ALOG
#Thank you, <UNK>.
Though perhaps not bell-ringing, our third quarter results were as expected given the return to core strategy in Ultrasound.
As you can see in the press release, the reexamination under profitability constraints of the Ultrasound diversification strategy yielded very modest continuing revenue.
In contrast, our Security and Detection business will experience a very successful 2017 and continuation thereafter.
Medical Imaging, now extending its appeal to numerous embryonic imaging customers generally in Asia, is doing well, while the broader market remains under pressure in the more traditional relationships as outsourcing in health care markets has not yet fully relaxed.
I ask you to recall that in Medical Imaging, we are shifting from a components to a higher value system kind of strategy.
All these patterns will be distilled by the end of Q4, at which time we will provide fiscal 2018 guidance at the traditional year-ending telecom.
We do expect returning to our core activities.
Particularly in Ultrasound, we'll permit an encouraging view of FY '18 to '20.
Some favorable points from Q3 FY '17 would include our motion control business, which is reported inside Medical Imaging.
This business will exhibit nearly 20% year-over-year growth, a trend we believe will continue.
Further, the operating margin in Medical Imaging is up 2.6% from a year ago same period.
This business segment and the security segment as well still exhibit attractive cost structures and, thus, operating leverage.
By contrast, the profitability results in our Ultrasound segment earned all the attention we are providing, thus justifying the dramatic restructuring to be concluded this quarter.
Our highest priority is successfully executing the restructuring in a disciplined way, manifesting a cost structure productive at current volumes and attractively scaling with future growth.
It is unfortunate as well as unanticipated at the start of the restructuring effort that our closer examination of the Ultrasound initiatives have resulted in such a dramatic impairment of goodwill and intangibles.
However, our analysis was deliberate, evaluations patiently awaited and conclusions endorsed by very experienced Board of Directors.
Soon time to move on to FY '18 shortly.
We continue the certification process of ConneCT, our new Checkpoint product, perhaps with a late summer completion.
<UNK>et feedback continues to be encouraging, and international demo sites are being arranged.
Once launched commercially, the ConneCT should catalyze a growth spurt in the security business.
Legislation is now passed in the Senate and the House and encouraged a vitalized net bio perhaps during the second half of 2018.
The aforementioned activities announced a quarter ago executed the completion in FY '17 this quarter, along with maturation of a mix of Ultrasound, Security and Medical Imaging products will yield favorable revenue comparisons for the second half of 2018.
Nobody is more anxious than we are to move on to that period.
Now I invite our CFO, <UNK> <UNK>, to discuss the financial details.
<UNK>.
Thanks, <UNK>.
Good afternoon, evening, everyone.
I'll start on Slide 5 of our quarterly financial highlights.
Revenue dropped 5%, as expected, as growth in security was offset by declines in Ultrasound and Medical Imaging.
Non-GAAP EPS, earnings per share, was $0.79 per share, roughly flat with the prior year and in line with expectations.
GAAP earnings per share decreased to negative $4.78 per share, reflecting impact of the restructuring announced in the previous quarter with a $2.1 million charge or $0.11 per share.
The larger charge was the noncash impairment recorded of $73.1 million or $5.29 per share.
The charge was triggered by impairment indicators related to our Ultrasound segment as we reduced future revenue expectations primarily related to ongoing delays in the introduction and commercialization of our general imaging platform through our technology partner as well as Oncura Veterinary performance.
In addition, we impaired our intangibles related to our Sonic Window technology.
Our impairment charges were partially reduced by a reversal of our Oncura Vet contingent liability of $2.1 million.
We believe the general imaging product can still be an upside as well as our point-of-care offering to our future Ultrasound results.
We are evaluating strategic options for both our Vet and Sonic Window businesses.
As <UNK> has mentioned, our restructuring is progressing over expectation that we will finish our process by the end of the fourth quarter.
We believe now that we will be more towards a higher level of savings of $15 million to $18 million versus the $12 million to $15 million we communicated last quarter.
We do expect we will incur further restructuring charges in the fourth quarter related to personnel as well as fixed assets and inventory.
These are anticipated based on a shutdown of our Vancouver site and final product road map decisions.
So I'll turn to Slide 6 and quarter 3 financial results.
Revenue and gross margin were down based on lower volume in Ultrasound and Medical Imaging.
Non-GAAP operating expenses dropped about $1 million and would have been down $2 million if not for some onetime cleanup related to our Ultrasound optimization efforts.
GAAP expenses, as noted earlier, are significantly higher, caused by the noncash impairment charges.
As I indicated before, we expect further charges, both GAAP and non-GAAP, in finalizing our Ultrasound portfolio optimization efforts by the end of the year.
Non-GAAP operating margin was down a little over 1 point because of lower revenue volume.
Improvement though in other income expense from a reduced FX charge plus a slightly lower tax rate brought non-GAAP EPS back closer ---+ close to prior year results.
I'm going to skip by Slide 7 on quarterly performance trends as we already have covered the key points.
I'll move to Slide 8 in operating performance by segment.
Medical Imaging revenue fell 5% with declines across all the modalities.
Non-GAAP operating income margin though improved by 3 points despite a gross margin decrease from the revenue drop as we reduced R&D investment and initiated corporate structure actions to reduce G&A.
Turning to Ultrasound.
Ultrasound revenue fell 7%, resulting from continued delays in our general imaging product as well as lower EMEA distribution offset in part by strong China, Asia performance.
We have lowered our revenue forecast based on weakness in our Vet business and the residual effect of our restructuring efforts on our sales force.
Revenue is now expected to be down high single digits for the fiscal year.
Non-GAAP operating margins deteriorated, as expected, based on lower revenue and portfolio cleanup in the expense area.
We are now anticipating that the Ultrasound business will end a low double-digit negative operating margin for the fiscal year.
As noted earlier, we expect based on the communicated restructuring savings that the segment will return to positive profitability in fiscal year '18.
Turning to Security.
Security grew 2% based on continued high speed demand.
Unfortunately, as we have discussed in the past, volatility is associated with this segment, and we lowered our forecast for the year as high-speed shipments were pushed to the first half of fiscal year '18 from the fourth quarter.
We still expect full year growth in the range of 15% to 20%.
Non-GAAP operating margin dropped 2 points, reflecting investment in both R&D and sales and marketing for the ConneCT products.
I'll move to Slide 9 and year-to-date results.
Revenue continued to be positive for the year, driven by security results.
Gross margin is down about 140 basis points, reflecting primarily product/customer mix impacts.
Non-GAAP operating expenses have risen about $3 million, related primarily to first half sales and marketing cost associated with the Oncura acquisition.
Backing out CEO transition cost and onetime ultrasound optimization cost incurred in the third quarter, expenses would have been flat year-to-date.
GAAP expenses, as we discussed, are higher because of a noncash impairment charge but partially offset by the BK matter settlement in FY '16, which obviously did not occur in '17; the Oncura contingency reversal; and lower restructuring charges.
Overall, non-GAAP EPS is down about 13%, reflecting gross margin mix impact as well as higher expenses, partially offset by favorability in the other income expense line because of lower FX impact in FY '17.
And my last slide is Slide 10, covering working capital and cash flow.
We had another positive cash quarter with $13 million in operating cash and $11 million of free cash flow generation.
The balance sheet results were relatively consistent with the prior quarter, and our expectation is this will be true for the fourth quarter.
Capital expenses ---+ expenditures are now anticipated to range from $10 million to $12 million for the fiscal year.
I'll now turn the call back over to <UNK> to discuss our outlook.
So just to repeat an earlier comment, we're talking only about FY '17.
We'll be back in 3 months, and at that point, we'll be guiding for FY '18.
So as you see on Slide 11, the ---+ we'll have mid-digit ---+ mid-single-digit declines with non (sic) [non-GAAP] operating profit margins in the 8.5% to 9.5% and a non-GAAP EPS around $2.40 to $2.70.
Going to the particular businesses and Ultrasound, not surprisingly, since we have been examining that portfolio for about 6 months, we're seeing high-single-digit revenue declines with negative low-double-digit operating margins; Medical Imaging, a different profile, so we see mid-single-digit revenue declines but continuing a very productive cost structure with high teen operating margins.
And probably the highlight of the year this year, the Security and Detection business, high-teens revenue growth with low-teen operating margins, but we would highlight that it's a volatile business and we expect a slightly soft Q4.
So with that and prior to going to the Q&A, I have one supplementary comment and it's appropriate to come at the end of the FY '17 outlook.
Given the results reported in the recent quarters, in concert with the concern about the pace of anticipated progress, the Analogic Board of Directors has directed that all options, internal and external, be considered to accelerate the pace of value creation for our shareholders.
We will discuss this initiative again in 3 months when we provide guidance for FY '18.
And with that, I would invite the Q&A.
Yes.
I think that your arithmetic is correct in Q4.
As we finish the progress in terms of the restructuring, we don't think it's going to be a great revenue quarter.
We always keep an outlook active.
On going out farther, it's sometimes sufficient or not, but we think given the first half comparisons next year to first half comparisons of this year, probably not as favorable.
But we are convinced when we get this behind us mid next year, the revenue comparisons at that pace should be more favorable.
So that's sort of the high tide, low tide point.
<UNK>, do you have additional comments.
No, I think you'd captured that we would expect a stronger second half versus first half next year, but we'll crystallize those numbers at the September call.
This is <UNK>.
I would answer that we had some softness in general across a number of the modalities.
There's a little bit in all the different pieces, which led us to lower the numbers a bit in the fourth quarter.
I'll take the call ---+ the question, Larry.
It's a combination primarily focused on the noncore aspects of Ultrasound.
The base urology or surgery business is fine, but the other pieces, the general imaging product, the point-of-care products, the Sonic Window products, the Oncura products, all of the expectations ---+ and I think we talked a little bit about our concerns on this last quarter.
And that resulted when we looked at those revenue expectations.
Those were the drivers for why ---+ so I'd say it's the 3 pieces.
It's ---+ the general imaging element, the Sonic Window element and the Oncura element were the 3 major impairments that occurred within the quarter, and fibers that caused the impairment within the quarter.
Yes.
Larry, this is <UNK>.
Just to make sure that you hear.
We're putting those to a fairly harsh profit constraint and requirement now.
One time, we might be even more relaxed, but we are determined to be in businesses that are going to create value.
And so I think that's resulted in some of the conclusions that we have reached.
Yes.
I would agree to that.
Both.
Yes is the answer to that question.
We remain confident in the technology that we own.
We think it's going to be the best in the business, and we think it could arrive perhaps in the qualification sometime late this summer, but it's always an uncertain process.
And we all know when we know.
Best guess, late summer.
Yes, your math's in the general ball game, yes.
It might be off a couple of cents, but that's about right.
Yes.
I can tell you the big reason for the range is ---+ because we would have recorded these charges already, is the final decisions relating to the portfolio optimization decisions as they impact fixed assets and inventory.
And that's why there's such a large range, and there are a variety of decisions we got to go through with the sales and marketing teams, the operation teams to finalize what will be the NRV implication, net realizable value implications, for inventory associated with our decision in some of the fixed assets.
So that's why the range is so wide.
Yes.
Your math is correct, Jim.
And it's across the board.
I'd say Ultrasound relates somewhat to some of the portfolio decisions we've made ---+ are making.
Security, we talked about the volatility.
You had a customer move out some shipments.
And imaging, we just had a general move-out of some of the shipments, which caused that to further decline.
Well, Sonic Window was in its infancy.
So it was less than 1%, even less than 0.5%, so very, very low number.
Oncura was probably in the ballpark about 2% to 3%, 4% of our revenue for Ultrasound ---+ for the whole company, 2% of the whole company.
