- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED OCTOBER 31, 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
(Address of principal executive offices) (Zip Code)
</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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of Common Stock outstanding at December 5, 2002 was
13,291,098.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALOGIC CORPORATION
INDEX
<Table>
<Caption>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
October 31, 2002 and July 31, 2002.......................... 2
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended October 31, 2002 and 2001........ 3
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended October 31, 2002 and 2001........ 4
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 5-11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 12-20
Item 3. Quantitative and Qualitative Disclosures about Market
Risks....................................................... 20
Item 4. Controls and Procedures..................................... 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 21
Signatures........................................................... 22
Certifications....................................................... 23-24
Exhibit Index........................................................ 25
</Table>
1
PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
OCTOBER 31, JULY 31,
2002 2002
----------- --------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $123,551 $123,168
Marketable securities, at market.......................... 54,515 58,621
Accounts and notes receivable, net of allowance for
doubtful accounts of $1,976 at October 31, 2002, and
$1,308 at July 31, 2002................................ 73,986 61,119
Inventories (Note 2)...................................... 87,385 65,128
Refundable and deferred income taxes...................... 9,147 9,023
Other current assets...................................... 7,598 7,969
-------- --------
Total current assets................................... 356,182 325,028
Property, plant and equipment, net.......................... 82,925 79,613
Investments in and advances to affiliated companies (Note
12)....................................................... 6,786 8,619
Capitalized software, net................................... 4,485 4,333
Other assets, net........................................... 8,037 6,314
-------- --------
Total assets........................................... $458,415 $423,907
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Mortgage and other notes payable.......................... $ 227 $ 226
Obligations under capital leases.......................... 270 314
Accounts payable, trade................................... 41,841 24,731
Accrued liabilities (Note 2).............................. 20,987 17,267
Advance payments and deferred revenue (Note 2)............ 48,778 66,474
Accrued income taxes...................................... 14,350 2,487
-------- --------
Total current liabilities.............................. 126,453 111,499
-------- --------
Long-term liabilities:
Mortgage and other notes payable.......................... 4,012 4,069
Obligations under capital leases.......................... 306 337
Deferred revenue and other................................ 745 745
Deferred income taxes..................................... 2,336 2,162
-------- --------
Total long-term liabilities............................ 7,399 7,313
-------- --------
Commitments Stockholders' equity:
Common stock, $.05 par.................................... 707 706
Capital in excess of par value............................ 39,697 39,379
Retained earnings......................................... 296,183 277,074
Accumulated other comprehensive income.................... 377 458
Treasury stock, at cost................................... (8,271) (8,313)
Unearned compensation..................................... (4,130) (4,209)
-------- --------
Total stockholders' equity............................. 324,563 305,095
-------- --------
Total liabilities and stockholders' equity............. $458,415 $423,907
======== ========
</Table>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
----------------------
2002 2001
---------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net revenue:
Product................................................... $126,646 $65,353
Engineering............................................... 6,380 7,477
Other..................................................... 2,676 2,972
-------- -------
Total net revenue........................................... 135,702 75,802
-------- -------
Cost of sales:
Product................................................... 69,869 42,067
Engineering............................................... 4,896 6,623
Other..................................................... 1,241 1,455
Asset impairment charges.................................. -- 8,883
-------- -------
Total cost of sales......................................... 76,006 59,028
-------- -------
Gross margin................................................ 59,696 16,774
-------- -------
Operating expenses:
Research and product development.......................... 11,377 10,162
Selling and marketing..................................... 8,131 8,352
General and administrative................................ 8,085 7,949
-------- -------
27,593 26,463
-------- -------
Income (loss) from operations............................... 32,103 (9,689)
-------- -------
Other (income) expense:
Interest income........................................... (1,219) (1,155)
Equity in unconsolidated affiliates....................... 986 (738)
Other..................................................... (198) 166
-------- -------
(431) (1,727)
-------- -------
Income (loss) before income taxes........................... 32,534 (7,962)
Provision (benefit) for income taxes (Note 11).............. 12,363 (1,592)
-------- -------
Net income (loss)........................................... $ 20,171 $(6,370)
======== =======
Net income (loss) per common share: (Note 8)
Basic..................................................... $ 1.53 $ (0.49)
Diluted................................................... 1.52 (0.49)
Weighted average shares outstanding: (Note 8)
Basic..................................................... 13,173 13,093
Diluted................................................... 13,252 13,093
</Table>
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 20,171 $ (6,370)
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes.................................. 72 (1,607)
Depreciation and amortization.......................... 4,593 4,216
Allowance for doubtful accounts........................ 685 75
Impairment of assets................................... -- 8,883
Gain on sale of equipment.............................. 3 32
Equity (gain) loss in unconsolidated affiliates........ 986 (738)
Compensation from stock grants......................... 279 200
Net changes in operating assets and liabilities (Note
9).................................................... (21,269) 9,786
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES:................ 5,520 14,477
-------- --------
INVESTING ACTIVITIES:
Investments in and advances to affiliated companies....... -- (7,500)
Return of investment from affiliated company.............. 516 1,002
Purchase of FTNI, net of cash acquired (Note 3)........... (1,751) --
Additions to property, plant and equipment................ (6,892) (7,309)
Capitalized software...................................... (545) (688)
Proceeds from sale of property, plant and equipment....... 49 4
Maturities of marketable securities....................... 3,685 1,165
-------- --------
NET CASH USED BY INVESTING ACTIVITIES..................... (4,938) (13,326)
-------- --------
FINANCING ACTIVITIES:
Payments on debt and capital lease obligations............ (103) (246)
Proceeds from long-term debt.............................. -- 3,494
Issuance of stock pursuant to stock options and employee
stock purchase plan.................................... 137 28
-------- --------
NET CASH USED BY IN FINANCING ACTIVITIES.................. 34 3,276
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................ (233) 163
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 383 4,590
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 123,168 46,013
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $123,551 $ 50,603
======== ========
</Table>
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS 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 months ended
October 31, 2002 are not necessarily indicative of the results to be expected
for the fiscal year ending July 31, 2003, 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, 2002,
included in the Company's Form 10-K as filed with the Securities and Exchange
Commission on October 25, 2002.
The financial statements have not been audited by independent certified
public accountants. The consolidated balance sheet as of July 31, 2002, 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>
OCTOBER 31, JULY 31,
2002 2002
----------- --------
Inventories:
Raw materials............................................. $42,825 $34,753
Work-in-process........................................... 31,631 19,882
Finished goods............................................ 12,929 10,493
------- -------
$87,385 $65,128
======= =======
Accrued liabilities:
Accrued employee compensation and benefits................ $11,055 $11,036
Accrued warranty.......................................... 5,054 3,554
Dividends payable to shareholders......................... 1,062 --
Other..................................................... 3,816 2,677
------- -------
$20,987 $17,267
======= =======
Advance payments and deferred revenue:
Long-lead-time components................................. $31,950 $50,550
Ramp-up funds............................................. 9,602 7,943
Customer deposits......................................... 3,306 3,751
Deferred revenue.......................................... 3,920 4,230
------- -------
$48,778 $66,474
======= =======
</Table>
5
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BUSINESS COMBINATIONS:
During October 2002, Anrad Corporation, the Company's wholly owned
subsidiary located in Saint-Laurent, Quebec, purchased the remaining 52% of the
outstanding common stock of FTNI, Inc. for $2,407 in cash. Anrad's total
investment at October 31, 2002, amounted to approximately $2,746 of which
approximately $2,019 was determined to be intellectual property and $727
represented net assets, mainly cash. The intellectual property will be amortized
over its estimated useful life of five years. The supplemental pro forma
information disclosing the results of operations for the quarters ended October
31, 2002 and 2001 have not been presented as the results are immaterial.
FTNI was founded by three Canadian companies in April 1997 to develop
products for medical and industrial applications. Noranda Advanced Materials,
which was one of the FTNI founders with a 48% ownership interest, was acquired
by Analogic in 1999 and renamed Anrad. With the acquisition of FTNI, Anrad will
have full ownership rights and access to FTNI's basic technology and
intellectual property.
4. EXPLOSIVE ASSESSMENT COMPUTED TOMOGRAPHY ("EXACT") SYSTEMS AGREEMENT:
The Company announced in April 2002 that it had entered into an agreement
to supply up to 1,000 of its EXACT Systems to L-3 Communications' Security and
Detection System division ("L-3"). The EXACT is the core system of L-3's
Examiner 3DX6000 certified Explosive Detection System that is being purchased by
the United States Transportation Security Administration (TSA) and installed at
major airports across the United States.
The Company recognizes product revenue upon shipment of EXACT systems and
spare parts to L-3, at which time all revenue recognition criteria have been
met. During the first quarter of fiscal 2003, the Company received firm orders
from L-3 for 245 additional systems. These orders brought the total number of
systems that had been ordered by L-3 for delivery to the TSA to 425. As of
October 31, 2002, the Company has shipped 229 completed units and certain spare
parts related to the contract. The Company expects to be able to ship the
remaining EXACT systems by December 31, 2002.
The Company recorded cash received from L-3 for the purchase of
long-lead-time inventory components as advance payments and deferred revenue
within the liabilities section of the balance sheet. These payments are not
recognized as revenue until the systems to which the inventory components relate
to have been shipped. As of October 31, 2002, the Company had a remaining
balance of $31,950 recorded within advance payments related to long-lead
purchases.
The agreement also provided for the Company to receive $22,000 of ramp-up
funds for the purpose of leasing and fitting up a facility and ensuring the
availability of key critical raw material and inventory components from
suppliers to meet the production and volume requirements of this contract. These
costs incurred and assets purchased are fully reimbursed by L-3. The Company has
not recorded any revenues, costs or assets related to these ramp-up funds.
All cash received for ramp-up activities is recorded within advance
payments and deferred revenue within the liability section of the balance sheet
and reduced as the cash is spent on these activities.
In addition to the $22,000 of ramp-up funds provided by L-3 on behalf of
the TSA, the Company has spent approximately $5,700 for manufacturing and office
equipment which was capitalized during the quarter ended October 31, 2002.
As of October 31, 2002, the Company had a balance of $9,602 of unexpended
funds recorded within advance payments and deferred revenue related to ramp-up
funds.
6
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DIVIDENDS:
The Company declared dividends of $.08 per common share on October 15,
2002, payable November 12, 2002 to shareholders of record on October 29, 2002.
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
As of August 1, 2002, Analogic adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). Under SFAS No. 142, goodwill and certain other intangible assets with
indefinite lives are no longer amortized, but instead are viewed for impairment
annually, or more frequently if impairment indicators arise.
In connection with the adoption of SFAS No. 142, Analogic was required to
perform a transitional impairment assessment of goodwill within six months of
adoption of this standard. SFAS No. 142 requires that Analogic identify its
reporting units and determine the carrying value of each of those reporting
units by assigning assets and liabilities, including existing goodwill and
intangible assets, to those reporting units. Analogic has assigned the entire
balance of goodwill to Imaging technology products for the purpose of performing
the transitional impairment test. Analogic completed its transitional impairment
assessment of goodwill during the first quarter of 2003, and determined that
goodwill was not impaired.
The following table reflects the unaudited net income as adjusted of
Analogic, giving effect to SFAS No. 142 as if it were adopted on August 1, 2001:
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
Net income (loss), as reported.............................. $20,171 $(6,370)
Add back goodwill amortization expense...................... -- 34
------- -------
Net income (loss), as adjusted.............................. $20,171 $(6,336)
======= =======
Basic earning (loss) per common share:
As reported............................................... $ 1.53 $ (0.49)
As adjusted............................................... 1.53 (0.48)
Diluted earning (loss) per common share:
As reported............................................... 1.52 (0.49)
As adjusted............................................... 1.52 (0.48)
</Table>
Intangible assets, classified in other assets, consist of the following:
<Table>
<Caption>
OCTOBER 31, 2002 JULY 31, 2002
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
------ ------------ ------ ------ ------------ ------
Software Technology................ $7,018 $1,587 $5,431 $7,018 $1,236 $5,782
Intellectual Property.............. 2,187 58 2,129 100 46 54
------ ------ ------ ------ ------ ------
$9,205 $1,645 $7,560 $7,118 $1,282 $5,836
====== ====== ====== ====== ====== ======
</Table>
7
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The remaining amortization expense of intangible assets is expected to be
as follows:
<Table>
2003 (9 months)............................................. $1,402
2004........................................................ 1,827
2005........................................................ 1,821
2006........................................................ 1,821
2007........................................................ 583
</Table>
7. COMPREHENSIVE INCOME (LOSS):
The following table presents the calculation of total comprehensive income
(loss) and its components:
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
---------------------
2002 2001
----------- -------
Net income (loss)........................................... $20,171 $(6,370)
Other comprehensive income (loss) net of tax:
Unrealized gains and losses from marketable securities,
net of taxes of $167 and $229, for the three months
ended October 31, 2002 and 2001........................ (254) 350
Foreign currency translation adjustment, net of taxes of
$119 and $39, for the three months ended October 31,
2002 and 2001.......................................... 173 59
------- -------
Total comprehensive income (loss)........................... $20,090 $(5,961)
======= =======
</Table>
8. NET INCOME (LOSS) PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
Net income (loss)........................................... $20,171 $(6,370)
======= =======
Basic:
Weighted average number of common shares outstanding...... 13,173 13,093
======= =======
Net income (loss) per share............................... $ 1.53 $ (0.49)
======= =======
Diluted:
Weighted average number of common shares outstanding...... 13,173 13,093
Dilutive effect of stock options.......................... 79
------- -------
Total..................................................... 13,252 13,093
======= =======
Net income (loss) per share................................. $ 1.52 $ (0.49)
======= =======
</Table>
Options to purchase 264 and 101 shares of common stock were outstanding as
of October 31, 2002 and 2001, respectively, but were not included in the
computation of diluted earnings per share because the exercise prices of the
options were greater than the average market price of Analogic's common stock
during the three months ended October 31, 2002 and 2001.
8
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Changes in operating assets and liabilities are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
------------------
2002 2001
-------- -------
Accounts and notes receivable............................... $(14,315) $15,285
Accounts receivable from affiliates......................... 808 (1,785)
Inventories................................................. (22,106) (2,433)
Other current assets........................................ 329 242
Other assets................................................ 67 (200)
Accounts payable, trade..................................... 17,066 1,222
Accrued liabilities......................................... 2,745 (2,632)
Advance payments and deferred revenue....................... (17,738) (457)
Accrued income taxes........................................ 11,875 544
-------- -------
Net changes in operating assets and liabilities............. $(21,269) $ 9,786
======== =======
</Table>
10. SEGMENT INFORMATION:
The Company operates primarily within two segments within the electronics
industry: Imaging Technology Products (consisting of medical and security
imaging products) and Signal Processing Technology Products. Imaging Technology
Products consist primarily of electronic systems and subsystems for medical
imaging equipment and advanced explosive detection systems. Signal Processing
Technology Products consist of A/D converters and supporting modules, and
high-speed digital signal processors. The Company's Corporate and other
represents the Company's hotel business and net interest income. Assets of
Corporate and other consist primarily of the Company's cash equivalents,
marketable securities, fixed and other assets, not specifically identifiable.
The table below presents information about the Company's reportable
segments:
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
Revenues:
Imaging technology products............................... $125,373 $ 62,555
Signal processing technology products..................... 7,653 10,275
Corporate and other....................................... 2,676 2,972
-------- --------
Total....................................................... $135,702 $ 75,802
-------- --------
Income (loss) before income taxes:
Imaging technology products............................... $ 30,374 $ 2,179
Signal processing technology products(A).................. 388 (12,154)
Corporate and other....................................... 1,772 2,013
-------- --------
Total....................................................... $ 32,534 $ (7,962)
======== ========
</Table>
9
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
OCTOBER 31, JULY 31,
2002 2002
----------- --------
Identifiable assets:
Imaging technology products............................... $212,678 $184,381
Signal processing technology products..................... 13,383 14,260
Corporate and other(B).................................... 232,354 225,266
-------- --------
Total....................................................... $458,415 $423,907
-------- --------
</Table>
- ---------------
(A) Includes asset impairment charges on a pre-tax basis of $8,883 during the
quarter ended October 31, 2001.
(B) Includes cash equivalents and marketable securities of $167,634 and $174,336
at October 31, 2002, and July 31, 2002, respectively.
11. TAXES:
The effective tax rate for the first quarter of fiscal 2002 was 38% as
compared to 20% for the same period last year. This increase in the effective
tax rate was due primarily to the less significant impact of the benefit of both
tax exempt interest and the extraterritorial income exclusion as a percentage of
pre-tax income.
12. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES:
Summarized results of operations of the Company's partially-owned equity
affiliates for the quarters ended October 31, 2002 and 2001 are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
------------------
2002 2001
-------- -------
Net revenue................................................. $ 5,617 $2,994
Gross margin................................................ 2,766 1,728
Income (loss) from operations............................... (3,915) 242
Net income (loss)........................................... (3,842) 239
</Table>
13. SUBSEQUENT EVENTS:
On November 6, 2002, the Company's newly formed subsidiary, Sound
Technology, Inc. ("STI"), acquired certain assets and liabilities of the Sound
Technology business unit, located in State College, PA, from Acuson Corporation,
a wholly owned subsidiary of Siemens Corporation, for approximately $10,100 in
cash. STI produces linear and tightly curved array ultrasound transducers and
probes for a broad range of clinical applications that are supplied to medical
equipment companies worldwide. The Company is currently in the process of
determining the allocation of the purchase price amongst the assets and
liabilities acquired.
Also, on November 6, 2002, the Company's subsidiary, Camtronics Medical
Systems, Ltd., acquired all the shares of VMI Medical, Inc., of Ottawa, Canada,
for approximately $2,000 in cash, payable over a two year period and future
consideration which will be based upon the combined companies achieving certain
performance criteria over specific time periods. VMI Medical, Inc. is a medical
information software company specializing in clinical database, workflow
automation and business improvement solutions for children's heart centers. The
Company is currently in the process of determining the allocation of the
purchase price amongst the assets and liabilities acquired.
10
ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2002 the Company received additional orders for its EXACT
systems from L-3 Communications' Security and Detection Systems division. The
order from L-3 calls for the delivery of an additional 75 EXACT units for
foreign and other anticipated orders. These units will be delivered at a rate of
approximately eighteen to twenty systems per month during the first four months
of calendar 2003.
11
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 and should be read in conjunction
with the Unaudited Condensed Consolidated Financial Statements and notes thereto
included elsewhere in this Quarterly Report on Form 10-Q. The discussion below
contains forward-looking statements within the meaning of the Securities
Exchange Act of 1934. All statements, other than statements of historical fact,
the Company makes in this document or in any document incorporated by reference
are forward-looking. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors, which may cause the actual results,
performance, or achievements of Analogic Corporation to differ from the
projected results. See "Business Environment and Risk Factors" beginning on page
16.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") has issued Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" ("FRR 60"), suggesting companies provide additional
disclosure and commentary on their most critical accounting policies. In FRR 60,
the SEC defined the most critical accounting policies as the ones that are most
important to the portrayal of a company's financial condition and operating
results, and require management to make its most difficult and subjective
judgments, often as a result of the need to make estimates on matters that are
inherently uncertain. 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
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101").
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 provided all other revenue recognition criteria have been
met. Hardware maintenance revenues are recognized ratably over the life of the
contracts. For business units that sell software licenses, the Company
recognizes revenue in accordance with the AICPA's Statement of Position 97-2,
"Software Revenue Recognition." Licenses revenue is recognized upon delivery,
provided that persuasive evidence of an arrangement exist, no significant
obligations with regards to installation or implementation of the software
remain, fees are fixed or determinable, collectibility is reasonably assured and
customer acceptance, when applicable, is obtained. Software maintenance revenues
are recognized ratably over the life of the contracts. 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. Revenue related to
the hotel operations is 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.
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
12
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 adjusts
credit limits based upon payment history and the customer's current
creditworthiness. The Company continuously monitors collections and payments
from its 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 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.
INCOME TAXES
As part of the process of preparing the Company's financial statements, the
Company is required to estimate its income taxes in each of the jurisdictions in
which it operates. This process involves estimating actual current tax exposure
together with assessing temporary differences resulting from different treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the balance sheet. The
Company must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income and, to the extent that recovery is not
likely, a valuation allowance must be established. To the extent a valuation
allowance is established, the Company must include an expense within the tax
provision in the statement of operations. In the event that actual results
differ from these estimates, the provision for income taxes could be materially
impacted.
WARRANTY RESERVE
The Company provides for the estimated cost of product warranties at the
time products are shipped. Although the Company engages in extensive product
quality programs and processes, its warranty obligation is affected by product
failure rates and service delivery costs incurred in correcting a product
failure. Should actual product failure rates or service costs differ from the
Company's estimates which are based on historical data and engineering
estimates, where applicable, revisions to the estimated warranty liability would
be required.
13
RESULTS OF OPERATIONS
THREE MONTHS FISCAL 2003 (10/31/02) VS. THREE MONTHS FISCAL 2002 (10/31/01)
Product revenue for the three months ended October 31, 2002, was $126,646
as compared to $65,353 for the same period last year, an increase of $61,293 or
94%. The increase was primarily due to $65,959 in sales of medical and security
imaging products. Of this amount $72,648 represents sales of EXACT systems and
spare parts, partially offset by a decrease of $6,689 primarily due to a
reduction of sales of mid-range Computed Tomography ("CT") medical systems
supplied to Philips and, to a lesser extent, a decline in sales of Direct
Digital Radiography systems. In addition, sales of Signal Processing Technology
Products decreased $4,666 due to lower demand for embedded multiprocessing
equipment.
Engineering revenue for the three months ended October 31, 2002, was $6,380
compared to $7,477 for the same period last year, a decrease of $1,097, or 15%.
The decrease in engineering revenue was primarily due to a decrease in demand
for CT services by Philips.
Other revenues of $2,676 and $2,972 represent revenue from the Hotel
operation for the three months ended October 31, 2002 and 2001, respectively.
The decrease in revenues was attributable to the lower occupancy rate due to the
decline in the travel and lodging business.
Cost of product sales was $69,869 for the quarter ended October 31, 2002,
compared to $42,067 for the same period last year. Cost of product sales as a
percentage of product revenue was 55% and 64% for the three months ended October
31, 2002 and 2001, respectively. The decrease in the cost of product sales
percentage over the prior year was primarily attributable to a higher mix of
security imaging technology products.
Cost of engineering sales was $4,896 for the three months ended October 31,
2002, compared to $6,623 for the same period last year. The total cost of
engineering sales as a percentage of engineering revenue decreased to 77% for
the three months ended October 31, 2002, from 89% for the same period last year.
The decrease was primarily attributable to license revenue for which there was
no associated cost.
Research and Development expenses were $11,377 for the three months ended
October 31, 2002, or 8% of total revenue, compared to $10,162 for the same
period last year, or 13% of total revenue. The increase of $1,215 or 12%, was
mainly due to the Company's effort to develop a high-speed, low-cost carry-on
baggage CT scanning system, Explosive Detection Systems (EDS) for a variety of
applications, and advanced ultrasound systems for the urology market.
Selling and marketing expenses were $8,131 for the three months ended
October 31, 2002, or 6% of total revenue, compared to $8,352, or 11% of total
revenue for the same period last year. The decrease of $221, or 3%, was
primarily due to the termination of all business activities related to Anatel,
the Company's telecommunications subsidiary.
General and administrative expenses were $8,085 or 6% of total revenue, for
the three months ended October 31, 2002, as compared to $7,949 or 11% of total
revenue, for the same period last year. The increase of $136 was primarily due
to an increase in bad debt expense of $450 related to an unsecured note
receivable, an increase in general liability insurance, offset partially by the
Company not matching contributions to the employees 401(k) plan during the three
months ended October 31, 2002, and reduced use of outside consulting services.
Interest income, net of interest expense, was $1,219 for the three months
ended October 31, 2002, compared to $1,155 for the same period last year. The
increase was due to higher invested cash balances partially offset by lower
effective interest rates.
The Company recorded a loss of $986 related to equity in unconsolidated
affiliates for the three months ended October 31, 2002, as compared to a gain of
$738 for the same period last year. The equity loss consists primarily of $469
and $495 reflecting the Company's share of loss in Shenzhen Anke High-Tech Co.,
Ltd. (SAHCO) and Cedara Software Corporation, respectively. For the three months
ended October 31, 2001, the Company recorded a gain in equity of $331 and $407
reflecting the Company's share of profit in SAHCO and Enhanced CT Technology
LLC, respectively.
14
Other income was $198 for the three months ended October 31, 2002, compared
to a loss of $166 for the same period last year. Other income for the current
quarter primarily represents currency exchange gains from the Company's Canadian
subsidiary, versus currency exchange losses for the same period last year from
the Company's Canadian and Danish subsidiaries.
The effective tax rate for the three months ended October 31, 2002, was 38%
versus 20% for the same period last year. This increase in the effective tax
rate was due primarily to the less significant impact of the benefit of both tax
exempt interest and the extraterritorial income exclusion as a percentage of
pretax income.
Net income for the three months ended October 31, 2002, was $20,171 or
$1.53 per basic share and $1.52 per diluted share as compared to a net loss of
$6,370 or $0.49 per basic and diluted share for the same period last year. The
increase in net income over the prior year was primarily the result of increased
revenue for the medical and security imaging products. The prior year's loss
included a pre-tax asset impairment charge of $8,883 related to certain assets
of the Company's Anatel subsidiary and Test and Measurement Division.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet reflects a current ratio of 2.8 to 1 at October
31, 2002, and 2.9 to 1 at July 31, 2002. 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 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 .41 to 1 at October 31,
2002, and .39 to 1 at July 31, 2002. The Company believes that its balances of
cash and cash equivalents, marketable securities and cash flows expected to be
generated by future operating activities will be sufficient to meet its cash
requirements over the next twelve months.
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.
The carrying amounts reflected in the unaudited condensed consolidated
balance sheets of cash and cash equivalents, trade receivables, and trade
payables approximate fair value at October 31, 2002, due to the short maturities
of these instruments.
The Company maintains a bond investment portfolio of various issuers,
types, and maturities. This portfolio is classified on the balance sheet as
either cash and cash equivalents or marketable securities, depending on the
lengths of time to maturity from original purchase. Cash equivalents include all
highly liquid investments with maturities of three months or less from the time
of purchase. Investments having maturities from the time of purchase 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.
Cash flow provided from operations was $5,520 in the first three months of
fiscal 2003 compared to $14,477 during the same period of the prior year. The
decrease in cash flows from operations of $8,957 during the first three months
of fiscal 2003 over the prior year period resulted primarily from increases in
net income of $26,541, offset by a significant use of cash related to operating
assets and liabilities, representing a change from prior year of $31,055. The
significant use of cash relates to increased accounts receivable and
inventories, and a reduction in advance payments and deferred revenue for the
three month period ended October 31, 2002, of $27,007, $19,673 and $17,281,
respectively, partially offset by increases in account payable of $15,844 and
accrued income taxes of $11,331. These significant changes in operating assets
and liabilities for the period are primarily a result of the shipping,
production and long-lead procurement activities related to the EXACT contract
with L-3.
Net cash used in investing activities was $4,938 for the first three months
of fiscal 2003 compared to $13,326 for the same period last year. The decrease
in net cash used of $8,388 was primarily due to the
15
acquisition by the Company of a minority interest in Cedara Software Corporation
for $7,500 during the first quarter of fiscal 2002.
Net cash flow from financing activities was $34 for the first three months
of fiscal 2003 versus $3,276 for the prior year period. The decrease in
financing activities of $3,242 was primarily the results of external financing
for the construction of the Danish facility during the first quarter in fiscal
2002.
The Company's contractual obligations at October 31, 2002, and the effect
such obligations are expected to have on liquidity and cash flows in future
periods are as follows:
<Table>
<Caption>
LESS THEN AFTER 5
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
------- --------- --------- --------- -------
Mortgage payable............................... $ 5,310 $ 352 $ 704 $ 704 $3,550
Capital leases................................. 649 310 300 38
Operating leases(A)............................ 9,269 2,297 4,304 795 1,874
Other commitments(B)........................... 4,847 4,431 416
------- ------ ------ ------ ------
$20,075 $7,390 $5,724 $1,537 $5,424
======= ====== ====== ====== ======
</Table>
- ---------------
(A) Includes approximately $3.5 million of lease costs associated with the
Haverhill facility funded by ramp-up monies received by the Company in
connection with the EXACT system order.
(B) Includes approximately $4.8 million of commitments to suppliers for the
production of raw materials and inventory components funded by ramp-up
monies received by the Company in connection with the EXACT system order.
The Company currently has approximately $30,000 in revolving credit
facilities with various banks available for direct borrowings. As of October 31,
2002, there were no direct borrowings. However, the Company has guaranteed
through a provision of a credit facility with its principal bank the debt owed
by Cedara to its bank lender through a provision of a credit facility for
approximately $9,500.
BUSINESS ENVIRONMENT AND RISK FACTORS
FORWARD LOOKING STATEMENTS
This Quarterly 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 as a
result of a number of important factors, including those discussed below and
elsewhere herein.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION WITH RESPECT TO ANALOGIC COMMON STOCK. 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 significantly reduces 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 net product and
engineering revenue for our three largest
16
customers in any of 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,
---------------------
2002 2001 2000
----- ----- -----
Philips..................................................... 18% 22% 16%
General Electric............................................ 12% 11% 10%
L-3 Communications.......................................... 9% 1% 4%
Toshiba..................................................... 4% 7% 9%
Ten largest customers as a group............................ 65% 62% 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.
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
17
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 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. 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 BUSINESS STRATEGY INVOLVES THE PURSUIT OF ACQUISITIONS OR BUSINESS
COMBINATIONS, WHICH MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION.
As part of our business strategy, we may consummate additional acquisitions
or 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
18
distraction of management, expenses related to the acquisition and potential
unknown liabilities associated with acquired businesses.
If we are not successful in completing acquisitions that we may pursue in
the future, we may have incurred substantial expenses and devoted significant
management time and resources in seeking to complete proposed acquisitions that
will not generate benefits for us. In addition, with future acquisitions, we
could use substantial portions of our available cash as consideration for these
acquisitions.
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 occurs, 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
disproportionate 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 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 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, be certain that our development efforts will be successful.
19
ONE STOCKHOLDER HAS A SUBSTANTIAL INTEREST IN ANALOGIC
As of October 31, 2002, the Bernard M. Gordon Charitable Remainder Unitrust
owned approximately 29% of Analogic's outstanding Common Stock. Bernard M.
Gordon, Chairman of the Board of Directors, Executive Chairman, President and
Chief Executive Officer of Analogic, and Julian Soshnick, Vice President and
General Counsel of Analogic, serve as trustees of this trust and have full power
to vote or dispose of the shares held by the trust. The trust, based on its
ownership interest in Analogic, has the ability to exert substantial influence
over the actions of Analogic.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company places its cash investments in high credit quality financial
instruments and, by policy, limits the amount of credit exposure to any one
financial institution. 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.
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. Total
interest income, net for the quarter ended October 31, 2002 was $1,219. An
interest rate change of 10% would not have a material impact to the fair value
of the portfolio or to future earnings.
The Company's three largest customers in fiscal 2002, each of which is a
significant and valued customer, were Philips, General Electric and L-3
Communications, which accounted for approximately 17.7%, 12.0%, and 9.3%,
respectively, of product and engineering revenue for the fiscal year ended July
31, 2002. Loss of any one of these customers would have a material adverse
effect upon the Company's business.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q.
The Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
20
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
<Caption>
EXHIBIT DESCRIPTION
- ------- -----------
99.1 Certification of Chief Executive officer Pursuant to 18
U.S.C. Section 1350
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
</Table>
(b) During the quarter ended October 31, 2002, the Company did not file any
reports on Form 8-K.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANALOGIC CORPORATION
Registrant
/s/ BERNARD M. GORDON
--------------------------------------
Bernard M. Gordon
Chairman of the Board of
Directors, Executive Chairman,
President and Chief Executive
Officer (Principal Executive Officer)
Date: December 13, 2002
/s/ JOHN J. MILLERICK
--------------------------------------
John J. Millerick
Senior Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
Date: December 13, 2002
22
CERTIFICATION
I, Bernard M. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Analogic
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls: and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ BERNARD M. GORDON
--------------------------------------
Bernard M. Gordon
Chairman of the Board of Directors,
Executive Chairman, President and
Chief
Executive Officer (Principal Executive
Officer)
Date: December 13, 2002
23
CERTIFICATION
I, John J. Millerick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Analogic
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report, and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls: and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ JOHN J. MILLERICK
--------------------------------------
John J. Millerick
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
Date: December 13, 2002
24
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------
99.1.. Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 26
99.2.. Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 27
</Table>
25