ALOG
#Thanks, <UNK>.
Good afternoon, everybody.
Let's go ahead and move to slide 4 of the presentation, please.
You can see that our strong product mix drove a profitable quarter in spite of significant short-term challenges in the security and the OEM legacy probes business.
Our revenue came in at $128 million.
That's down 4% from last year.
Gross margin was 43%.
That's up 1 point from prior year.
Non-GAAP operating margin was a strong 12%, up 1.5 points from last year.
Non-GAAP EPS was $0.80.
After backing out last years tax benefit and this quarter's currency effect on certain balance sheet items, we see improvement of $0.09, or 11%.
GAAP EPS was $0.40.
That's down $0.32 from last year, and after adjusting for the items I just mentioned we see an improvement of $0.13, or 27%.
Let's go ahead and move to slide 5.
We'll look at the segment highlights.
Medical Imaging was up 1%.
MR was strong, up on growth from China customers.
CT was flat for the quarter, and we shipped our 100th rugged ICT unit to China.
Mammography was down compared to a strong prior year and timing.
Ultrasound all-in was down 3%, heavily impacted by legacy probe declines.
Direct ultrasound was up 12% on strong growth in Europe and China.
OEM legacy probe revenue stabilized at this lower level, which we expect to annualize at around $12 million to $14 million yearly.
We had some production start-up delays for the BK 3500 for point of care and for the systems going to our technology partner Carestream for worldwide general imaging.
These issues are now behind us, and now we're seeing Q4 ramping up nicely.
We saw initial shipments of the Sonic Window for use in dialysis treatment.
Security and Detection was down 24% on delays in international high speed shipments.
We expect to remain stable at this lower yearly run rate.
Medium speed TSA shipments continued at this lower rate.
And international high speed shipments continue with lower revenue, although at improved margin mix.
And we saw a return to Limited Rapid DNA shipments during the quarter.
Now I'll turn it over to <UNK>, our CFO.
<UNK>.
Thanks, <UNK>.
Good afternoon and evening everyone.
I'll start on slide 6 with our quarterly performance.
The quarter came in close to our financial expectations, with Ultrasound Direct up double digits, Medical Imaging slightly up, offset as expected by declines in security and ultrasound OEM probes, leading to revenue down 4% versus Q3 2015.
Gross margin continued to improve, increasing 110 basis points primarily from mix and cost reductions, particularly within the Medical Imaging segment.
Non-GAAP operating margin returns improved 150 basis points, reflecting stronger gross margin and lower expenses.
So we turn to slide 7 and our Q3 financial results.
The main highlight was non-GAAP operating income improved 10% versus prior year for the second quarter in a row, despite lower revenue.
The result was driven by stronger gross margins and lower expenses, mainly because of reduced incentive compensation.
An anomaly this quarter in our earnings was the large difference between operating margin and net income performance.
The major reason for the lower earnings versus prior year was the benefit we generated last year of $0.24 for the reversal of tax reserves.
This applied to both GAAP and non-GAAP results.
The other element is we incurred a $0.12 non-cash FX charge for balance sheet items reflecting third-quarter appreciation of the euro, which lead to a translation charge.
We have undertaken a process to create a US dollar account entity in Europe to hold our US dollars to prevent unintended translation charges in the future.
Now, our non-GAAP tax rate did bump up a bit in the quarter because of a higher mix of US dollar pre-tax income.
But for FY16 on a non-GAAP basis we continue to expect our effective rate to be in the mid-20%s.
Now move to slide 8 and year-to-date results.
Performance points are similar to my quarterly commentary for non-GAAP gross margin and operating margin results.
An additional comment pertaining to GAAP expenses was we previously incurred the cost of the BK Distributer inquiry and restructuring, which totaled $17.5 million.
Backing out these costs, GAAP expense would be close to the same non-GAAP operating expense decline.
On the other income expense line we incurred an FX charge of $1.8 million, principally from the quarter three, as well as accrued in the second quarter the cost of the $3.2 million interest charge associated with the BK Distributer matter.
So I'll turn to our operating performance by segment on slide 9.
Another quarter of strong earnings results in Medical Imaging with revenues up 1% because of increased MRI sales in China partially offset by timing of mammography detector shipments.
Non-GAAP operating margin returns as compared to quarter three 2015 improved by approximately 3 points driven primarily by reduced costs, both COGS and operating expense, as well as better yield at our mammography plant.
In Ultrasound revenue increased 12% for our direct systems business, but overall Ultrasound was down 3% because of the expected decline in legacy OEM probes.
Key drivers for the direct component were double-digit increases in China and Europe, as well as benefit from our technology partner relationship in Oncura sales.
Non-GAAP operating margin returns remain roughly flat with prior year after backing out the dilution impact of the Oncura acquisition.
The acquisition impact is expected to be about 1 point for the full year for the Ultrasound segment operating margin.
Security and Detection revenues, as expected, declined 24% in the quarter reflecting lower volume in medium speed for the US market and the mix of high speed shipments outside of the US.
Non-GAAP operating margins returns rebounded from the prior quarter and were up 10 points versus prior quarter and 1 point versus the prior year.
The key element of improved performance was reduction in operating expense as a result of cost control efforts.
So I'll now move to slide 10, working capital and cash flow.
We generated $16 million in operating cash flow with $11 million of free cash flow.
Cash flow increase was driven by lower working capital, principally from higher payables and stronger operating income.
Inventory did increase because of a safety stock build and transferring portions of our MRI gradient and motion production to China in connection with our previously announced restructuring.
Total cash and investments increased $8 million because of the stronger operating cash flow generation.
We returned $6 million of cash to shareholders through dividends and stock repurchases.
In addition, we announced in our release that our Board of Directors authorized an additional $15 million share repurchase program to continue our balanced strategy for capital allocation.
I'll now turn the call back over to <UNK> for the 2016 outlook.
Thanks, <UNK>.
Move to slide 11 and look at our FY16 outlook.
For the FY16 we expect strong Direct Ultrasound to drive the mix and Security and Detection and legacy OEM probes stabilizing at lower annual run rates.
Medical Imaging business should remain consistent.
We expect full year revenue flat to slightly down.
CT mix continue shifting to higher level content private label systems in China, with MRI down slightly.
Mammography should continue to strengthen on new Chinese customers.
Ultrasound total revenue should be up modestly in spite of the drag from legacy OEM probes.
Our direct sales are expected to be up double digits.
OEM legacy probes is expected to stabilize at $12 million to $14 million a year.
This means one more difficult quarter, quarterly year-on-year comparison as this bottoms out in Q4.
North America and Asia direct sales continue growing at double digits.
Sonic Window sales is increasing and under evaluation for adoption by major dialysis providers.
The BK 3500 point of care system sales and sales to our technology partner Carestream for general imaging will continue to accelerate growth.
Security and Detection stabilized at lower annual run rate, down approximately 30% for the year.
Q4 revenue bottoms out, and our FY17 growth outlook is strengthening from international high speed tenders starting to flow.
We expect a stable revenue run rate for the US TSA medium speed threat detection systems.
Rapid DNA is slowly restarting and in test for a new international standard that covers both US and outside the US.
Long lines at the checkpoint is driving a lot more interest in our CT checkpoint technology, and we're evaluating distribution options.
As I mentioned earlier, Q4 is expected to be a difficult comparison to prior year.
However when adjusted for the currency drags ---+ or the current drag in security detection and OEM legacy probes, the fundamental underlying business is growing, and expected to accelerate with new incremental growth and exciting new high margin products.
Given the short-term headwinds in security and OEM legacy probes, for the full year we expect total revenue down approximately 6% on a reported basis, with favorable mix and cost focus driving continued non-GAAP operating margin expansion of approximately 1 point.
Thank you.
And now we'll return to the operator for questions.
Afternoon.
Yes, I think that that's right, <UNK>.
We had some production delay issues in the quarter for both.
The systems are very similar and use pretty much the same base platform.
We had some issues that slowed up our initial production ramp in both the 3500 and the units going to Carestream.
So that caused a bit of a delay in the ramp-up.
The good news is we're through those issues and we feel good that we'll see the ramp continuing as we're here in Q4 and continuing forward.
The feedback is very strong.
If you look at what Carestream is doing, this is our opportunity for our technology to really be well represented all around the world.
They're getting ---+ my feedback I get is they have very strong pipeline.
And they're, at this point they are really only offering starting in the US and then starting in Europe.
They already had a production line that we will start to see taking over for all of our ultrasound starting to ship into the China operation here soon, too.
So as they are able to start shipping to China, they will be hitting on all four cyllinders.
And we expect this to be a very nice growth driver for the business going forward.
Siemens is doing well.
It hasn't been that long that they've been able to offer the product here in the US.
So certainly the US is becoming a nice piece of that business.
But then adding the China operation, like you say, the China customers, that's a nice incremental bump for us also.
So we're pretty happy with the way the business is going.
It's not a great big growth business, but it's a very profitable business.
We continue to improve the yields and the margins, and it really helps deliver on ---+ for the business overall.
Yes, great question.
Certainly this year we saw the run rate come down on the height beat systems, and we're taking a much more conservative view of that where the base business is very solid for the US, for the service components and for the US medium speed.
So that's the basis of the business.
If you look at the tenders that are developing overseas, we do see them starting to flow now.
So we think as we get through this year, next year we see a nice positive uptick on the security side, which is really great news.
However, we do still see Q4 being a pretty tough comparable.
Q4 last year in security was very strong.
And we are at a lower run rate as we complete this year.
I will say also we have a strong ---+ we're going into next year with a strong backlog in security.
So we feel like we're out of the woods as far as the big headwinds that security hit us with this year.
On a checkpoint, there's no question that around the world airport authorities and the TSA are now actively looking at helical CT as one of the very few options that can do what they need to do to raise the threat detection capability and at the same time dramatically improve the throughput of the checkpoint.
The reason we went public with this is that we do have a great technology.
We have been and we continue to speak with the TSA.
There's a lot more interest there now.
They've been talking about this concept of the innovation lane.
And using technology like ours could be key to helping the innovation lane really be much more efficient, getting people through the checkpoint much faster.
And it turns out if you can improve your throughput at the checkpoint by a factor of 2, you actually can dramatically reduce the size of these wait lines.
And that's the message.
As we do the math behind it, we see significant improvements.
And we're up and running today in the line of commerce in London's Luton airport, and proving the kind of throughput improvement.
So we have a good demonstration to show to the TSA and other airport authorities that this technology is ready now.
So for us it comes down to how do we want to distribute this.
And that's what we're testing, is how do we want to take this, the current technology with Cobra and the systems that are coming out now later in the year, and what's the right way to distribute that.
Is that something we work with some partners on, or go through distribution.
And that's what we're evaluating now.
Yes.
What we're testing right now, we finished the latest trials with liquids and laptops in the bag.
At Schiphol and Amsterdam.
And we're up and running at the airport in Luton, they asked to keep it running as it is.
They are offering as a premium line to be able to quickly get their premium passengers in.
A lot of the airports ---+ and we're all looking at the new specifications are coming out for this next-generation checkpoint that ---+ and it turns out they're using a lot of our technology, including the Cobra, to prove what can be done if you have CT.
So, we feel like we're in a real good position to have the right product and the right technology as the new checkpoint specs come out that need to be able to detect everything with liquids and laptops in.
It's starting up slowly.
Starting up is better than not, but there has been ---+ what they're doing is the initial testing that was done to be supportive of what's needed in the US, we've completed that testing.
The FBI approved it.
But the FBI is now also wanting to have a consistent spec with what the Europeans are using.
The Europeans have a requirement to be able to do more than just DNA fingerprint, also be able to look at family relationships.
And you might see why that makes sense, especially in Europe with all of the migration.
They want to be able to tell not only who somebody is but who their relatives are.
And so that ---+ the new specifications that we're testing to.
And that's why these last units went out, they are going to be used in testing to validate that we can hit the new overall worldwide standard.
So that's where this is.
It's always been kind of a slow mover.
We think as it comes together it's going to be a nice opportunity.
And we're working with our customers on this, and helping to get this up to speed.
I don't know that anybody is meeting the spec other than us at this point for something like this that very rapidly gets the answers.
And now that they've extended it to needing to have, it's what they call six-color type of views, the type of lasers that are used.
So it's a very high level of precision.
It's actually raising the standard.
And in some ways we're happy about that because we're confident that we won't have a problem with it.
The big hurdles are just the adoption time, having the FBI finish this final set of testing and then waiting for the legislature to approve the ability for states to buy the systems and operate them on their own.
In the meantime these systems could be start to be purchased into some of the big labs.
But I thought the big opportunity comes when law enforcement is able to use it in a more general use.
<UNK>, as far as we're aware we're the only ones that have been validated by the FBI for our equipment.
No one else has yet been validated.
Yes.
I think rather than going to the specific quarter number, if you look at that annual run rate we said around $12 million to $14 million.
It's actually fairly steady.
So I think it's fair to say if you divide it by four that gives you a rough order on where it is.
Last year would have been significantly higher.
Last year, it's come down.
Last year it was about 18% of our revenue and now we're down towards 11%, 12% of revenue, of the Ultrasound revenue.
Of Ultrasound revenue.
Yes, it was actually less than a full quarter delay.
It's up and running now.
So, and the same thing goes for the products that go to Carestream for their worldwide distribution.
We had a stop-ship delay until we solved some issues that needed to get done for full production ramp.
We think we're through those now.
We're up and running, and we're seeing that start to develop stronger now.
Well, I think it's true that probably the overall medical imaging market in China is slowing, but it's not just slowing.
It's actually shifting somewhat.
We're seeing the Chinese government putting a lot more emphasis on being able to buy from local players.
And as you know, we tend to work with most of the companies that can deliver these kind of technologies.
So we're seeing a bit of a shift where maybe in China equipment that would have gone through a big medical OEM, that might be slowing down.
But we're seeing an uptick in the local suppliers.
And there's not a whole lot of them, but there's a number of very big, well established, well-capitalized companies that we think are going to do really well as local suppliers into China.
So for us, we don't see a negative in China.
But certainly we see where some of the big OEMs are probably having a bit of a slowdown.
Thanks, <UNK>.
Okay.
Well thank you very much.
Again, let me take a second just to thank you for your interest in Analogic and invite you to call back in in September when we will review our fourth-quarter FY16 results.
Thank you very much.
Have a good evening.
