Analogic (ALOG) Q2 2018 Earnings Conference Call Transcript

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Analogic (ALOG)
Q2 2018 Earnings Conference Call
March 5, 2018 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to Analogic Corporation's Second-Quarter Conference Call for Fiscal 2018. I'd like to remind everyone that a supplementary presentation will be used during today's call, which can be downloaded from the company's IR website at investor.analogic.com. Now, I'd like to turn the call over to Mark Namaroff, senior director of investor relations. Mr.

Namaroff?

Mark Namaroff -- Senior Director of Investor Relations

Thank you. Good afternoon, everyone, and welcome to Analogic's Second-Quarter Conference Call for Fiscal 2018. Joining me today on the call is Fred Parks, president and CEO; Michael Bourque, senior vice president, CFO, and treasurer; and John Fry, senior vice president and general counsel. Earlier today, after the market closed, we issued a press release describing the financial results for our second quarter.

If you have not yet downloaded the press release, you can do so via our website at investor.analogic.com. Please take note, in view of the status of our company's sale process, we will not be commenting on our fiscal year 2018 guidance or be providing any other forward-looking information during the call. Also as a result of this, we have decided not to hold a live Q&A session after the prepared remarks. The call today will focus solely on the performance during the second quarter of fiscal 2018 and the first half of our fiscal year.Before we review the results for the second quarter, I would like to remind everyone that today's call may include forward-looking statements such as comments about our plans, expectations, and projections.

For more information on risks and other factors that could cause our actual results to differ significantly from our forward-looking statements, please refer to our most recent Form 10-K and 10-Q reports on file with the SEC. Also on today's call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. We believe that using non-GAAP metrics provides investors a more thorough understanding of our business. An explanation and a reconciliation of our non-GAAP financial measures are provided at the end of the presentation materials and in our second-quarter press release.And now, I'd like to turn the call over to Fred for opening comments.

Fred Parks -- President and Chief Executive Officer

Thank you, Mark. Following a respectable Q1 performance to start our fiscal 2018, Q2 delivers another gratifying quarter. Three of our business segments expanded and delivered at or above our expectations. Ultrasound, security, and motion control 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 on the medical side, our revenue still met our expectation. In between this stratification is our Montréal 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 halftime 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 to TSA under the previously announced contract with American Airlines, and Rapid Scan, primarily for the OUS 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 a standard course, we will not take your patience for granted. I now turn the microphone over to CFO Mike Bourque, who will provide details on our financial performance for Q2 and year to date, after which our remarks are concluded.

Mike Bourque -- Senior Vice President, Chief Financial Officer, and Treasurer

Thank you, Fred. 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 three 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 one-time 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, the non-GAAP operating margin of 15% was about 2.5 points higher than Q2 of 2017 on our reduced operating expenses.GAAP EPS is $0.52 per share, down $0.07 per share due to a one-time 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 one-time tax expense and a $0.11-per-share charge related to the Oncura Vet business in Q2 of 2017 that I mentioned earlier, GAAP EPS would have been up by $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 in our second-quarter financial results. As I mentioned, revenue was down 2% in the quarter, about $2.5 million lower than Q2 of the 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 2018 versus Q2 of 2017.

This includes the asset-impairment charge of $10.4 million and the $8.2 million of contingent gain in Q2 of the fiscal year 2017 related to Oncura. Excluding these one-time 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 2018 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 one-time 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 in 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 were expected. We also experienced lower revenue in MR that was offset by another strong quarter in motion. The 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 ultrasound, at 13%, was up 15 points as compared to the second quarter of 2017 on the higher revenue mix and much lower operating costs. Our security and detection revenues totaled $22 million, up 18% in the second quarter compared to same quarter of last year, primarily driven by the timing of our airport checked-baggage screening systems and to a lesser degree impacted by a one-time 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 a drop-down of the $1 million recovery payment.I'll move on to Slide 8 in our year-to-date results.

Revenue is down about $17 million on a year-to-date basis, however, generating about a 1-point improvement in gross margin in the fiscal year 2018 compared to the prior year. Excluding the one-time 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 the fiscal year 2018, we expected to achieve cost savings of about $24 million for the year as compared to the fiscal year 2017 as a result of our initiatives. So we're 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 the 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 Fred 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.

Questions and Answers:

Operator

For listeners who may have come in late, this call has been recorded. You can access the telephone replay by dialing 1-877-919-4059 or, for international callers, 1-334-323-0140 and entering passcode 84106845. The telephone replay will be available at that number beginning two hours from now and running through midnight Eastern Time, Thursday, April 5, 2018. The webcast replay will be available on the Investor Relations page of our website at www.analogic.com beginning about three hours from now and will be available through Thursday, April 5, 2018.

Thank you for joining Analogic Corporation's second-quarter fiscal 2018 conference call.

Duration: 17 minutes

Call Participants:

Mark Namaroff -- Senior Director of Investor Relations

Fred Parks -- President and Chief Executive Officer

Mike Bourque -- Senior Vice President, Chief Financial Officer, and Treasurer

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