.18 per share. These shares were purchased pursuant to a repurchase program authorized by our board of directors that was publicly announced on May 26, 2016 to repurchase up to $15.0 million of our common stock. The repurchase program does not have a fixed expiration date.

(2)

Includes 15,069 shares, consisting of 647 shares, 483 shares, and 13,939 shares of our common stock surrendered by employees in order to meet tax withholding obligations in connection with the vesting of restricted stock in May, June and July 2017, respectively.  For purposes of determining the number of shares to be surrendered by employees to meet tax withholding obligations, 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.

26


 

Comparison of Five-Year Cumulative Total Returns

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Center for Research in Security Prices of the University of Chicago, or CRSP, Total Return Index for the NASDAQ Stock Market (US Companies), the Russell 2000 Index, and the CRSP Total Return Index for all NASDAQ stocks with SIC Codes related to our business in the areas of measuring instruments, photo goods, medical goods, optical goods, and timepieces. The graph assumes $100 invested on July 31, 2012, in our common stock and $100 invested at that time in each of the indexes. The comparison assumes that all dividends are reinvested.

 

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

 

27


 

Item 6.

Selected Consol idated Financial Data

The following selected consolidated financial data are derived from our audited Consolidated Financial Statements and the notes thereto and should be read in connection with, and are qualified in their entirety by, our audited Consolidated Financial Statements and the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K.

 

 

 

Years Ended July 31,

 

(In millions, except share and per share data)

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Total net revenue

 

$

486.4

 

 

$

508.8

 

 

$

540.3

 

 

$

517.5

 

 

$

550.4

 

Total cost of sales (A)

 

 

287.1

 

 

 

280.7

 

 

 

310.8

 

 

 

297.8

 

 

 

333.7

 

Gross profit

 

 

199.3

 

 

 

228.1

 

 

 

229.5

 

 

 

219.7

 

 

 

216.7

 

(Loss) income from operations (B)

 

 

(66.8

)

 

 

25.2

 

 

 

40.6

 

 

 

29.1

 

 

 

45.4

 

Net (loss) income (C)

 

$

(74.2

)

 

$

12.1

 

 

$

33.5

 

 

$

34.5

 

 

$

31.1

 

Basic net (loss) income per share

 

$

(5.96

)

 

$

0.98

 

 

$

2.70

 

 

$

2.78

 

 

$

2.54

 

Diluted net (loss) income per share

 

$

(5.96

)

 

$

0.96

 

 

$

2.66

 

 

$

2.72

 

 

$

2.48

 

Cash dividends declared per common share

 

$

0.40

 

 

$

0.40

 

 

$

0.40

 

 

$

0.40

 

 

$

0.40

 

Weighted average shares outstanding (000’s):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,456

 

 

 

12,402

 

 

 

12,407

 

 

 

12,404

 

 

 

12,247

 

Diluted

 

 

12,456

 

 

 

12,615

 

 

 

12,606

 

 

 

12,667

 

 

 

12,569

 

Cash, cash equivalents

 

$

129.3

 

 

$

118.7

 

 

$

123.8

 

 

$

114.5

 

 

$

113.0

 

Working Capital (D)

 

 

303.6

 

 

 

310.3

 

 

 

316.8

 

 

 

280.0

 

 

 

262.7

 

Total assets (D)

 

 

538.1

 

 

 

632.9

 

 

 

624.6

 

 

 

611.6

 

 

 

587.8

 

Long-term liabilities (D)

 

 

10.5

 

 

 

23.3

 

 

 

13.4

 

 

 

14.5

 

 

 

10.5

 

Stockholders’ equity

 

 

460.5

 

 

 

531.2

 

 

 

531.4

 

 

 

512.6

 

 

 

486.4

 

 

(A)

During fiscal year 2017, we recorded an $8.3 million excess and obsolescence charge related to the write-downs of inventory.

(B)

In fiscal year 2017, we recorded restructuring charges of $7.2 million. During fiscal 2017, we recorded an aggregate of $84.5 million asset impairment charges. We also recorded a decrease in contingent consideration of $10.2 million related to Oncura in fiscal 2017.

In fiscal year 2016, we recorded acquisition-related expenses of approximately $0.4 million associated with the acquisition of Oncura.  We recorded restructuring charges of $9.6 million in fiscal year 2016. During fiscal year 2016, we also recorded a $10.1 million charge in connection with the investigation related to our Danish Subsidiary BK Medical.

During fiscal year 2015, we recorded a $1.0 million charge in connection with the investigation related to our Danish Subsidiary BK Medical.

In fiscal year 2014, we recorded acquisition-related expenses of approximately $8.7 million associated with the acquisition of Ultrasonix, which includes $7.8 million of amortization of acquired intangibles. During fiscal year 2014, we also recorded pre-tax restructuring charges of $2.9 million under the fiscal year 2014 restructuring plan primarily for severance and personnel related costs for 48 involuntarily terminated employees and $0.6 million in relation to the fiscal year 2013 restructuring plan primarily for facility exit costs.

In fiscal year 2013, we recorded $5.6 million of acquisition-related expenses associated with the acquisition of Ultrasonix which includes $3.9 million of amortization of acquired intangibles. During fiscal year 2013, we also recorded pre-tax restructuring charges of $3.5 million primarily for severance and personnel related costs for 115 involuntarily terminated employees and facility exit costs.

(C)

In fiscal year 2017, we recorded certain discrete tax provisions totaling $15.7 million.  The discrete tax provision for fiscal year 2017 consists primarily of a $16.6 million increase in valuation allowance on deferred tax assets.

In fiscal year 2016, we recorded certain discrete tax provisions totaling $1.2 million, consisting primarily of a $1.5 million increase in uncertain tax benefits associated with an increase in uncertain tax positions primarily associated with the BK Medical matter.

In fiscal year 2015, we recorded certain discrete tax benefits totaling $2.9 million, consisting primarily of a $3.4 million reduction in uncertain tax positions primarily associated with the expiration of the statute of

28


 

limitations. During fiscal year 2015, we also recorded a $0.6 million interest charge in connection with the investigation rel ated to our Danish Subsidiary BK Medical.

In fiscal year 2014, we recorded certain discrete tax benefits totaling $8.8 million associated with a change in classification of our Canadian operations. Further discrete tax benefits recognized amounted to $3.8 million, of which $1.1 million related to reversal and remeasurement of reserves as a result of a favorable IRS tax audit and $2.7 million associated with a US tax benefit for historical currency losses incurred as a result of operating offshore in a non-functional currency. We also recorded a loss on investments in PocketSonics of $0.5 million resulting from the acquisition of PocketSonics on September 20, 2013.

(D)

In fiscal year 2016, we retrospectively adopted ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” Please refer to Note 1, Recent Accounting Pronouncements, and Note 15, Income taxes in our Annual Report on Form 10-K for fiscal year 2016, as filed with the SEC on September 27, 2016 for additional information. The effects of the accounting change on working capital, total assets, and long-term liabilities were revised to reflect the change on the Consolidated Balance Sheets as of July 31, 2015, 2014 and 2013, respectively.

Item 7.

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

The following discussion provides an analysis of our financial condition and results of operations and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The discussion contains statements, which, to the extent that they are not a recitation of historical facts, constitute “forward-looking statements” pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements about product development, market and industry trends, strategic initiatives, regulatory approvals, sales, profits, expenses, price trends, R&D expenses and trends, and capital expenditures, we make in this document or in any document incorporated by reference are forward-looking. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to differ from the projected results. Refer to “Risk Factors” in Item 1A for a discussion of the primary risks and uncertainties known to us at this time.

In addition, any forward-looking statements represent management’s views only as of the date of this Annual Report on Form 10-K was filed with the SEC and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change, except as required by law.

We report our financial condition and results of operations on a fiscal year basis ending July 31. The three months ended July 31, 2017 and 2016 represent the fourth quarters of fiscal years 2017 and 2016, respectively.

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

 

Business Overview

 

Fiscal Year 2017 Financial Highlights

 

Results of Operations

 

Liquidity and Capital Resources

 

Recent Accounting Pronouncements

 

Critical Accounting Policies

Business Overview

Analogic Corporation designs, manufactures, and commercializes innovative real-time guidance, diagnostic imaging and threat detection technologies to advance the practice of medicine and save lives. We design, manufacture and sell advanced medical imaging, ultrasound and security systems and subsystems to original equipment manufacturers, or OEMs, and end users primarily for the medical and airport security markets.

29


 

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

 

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

 

Ultrasound includes ultrasound systems and transducers primarily used in the urology, surgery, EMED and Anesthesia markets.

 

Security and Detection includes advanced threat detection CT systems utilizing our expertise in advanced medical imaging technology, primarily used in the checked baggage screening at airports worldwide.

The following table sets forth the percentage of total net revenue by reporting segment for fiscal years 2017, 2016 and 2015.

 

 

 

For the Year ended

 

 

 

July 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Medical Imaging

 

 

57

%

 

 

57

%

 

 

54

%

Ultrasound

 

 

30

%

 

 

32

%

 

 

31

%

Security and Detection

 

 

13

%

 

 

11

%

 

 

15

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

 

Fiscal Year 2017 Financial Highlights

The following table is a summary of our financial results for the fiscal years ended July 31, 2017 and 2016. This summary is not a substitute for the detail provided in the following pages or the audited Consolidated Financial Statements and notes that appear elsewhere in this document.

 

 

 

For the Year ended

 

 

 

 

 

 

 

July 31,

 

 

Percentage

 

(in millions, except per share amounts and  percentages)

 

2017

 

 

2016

 

 

Change

 

Total net revenues

 

$

486.4

 

 

$

508.8

 

 

 

-4

%

Gross profit

 

$

199.3

 

 

$

228.1

 

 

 

-13

%

Gross margin

 

 

41.0

%

 

 

44.8

%

 

 

 

 

(Loss) income from operations

 

$

(66.8

)

 

$

25.2

 

 

 

-365

%

Operating margin

 

 

-13.7

%

 

 

5.0

%

 

 

 

 

Net (loss) income

 

$

(74.2

)

 

$

12.1

 

 

 

-713

%

Diluted net (loss) income per share

 

$

(5.96

)

 

$

0.96

 

 

 

-720

%

 

During fiscal year 2017 our total net revenue decreased by 4% as compared to fiscal year 2016, primarily due to a decrease in sales in our Ultrasound segment driven by a decrease in private label sales and by lower demand for legacy OEM probes and a decrease in our Medical Imaging segment driven by reductions in CT, MRI and digital Mammography, partially offset by an increase in sales of Security and Detection segment driven by increases in our high speed airport screening systems and increases in our rapid DNA system sales.

Gross profit and gross margin decreased by 13% and 3.8 points, respectively, in fiscal year 2017, compared to fiscal year 2016, as a result of lower revenues including a reversal of engineering revenue in both Ultrasound and Security and Detection segments, and impairment charges related to write-downs of obsolete inventory.

(Loss) income from operations decreased and operating margin decreased in fiscal year 2017, compared to fiscal year 2016,  primarily due to lower revenues, an $8.3 million impairment charge related to write-downs of excess and obsolete inventory (please refer to Note 9. Inventory ), and $84.5 million asset impairment charges (please refer to Note 1(i). Property, plant, and equipment and Note 10. Intangible assets and goodwill ), partially offset by a $10.2 million decrease in contingent consideration related to our acquisition of Oncura (please refer to Note 8. Fair value for more information), and charges for the BK Medical matter of $10.1 million in 2016. For more information

30


 

on the BK Medical matter, please refer to Note 11. Commitments, guarantees and contingencies in our Annual Report on Form 10-K for fiscal year 2016, as filed with the SEC on September 27, 2016.

Results of Operations

Fiscal Year 2017 Compared to Fiscal Year 2016

Net Revenue

Product Revenue

Product revenue for fiscal year 2017 as compared with fiscal year 2016 is summarized in the table below.

 

 

 

For the Year ended

 

 

 

 

 

 

 

July 31,

 

 

Percentage

 

(in millions except percentages)

 

2017

 

 

2016

 

 

Change

 

Medical Imaging

 

$

269.2

 

 

$

285.8

 

 

 

-6

%

Ultrasound

 

 

148.0

 

 

 

160.8

 

 

 

-8

%

Security and Detection

 

 

67.0

 

 

 

56.1

 

 

 

19

%

Total product revenue

 

$

484.2

 

 

$

502.7

 

 

 

-4

%

 

Medical Imaging

During fiscal year 2017, our Medical Imaging product revenue decreased by 6%, compared to fiscal year 2016, primarily due to reductions in CT, MRI and digital Mammography, partially offset by increases in Motion due to additions of new customers.

Ultrasound

During fiscal year 2017, our Ultrasound product revenue decreased by 8%, compared to fiscal year 2016, primarily driven by decrease in private label sales and reduced customer demand for legacy OEM probes.

Security and Detection

During fiscal year 2017, our Security and Detection product revenue increased by 19%, compared to fiscal year 2016, primarily driven by increases in our high speed airport screening systems and increases in our rapid DNA system sales.

Engineering Revenue

Engineering revenue for fiscal year 2017 as compared with fiscal year 2016 is summarized in the table below.

 

 

 

For the Year ended

 

 

 

 

 

 

 

July 31,

 

 

Percentage

 

(in millions except percentages)

 

2017

 

 

2016

 

 

Change

 

Medical Imaging

 

$

5.0

 

 

$

3.4

 

 

 

47

%

Ultrasound

 

 

(1.1

)

 

 

2.4

 

 

 

-146

%

Security and Detection

 

 

(1.7

)

 

 

0.3

 

 

 

-667

%

Total engineering revenue

 

$

2.2

 

 

$

6.1

 

 

 

-64

%

 

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

The change in engineering revenue during fiscal year 2017, compared to fiscal year 2016, was primarily due to timing of work done on customer-funded engineering projects in the Medical Imaging segment, and reversal of revenue in both of the Ultrasound and Security and Detection segments as a result of changes in facts and circumstances in the fourth quarter that lead us to no longer being able to meet the revenue recognition criteria.

Gross Margin

31


 

Product Gross Margin

Product gross margin for fiscal year 2017, as compared with fiscal year 2016, is summarized in the table below.

 

 

 

For the Year ended

 

 

 

 

 

 

 

July 31,

 

 

Percentage

 

(in millions except percentages)

 

2017

 

 

2016

 

 

Change

 

Product gross profit

 

$

202.1

 

 

$

227.1

 

 

 

-11

%

Product gross margin

 

 

41.7

%

 

 

45.2

%

 

 

 

 

 

During fiscal year 2017 compared to fiscal year 2016, gross margin decreased by 3.5 points, primarily as a result of  $8.3 million excess and obsolescence charges related to the write-downs in inventory and product/segment mix, primarily related to strategic changes in the business to discontinue investment in certain products.

Engineering Gross Margin

Engineering gross margin for fiscal year 2017, as compared with fiscal year 2016, is summarized in the table below.

 

 

 

For the Year ended

 

 

 

 

 

 

 

July 31,

 

 

Percentage

 

(in millions except percentages)

 

2017

 

 

2016

 

 

Change

 

Engineering gross (loss) profit

 

$

(2.8

)

 

$

0.9

 

 

 

-411

%

Engineering gross margin

 

 

-126.7

%

 

 

15.5

%

 

 

 

 

 

The decrease in the engineering gross profit and decrease in the engineering gross margin in fiscal year 2017, compared to fiscal year 2016, was due to our lower engineering revenue and reversal of engineering revenue in both of the Ultrasound and Security and Detection segments as a result of changes in facts and circumstances in the fourth quarter that lead us to no longer being able to meet the revenue recognition criteria. .

Operating Expenses

Operating expenses are summarized as follows:

 

 

 

For the Year ended

 

 

 

 

 

 

Percentage of Net

 

 

 

July 31,

 

 

Percentage

 

 

Revenue

 

(in millions except percentages)

 

2017

 

 

2016

 

 

Change

 

 

2017

 

 

2016

 

Research and product development

 

$

63.5

 

 

$

67.1

 

 

 

-5

%

 

 

13

%

 

 

13

%

Selling and marketing

 

 

67.8