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Analogic Corporation (NASDAQ:ALOG)

F1Q08 Earnings Call

December 6, 2007 11:00 am ET

Executives

Jim Green - President and Chief ExecutiveOfficer

John Millerick - Senior VicePresident, Chief Financial Officer and Treasurer

Ed Becker - Executive VicePresident and Chief Operating Officer

John J. Fry - Vice President,General Counsel and Corporation Secretary

Analysts

DaltonChandler - Needham& Company

Josephine Millward - StanfordGroup

Arnie Ursaner - CJS

Steve Levenson - Stifel Nicolaus

Alan Mitrani - Sylvan Lake AssetManagement

Greg Hartley - Kalmar

Matthew McKay - Jefferies &Company

Michael Martin - SmallCap Report

Ed Saylor - GunnAllen

Herbert Denton - Providence Capital

John Francis - Francis CapitalManagement

Operator

Good morning and welcome toAnalogic Corporation's First Quarter Investor Conference call.

The following corporate officersare present: Mr. Jim Green, President and CEO; Dr. Ed Becker, Executive VicePresident and COO; Mr. John Millerick, Senior Vice President, CFO and Treasurer;and Mr. John J. Fry, Vice President, General Counsel and Corporation Secretary.

I would like to remind everyonethat a supplementary financial presentation will be used during today's call.If you have not already downloaded that presentation, you may do so at any timeat www.analogic.com. That presentation will remain available until midnightDecember 27, 2007.

Mr. Green will open the call. Goahead, sir.

Jim Green - President and Chief Executive Officer

Good morning, everyone. Welcomeand thank you for taking the time to participate in the call today. We'll beginby introducing our new Vice President and General Counsel, John Fry, ask him toread the Safe Harbor statement. John Millerick and Iwill then review the first quarter using the supplementary financialpresentation available on our website, following which we'll take yourquestions.

John?

John J. Fry - Vice President, General Counsel and Corporation Secretary

Thank you, Jim, and good morningeveryone.

Any forward-looking statementsthat are made during this conference call are made pursuant to the Safe Harborprovisions of the Private Securities Litigation Reform Act of 1995. I wish tocaution you that each and every one of you that all forward-looking statementsinvolve, among other things risks and uncertainties, including but not limitedto risks associated with competition, technology development, productcommercialization, intellectual property litigation, foreign sales, limiteddemand for the company's products, downturns in the economy, uncertaintiesconnected with regulatory agency actions and competitive pricing pressures.

Statements made during thisconference call that express the company's or management's intentions, hopes,beliefs, expectations or predictions for the future are forward-lookingstatements. It is important to note that the company's actual results coulddiffer materially from those projected in such forward-looking statements.

Additional information regardingfactors that could cause actual results to differ materially from those inforward-looking statements is contained in the company's SEC filings, includingbut not limited to the company's Form 10-K report. Copies of the 10-K and otherfilings of the company may be obtained upon written request from the company orthrough the SEC.

At this point, I'd like to turnthe call back to Jim Green, our President and CEO.

Jim Green - President and Chief Executive Officer

Thanks, John.

Before we get started, I justwant to say, historically, Analogic has kept firmly to GAAP reporting. I'veheard the message loud and clear from investors that we need to be moretransparent about the underlying health of the business. So today you're seeingwhat we hope is a clear picture with this presentation providing an additionalnon-GAAP view.

John Millerick and I will nowreview the quarter and recent events. So let's start with slide 5 of yourpresentation.

Starting with the Q1 finance withthe fiscal year '08 Q1 highlights, our revenues of $94.2 million were up $18.5million or 25% over Q1 of fiscal year '07. We recorded net income of $6.4million on a GAAP basis and our earnings per share at $0.48 on a GAAP basis.Medical technology products demonstrating growth, and our security technologysegment returned to profitability.

Now, I'll turn it over to JohnMillerick, our CFO, to review our consolidated results.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Thanks, Jim.

In terms of our financial resultson a GAAP basis on page 6, you can see that we had good overall results for thequarter and for the past four quarters. And as Jim just noted, our focus iscoming beyond the non-GAAP results, primarily because the intention of thecompany is to be responsive to our investors and shareholders and to trying toprovide information that will help them to better understand the results of thecompany.

In terms of those non-GAAPadjustments on page 7, we've outlined for you the type of adjustments that weconsidered as we present our non-GAAP results. The company spent much timereviewing and agreeing these items and have provided a detailed discussion bothin the press release and in the appendix after this presentation.

Just to review with you quicklythe non-GAAP adjustments, we have considered share-based compensation, assetimpairment charges, executive transition expenses, acquisition-relatedexpenses, and gain and loss on sale of assets.

In terms of the financial resultson a non-GAAP basis on page 8, I think as you look at the quarters as they arepresented, from a revenue standpoint, we find that we had good growth over thequarters. Q1-over-Q1 growth is approximately 25%. If we review our grossmargin, gross margin has, over the last four quarters, normalized at about 37%.

There is a small consider it an aberrationin here in terms of Q3 gross margin of approximately 39%, but that was dueprimarily to [two NRE] contracts where we had good gross margin on a completedcontract method and very little cost. In addition, B-K had contributed about 1%on that margin line. But overall, I think we would look at the gross margin forlast four quarters as being normalized at approximately 37%.

Operating expenses for the lastfour quarters approximately 31% in terms of a percent of revenue, although inthis quarter it came in at around 29%. I think if we look this quarter backover, the previous quarter where we've got in Q4 about 2 points higher than Q1as a result of bonus expenses of approximately a $1 million and severanceexpenses of approximately a $1.2 million. This was offset somewhat by lowerR&D and SOX 404 audit expenses in the quarter. But again, as a percentageit was higher in Q4 and now we are seeing it move from 31% to 29%.

Net income, if you look at netincome, particularly over the last four quarters, the company generated $27.6million with the fully diluted EPS of $2.01. If we look at GAAP, on a GAAPbasis it was close, we generated $27.1 million or $1.97 over the same fourperiods.

Again, if I look at the quarter,Q1-over-Q1, particularly GAAP to non-GAAP I find that the quarter, our expenseson a GAAP basis approximately $1 million higher and we do breakout the detail,I can discuss it further on the discussion, if you'd like.

Income before taxes wasapproximately a $1 million lower on a GAAP basis. Net income was approximately$700,000. So we have the delta returns of diluted earnings per share, GAAPversus non-GAAP, on a Q1 basis was $0.48 to $0.53, $0.05 difference. I think aswe step back from the quarter and we look at it, I think we basically come awaywith overall good quarter, good four quarters for the company.

As I turn over to page 9, interms of some key financial data, one item that sticks out on the page is cashposition. If I roll it forward from Q1, we had about $262 million. During thatfour-quarter period, we had a share repurchase of $60 million in what nettedout as we generated approximately $35 million in cash in the four quarters.

In terms of information relatedto total assets and stockholders' equity, I want to point out that it's not yetavailable at this time. The company is still working to finalize its tax workrelated to FIN 48 which is accounting for uncertainty in income taxes. We planto have that work completed shortly. There is no P&L impact, it's strictlya balance sheet adjustments and we plan to file our Form 10-K on Monday,December, 10th.

At this point, I want to turnthis back over to you Jim.

Jim Green - President and Chief Executive Officer

Thanks John. To move on to slide10 and take a look at the reportable segments. Starting with MedicalTechnology, just over $52 million we continue to see sustained growth. We're $7million favorable to Q1 of the prior year and at roughly the same rate as thefinal quarter of fiscal year '07.

Income before taxes continues tobe strong at $5.8 million. Our Digital Radiography segment consists of Anrad'sDirect Digital Mammography business and the ANEXA DR business. And as I havediscussed previously, the ANEXA direct sales and service business which ishistorically underperformed is transitioning to an OEM product line and hasbeen restructured to get costs in line with revenues.

We are very optimistic about Anrad'sSelenium-based mammography line where we continue to invest. Net loss in DR was$1.8 million, $12.2 million better than the same quarter of the previous year,$2.4 million favorable once you remove the asset impairment and $2.7 millionbetter than the final quarter of fiscal '07.

Looking to our B-K ultrasound,revenues continued to grow at $20.5 million or roughly $3 million above samequarter prior year; however, $2 million of the improvement was currencyrelated. In addition at $1.2 million we were nearly at Q4's run rate which istypically our strongest quarter. Profit before tax was nearly a $1 millionfavorable to the same quarter prior year.

Moving to our Security segment,at $13.3 million our Security Technology revenues were $8.7 million favorableto the same quarter of prior year and over $3 million favorable to Q4. Profitbefore tax was nearly $1.3 million favorable both to the same quarter and thefinal quarter of last year by $5 million and $1.7 million respectively.

Let's move forward to slide 11.In Medical Imaging, growth in precision MR Amplifiers and CT detection systemsso we saw nice growth in both. We released to production our precision RFamplifier for the high-end 3.0T MRI and we released to production the firstCASMED-branded Lifegard II patient monitor with deliveries starting in Q2.

For B-K Medical, we released the ProFocus OR, our surgical ultrasound system designed specifically for the uniqueneeds of the operating room and we released the Falcon Premium, a dedicatedscanner for private urologists.

In Digital Radiography, wecompleted the restructuring of the ANEXA/Digital Radiography business and weshipped first production Selenium-based flat panel detectors to Siemens for usein the Full Field Digital Mammography, FFDM.

On to page 12, the SecurityTechnology, and first looking at Checkpoint Systems with the COBRA, we received$7.6 million order for 12 units as part of the $37.5 million IndefiniteDelivery Indefinite Quantity contract that was for up to 40 units to bedelivered over the next two years. There is also potential additional $40million for further engineering services over five years.

In the Checked Baggage side,referring to our EXACT AN6000, we received $17.5 million order from L-3, and wecontinue to see stable demand of approximately 15 units per quarter. For KINGCOBRA, which is designed for small to mid-sized airports, it was delivered tothe TSA, the first unit, for testing, and we expect certification in Q3 of ourfiscal year.

Looking to the XLB, which isdesigned for the high-speed inline automated airports, is currently undergoingcertification testing at the TSA's test lab, and we are responding to TSA's RFPto complete the hardening for production and field readiness.

Moving to page 13, just want tohighlight some of the key leadership changes in the organization. Fred Parks,PhD, has joined us on our Board of Directors. John O'Connor, PhD, has taken onthe Engineering leadership position. Peter Cempellin, who holds an MBA, takeson the Security Business leadership position. John Fry, who you've met today,has taken over the position as General Counsel. And Doug Rosenfeld, who alsoholds an MBA, takes over as the leader of our Human Resources department.

We move on to page 14. And insummary, I just want to say that we’re resolving the loss businesses. We arebuilding the leadership team. We are evaluating good fit acquisitions. We’refocusing on growth and profitability of the base business from operations. Andwe are investing in the future.

As far as the presentation goes,we are through with this. I guess at this point, we'd move back to theoperator.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Dalton Chandler with Needham & Company.

Dalton Chandler- Needham &Company

Hi, it's Dalton.

Jim Green - President and Chief Executive Officer

Hi, Dalton

Dalton Chandler- Needham &Company

How are you?

Jim Green - President and Chief Executive Officer

Good. Thanks.

Dalton Chandler- Needham &Company

Let me first a quick sort ofhousekeeping thing in your press release, talking about the sale of medicalimaging products revenue is $52.1 million, up 15%. And then in the nextsentence, you're talking about patient monitoring revue being flat. You areincluding patient monitoring in the $52.1 million. Is that correct?

Jim Green - President and Chief Executive Officer

John?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Let's take a quick look. Dalton, give a minute.

Dalton Chandler- Needham &Company

Sure.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Don't want to give you a quickanswer, Dalton.I just want to make sure it's right.

Dalton Chandler- Needham &Company

No, problem.

Jim Green - President and Chief Executive Officer

Yes, Dalton, it is part of it.

Dalton Chandler- Needham &Company

Okay, great. So the implicationthere clearly is the medical imaging products are growing faster than that 15%blended rate. So then the question is, all of the major imaging OEMs havedecided over the last few months that they think their business is beingpressured by the Deficit Reduction Act. Clearly, you have bucked that trend.What is different about your business and how you are maintaining this kind ofgrowth rate?

Jim Green - President and Chief Executive Officer

As I said last time, it issomething that we're watching very cautiously. We know that the DRA has had asubstantial effect on commercial imaging companies that typically had been abig part of a large growth over the last two to three years in diagnostic imaging,primarily in CT and in CT/PET.

What we are seeing is some changein the mix of demand as that particular segment, as they become financiallypressured, what we believe is happening is instead of buying certain kinds ofsystems maybe 64-slice CTs, we expect that they're switching more to morestandard 16-slice CTs.

I guess as I look at it, a lot ofour business is overseas. A tremendous amount of our business is into hot listof companies that sell primarily to hospitals, which are really not affected bythis. So, we do understand that some -- that lot of the big OEMs are seeing arevenue hit, but when I look forward you still have the number of proceduresthat are demanded that continue to grow. You're going to need equipment to runthose procedures. And as long as that's the case, we're going to continue tosee different kinds of gear sold into the various places.

So, if there is going to be ashift of where those procedures are performed, we would expect that some ofthose may shift from imaging centers to hospital. But again, as far as whywe've not been specifically ahead, we do get pretty good firm forecast from thecustomers that we sell to. And we tend to focus in specific areas of high-endCT, a high-end MR, and a lot of our gear, again, goes into hospitals in outsidethe US.So, that's the main reason why we expect that we're not being a substantialeffect on our business at this point.

Dalton Chandler- Needham &Company

Okay. That's helpful. Thanks. Andthen on the corporate and other revenue line of $3.4 million, is that all thehotels or is there something else in there this quarter?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

No, we've got the securities.

Jim Green - President and Chief Executive Officer

Hang on a second, John.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

If I look at the P&L, right,it's a combination of security, interest -- it's a combination of interestincome. From a revenue standpoint, it's the hotel.

Dalton Chandler- Needham &Company

Right.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

But as in terms of -- as we getdown to the other income line, it really flows from interest income.

Dalton Chandler- Needham &Company

You're talking about the --looking at slide 10 where you have $3.37 million of corporate and other underincome before taxes that includes the interest income.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Right, the $3.37 million.

Dalton Chandler- Needham &Company

And I assume there is also someunallocated overhead in that number.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Well, there's also profit onhotel on that number also.

Dalton Chandler- Needham &Company

Right. Okay. And then, justfinally with the -- you're now expecting an approval date for the COBRA. Do youhave any sense of what sort of demand you might see once it is actuallyapproved? I assume you've been out talking to some prospective customers aboutthis.

Jim Green - President and Chief Executive Officer

Well, as far as the COBRA goes,we already have a production level of contracts for the first 12 productionunits. That's part of the first 40. So there is not really a need for anapproval to bring you that. Where we do expect to see a certification approval,it's going to be in kicking off the KING COBRA product, which is really goingto be addressing a separate segment of the business.

Now the current COBRA will gothrough a certification for turning on automatic detection, which we're now inthat certification process for now. But that has -- there is no real effect asfar as that as far as slowing up the initiation of these products and thedemands for these products.

Dalton Chandler- Needham &Company

Okay. Your current contract is aGSA contract, right?

Jim Green - President and Chief Executive Officer

Right.

Dalton Chandler- Needham &Company

I was really referring tocustomers beyond the GSA.

Jim Green - President and Chief Executive Officer

Well, we're looking at alternatedistribution opportunities both outside of aviation and geographically outsidethe US.We're well positioned in the US.And I would tell you that our primary focus right now is to make sure we getthis product right that we prove that it does exactly what we say it can do.And that -- we've been in this business of producing highly complicated systemslike this where there was literally thousands of microcomputers inside ofsomething like this.

And so, rolling it out, gettinggood feedback from the field, having an initial 10 to 15 units operating reallyhelps us prove that it's the right thing and make sure that it becomes -- thatdelivers a level of security and reliability that we expect it to deliver.That's going to be what's really going to generate the demand. So, I guess, ina nutshell, I don't want to oversell this until we get good feedback withenough installations, and we really are going to prove that here in the United Statesfirst.

Dalton Chandler- Needham &Company

Okay. All right. Thanks a lot.

Jim Green - President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next questioncomes from Josephine Millward with the Stanford Group.

Jim Green - President and Chief Executive Officer

Hi, Josephine.

Josephine Millward - Stanford Group

Hi. Good morning.

Jim Green - President and Chief Executive Officer

Good morning.

Josephine Millward - Stanford Group

Congratulations on a greatquarter.

Jim Green - President and Chief Executive Officer

Thank you.

Josephine Millward - Stanford Group

Jim, can you give us an update onhow many units of EXACT you have in your backlog right now?

Ed Becker - Executive Vice President and Chief Operating Officer

You have that number right there.

Jim Green - President and Chief Executive Officer

Hang on for a second. We're goingto look it up.

Josephine Millward - Stanford Group

Sure.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

17.

Josephine Millward - Stanford Group

17?

Jim Green - President and Chief Executive Officer

No, we've added now. We've added.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Backlog as of Q1, 30 units in thebacklog, is that…

Jim Green - President and Chief Executive Officer

We're expecting an order herewith the next group, from L-3 here any time.

Josephine Millward - Stanford Group

Okay. So you are still expectinganother order?

Jim Green - President and Chief Executive Officer

Yeah, we're still expectinganother order at any time. And like I said, we expect just to see a generaldemand of about 15 units a quarter. There may be some upside to that. But then,over the next couple of years, that's when -- within a couple of years, we'llstart to see the ramping in of replacement units there too.

Josephine Millward - Stanford Group

Sorry, I thought you have 30units in your backlog before the end of this quarter. And since you shift to15, you should have about 15 left. Am I missing something?

Jim Green - President and Chief Executive Officer

I mean we showed that we have 30in backlog as of right now.

Josephine Millward - Stanford Group

Okay.

Jim Green - President and Chief Executive Officer

And again, we're expecting thenext orders. So we'll certainly have -- expect to have -- and I expect to havea big enough backlog to at least carry us through the next year or through ayear from now.

Josephine Millward - Stanford Group

Okay. And 15 units a quarter isreally the base case, the minimum number of shipment you are looking for everyquarter based on your agreement with L-3, is that correct?

Jim Green - President and Chief Executive Officer

That's right. We expect to see atleast a sustained number of around 15 a quarter. And again, there couldcertainly be upside from that, but at this point that we feel pretty firmabout.

Josephine Millward - Stanford Group

Okay. And in terms of the ordersyou receive for the COBRA, when do you expect to ship those and do yourecognize revenue on them once they're shipped or once they have to beinstalled?

Jim Green - President and Chief Executive Officer

As they get accepted here withthe final acceptance test by the TSA, we're able to recognize 90% of therevenue. So, I guess, that would be answering your first question. And as faras timing goes, we expect around April-May to start seeing the first productionunits going through that final test and shipment.

Josephine Millward - Stanford Group

Okay. So you can recognize about90% of the revenue once you shift the COBRA, so you are looking at April-Maytimeframe?

Jim Green - President and Chief Executive Officer

Yes.

Josephine Millward - Stanford Group

Great. Can you give us an updateon the EDS upgrade kit, is that still under evaluation or has that been put onhold?

Jim Green - President and Chief Executive Officer

I would say, you know I don't paymuch attention to that, and as I don't really see that as a real opportunity, Ithink.

Josephine Millward - Stanford Group

Okay.

Jim Green - President and Chief Executive Officer

In a business like this, what youwant to do is and anybody who is going to take an upgrade, they would typicallyexpect it to really lengthen the life of the system. And these kinds ofsystems, they have a life and as they reach that [near end of] life, it'sreally time to do what we would call a forklift upgrade.

Josephine Millward - Stanford Group

Okay. So you don't expect that tobe a contributor really going forward?

Jim Green - President and Chief Executive Officer

No, no, I think it's really aboutshipment of new systems.

Josephine Millward - Stanford Group

What about the KING COBRA, canyou give us a sense of what you think the scope of the opportunity?

Jim Green - President and Chief Executive Officer

I have-- I am really optimisticabout the KING COBRA. We know that there are ton of smaller and mid-sizeairports that need this kind of product. We are hearing a lot of positiveexcitement out of the TSA and others in the industry. We are working to get itcertified now. We have-- I said that I have very good strong hopes and a strongfeeling about what we're going to accomplish with KING COBRA.

Josephine Millward - Stanford Group

You mentioned you expectcertification around third quarter of your fiscal year, do you think you wouldreceive some sort of initial production order around that time once the KINGCOBRA is certified?

Jim Green - President and Chief Executive Officer

People -- I don't expect peopleto order and to be pushing hard for that until I can show that it certified.But I do expect to have it certified here over the next few months, and I doexpect that we will start seeing orders for that system almost immediately uponthe time that we get certification.

Josephine Millward - Stanford Group

That's great. Thank you verymuch.

Jim Green - President and Chief Executive Officer

Thank you.

Operator

Thank you. The next questioncomes from Frank Wooten with CJS.

Arnie Ursaner - CJS

Hi, it's actually Arnie Ursanerbacking up Frank Wooten on this call if I can. Good morning.

Jim Green - President and Chief Executive Officer

Hi, Arnie.

Arnie Ursaner - CJS

A real quick question I ask you,you describe in your excellent presentation that you are talking good fitacquisitions. Could you describe the characteristics of the good fitacquisition and the capital structure you envision that would make sense tosupport those good fit acquisitions?

Jim Green - President and Chief Executive Officer

To me when I look at what thekind of business is that fit well with answer our businesses that have productsand systems that would synergize well with what we currently do, products thatwe could leverage our existing channels, whether they be OEM products that fitwell along side of current OEM products, or if there are products and systemsthat would distribute well to our direct sales and service business, our B-KUltrasound business. So both I think are good fits from the medical side.

On the security side, we look --there I think we have to do a little more homework and make sure that if thatwhat we might do there really makes a lot of sense, I would expect and based onthe development of a backlog or pipeline of potential acquisitions that wewould see some that could be potentially, immediately accretive and some thatmight be more of an investment for the future. So, I think, we are wellpositioned and we have the kind of distribution networks in place for a numberof different opportunities.

Arnie Ursaner - CJS

Okay. And the capital structureto fund them, have you envision that?

Jim Green - President and Chief Executive Officer

It just depends, some might besomething that that's small enough to do on a cash basis, some depending on thekind of cash flow that they would also provide, might dictate that we use somedebt to do it.

Arnie Ursaner - CJS

My second area of questionrelates to the proxy that you put out. I noticed a few things and thiscertainly caught my eye, one is, I think Mr. Gordon who I have known for sevenor eight years, had indicated when you came on board, his intention that somepoint would be to step down, but I noticed he has not chosen to do that in theproxy?

And the second question is therewere some pretty sizable one-time payments made to some long-time Analogicemployees for special services. Could you expand a little bit on both of thoseissues, please?

Jim Green - President and Chief Executive Officer

Sure, sure. As far as Bernie, hehas indicated in the past his intention to step down from the chairmanshipafter the Annual Shareholders Meeting that's coming up in January. Bernie, forme he has been a tremendous asset and a huge help for me in picking up theleadership role of the company, and also he has been a great help to Analogicas a whole during this transition. The Board is working on a smooth transitionfor the chairmanship for the next board meeting after we get through the annualshareholders meeting. So I don't see any big surprises there.

As far as discussion of specificpayments to some of the people who were involved in running the business duringthe transition between John Wood leaving and Mike coming on, I think I'll letJohn Millerick maybe comment on some of what's in there. These would have beendecisions made by the independent compensation committee, but that post isclosed here.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Yes, I think if you look backwhen John Wood left the company and Bernie joined, he asked John Tarello andRoss Brown to assist him in that effort. And they completed their work and Jimtransitioned to that company, the board felt that they had made contributionthat wanted a bonus payment. I think that's what you're saying within theproxy. There are also certain payments that they felt that were warranted anddue to Bernie for his work at that time and that's also what's reflected in theproxy.

Arnie Ursaner - CJS

When they total roughly a $1million, that seems like a lot of help, but that's a different discussion.Thank you very much.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

All right. Thank you.

Arnie Ursaner - CJS

-- conference. Thank you.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

All right. Thank you.

Operator

Thank you. The next questioncomes from Steve Levenson with Stifel Nicolaus.

Steve Levenson - Stifel Nicolaus

Thank you. Good morning.

Jim Green - President and Chief Executive Officer

Hi, Steve.

Steve Levenson - Stifel Nicolaus

Sir, your comments on the XLBthat now you're getting up to the step of partnering the equipment, does thatmean as far as performance that you are getting good results back and the TSAis ready to move to next step?

Jim Green - President and Chief Executive Officer

We have the system at the TSL,which is the TSA test lab. The system is performing well and, we're right inthe middle of certification testing. So yes, I think the outlook is good. Andthe next step would be to establish funding for taking the product to thatstage of making a production and feel ready.

Steve Levenson - Stifel Nicolaus

Okay. Do you see as well as thedomestic opportunities with some potential public switching to inline baggagechecking? WHAT do you see internationally and how does that product fit in?Apparently, there were few international competitors. It doesn't sound likethey use the same technology. Maybe you can talk a little bit about what do youthink the competitive landscape is?

Jim Green - President and Chief Executive Officer

Well the opportunity outside the USdoes look good, especially from very large airports with large inlinehigh-speed baggage systems. The law outside of United States is slightlydifferent as far as the level of requirement for specifically using certifiedexplosive detection, but I understand that the law outside the US that there isgoing to be a requirement for the airports to move towards using certifiedequipments.

So that will provide an opportunityfor us. But also, slight originating outside the US that are coming here, there isan expectation that the luggage go through a certified explosive detectionsystem like this. So yes, there is a nice opportunity outside the US in addition to what we would expect to see inthe US.

Steve Levenson - Stifel Nicolaus

And do you see anything that youwould really consider a competitive product right now?

Jim Green - President and Chief Executive Officer

Well, there is lots of differentkinds of systems that can scan luggage. But at this point, I'm only aware ofone type of technology, and that's high resolution computed tomography that canspecifically and certifiably detect the kind of things that we have to detect.So if something else would be able do it and pass certification that I wouldsee certainly as a threat to the business. But probably, the bigger thing thatI watch out for is, is there going to be some kind of political sea changewhere maybe the legal expectations, if they were to loosen, that could enableother technologies that maybe don’t quite have the level of precision andaccuracy of viewing inside of things to start to become an issue.

Steve Levenson - Stifel Nicolaus

Okay. None of them use the sameAnalogic technology, though, if I am correct?

Jim Green - President and Chief Executive Officer

That will be correct. Wespecialized in using the one technology that’s evolved the farthest. And if youlook to medical over the years, there has been lots of work in lots of areas totry and on a non-interventional basis look with precision inside the body.We’ve learned a lot along those lines. And at this point, the best currentstate-of-the-art and for the near future seems to be computed tomography, whichis what we specialize in.

Steve Levenson - Stifel Nicolaus

Could you see any potential formedical use for an XLB type product?

Jim Green - President and Chief Executive Officer

Not really. We are, of course,heavily involved on the medical side precision imaging systems. It’s a slightlydifferent kind of a system. Overall, it’s not too far off. But the place wherethey share is in the detection system themselves. And yes, we do deliver. Alarge part of our medical business is based on CT detection systems. But for anoverall system in medical, I would think that that would be highly unlikely.

Steve Levenson - Stifel Nicolaus

Okay, thanks. Last quarter, youdid talk about the DRA. And is there anyway to quantify the impact that you sawin this quarter, if you think you’re still in that lag period or if you begunto see the pickup on the hospital side?

Jim Green - President and Chief Executive Officer

It all kind of washes out. And wesee the net result, but it hasn’t, again because we ship to so many people andwho sell into so many different segments, it hasn’t been a major effect for us.So, again, I am not sure exactly what you are looking for. We haveopportunities to somewhat tune what we're doing and what particular areas we'regoing to put more effort into.

But, again, the piece that waseffective with commercial imaging centers, it's a fairly small percentage ofthe total worldwide market of performing CT procedures. And as long as CTprocedures continue to grow like they do, it all eventually catches up eitherway. And it then just becomes a question of where the procedures are performed.

Steve Levenson - Stifel Nicolaus

Great. Thanks very much.

Jim Green - President and Chief Executive Officer

Thanks, Steve.

Steve Levenson - Stifel Nicolaus

Looking forward to the next fewquarters too.

Jim Green - President and Chief Executive Officer

Great. Thank you.

Operator

Thank you. The next questioncomes from Alan Mitrani with Sylvan Lake Asset Management.

Alan Mitrani - Sylvan Lake Asset Management

Hi. Thank you. Can I just getsome clean up questions? Can you give us a sense where capital spending wasgoing to come out this year, whether that will be ratably across the year?

Jim Green - President and Chief Executive Officer

John?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

In term of '08?

Alan Mitrani - Sylvan Lake Asset Management.

Yes. In terms of '08, you didabout $9 million this past year.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

In the first quarter, someimportant pages here, I think on the key datasheet we had indicated, let's say.In the first quarter, we had capital spending of about $3 million. I wouldthink it's probably going to be in the $10 million, $12 million range for the year.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And where is the priorityfor projects, if you could just let us know where the money has gone?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

We continue to support the[in-rate] operation, in particular with a contract to support one of thecontract that we just took on. We're also, basically, in terms of our medicalimaging business, that's showing strong growth.

Jim Green - President and Chief Executive Officer

IT.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Yeah. And we intend to basicallysupport that with new test equipment and help to expand their capacity. We'realso looking in terms of IT. The IT infrastructure in terms of essentially howwe continue to make sure that we're competitive in that area.

Alan Mitrani - Sylvan Lake Asset Management

Yeah.

Jim Green - President and Chief Executive Officer

And looking at the IT piece, ifwe're going take advantage of leaning the manufacturing side, there are certainkinds of tools and levels of performance that the IT systems have failed toperform.

Alan Mitrani - Sylvan Lake Asset Management

And you're going to capitalizeall the IT systems?

Jim Green - President and Chief Executive Officer

Yeah. That's primarilycapitalized.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And D&A this quarter, Imean I saw you put a slide up there with EBIDTA of 13.481, but it's hard for meto reconcile to get there. I'm not sure what you're adding back to operatingincome of, call it, $6.4 million this quarter to get to that number. What wasthe actual D&A?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

You are right. We'll have thatfigure in a minute. I'm just not sure.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And then, maybe Jim, canyou just tell us you've made some management changes, you've been there anumber months now, can you just walk us through where your expectations are,not for necessarily this next 12 months, but over the next 24, 48 months wherecan this business get to? It seems like the margins are good, the grossmargins, but not all the divisions are humming. Can you just give us your senseof what a couple of your priorities are now over the next 12 or 24 months?

Jim Green - President and Chief Executive Officer

Sure. Overall, first thing Iwanted do is just get a handle on some of the businesses that were losing moneyand why they were losing money. Sometimes, if you're investing in something, itmakes sense to invest more than you're making in an area if you expect to comeout of it and its going great growth opportunity. So something like what we dowith our direct digital mammography systems with Anrad fits that bill.

We have -- I've got great hopesfor that product -- for those products in that market. And we're seeing --we're expecting and we're starting to see some really nice demands starting togrow there. So there we just have to be careful that we invest properly withit. But just, overall, we have some very well established distribution channelsthrough our OEMs. I see nice growth in those areas both organic and throughacquisitions. Our direct medical imaging -- our direct ultrasound business,it's an outstanding business. It's a growth area. The margins are very good.And there, it really is all about growth and maybe also finding some newproducts to sell through those distribution channels.

And then, last, looking hard atthe security side and seeing what really make sense there, certainly makingsure that we don't lose money there, and as opportunities come along, newgrowth areas that we really are able to capitalize on that. Our barriers toentry on a security side are very, very high. We have a great win, greatproducts, limited competition, we're position there that we really should dowell there too.

So in a building, starting withgetting a team in place, you saw a number of changes that we've made withbringing in some very key people into critical positions. And then, movingforward on a growth path, both in terms of topline, organically, and throughacquisition, and paying attention to the bottomline that were profitable alongthe way.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And do you have thatD&A number or you don't know?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

I have it right here. It's $3.5million now.

Alan Mitrani - Sylvan Lake Asset Management

$3.5 million, okay. And that doesnot include share-based comp, right?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

It does not.

Alan Mitrani - Sylvan Lake Asset Management

Does not, great. Okay. So D&Afor the year also roughly around, you know, as it picks up maybe 15ish millionor something like that. Is that a fair estimate?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Yeah. I think you could probablytake the $3.5 million and extrapolate it up.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And then, lastly, just acouple of other questions. G&A has been in the high 30s for several yearsas a percent of revenues, revenues equivalence come down, and could we assumethat that's a fair place where it's going to stay or as you're adding people tocorporate that should trend up?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

I would not expect it. Certainly,not expect it to trend up, certainly not as a percentage of revenue. I wouldexpect it to continue to improve. And even on an absolute basis, I expect justto continue to get more and more efficient.

Alan Mitrani - Sylvan Lake Asset Management

Okay. Great. And what aboutR&D, I know there was an effort to try to streamline the R&D on anabsolute dollar basis, it's come down this past year and seems to be settlingout in the $11ish million range, is that a fair range to use roughly?

Jim Green - President and Chief Executive Officer

I think right now it's a fairrange to use, yes, you know certain, some projects have very low requiredinvestments there and some really honestly demand and should get a verypercentage. So it's a bit, it's a bit of a mix. But in general, I think we'resitting at a good place right now and especially as we position ourselves forsome nice growth.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And then do you have theinventory numbers for this quarter, really you don't have the balance sheetyet, but is the inventory still around the 50ish, 50 plus million level, thatit improved at all?

Jim Green - President and Chief Executive Officer

Yeah, it is, in fact I think inthe press release, we're able callout inventory even though we didn't have afull balance sheet. Let me just see if I can hold the number here.

Alan Mitrani - Sylvan Lake Asset Management

I see it, 57, I'm sorry, Iapologies my fault. I got it. Can you talk in the past you've had an inventoryissue in security where I think there was lot of excess inventory waitingaround because of the staggered nature of the business. Can you talk about whatyou are doing to improve inventories or work-in-process inventories, whetheryou think that's an opportunity?

Jim Green - President and Chief Executive Officer

I think it's clearly anopportunity, starting with getting, establishing a smooth delivery schedule onthe EXACT system that helps us a lot. But as we start to get prepared for somethese new products like COBRA, KING COBRA, that's where we will see some levelof inventory until we turn those products over for revenue.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And then lastly, is thereany plan, you know we've talked over many calls some of the, what's callednon-core assets, I guess, you had sometime to look at them and evaluate whatyou have. Do you think this is the year when you started to put some of thecash towards the buyback stock, which I applaud you for? Do you think this ayear where we're going to look to divest some of the non-core assets orpossibly put in more money to the stock buyback? And maybe just update us onwhere the stock buyback is?

Jim Green - President and Chief Executive Officer

Well, I guess, yes, a lot ofquestions there. But first, looking at some of the non-core assets, we arelooking at some of what we have for instance the hotel, what the value might bethere and how best to deal with that, what we own there. Certainly, I mean, weall, I think we all agree it's not really a core asset and I almost see it asmoney in the bank and it comes down to, how we maximize it and then how do webest deploy it. We've talked about acquisitions in such. Those are much betteruses of cash in my mind. As far as buyback goes, we've started the discussionwith the board, with the last board meeting to investigate how best to positionourselves with for the buyback. So we are definitely looking at that, yes.

Alan Mitrani - Sylvan Lake Asset Management

Great, thank you.

Jim Green - President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next questioncomes from Greg Hartley with Kalmar.

Greg Hartley - Kalmar

Good day. Could you comment aboutRSNA and what kind of response, feedback you received there?

Jim Green - President and Chief Executive Officer

Sure thanks. Good to hear fromyou Greg. RSNA, it was another, in my mind, a very good meeting. If you look atsome of the new products that were introduced there Toshiba with 256 or 320slice CT for wide coverage. Each of the main players showed advantage in CTwhich is always good for us. Our PowerLink system got a tremendous amount ofvisibility, a lot of interest there, we are in detailed discussions with allthe major players there as to the opportunity for the contact was PowerLink.

Looking at in the RF amplifierside, MR systems and the growth in 3.0T is a nice opportunity for us. We'vedeveloped a great reputation in solid state amplifiers or precision amplifiersin MR. So there, we are positioned very nicely. But overall, the show was very,very good, a lot of excitement, a lot of new things going on, almost as usualyou can count on RSNA. It's kind of like our Christmas. Lot of new thingscoming out and we are Intel inside of lot of these companies and people askedme, well, how busy, was you booth? I look and say, well, I look at ourcustomers' booth that tells me an outlook how our future looks in. Ourcustomers' booths looked very strong.

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Take a rough count, I think we,total of something like 19 other booths that were at Analogic products.

Jim Green - President and Chief Executive Officer

19 booths at Analogic inside now.

Greg Hartley - Kalmar

Would that be a higher number ofbooths than may be in prior years?

Jim Green - President and Chief Executive Officer

I would say and I have had said anumber of times that the kind of people and the numbers of the level ofinterest and the number of companies interested in coming to see us this yearwas up nicely, and almost dramatically over the number of people who have been talkingto us over the last few years. So, it's a great opportunity for us, we arepositioned well and we are making really contacts through it.

Greg Hartley - Kalmar

If you could also just clarify asit relates to the Siemens' products, whether public announcements relative tothe product as well as your involvement on the Selenium plates, is that atomosynthesis-oriented mammography product, or is it step down from that?

Jim Green - President and Chief Executive Officer

It's actually I would say the firstof a series of technologies that not only is the best-in-class for what you cando today before you move to tomosynthesis, it is essentiallytomosynthesis-ready. So it's positioned not just for the state-of-the-art now,but also is ready for that next kind of capability coming up that we wouldexpect to see probably release sometime in the next few years.

Ed Becker - Executive Vice President and Chief Operating Officer

You can see some excellentclinical studies coming out of Duke University on tomosynthesisusing that detector.

Greg Hartley - Kalmar

So, there is trials ongoing thatare using your technology?

Ed Becker - Executive Vice President and Chief Operating Officer

Yes.

Jim Green - President and Chief Executive Officer

Yes. And a lot of interest in ourdetector: With Siemens signing on, we now have other major OEMs in detaileddiscussion with us about this detector system.

Greg Hartley - Kalmar

But your involvement goes beyondjust the plates, if I understand that correctly?

Jim Green - President and Chief Executive Officer

Well, in mammography, that's ourmain play, actually is the heart of the system, the direct digital conversionsystem, which is the piece that makes it all work.

Greg Hartley - Kalmar

Okay. And so the prior expectationor hope I think was that you were starting or would soon be beginning to rampvolume of the plates. That in fact is happening and that we're not going to bewaiting for clinical trials to be finished and/or FDA approvals prospectivelyto continue to have volume ramp within the plate business?

Jim Green - President and Chief Executive Officer

The plate business is rampingnow. The demand is growing. It's growing very nicely, very strongly. Now, inthe US,the OEMs will not sell systems with those plates until they complete gettingtheir clearances from the FDA. But that does not at all slow them down fromwhere they're also very, very strong and that's everywhere outside the US.So, that's not going to slow anything up. If anything, it almost helps us getthe production capacity in place to meet that overall level of demand that itdevelops.

Greg Hartley - Kalmar

But in terms of US and FDA, thisis a 510(k) proposition and not some kind of more onerous FDA approval?

Jim Green - President and Chief Executive Officer

Well, it's a little more than510(k). It's a pre-market approval requirement. So it is more than that. I knowthat it's been started in more than one company. And I'd have to defer toSiemens or the others to say where they are in their release cycle with theFDA. But again, these are the companies that have tremendous amount of businessoutside the US.And as soon as they get that FDA clearance, it's going to dramatically drivethe demand much higher.

Greg Hartley - Kalmar

Okay. And then just a point ofclarification here relative to Steve Levenson's question earlier. Is it fair toassume that you maybe shipping to more medical OEs in the CT/MR business andhow is the content per unit changing such that it may explain and us better understandthe revenues in the quarter relative to DRA?

Jim Green - President and Chief Executive Officer

It gets a little noisy, becausethere could be shifts in market share. The companies that we happen to beselling much of our volume through, we see growth in various segments. So itgets complicated. What we do is our jobs are to get these products into all theOEMs, and that helps us, in spite of if they do start to see a slowdown.

And again, they can see aslowdown in revenue and not see a slowdown in units, because, let's say, youare selling a 64-slice system at, take a number, $1.2 million or something, andif the imaging centers start to shift more towards 16 slices at $800,000 or$900,000, then there might be a slight revenue hit for them; actually notslight at that point, but there is still demand for what we deliver.

So, again, we might start to seesome mix shift periodically. But overall, the procedures grow the demand forthe products and that can cause the procedures to grow. And we continue topenetrate more and more opportunities with the OEMs as we position our systems.

Greg Hartley - Kalmar

Okay. Then, I am just curious interms of acquisition pricing. I know you've had a lot of internal challenges,but it does sound like you have some kind of business development effortongoing. To what extent has acquisition pricing been a challenge for you andhas there been any change in that over the more recent period?

Jim Green - President and Chief Executive Officer

I guess I am not really sure Iunderstand the question. We have an internal process going to developacquisition pipeline, looking at what are good fits for us. We are wellpositioned from a cash perspective. We have no debt. And the board is fully insupport of having this to be a part of our growth process.

Greg Hartley - Kalmar

What I am really being morespecific about is, with the bulge in private equity activity generally in theacquisition market over the last year or so, a lot of companies that I'vetalked to have commented that acquisition pricing was unrealistic. I am curiouswhether you've faced similar challenges and given the challenges in the fundingmarkets more of recent, whether there has been any meaningful change orcorrection in acquisition pricing?

Jim Green - President and Chief Executive Officer

I don't know if any change inpricing of potential targeted business. I can tell you that certainly dependingon the company, some have a higher premium than others, some can be veryattractive immediately, some could be attractive but more on a longer term, inwhich case, there would be a higher initial price and a payback that comes backa little further down the road. So it's really a mix bag, and it depends on theindustry and it depends on the target.

Greg Hartley - Kalmar

Okay. And then my final questionis, as it relates to COBRA, how significant is the certification relative tothe automated software, and does that meaningfully change the value propositionto the end user customer if that certification turns out to be successful?

Jim Green - President and Chief Executive Officer

I think, the certification Iexpect to not be a problem at all. Technically, we feel confident where we areas far as getting certification for auto detection in the COBRA. But your questionabout does that make a whole lot of differences for us the demand in themarket, it actually may not, because the level of visibility inside the bagswith the COBRA is so nice that it just -- what we're finding is that people whocouldn't see much with the older systems are able to very quickly pick out whatthey're looking for.

So, I don't even know at the endof the day how important it's going to be the turn on the automatic part of it,but we are moving toward certifying it to be able to. And then, it will be upto the TSA and there are other operational procedures as to how, where and whenthey decide to turn it on, and what they do differently when they turn it onversus when they don't.

Greg Hartley - Kalmar

All right. Thank you very much.

Jim Green - President and Chief Executive Officer

All right. Thanks, Greg.

Operator

Thank you. Our next questioncomes from Matthew McKay with Jefferies & Company.

Matthew McKay - Jefferies & Company

Great. Good morning, guys.

Jim Green - President and Chief Executive Officer

Hi.

Matthew McKay - Jefferies & Company

So just -- you've got a lot ofthe security products that, you know, COBRA and everything else that's reallyreaching a point where we're getting to an interesting point in terms of marketdemand potential. And I'm still curious as to what exactly you're going to dowith the sales force on the security side, given -- especially, if you're goingto look at international opportunities, it looks like you're going to have tobuild up the sales force lot more in the security side in order to go afterthose opportunities, or do you try and mere the strategy on the medical sidewhere you start -- trying to sell through some other companies?

Jim Green - President and Chief Executive Officer

I think initially and, at leastin the near future, we're better off to leverage an existing channel thatalready has connections. Now that would be in the aviation side. Outside ofaviation, it becomes interesting as to whether it might make sense to have someof our own feet on the street for that. But right now, I think exploring otherdistribution channels besides building up an internal capability withinaviation, I think we're better off to go with the existing channels or, atleast, explore it for now.

Matthew McKay - Jefferies & Company

Yeah. So potentially one way youwere to look at it is one partner may be for hold baggage like L-3 and thenanother partner for the carry-on baggage market?

Jim Green - President and Chief Executive Officer

I mean it could. I mean if youthink about how you segment the opportunities, there is carry-on and there ischeck, but there is also geographical segmentation that we've got to evaluatewhat really makes sense. We want to do what's going to drive our business the bestin a sustained method. And we're right now in discussions with some of theseopportunities and evaluating what's the best long-term play there. We do have agreat relationship and should -- a relationship that's become very good nowwith L-3, and I see them as an excellent partner today, and I expect that tocontinue to be the case going forward.

And so, I also have to be carefulthat what we do works best for all of us. And I've always believed that yourrelationships with the OEMs need to be designed on the philosophy that we'reboth right and you don't want to have a situation where there is conflictthere. So we are looking at the different opportunities. We're keeping in mindall the complications of what you do in a market like that and where there'spotential risks of added competition and cannibalization. And I think we're,like you say, we're at an interesting point here with the right kind ofproducts and the right kind of demand and we just have to make sure that wedistribute in the best possible way.

Matthew McKay - Jefferies & Company

Yeah. And with the XLB, giventhat it's really sort of a next-generation with the EXACT systems, has therebeen any promise to L-3 that they would be able to distribute those or is itgoing to be some type of open process to try and figure out who the best oneis, and it may not be L-3, or L-3 continues with EXACT, and maybe someone elsegets the XLB.

Jim Green - President and Chief Executive Officer

Honestly, we're talking with L-3about this. I think it would be -- it could be a conflict if I were todistribute the XLB through somebody else and the EXACT through L-3. So we'recognizant of it. I think -- I can't really say too much more other than thatwe're talking with L-3 very seriously about how to do this in the best possibleway for both of us.

Matthew McKay - Jefferies & Company

Okay. Fair enough. And then, juston the certification of the auto detect no the COBRA, I'm just wondering whatkind of false alarm rate is there in a carry-on baggage situation using aCOBRA.

Jim Green - President and Chief Executive Officer

Well, there are false alarmspecifications, and that's part of the testing process is to verify that we'rebelow the false alarm rate, and then how the TSA decides to utilize that. Theywill make a determination once we've proven that we can do that. They willdetermine does it need to be even rate higher or do they change something intheir operational procedures to make the best of it. But right now, again, Iwould just say that we're comfortable with the specifications and we're in testwith it now.

Matthew McKay - Jefferies & Company

Okay. Great. Thanks a lot, guys.

Jim Green - President and Chief Executive Officer

Great. Thank you.

Operator

Thank you. The next questioncomes from Michael Martin with SmallCap Report.

Michael Martin - SmallCap Report

Good morning and congratulations.Most of my questions have been asked. First, just a housekeeping, what kind oftax rates should we assume going forward?

Jim Green - President and Chief Executive Officer

We'll go 33% rates at this pointif they reinstitute the R&D tax credit before the end of the fiscal, itcould be in the 31% to 32%.

Michael Martin - SmallCap Report

Okay. And on the COBRA, youindicated that you're focusing on just making sure the product is workingperfectly. How long appear to time does that process go on before you think youcan really start getting very aggressive on the marketing?

Jim Green - President and Chief Executive Officer

We were as far as the marketingon it, right now the focuses get it working right here in the U.S. with the TSAand what we -- what I expect to see happen is kind of a groundswell and thetraveling public and with the TSA that this is a great product, highly reliableand it does exactly what it needs to do. So, as we get I would say somethinglike six or eight months into production that's where we would really look athow can we now accelerate that with additional demand through additionaldistribution channels and opportunities.

Michael Martin - SmallCap Report

And in terms of the groundswell, theadditional order talks about forty units over two years, do you believe thereis significant upside to that, I mean can you give us a little more definitionof your sense of what the market is just for the U.S. airports?

Jim Green - President and Chief Executive Officer

You know it's really hard tocomment on that, because the TSA they decide those the kinds of technologiesand how they are going to deploy, I mean what kind of configuration. So, Ireally can't comment other than to say that we are going to show that this isgreat product, that it is the best that you can buy and I expect the TSA willuse it in a right way and we will make sure that we are able to produce thenumbers of systems that they can put in place. But you know again the initialdemand I see developing there is more on the Check version of that productwhich we call the KING COBRA, that I -- really high hopes on that very quickly.

Michael Martin - SmallCap Report

Terrific. And finally in terms ofthe replacement cycle for the existing EXACT systems you shipped over 400 infiscal '03. And I believe the estimated life is 6 to 8 years, do you expectmost of those systems to actually be replaced?

Jim Green - President and Chief Executive Officer

Yeah, I would expect that, that'stypical of the CT market and medical, typical of the same kinds of systems andthese kind of application that as they reach their life you know they have togo through replacement process. And then it just comes down to do a replacementwith an existing a new version of the current kind of system that has the samefootprint, are they able to upgrade, and do they need to upgrade to biggerfaster kind of system like an XLB.

Michael Martin - SmallCap Report

Terrific. Thank you very much.

Jim Green - President and Chief Executive Officer

Okay. Thank you.

Operator

Thank you. The next questioncomes from [Ed Saylor] with GunnAllen?

Ed Saylor - GunnAllen

Good morning.

Jim Green - President and Chief Executive Officer

Good morning Ed.

Ed Saylor - GunnAllen

Thanks for another great quarter.Just a few quick questions here relative to, one, first of all, are you givenany thought to dividend increase for shareholder value?

Jim Green - President and Chief Executive Officer

I don't know that we specificallytalked about it with the board if there is any conversations about it. But Ithink it is worth discussing with the board, I would leave it up to them toadvice on what make sense there.

Ed Saylor - GunnAllen

And when do they meet again?

Jim Green - President and Chief Executive Officer

The next meeting will be I thinkit's the day after the Annual Shareholders Meeting, so it's late in January.

Ed Saylor - GunnAllen

Okay. And speaking of theshareholders meeting in January, we had understood that you are going to layout the three to five year plan for Analogic, is that something we can stilllook forward to at the meeting?

Jim Green - President and Chief Executive Officer

You can certainly look forward toa more clear strategic view for Analogic at the meeting, yes.

Ed Saylor - GunnAllen

Okay. And has the TSA or Lockheedestablished any benchmarks for the COBRA yet, labor savings, size of market forCOBRA or funding, TSA funding, we okay there in the funding?

Jim Green - President and Chief Executive Officer

I don't have any concerns at thispoint on the funding, they started -- we started the indefinite delivery,indefinite quantity contract with the TSA on it. There are a work -- there weresome studies done and some may be even some studies in work with the COBRA inoperation. But, lot of that is information that in TSA, the other side how muchof that they all don't make public. But certainly, they are studying what theCOBRA brings to the Checkpoint both in terms of its visibility to detect itsprocess plus its ability to help optimize the overall Checkpoint, so they arelooking at that now.

Ed Saylor - GunnAllen

Just a couple of strenuousquestion relative to Siemens, I understand they introduced their newmammography machine in Europe last week and Anrad product is not the -- Siemensis not your only customer there, so Siemens is on the move for that product,right?

Jim Green - President and Chief Executive Officer

Yes, they are, they're alreadyup, they're already moving on it.

Ed Saylor - GunnAllen

And when do you think we mightsee that in the U.S.?

Jim Green - President and Chief Executive Officer

It really depends on the FDAclearness for that product in the US. Of course, we are rooting forthem to get it quickly.

Ed Saylor - GunnAllen

Okay. And new OEM customer thatseems to be an important item on your agenda other than TomoTherapy, Inc. doyou have other OEMs that are knocking down your door?

Jim Green - President and Chief Executive Officer

Well, there is the big OEMs thatwe already have existing relationships with that we're strengthening thoserelationships and showing what it is that we're doing that we can do for themthat we might already be doing for one of the other OEMs.

We are seeing a move toward amodel where the OEMs, and I was in a position like that when I ran the CTbusiness for Philips where, you know, you have to make decisions about whereyou're going to spend your R&D.

And if there is someone who canprovide you a very high-quality component that you can get instead of having toinvest and design to help yourself, the model fits well where they can designthe systems with Analogic inside. And that's -- so that's the big model that weare driving, and we are getting really good traction with this type ofphilosophy and with the OEMs.

Ed Saylor - GunnAllen

Okay. Jim, John, may be you canhelp with one extraneous question here relative to the last quarter surprise onthe sale of an asset. Do you have any other assets is Fulton still one of your assets or have youwritten that down?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

PDS, yes, they are stillconsidered an investment, although we carry them with zero value.

Ed Saylor - GunnAllen

And how much of that do you own?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

We -- approximately 44%

Ed Saylor - GunnAllen

Okay. Are there any assets thatwe don't know about?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

I wouldn’t think so. You’ve beenthorough in the past that in terms of digging these out on us. The hotel is onethat sticks out and Jim addressed that. I don't think there is anything elsethat we’ve gotten to cover that we haven’t disclosed.

Ed Saylor - GunnAllen

And just one last question. Thisrecent announcement with Del Global, it's been somewhat of a troubled company,but seems to be solving its problems. Is Del Global going to be marketing your ANEXAequipment that you were previously selling or is this something new?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

No, they are going to be -- yes,they are going to be a non-exclusive seller of the ANEXA product components.There are part -- there are systems like that that come from ANEXA andsubsystems that the customers feel very, very positive about and there are --so that's what a company like Del are interested in being able to distribute thosesystems for us or systems or subsystems.

Ed Saylor - GunnAllen

So you are looking at this as aprofit center, even though -- and by the way, it's nice to see those medicalimaging also is going down so quickly. But do you see that as a profit channelfor you through Delthen?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Yes, I do. It was -- what we saidwe would do is we wanted to position it as a direct business. It just wasn'tmaking sense. I didn't think it was ever going to really work for us. We justdon't have the infrastructure to do something like that and then gohead-to-head with some of our large customers. So yes, transitioning into anOEM kind of product that we can sell through a Del or others in my mind is the only way toturn that investment, that sunk investment, and it is something that mightprovide us some opportunity going forward, yes.

Ed Saylor - GunnAllen

And Del has a good -- a big Italian subsidiarythat could handle the international side for that, couldn't they?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Yes. Well, I don't know thedetail on how they are split, but they are well recognized in that space. Theyhave the distribution capability, and they can service or provide service towhere they sell the product. So, it's a good opportunity for us.

Ed Saylor - GunnAllen

John, one last question. We raninto some people who were concerned about medical imaging again. Let's talk --last question, let's talk about visibility here as we look forward in thisdiagnostic imaging.

What you are saying is that's nota big part of your business at this point in the medical side? Is it -- someother companies have reported they are seeing weakness. But what you are seeingis, what, six to nine months visibility?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

We see -- generally, we are ableto get some kind of look out in that 8 to 9, 10 month-view. And then as far aslooking out three to four months, we have a pretty solid -- it's very firm. So,it's like any rolling forward forecast. The further out you look, the less firmit is; the closer, the firmer it is.

And as far as the DRA again,because it's fairly -- I don't think it's fairly limited in terms of ourcustomers, because it was a big part of their previous growth. But it is asmall portion when you look at the total world. And then you further segment itinto the percentage of what's done in commercial imaging centers versus what'sdone in hospitals, because hospitals is clearly most of all that really takesplace by large percentage.

Ed Saylor - GunnAllen

Yes. Would you expect to see thelosses in ANEXA gone by the second quarter?

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

What I have said is as we exitthe year, the fiscal year on a run rate basis, I would expect to not be losingany money at all.

Ed Saylor - GunnAllen

All right. That's terrific. Thankyou very much

John Millerick - Senior Vice President, Chief Financial Officer andTreasurer

Thank you, Ed

Operator

Thank you. The next questioncomes from Herbert Denton with Providence Capital.

Jim Green - President and Chief Executive Officer

Hello

Herbert Denton - ProvidenceCapital

Hello

Jim Green - President and Chief Executive Officer

Hi.

Herbert Denton - ProvidenceCapital

Yes. This question, anobservation predates you. So I apologize if it puts you on the spot. And Iwould like to talk about corporate governance and the integrity of the Board ofDirectors of this Corporation. 363 days ago, the Corporation wrote Mr. Francisa letter saying that it welcomed stockholder suggestions for additional membersof the Board of Directors and can assure there is representation of stockholdersin all three Analogic Director classes. That was put out in the form of a SECForm 10-K on January 22nd of this year. I think I submitted six names, all verywell qualified individuals, and to my knowledge nothing has been done. And Iwas wondering whether the Corporation intends to honor its commitment?

Jim Green - President and Chief Executive Officer

I can try and answer that atleast from my perspective. We've talked with the Board, and I suggestedstrongly that we look at a clean independent way of looking for top talent tohelp us fill a couple of different very specific needs for the kinds of thingsthat we do. And it would be good for me personally to have a couple ofdifferent kinds of people as Board members who can help advice not only theboard, but help advice me.

We are looking at how best toindependently look at all the kind of folks who could be out there that couldbe potential candidates. And I suspect that we'll move toward using someonelike Korn/Ferry to help us go out and look for the right kind of people, and doit in a way that doesn't appear that there was any impropriety in terms of howwe found those people.

Herbert Denton - ProvidenceCapital

So, Mr. Green, you're suggestingthat somehow there is impropriety in shareholder suggesting nominees. Thecompany goes out, makes a promise to the shareholders, reneges on it, does notfollow through, and then it's going to spend shareholder money and findingpeople from Korn/Ferry, is that what I just heard?

Jim Green - President and Chief Executive Officer

Well, what you heard me say isthat I believe, and again, I wasn't here 360 something days ago. But I think weneed to be that as -- in terms of running the company, we need to look for thebest possible people we can find, not limit ourselves. And if there is a lot ofgood candidates, that's great. The more candidates, the better. And I think itsworth spending a few dollars with a search firm to help us locate the kind ofpeople, with the kind of experienced background and attributes that we need.

Herbert Denton - ProvidenceCapital

Let me tell you where I comefrom. The company has just reneged on what it had said in a SEC filing. Andyour last shareholder meeting where I was the only person that defendedmanagement and the Board was extremely (inaudible). I've never seen throughoutthis business in 35 year, Mr. Green, I've never seen a company go back on acommitment like this. And I think for you all to spend shareholder money isyour choice, but I think some type of vow in the direction of what the Companypromised its shareholders in an SEC document is required.

Jim Green - President and Chief Executive Officer

Okay. Well…

Herbert Denton - ProvidenceCapital

And the point is that theCorporation's governance committee didn't even contact a half a dozen peoplethat I put forward, and they are all very solid people.

Jim Green - President and Chief Executive Officer

I honestly can't speak to that.That would be I think something we could certainly talk about at the shareholder'smeeting when we have the governance folks there.

Herbert Denton - ProvidenceCapital

All right, I will be there.

Jim Green - President and Chief Executive Officer

All right. Thank you.

Herbert Denton - ProvidenceCapital

Thank you.

Jim Green - President and Chief Executive Officer

Okay. Maybe we have time for onemore question.

Operator

The next is from John Franciswith Francis Capital Management.

Jim Green - President and Chief Executive Officer

Hello, John.

John Francis - Francis Capital Management

Hello, gentlemen. I was a bitpreempted by Mr. Denton there. But I just wanted to confirm what you -- what Ijust heard is that the company is and Bernie Gordon are officially reneging ontheir agreements that you appoint Directors that are put forth by shareholders?

Jim Green - President and Chief Executive Officer

Again, I can't really comment onthat other than to say that we have an interest in looking for more boardmembers who bring more attribute to the board. We are looking at how best to dothat and it really does come down to the corporate governance and thenominating committee to choose who are the best people to look at and how to goabout locating those people. Okay.

John Francis - Francis Capital Management

Specifically, represented to methat this was going to happen and told me trust them. So, if he is going backon this word then that's something will take under submission. So with thatsaid, when I attended the RSNA, I noticed that the company, that one of the otherentities was NeuroLogica which Mr. Gordon I understand is an investor and aBoard member. Can you tell me how Analogic manages the conflict of interestbetween Mr. Gordon's involvement in NeuroLogica and his interest, hisinvolvement in Analogic?

Jim Green - President and Chief Executive Officer

I don't remember I could reallycomment on how -- on that, I could say yes may be our Corporate General Counselif he has any comments or things we should take that off-line somehow.

John Francis - Francis Capital Management

Okay. But has the company everreceived compensation for the intellectual property transfer that's occurredbetween Analogic and NeuroLogica?

Jim Green - President and Chief Executive Officer

I am not aware of any transfer oftechnology but again that all happened before my time.

John Francis - Francis Capital Management

Well, I mean, there is a numberof -- I mean many of the employees of NeuroLogica are former Analogic employeeswho were basically approached from Analogic.

Jim Green - President and Chief Executive Officer

I just can't comment on thatbecause it didn't happen during my time and in the businesses I've been in,people were often move from GE to Philips to Toshiba and so on and it wasalways something that we expected people to maintain confidentiality of whatthey had learned during their employment and that seem -- it's still the case for us here anybody thatwho would have left here, would be expected to maintain confidentiality of whatthey have learned here.

John Francis - Francis Capital Management

Okay. And so, can I ask one forthat Mr. Gordon is reneging on his agreement to leave the Board?

Jim Green - President and Chief Executive Officer

I can't comment on that, that'ssomething that Bernie Gordon has to decide as to you know his membership on theboard, that's really his decision.

John Francis - Francis Capital Management

Okay, thank you very much.

Jim Green - President and Chief Executive Officer

All right, thanks Jim. I think wehave time maybe for one more call. One more.

Operator

Our final question comes fromAlan Mitrani with Sylvan Lake Asset Management.

Alan Mitrani - Sylvan Lake Asset Management

Hi, is there a change or hasthere been any change Jim now that brought up some people on to the companyfrom the Philips or elsewhere in terms of compensation and whether you guyscould be compensated a bit on maybe over the concept of return on investedcapital or return on equity or any sort of margin target as opposed to sort ofa base to discretionary cash bonus and some stock order in the past has been,have been used, can you just talk about compensation your philosophy a littlebit?

Jim Green - President and Chief Executive Officer

Yeah, that's a good point. It issomething that we are changing now. We are moving toward or actually we haveadopted a program where yearly compensation with bonuses is based onperformance and meeting targets, heavily weighted on growth in the business intop line and growth in earnings per share in terms of profitability of thebusiness and in terms of long-term incentives, we're implementing a programthat will -- that is a -- that uses performance restricted stock. There isrestricted stock, has been authorized by the shareholders and the Board in thepast. So there is availability of use of restricted stock. And we areimplementing a program that's based on improving on a multi-year basis theearnings per share and earnings per share growth of the business tied toperformance restricted stock.

It's a very important thing to beconsistent with and to compete in the marketplace for really good people toattract top talent and to retain top talent. But we need to be consistent withwhat our peers were doing.

We've established a peer groupthat makes sense. It was independently put together with input -- actually puttogether by an outside firm that helped us do this. And I think it's veryimportant and it's a part of what's the compensation that has to be in placefor the senior people in a company like this.

Alan Mitrani - Sylvan Lake Asset Management

Okay. Can you tell us what thetargets are then for this year, the management targets? I mean is it growingtopline 5% to 10%? Is there a threshold so that no one gets a bonus if youdon't grow a certain amount?

Jim Green - President and Chief Executive Officer

I think I don’t have it right infront of me, and I'm not sure how much I can even really legally discuss. But Ican tell you that there are targets and thresholds that expect strong growth inearnings per share and strong growth in topline revenue growth in the business.And if the business doesn't improve along those lines, then those bonuses don'tpay out.

Alan Mitrani - Sylvan Lake Asset Management

Okay. That's final. I 'm happy tosee some changes here. I would only encourage you as you are doing this or asyou are putting it together, but not finalized. Since you -- I mean thebusiness is a little cleaner than it was over the last couple of years,obviously, but you have a lot of non-operating things that could hit. The factthat they can hit below the line in tax rate changes, equity gains, interestincome, you know, fluctuates with where your shares are and where interestrates are, I think you should really look at probably compensating based onEBITDA as a percent and put a lesser component to EPS unless you plan oncleaning everything up below the line. So it's just a comment. Thank you.

Jim Green - President and Chief Executive Officer

Thanks for your input. Thank you.Okay. Well, I think that’s it for today. I just want to thank everybody foryour interest in Analogic. We invite you to attend our annual shareholdersmeeting, which will be held on Monday, January 28 at 11:00 AM Eastern time hereat our corporate headquarters in Peabody.

If you are not able to attend, wewill webcast the meeting. Complete information will be available on our websitein January. We also invite you to join us for our second quarter investor callin March. Thank you and I will turn it back to the operator.

Operator

For listeners who may have comein late, this call has been recorded. You can access the telephone replay bydialing 1-877-919-4059 or 334-323-7226 for international callers and enteringconference ID, 17573477. The telephone replay will be available at that numberbeginning two hours from now and running through midnight Eastern Time,Thursday, December 13, 2007.

The webcast replay will beavailable on the Investor Relations page of our website at www.analogic.com,beginning in about three hours from now and will be available through Thursday,December 27, 2007. The investor conference call presentation will be availableat www.analogic.com through Thursday, December 27th as well.

Thank you for joining AnalogicCorporation's first quarter investor conference call. You may now disconnect.

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Source: Analogic Corporation F1Q08 (Qtr End 10/31/07) Earnings Call Transcript
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