- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED APRIL 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-6715
---------------------
ANALOGIC CORPORATION
(Exact name of registrant as specified in its charter)
---------------------
<Table>
MASSACHUSETTS 04-2454372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 CENTENNIAL DRIVE 01960
PEABODY, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
</Table>
(978) 977-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding at May 31, 2002 was
13,259,031.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALOGIC CORPORATION
INDEX
<Table>
<Caption>
PAGE NO
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2002
and July 31, 2001........................................... 2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended April 30, 2002 and 2001......... 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended April 30, 2002 and 2001........................ 4
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 5-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 10-18
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 19
Signatures........................................................... 20
</Table>
1
ITEM 1. FINANCIAL STATEMENTS
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
APRIL 30, JULY 31,
2002 2001
--------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 79,594 $ 46,013
Marketable securities, at market.......................... 65,344 76,899
Accounts and notes receivable, net of allowance for
doubtful accounts $1,693 in fiscal 2002, and $1,268 in
fiscal 2001............................................. 55,386 68,287
Inventories (Note 2)...................................... 62,356 60,696
Refundable and deferred income taxes...................... 14,087 9,045
Other current assets...................................... 8,279 7,410
-------- --------
Total current assets................................. 285,046 268,350
Property, plant and equipment, net.......................... 75,392 68,846
Investments in and advances to affiliated companies (Note
3)........................................................ 8,745 4,692
Capitalized software, net................................... 4,055 5,488
Other assets................................................ 6,722 5,143
-------- --------
Total assets......................................... $379,960 $352,519
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Mortgage and other notes payable.......................... $ 224 $ 369
Obligations under capital leases.......................... 306 275
Accounts payable, trade................................... 18,457 15,378
Accrued liabilities (Note 2).............................. 19,152 21,850
Deferred revenue (Note 2)................................. 35,812 4,333
Accrued income taxes...................................... 858 1,646
-------- --------
Total current liabilities............................ 74,809 43,851
Mortgage and other notes payable............................ 4,126 4,896
Obligations under capital leases............................ 419 664
Advance payments and other.................................. 1,045 1,135
Deferred income taxes....................................... 3,028 1,836
-------- --------
8,618 8,531
Commitments (Note 11)
Stockholders' equity:
Common stock, $.05 par value.............................. 706 703
Capital in excess of par value............................ 38,514 37,857
Retained earnings......................................... 271,656 277,450
Accumulated other comprehensive loss...................... (1,224) (1,598)
Treasury stock, at cost................................... (8,568) (9,035)
Unearned compensation..................................... (4,551) (5,240)
-------- --------
Total stockholders' equity........................... 296,533 300,137
-------- --------
Total liabilities and stockholders' equity........... $379,960 $352,519
======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
2
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenue:
Product............................................ $64,979 $81,449 $196,729 $235,889
Engineering........................................ 5,988 6,852 17,726 18,920
Other revenue...................................... 1,941 2,785 6,865 9,542
------- ------- -------- --------
Total net revenue.................................... 72,908 91,086 221,320 264,351
------- ------- -------- --------
Costs of sales:
Product............................................ 40,253 52,200 123,072 151,192
Engineering........................................ 5,620 5,367 17,474 15,398
Other.............................................. 1,126 1,669 3,847 4,901
Asset impairment charges (Note 5).................. 8,883
------- ------- -------- --------
Total cost of sales.................................. 46,999 59,236 153,276 171,491
------- ------- -------- --------
Gross Margin......................................... 25,909 31,850 68,044 92,860
Operating expenses:
Research and product development................... 9,643 10,641 31,054 30,134
Selling and marketing.............................. 8,200 8,813 24,641 24,115
General and administrative......................... 6,905 7,909 21,681 22,902
------- ------- -------- --------
24,748 27,363 77,376 77,151
Income (loss) from operations........................ 1,161 4,487 (9,332) 15,709
Other (income) expense:
Interest income, net............................... (913) (1,314) (2,946) (4,254)
Equity in unconsolidated affiliates................ 688 (1,331) (681) (1,192)
Other, net......................................... (16) 94 98 516
------- ------- -------- --------
(241) (2,551) (3,529) (4,930)
Income (loss) before income taxes and minority
interest........................................... 1,402 7,038 (5,803) 20,639
Provision (benefit) for income taxes (Note 10)....... (1,345) 2,006 (2,785) 6,358
Minority interest.................................... 176 294
------- ------- -------- --------
Net income (loss).................................... $ 2,747 $ 4,856 $ (3,018) $ 13,987
======= ======= ======== ========
Net income (loss) per common share: (Note 7)
Basic........................................... $ 0.21 $ 0.37 $ (0.23) $ 1.08
Diluted......................................... $ 0.21 $ 0.37 $ (0.23) $ 1.07
Weighted average shares outstanding: (Note 7)
Basic........................................... 13,112 12,992 13,107 12,901
Diluted......................................... 13,256 13,127 13,107 13,044
</Table>
The accompanying notes are an integral part of these financial statements.
3
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
APRIL 30,
-----------------
2002 2001
------- -------
OPERATING ACTIVITIES:
Net Income (loss)......................................... $(3,018) $13,987
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes.................................. (4,134) 545
Depreciation and amortization.......................... 12,573 10,128
Minority interest in net income of consolidated
subsidiaries.......................................... 294
Allowance for doubtful accounts........................ 415 (22)
Impairment of assets................................... 8,883
Loss(gain)on sale of equipment......................... 58 (51)
Equity gain in unconsolidated affiliates............... (681) (1,192)
Loss on investment..................................... 487
Compensation from stock grants......................... 733 734
Net changes in operating assets and liabilities (Note
8).................................................... 37,070 (17,529)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 51,899 7,381
------- -------
INVESTING ACTIVITIES:
Investments in affiliated companies (Note 3).............. (9,500)
Return of investment from affiliated company.............. 1,502 1,000
Additions to property, plant and equipment................ (18,332) (11,940)
Capitalized software...................................... (1,767) (2,369)
Proceeds from sale of property, plant and equipment....... 74 109
Maturities of marketable securities....................... 11,585 10,320
------- -------
NET CASH USED IN INVESTING ACTIVITIES..................... (16,438) (2,880)
------- -------
FINANCING ACTIVITIES:
Payments on debt and capital lease obligations............ (1,044) (412)
Issuance of common stock pursuant to stock options and
employee stock purchase plan........................... 1,079 1,230
Dividends paid to shareholders............................ (2,776) (2,714)
------- -------
NET CASH USED IN FINANCING ACTIVITIES..................... (2,741) (1,896)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................... 861 (618)
======= =======
NET INCREASE IN CASH & CASH EQIVALENTS.................... 33,581 1,987
------- -------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 46,013 29,132
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $79,594 $31,119
======= =======
</Table>
The accompanying notes are an integral part of these financial statements.
4
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Analogic
Corporation (the "Company") presented herein have been prepared pursuant to the
rules of the Securities and Exchange Commission for quarterly reports on Form
10-Q and do not include all of the information and note disclosures required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the results for all
periods presented. The results of the operations for the three and nine months
ended April 30, 2002 are not necessarily indicative of the results to be
expected for the fiscal year ending July 31, 2002 or any other interim period.
These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended July 31, 2001 included
in the Company's Form 10-K as filed with the Securities and Exchange Commission
on October 26, 2001.
The financial statements have not been audited by our independent certified
public accountants. The consolidated balance sheet as of July 31, 2001 contains
data derived from audited financial statements.
Certain financial statement items have been reclassified to conform to the
current year's financial presentation format.
2. BALANCE SHEET INFORMATION
Additional information for certain balance sheet accounts is as follows for
the periods indicated:
<Table>
<Caption>
APRIL 30, JULY 31,
2002 2001
--------- --------
Inventory:
Raw materials.......................................... $36,065 $35,660
Work-in-process........................................ 14,392 15,642
Finished goods......................................... 11,899 9,394
------- -------
$62,356 $60,696
======= =======
Accrued liabilities:
Accrued employee compensation and benefits............. $ 8,951 $14,617
Accrued warranty....................................... 3,035 3,202
Customer's deposit (Note 12)........................... 4,252 972
Other.................................................. 2,914 3,059
------- -------
$19,152 $21,850
======= =======
Deferred Revenue:
Long lead time components (Note 12).................... $30,000 $ --
Other.................................................. 5,812 4,333
------- -------
$35,812 $ 4,333
======= =======
</Table>
3. INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES
In September 2001, the Company acquired a 19% interest in Cedara Software
Corporation of Mississauga, Ontario, Canada, in exchange for cash of $7,500 and
other considerations. The Company
5
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded an investment of $2,469 and a premium in excess of book value of
$5,031, which was applied to intangible assets related to acquired technologies
and is being amortized over the estimated useful life of five years. The Company
accounts for this investment using the equity method of accounting due to the
Company's ability to exercise influence over operating and financial policies
and has two of the seven seats on Cedara's board of directors. During the nine
months of fiscal 2002, the Company recorded a gain of $513 from its share of
profit in Cedara, with a carrying value of this investment at April 30, 2002 of
$2,982. The company also recognized amortization of the intangible asset of $588
during the nine months of fiscal 2002, with a carrying value of the intangible
asset at April 30, 2002 of $4,443, which is classified as Other Assets in the
Condensed Consolidated Balance Sheets. The Company has guaranteed the debt owed
by Cedara to its bank lender through the provision of a credit facility with
Analogic's principal bank for approximately $6,300.
As part of the Company's original investment agreement, Cedara agreed to
grant the Company pre-emptive rights whereby it has the right to maintain a 19%
equity interest in the event of certain future issuances of stock by Cedara.
Cedara had issued additional stock and on May 3, 2002 the Company acquired an
additional 580,641 of common shares of Cedara for approximately $872 to maintain
the Company's interest of approximately 19%.
During the first quarter of fiscal 2002, the Company's subsidiary,
Camtronics Medical Systems, Ltd entered into an agreement to purchase a 15%
interest in CardioWorks, Inc. for $2,000. CardioWorks specializes in knowledge
databases for electronics medical records. Camtronics plans to integrate
CardioWorks knowledge database in a digital charting product to be offered as
part of the Company's VERICIS product line. The Company recorded $1,900 as an
investment and $100 as intangible assets related to intellectual property. The
Company also recorded its share of the 15% equity loss in CardioWorks in the
amount of $76, representing CardioWorks cumulative losses.
4. DIVIDENDS
The Company declared dividends of $.07 per common share as follows: on June
11, 2002, payable July 9, 2002 to shareholders of record on June 25, 2002; on
March 16, 2002, payable April 15, 2002 to shareholders of record on April 1,
2002; on December 11, 2001, payable January 10, 2002 to shareholders of record
on December 26, 2001; and on October 11, 2001, payable November 8, 2001 to
shareholders of record on October 25, 2001.
5. ASSET IMPAIRMENT CHARGES
During the quarter ending October 31, 2001, Analogic recorded asset
impairment charges totaling $8,883 on a pre-tax basis.
As a result of the continued decline in the economic and business
conditions in the telecommunications industry, Analogic decided to terminate
activities related to Anatel, the Company's wholly-owned telecommunications
subsidiary. The Company recorded a pre-tax charge of $1,901 related to the
impairment of purchased intangibles and other long-lived assets. The impairment
charge is equal to the amount by which the assets' carrying value exceeded the
present value of their estimated discounted cash flows. Additionally, a pre-tax
charge of $557 related to obsolete inventory, as well as a pre-tax charge of
$1,120 related to capitalized software, has been recorded as those assets have
been deemed to be unrecoverable. The Company also recorded a pretax asset
impairment charge of $3,200 in fiscal 2001 primarily for inventory and
capitalized software related to Anatel.
The Company decided to discontinue the sales of certain of its older and
unprofitable product lines within its semi-conductor test equipment business in
order to focus its resources on the highest potential growth areas within this
business. As a result, the Company recorded a pre-tax charge of $902 related to
the impairment of purchased intangibles and other long-lived assets. The
impairment charge is equal to the amount by which the
6
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets' carrying value exceeded the present value of their estimated discounted
cash flows. Additionally, a pre-tax charge of $3,600 related to excess and
obsolete test equipment inventory, as well as a pre-tax charge of $803 related
to capitalized software, has been recorded as those assets have been deemed to
be unrecoverable. The Company also incurred immaterial costs related to
involuntary terminations and other related activities. The entire balance of
each charge has been recorded within the Cost of Sales section of the Company's
Condensed Consolidated Statements of Operations.
The inventory reserve established in fiscal year 2001 and in the first
quarter of fiscal year 2002 as part of the activities noted above totaled
$5,657. No inventory specifically related to this reserve was scrapped during
the third quarter ended April 30, 2002. A total of $659 of this inventory was
scrapped and charged against the reserve during the nine months ended April 30,
2002.
6. COMPREHENSIVE INCOME (LOSS)
The following table presents the calculation of total comprehensive income
(loss) and its components:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income (loss).............................. $2,747 $4,856 $(3,018) $13,987
Other comprehensive income (loss) net of tax:
Unrealized gains and losses from marketable
securities, net of taxes of $156 and $80
for the three months ended April 30, 2002
and 2001, and $11 and $600 for the nine
months ended April 30, 2002 and 2001...... (237) (121) 19 918
Foreign currency translation adjustment, net
of taxes of $475 and $328 for the three
months ended April 30, 2002 and 2001, and
$234 and $417 for the nine months ended
April 30, 2002 and 2001................... 725 (502) 355 (643)
------ ------ ------- -------
Total comprehensive income (loss).............. $3,235 $4,233 $(2,644) $14,262
====== ====== ======= =======
</Table>
7. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income (loss).............................. $2,747 $4,856 $(3,018) $13,987
====== ====== ======= =======
Basic:
Weighted average number of common shares
outstanding............................. 13,112 12,992 13,107 12,901
====== ====== ======= =======
Net income(loss) per share................ $ 0.21 $ 0.37 $ (0.23) $ 1.08
====== ====== ======= =======
Diluted:
Weighted average number of common share
outstanding............................. 13,112 12,992 13,107 12,901
Dilutive effect of stock options.......... 144 135 143
------ ------ ------- -------
Total................................... 13,256 13,127 13,107 13,044
====== ====== ======= =======
Net income(loss) per share..................... $ 0.21 $ 0.37 $ (0.23) $ 1.07
====== ====== ======= =======
</Table>
7
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the three months ended April 30, 2002, options to acquire 20 shares of
common stock have been excluded from the calculation of diluted earnings per
share because the options' price was greater than the average market price of
the common shares. For the nine months ended April 30, 2002, options to acquire
809 shares of common stock and 126 shares of unvested restricted common stock
have been excluded from the calculation of diluted earnings per share, as their
inclusion would have been antidilutive.
For the three and nine months ended April 30, 2001, options to acquire 130
and 175 shares of common stock, respectively, have been excluded from the
calculation of diluted earnings per share because the options' price was greater
than the average market price of the common shares.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Changes in operating assets and liabilities are as follows:
<Table>
<Caption>
NINE MONTHS ENDED
APRIL 30,
-------------------
2002 2001
------- --------
Accounts and notes receivable............................... $13,121 $ (5,317)
Inventories................................................. (5,535) (10,442)
Other current assets........................................ (1,347) (1,694)
Other assets................................................ 139 (456)
Accounts payable, trade..................................... 3,034 2,290
Accrued expenses and other current liabilities.............. (3,035) 996
Deferred revenue............................................ 31,514 (1,071)
Accrued income taxes........................................ (821) (1,835)
------- --------
Net changes in operating assets and liabilities............. $37,070 $(17,529)
======= ========
</Table>
9. SEGMENT INFORMATION
The Company's operations are primarily within a single segment within the
electronics industry (Medical Instrumentation Technology Products). These
operations encompass the design, manufacture and sale of high technology,
high-performance, high precision data acquisition, conversion (analog/digital)
and signal processing instruments and systems to customers that both manufacture
and market products for medical and industrial use. The other segment represents
the Company's hotel and other operations, which do not meet the materiality
requirements for separate disclosure. The table below presents information about
the Company's reportable segments:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Medical instrumentation technology
products................................ $60,407 $81,448 $192,147 $236,285
Other...................................... 12,501 9,638 29,173 28,066
------- ------- -------- --------
Total................................. $72,908 $91,086 $221,320 $264,351
======= ======= ======== ========
Income(loss) before income taxes and minority
interest:
Medical instrumentation technology
product................................. $ 825 $ 5,335 $ (8,656) $ 14,492
Other...................................... 577 1,703 2,853 6,147
------- ------- -------- --------
Total................................. $ 1,402 $ 7,038 $ (5,803) $ 20,639
======= ======= ======== ========
</Table>
8
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
APRIL 30, 2002 JULY 31, 2001
-------------- -------------
Identifiable assets:
Medical instrumentation technology product................ $251,154 $237,642
Other..................................................... 128,806 114,877
-------- --------
Total................................................ $379,960 $352,519
======== ========
</Table>
10. TAXES
The effective tax rate for the nine months ended April 30, 2002 was 48%.
This rate represents the actual effective rate for that period. The effective
tax rate was calculated using this methodology, as opposed to a methodology that
anticipates the effective tax rate based upon estimated annual operating
results, because insignificant changes in estimated operating results for the
balance of the year will have a dramatic impact on the effective tax rate. The
tax rate of 48% represents the results of the benefit derived from the net
operating loss carry back and the benefit of tax free interest income along with
the extraterritorial income exclusion.
11. COMMITMENTS
The Company's Danish subsidiary B-K Medical A/S announced in May 2001 the
construction of a new 110,000 square foot facility in Herlev, north of
Copenhagen, for the manufacturing of specialized diagnostic ultrasound equipment
at a cost of $15,500 which was funded internally.
Manufacturing, R&D, service, marketing, sales and administrative functions
moved into this new facility in May 2002.
The Company has guaranteed the debt owed by Cedara to its bank lender
through the provision of a credit facility with Analogic's principal bank for
approximately $6,300.
12. SIGNIFICANT EVENT
The Company announced in the third quarter of fiscal 2002 that it has
received an open-ended order for up to 1,000 of its Explosive Assessment
Computed Tomography (EXACT(TM)) Systems from an Original Equipment Manufacturer
(OEM). The EXACT is the "heart" of a certified Explosive Detection System (EDS)
that is being purchased by the United States Government and installed at major
airports across the United States. This order has the potential value of
approximately $500,000, including spare parts, associated services, and
infrastructure enhancements. The initial release was for approximately $100,000,
including initial units, spare parts, infrastructure enhancements, and $30,000
for long-lead-time components for the next release. This amount has been
recorded as Deferred Revenue on the Condensed Consolidated Balance Sheets.
Funding of approximately $22,000 for infrastructure enhancements was also
included for the Company to quickly ramp up production and significantly
increase its manufacturing capacity in preparation for additional releases. As
of April 30, 2002, $5,000 of the ramp-up funding has been received and
approximately $1,500 has been spent. The balance of $3,500 is recorded as
Customer Deposit on the Condensed Consolidated Balance Sheet.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion provides an analysis of Analogic Corporation's
financial condition and results of operations. The discussion below contains
forward looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934. Such forward looking statements involve
known and unknown risks, uncertainties, and other factors, which may cause the
actual results, performance, or achievements of Analogic Corporation to differ
from the projected results. Such factors are discussed in greater detail on page
15. All statements other than statements of historical fact the Company makes in
this document or in any document incorporated by reference are forward looking.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 1 of
the Company's Form 10K for the year ended July 31, 2001 as filed with the
Securities and Exchange Commission on October 26, 2001. Certain of our
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
as appropriate. Our critical accounting policies include:
REVENUE RECOGNITION
Revenue related to product sales is recognized upon shipment provided that
title and risk of loss has passed to the customer, there is persuasive evidence
of an arrangement, the sales price is fixed or determinable, collection of the
related receivable is reasonably assured and customer acceptance criteria, if
any, have been successfully demonstrated. For product sales with acceptance
criteria that are not successfully demonstrated prior to shipment, revenue is
recognized upon customer acceptance. Service revenues are recognized at the time
the services are rendered. The Company provides engineering services to some of
its customers on a contractual basis and recognizes revenue using the percentage
of completion method. License revenue, based on contractual agreements reached
with customers, is recognized over the term of the license. Revenue related to
the hotel operations are recognized as services are performed.
INVENTORIES
The Company values inventory at the lower of cost or market using the
first-in, first-out (FIFO) method. Management assesses the recoverability of
inventory based on types and levels of inventory held, forecasted demand and
changes in technology. These assessments require management judgments and
estimates, and valuation adjustments for excess and obsolete inventory may be
recorded based on these assessments. Estimates of future product demand or
judgments related to changes in technology may prove to be inaccurate, in which
case the carrying value of inventory could be overstated or understated. In the
event of any such inaccuracies, an adjustment would be recognized in cost of
goods sold at the time of such determination.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities and accounts receivable. The Company places its cash
investments and marketable securities in high credit quality financial
instruments and by policy, limits the amount of credit exposure to any one
financial institution. The Company grants credit to domestic and foreign
original equipment manufacturers, distributors and end users, performs ongoing
credit evaluations and adjust credit limits based upon payment history and the
customer's current credit worthiness. The Company continuously monitors
collections and payments from our customers and maintains a provision for
estimated credit losses based upon historical experience and any specific
customer collections issues that have been identified. While such credit losses
have historically been within expectations and provisions established, there is
no guarantee that the Company will continue to experience the same credit loss
rates as in the past. Since
10
the accounts receivable are concentrated in a relatively few number of
customers, a significant change in liquidity or financial position of any one of
these customers could have a material adverse impact on the collectability of
accounts receivables and future operating results.
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES
The Company has several investments in affiliated companies related to
areas of the Company's strategic focus. The Company accounts for these
investments using the equity method of accounting. In assessing the
recoverability of these investments, the Company must make certain assumptions
and judgments based on changes in the Company's overall business strategy, the
financial condition of the affiliated companies, market conditions and the
industry and economic environment in which the entity operates. Adverse changes
in market conditions or poor operating results of affiliated companies could
result in losses or an inability to recover the carrying value of the
investments, thereby requiring an impairment charge in the future.
INTANGIBLE AND OTHER LONG-LIVED ASSETS
The Company has intangible and other long-lived assets primarily related to
technology, licenses, capitalized software and property, plant and equipment. In
assessing the recoverability of these assets, the Company must make assumptions
regarding estimated future cash flows, the expected period in which the asset is
to be utilized, changes in technology and customer demand. If these estimates or
their related assumptions change in the future, the Company may be required to
record impairment charges for these assets not previously recorded.
RESULTS OF OPERATIONS
NINE MONTHS FISCAL 2002 (APRIL 30, 2002) VS. NINE MONTHS FISCAL 2001 (APRIL 30,
2001)
Product revenue for the nine months ended April 30, 2002 was $196,729 as
compared to $235,889 for the same period last year, a decrease of 17%. The
decrease in revenue of $39,160 was primarily due to a decrease of sales volume
in Industrial Technology Products of $24,480, or 88%, due to a severe decline in
volume of its semi-conductor Automatic Test Equipment (ATE) boards and a
decrease in revenue in Medical Technology Products of $13,716 or 8%, primarily
due to lower volume of the Company's patient monitoring and medical imaging
equipment.
Engineering revenue for the nine months ended April 30, 2002 was $17,726
compared to $18,920 for the same period last year, a decrease of 6%. The change
was primarily due to a decrease in the demand for these services.
Other revenues of $6,865 and $9,542 represent revenue from the Hotel
operation for the nine months ended April 30, 2002 and 2001, respectively. The
decrease in revenues is mostly attributable to the current economic decline in
the travel and lodging industries.
Cost of product sales was $123,072 and $151,192 for the nine months ended
April 30, 2002 and 2001, respectively. Cost of product sales as a percentage of
product revenue was 63% for the nine months ended April 30, 2002 compared to 64%
for the same period last year.
Engineering cost of sales was $17,474 for the nine months ended April 30,
2002 compared to $15,398 for the same period last year. The total cost of
engineering sales as a percentage of engineering revenue increased to 99% for
the nine months ending April 30, 2002 from 81% for the nine months ended April
30, 2001. The increase was primarily attributable to the unanticipated costs
associated with the development of leading edge, high precision health and
security imaging systems.
Other costs of sales were $3,847 and $4,901 from the Company's Hotel
operation for the nine months ended April 30, 2002 and 2001, respectively.
During the nine months ended April 30, 2002, the Company has recorded asset
impairment charges totaling $8,883 on a pre-tax basis.
11
As a result of the continued decline in the economic and business
conditions in the telecommunications industry, Analogic decided to terminate
activities related to Anatel, the Company's wholly-owned telecommunications
subsidiary. The Company recorded a pre-tax charge of $1,901 related to the
impairment of purchased intangibles and other long-lived assets. The impairment
charge is equal to the amount by which the assets' carrying value exceeded the
present value of their estimated discounted cash flows. Additionally, a pre-tax
charge of $557 related to obsolete inventory, as well as a pre-tax charge of
$1,120 related to capitalized software, has been recorded as those assets have
been deemed to be unrecoverable. The Company also recorded a pretax asset
impairment charge of $3,200 in fiscal 2001 primarily for inventory and
capitalized software related to Anatel.
The Company also decided to discontinue the sales of certain of its older
and unprofitable product lines within its semi-conductor test equipment
business, in order to focus its resources on the highest potential growth areas
within this business. As a result, the Company recorded a pre-tax charge of $902
related to the impairment of purchased intangibles and other long-lived assets.
The impairment charge is equal to the amount by which the assets' carrying value
exceeded the present value of their estimated discounted cash flows.
Additionally, a pre-tax charge of $3,600 related to excess and obsolete test
equipment inventory, as well as a pre-tax charge of $803 related to capitalized
software, has been recorded as those assets have been deemed to be
unrecoverable. The Company also incurred immaterial costs related to involuntary
terminations and other related activities. The entire balance of each charge has
been recorded within the Cost of Sales section of the Company's Condensed
Consolidated Statements of Operations.
The inventory reserve established in fiscal year 2001 and in the first
quarter of fiscal year 2002 as part of the activities noted above totaled
$5,657. A total of $659 of this inventory was scrapped and charged to the
reserve during the nine months ended April 30, 2002.
Research and Development expenses were $31,054 for the nine months ended
April 30, 2002, or 14% of total revenue, as compared to $30,134 for the same
period the prior year, or 11% of total revenue. The increase of $920 was
primarily due to research and development activities associated with the
development of medical and explosive detection system (EDS) products.
Selling and marketing expenses were $24,641 for the nine months ended April
30, 2002, or 11% of total revenue, as compared to $24,115, or 9% of total
revenue for the same period last year. The increase of $526 was primarily due to
the Company's subsidiaries, Camtronics and B-K Medical, as they continue to
expand their activities in the end user market.
General and administrative expenses were $21,681, or 10% of total revenue,
for the nine months ended April 30, 2002, as compared to $22,902, or 9% of total
revenue, for the same period last year. The decrease of $1,221 was primarily due
to the Company's ongoing cost reduction and containment initiatives, including
staff reductions and a reduction in discretionary expenditures.
Interest income net of interest expense was $2,946 for the nine months
ended April 30, 2002, as compared with $4,254 for the same period last year. The
decrease of $1,308 was primarily the result of lower interest rates on short
term investments.
The Company recorded income related to equity in unconsolidated affiliates
of $681 for the nine months ended April 30, 2002, versus income of $1,192 for
the same period last year. The equity income for the nine months ended April 30,
2002 in unconsolidated affiliates primarily consisted of a profit of $1,235
related to its share of profit in Enhanced CT Technology LLC that generated
income from license related royalties based on sales of medical imaging
equipment, and income of $513 for its share of profit in Cedara Software
Corporation, in which the Company acquired a 19% interest in September 2001,
partially offset by a loss of $975 related to its share of loss in Shenzhen Anke
High-Tech Co., Ltd. (SAHCO). For the nine months ended April 30, 2001 the
Company recorded a gain of $1,245 related to its share of profit in Enchanced CT
Technology LLC, partially offset by a loss of $111 related to its share of loss
in SAHCO.
Other expenses were $98 for the nine months ended April 30, 2002, as
compared to $516 for the same period last year. The decrease was primarily due
to an other than temporary impairment on an investment of
12
restricted securities of approximately $487 recorded in the nine months of
fiscal 2001 versus none in fiscal 2002.
The effective tax rate for the nine months ended April 30, 2002 was 48%.
This rate represents the actual effective rate for that period. The effective
tax rate was calculated using this methodology, as opposed to a methodology that
anticipates the effective tax rate based upon estimated annual operating
results, because insignificant changes in estimated operating results for the
balance of the year will have a dramatic impact on the effective tax rate. The
tax rate of 48% represents the results of the benefit derived from the net
operating loss carry back and the benefit of tax free interest income along with
the extraterritorial income exclusion.
For the nine months ended April 30, 2001 the effective tax rate was 31%,
which reflected the benefit of tax exempt interest and the utilization of the
Foreign Sales Corporations.
Net loss for the nine months ended April 30, 2002 was $3,018 or $0.23 per
basic and diluted share as compared with net income of $13,987 or $1.08 per
basic share and $1.07 per diluted share for the same period last year. The net
loss for the nine months of fiscal 2002 includes a pre-tax asset impairment
charge of $8,883 or $4,619 after taxes, related to the Company's
telecommunications subsidiary Anatel, and certain assets of the Company's Test
and Measurement Division. The decrease in net income over the prior year,
excluding the asset impairment charges, was primarily the result of decreased
revenue in the semi-conductor industry, the effect of the recession in several
of the business units, the equity loss in SAHCO, and change in the effective tax
rate.
THIRD QUARTER FISCAL 2002 (APRIL 30, 2002) VS. THIRD QUARTER FISCAL 2001 (APRIL
30 2001)
Product revenue for the three months ended April 30, 2002 was $72,908 as
compared to $91,086 for the same period last year, a decrease of 20%. The
decrease in revenue of $18,178 was due to a decrease in sales of Medical
Technology Products of $13,503, or 21%, primarily due to the effect of the
recession and lower demand for the Company's cardiovascular and patient
monitoring systems and lower demand for medical imaging equipment; a decrease in
sales volume in Industrial Technology Products of $6,197 or 86%, due to a
decline in its semi-conductor Automatic Test Equipment (ATE) boards; and an
increase in sales in Industrial Processing Technology Products of $3, 230 mainly
for initial shipments of its Explosive Assessment Computed Tomography
(EXACT(TM)) Systems as part of a multi-million dollar order the Company has
received for the EXACT systems.
Engineering revenue for the three months ended April 30, 2002 was $5,988
compared to $6,852 for the same period last year, a decrease of 13%. The change
was primarily due to a decrease in the demand for these services.
Other revenues of $1,941 and $2,785 represent revenue from the Hotel
operation for the three months ended April 30, 2002 and 2001, respectively. The
decrease in revenues is due to the current economic decline in the travel and
lodging industries.
Cost of product sales was $40,253 and $52,200 for the three months ended
April 30, 2002 and 2001, respectively. Cost of product sales as a percentage of
product revenue was 62% for the three months ended April 30, 2002 compared to
64% for the same period last year. The decrease was primarily due to changes in
product mix.
Engineering cost of sales was $5,620 for the three months ended April 30,
2002 compared to $5,367 for the same period last year. The total cost of
engineering sales as a percentage of engineering revenue increased to 94% for
the three months ended April 30, 2002 from 78% for the three months ended April
30, 2001. This percentage increase was primarily attributable to the
unanticipated costs associated with the development of leading edge, high
precision health and security imaging systems.
Research and Development expenses were $9,643 for the quarter ended April
30, 2002, or 13% of total revenue, as compared to $10,641 for the same period
the prior year, or 12% of total revenue. The decrease of $998 was mostly
attributable to terminated activities associated with Anatel.
13
Selling and marketing expenses were $8,200 for the three months ended April
30, 2002, or 11% of total revenue, as compared to $8,813, or 10% of total
revenue for the same period last year. The decrease of $613 was primarily due to
the cost containment efforts that had been put in place across the Company.
General and administrative expenses were $6,905, or 9% of total revenue,
for the three months ended April 30, 2002, as compared to $7,909, or 9% of total
revenue, for the same period last year. The decrease of $1,004 was primarily due
to the Company's on going cost reduction and containment initiatives, including
staff reductions and a reduction in discretionary expenditures.
Interest income net of interest expense was $913 for the three months ended
April 30, 2002, as compared with $1,314 for the same period last year. The
decrease of $401 was primarily the result of lower interest rates on short term
investments.
The Company recorded a loss of $688 related to equity in unconsolidated
affiliates for the three months ended April 30, 2002, versus a gain of $1,331
for the same period last year. The equity loss for the three months ended April
30, 2002 in unconsolidated affiliates consisted of a loss of $1,308 in SAHCO and
a loss of $76 related to its share of loss in CardioWorks (Note 3), partially
offset by a gain of $410 for its share of profit in Enhanced Ct Technology LLC
and a gain of $286 for its share of profit in Cedara Software Corporation, in
which the Company acquired a 19% interest in September 2001. For the three
months ended April 30, 2001 the Company reported a gain of $525 for its share of
profit in Enhanced CT Technology LLC and a gain of $825 related to its share of
profit in SAHCO, resulted primarily from a gain of $810 for the sale of 5.4%
equity interest in SAHCO to a group of investors.
The effective tax rate for the nine months ended April 30, 2002 was 48%.
This rate represents the actual effective rate for that period. The effective
tax rate was calculated using this methodology, as opposed to a methodology that
anticipates the effective tax rate based upon estimated annual operating
results, because insignificant changes in estimated operating results for the
balance of the year will have a dramatic impact on the effective tax rate. The
tax rate of 48% represents the results of the benefit derived from the net
operating loss carry back and the benefit of tax free interest income along with
the extra territorial income exclusion. As a result, the tax benefit amount for
the three months ended April 30, 2002 reflects the cumulative effect of the
change in the effective rate. For the three months ended April 30, 2001 the
effective tax rate was 29%, which reflected the benefit of tax exempt interest
and the utilization of the Foreign Sales Corporations.
Net income for the third quarter ended April 30, 2002 was $2,747 or $0.21
per basic and diluted share as compared with net income of $4,856 or $0.37 per
basic and per diluted share for the same period last year. The decrease in net
income over the prior year was primarily the result of decreased revenue in the
semi-conductor industry, the effect of the recession in several of the business
units, and the equity loss in SAHCO.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations in the nine months of fiscal 2002 was $51,899
compared to $7,381 during the same period of the prior year. Although the
company generated a net loss of $3,018 for the nine months of fiscal 2002, when
the asset impairment charge of $8,883 and other recurring non-cash adjustments
are added back to the net loss, operating cash of $51,899 was generated. This is
primarily due to the $30,000 advance received for the purchase of certain
long-lead-time components as part of the Company's EXACT(TM) order, and a
decrease in accounts receivable. Net cash used in investment activities was
$16,438 in the nine months of fiscal 2002, primarily due to the Company's
investment in Cedara of $7,500, the Company's investment in CardioWorks of
$2,000, and $18,332 used for additions to property, plant and equipment,
partially offset by return on investment from an affiliated company and
maturities of marketable securities. The increase in property, plant and
equipment was primarily for the construction of a new facility by the Company's
Danish subsidiary, B-K Medical. Net cash used from financing activities of
$2,741 was mostly due to dividends paid to shareholders and payment of debt.
The Company's balance sheet reflects a current ratio of 3.8 to 1 at April
30, 2002 and 6.1 to 1 at July 31, 2001. Liquidity is sustained principally
through funds provided from operations, with short term time deposits and
marketable securities available to provide additional sources of cash. The
Company places its cash
14
investments in high credit quality financial instruments and, by policy, limits
the amount of credit exposure to any one financial institution. The Company's
debt to equity ratio was .28 to 1 at April 30, 2002 and .17 to 1 at July 31,
2001. The current ratio decrease and the debt to equity ratio increase was
mostly attributable to funding received as part of the open-ended order for the
Company's EXACT(TM) Systems (Note 12). Management does not anticipate any
difficulties in financing operations at anticipated levels for the foreseeable
future.
During the nine months of fiscal 2002, the Company received a $20,000
revolving line of credit from its principal bank. Of this amount a $6,300 letter
of credit was used to guarantee a debt owed by Cedara to its bank lender. The
Company has approximately $30,000 in revolving lines of credit.
The carrying amounts reflected in the consolidated balance sheets of cash
and cash equivalents, trade receivables, and trade payables approximate fair
value at April 30, 2002 due to the short maturities of these instruments.
The Company maintains a bond investment portfolio of various issuers,
types, and maturities. The Company's cash and investments include cash
equivalents, which the Company considers to be investments purchased with
original maturities of three months or less. Investments having original
maturities in excess of three months are stated at amortized cost, which
approximates fair value, and are classified as available for sale. A rise in
interest rates could have an adverse impact on the fair value of the Company's
investment portfolio. The Company does not currently hedge these interest rate
exposures.
Accounts and notes receivable decreased by $12,901 during the nine months
ended April 30, 2002, primarily due to an increase in collection activities and
a decrease in revenue.
Inventory increased $5,817, before the asset impairment charges of $4,157,
during the nine months ended April 30, 2002, primarily due to an increase in raw
material purchases associated with the Company's Explosive Assessment Computed
Tomography (EXACT(TM)) Systems business.
Deferred revenue increased $31, 479 during the nine months ended April 30,
2002, mainly due to an advance of $30,000 for the purchase of certain
long-lead-time components for the next release of the open-ended order the
Company received. (Note 12)
Our contractual obligations at April 30, 2002, and the effect such
obligations are expected to have on liquidity and cash flows in future periods
are as follows:
<Table>
<Caption>
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
------- --------- --------- --------- -------
Long-term debt......................... $ 4,650 $ 224 $ 769 $497 $3,160
Capital lease obligations.............. 725 306 419
Operating leases....................... 6,697 2,581 4,053 314
------- ------ ------ ---- ------
$12,072 $3,111 $5,241 $811 $3,160
======= ====== ====== ==== ======
</Table>
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains statements, which to the extent that they
are not recitation of historical facts, constitute "forward looking statements"
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward looking statements,
including statements about product development, market and industry trends,
strategic initiatives, regulatory approvals, sales, profits, expenses, price
trends, research and development expenses and trends, and capital expenditures
involve risk and uncertainties and actual events and results may differ
significantly from those indicated in any forward looking statements.
15
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS. ANY OF THESE RISKS 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 may have a significant impact on
our operating results. If a major customer were to significantly reduce the
amount of business it does with us, there would be an adverse impact on our
operating results.
The following table sets forth the percentages of our total net sales of
our three largest customers in the last three fiscal years and the percentage of
our total net sales to our ten largest customers in those years:
<Table>
<Caption>
YEAR ENDED JULY 31,
---------------------
2001 2000 1999
----- ----- -----
Philips..................................................... 22% 16% 18%
General Electric............................................ 11% 10% 8%
Toshiba..................................................... 7% 9% 9%
Ten largest customers as a group............................ 62% 60% 60%
</Table>
Although we are seeking 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 services, our operating results and financial condition could be
adversely affected.
COMPETITION FROM EXISTING OR NEW COMPANIES IN THE MEDICAL INSTRUMENTATION
TECHNOLOGY INDUSTRY COULD CAUSE US TO EXPERIENCE DOWNWARD PRESSURE ON PRICES,
FEWER CUSTOMER ORDERS, REDUCED MARGINS, THE INABILITY TO TAKE ADVANTAGE OF NEW
BUSINESS OPPORTUNITIES AND THE LOSS OF MARKET SHARE.
We operate in a highly competitive industry. We are subject to competition
based upon product design, performance, pricing, quality and services and we
believe our innovative engineering and product reliability have been important
factors in our growth. While we try to maintain competitive pricing on those
products which are directly comparable to products manufactured by others, in
many instances our products will conform to more exacting specifications and
carry a higher price than analogous products manufactured by others.
Our competitors include divisions of some larger, more diversified
organizations as well as several specialized companies.
Some of them have greater resources and larger staffs than we have.
Many of our OEM customers and potential OEM customers have the capacity to
design and manufacture the products we manufacture for themselves. We face
competition from research and product development groups and the manufacturing
operations of our current and potential customers, who continually evaluate the
benefits of internal research and product development and manufacturing versus
outsourcing.
16
WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE THE SOLE SOURCE FOR OUR
COMPONENTS, AND OUR PRODUCTION WOULD BE SUBSTANTIALLY CURTAILED IF THESE
SUPPLIERS ARE NOT ABLE TO MEET OUR DEMANDS AND ALTERNATIVE SOURCES ARE 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 may have
to delay shipments or pay premium pricing, which would adversely affect our
operating results. In some cases, supply shortages of particular components will
substantially curtail 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, some of whom are
affiliated with customers or competitors and others of whom may be small, poorly
financed companies, for many of the other raw materials and components that we
use in our business. If we are unable to continue to purchase these raw
materials and components from our suppliers, our operating results would be
adversely affected. Because many of our costs are fixed, our margins depend on
our volume of output at our facilities and a reduction in volume will adversely
affect our margins.
IF WE ARE LEFT WITH EXCESS INVENTORY, OUR OPERATING RESULTS WILL BE ADVERSELY
AFFECTED.
Because of long-lead times and specialized product designs, we typically
purchase components and manufacture products for customer orders or in
anticipation of customer orders based on customer forecasts. For a variety of
reasons, such as decreased end-user demand for the products we are
manufacturing, our customers may not purchase all of the products we have
manufactured or for which we have purchased components. In either event, we
would attempt to recoup our materials 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 we
are unsuccessful in recouping our material and manufacturing costs, not only
would our net sales be adversely affected, but also our operating results would
be disproportionately 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 MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our business depends primarily on a specific segment of the electronics
industry, medical instrumentation technology products, which is subject to rapid
technological change and pricing and margin pressure. This industry has
historically been cyclical and subject to significant downturns characterized by
diminished product demand, rapid declines in average selling prices and
production over-capacity. In addition, changes in government policy relating to
reimbursement for the purchase and use of medical capital equipment could also
affect our sales. Our customers' markets are also subject to economic cycles and
are likely to experience recessionary periods in the future. The economic
conditions affecting our industry, in general, or any of our major customers, in
particular, may adversely affect our operating results. Our businesses outside
the medical instrumentation technology product sector are subject to the same or
greater technological and cyclical pressures.
OUR CUSTOMERS' DELAY OR INABILITY TO OBTAIN ANY NECESSARY UNITED STATES OR
FOREIGN REGULATORY CLEARANCES OR APPROVALS FOR THEIR PRODUCTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our products are used by a number of our customers in the production of
medical devices that are the subject of a high level of regulatory oversight. A
delay or inability to obtain any necessary United States or foreign regulatory
clearances or approvals for products could have a material adverse effect on our
business.
17
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, may be withdrawn or modified. Medical devices cannot be marketed in
the United States without clearance or approval by the FDA. Medical devices sold
in the United States must also be manufactured in compliance with FDA Good
Manufacturing Practices, which regulate the design, manufacture, packing,
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 manufacture, sale and use of medical
devices. Medical device products are also subject to approval and regulation by
foreign regulatory and safety agencies.
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 may 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 were to occur, the
price of our Common Stock would likely decline.
These factors include:
- variations in the timing and volume of customer orders relative to our
manufacturing capacity;
- introduction and market acceptance of our customers' new products;
- changes in demand for our customers' 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 or in our
customers' markets;
- changes in the cost or availability of components or skilled labor; and
- foreign currency exposure.
As is the case with many technology companies, we typically ship a
significant portion of our products in the last month of a quarter. As a result,
any delay in anticipated sales is likely to result in the deferral of the
associated revenue beyond the end of a particular quarter, which would have a
significant effect on our operating results for that quarter. In addition, most
of our operating expenses do not vary directly with net sales and are difficult
to adjust in the short term. As a result, if net sales for a particular quarter
were below our expectations, we could not proportionately reduce operating
expenses for that quarter, and, therefore, that revenue shortfall would have a
disproportionately adverse effect on our operating results for that quarter.
LOSS OF ANY OF OUR 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 employees or an inability to attract,
train and retain qualified and skilled employees, specifically engineering and
operations a personnel, could result in the loss of customers or otherwise
inhibit our ability to operate and grow our business successfully.
IF WE ARE UNABLE TO MAINTAIN OUR TECHNOLOGICAL EXPERTISE IN RESEARCH AND
PRODUCT DEVELOPMENT AND MANUFACTURING PROCESSES WE WILL NOT BE ABLE TO
SUCCESSFULLY COMPETE.
We believe that our future success will depend upon our ability to provide
research and product development and manufacturing services that meet the
changing needs of our customers. This requires that we successfully anticipate
and respond to technological changes in design and manufacturing a processes in
a cost-effective and timely manner. As a result, we continually evaluate the
advantages and feasibility of new product design and manufacturing processes. We
cannot, however, assure you that our development efforts will be successful.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company faces limited exposure to financial market risks, including
adverse movements in foreign currency exchange rates and changes in interest
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on the Company's financial results. The
Company's primary exposure has been related to local currency revenue and
operating expenses in Europe.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<Table>
<Caption>
ANALOGIC CORPORATION
Registrant
Date: June 12, 2002 /s/ BERNARD M. GORDON
----------------------------------------------
Bernard M. Gordon
Chairman of the Board of
Directors and Executive Chairman
Date: June 12, 2002 /s/ JOHN J. MILLERICK
----------------------------------------------
John J. Millerick
Senior Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
</Table>
20