UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Amendment No. 2 on
R 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
Commission file number 0-6715
Analogic Corporation
Massachusetts | 04-2454372 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
8 Centennial Drive, | ||
Peabody, Massachusetts | 01960 | |
(Address of principal executive offices) | (Zip Code) |
(978) 977-3000
(Registrants 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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes R No £
The number of shares of Common Stock outstanding at December 5, 2002 was 13,291,098.
ANALOGIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A
FOR THE QUARTER ENDED OCTOBER 31, 2002
INTRODUCTORY NOTE
(in thousands, except per share data)
Pursuant to Rule 12b-15 of the Rules and Regulations under the Securities Exchange Act of 1934, this Amendment No. 2 on Form 10-Q/A to the Quarterly Report on Form 10-Q of Analogic Corporation (the Company) for the quarter ended October 31, 2002 is being filed to (i) restate the Companys Condensed Consolidated Financial Statements (Unaudited) for the quarters ended October 31, 2002 and 2001, and (ii) revise related disclosures included in the Quarterly Report on Form 10-Q.
On January 14, 2005, the Company announced that it would restate its financial statements for the fiscal years ended July 31, 2002 and 2003 and each of the interim periods within those years. The purpose of this restatement is to reflect the application of the appropriate accounting principles to the recognition of software revenue and related costs by Camtronics Medical Systems, Ltd. (Camtronics) a wholly owned U.S. subsidiary of the Company. The restatement primarily involves a deferral of Camtronics revenues and associated costs from the fiscal period in which they were originally recorded to subsequent fiscal periods. As restated, the Companys financial results for the quarter ended October 31, 2002 reflect a reduction in revenues of $51 and net income of $23, and no change in basic and diluted earnings per share; and the Companys financial results for the quarter ended October 31, 2001 reflect a reduction in revenues of $654, net income of $257, and basic and diluted earnings per share of $0.02. See Note 2, Restatement, of the Notes to Unaudited Condensed Consolidated Financial Statements for a more complete discussion of the restatement.
This Amendment No. 2 amends Part I, Items 1, 2, 3 and 4 and Part II, Item 6 of the Quarterly Report of Form 10-Q for the quarter ended October 31, 2002. This Amendment No. 2 continues to reflect circumstances as of the date of the original filing of the Quarterly Report on Form 10-Q, and the Company has not updated the disclosures contained therein to reflect events that occurred at a later date, except for items relating to the restatement.
2
ANALOGIC CORPORATION
INDEX
Page No. | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7-21 | ||||||||
22-27 | ||||||||
27 | ||||||||
28-29 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
Certifications |
33-36 | |||||||
EX-31.1 Section 302 Certification of CEO | ||||||||
EX-31.2 Section 302 Certification of CFO | ||||||||
EX-32.1 Section 906 Certification of CEO | ||||||||
EX-32.2 Section 906 Certification of CFO |
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share data)
October 31, | July 31, | |||||||
2002 | 2002 | |||||||
Restated | Restated | |||||||
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 |
87,385 | 65,128 | ||||||
Costs related to deferred revenue |
3,114 | 2,503 | ||||||
Refundable and deferred income taxes |
12,457 | 11,763 | ||||||
Other current assets |
7,598 | 7,969 | ||||||
Total current assets |
362,606 | 330,271 | ||||||
Property, plant and equipment, net |
82,925 | 79,613 | ||||||
Investments in and advances to affiliated companies |
10,725 | 12,810 | ||||||
Capitalized software, net |
4,485 | 4,333 | ||||||
Costs related to deferred revenue |
10,992 | 9,164 | ||||||
Other assets, net |
4,423 | 2,448 | ||||||
Total assets |
$ | 476,156 | $ | 438,639 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Mortgage and other notes payable |
$ | 227 | $ | 226 | ||||
Obligations under capital leases |
270 | 314 | ||||||
Accounts payable, trade |
41,971 | 24,836 | ||||||
Accrued liabilities |
20,637 | 16,948 | ||||||
Deferred revenue |
9,025 | 8,618 | ||||||
Advance payments |
44,858 | 62,244 | ||||||
Accrued income taxes |
15,104 | 3,118 | ||||||
Total current liabilities |
132,092 | 116,304 | ||||||
Long-term liabilities: |
||||||||
Mortgage and other notes payable |
4,012 | 4,069 | ||||||
Obligations under capital leases |
306 | 337 | ||||||
Deferred revenue |
16,252 | 13,500 | ||||||
Deferred income taxes |
2,658 | 2,429 | ||||||
Total long-term liabilities |
23,228 | 20,335 | ||||||
Commitments
|
||||||||
Stockholders equity
|
||||||||
Common stock, $.05 par value |
707 | 706 | ||||||
Capital in excess of par value |
39,697 | 39,379 | ||||||
Retained earnings |
293,322 | 274,757 | ||||||
Accumulated other comprehensive income |
(489 | ) | (320 | ) | ||||
Treasury stock, at cost |
(8,271 | ) | (8,313 | ) | ||||
Unearned compensation |
(4,130 | ) | (4,209 | ) | ||||
Total stockholders equity |
320,836 | 302,000 | ||||||
Total liabilities and stockholders equity |
$ | 476,156 | $ | 438,639 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended | ||||||||
October 31, | ||||||||
2002 | 2001 | |||||||
Restated | Restated | |||||||
Net revenue: |
||||||||
Product |
$ | 123,177 | $ | 64,501 | ||||
Engineering |
6,380 | 7,477 | ||||||
Other |
2,676 | 2,972 | ||||||
Total net revenue |
132,233 | 74,950 | ||||||
Cost of sales: |
||||||||
Product |
67,622 | 41,698 | ||||||
Engineering |
4,896 | 6,623 | ||||||
Other |
1,241 | 1,455 | ||||||
Asset impairment charges |
| 8,883 | ||||||
Total cost of sales |
73,759 | 58,659 | ||||||
Gross margin |
58,474 | 16,291 | ||||||
Operating expenses: |
||||||||
Research and product development |
11,377 | 10,162 | ||||||
Selling and marketing |
7,932 | 8,288 | ||||||
General and administrative |
7,833 | 7,865 | ||||||
27,142 | 26,315 | |||||||
Income (loss) from operations |
31,332 | (10,024 | ) | |||||
Other (income) expense: |
||||||||
Interest income, net |
(1,219 | ) | (1,155 | ) | ||||
Equity in unconsolidated affiliates |
1,238 | (654 | ) | |||||
Other, net |
(343 | ) | 166 | |||||
(324 | ) | (1,643 | ) | |||||
Income (loss) before income taxes |
31,656 | (8,381 | ) | |||||
Provision (benefit) for income taxes |
12,029 | (1,676 | ) | |||||
Net income (loss) |
$ | 19,627 | $ | (6,705 | ) | |||
Net income (loss) per common share: |
||||||||
Basic |
$ | 1.49 | $ | (0.51 | ) | |||
Diluted |
1.48 | (0.51 | ) | |||||
Weighted average shares outstanding: |
||||||||
Basic |
13,173 | 13,093 | ||||||
Diluted |
13,252 | 13,093 |
The accompanying notes are an integral part of these unaudited condensed financial statements.
5
ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended | ||||||||
October 31, | ||||||||
2002 | 2001 | |||||||
Restated | Restated | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 19,627 | $ | (6,705 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities: |
||||||||
Deferred income taxes |
(443 | ) | (1,776 | ) | ||||
Depreciation and amortization |
4,341 | 4,133 | ||||||
Allowance for doubtful accounts |
685 | 75 | ||||||
Impairment of assets |
| 8,883 | ||||||
Loss on sale of equipment |
3 | 32 | ||||||
Equity (gain) loss in unconsolidated affiliates |
1,238 | (654 | ) | |||||
Non-cash compensation expense from stock grants |
279 | 200 | ||||||
Net changes in operating assets and liabilities (Note 10) |
(20,122 | ) | 10,289 | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES: |
5,608 | 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 |
(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 exercise of stock options and
employee stock purchase plan |
137 | 28 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
34 | 3,276 | ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
(321 | ) | 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 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
6
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 (SEC) 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 Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2004, as filed with the SEC on February 1, 2005.
The condensed financial statements have not been audited by independent certified public accountants. The condensed 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 years financial presentation format.
2. Restatement:
The Company is restating its condensed financial statements for the fiscal years ended July 31, 2002 and 2003 and each of the interim periods included in those fiscal years to reflect the application of the appropriate accounting principles to the recognition of software revenue and related costs by its 100% owned U.S. subsidiary Camtronics Medical Systems, Ltd. (Camtronics). As restated, the Companys financial results for the quarter ended October 31, 2002 reflect a reduction in revenues of $51 and net income of $23, and no change in basic and diluted earning per share; and the Companys financial results for the quarter ended October 31, 2001 reflect a reduction in revenues of $654, net income of $257, and basic and diluted earnings per share of $0.02, in each case as compared to the Companys financial results previously reported for the quarters ended October 31, 2002 and 2001. There are also resulting changes to the captions within the net cash provided by operating activities on the Statement of Cash Flows.
Summarized below is a more detailed discussion of the restatement affecting the quarters ended October 31, 2002 and 2001and a comparison of the amounts previously reported in the unaudited condensed balance sheets and statements of operations in the Companys Quarterly Report on Form 10-Q for the quarters ended October 31, 2002 and 2001. The Company reclassified certain intangibles and goodwill balances related to the Companys ownership of Cedara Software Corporation (Cedara) to investment in and advances to affiliated companies in the unaudited condensed consolidated balance sheets, and reclassified in the unaudited condensed consolidated statements of operations the amortization of intangible assets related to Cedara from general and administrative expense to equity in unconsolidated affiliates.
Software Revenue
Camtronics revenues are derived primarily from the sales of Digital Cardiac Information Systems. System sales revenues consist of the following components: computer software licenses, computer hardware, installation support, and sublicensed software. In addition, Camtronics generates revenues related to system sales for software support, hardware maintenance, training, consulting and other professional services.
7
Camtronics recognizes revenue in accordance with the provisions of American Institute of Certified Public Accountants (AICPA) Statement of Position 97-2, Software Recognition (SOP 97-2). SOP 97-2 requires revenue earned on software arrangements involving multiple-elements to be allocated to each element based on the fair values of those elements or by use of the residual method. Under the residual method, revenue is recognized in a multiple-element arrangement when vendor-specific objective evidence (VSOE) of fair value exists for all the undelivered elements in the arrangement, which is determined by the price charged when that element is sold separately (i.e. professional services, software support, hardware maintenance, hardware and sublicensed software), but does not exist for one or more of the delivered elements in the arrangement (i.e. software solutions). Specifically, Camtronics determines the VSOE of fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance charged to clients; determines the VSOE of fair value of the professional services portion of the arrangement, other than installation services, based on hourly rates which Camtronics charges for these service when sold apart from a software license; and determines the VSOE of fair value of the hardware and software sublicenses based on the prices for these elements when they are sold separately from the software. If evidence of the VSOE of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or the VSOE of fair value for the remaining undelivered elements is established.
Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and amount of revenue recognition. In particular, the application of SOP 97-2 requires judgment concerning whether a software arrangement includes multiple elements; if so, whether all such elements have been delivered; and if not, whether VSOE of fair value exists for the undelivered elements.
The restatements are required due to the incorrect application of software revenue recognition procedures with respect to certain Camtronics transactions. Under software revenue recognition rules, revenue cannot be recognized on a multiple-element software arrangement until such time as Camtronics has delivered or performed all elements of the arrangement or has VSOE of fair value for each undelivered or non-performed element of the arrangement. In the majority of the transactions underlying the restatement, Camtronics has delivered and the customer has paid for the software. However, revenue cannot be recognized from the transactions because some element of the transaction such as the delivery of a software upgrade or the performance of customization services has not been delivered or performed and VSOE of fair value for those elements cannot be determined.
8
The following tables show the effect of the restatement on the Companys Statements of Operations and Balance Sheets.
Statements of Operations:
Three Months Ended October 31, 2002 | ||||||||||||||
(unaudited) | ||||||||||||||
Previously | ||||||||||||||
Reported | Restated | Change | ||||||||||||
Net revenue: |
||||||||||||||
Product |
$ | 123,228 | $ | 123,177 | $ | (51 | )(a) | |||||||
Engineering |
6,380 | 6,380 | ||||||||||||
Other |
2,676 | 2,676 | ||||||||||||
Total net revenue |
132,284 | 132,233 | (51 | ) | ||||||||||
Cost of sales: |
||||||||||||||
Product |
67,633 | 67,622 | (11 | )(b) | ||||||||||
Engineering |
4,896 | 4,896 | ||||||||||||
Other |
1,241 | 1,241 | ||||||||||||
Total cost of sales |
73,770 | 73,759 | (11 | ) | ||||||||||
Gross margin |
58,514 | 58,474 | (40 | ) | ||||||||||
Operating expenses: |
||||||||||||||
Research and product development |
11,377 | 11,377 | ||||||||||||
Selling and marketing |
7,934 | 7,932 | (2 | )(c) | ||||||||||
General and administrative |
8,085 | 7,833 | (252 | )(d) | ||||||||||
27,396 | 27,142 | (254 | ) | |||||||||||
Income from operations |
31,118 | 31,332 | 214 | |||||||||||
Other (income) expense: |
||||||||||||||
Interest income, net |
(1,219 | ) | (1,219 | ) | ||||||||||
Equity in unconsolidated affiliates |
986 | 1,238 | 252 | (e) | ||||||||||
Other, net |
(343 | ) | (343 | ) | ||||||||||
(576 | ) | (324 | ) | 252 | ||||||||||
Income before income taxes |
31,694 | 31,656 | (38 | ) | ||||||||||
Provision for income taxes |
12,044 | 12,029 | (15 | )(f) | ||||||||||
Net income |
$ | 19,650 | $ | 19,627 | $ | (23 | ) | |||||||
Net income per common share: |
||||||||||||||
Basic |
$ | 1.49 | $ | 1.49 | ||||||||||
Diluted |
1.48 | 1.48 | ||||||||||||
Weighted average shares outstanding: |
||||||||||||||
Basic |
13,173 | 13,173 | ||||||||||||
Diluted |
13,252 | 13,252 |
9
Statements of Operations components increased (decreased) as a result of the following:
(a) |
Net revenue:
Product Adjust recognition of revenue for application of SOP 97-2 |
$ | (51 | ) | ||
(b) |
Cost of sales: Product Adjust cost of sales related to transactions for which revenue has been deferred |
$ | (11 | ) | ||
(c) |
Selling and marketing Adjust commission expense related to transactions for which revenue has been deferred |
$ | (2 | ) | ||
(d) |
General and administrative Reclassifications not impacting net income |
$ | (252 | ) | ||
(e) |
Equity in unconsolidated affiliates Reclassifications not impacting net income |
$ | 252 | |||
(f) |
Provision for income taxes Net decrease to provision due to above adjustments |
$ | (15 | ) | ||
10
\
Statements of Operations:
Three Months Ended October 31, 2001 | ||||||||||||||
(unaudited) | ||||||||||||||
Previously | ||||||||||||||
Reported | Restated | Change | ||||||||||||
Net revenue: |
||||||||||||||
Product |
$ | 65,155 | $ | 64,501 | $ | (654 | )(a) | |||||||
Engineering |
7,477 | 7,477 | ||||||||||||
Other |
2,972 | 2,972 | ||||||||||||
Total net revenue |
75,604 | 74,950 | (654 | ) | ||||||||||
Cost of sales: |
||||||||||||||
Product |
41,989 | 41,698 | (291 | )(b) | ||||||||||
Engineering |
6,623 | 6,623 | ||||||||||||
Other |
1,455 | 1,455 | ||||||||||||
Asset impairment charges |
8,883 | 8,883 | ||||||||||||
Total cost of sales |
58,950 | 58,659 | (291 | ) | ||||||||||
Gross margin |
16,654 | 16,291 | (363 | ) | ||||||||||
Operating expenses: |
||||||||||||||
Research and product development |
10,162 | 10,162 | ||||||||||||
Selling and marketing |
8,329 | 8,288 | (41 | )(c) | ||||||||||
General and administrative |
7,949 | 7,865 | (84 | )(d) | ||||||||||
26,440 | 26,315 | (125 | ) | |||||||||||
Loss from operations |
(9,786 | ) | (10,024 | ) | (238 | ) | ||||||||
Other (income) expense: |
||||||||||||||
Interest income, net |
(1,155 | ) | (1,155 | ) | ||||||||||
Equity in unconsolidated affiliates |
(738 | ) | (654 | ) | 84 | (e) | ||||||||
Other, net |
166 | 166 | ||||||||||||
(1,727 | ) | (1,643 | ) | 84 | ||||||||||
Loss before income taxes |
(8,059 | ) | (8,381 | ) | (322 | ) | ||||||||
Provision for income taxes |
(1,611 | ) | (1,676 | ) | (65 | )(f) | ||||||||
Net loss |
$ | (6,448 | ) | $ | (6,705 | ) | $ | (257 | ) | |||||
Net loss per common share: |
||||||||||||||
Basic |
$ | (0.49 | ) | $ | (0.51 | ) | $ | (0.02 | )(g) | |||||
Diluted |
(0.49 | ) | (0.51 | ) | (0.02 | )(h) | ||||||||
Weighted average shares outstanding: |
||||||||||||||
Basic |
13,093 | 13,093 | ||||||||||||
Diluted |
13,093 | 13,093 |
11
Statements of Operations components increased (decreased) as a result of the following:
(a) |
Net revenue:
Product Adjust recognition of revenue for application of SOP 97-2 |
$ | (654 | ) | ||
(b) |
Cost of sales: Product Adjust cost of sales related to transactions for which revenue has been deferred |
$ | (291 | ) | ||
(c) |
Selling and marketing Adjust commission expense related to transactions for which revenue has been Deferred |
$ | (41 | ) | ||
(d) |
General and administrative Reclassifications not impacting net income |
$ | (84 | ) | ||
(e) |
Equity in unconsolidated affiliates Reclassifications not impacting net income |
$ | 84 | |||
(f) |
Provision for income taxes Net decrease to provision due to above adjustments |
$ | (65 | ) | ||
(g) |
Net income per common share: Basic Net effect to basic earnings per share due to above adjustments |
$ | (0.02 | ) | ||
(h) |
Net income per common share: Diluted Net effect to diluted earnings per share due to above adjustments |
$ | (0.02 | ) | ||
12
Balance Sheets:
October 31, 2002 | ||||||||||||||||
(unaudited) | ||||||||||||||||
Previously | ||||||||||||||||
Reported | Restated | Change | ||||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 123,551 | $ | 123,551 | ||||||||||||
Marketable securities, at market |
54,515 | 54,515 | ||||||||||||||
Accounts and notes receivable, net of allowance for doubtful accounts |
73,986 | 73,986 | ||||||||||||||
Inventories |
87,385 | 87,385 | ||||||||||||||
Costs related to deferred revenue |
2,778 | 3,114 | $ | 336 | (a) | |||||||||||
Refundable and deferred income taxes |
12,247 | 12,457 | 210 | (b) | ||||||||||||
Other current assets |
7,598 | 7,598 | ||||||||||||||
Total current assets |
362,060 | 362,606 | 546 | |||||||||||||
Property, plant and equipment, net |
82,925 | 82,925 | ||||||||||||||
Investments in and advances to affiliated companies |
6,786 | 10,725 | 3,939 | (c) | ||||||||||||
Capitalized software, net |
4,485 | 4,485 | ||||||||||||||
Costs related to deferred revenue |
10,437 | 10,992 | 555 | (d) | ||||||||||||
Other assets, net |
8,362 | 4,423 | (3,939 | )(e) | ||||||||||||
Total assets |
$ | 475,055 | $ | 476,156 | $ | 1,101 | ||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Mortgage and other notes payable |
$ | 227 | $ | 227 | ||||||||||||
Obligations under capital leases |
270 | 270 | ||||||||||||||
Accounts payable, trade |
41,841 | 41,971 | $ | 130 | (f) | |||||||||||
Accrued liabilities |
20,637 | 20,637 | ||||||||||||||
Deferred revenue |
8,361 | 9,025 | 664 | (g) | ||||||||||||
Advance payments |
44,858 | 44,858 | ||||||||||||||
Accrued income taxes |
15,078 | 15,104 | 26 | (h) | ||||||||||||
Total current liabilities |
131,272 | 132,092 | 820 | |||||||||||||
Long-term liabilities: |
||||||||||||||||
Mortgage and other notes payable |
4,012 | 4,012 | ||||||||||||||
Obligations under capital leases |
306 | 306 | ||||||||||||||
Deferred revenue |
15,597 | 16,252 | 655 | (i) | ||||||||||||
Deferred income taxes |
2,658 | 2,658 | ||||||||||||||
Total long-term liabilities |
22,573 | 23,228 | 655 | |||||||||||||
Commitments |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Common stock, $.05 par value |
707 | 707 | ||||||||||||||
Capital in excess of par value |
39,697 | 39,697 | ||||||||||||||
Retained earnings |
293,696 | 293,322 | (374 | )(j) | ||||||||||||
Accumulated other comprehensive income |
(489 | ) | (489 | ) | ||||||||||||
Treasury stock, at cost |
(8,271 | ) | (8,271 | ) | ||||||||||||
Unearned compensation |
(4,130 | ) | (4,130 | ) | ||||||||||||
Total stockholders equity |
321,210 | 320,836 | (374 | ) | ||||||||||||
Total liabilities and stockholders equity |
$ | 475,055 | $ | 476,156 | $ | 1,101 | ||||||||||
13
The increases (decreases) to the balance sheet components are due to (1) current period recognition of the effect of the current period restatement for deferral of revenue and related costs, and (2) the cumulative effect at the beginning of the quarter for the restatements of prior periods for similar matters. On a net basis the balance sheet components increased (decreased) due to the following:
(a) |
Costs related to deferred revenue (short-term) Deferred costs related to deferred revenue |
$ | 336 | |||
(b) |
Refundable and deferred income taxes Deferred income tax related to deferred costs and revenue |
$ | 210 | |||
(c) |
Investment in and advances to affiliated companies Intangible asset reclassification not impacting net income |
$ | 3,939 | |||
(d) |
Costs related to deferred revenue (long-term) Deferred costs related to deferred revenue |
$ | 555 | |||
(e) |
Other assets Intangible assets reclassification not impacting net income |
$ | (3,939 | ) | ||
(f) |
Accounts payable, trade Accrued license related to deferred revenue |
$ | 130 | |||
(g) |
Deferred revenue (short-term) Deferred revenue classified as short-term |
$ | 664 | |||
(h) |
Accrued income taxes Tax provision adjusted for the change to net income |
$ | 26 | |||
(i) |
Deferred revenue (long-term) Deferred revenue classified as long-term |
$ | 655 | |||
(j) |
Retained earnings Net effect to retained earnings from above adjustments: |
|||||
Cumulative effect through July 31, 2002 | $ | (351 | ) | |||
Effect for the quarter ended October 31,2002 | (23 | ) | ||||
Total | $ | (374 | ) | |||
14
Balance Sheets:
July 31, 2002 | ||||||||||||||
Previously | ||||||||||||||
Reported | Restated | Change | ||||||||||||
ASSETS |
||||||||||||||
Current assets: |
||||||||||||||
Cash and cash equivalents |
$ | 123,168 | $ | 123,168 | ||||||||||
Marketable securities, at market |
58,621 | 58,621 | ||||||||||||
Accounts and notes receivable, net of allowance for doubtful accounts |
61,119 | 61,119 | ||||||||||||
Inventories |
65,128 | 65,128 | ||||||||||||
Costs related to deferred revenue |
2,171 | 2,503 | $ | 332 | (a) | |||||||||
Refundable and deferred income taxes |
11,567 | 11,763 | 196 | (b) | ||||||||||
Other current assets |
7,969 | 7,969 | ||||||||||||
Total current assets |
329,743 | 330,271 | 528 | |||||||||||
Property, plant and equipment, net |
79,613 | 79,613 | ||||||||||||
Investments in and advances to affiliated companies |
8,619 | 12,810 | 4,191 | (c) | ||||||||||
Capitalized software, net |
4,333 | 4,333 | ||||||||||||
Costs related to deferred revenue |
8,643 | 9,164 | 521 | (d) | ||||||||||
Other assets, net |
6,639 | 2,448 | (4,191 | )(e) | ||||||||||
Total assets |
$ | 437,590 | $ | 438,639 | $ | 1,049 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||
Current liabilities: |
||||||||||||||
Mortgage and other notes payable |
$ | 226 | $ | 226 | ||||||||||
Obligations under capital leases |
314 | 314 | ||||||||||||
Accounts payable, trade |
24,731 | 24,836 | $ | 105 | (f) | |||||||||
Accrued liabilities |
16,948 | 16,948 | ||||||||||||
Deferred revenue |
7,964 | 8,618 | 654 | (g) | ||||||||||
Advance payments |
62,244 | 62,244 | ||||||||||||
Accrued income taxes |
3,091 | 3,118 | 27 | (h) | ||||||||||
Total current liabilities |
115,518 | 116,304 | 786 | |||||||||||
Long-term liabilities: |
||||||||||||||
Mortgage and other notes payable |
4,069 | 4,069 | ||||||||||||
Obligations under capital leases |
337 | 337 | ||||||||||||
Deferred revenue |
12,886 | 13,500 | 614 | (i) | ||||||||||
Deferred income taxes |
2,429 | 2,429 | ||||||||||||
Total long-term liabilities |
19,721 | 20,335 | 614 | |||||||||||
Commitments |
||||||||||||||
Stockholders equity: |
||||||||||||||
Common stock, $.05 par value |
706 | 706 | ||||||||||||
Capital in excess of par value |
39,379 | 39,379 | ||||||||||||
Retained earnings |
275,108 | 274,757 | (351 | )(j) | ||||||||||
Accumulated other comprehensive income |
(320 | ) | (320 | ) | ||||||||||
Treasury stock, at cost |
(8,313 | ) | (8,313 | ) | ||||||||||
Unearned compensation |
(4,209 | ) | (4,209 | ) | ||||||||||
Total stockholders equity |
302,351 | 302,000 | (351 | ) | ||||||||||
Total liabilities and stockholders equity |
$ | 437,590 | $ | 438,639 | $ | 1,049 | ||||||||
15
The increases (decreases) to the balance sheet components are due to current period recognition of the effect of the current period restatement for deferral of revenue and related costs. On a net basis the balance sheet components increased (decreased) due to the following:
(a) |
Costs related to deferred revenue (short-term) Deferred costs related to deferred revenue |
$ | 332 | |||
(b) |
Refundable and deferred income taxes Deferred income tax related to deferred costs and revenue |
$ | 196 | |||
(c) |
Investment in and advances to affiliated companies Intangible asset reclassification not impacting net income |
$ | 4,191 | |||
(d) |
Costs related to deferred revenue (long-term) Deferred costs related to deferred revenue |
$ | 521 | |||
(e) |
Other assets Intangible asset reclassification not impacting net income |
$ | (4,191 | ) | ||
(f) |
Accounts payable, trade Accrued license related to deferred revenue |
$ | 105 | |||
(g) |
Deferred revenue (short-term) Deferred revenue classified as short-term |
$ | 654 | |||
(h) |
Accrued income taxes Tax provision adjusted for the change to net income |
$ | 27 | |||
(i) |
Deferred revenue (long-term) Deferred revenue classified as long-term |
$ | 614 | |||
(j) |
Retained earnings Net effect to retained earnings from above adjustments |
$ | (351 | ) | ||
16
3. Balance sheet information:
Additional information for certain balance sheet accounts is as follows for the periods indicated:
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 |
4,704 | 3,235 | ||||||
Dividends payable to shareholders |
1,062 | |||||||
Other |
3,816 | 2,677 | ||||||
$ | 20,637 | $ | 16,948 | |||||
Advance payments and other: |
||||||||
Long-lead-time components |
$ | 31,950 | $ | 50,550 | ||||
Ramp-up funds |
9,602 | 7,943 | ||||||
Customer deposits |
3,306 | 3,751 | ||||||
$ | 44,858 | $ | 62,244 | |||||
4. Business combinations:
During October 2002, Anrad Corporation, the Companys 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. Anrads 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 FTNIs basic technology and intellectual property.
5. 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-3s 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
17
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. 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.
7. 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 reviewed 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:
Three Months Ended | ||||||||
October 31, | ||||||||
2002 | 2001 | |||||||
Restated | Restated | |||||||
Net income (loss), as reported |
$ | 19,627 | $ | (6,705 | ) | |||
Add back goodwill amortization expense |
34 | |||||||
Net income (loss), as adjusted |
$ | 19,627 | $ | (6,671 | ) | |||
Basic earning (loss) per common share: |
||||||||
As reported |
$ | 1.49 | $ | (0.51 | ) | |||
As adjusted |
1.49 | (0.51 | ) | |||||
Diluted earning (loss) per common share: |
||||||||
As reported |
1.48 | (0.51 | ) | |||||
As adjusted |
1.48 | (0.51 | ) |
18
Intangible assets, classified in other assets, consist of the following:
October 31, 2002 | July 31, 2002 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Cost | Amortization | Net | Cost | Amortization | Net | |||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | |||||||||||||||||||
Software Technology |
$ | 2,312 | $ | 495 | $ | 1,817 | $ | 2,312 | $ | 396 | $ | 1,916 | ||||||||||||
Intellectual Property |
2,187 | 58 | 2,129 | 100 | 46 | 54 | ||||||||||||||||||
$ | 4,499 | $ | 553 | $ | 3,946 | $ | 2,412 | $ | 442 | $ | 1,970 | |||||||||||||
The remaining amortization expense of intangible assets is expected to be as follows:
2003 (9 months) |
$ | 646 | ||
2004 |
819 | |||
2005 |
813 | |||
2006 |
813 | |||
2007 and beyond |
855 |
8. Comprehensive Income (Loss):
The following table presents the calculation of total comprehensive income (loss) and its components:
Three Months Ended | ||||||||
October 31, | ||||||||
2002 | 2001 | |||||||
Restated | Restated | |||||||
Net income (loss) |
$ | 19,627 | $ | (6,705 | ) | |||
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 $62 and $39, for the three
months ended October 31, 2002 and 2001 |
85 | 59 | ||||||
Total comprehensive income (loss) |
$ | 19,458 | $ | (6,296 | ) | |||
9. Net income (loss) per share:
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended | ||||||||||
October 31, | ||||||||||
2002 | 2001 | |||||||||
Restated | Restated | |||||||||
Net income (loss) |
$ | 19,627 | $ | (6,705 | ) | |||||
Basic: |
||||||||||
Weighted average number of common shares outstanding |
13,173 | 13,093 | ||||||||
Net income (loss) per share |
$ | 1.49 | $ | (0.51 | ) | |||||
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 |
$ | 1.48 | $ | (0.51 | ) | |||||
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 Analogics common stock during the three months ended October 31, 2002 and 2001.
19
10. Supplemental disclosure of cash flow information:
Changes in operating assets and liabilities are as follows:
Three Months Ended | ||||||||
October 31, | ||||||||
2002 | 2001 | |||||||
Restated | Restated | |||||||
Accounts and notes receivable |
$ | (14,315 | ) | $ | 15,285 | |||
Accounts receivable from affiliates |
808 | (1,785 | ) | |||||
Inventories |
(22,106 | ) | (2,433 | ) | ||||
Costs related to deferred revenue |
(2,439 | ) | (481 | ) | ||||
Other current assets |
329 | 242 | ||||||
Other assets |
67 | (200 | ) | |||||
Accounts payable, trade |
17,091 | 1,222 | ||||||
Accrued liabilities |
2,714 | (3,041 | ) | |||||
Advance payments and deferred revenue |
(14,269 | ) | 852 | |||||
Accrued income taxes |
11,998 | 628 | ||||||
Net changes in operating assets and liabilities |
$ | (20,122 | ) | $ | 10,289 | |||
11. 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 Companys Corporate and other represents the Companys hotel business and net interest income. Assets of Corporate and other consist primarily of the Companys cash equivalents, marketable securities, fixed and other assets, not specifically identifiable.
The table below presents information about the Companys reportable segments:
Three Months Ended | ||||||||
October 31, | ||||||||
2002 | 2001 | |||||||
Restated | Restated | |||||||
Revenues: |
||||||||
Imaging technology products |
$ | 121,904 | $ | 61,703 | ||||
Signal processing technology products |
7,653 | 10,275 | ||||||
Corporate and other |
2,676 | 2,972 | ||||||
Total |
$ | 132,233 | $ | 74,950 | ||||
Income (loss) before income taxes: |
||||||||
Imaging technology products |
$ | 29,496 | $ | 1,760 | ||||
Signal processing technology products(A) |
388 | (12,154 | ) | |||||
Corporate and other |
1,772 | 2,013 | ||||||
Total |
$ | 31,656 | $ | (8,381 | ) | |||
October 31, | July 31, | |||||||
2002 | 2002 | |||||||
Restated | Restated | |||||||
Identifiable assets: |
||||||||
Imaging technology products |
$ | 230,419 | $ | 199,113 | ||||
Signal processing technology products |
13,383 | 14,260 | ||||||
Corporate and other(B) |
232,354 | 225,266 | ||||||
Total |
$ | 476,156 | $ | 438,639 | ||||
20
(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. |
12. Taxes:
The effective tax rate for the first quarter of fiscal 2003 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.
13. Investments in and advances to affiliated companies:
Summarized results of operations of the Companys partially-owned equity affiliates for the quarters ended October 31, 2002 and 2001 are as follows:
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 |
14. Subsequent events:
On November 6, 2002, the Companys 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 Companys 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 childrens heart centers. The Company is currently in the process of determining the allocation of the purchase price amongst the assets and liabilities acquired.
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.
21
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
All amounts in Item 2 are in thousands except per share data
The following information has been amended to reflect the revisions made to the Condensed Consolidated Financial Statements as further discussed in Note 2, Restatement. This information should be read in conjunction with the information contained in the Unaudited Condensed Consolidated Financial Statements, and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q/A.
Result of Operations
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 companys 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 the majority of its revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. 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. Our sales contracts generally provide for the customer to accept title and risk of loss when the product leaves our facilities. When shipping terms or local laws do not allow for passage of title and risk of loss at shipping point, we defer recognizing revenue until title and risk of loss transfer to the customer.
For business units that sell software licenses, the Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (AICPA)s Statement of Position 97-2, Software Revenue Recognition (SOP 97-2). The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. License revenue is recognized upon delivery, provided that persuasive evidence of an arrangement exists, no significant obligations with regards to installation or implementation remain, fees are fixed or determinable, collectibility is reasonably assured and customer acceptance, when applicable, is obtained. Hardware and software maintenance fees are marketed under annual and multi-year arrangements and are recognized as revenue ratably over the contracted maintenance term. Service revenues are recognized ratably over the life of the contracts.
The Company provides engineering services to some of its customers on a contractual basis and recognizes revenue using the percentage of completion method. The Company estimates the percentage of completion on contracts with fixed fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress towards completion, revenue is recognized upon completion of the contract. When total cost estimates exceed revenues, the Company accrues for the estimated losses immediately.
Revenue related to the hotel operations is recognized as services are performed.
22
Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and the amount of revenue recognition. Camtronics, one of the Companys subsidiaries, provides several models for the procurement of its digital cardiac information systems. The predominant model includes a perpetual software license agreement, project-related installation services, professional consulting services, computer hardware and sub-licensed software and software support.
Camtronics provides installation services, which include project-scoping services, conducting pre-installation audits, detailed installation plans, actual installation of hardware components, and testing of all hardware and software installed at the customer site. Because installation services are deemed to be essential to the functionality of the software, software license and installation services, fees are recognized upon completion of installation.
Camtronics also provides professional consulting services, which include consulting activities that fall outside of the scope of the standard installation services. These services vary depending on the scope and complexity requested by the client. Examples of such services may include additional database consulting, system configuration, project management, interfacing to existing systems, and network consulting. Professional consulting services generally are not deemed to be essential to the functionality of the software, and thus, do not impact the timing of the software license revenue recognition. If VSOE exists, professional consulting service revenue is recognized as the services are performed.
Deferred revenue is comprised of 1) license fee, maintenance and other service revenues for which payment has been received and for which services have not yet been performed and 2) revenues related to delivered components of a multiple-element arrangement for which fair value has not been determined for components not yet delivered or accepted by the customer. Deferred costs represent costs related to these revenues; for example, costs of goods sold and services provided and sales commission expenses.
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 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 customers 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 Companys 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 Companys 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.
23
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 Companys 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 Companys estimates which are based on historical data and engineering estimates, where applicable, revisions to the estimated warranty liability would be required.
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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 $123,177 as compared to $64,501 for the same period last year, an increase of $58,676 or 91%. The increase was primarily due to $63,342 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 revenue was attributable to the lower occupancy rate due to the decline in the travel and lodging business.
Cost of product sales was $67,622 for the three months ended October 31, 2002, compared to $41,698 for the same period last year. Cost of product sales as a percentage of product revenue was 55% and 65% 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 product development expenses were $11,377 for the three months ended October 31, 2002, or 9% of total revenue, compared to $10,162 for the same period last year, or 14% of total revenue. The increase of $1,215, or 12%, was mainly due to the Companys 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 $7,932 for the three months ended October 31, 2002, or 6% of total revenue, compared to $8,288, or 11% of total revenue for the same period last year. The decrease of $356, or 4%, was primarily due to the termination of all business activities related to Anatel, the Companys telecommunications subsidiary.
General and administrative expenses were $7,833 or 6% of total revenue, for the three months ended October 31, 2002, as compared to $7,865 or 10% of total revenue, for the same period last year. The decrease of $32 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 $1,238 related to equity in unconsolidated affiliates for the three months ended October 31, 2002, as compared to a gain of $654 for the same period last year. The equity loss consists primarily of $469 and $747 reflecting the Companys share of losses in Shenzhen Anke High-Tech Co., Ltd. (SAHCO) and Cedara Software Corporation, (Cedara) respectively. For the three months ended October 31, 2001, the Company
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recorded a gain in equity of $331 and $323 reflecting the Companys share of profit in SAHCO and Enhanced CT Technology LLC, respectively.
Other income was $343 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 represents primarily currency exchange gains from the intercompany balances with the Companys Canadian and Danish subsidiaries, versus currency exchange losses for the same period last year from the same 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 $19,627, or $1.49 basic earnings per share and $1.48 per diluted earnings per share, as compared to a net loss of $6,705 or $0.51 per basic and diluted earnings per 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 years loss included a pre-tax asset impairment charge of $8,883 related to certain assets of the Companys Anatel subsidiary and Test and Measurement Division.
Liquidity and Capital Resources
The Companys balance sheet reflects a current ratio of 2.7 to 1 at October 31, 2002, and 2.8 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 Companys debt to equity ratio was .48 to 1 at October 31, 2002, and .45 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 Companys financial results. The Companys 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 Companys investment portfolio. The Company does not currently hedge these interest rate exposures.
Cash flow provided from operations was $5,608 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 $8,869 during the first three months of fiscal 2003 over the prior year period resulted primarily from increases in net income of $26,332, offset by a significant use of cash related to operating assets and liabilities, representing a change from prior year of $30,411. 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 $15,121, respectively, partially offset by increases in account payable of $15,869 and accrued income taxes of $11,370. 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.
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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 acquisition by the Company of a minority interest in Cedara for $7,500 during the first three months 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 three months in fiscal 2002.
The Companys 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:
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 | |||||||||||
(A) | Includes approximately $3,500 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 $4,800 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. |
As of October 31, 2002, the Company had 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.
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 Companys financial results. The Companys 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 Companys 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 Companys 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 18.3%, 12.4%, and 9.5%, 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 Companys business.
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Item 4. Controls and Procedures
The Companys management, with the participation of the Companys chief executive officer and chief financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of October 31, 2002. The Companys chief executive officer and chief financial officer believe that the Companys disclosure controls and procedures were designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Companys chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared.
The Companys management performed its initial evaluation of its disclosure controls and procedures shortly following the quarter ended October 31, 2002. However, in the course of preparing its Annual Report on Form 10-K for the fiscal year ended July 31, 2004, the Company further evaluated certain information leading it to question whether appropriate software revenue recognition procedures had been followed in all cases by its Camtronics Medical Systems Ltd. subsidiary. The Company conducted a review of Camtronics transactions and the revenue recognition procedures followed, which has led the Company to restate its financial statements for the first three quarters of the fiscal year ended July 31, 2004 and for the fiscal years ended July 31, 2002 and 2003 and each of the interim periods within those years (see Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements). Based upon this subsequent evaluation of the effectiveness of the Companys disclosure controls and procedures performed by management, as well as the information learned as a result of its review of Camtronics transactions, the Companys chief executive officer and chief financial officer have concluded that, as of October 31, 2002, there were a number of significant deficiencies in the controls and procedures relating to the Companys Camtronics subsidiary that together constitute a material weakness in the Companys internal control over financial reporting. Accordingly, the Companys chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures were not operating effectively as of October 31, 2002.
The principal internal control issues identified by the Companys management are:
| the software revenue recognition expertise of Company management needs to be improved; | |||
| the Company needs to enhance its written accounting policies and procedures related to software revenue recognition; | |||
| the Company needs to enhance the training provided to employees with respect to software revenue recognition; and | |||
| the business processes and procedures of Camtronics need to be improved to ensure that they do not have unintended consequences with respect to software revenue recognition. |
Since identifying these issues, the Company has taken the following steps to improve its disclosure controls and procedures and internal control over financial reporting:
| Appointment of an interim President of Camtronics, succeeding the former President who left the employ of the Company, until such time that a full time President has been appointed. | |||
| Appointment of a Controller, replacing Camtronics Vice President and Controller who left the employ of the Company. | |||
| All subsidiary Controllers, who formerly reported to subsidiary General Managers, also now report directly to the Companys Corporate finance organization. | |||
| Detailed quarterly review of all software revenue transactions by the Companys Corporate finance organization. |
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In addition, the Company plans to take the following additional actions to further improve its disclosure controls and procedures and internal control over financial reporting:
| Review and revise, as required, Camtronics software revenue recognition policies, procedures and processes to ensure compliance with SOP 97-2. | |||
| Conduct periodic internal audit reviews of Camtronics business practices and software revenue recognition policies and procedures. | |||
| Conduct software revenue recognition training for all Camtronics personnel who have responsibility for generating, administering, and recording software revenues. |
The Company believes that the above steps taken and the planned additional actions will address and resolve the material weaknesses in the Companys internal controls over financial reporting at its Camtronics subsidiary. With respect to planned additional actions, the Company will initiate and, where practicable, complete these actions on or before the end of its third quarter ending April 30, 2005.
While there have been significant changes (described above) in the Companys internal control over financial reporting since October 31, 2004, no change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 31, 2002 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
The certifications of the Companys chief executive officer and chief financial officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q/A include, in paragraph 4 of such certifications, information concerning the Companys disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.
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PART II OTHER INFORMATION
Item 6. Exhibits
Exhibit | Description | |
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to be signed on its behalf by the undersigned thereunto duly authorized.
Analogic Corporation | ||
Registrant | ||
/s/ John W. Wood Jr. | ||
John W. Wood Jr. | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: March 1, 2005 |
||
/s/ John J. Millerick | ||
John J. Millerick | ||
Senior Vice President, | ||
Chief Financial Officer and Treasurer | ||
(Principal Financial and Accounting Officer) | ||
Date: March 1, 2005 |
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EXHIBIT INDEX
Exhibit | Description | |
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |