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Analogic Corporation (NASDAQ:ALOG)

Q1 2009 Earnings Call

December 9, 2008 11:00 am ET

Executives

James Green – President & CEO

John Millerick – SVP & CFO

John Fry – VP, General Counsel, Corporate Secretary

Analysts

Larry Solow - CJS Securities

Steve Levenson - Stifel Nicolaus

Josephine Millward - Stanford Group

Dalton Chandler - Needham & Company

Edwin Fowler – The Small Cap Report

Doug Fisher - Kennedy Capital

Operator

Welcome to Analogic Corporation’s first quarter investor conference call. (Operator Instructions) The following corporate officers are present: Mr. James Green, President and CEO; Mr. John Millerick, Senior Vice President, CFO and Treasurer; and Mr. John Fry, Vice President, General Counsel and Corporation Secretary.

I’d like to remind everyone that a supplementary financial presentation will be used during today’s call. If you have not already downloaded that presentation, you can do so at any time at www.analogic.com. That presentation will remain available until midnight, Tuesday, December 30, 2008. Mr. Green will open the call; Mr. Green.

James Green

Good morning everyone. Welcome and thank you for taking the time to participate in the conference today. We’ll begin by asking our Vice President and General Counsel, John Fry to read the Safe Harbor statement. John Millerick and I will then review the first quarter ended October 31, 2008 using the supplementary financial presentation available on our website, following which we will take your questions.

John Fry

Any statements in this presentation about future expectations, plans and prospects for the company, including statements about orders for the company’s products, statements about shipments and installation of the company’s products and statements containing the words believes, anticipates, plans, expects and similar expressions constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including risks relating to technology development and commercialization; risks in product development; limited demand for the company’s products; risks associated with competition; uncertainties associated with regulatory agency approvals; competitive pricing pressures; downturns in the economy; the risk of potential intellectual property litigation and other factors discussed in our most recent quarterly report filed with the SEC.

In addition, the forward-looking statements included in this presentation represent the company’s views as of today. The company anticipates that subsequent events and developments will cause the company’s views to change.

However, while the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the company’s views as of any other date subsequent to today.

At this point, I’ll turn the call back to James Green, our President, and CEO.

James Green

Thank you John, John Millerick, and I will now review the first quarter and recent events. Let’s move to slide four of the presentation, Q1 was a difficult quarter as we expected and it was exacerbated somewhat by the financial credit crisis.

Our consolidated revenues of $102 million were up 8% driven primarily by the Copley acquisition. Without Copley organic revenue declined 13%. Earnings per share were $0.02 on a GAAP basis and $0.19 non-GAAP.

Non-GAAP income from operations of $1.7 million were down $5.8 million from prior year. Our medical technology revenue growth was driven by the Copley acquisition and our security technology business improved in profitability.

Moving on to slide five, looking at revenue and non-GAAP EPS, compared to Q1 prior year revenue felt the effects of the push-outs of CT subsystems for radiation treatment applications, reduced demand in CT DAS and DMS systems, all combined with the impact of the financial crisis first seen in early October.

Non-GAAP EPS was unfavorably impacted by product mix and increased manufacturing costs due to lower production volumes. The increase in operating expenses year-over-year reflect the acquisition of Copley which was not included in last year’s financials.

EPS was also negatively effected by lower cash balances and a reduction in interest rates. GAAP EPS was additionally impacted by accelerated Copley purchased amortization, and FAS 123R expense.

Moving to slide six, starting with medical technology, medical imaging product revenues of $59.2 million were up $7 million driven by the Copley acquisition. Excluding Copley medical imaging revenues declined $12.4 million versus the prior year.

This includes a $6.9 million decrease due largely to Deficit Reduction Act driven softness in the US CT market. As I stated in our last call shipments of CT gantries to a major OEM in the radiation treatment market were off, down $4.6 million in the quarter.

Overall medical imaging had a pre-tax loss of $1.5 million, down $7.2 million from the prior year. Copley contributed $19.6 million in revenue and $1.5 million in pre-tax income on a non-GAAP basis. Copley operating performance was offset by $1.6 million in acquisition-related accounting costs which are reflected in our GAAP results.

The Copley integration continues to proceed well and on schedule and during the quarter we also signed three major new agreements with OEM customers, one of which for next generation gradient amplifiers which will enter production in mid-2010.

Going to slide seven, on to digital radiography and mammography, sales of Selenium based direct digital plates grew 53% to $7.5 million. We continue to improve our manufacturing yields and pre-tax profit was up $1.7 million from a loss in Q1 fiscal 2008 including some positive effects of currency.

In addition we continue to find new customers.

On slide eight, moving to B-K medical ultrasound, our revenues were $18.9 million, down 8% driven by the anticipated introduction of a new ultrasound system and unfavorable exchange rates. Pre-tax loss was $2.1 million, down $3 million impacted by lower gross margins from product mix and currency effects.

In addition R&D spend increased due to the new platform that we’re developing.

Other highlights, our first HistoScan units were sold in Europe. The application is designed to differentiate normal from cancerous tissue in the prostate in order to improve biopsies. We launched our new surgical biplane transducer which enables superb image quality and easier, faster, more accurate biopsies.

Finally last week at RSNA we launched our new high performance UltraView product and in early Q3 we’ll launch our new Flex Focus family. Both of these platforms are designed to drive growth in our current served market, while opening new incremental opportunities in adjacent markets.

Moving on to slide nine and security, pre-tax profit improved 20% to $1.5 million on revenue that’s slightly down at $12.9 million. Regarding our new mid-tier check baggage systems, the TSA completed certification testing for the US market and we also completed STAC certification which clears the way for sales in France, Italy, Spain, Greece, and the Benelux countries.

In addition we’re training the global sales channel. Our new eXaminer XLB system designed for large high demand airports, has completed pre-certification testing at the TSA and is scheduled to begin full certification testing this month. We still plan for eXaminer XLB production shipments this fall.

Let’s move on to slide 10 and I’ll turn it over to John Millerick.

John Millerick

Thank you James, I’ll now provide details on the company’s financial performance for Q1 fiscal year 2009.

I’ll begin with the discussion of our GAAP performance in the quarter, on slide 10 you will see that Q1 revenues of $101.6 million grew $7.3 million or 8% over the prior year. The increase in revenue was primarily due to the acquisition of Copley Controls Corporation.

Copley accounted for $9.6 million of revenue which was partially offset by a decline in demand for our data acquisition systems detectors and CT subsystems. The decrease in income from operations, net income, and diluted net income per share in Q1 fiscal year 2009 from Q1 fiscal year 2008 was due primarily to a decline in gross margin to 30.8% from 37%.

This drop in gross margin was attributable to product mix, reduced manufacturing efficiencies caused by lower production volumes, amortization of intangible assets from the acquisition of Copley, and a higher mix of lower gross margin Copley products.

Also contributing to the decrease were increases in operating expenses of $4.5 million primarily due to Copley which wasn’t included in last year’s financial results and a decrease in net interest income of $1.7 million due primarily to lower effective interest rates and lower invested cash balances.

The decreases in net income and diluted net income per share were partially offset by a decrease in the effective tax rate to a benefit of 324% for Q1 from the provision of 33% from Q1 of fiscal year 2008.

The tax benefit for Q1 fiscal year 2009 was primarily due to the reinstatement of the Federal R&D tax credit.

On the next slide, we show our non-GAAP financial results. Our non-GAAP adjustments include share-based compensation, executive transition expenses, acquisition related expenses, gain on the sale of other investments, and adjustments for related tax impact.

I encourage you to review the non-GAAP reconciliation table and notes in our Q1 fiscal year 2009 press release issued today for the detail of our adjustments.

On slide 11 you will see that on a non-GAAP basis income from operations decreased 78% from $7.5 million in Q1 2008 to $1.7 million in Q1 2009. As a percent of revenues, income from operations was 1.6% of net revenues in Q1 2009 as compared to 8% of net revenues in the prior year.

Non-GAAP diluted earnings per share was $0.19 in Q1 2009 as compared to $0.53 in the prior year.

Turning to the key financial data on slide 12, net cash flow from operations was a $13.3 million use of cash in Q1 fiscal year 2009 as compared to a $10.3 million source of cash in the prior year. The cash flow used for operating activities during Q1 fiscal year 2009 was primarily due to a net change in operating assets and liabilities of $17.5 million, partially offset by net income depreciation and amortization and shared base compensation expense.

During the quarter the company also expended funds of $3.6 million for capital expenditures, $3.5 million to repurchase its common stock, and $1.3 million in dividend payments. As a result of the use of cash during the quarter the company’s and investment balances of $161.5 million were approximately $25 million lower then at its fiscal year-end.

With respect to the company’s Form 10-Q for the quarter ended October 31, 2008, the company will file this report on Wednesday, December 10, 2008.

With that let me turn the call back over to James to discuss the business outlook.

James Green

Moving on to slide 13 taking a quick look at some of the challenges in FY09, starting with our OEM businesses, the Deficit Reduction Act continues to effect our high-end CT DAS and DMS lines. As we discussed last quarter we saw substantial push-outs of CT subsystems for radiation treatment OEM in Q1.

However we do see orders starting to pick up there. We do believe the credit crisis is causing some purchasing delays. When I look to our end customer B-K Ultrasound business, hospital sales of surgical ultrasound products remain solid and poised to grow with the introduction of new generation products.

And on securities, with the broader offering in security we expect growth in our check baggage business. Moving on to slide 14 and in summary the financial credit crisis did worsen our Q1 results. However we are accelerating our efforts to improve our operating cost structure.

Our strong balance sheet and cash position us for attractive acquisitions. New product platforms in both medical and security position us for share growth. And finally, our considerable technological strength and the continuing growth of medical imaging procedures and the opportunities for new baggage screening systems, leave Analogic well positioned for both the short and the long-term.

Let me say thank you and we are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Larry Solow - CJS Securities

Larry Solow - CJS Securities

Could you maybe discuss what changes you’ve seen since your last call and if I’m not mistaken I think you thought medical imaging would be close to flat if we excluded Copley and the inventory draw-down from I would assume would be [inaudible] therapy, I thought maybe you thought it would be down mid-single-digits. It seems like it was much worse then that and then I know you kind of put an outlook out there for last quarter do you have any quantitative outlook going forward or is the environment just too difficult to put one out?

James Green

Let me start by looking at what we talked about last time and so many things we expected to see in the first quarter we did expect to see a substantial inventory adjustment with the subsystems that go to the radiation treatment OEM and that accounted for a little over $4.5 million.

We also saw with a couple of our high end CT customers some adjustments associated with as we thought the DRA driving, softening the overall demand but really resulting in again a more of an inventory adjustment in that first quarter because we also expected to see and do see some improvements going forward in those areas.

But when you put those two numbers together you’re talking about north of $10 million in the quarter. That has a dramatic amount of that drops to the bottom line when you’re dealing with the kind of equipment that we make with these kind of push-outs. So if we can’t recognize revenue on it and we’ve already covered the cost of the material, and it’s a push-out, it has a pretty dramatic effect on it.

The other thing, as I said before is we’re making more investments on the ultrasound side because we see that a real nice new opportunity in a market that has not been effected by DRAs and does seem to still be a pretty strong business opportunity for us.

And then last of all and starting I think it was the first week of October with the credit crisis its kind of hard to predict exactly what that’s going to be. We know and we hear from our customers that there are some end customers that are delaying decisions. So that’s the piece that its hard for us to really comment on as to what kind of additional effect that might have on us going forward.

But as far as Q1 we certainly saw the effect of something that I feel like we pretty much knew what that number was going to look like, maybe we didn’t do a good enough job of describing that and what kind of effect that might have on us. I guess that’s about where we are at this point.

Larry Solow - CJS Securities

Sequentially going forward do you think some of these, obviously you’re citing some improvement seen I guess sequentially, would you think, we expect things to pick up or could the financial crisis still, obviously its going to cloud things over, but do you see any light at the end of the tunnel or is there any visibility for you?

James Green

We look for visibility through what our end customers are seeing in the general market. With a few of the areas that we saw the Q1 down ticks in, for instance, with the radiation treatment subsystems we are starting to see an uptick there as we expected. In the CT subsystems and the DMS systems we’re starting to see some improvement there in orders also.

But its really hard to predict what the financial credit situation is going to do and how that’s going to flow to us so there we just look to the big OEMs and we listen to what they have to say about the market and all we can do then is make sure that we’re lean and that we’re taking the right kind of cost actions to [under-pen] our profitability. That’s the piece that we can manage and at the same time look to invest in some new products that will help position us well in our current markets but also give us some movement into some of the adjacencies like with the new platforms we’re starting to introduce in ultrasound.

Operator

Your next question comes from the line of Steve Levenson - Stifel Nicolaus

Steve Levenson - Stifel Nicolaus

Away from the radiation therapy customer were the problems during the quarter mostly one customer or was it across the spectrum?

James Green

I would say its mainly on the CT side in the high end attributable primarily to a couple of customers. So the MR side, if you look at Copley, our MR business is actually doing I would say reasonably well and we see some slight growth there.

Its really been, the effect has primarily been on the CT side at the high end and that’s where we’re watching closely.

Steve Levenson - Stifel Nicolaus

You mentioned push-outs, have there been any cancellations?

James Green

Its always hard to decide is it a push-out or is it a cancellation. Our systems, its based on the demand. When we have a handful of units that were ordered for a given quarter and the customer can’t take them, maybe the end customer is running late with the construction or whatever, what they’ll do is they’ll call up and say, well we need to push this out a month or a quarter or into the next quarter.

So I typically see them as push-outs. If we see the underlying demand start to drop off then we just have to look at whether or not we’re seeing a change in our [resending] of the market.

Steve Levenson - Stifel Nicolaus

On the security side with the eXaminer SX I know you say you expect to see sales, are there any orders actually in the house yet?

James Green

We’re working on that now. We just finished getting the approvals, just finished the testing with the TSA. The TSA does still have to issue us the formal letter. That typically takes about 30 days so you go 30 days from a couple of weeks ago, so we’re expecting that letter.

But in the meantime that’s not slowing us down. We’re training the sales forces, we’re working close with our distribution partner. We see this as a very nice opportunity for incremental growth. Certainly not slowing us down.

Steve Levenson - Stifel Nicolaus

In terms of the orders that you said you’re seeing a pickup in orders in some areas, are those for shipments in the current quarter, or are those for future quarters?

James Green

Well for instance with the radiation treatment subsystems that we supply, those are for orders that, one of the problems that we got into that you sometimes see with customers is orders, managing the supply chain so that we get orders for, we want to manage it in a way that we get orders and we can ship in the near-term with those.

So I would say we are seeing uptick in the demand here over the next few quarters, even going into the current quarter.

Steve Levenson - Stifel Nicolaus

I see you made a management addition yesterday, is your new guy strictly a manufacturing guy or has he got a lot of experience in the medical area and security area?

James Green

The primary thing I was looking for was somebody to come in with a breadth of experience across a number of business segments but primarily on the operations and manufacturing and supply chain side. If you look at his background you see that he’s a very, very strong player and when you look at our business there’s a series of complexities in that we’re not just one business and serving one particular market so I felt like we needed somebody to bring some broad experience and someone who has seen a lot of different types of models who could really help us design or I would say reengineer our entire global footprint.

I’m real excited to have Mr. Ryan joining us here.

Steve Levenson - Stifel Nicolaus

Just about R&D, do you expect it to tick along at the current dollar rate, go up or decline or stay flat over the balance of the year.

James Green

Its hard to say, I would say as part of our overall looking at the sizing of our business, we’re going to do the level of engineering that it takes for us to meet our current and future needs. We’ve got products that we expect to release in 2010 and 2011 and these are all part of the future so I certainly don’t want to put any of that at risk. But we are looking very hard at what are the right things to do, what are the things we should and shouldn’t be doing based on return on our investment.

Operator

Your next question comes from the line of Josephine Millward - Stanford Group

Josephine Millward - Stanford Group

On your last call you thought imaging would recover to flat in Q2 and grow in the second half of 2009, can you give us an update on that, if you still believe that’s the case or has that changed.

James Green

I guess the indications in that we see some of the areas that were down in the first quarter we are seeing some improvements in those areas but with the financial credit crisis its really very difficult for us to predict exactly what kind of impact that’s going to have. We do expect its going to have some and we’re hearing that from our big OEM customers.

So what I have to do and what we have to do is look to their marketplace and if the market continues to, gets to an organic growth spot here in the second half, then we would expect to follow that. If it doesn’t, if it starts to decline further, then we would expect to follow that and then only improve on it based on new products to help us grow into new segments and add share.

So I guess what I’m saying is at this point I certainly would expect that the financial crisis will at least have some delay on when we get back to procedure-based demand because the growth in procedures is still happening. We still see at the end user the number of CT scans and MR scans, its still growing so at a point in time the demand has to get in line with the basic operation of the systems.

Josephine Millward - Stanford Group

What about international demand for imaging equipment, is that still holding up relatively well compared to the US?

James Green

We’re still seeing growth in the areas, the BRIC countries, with Brazil but mainly in China and India, Eastern Europe is still growing. Outside the US is where we’re still seeing most of the unit growth.

Josephine Millward - Stanford Group

What about in Western Europe?

James Green

Western Europe has been somewhat flat or depressed for actually for quite a while. Its still, no one is predicting large growth in the European areas at this point.

Josephine Millward - Stanford Group

You mentioned that you signed three major OEM products in CT and MRI during the quarter, is there anything that will contribute to revenues in fiscal year 2009?

James Green

We believe that some of the CT products could see some 2009, actually calendar year 2009. I wouldn’t expect any of it in fiscal 2009. With the new MR business and that’s in the gradient world, that’s actually some new business associated with the Copley acquisition, that’s some very exciting opportunities for us there but that we don’t expect to see until fiscal 2010.

Josephine Millward - Stanford Group

Can you help us quantify how much of the decline in B-K medical was due to the exchange rate?

James Green

We think its about, of the 8%, about 25% of it is due to exchange and the exchange also has a pretty dramatic effect on gross margins in that area too which I guess finance is trying to explain that to me a little better but it has an effect both on profitability and on the revenue.

And then with the introduction of these new platforms there is typically some level of pause in certain regions and what we saw is with our distributors that’s where we saw some pause while they, they want to wait until they get the latest and greatest systems as opposed to continuing to sell at rate with the existing systems so that’s why we see a little bit of a pause there that we think made up for the last few percent.

But with this product now launching, we’ll be shipping it here within about a month and production unit production volumes followed by a very exciting new product that will also come out just a month or so later.

Josephine Millward - Stanford Group

Can you talk about your margin outlook, it looks like you had a pretty big increase in operating expenses from Copley, do you expect that to continue and the product mix?

James Green

With the delay or push-outs of the big systems for radiation treatment subsystems and some of the CT that of course had a substantial effect on margin, but that will improve as we get our systems in line with the demand and as that demand starts picking back up.

With Copley the base systems are slightly lower margin at the unit level but as we complete the integration, get things in line, and get that business aligned with the rest of Analogic and also we have better, with the full integration, we’ll have a better cost position even at the unit level so that will move up to be inline with more of what we would typically expect to see.

But as we would expect it will take a few more months.

Josephine Millward - Stanford Group

So you think Copley margins will likely be coming in line in a few quarters?

James Green

Yes definitely.

Josephine Millward - Stanford Group

And in terms of the backlog for your exact system, I have 25 units at the end of this quarter, is that correct?

James Green

As you know we typically get a slug of orders that come in periodically just to maintain the demand—

Josephine Millward - Stanford Group

I think you received one in late September so based on my calculations you should have about 25 units left in your backlog.

James Green

That looks about right.

John Millerick

Yes, we had 25 at the end of the quarter and currently there are 20 in backlog.

Josephine Millward - Stanford Group

On the [XX] which is also the COBRA, do you expect to ship that to the TSA in second half of next year or are you thinking about demand from outside of the US?

James Green

We expect both. And now that we’ve got the STAC certification, that opens up France and Italy and a number of European countries where we expect to see some nice opportunity plus also in the US.

Operator

Your next question comes from the line of Dalton Chandler - Needham & Company

Dalton Chandler - Needham & Company

I just wanted to ask a clarification question, you were talking about already seeing some improvements in some of the areas that have been down, were you including CT in that or were you just specifically talking about the radiation therapy?

James Green

It was both, both the CT DMS, some of the high end CT DAS and of course the radiation treatment which we certainly knew was more of an end-quarter significant hit that would start to recover afterward.

Dalton Chandler - Needham & Company

If I could just ask a question about revenue timing, your CT customers for example, if they sign a new order today, they’re probably going to be delivering that unit say sometime in the summer. So when would you expect that deal to generate revenue for Analogic?

James Green

It really depends on the size and what we’re doing. If it’s a brand new subsystem it may take a number of quarters before we’re starting to ship production units. If its an improvement on a system that maybe takes it to a new level, then it may be a shorter period. But it’s a very difficult question to answer but certainly it could range from three quarters to 18 months if its more of a larger system.

Dalton Chandler - Needham & Company

If they actually sell a complete system, if your customer sells a complete system to say a hospital—

James Green

I see what you’re saying, you’re saying if a customer gets an order and then, I guess to give you a view of the timing for CT, typically an end customer places an order and takes a shipment in about six months. That’s kind of the typical CT timeframe.

MR is typically more closer to nine months to a year just on average. So when an order comes in to an end user customer when they’re ready, they’ll send us a signal to ship what we need to send that becomes part of their system so that would be a few months into that six month cycle.

Typically we both want it to be as late in the cycle as possible.

Dalton Chandler - Needham & Company

You did have a slight sequential decline at Anrad, do you think that’s a slowing of the digital mammography market or is that more of a timing issue.

James Green

It’s a little of both. I wouldn’t say it’s a slowing of the market, that’s certainly we see as, that business and the demand for digital mammography we see as strong and we see a complete transition in most countries to digital.

What we’re dealing with now is the time it takes for our big customers to get, to be able to ship in the United States. They’re right now limited to outside the US. So there’s somewhat limited market view for the big customers there until they get full access and FDA clearance in the United States and that’s when we expect to see very nice uptick in that business.

Dalton Chandler - Needham & Company

On the COBRA you said last quarter you had orders for 10 units, and you shipped six so do you just have four left to go or have you taken some additional orders since then.

James Green

On the base COBRA itself we expect to ship the first 12 which were committed. The original order was for 40 units but working with the TSA, we fully expect to transition that product into a dual use system which is used for both carry-on and check in some of these very small airports where they really are stretched for investment capital.

Dalton Chandler - Needham & Company

I guess maybe you had said you expected to ship 10 by February.

James Green

That sounds about right.

John Millerick

We’ve shipped through the quarter, we’ve shipped six. We shipped another this quarter and we’ve got three left in backlog as of today.

Dalton Chandler - Needham & Company

I know everyone in medical imaging continues to cite the DRA as a negative impact on the business but that was signed almost two years ago. How much longer do you expect that to continue to be a drag?

James Green

When I look at it for the US market and you look at something like CT and MR, we felt a quarter ago that both were coming out of this but that the DRA had really reset the market, that there was a lower overall market in the US for CT and MR.

Most feel that MR has pretty well reached that point and expect to see a growth going forward on the MR side. CT at this point, we got through that last quarter and my personal feeling is that it wasn’t so much the DRA that caused the additional market effect on CT, that its really more of a delay caused by the credit crunch.

So its hard to tell, hard to separate how much of the additional market drop that happened in CT last quarter was due to DRA and how much of it was due to the credit. I agree with you. I think that its been washed through the system far enough now and long enough that the market level is the market level and that that additional hit that took in last quarter was probably somewhat if not mostly due to the credit.

Operator

Your next question comes from the line of Edwin Fowler – The Small Cap Report

Edwin Fowler – The Small Cap Report

Last quarter you were talking about some of your customers had some inventory problems and are you still seeing that?

James Green

We knew we had inventory issues at at least two customers and that was why we projected the Q1 adjustment that we’re going to get the inventory inline with their base demand. As far as are there some others out there, I can’t say that I’m aware of any.

I think you may have seen over the last year we have actually had to cycle through a few large customers to make sure that demand was really truly inline with supply and starting with the acquisition of Copley we had as you remember a pretty major adjustment that had to be sorted out and now you look at our MR business there and you see it’s a nice steady business.

To answer your question I wouldn’t say that we’re aware of any other large customers that are stuck with a lot of inventory they’re going to have to deal with.

Edwin Fowler – The Small Cap Report

What was your medical imaging products revenue excluding Copley in the first quarter?

James Green

In Q1 it was $40 million.

Edwin Fowler – The Small Cap Report

And what was your backlog excluding Copley at the end of the quarter for medical imaging?

James Green

For imaging subsystems, I have $27 million in the backlog for imaging subsystems. So if I add up ISD and CT Med which the combination, its about $45 million.

Edwin Fowler – The Small Cap Report

And as of the end of last quarter where was that?

James Green

The end of last quarter, year-end quarter was, it looks like it was maybe a million or two less coming out of last quarter.

Edwin Fowler – The Small Cap Report

What’s your best guess on when you’ll begin shipping the eXaminer SX assuming certification is [inaudible] in 30 days.

James Green

We’re still projecting second half for the fiscal year.

Edwin Fowler – The Small Cap Report

And do you have any idea of the size of this market?

James Green

Well we have, certainly there could be a home for 300 to 400 units, for the units in the US, you would expect the TSA likes to split the business with others. So certainly we’re assuming that there is opportunity to be going after worldwide somewhere north of, somewhere in that 400 to 500 units for a total potential market that we can go after.

Edwin Fowler – The Small Cap Report

When do you begin shipping the detectors to your two other customers other then Siemens?

James Green

Well as the other two major customers Philips and Toshiba, as they start to ramp up we’ll start shipping to them and then as they get their ability to ship in more countries, then we expect that also to see further growth.

Siemens is the biggest opportunity right now. They already have a large installed base and good access worldwide. So that’s kind of the way I see it developing. Mainly we’ll start to see this later in the year.

Edwin Fowler – The Small Cap Report

Would you expect the SX to outsell the eXaminers during the next year when certified?

James Green

Kind of hard to tell as the mix, as everything becomes available we expect to be shipping the XLB as we get into this fall so the market from our perspective will move to three products covering the full gamut from the low end to the mid-tier existing 6000s to the very high end.

How that mix will ship will be based on the airports so large airports with brand new construction will go for the higher speed, small airports that don’t need inline baggage handling will go for the SX. Airports that already have a 6000 will have to make a decision whether they just replace their current unit or if they can take on the additional cost of upgrading to a newer higher speed unit.

So its very difficult to describe the splits but certainly we would expect to see a healthy mix across the three.

Edwin Fowler – The Small Cap Report

But the XLB is in for certification, you would expect to have that in February?

James Green

We expect to start the certification testing here this month so when we have to have it done is before we start shipping production units in the fall but certainly we expect to get it certified long before that.

Edwin Fowler – The Small Cap Report

With regard to the buyback, you announced the $25 million buyback and did I hear you bought back $6 million?

James Green

I think at the end of the quarter which was only a few days of buying, I think the number was in the neighborhood of $3.5 million but that was only for a few days in the quarter.

John Millerick

Yes it was $3.5 million.

Edwin Fowler – The Small Cap Report

Has the Board ever considered raising the dividend at any of its meetings?

James Green

There hasn’t been a lot of talk about it and one of the things you noticed with the acquisition of Copley that if we were able to use our cash for a very good, an additional acquisition that we think would be very good use of the cash.

Edwin Fowler – The Small Cap Report

With regard to the long-term debt on the balance sheet when did this come in? It was there last quarter as well but I didn’t get a chance to ask any questions. Long-term liability, that’s what it was.

John Millerick

Its certainly not debt.

Edwin Fowler – The Small Cap Report

Yes, it’s a long-term liability, how long-term is that?

John Millerick

I’m sure what it is, its deferred revenue that stretches out over a year.

Edwin Fowler – The Small Cap Report

So that will come into your income statement at some point.

John Millerick

Yes, the intent is that, it won’t roll in this year, we anticipate it will roll in next year. But there is no long-term debt per say.

Edwin Fowler – The Small Cap Report

What date did you set for your Annual Meeting?

James Green

Its set for January 26, 2009.

Operator

Your next question is a follow-up from the line of Larry Solow - CJS Securities

Larry Solow - CJS Securities

Can you maybe, I know you hired a new guy on the ground in China during the quarter, could you maybe talk about your opportunities there and potentially you may have some, any infrastructure build or building of facilities.

James Green

If you look at the business we’ve been growing in China as far as customers very steadily and a lot of our big customers have moved their factories there and that’s becoming their center of manufacturing so for us its very inconvenient to get components from, often from China, bring them to Massachusetts and assemble them and send them back to China. And pay some fees on the way in there so we are starting up our operation there. We brought in a very solid experienced fellow who has done this kind of work before.

So yes we will be making some investments there. The cost of starting there is not very high. The opportunity of being there is very high. There are large growth opportunities in China.

Larry Solow - CJS Securities

Your stock comp expense seemed to go up a little bit, was that just an aberration or do you expect that trend to continue?

James Green

Well if you look at the FAS 123 charges, the way the accountants have to work that is, and if you go back a year or so there was basically almost none so any increase starts to look like a pretty dramatic increase.

And then the way the accounting works is you typically don’t start to take the charge until there is evidence that you’re meeting the targets so the further you get in to it the more it starts to backload which is one of the reasons that I think its important to separate out FAS 123 is because you don’t get a apples and apples view of things like income unless you separate it out or until you get into three or four years into things and then at that point, ins and outs kind of cancel out.

Larry Solow - CJS Securities

Just on currency impact, I know it impacts B-K medical is there any dramatic or potential exposure on the other portions of your business?

John Millerick

In terms of foreign exchange we really haven’t seen it to date. Some we see with our Canadian situation and Anrad, that’s been more positive but the bigger concern is on the negative side which would be B-K.

Larry Solow - CJS Securities

Just on, do you still expect Siemens, Toshiba, Philips, any or all of the above to get US approval in calendar 2009? I know you kind of, its really, that would be more their announcement but is approval widely expected in calendar 2009 in the US?

James Green

I think everyone is expecting that they’ll get approval in calendar year 2009. We’re certainly hoping.

Operator

Your next question comes from the line of Doug Fisher - Kennedy Capital

Doug Fisher - Kennedy Capital

I wonder if you could talk a bit about your efforts to optimize the cost structure you mentioned in your remarks, if you can give us some sense for timing and magnitude of that. For instance do you think that would have more or less of an impact then the most recent cost reduction efforts.

James Green

I would certainly expect the cost reduction to be more significant then the last one we did. We’re looking at the business. We’re looking at all of the fixed infrastructure and such that we have spread across the globe. We brought in an expert in this field with hands-on experience to help us optimize the business so that we free up cash for the right kinds of investments.

Definitely we are, when I look at the business, its an area that we have to always be working to be as lean as possible.

Doug Fisher - Kennedy Capital

As far as timing, it sounds like a work in progress but your best guess?

James Green

We would certainly expect to see some things happening here in the quarter followed with maybe some more as we reengineer the footprint, that would be something that will be a little further down the road but something early on followed by more of a long-term view as we get through the completion of the investigations.

Doug Fisher - Kennedy Capital

Did I hear you correctly if you look at the MRI business pro forma for the acquisition that that is actually up year-over-year?

James Green

When I look at the overall its roughly flat now we’ve had some softening on the motion side with the credit crisis but its being more then offset by the MRI side which is the primary piece of the business so I would say within MRI we’re certainly happy with the way its performing given the market that we’re dealing with and the way that’s developing.

Doug Fisher - Kennedy Capital

As far as your customer inventories, you had mentioned that a couple of people made adjustments to get inventories inline with base demand and I’m just trying to understand if that presumes a continuation of the currently depressed levels given the credit crunch and the problems impacting the hospitals don’t seem like they’re going to abate anytime soon.

James Green

Right now what they are doing is getting the inventories inline with the known demand that they have. If that were to shift somewhat then you would not expect to see major inventory adjustments you should just see more of a run rate demand change.

Part of what we do at Analogic is we work toward what we call supplier managed inventory with our major customers so that’s what we’re trying to do with some of these customers that have had some inventory issues because it doesn’t do us any good for them to be inefficient with their inventory and then we wake up one day and they say, well don’t ship us anything for a month or something.

So at this point they’re getting each of our major customers leaned from their side with us. That just helps us align with the underlying demand.

Doug Fisher - Kennedy Capital

And that’s been accomplished, that part of its been accomplished correct?

James Green

We think so, yes.

Doug Fisher - Kennedy Capital

Without being too specific as I try to understand the trends rolling through the different pieces of the business on the core medical imaging side, just ballpark, how much of that is CT versus MRI?

James Green

Its roughly 50/50. Of that section about half of its MRI and half of its CT. Part of the acquisition of Copley it was dramatically more meaningful to the CT side, now its pretty close to half and half.

Doug Fisher - Kennedy Capital

That would hold for the quarter just reported or is that for some other period?

James Green

That would hold I think on a pro forma view last quarter and looking forward.

Doug Fisher - Kennedy Capital

And when you mentioned the BRIC countries and eastern European, they are doing relatively well, just again ballpark, any feel for how big those are and how much growth you’re seeing from those markets?

James Green

The last reports that we’ve seen indicate that at the end user level they’re still growing at a high single-digits close to 10%.

Doug Fisher - Kennedy Capital

And for you, is that a meaningful part of the business or is it more like 5% or 10%?

James Green

Its difficult to say because a lot of, some we sell directly into these areas but a lot goes through our major OEMs and then they will sell into those areas so its difficult for us to pull out how much of growth, we look to our OEMs and what they say and their calls and look at their data and they give us a pretty good breakdown of where they see the splits in terms of the demand growth.

Doug Fisher - Kennedy Capital

On the buyback, presumably you’ve been active since the quarter ended, or have you been in a blackout period. I’m just trying to get a feel for whether you’ve repurchased any more shares subsequent to quarter end.

James Green

We’ve been in a blackout so we kicked off the buyback to run, it runs—

John Millerick

Its basically programmed.

James Green

It’s the 10B5-programmed buyback. So it spreads out throughout a number of weeks.

John Millerick

We’re in the market on a daily basis.

Operator

Your final question is a follow-up from the line of Edwin Fowler – The Small Cap Report

Edwin Fowler – The Small Cap Report

With regard to your cash position, do you still have your acquisition man on board, you must be seeing some opportunities out there with some of these smaller players. Could you give us a little rundown on what’s going on out there?

James Green

Jim [Dacosta] our acquisition, our M&A guy is still on board and I can tell you he’s about as busy as he’s ever been because there are a lot of things coming up. There are a lot of companies that are under various degrees of pressure and we see this as opportunity in a depressed price market for us to put something together that positions us nicely as we come out of this.

So there’s no question we are very interested and looking.

Edwin Fowler – The Small Cap Report

Would you be looking in the $50 to $80 million range or would you be looking at little companies, smaller market caps?

James Green

I don’t see any reason to limit ourselves to any particular size. Something small could be simple but on the other hand sometimes something small is just about as much work as something big. So I like to be looking at all of them and see what’s going to give us, what’s worth really putting our attention into that’s going to best position us strategically.

Edwin Fowler – The Small Cap Report

When do you think in China you’ll be set up to supply those major OEMs?

James Green

Within a year from now we should be shipping local for local for OEMs that where the products are going into China.

Edwin Fowler – The Small Cap Report

So you’ll have to hire some Chinese people there, 20 or 30 people or how do you see that rolling out?

James Green

Yes, we would be bringing on some people there yes.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

James Green

Thank you for your interest in Analogic. We invite you to call in again in March when the company will announce its second quarter earnings. Thank you and good afternoon.

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Source: Analogic Corporation F1Q09 (Qtr End 10/31/08) Earnings Call Transcript
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