ALOG
#Thank you, <UNK>.
Following a respectable Q1 performance to start our fiscal 2018, Q2 delivered another gratifying quarter.
Three of our business segments expanded and delivered at or above our expectations.
Ultrasound, Security and Motion Controls are ensconced in this position and are establishing themselves as legitimate growth opportunities.
In the case of Ultrasound, the growth is occurring despite some historical drag from businesses we exited or reduced in the restructuring of 2017.
In other categories facing near-term market challenges, i.
e.
CT and MR and medical side, our revenues still met our expectation.
In between this stratification is our Montr\u0102\u0160al operation, which remains a productive, stable business.
All in all, Q2 was gratifying.
On behalf of shareholders and our Board of Directors, I recognize and I thank our employees for the Q2 results.
At half time in our fiscal year, the momentum is evident somewhat in the revenue column, and clearly in the earnings column.
Specific to some milestone achievements, we have delivered prototypes in our Security business, both the TSA under the previously announced contract with American Airlines, and Rapid Scan primarily for the O.
U.S. carry-on markets.
In Ultrasound, the improvements are broad based across products and geographies.
As the strategic alternative process matures, we have elected to not provide guidance for the balance of fiscal 2018, neither will we be taking questions at the conclusion of our remarks.
Realizing this is not standard course, we will not take your patience for granted.
I now turn the microphone of over CFO, Mike <UNK>, who will provide details on our financial performance for Q2 and year-to-date, after which our remarks are concluded.
Thank you, <UNK>, and good evening everyone.
Please turn to Slide 5 in our financial highlights for the second quarter of fiscal 2018.
Revenues in the second quarter were $129 million, down 2% compared to Q2 of last year, but better-than-expected in all 3 of our business segments.
I will walk you through our segment performance a bit later.
GAAP operating margin at 12% was 5 points higher than Q2 of 2017 through the effectiveness of our expense reduction efforts taken during last year and also due to onetime events in Q2 of 2017 related to our Oncura Vet business, including $10.4 million of asset impairment charges and an $8.2 million contingent gain.
Similarly, non-GAAP operating margin of 15% was about 2.5 points higher than Q2 of 2017 and our reduced operating expenses.
GAAP EPS is $0.52 per share, down $0.07 per share due to a onetime tax expense in Q2 of this year as a result of the Tax Cuts and Jobs Act, which was a $0.51 per share impact on our GAAP EPS.
Excluding this onetime tax expense and an $0.11 per share charge related to the Oncura Vet business in Q2 of '17 that I mentioned earlier, GAAP EPS would have been up $0.33 per share compared to the same quarter last year, primarily resulting from our operating expense improvement.
Non-GAAP EPS was $1.27 per share, up $0.28 per share compared to Q2 of 2017, again driven by our improved cost structure in 2018.
Please turn to Slide 6 for our second quarter financial results.
As I mentioned, revenue was down 2% in the quarter, about $2.5 million lower than Q2 of fiscal year 2017.
I will provide some color on that a bit later.
Our GAAP operating expenses decreased by about $7 million in Q2 of '18 versus Q2 of '17.
This includes the asset impairment charge of $10.4 million and the $8.2 million of contingent gain in Q2 of fiscal year '17 related to Oncura.
Excluding these onetime items, GAAP operating expenses were down close to $5 million in Q2 of this year compared to Q2 of 2017.
Non-GAAP operating expenses were also significantly lower in Q2 of '18 compared to the prior year, decreasing by close to $4 million, a 9% reduction, again as a result of our improved cost structure.
Similar to our performance in the first quarter of this year, we generated close to $3 million of incremental non-GAAP operating income even with the $2.5 million drop in revenue as compared to Q2 of 2017.
In the tax area, you will see our GAAP effective tax rate for the quarter is at 60.7%.
This higher GAAP tax rate was driven by a $6.5 million onetime transition tax we incurred in Q2 of this year as a result of the Tax Cuts and Jobs Act.
We expect our non-GAAP tax rate to be in the low to mid-20s for the full fiscal year of 2018.
Please turn to Slide 7 and our operating performance by segment.
Our Medical Imaging revenues totaled $63 million, down 12% compared to the second quarter of 2017 but better-than-expected.
The primary driver of the decrease relates to the sourcing decisions by CT OEM customers which was expected.
We also experienced lower revenue in MR that was offset by another strong quarter in Motion.
Non-GAAP operating margin for Medical Imaging was down about 5 points compared to the second quarter of last year on the lower CT revenue impact and slightly higher operating expenses.
In Ultrasound, our revenues were $44 million, an increase of 8% for the quarter over last year, and our core Ultrasound business was again up mid-teens on a quarterly comparison to the prior year.
Continued growth in North America and in Europe were key drivers to another strong quarter for the Ultrasound business.
Non-GAAP operating margin for margin for Ultrasound at 13% was up 15 points as compared to the second quarter of 2017 and the higher revenue mix and much lower operating cost.
Our Security and Detection revenues totaled $22 million, up 18% in the second quarter compared to the same quarter of last year, primarily driven by the timing of our airport check baggage screening systems, and to a lesser degree, impacted by a onetime payment, a recovery from a customer of our Rapid DNA systems of about $1 million.
Non-GAAP operating margin in Security and Detection was up about 5 points, with the primary driver about 4 points being the dropdown of the $1 million recovery payment.
I will move on to Slide 8 and our year-to-date results.
Revenue was down about $17 million on a year-to-date basis.
However, generating about a 1-point revenue gross margin in fiscal year 2018 compared to the prior year.
Excluding the onetime charges in 2017 that I noted earlier, GAAP and non-GAAP operating expenses are down about $13 million as a result of our improved cost structure.
You may recall that as we entered fiscal year 2018, we expected to achieve cost savings of about $24 million for the year as compared to fiscal year 2017 as a result of our initiatives, so we are on target for these savings through the first half of this year.
Our year-to-date GAAP effective tax rate of 50.8% for the first half of 2018 again reflects the $6.5 million transition tax expense taken in Q2 of this year, which was a $0.51 per share impact on GAAP EPS on a year-to-date basis.
Non-GAAP EPS at $2.01 per share is up $0.60 per share on a year-to-date basis on our improved profitability for the first half of the year as compared to the first half of fiscal year 2017.
Please turn now to Slide 9.
We generated $21 million in operating cash flows for the quarter, and from a capital allocation standpoint, we spent about $1 million in capital expenditures.
Our cash and investment balance is $202 million as of the end of Q2 of this fiscal year.
That concludes our remarks.
As <UNK> noted earlier, we realize that this is not the standard course.
We thank you for your patience, and we thank you for your interest in Analogic.
