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Analogic Corporation (NASDAQ:ALOG)

F1Q08 Earnings Call

December 6, 2007 11:00 am ET

Executives

Jim Green - President and Chief Executive Officer

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

Ed Becker - Executive Vice President and Chief Operating Officer

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

Analysts

DaltonChandler - Needham & Company

Josephine Millward - Stanford Group

Arnie Ursaner - CJS

Steve Levenson - Stifel Nicolaus

Alan Mitrani - Sylvan Lake Asset Management

Greg Hartley - Kalmar

Matthew McKay - Jefferies & Company

Michael Martin - SmallCap Report

Ed Saylor - GunnAllen

Herbert Denton - Providence Capital

John Francis - Francis Capital Management

Operator

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

The following corporate officers are present: Mr. Jim Green, President and CEO; Dr. Ed Becker, Executive Vice President 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 everyone that 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 time at www.analogic.com. That presentation will remain available until midnight December 27, 2007.

Mr. Green will open the call. Go ahead, sir.

Jim Green - President and Chief Executive Officer

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

John?

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

Thank you, Jim, and good morning everyone.

Any forward-looking statements that are made during this conference call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. I wish to caution you that each and every one of you that all forward-looking statements involve, among other things risks and uncertainties, including but not limited to risks associated with competition, technology development, product commercialization, intellectual property litigation, foreign sales, limited demand for the company's products, downturns in the economy, uncertainties connected with regulatory agency actions and competitive pricing pressures.

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

Additional information regarding factors that could cause actual results to differ materially from those in forward-looking statements is contained in the company's SEC filings, including but not limited to the company's Form 10-K report. Copies of the 10-K and other filings of the company may be obtained upon written request from the company or through the SEC.

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

Jim Green - President and Chief Executive Officer

Thanks, John.

Before we get started, I just want to say, historically, Analogic has kept firmly to GAAP reporting. I've heard the message loud and clear from investors that we need to be more transparent about the underlying health of the business. So today you're seeing what we hope is a clear picture with this presentation providing an additional non-GAAP view.

John Millerick and I will now review the quarter and recent events. So let's start with slide 5 of your presentation.

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

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Jim.

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

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

Just to review with you quickly the non-GAAP adjustments, we have considered share-based compensation, asset impairment charges, executive transition expenses, acquisition-related expenses, and gain and loss on sale of assets.

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

There is a small consider it an aberration in here in terms of Q3 gross margin of approximately 39%, but that was due primarily to [two NRE] contracts where we had good gross margin on a completed contract 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 for last four quarters as being normalized at approximately 37%.

Operating expenses for the last four quarters approximately 31% in terms of a percent of revenue, although in this quarter it came in at around 29%. I think if we look this quarter back over, the previous quarter where we've got in Q4 about 2 points higher than Q1 as a result of bonus expenses of approximately a $1 million and severance expenses of approximately a $1.2 million. This was offset somewhat by lower R&D and SOX 404 audit expenses in the quarter. But again, as a percentage it was higher in Q4 and now we are seeing it move from 31% to 29%.

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

Again, if I look at the quarter, Q1-over-Q1, particularly GAAP to non-GAAP I find that the quarter, our expenses on 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 was approximately 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, GAAP versus non-GAAP, on a Q1 basis was $0.48 to $0.53, $0.05 difference. I think as we step back from the quarter and we look at it, I think we basically come away with overall good quarter, good four quarters for the company.

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

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

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

Jim Green - President and Chief Executive Officer

Thanks John. To move on to slide 10 and take a look at the reportable segments. Starting with Medical Technology, just over $52 million we continue to see sustained growth. We're $7 million favorable to Q1 of the prior year and at roughly the same rate as the final quarter of fiscal year '07.

Income before taxes continues to be strong at $5.8 million. Our Digital Radiography segment consists of Anrad's Direct Digital Mammography business and the ANEXA DR business. And as I have discussed previously, the ANEXA direct sales and service business which is historically underperformed is transitioning to an OEM product line and has been restructured to get costs in line with revenues.

We are very optimistic about Anrad's Selenium-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 million better 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 same quarter prior year; however, $2 million of the improvement was currency related. In addition at $1.2 million we were nearly at Q4's run rate which is typically our strongest quarter. Profit before tax was nearly a $1 million favorable to the same quarter prior year.

Moving to our Security segment, at $13.3 million our Security Technology revenues were $8.7 million favorable to the same quarter of prior year and over $3 million favorable to Q4. Profit before tax was nearly $1.3 million favorable both to the same quarter and the final 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 systems so we saw nice growth in both. We released to production our precision RF amplifier for the high-end 3.0T MRI and we released to production the first CASMED-branded Lifegard II patient monitor with deliveries starting in Q2.

For B-K Medical, we released the Pro Focus OR, our surgical ultrasound system designed specifically for the unique needs of the operating room and we released the Falcon Premium, a dedicated scanner for private urologists.

In Digital Radiography, we completed the restructuring of the ANEXA/Digital Radiography business and we shipped first production Selenium-based flat panel detectors to Siemens for use in the Full Field Digital Mammography, FFDM.

On to page 12, the Security Technology, 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 Indefinite Delivery Indefinite Quantity contract that was for up to 40 units to be delivered over the next two years. There is also potential additional $40 million 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 we continue to see stable demand of approximately 15 units per quarter. For KING COBRA, which is designed for small to mid-sized airports, it was delivered to the TSA, the first unit, for testing, and we expect certification in Q3 of our fiscal year.

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

Moving to page 13, just want to highlight 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 on the Engineering leadership position. Peter Cempellin, who holds an MBA, takes on the Security Business leadership position. John Fry, who you've met today, has taken over the position as General Counsel. And Doug Rosenfeld, who also holds an MBA, takes over as the leader of our Human Resources department.

We move on to page 14. And in summary, I just want to say that we’re resolving the loss businesses. We are building the leadership team. We are evaluating good fit acquisitions. We’re focusing on growth and profitability of the base business from operations. And we 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 the operator.

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 of housekeeping thing in your press release, talking about the sale of medical imaging products revenue is $52.1 million, up 15%. And then in the next sentence, you're talking about patient monitoring revue being flat. You are including 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 and Treasurer

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

Dalton Chandler - Needham & Company

Sure.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

Don't want to give you a quick answer, 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 implication there 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 have decided over the last few months that they think their business is being pressured by the Deficit Reduction Act. Clearly, you have bucked that trend. What is different about your business and how you are maintaining this kind of growth rate?

Jim Green - President and Chief Executive Officer

As I said last time, it is something that we're watching very cautiously. We know that the DRA has had a substantial effect on commercial imaging companies that typically had been a big 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 change in the mix of demand as that particular segment, as they become financially pressured, what we believe is happening is instead of buying certain kinds of systems maybe 64-slice CTs, we expect that they're switching more to more standard 16-slice CTs.

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

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

Dalton Chandler - Needham & Company

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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 and Treasurer

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

Dalton Chandler - Needham & Company

Right.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

But as in terms of -- as we get down 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 under income before taxes that includes the interest income.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

Right, the $3.37 million.

Dalton Chandler - Needham & Company

And I assume there is also some unallocated overhead in that number.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Dalton Chandler - Needham & Company

Right. Okay. And then, just finally with the -- you're now expecting an approval date for the COBRA. Do you have any sense of what sort of demand you might see once it is actually approved? I assume you've been out talking to some prospective customers about this.

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 production units. That's part of the first 40. So there is not really a need for an approval 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 going to be addressing a separate segment of the business.

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

Dalton Chandler - Needham & Company

Okay. Your current contract is a GSA contract, right?

Jim Green - President and Chief Executive Officer

Right.

Dalton Chandler - Needham & Company

I was really referring to customers beyond the GSA.

Jim Green - President and Chief Executive Officer

Well, we're looking at alternate distribution opportunities both outside of aviation and geographically outside the US. We're well positioned in the US. And I would tell you that our primary focus right now is to make sure we get this 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 systems like this where there was literally thousands of microcomputers inside of something like this.

And so, rolling it out, getting good feedback from the field, having an initial 10 to 15 units operating really helps us prove that it's the right thing and make sure that it becomes -- that delivers 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, in a nutshell, I don't want to oversell this until we get good feedback with enough installations, and we really are going to prove that here in the United States first.

Dalton Chandler - Needham & Company

Okay. All right. Thanks a lot.

Jim Green - President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes 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 great quarter.

Jim Green - President and Chief Executive Officer

Thank you.

Josephine Millward - Stanford Group

Jim, can you give us an update on how 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 going to look it up.

Josephine Millward - Stanford Group

Sure.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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 and Treasurer

Backlog as of Q1, 30 units in the backlog, is that…

Jim Green - President and Chief Executive Officer

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

Josephine Millward - Stanford Group

Okay. So you are still expecting another order?

Jim Green - President and Chief Executive Officer

Yeah, we're still expecting another order at any time. And like I said, we expect just to see a general demand 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'll start to see the ramping in of replacement units there too.

Josephine Millward - Stanford Group

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

Jim Green - President and Chief Executive Officer

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

Josephine Millward - Stanford Group

Okay.

Jim Green - President and Chief Executive Officer

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

Josephine Millward - Stanford Group

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

Jim Green - President and Chief Executive Officer

That's right. We expect to see at least a sustained number of around 15 a quarter. And again, there could certainly be upside from that, but at this point that we feel pretty firm about.

Josephine Millward - Stanford Group

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

Jim Green - President and Chief Executive Officer

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

Josephine Millward - Stanford Group

Okay. So you can recognize about 90% of the revenue once you shift the COBRA, so you are looking at April-May timeframe?

Jim Green - President and Chief Executive Officer

Yes.

Josephine Millward - Stanford Group

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

Jim Green - President and Chief Executive Officer

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

Josephine Millward - Stanford Group

Okay.

Jim Green - President and Chief Executive Officer

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

Josephine Millward - Stanford Group

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

Jim Green - President and Chief Executive Officer

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

Josephine Millward - Stanford Group

What about the KING COBRA, can you 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 optimistic about the KING COBRA. We know that there are ton of smaller and mid-size airports that need this kind of product. We are hearing a lot of positive excitement out of the TSA and others in the industry. We are working to get it certified now. We have-- I said that I have very good strong hopes and a strong feeling about what we're going to accomplish with KING COBRA.

Josephine Millward - Stanford Group

You mentioned you expect certification around third quarter of your fiscal year, do you think you would receive some sort of initial production order around that time once the KING COBRA is certified?

Jim Green - President and Chief Executive Officer

People -- I don't expect people to 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 do expect that we will start seeing orders for that system almost immediately upon the time that we get certification.

Josephine Millward - Stanford Group

That's great. Thank you very much.

Jim Green - President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Frank Wooten with CJS.

Arnie Ursaner - CJS

Hi, it's actually Arnie Ursaner backing 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 fit acquisitions. Could you describe the characteristics of the good fit acquisition and the capital structure you envision that would make sense to support those good fit acquisitions?

Jim Green - President and Chief Executive Officer

To me when I look at what the kind of business is that fit well with answer our businesses that have products and systems that would synergize well with what we currently do, products that we could leverage our existing channels, whether they be OEM products that fit well along side of current OEM products, or if there are products and systems that would distribute well to our direct sales and service business, our B-K Ultrasound 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 that what we might do there really makes a lot of sense, I would expect and based on the development of a backlog or pipeline of potential acquisitions that we would see some that could be potentially, immediately accretive and some that might be more of an investment for the future. So, I think, we are well positioned and we have the kind of distribution networks in place for a number of different opportunities.

Arnie Ursaner - CJS

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

Jim Green - President and Chief Executive Officer

It just depends, some might be something that that's small enough to do on a cash basis, some depending on the kind of cash flow that they would also provide, might dictate that we use some debt to do it.

Arnie Ursaner - CJS

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

And the second question is there were some pretty sizable one-time payments made to some long-time Analogic employees for special services. Could you expand a little bit on both of those issues, please?

Jim Green - President and Chief Executive Officer

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

As far as discussion of specific payments to some of the people who were involved in running the business during the transition between John Wood leaving and Mike coming on, I think I'll let John Millerick maybe comment on some of what's in there. These would have been decisions made by the independent compensation committee, but that post is closed here.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Arnie Ursaner - CJS

When they total roughly a $1 million, 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 and Treasurer

All right. Thank you.

Arnie Ursaner - CJS

-- conference. Thank you.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

All right. Thank you.

Operator

Thank you. The next question comes 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 XLB that now you're getting up to the step of partnering the equipment, does that mean as far as performance that you are getting good results back and the TSA is 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 in the middle of certification testing. So yes, I think the outlook is good. And the next step would be to establish funding for taking the product to that stage of making a production and feel ready.

Steve Levenson - Stifel Nicolaus

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

Jim Green - President and Chief Executive Officer

Well the opportunity outside the US does look good, especially from very large airports with large inline high-speed baggage systems. The law outside of United States is slightly different as far as the level of requirement for specifically using certified explosive detection, but I understand that the law outside the US that there is going to be a requirement for the airports to move towards using certified equipments.

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

Steve Levenson - Stifel Nicolaus

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

Jim Green - President and Chief Executive Officer

Well, there is lots of different kinds of systems that can scan luggage. But at this point, I'm only aware of one type of technology, and that's high resolution computed tomography that can specifically 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 would see certainly as a threat to the business. But probably, the bigger thing that I watch out for is, is there going to be some kind of political sea change where maybe the legal expectations, if they were to loosen, that could enable other technologies that maybe don’t quite have the level of precision and accuracy of viewing inside of things to start to become an issue.

Steve Levenson - Stifel Nicolaus

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

Jim Green - President and Chief Executive Officer

That will be correct. We specialized in using the one technology that’s evolved the farthest. And if you look to medical over the years, there has been lots of work in lots of areas to try 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 current state-of-the-art and for the near future seems to be computed tomography, which is what we specialize in.

Steve Levenson - Stifel Nicolaus

Could you see any potential for medical 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 slightly different kind of a system. Overall, it’s not too far off. But the place where they share is in the detection system themselves. And yes, we do deliver. A large part of our medical business is based on CT detection systems. But for an overall system in medical, I would think that that would be highly unlikely.

Steve Levenson - Stifel Nicolaus

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

Jim Green - President and Chief Executive Officer

It all kind of washes out. And we see the net result, but it hasn’t, again because we ship to so many people and who 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 have opportunities to somewhat tune what we're doing and what particular areas we're going to put more effort into.

But, again, the piece that was effective with commercial imaging centers, it's a fairly small percentage of the total worldwide market of performing CT procedures. And as long as CT procedures continue to grow like they do, it all eventually catches up either way. 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 few quarters too.

Jim Green - President and Chief Executive Officer

Great. Thank you.

Operator

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

Alan Mitrani - Sylvan Lake Asset Management

Hi. Thank you. Can I just get some clean up questions? Can you give us a sense where capital spending was going 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 and Treasurer

In term of '08?

Alan Mitrani - Sylvan Lake Asset Management.

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

In the first quarter, some important 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 would think 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 priority for projects, if you could just let us know where the money has gone?

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Jim Green - President and Chief Executive Officer

IT.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

Yeah. And we intend to basically support that with new test equipment and help to expand their capacity. We're also looking in terms of IT. The IT infrastructure in terms of essentially how we 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, if we're going take advantage of leaning the manufacturing side, there are certain kinds of tools and levels of performance that the IT systems have failed to perform.

Alan Mitrani - Sylvan Lake Asset Management

And you're going to capitalize all the IT systems?

Jim Green - President and Chief Executive Officer

Yeah. That's primarily capitalized.

Alan Mitrani - Sylvan Lake Asset Management

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Alan Mitrani - Sylvan Lake Asset Management

Okay. And then, maybe Jim, can you just tell us you've made some management changes, you've been there a number 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 where can this business get to? It seems like the margins are good, the gross margins, but not all the divisions are humming. Can you just give us your sense of 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 I wanted do is just get a handle on some of the businesses that were losing money and why they were losing money. Sometimes, if you're investing in something, it makes sense to invest more than you're making in an area if you expect to come out of it and its going great growth opportunity. So something like what we do with our direct digital mammography systems with Anrad fits that bill.

We have -- I've got great hopes for 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 to grow there. So there we just have to be careful that we invest properly with it. But just, overall, we have some very well established distribution channels through our OEMs. I see nice growth in those areas both organic and through acquisitions. 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 new products to sell through those distribution channels.

And then, last, looking hard at the security side and seeing what really make sense there, certainly making sure that we don't lose money there, and as opportunities come along, new growth areas that we really are able to capitalize on that. Our barriers to entry on a security side are very, very high. We have a great win, great products, limited competition, we're position there that we really should do well there too.

So in a building, starting with getting a team in place, you saw a number of changes that we've made with bringing in some very key people into critical positions. And then, moving forward on a growth path, both in terms of topline, organically, and through acquisition, and paying attention to the bottomline that were profitable along the way.

Alan Mitrani - Sylvan Lake Asset Management

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Alan Mitrani - Sylvan Lake Asset Management

$3.5 million, okay. And that does not include share-based comp, right?

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

It does not.

Alan Mitrani - Sylvan Lake Asset Management

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Alan Mitrani - Sylvan Lake Asset Management

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Alan Mitrani - Sylvan Lake Asset Management

Okay. Great. And what about R&D, I know there was an effort to try to streamline the R&D on an absolute dollar basis, it's come down this past year and seems to be settling out 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 fair range to use, yes, you know certain, some projects have very low required investments there and some really honestly demand and should get a very percentage. So it's a bit, it's a bit of a mix. But in general, I think we're sitting at a good place right now and especially as we position ourselves for some nice growth.

Alan Mitrani - Sylvan Lake Asset Management

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

Jim Green - President and Chief Executive Officer

Yeah, it is, in fact I think in the press release, we're able callout inventory even though we didn't have a full 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, I apologies my fault. I got it. Can you talk in the past you've had an inventory issue in security where I think there was lot of excess inventory waiting around because of the staggered nature of the business. Can you talk about what you are doing to improve inventories or work-in-process inventories, whether you think that's an opportunity?

Jim Green - President and Chief Executive Officer

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

Alan Mitrani - Sylvan Lake Asset Management

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

Jim Green - President and Chief Executive Officer

Well, I guess, yes, a lot of questions there. But first, looking at some of the non-core assets, we are looking at some of what we have for instance the hotel, what the value might be there and how best to deal with that, what we own there. Certainly, I mean, we all, I think we all agree it's not really a core asset and I almost see it as money in the bank and it comes down to, how we maximize it and then how do we best deploy it. We've talked about acquisitions in such. Those are much better uses of cash in my mind. As far as buyback goes, we've started the discussion with the board, with the last board meeting to investigate how best to position ourselves 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 question comes from Greg Hartley with Kalmar.

Greg Hartley - Kalmar

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

Jim Green - President and Chief Executive Officer

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

Looking at in the RF amplifier side, MR systems and the growth in 3.0T is a nice opportunity for us. We've developed a great reputation in solid state amplifiers or precision amplifiers in 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 usual you can count on RSNA. It's kind of like our Christmas. Lot of new things coming out and we are Intel inside of lot of these companies and people asked me, well, how busy, was you booth? I look and say, well, I look at our customers' booth that tells me an outlook how our future looks in. Our customers' booths looked very strong.

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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 of booths than may be in prior years?

Jim Green - President and Chief Executive Officer

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

Greg Hartley - Kalmar

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

Jim Green - President and Chief Executive Officer

It's actually I would say the first of a series of technologies that not only is the best-in-class for what you can do today before you move to tomosynthesis, it is essentially tomosynthesis-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 would expect to see probably release sometime in the next few years.

Ed Becker - Executive Vice President and Chief Operating Officer

You can see some excellent clinical studies coming out of Duke University on tomosynthesis using that detector.

Greg Hartley - Kalmar

So, there is trials ongoing that are 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 our detector: With Siemens signing on, we now have other major OEMs in detailed discussion with us about this detector system.

Greg Hartley - Kalmar

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

Jim Green - President and Chief Executive Officer

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

Greg Hartley - Kalmar

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

Jim Green - President and Chief Executive Officer

The plate business is ramping now. The demand is growing. It's growing very nicely, very strongly. Now, in the US, the OEMs will not sell systems with those plates until they complete getting their clearances from the FDA. But that does not at all slow them down from where 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 get the production capacity in place to meet that overall level of demand that it develops.

Greg Hartley - Kalmar

But in terms of US and FDA, this is 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 than 510(k). It's a pre-market approval requirement. So it is more than that. I know that it's been started in more than one company. And I'd have to defer to Siemens or the others to say where they are in their release cycle with the FDA. But again, these are the companies that have tremendous amount of business outside the US. And as soon as they get that FDA clearance, it's going to dramatically drive the demand much higher.

Greg Hartley - Kalmar

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

Jim Green - President and Chief Executive Officer

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

And again, they can see a slowdown in revenue and not see a slowdown in units, because, let's say, you are selling a 64-slice system at, take a number, $1.2 million or something, and if 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 not slight at that point, but there is still demand for what we deliver.

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

Greg Hartley - Kalmar

Okay. Then, I am just curious in terms 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 effort ongoing. To what extent has acquisition pricing been a challenge for you and has 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 I understand the question. We have an internal process going to develop acquisition pipeline, looking at what are good fits for us. We are well positioned from a cash perspective. We have no debt. And the board is fully in support of having this to be a part of our growth process.

Greg Hartley - Kalmar

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

Jim Green - President and Chief Executive Officer

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

Greg Hartley - Kalmar

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

Jim Green - President and Chief Executive Officer

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

So, I don't even know at the end of 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 up to the TSA and there are other operational procedures as to how, where and when they decide to turn it on, and what they do differently when they turn it on versus 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 question comes 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 of the security products that, you know, COBRA and everything else that's really reaching a point where we're getting to an interesting point in terms of market demand potential. And I'm still curious as to what exactly you're going to do with the sales force on the security side, given -- especially, if you're going to look at international opportunities, it looks like you're going to have to build up the sales force lot more in the security side in order to go after those opportunities, or do you try and mere the strategy on the medical side where you start -- trying to sell through some other companies?

Jim Green - President and Chief Executive Officer

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

Matthew McKay - Jefferies & Company

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

Jim Green - President and Chief Executive Officer

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

And so, I also have to be careful that what we do works best for all of us. And I've always believed that your relationships with the OEMs need to be designed on the philosophy that we're both right and you don't want to have a situation where there is conflict there. So we are looking at the different opportunities. We're keeping in mind all the complications of what you do in a market like that and where there's potential 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 of products and the right kind of demand and we just have to make sure that we distribute in the best possible way.

Matthew McKay - Jefferies & Company

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

Jim Green - President and Chief Executive Officer

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

Matthew McKay - Jefferies & Company

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

Jim Green - President and Chief Executive Officer

Well, there are false alarm specifications, and that's part of the testing process is to verify that we're below the false alarm rate, and then how the TSA decides to utilize that. They will make a determination once we've proven that we can do that. They will determine does it need to be even rate higher or do they change something in their operational procedures to make the best of it. But right now, again, I would just say that we're comfortable with the specifications and we're in test with 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 question comes 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 of tax rates should we assume going forward?

Jim Green - President and Chief Executive Officer

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

Michael Martin - SmallCap Report

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

Jim Green - President and Chief Executive Officer

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

Michael Martin - SmallCap Report

And in terms of the groundswell, the additional order talks about forty units over two years, do you believe there is significant upside to that, I mean can you give us a little more definition of 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 to comment on that, because the TSA they decide those the kinds of technologies and how they are going to deploy, I mean what kind of configuration. So, I really can't comment other than to say that we are going to show that this is great product, that it is the best that you can buy and I expect the TSA will use it in a right way and we will make sure that we are able to produce the numbers of systems that they can put in place. But you know again the initial demand I see developing there is more on the Check version of that product which we call the KING COBRA, that I -- really high hopes on that very quickly.

Michael Martin - SmallCap Report

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

Jim Green - President and Chief Executive Officer

Yeah, I would expect that, that's typical of the CT market and medical, typical of the same kinds of systems and these kind of application that as they reach their life you know they have to go through replacement process. And then it just comes down to do a replacement with an existing a new version of the current kind of system that has the same footprint, are they able to upgrade, and do they need to upgrade to bigger faster 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 question comes 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 given any thought to dividend increase for shareholder value?

Jim Green - President and Chief Executive Officer

I don't know that we specifically talked about it with the board if there is any conversations about it. But I think it is worth discussing with the board, I would leave it up to them to advice 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 think it's the day after the Annual Shareholders Meeting, so it's late in January.

Ed Saylor - GunnAllen

Okay. And speaking of the shareholders meeting in January, we had understood that you are going to lay out the three to five year plan for Analogic, is that something we can still look forward to at the meeting?

Jim Green - President and Chief Executive Officer

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

Ed Saylor - GunnAllen

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

Jim Green - President and Chief Executive Officer

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

Ed Saylor - GunnAllen

Just a couple of strenuous question relative to Siemens, I understand they introduced their new mammography machine in Europe last week and Anrad product is not the -- Siemens is 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 already up, they're already moving on it.

Ed Saylor - GunnAllen

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

Jim Green - President and Chief Executive Officer

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

Ed Saylor - GunnAllen

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

Jim Green - President and Chief Executive Officer

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

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

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

Ed Saylor - GunnAllen

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

PDS, yes, they are still considered 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 and Treasurer

We -- approximately 44%

Ed Saylor - GunnAllen

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Ed Saylor - GunnAllen

And just one last question. This recent 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 ANEXA equipment that you were previously selling or is this something new?

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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 and subsystems 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 those systems for us or systems or subsystems.

Ed Saylor - GunnAllen

So you are looking at this as a profit center, even though -- and by the way, it's nice to see those medical imaging also is going down so quickly. But do you see that as a profit channel for you through Del then?

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Ed Saylor - GunnAllen

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Ed Saylor - GunnAllen

John, one last question. We ran into 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 this diagnostic imaging.

What you are saying is that's not a big part of your business at this point in the medical side? Is it -- some other companies have reported they are seeing weakness. But what you are seeing is, what, six to nine months visibility?

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

We see -- generally, we are able to get some kind of look out in that 8 to 9, 10 month-view. And then as far as looking 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 firm it 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 our customers, because it was a big part of their previous growth. But it is a small portion when you look at the total world. And then you further segment it into the percentage of what's done in commercial imaging centers versus what's done in hospitals, because hospitals is clearly most of all that really takes place by large percentage.

Ed Saylor - GunnAllen

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

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

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

Ed Saylor - GunnAllen

All right. That's terrific. Thank you very much

John Millerick - Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Ed

Operator

Thank you. The next question comes from Herbert Denton with Providence Capital.

Jim Green - President and Chief Executive Officer

Hello

Herbert Denton - Providence Capital

Hello

Jim Green - President and Chief Executive Officer

Hi.

Herbert Denton - Providence Capital

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

Jim Green - President and Chief Executive Officer

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

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

Herbert Denton - Providence Capital

So, Mr. Green, you're suggesting that somehow there is impropriety in shareholder suggesting nominees. The company goes out, makes a promise to the shareholders, reneges on it, does not follow through, and then it's going to spend shareholder money and finding people from Korn/Ferry, is that what I just heard?

Jim Green - President and Chief Executive Officer

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

Herbert Denton - Providence Capital

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

Jim Green - President and Chief Executive Officer

Okay. Well…

Herbert Denton - Providence Capital

And the point is that the Corporation's governance committee didn't even contact a half a dozen people that 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's meeting when we have the governance folks there.

Herbert Denton - Providence Capital

All right, I will be there.

Jim Green - President and Chief Executive Officer

All right. Thank you.

Herbert Denton - Providence Capital

Thank you.

Jim Green - President and Chief Executive Officer

Okay. Maybe we have time for one more question.

Operator

The next is from John Francis with Francis Capital Management.

Jim Green - President and Chief Executive Officer

Hello, John.

John Francis - Francis Capital Management

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

Jim Green - President and Chief Executive Officer

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

John Francis - Francis Capital Management

Specifically, represented to me that this was going to happen and told me trust them. So, if he is going back on this word then that's something will take under submission. So with that said, when I attended the RSNA, I noticed that the company, that one of the other entities was NeuroLogica which Mr. Gordon I understand is an investor and a Board member. Can you tell me how Analogic manages the conflict of interest between Mr. Gordon's involvement in NeuroLogica and his interest, his involvement in Analogic?

Jim Green - President and Chief Executive Officer

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

John Francis - Francis Capital Management

Okay. But has the company ever received compensation for the intellectual property transfer that's occurred between Analogic and NeuroLogica?

Jim Green - President and Chief Executive Officer

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

John Francis - Francis Capital Management

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

Jim Green - President and Chief Executive Officer

I just can't comment on that because 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 was always something that we expected people to maintain confidentiality of what they had learned during their employment and that seem -- it's still the case for us here anybody that who would have left here, would be expected to maintain confidentiality of what they have learned here.

John Francis - Francis Capital Management

Okay. And so, can I ask one for that 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's something that Bernie Gordon has to decide as to you know his membership on the board, 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 we have time maybe for one more call. One more.

Operator

Our final question comes from Alan Mitrani with Sylvan Lake Asset Management.

Alan Mitrani - Sylvan Lake Asset Management

Hi, is there a change or has there been any change Jim now that brought up some people on to the company from the Philips or elsewhere in terms of compensation and whether you guys could be compensated a bit on maybe over the concept of return on invested capital or return on equity or any sort of margin target as opposed to sort of a 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 little bit?

Jim Green - President and Chief Executive Officer

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

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

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

Alan Mitrani - Sylvan Lake Asset Management

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

Jim Green - President and Chief Executive Officer

I think I don’t have it right in front of me, and I'm not sure how much I can even really legally discuss. But I can tell you that there are targets and thresholds that expect strong growth in earnings 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't pay out.

Alan Mitrani - Sylvan Lake Asset Management

Okay. That's final. I 'm happy to see some changes here. I would only encourage you as you are doing this or as you are putting it together, but not finalized. Since you -- I mean the business 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 fact that they can hit below the line in tax rate changes, equity gains, interest income, you know, fluctuates with where your shares are and where interest rates are, I think you should really look at probably compensating based on EBITDA as a percent and put a lesser component to EPS unless you plan on cleaning 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 for your interest in Analogic. We invite you to attend our annual shareholders meeting, which will be held on Monday, January 28 at 11:00 AM Eastern time here at our corporate headquarters in Peabody.

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

Operator

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

The webcast replay will be available 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 available at www.analogic.com through Thursday, December 27th as well.

Thank you for joining Analogic Corporation'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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