NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in millions, except share and per share data)

1. Basis of presentation

Throughout this Quarterly Report on Form 10-Q, unless the context states otherwise, the words “we,” “us,” “our” and “Analogic” refer to Analogic Corporation and all of its subsidiaries taken as a whole, and “our board of directors” refers to the board of directors of Analogic Corporation.

Our unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the United States Securities and Exchange Commission, or SEC, for quarterly reports on Form 10-Q. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We report our financial condition and results of operations on a fiscal year basis ending on July 31st of each year. The three months ended January 31, 2017 and 2016 represent the second quarters of fiscal years 2017 and 2016, respectively.

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair statement of the results for all interim periods presented. The results of operations for the three and six months ended January 31, 2017 are not necessarily indicative of the operating results for the full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended July 31, 2016, or fiscal year 2016, included in our Annual Report on Form 10-K as filed with the SEC on September 27, 2016. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles, or GAAP, in the United States of America.

Consolidation

The unaudited consolidated financial statements presented herein include our accounts and those of our subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.

In determining whether we are the primary beneficiary of an entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. We have not been required to consolidate the activity of any entity due to these considerations.

Reclassifications and revisions to prior period financial statements

Certain financial statement items have been reclassified to conform to the current period presentation. We separately presented write down of demo equipment to net realizable value and provision for excess and obsolescence inventory on our January 31, 2016 Consolidated Statements of Cash Flows to conform to the current period presentation. There was no impact on our Consolidated Statements of Operations as a result of these reclassifications.

2. Recent accounting pronouncements

Accounting pronouncements issued and recently adopted

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, “ Intangibles—Goodwill and Other (Topic 350)” The amendments remove Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendments are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. The standard will be effective for us for annual or any interim goodwill impairment tests in fiscal years beginning August 1, 2020. We elected early adoption of ASU 2017-04 as of January 1, 2017. We do not deem the adoption of this update to have a material impact on our consolidated financial statements as of January 1, 2017.

Accounting pronouncements issued and not yet effective

Clarifying the Definition of a Business

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments provide the requirements needed for a set to be a business and establish a practical way to determine when a set is not a business. To be considered a business, an acquisition would have to include an input and a substantive process that

7

Table of Contents

together significantly contribute to the ability to create outputs. An output is the result of inputs and substantive processes that provide goods or services to customers, other revenue, or investment income, such as dividends and interest. The amendments narrow the definition of outputs and align it with how outputs are described in Topic 606 “Revenue from Contracts with Customers”. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The standard will be effective for us in fiscal years beginning August 1, 2018. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU No. 2016-15, “ Statement of Cash Flows (Topic 230).”  The amendments provide guidance on the eight specific cash flow statement presentation and classification issues as follows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The standard will be effective for us in the first quarter of our fiscal year ending July 31, 2019. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Improvements to employee share-based payment accounting

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which amends ASC 718, “Stock Based Compensation.” The amendments require that all excess tax benefits be recorded as an income tax benefit or expense in the income statement and be classified as an operating activity in the statement of cash flows. Entities may also elect to estimate the amount of forfeitures or recognize them as they occur. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The standard will be effective for us in the first quarter of our fiscal year ending July 31, 2018 and early adoption is permitted. We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires lessees to recognize assets and liabilities for most leases on the balance sheet. For income statement purposes, the standard requires leases to be classified as either operating or finance. The standard is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The standard will be effective for us in the first quarter of our fiscal year ending July 31, 2020. Adoption requires application of the new guidance for all periods presented. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

Revenue from contracts with customers

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This update will supersede existing revenue recognition requirements and most industry-specific guidance. This update also supersedes some cost guidance, including revenue recognition guidance for construction-type and production-type contracts. The update’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This update should be applied either on a retrospective or modified retrospective basis. This update was originally effective for us in the first quarter of our fiscal year ending July 31, 2018. Early adoption was not permitted. In August 2015, the FASB approved a one year delay of the effective date of the new revenue standard for public entities. Therefore, this update would be effective for us in the first quarter of our fiscal year ending July 31, 2019. The standard permits entities to early adopt, but only as of the original effective date (i.e. one year earlier). We are currently evaluating the impact of the adoption of this update on our consolidated financial statements.

3. Business Combinations

Oncura Partners Diagnostics, LLC, or Oncura

On January 8, 2016, the Company wholly acquired Oncura Partners Diagnostics, LLC, a privately held provider of remote, real-time ultrasound imaging and teleconsulting services currently focused on the veterinary medicine market. Oncura is included within

8

Table of Contents

the Ultrasound reportable segment. The purchase price was $20.2 million, comprised of an upfront cash payment of $8.4 million, post-closing adjustments of $0.4 million, the relief of liabilities owed to Analogic of $1.3 million, and the fair value of contingent consideration at the time of acquisition of $10.1 million. The acquisition has been accounted for as an acquisition of a business.

We finalized the purchase accounting for the Oncura acquisition during the second quarter of fiscal year 2017. The following table summarizes the purchase price allocation based on estimates of the fair values of the separately identifiable assets acquired and liabilities assumed as of the acquisition date. The fair value measurements of intangibles, property, plant and equipment, deferred revenue, and contingent consideration were based upon significant inputs not observable in the market and therefore represent fair value measurements based on Level 3 inputs, as defined in  Note 7, Fair Value Measurements .

We estimated the fair value of identifiable acquisition-related intangible assets primarily based on discounted cash flow projections that will arise from these assets. We use significant judgment with regard to assumptions used in the determination of fair value such as discount rates and the determination of the estimated useful lives of the intangible assets.

In connection with this acquisition, we recorded an acquisition date fair value contingent consideration obligation of $10.1 million within long-term contingent consideration, in the Consolidated Balance Sheets. This obligation is payable upon the achievement of certain revenue and gross margin targets over a four year period starting on May 1, 2016. There is no limit on the earnout that can be paid out. The $10.1 million fair value was estimated through a Monte Carlo valuation model that incorporates probability adjusted assumptions relating to the achievement of these targets and the likelihood of us making payments. This fair value measurement is based upon significant inputs not observable in the market and therefore represents a Level 3 input measurement. Subsequent changes in the fair value of this obligation will be recognized as adjustments to the contingent consideration liability and reflected within our Consolidated Statement of Operations within general and administrative operating expenses. During the six months ended January 31, 2017 and fiscal year 2016, the estimated fair value of our contingent consideration obligation changed by $(8.1) million and $0.1 million. The total fair value of our contingent consideration obligation was $2.1 million and $10.2 million as of January 31, 2017 and July 31, 2016. For additional information related to the fair value of this obligation, please refer to Note 7. Fair Value Measurements .

We recorded goodwill of $16.4 million related to the Oncura acquisition representing the value of the opportunities from the addition of Oncura’s product and service portfolio within the veterinary industry. The goodwill from this acquisition will be deductible for tax purposes over the statutory 15 year period.

During the three and six months ended January 31, 2017, we did not incur acquisition costs. During the three and six months ended January 31, 2016, we incurred acquisition costs of approximately $0.4 million, which consisted primarily of legal and due diligence expenses that are included in our general and administrative expenses in our Consolidated Statements of Operations.

The pro forma financial information for the three and six months ended January 31, 2017 and 2016, including revenue and net income, is immaterial, and has not been separately presented.

4. Accounts receivable, net

Our accounts receivable arise primarily from products sold and services provided in North America, Europe and Asia. The balance in accounts receivable represents the amount due from our domestic and foreign original equipment manufacturers, or OEM, customers, distributors and end users. We perform ongoing credit evaluations of our customers’ financial condition and continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon specific

9

Table of Contents

customer collection issues that have been identified. We accrue reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written off against the reserve. To date, our historical write-offs of accounts receivable have been minimal.

Our top ten customers combined accounted for approximately 63% and 61% of our total net revenue for each of the three months ended January 31, 2017 and 2016, respectively and 63% and 62% of our total net revenue for the six months ended January 31, 2017 and 2016 respectively. Set forth in the table below are customers which individually accounted for 10% or more of our net revenue.

5. Inventory

The components of inventory, net of allowance for obsolete, unmarketable or slow-moving inventories, are summarized as follows:

6. Intangible assets and goodwill

Intangible assets

Intangible assets include the value assigned to intellectual property and other technology, patents, customer contracts and relationships, and trade names. The estimated useful lives for all of these intangible assets, excluding a trade name determined to have an indefinite life, range between 1 to 14 years. Indefinite-lived intangible assets consist of trade names acquired in business combinations. The carrying values of our indefinite-lived intangible assets were $7.6 million at both January 31, 2017 and July 31, 2016.

Finite-lived intangible assets are summarized as follows:

10

Table of Contents

Amortization expense related to acquired intangible assets was $2.0 million and $4.0 million for the three and six months ended January 31, 2017, respectively. Amortization expense related to acquired intangible assets was $2.0 million and $4.0 for the three and six months ended January 31, 2016, respectively.

During the second quarter of fiscal year 2017, management noted impairment indicators related to the Pathfinder intangible assets which had a carrying value of $0.6 million. Pathfinder is part of our Security and Detection operating segment. Management performed an impairment test based on the projected future cash flows and recorded an impairment charge of $0.6 million, including a write-off of developed technology of $0.5 million and a write-off of trade name of $0.1 million. We recorded these amounts in the asset impairment charges caption in our accompanying unaudited condensed consolidated statements of operations.

The estimated future amortization expense related to intangible assets for the five succeeding fiscal years is expected to be as follows:

Goodwill

Analogic has goodwill balances of $64.1 million at January 31, 2017 and $73.9 million at July 31, 2016. We review periodically or more frequently if indicators are present or changes in circumstances suggest that it is more likely than not that impairment may exist and we perform a formal goodwill impairment test in the second quarter of each fiscal year.

Changes in the carrying amount of goodwill by reportable segments for the six months ended January 31, 2017 are as follows:

We have four reporting units with goodwill—Medical Imaging, Ultrasound, Oncura, and Security and Detection and three reportable segments—Medical Imaging, Ultrasound, and Security and Detection. We performed the annual impairment test for our goodwill and other intangible assets with indefinite lives as of December 31, 2016. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value and as a basis for determining whether it is necessary to perform the quantitative impairment test. Alternatively, we may elect to bypass the qualitative assessment and proceed to the two-step quantitative impairment test. If we choose to perform a qualitative assessment and determine it is more likely than not that the carrying value of the net assets is more than the fair value of the related operations, the two-step impairment process is then performed; otherwise, no further testing is required.

Our quantitative impairment assessment considered both the market approach and income approach to calculate the fair value of the reporting unit, with different weights assigned to each. Under the market approach, the fair value of the reporting unit is based on trading multiples of a peer group of companies, which was determined based on an analysis of the selected guideline public companies’ business enterprise value (“BEV”) plus a control premium, which was determined based on an analysis of control premiums for recent relevant acquisitions. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows, which are determined, based upon the Company’s most recent strategic operating plan and considering market participant assumptions. The income approach is dependent on a number of significant management assumptions including estimates of future revenues, costs and expenses, and a number of significant valuation inputs including discount rates, working

11

Table of Contents

capital rates and tax rates. For our Medical Imaging, Ultrasound, Oncura and Security and Detection reporting units, we used the two-step quantitative impairment test. For the Security and Detection reporting unit, we performed the market approach and determined that the fair value of our Security and Detection reporting unit was in excess of its carrying value, and concluded that there was no impairment. For our Medical Imaging and Ultrasound reporting units we used both the market approach and income approach and determined that there was no impairment of goodwill. For our Medical Imaging reporting unit, we determined that the estimated fair value of the Medical Imaging reporting unit substantially exceeds its carrying value. For our Ultrasound reporting unit, we determined that our Ultrasound reporting unit was at risk of failing the first step of the goodwill impairment test in future reporting periods due to forecast revisions and changes in strategy in our ultrasound business. For example, an increase in the discount rate applied to the Ultrasound cash flows of 300 basis points could result in a failure of Step 1 of the impairment test. Also, a decrease in the revenue compound annual growth rate within the Ultrasound cash flow forecast of 200 basis points could result in a failure of Step 1 of the impairment test. Our Ultrasound reporting unit had excess fair value over carrying value of approximately 25% as of our annual test date and held $55.1 million of allocated goodwill as of December 31, 2016.

For our Oncura reporting unit, recent changes in our strategy caused us to decrease future forecasted revenues from our prior estimates. As a result, we determined that the associated goodwill was impaired and recorded an estimated charge of $9.8 million in the second quarter of fiscal year 2017. We recorded this amount in the asset impairment charges caption in our accompanying unaudited condensed consolidated statements of operations. The amount of this charge is subject to finalization in the third quarter of fiscal year 2017. We would recognize any necessary adjustment to this estimate in the third quarter of fiscal year 2017, as we finalize the second step of the goodwill impairment test, in accordance with ASC Topic 350,  Intangibles -Goodwill and Other . Also as a result of our decreased revenue forecast for Oncura, we recorded an adjustment to the associated contingent considerations liability, which resulted in a gain of $8.1 million recorded within General and Administrative expenses.

The aggregate amount of goodwill that remains associated with our Oncura reporting unit is $6.6 million as of January 31, 2017. In addition, the remaining book value of our other intangible assets allocated to our Oncura reporting unit is approximately $3.3 million as of January 31, 2017. In accordance with ASC Topic 360, we tested our Oncura amortizable intangible assets as of December 31, 2016 for recoverability on an undiscounted cash flow basis, and determined that these assets were recoverable.

We compared the fair value of a tradename that has an indefinite life using the relief from royalty approach to its carrying value as of December 31, 2016. The relief from royalty approach utilized an after-tax royalty rate and a discount rate. The after-tax royalty rate was determined based on royalty research and margin analysis, while the discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital, and the risk associated with achieving forecasted sales for the tradename. We determined that the fair value of the tradename was in excess of its carrying value.

The current economic environment and the uncertainties regarding its impact on our business and our estimates for forecasted revenue and spending levels made for purposes of our goodwill and trade name impairment testing may not be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates of each reporting unit and trade name are not achieved, we may be required to record an impairment charge for the goodwill and trade name in future periods, whether in connection with our next annual impairment testing in the second quarter of the fiscal year ending July 31, 2018, or prior to that if any such change constitutes a triggering event outside of the quarter from when the annual goodwill and trade name impairment test is performed. Changes in our forecasts, or decreases in the value of our common stock could cause book values of certain operations to exceed their fair values which may result in goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

7. Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

12

Table of Contents

The following tables provide the assets and liabilities carried at fair value and measured on a recurring basis at January 31, 2017 and July 31, 2016:

Assets held in the deferred compensation plan will be used to pay benefits under our non-qualified deferred compensation plan. The investments primarily consist of mutual funds which are publicly traded on stock exchanges. Accordingly, the fair value of these assets is categorized as Level 1 within the fair value hierarchy.

The fair value of the liabilities arising from our foreign currency forward contracts is determined by valuation models based on market observable inputs, including forward and spot prices for currencies. Accordingly, the fair value of these liabilities is categorized as Level 2 within the fair value hierarchy.

The fair value of our contingent consideration obligation is based on significant unobservable inputs, including management estimates and assumptions, and is measured based on the probability-weighted present value of the payments expected to be made. Accordingly, the fair value of this liability is categorized as Level 3 within the fair value hierarchy.

The fair value of the contingent payments associated with the acquisition of PocketSonics, Inc., or PocketSonics, was calculated utilizing 100% probability for the earn out associated with the Section 510(k) clearance obtained from the Food and Drug Administration, or FDA, on April 9, 2014 and the first commercial shipment as defined in the purchase agreement, in the fiscal year ending July 31, 2016, or fiscal year 2016. Each quarter we revalue the contingent consideration obligations associated with the acquisition of PocketSonics to its then current fair value and record changes in the fair value to the Consolidated Statements of Operations. Changes in contingent consideration result from changes in the assumptions regarding probabilities of the estimated timing of launch, volume sales target, payments and the discount rate used to estimate the fair value of the liability. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. There was no change in the fair value of our contingent consideration obligation during the three and six months ended January 31, 2017. As of January 31, 2017 and July 31, 2016 the fair value of the contingent consideration obligation was reported in Other current liabilities as $2.0 million, in the Consolidated Balance Sheets. We anticipate paying out the $2.0 million contingent liability by the end of the third quarter during fiscal year 2017. Please refer to Note 3. Business combination in our Annual Report on Form 10-K for fiscal year 2016, as filed with the SEC on September 27, 2016 for more information on the acquisition of Pocketsonics.

13

Table of Contents

The fair value of the contingent payment obligation associated with the acquisition of Oncura was valued using a Monte Carlo simulation. The fair value of the contingent payment obligation of Oncura will be revalued each quarter to its then fair value and we will record changes in the fair value as contingent consideration expense within our Consolidated Statement of Operations within general and administrative operating expenses. Changes in contingent consideration expense result from changes in the assumptions regarding probabilities of the estimated future sales volume and gross margin targets and the discount rate used to estimate the fair value of the liability. The assumptions used in estimating the fair value require significant judgment. The use of different assumptions and judgments could result in a different estimate of fair value. There was a $8.2 million and $8.1 million decrease in the fair value of our contingent consideration obligation during the three and six months ended January 31, 2017, due to revisions in our forecasted revenues of the Oncura business, which reduced the amount of contingent consideration we expect to pay. As of January 31, 2017, the fair value of the contingent consideration obligation associated with the Oncura acquisition was $1.1 million within short-term contingent consideration and $1.0 million within long-term contingent consideration, in the Consolidated Balance Sheets. For more information on the acquisition of Oncura, please refer to Note 3. Business combination in our Annual Report on Form 10-K for fiscal year 2016, as filed with the SEC on September 27, 2016.

8. Derivative instruments

Certain of our foreign operations have revenue and expenses transacted in currencies other than the U.S. dollar. In order to mitigate foreign currency exchange risk, we use forward contracts to lock in exchange rates associated with a portion of our forecasted international expenses.

As of January 31, 2017, we have forward contracts outstanding with notional amounts totaling $14.3 million. These contracts are designated as cash flow hedges, and the unrealized loss of $0.0 million, net of tax, on these contracts are reported in Accumulated other comprehensive income as of January 31, 2017. Assets and liability derivatives designated as hedging instruments are presented in other assets and other liabilities, respectively, on our Consolidated Balance Sheets. At January 31, 2017 we had a derivative liability of $0.0 million included in other liabilities on our Consolidated Balance Sheet.

As of July 31, 2016, we have forward contracts outstanding with notional amounts totaling $18.6 million. These contracts are designated as cash flow hedges, and the unrealized loss of $0.2 million, net of tax, on these contracts are reported in Accumulated other comprehensive income as of July 31, 2016. At July 31, 2016 we had a derivative liability of $0.3 million included in other liabilities on our Consolidated Balance Sheet.

Realized gains and (losses) on the cash flow hedges are recognized in income in the period when the payment of expenses is recognized. During the three and six months ended January 31, 2017 we recorded approximately $0.2 million and $0.3 million of realized loss, respectively, included in our Consolidated Statements of Operations. During the three and six months ended January 31, 2016 we recorded $0.2 million and $0.5 million of realized loss, respectively.

9. Common stock repurchases

On May 26, 2016, our board of directors authorized the repurchase of up to $15.0 million of our common stock. This amount is in addition to $1.0 million remaining under the $30 million stock repurchase authorized by our board of directors on June 2, 2014. The purchases will be made from time to time depending on market conditions and other factors. The Company’s repurchase program has no expiration date. The Board’s authorization of the share repurchase program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or discontinued at any time at the Company’s discretion. No shares have been repurchased under this program in the three and six months ended January 31, 2017.

10. Accumulated other comprehensive income

Components of comprehensive (loss) income include net income and certain transactions that have generally been reported in the Consolidated Statements of Changes in Stockholders’ Equity. Other comprehensive (loss) income consists of reported foreign currency translation gains and losses (net of taxes), actuarial gains and losses on pension plan assets (net of taxes), and changes in the unrealized value on foreign currency forward contracts (net of taxes). Deferred taxes are not provided on cumulative translation adjustments where we expect earnings of a foreign subsidiary to be indefinitely reinvested. The income tax effect of currency translation adjustments related to foreign subsidiaries that are not considered indefinitely reinvested is recorded as a component of deferred taxes with an offset to other comprehensive (loss) income.

14

Table of Contents

The following table summarizes components of Accumulated other comprehensive (loss) income for the six months ended January 31, 2017:

The ineffective portion of the unrealized losses on foreign currency forward contracts and unrealized gains or losses on currency translation adjustment are included in other expense, net on our Consolidated Statements of Operations.

11. Share-based compensation

The following table presents share-based compensation expense included in our Consolidated Statements of Operations:

Stock options

We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

No stock options were granted during the three and six months ended January 31, 2017 and January 31, 2016, respectively.

The total intrinsic value of options exercised during the three and six months ended January 31, 2017 was $1.5 million and $2.2 million, respectively.

Restricted stock and restricted stock units

We estimate the fair value of restricted stock units, or RSUs, that vest based on service conditions using the quoted closing price of our common stock on the date of grant. Share-based compensation expense is amortized over each award’s vesting period on a straight-line basis for all awards with service and performance conditions that vest at the end of the performance cycle, while the accelerated method applies to other awards with both service and performance conditions.

For our non-GAAP earnings per share, or EPS awards, the compensation cost is amortized over the performance period on a straight-line basis, net of forfeitures, because such awards vest only at the end of the performance period. The compensation cost is based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is done each quarter and changes in estimates can result in significant expense fluctuations due to the cumulative catch-up adjustment. We estimate the fair value of the non-GAAP EPS awards using the quoted closing price of our common stock on the date of grant.

15

Table of Contents

For our relative total shareholder return, or TSR awards, which are based on market performance of our stock as compared to an industry peer group, the compensation cost is amortized over the performance period on a straight-line basis net of forfeitures, because the awards vest only at the end of the measurement period and the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate the fair value of the TSR awards using the Monte-Carlo simulation model.

We granted 0 and 28,148 TSR awards and 0 and 62,032 non-GAAP EPS awards during the three and six months ended January 31, 2017, respectively. We granted 1,711 and 24,821 TSR awards and 2,320 and 32,444 non-GAAP EPS awards during the three and six months ended January 31, 2016, respectively. The fair value of our TSR performance-based awards at the date of grant was estimated using the Monte-Carlo simulation model with the following assumptions:

The total fair value of RSUs that vested during the three and six months ended January 31, 2017 was $0.6 million and $3.2 million, respectively.

The total fair value of RSUs that vested during the three and six months ended January 31, 2016 was $2.4 million and $4.4 million, respectively.

As of January 31, 2017, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock was $12.9 million. This cost will be recognized over an estimated weighted average amortization period of 1.4 years and assumes target performance for the non-GAAP EPS awards.

12. Restructuring charges

Fiscal Year 2017 Restructuring Plan

On March 6, 2017, the Company announced a restructuring of its Ultrasound business designed to improve profitability and provide consistent long term growth. The Company intends to focus on its core markets of Urology and Surgery as well as specific areas of the Point of Care market where its products have a competitive advantage. The Company will consolidate the activities currently conducted in Vancouver, British Columbia with its existing operations in Copenhagen, Denmark and Peabody, Massachusetts and plans to exit the Vancouver facility by the end fiscal 2017. The Company intends to re-size its U.S. sales, global marketing as well as general and administration organizations in-line with its objectives. These activities will result in a workforce reduction of approximately 130 employees and is expected to be substantially completed by the end of fiscal 2017.

The Company expects to incur restructuring related charges of up to $5.0 million in fiscal 2017 of which $0.5 million was recorded in the second quarter of FY17.

Fiscal Year 2016 Restructuring Plan

On September 16, 2015, the Company announced our fiscal year 2016 restructuring plan, or 2016 Restructuring Plan. This plan includes the transition of certain manufacturing activities from our Peabody, Massachusetts location to our existing facility in Shanghai, China, and a reduction in force in order to align our research and development investment with expected customer funding. We had pre-tax

16

Table of Contents

adjustment of approximately ($0.2) million to restructuring during the three and six months ended January 31, 2017. We incurred pre-tax charges of $3.1 million and $6.4 million during the three and six months ended January 31, 2016, respectively, primarily relating to severance and personnel related costs for terminated employees. We expect that the 2016 Restructuring Plan will be substantially completed during fiscal year 2017.

The following table summarizes accrued restructuring activities for the six months ended January 31, 2017:

Restructuring and related charges, including actions associated with acquisitions, by segment are as follows:

Accrued restructuring charges are classified on the Consolidated Balance Sheets in the Current Liabilities section.

13. Net income per common share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including unvested restricted stock and the assumed exercise of stock options using the treasury stock method.

17

Table of Contents

Basic and diluted net income per share are calculated as follows:

14. Income taxes

The following table presents the provision for income taxes and our effective tax rate for the three and six months ended January 31, 2017 and 2016:

The effective income tax rate on operations is based upon the estimated income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.

Our effective tax rate for the three and six months ended January 31, 2017 is lower than the statutory rate of 35% primarily due to income generated outside the United States in countries with lower tax rates, tax credits in the United States and Canada, and the manufacturing deduction in the United States. The tax provision for the three and six months ended January 31, 2017 includes discrete tax benefits totaling $0.4 million.

Our effective tax rate for the three and six months ended January 31, 2016 is lower than the statutory rate of 35% primarily due to income generated outside the United States in countries with lower tax rates, tax credits in Canada, and a non-recurring discrete item. The tax provision for the three and six months ended January 31, 2016 includes discrete tax benefits totaling $1.4 million and $1.3 million, respectively.

We are subject to U.S. Federal income tax as well as the income tax of multiple state and foreign jurisdictions. As of January 31, 2017, we have concluded all U.S. Federal income tax matters through the year ended July 31, 2012.

We accrue interest and, if applicable, penalties for any uncertain tax positions. This interest and penalty expense is treated as a component of income tax expense. At January 31, 2017 and July 31, 2016, we had approximately $0.5 million and $0.4 million accrued for interest and penalties on unrecognized tax benefits.

At January 31, 2017, we had $7.1 million of unrecognized tax benefits for uncertain tax positions and $0.5 million of related accrued interest and penalties. We are unable to reasonably estimate the amount and period in which these liabilities might be paid.

We do not provide for U.S. Federal income taxes on undistributed earnings of consolidated foreign subsidiaries, as such earnings are intended to be indefinitely reinvested in those operations. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations would be the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to use foreign tax credits.

18

Table of Contents

15. Segment information

Our business is strategically aligned into three segments: Medical Imaging, Ultrasound, and Security and Detection. Our business segments are described as follows:

The tables below present information about our reportable segments:

Includes contingent consideration charges of $(8.2) million and $(8.1) million related to Oncura for three and six months ended January 31, 2017, respectively, asset impairment charges of $9.8 million related to Oncura for three and six months ended January 31, 2017, charges for the BK Medical matter of $10.1 million for three and six months ended January 31, 2016.

19

Table of Contents

Includes asset impairment charges of $0.6 million related to Pathfinder for three and six months ended January 31, 2017.

16. Guarantees, commitments and contingencies

Guarantees and Indemnification Obligations

Our standard OEM and supply agreements entered in the ordinary course of business typically contain an indemnification provision pursuant to which we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to our products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments we could be required to make under these indemnification provisions is, in some instances, unlimited. Our costs to defend lawsuits or settle claims related to these indemnification agreements have been insignificant to date. As a result, we believe that our estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded for these agreements as of January 31, 2017.

Generally, we warrant that our products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the products to the customer for a period ranging from 12 to 60 months from the date of delivery. We provide for the estimated cost of product and service warranties based on specific warranty claims, claim history, and engineering estimates, where applicable.

The following table presents our product warranty liability as of January 31, 2017:

At January 31, 2017 and July 31, 2016, we had deferred revenue for extended product warranty contracts of $0.3 million and $0.2 million, respectively.

Revolving Credit Agreements

On November 23, 2015, we entered into a five-year revolving credit agreement, or Credit Agreement, with the financial institutions identified therein as lenders, which included JPMorgan Chase Bank, N.A., TD Bank, N.A., Wells Fargo Bank, N.A., HSBC Bank, N.A., and People’s United Bank, N.A. The Credit Agreement provides $100.0 million in available credit and expires on November 23, 2020, when all outstanding borrowings must be paid in full. The credit facility does not require amortization of principal and may be reduced before maturity in whole or in part at our option without penalty. Upon entry into the Credit Agreement, we terminated without penalty a $100.0 million five-year, revolving credit agreement entered into on October 11, 2011 and previously paid in full in accordance with its terms. Borrowings under the Credit Agreement may be used for general corporate purposes, including permitted acquisitions. The amount of available credit can be increased under specified circumstances up to $200.0 million in aggregate. We are the sole borrower under the Credit Agreement. The obligations under the credit facility are guaranteed as required to be by our material domestic subsidiaries as designated by us from time to time or as required under the Credit Agreement. There are no pledges of the capital stock or assets of our international subsidiaries.

Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.75% above the LIBOR rate, or, at our option range from 0.00% to 1.00% above a defined base rate, the amount in each case varying based upon our leverage ratio. A quarterly commitment fee ranging from 0.20% to 0.35% per annum is applicable on the undrawn portion of the credit facility, based upon our leverage ratio.

20

Table of Contents

The Credit Agreement limits our and our subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends or make other distributions; make investments; dispose of assets; and engage in transactions with affiliates except on an arms-length basis. In addition, the Credit Agreement requires us to maintain the following financial ratios:

As of January 31, 2017, our leverage ratio was 0.004:1.00 and our interest coverage ratio was not applicable as we had no attributable interest expense. As of January 31, 2017, we were in full compliance with all financial and operating covenants contained in the Credit Agreement.

Any failure to comply with the financial or operating covenants of the credit facility would prevent us from being able to borrow and would also constitute a default, permitting the lenders to, among other things, accelerate repayment of outstanding borrowings, including all accrued interest and fees, and to terminate the credit facility. A change in control, as defined in the Credit Agreement, would also constitute an event of default, permitting the lenders to accelerate repayment and terminate the Credit Agreement.

In connection with entering into the Credit Agreement, we incurred approximately $0.5 million of transactions costs, which are being amortized over the five-year life of the credit facility.

As of January 31, 2017 and July 31, 2016, we had approximately $1.2 million in other revolving credit facilities with banks available for direct borrowings.

We did not have any borrowing outstanding under any of our credit facilities at January 31, 2017 and July 31, 2016, respectively.

Legal Claims

We are subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of our business. Although legal proceedings are inherently unpredictable, we believe that we have valid defenses with respect to those matters currently pending against us and intend to defend ourselves vigorously. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on our cash flows, results of operations, or financial position. We record losses when estimable and probable in accordance with U.S. GAAP.

On January 3, 2017, the Company’s subsidiary Ultrasonix Medical Corporation (“UMC”) received a notice of civil claim as a defendant. The lawsuit relates to the lease of a corporate office in Burnaby, British Columbia, of which UMC never took possession. The lawsuit claims that UMC is indebted to the landlord for unpaid and accelerated rent in an amount of approximately CAD 1.0 million, plus costs, plus interest on unpaid rent commencing in April 2014. Subsequent to the second quarter ended January 31, 2017, the Company filed a response in which it contests both liability and the extent of damages. It is reasonably possible that we will have a loss in connection with this matter, but currently we are unable to estimate the amount of liability, if any, that may be incurred related to this matter.

17. Subsequent events

We declared a dividend of $0.10 per share of common stock on February 28, 2017, which will be paid on March 31, 2017 to stockholders of record on March 17, 2017.

21

Table of Contents