| ANALOGIC CORP Item 1A Risk Factors This Annual Report on Form 10-K contains statements, which, to the extent that they are not recitation of historical facts, constitute “forward-looking statements” pursuant to the safe harbor provisions of the Private 7 ______________________________________________________________________ [35]Table of Contents Securities Litigation Reform Act of 1995 |
| Investors are cautioned that all forward-looking statements, including, without limitation, statements about product development, market and industry trends, strategic initiatives, regulatory approvals, sales, profits, expenses, price trends, research and development expenses and trends, and capital expenditures involve risk and uncertainties, and actual events and results may differ significantly from those indicated in any forward-looking statement as a result of a number of important factors, including those discussed below and elsewhere herein |
| You should carefully consider the risks described below before making an investment decision with respect to Analogic Common Stock |
| Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business |
| Any of these could have a material and negative effect on our business, financial condition, or results of operations |
| Because a significant portion of the Company’s revenue currently comes from a small number of customers, any decrease in revenue from these customers could harm the Company’s operating results |
| The Company depends on a small number of customers for a large portion of its business, and changes in its customers’ orders may have a significant impact on the Company’s operating results |
| If a major customer significantly reduces the amount of business it does with the Company, there would be an adverse impact on its operating results |
| The following table sets forth the percentages of the Company’s net product and engineering revenue from its five largest customers in each of the last three fiscal years, and the percentages of its product and engineering revenue to its ten largest customers during these periods: Year Ended July 31, 2006 2005 2004 Toshiba 19 % 15 % 14 % L-3 Communications 17 % 16 % 9 % Siemens 9 % 9 % 10 % General Electric 8 % 10 % 9 % Philips 5 % 7 % 8 % Ten largest customers as a group 70 % 66 % 68 % Although the Company is seeking to broaden its customer base, it will continue to depend on sales to a relatively small number of major customers |
| Because it often takes significant time to replace lost business, it is likely that the Company’s operating results would be adversely affected if one or more of the Company’s major customers were to cancel, delay, or reduce significant orders in the future |
| The Company’s customer agreements typically permit the customer to discontinue future purchases after timely notice |
| In addition, the Company generates significant accounts receivable in connection with the products the Company sells and the services it provides to its major customers |
| Although the Company’s major customers are large corporations, if one or more of its customers were to become insolvent or otherwise be unable to pay for the Company’s products and services, the Company’s operating results and financial condition could be adversely affected |
| Competition from existing or new companies in the medical and security imaging technology industry could cause the Company to experience downward pressure on prices, fewer customer orders, reduced margins, the inability to take advantage of new business opportunities, and the loss of market share |
| The Company operates in a highly competitive industry |
| The Company is subject to competition based on product design, performance, pricing, quality, and service offerings, and management believes the Company’s innovative engineering and product reliability have been important factors in its growth |
| While the Company tries to maintain competitive pricing on those products which are directly comparable to products manufactured by others, in many instances the Company’s products will conform to more exacting specifications and carry a higher price than analogous products manufactured by others |
| 8 ______________________________________________________________________ [36]Table of Contents The Company’s competitors include divisions of larger, more diversified organizations as well as specialized companies |
| Some of them have greater resources and larger staffs than the Company has |
| Many of the Company’s existing and potential OEM customers have the ability to design and manufacture internally the products that the Company manufactures for them |
| The Company faces competition from the research and product development groups and manufacturing operations of its existing and potential customers, who continually compare the benefits of internal research, product development, and manufacturing with the costs and benefits of outsourcing |
| The Company depends on its suppliers, some of which are the sole source for certain components, and its production would be substantially curtailed if these suppliers were not able to meet the Company’s demands and alternative sources were not available |
| The Company orders raw materials and components to complete its customers’ orders, and some of these raw materials and components are ordered from sole-source suppliers |
| Although the Company works with its customers and suppliers to minimize the impact of shortages in raw materials and components, the Company sometimes experiences short-term adverse effects due to price fluctuations and delayed shipments |
| In the past, there have been industry-wide shortages of electronics components |
| If a significant shortage of raw materials or components were to occur, the Company might have to delay shipments or pay premium pricing, which could adversely affect its operating results |
| In some cases, supply shortages of particular components will substantially curtail the Company’s production of products using these components |
| The Company is not always able to pass on price increases to its customers |
| Accordingly, some raw material and component price increases could adversely affect its operating results |
| The Company also depends on a small number of suppliers to provide many of the other raw materials and components that it uses in its business |
| Some of these suppliers are affiliated with customers or competitors, and others are small companies |
| If the Company was unable to continue to purchase these raw materials and components from its suppliers, its operating results could be adversely affected |
| Because many of the Company’s costs are fixed, its margins depend on the volume of output at its facilities, and a reduction in volume could adversely affect its margins |
| If the Company were to be left with excess inventory, its operating results would be adversely affected |
| Because of long lead times and specialized product designs, the Company typically purchases components and manufacture products in anticipation of customer orders based on customer forecasts |
| For a variety of reasons, such as decreased end-user demand for the Company’s products, its customers might not purchase all of the products that it has manufactured or for which it has purchased components |
| In either event, the Company would attempt to recoup material and manufacturing costs by means such as returning components to its vendors, disposing of excess inventory through other channels, or requiring its OEM customers to purchase or otherwise compensate it for such excess inventory |
| Some of the Company’s significant customer agreements do not give it the ability to require its OEM customers to do this |
| To the extent that the Company was unsuccessful in recouping its material and manufacturing costs, its net sales and operating results would be adversely affected |
| Moreover, carrying excess inventory would reduce the working capital the Company has available to continue to operate and grow its business |
| Uncertainties and adverse trends affecting the Company’s industry or any of its major customers may adversely affect its operating results |
| The Company’s business operates primarily within two major markets within the electronics industry, Medical Technology Products and Security Technology Products, which are subject to rapid technological change and pricing and margin pressure |
| These markets have historically been cyclical and subject to significant downturns characterized by diminished product demand, rapid declines in average selling prices, and production over-capacity |
| In addition, changes in government policy relating to reimbursement for the purchase and use of medical and security-related capital equipment could also affect the Company’s sales |
| The Company’s customers’ markets are also subject to economic cycles and are likely to experience recessionary periods in the 9 ______________________________________________________________________ [37]Table of Contents future |
| The economic conditions affecting the Company’s industry in general, or any of its major customers in particular, might adversely affect its operating results |
| The Company’s other businesses are subject to the same or greater technological and cyclical pressures |
| The Company’s customers’ delay or inability to obtain any necessary United States or foreign regulatory clearances or approvals for their products could have a material adverse effect on the Company’s business |
| The Company’s products are used by a number of its customers in the production of medical devices that are subject to a high level of regulatory oversight |
| A delay in obtaining or inability to obtain any necessary United States or foreign regulatory clearances or approvals for products could have a material adverse effect on the Company’s business |
| The process of obtaining clearances and approvals can be costly and time-consuming |
| There is a further risk that any approvals or clearances, once obtained, might be withdrawn or modified |
| Medical devices cannot be marketed in the United States without clearance from the United States Food and Drug Administration (FDA) |
| Medical devices sold in the United States must also be manufactured in compliance with FDA rules and regulations, which regulate the design, manufacturing, packing, storage, and installation of medical devices |
| Moreover, medical devices are required to comply with FDA regulations relating to investigational research and labeling |
| States may also regulate the manufacturing, sale, and use of medical devices |
| Medical devices are also subject to approval and regulation by foreign regulatory and safety agencies |
| The Company’s business strategy involves the pursuit of acquisitions or business combinations, which if consummated could be difficult to integrate, disrupt the Company’s business, dilute stockholder value, or divert management attention |
| As part of the Company’s business strategy, the Company might consummate acquisitions or business combinations |
| Acquisitions are typically accompanied by a number of risks, including the difficulty of integrating the operations and personnel of the acquired companies, the potential disruption of the Company’s ongoing business and distraction of management, expenses related to the acquisition, and potential unknown liabilities associated with acquired businesses |
| If the Company does not successfully complete acquisitions that it pursues in the future, it could incur substantial expenses and devote significant management time and resources without generating any benefit to the Company |
| In addition, substantial portions of the Company’s available cash might be utilized as consideration for these acquisitions |
| The Company’s annual and quarterly operating results are subject to fluctuations, which could affect the market price of its Common Stock |
| The Company’s annual and quarterly results may vary significantly depending on various factors, many of which are beyond the Company’s control, and may not meet the expectations of securities analysts or investors |
| If this occurs, the price of the Company’s common stock would likely decline |
| These factors include: • variations in the timing and volume of customer orders relative to the Company’s manufacturing capacity; • introduction and market acceptance of the Company’s customers’ new products; • changes in demand for the Company’s customers’ existing products; • the timing of the Company’s expenditures in anticipation of future orders; • effectiveness in managing the Company’s manufacturing processes; • changes in competitive and economic conditions generally or in the Company’s customers’ markets; • changes in the cost or availability of components or skilled labor; • foreign currency exposure; and • investor and analyst perceptions of events affecting the Company, its competitors, and/or its industry |
| 10 ______________________________________________________________________ [38]Table of Contents As is the case with many technology companies, the Company typically ships a significant portion of its products in the last month of a quarter |
| As a result, any delay in anticipated sales is likely to result in the deferral of the associated revenue beyond the end of a particular quarter, which would have a significant effect on the Company’s operating results for that quarter |
| In addition, most of the Company’s operating expenses do not vary directly with net sales and are difficult to adjust in the short term |
| As a result, if net sales for a particular quarter were below the Company’s expectations, it could not proportionately reduce operating expenses for that quarter, and, therefore, that revenue shortfall would have a disproportionate adverse effect on its operating results for that quarter |
| Loss of any of the Company’s key personnel could hurt its business because of their industry experience and their technological expertise |
| The Company operates in a highly competitive industry and depends on the services of its key senior executives and its technological experts |
| The loss of the services of one or several of its key employees or an inability to attract, train, and retain qualified and skilled employees, specifically engineering and operations personnel, could result in the loss of customers or otherwise inhibit the Company’s ability to operate and grow its business successfully |
| If the Company is unable to maintain its expertise in research, product development, and manufacturing processes, it will not be able to compete successfully |
| The Company believes that its future success will depend upon its ability to provide research, product development, and manufacturing services that meet the changing needs of its customers |
| This requires that the Company successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner |
| As a result, the Company continually evaluates the advantages and feasibility of new product designs, and manufacturing processes |
| The Company cannot, however, be certain that its development efforts will be successful |