Analogic Corporation F2Q08 (Qtr End 01/31/08) Earnings Call Transcript

Mar. 6.08 | About: Analogic Corporation (ALOG)

Analogic Corporation (NASDAQ:ALOG)

F2Q08 Earnings Call

March 06, 2008 11:00 am ET

Executives

James Green – CEO, President

John Millerick – CFO, Senior Vice President, Treasurer

Edmund Becker – COO, Executive Vice President

John Fry – Vice President, General Counsel and Corporation Secretary.

Analysts

Matthew McKay – Jefferies & Company

Dalton Chandler – Needham & Company

Josephine Millward – Stanford Group Company

[Ed Fowler – Small Cap Report]

[Greg Hartly – Kilmore Investments]

Operator

Good morning and welcome to Analogic Corporation’s second 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 Fry, Vice President, General Counsel and Corporation Secretary.

I’d like to remind everyone that a supplementary financial presentation will be used during today’s call. If you have not already downloaded that presentation, you can do so at any time at www.analogic.com. That presentation will remain available until midnight, March 27, 2008. Mr. Green will open the call.

James Green

Good morning everyone, welcome and thank you for taking the time to participate in the call today.

We will begin by asking our Vice President and General Counsel John Fry to read the Safe Harbor Statement. John Millerick and I will then review the second quarter and recent events using the supplementary finance presentation available on our website following which we will take your questions, John.

John Fry

Thank you Jim, any forward-looking statements that are made during this conference call are made pursuant to the Safe Harbor provisions of the Private Securities Ligation Reform Act of 1995.

I wish to caution each and everyone of you that all forward looking statement involved among other things risks and uncertainties including but not limited to risks associated with competition, technology, development, product commercialization, intellectual property ligation, foreign sales, limited demand for the Company product, down turns 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 statement. It is important to note that the Company’s actual results could differ materially from 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 FCC filings including the Company’s form 10K and 10Q reports. Copies of these and other filings of the Company’s may be obtained upon written request from the Company or through the FCC.

Thank you Jim.

Jim Green

Thank you John, John Millerick and I will now review the quarter and recent events.

Start with page 5 of the presentation, taking a quick look for our highlights for the quarter showed strong financial results our revenue of $99.4 million up 12% versus 22 of prior year. Our GAAP earnings per share at $0.54 38% up from the same quarter prior year and 12% up from last quarter and on a non-GAAP basis, we record $0.59 in earnings per share.

We signed a purchase and sale agreement for the acquisition of Copley Controls, which is projected to close in early April of 2008. Our medical technology segment demonstrated strong growth in sales and profit and our securities technologies segment recorded improved profitability on a slight decrease in sales.

Through page six and I am going to turn it over to John Millerick, our CFO to quickly look through the details of our financials.

John Millerick

Thank you Jim, I will now provide details on the Company’s financial performance for Q2 in the half of fiscal year 2008.

I will begin with the discussion of our GAAP performance of the quarter on slide six you will see the Q2 revenues grew 12% over the prior year. A combination of strong growth in our medical technology products segment actually offset by a slight decline in the security technology product segment.

Revenues of 99.4 million were the highest since Q2 2006 and have been steadily increasing over the last four quarters.

On a GAAP basis, operating margins improved from 4.5% of revenue in Q2 fiscal year ’07 to almost 8% in Q2 fiscal year 2008. Our diluted earnings per share increased $0.15 to $0.38 from $0.39 per share in Q2 2008 to $0.54 per share, in the current quarter. The decreasing GAAP operating margins and EPS reflects underlying improvement in gross margins and other operating leverage.

On the next slide, we show GAAP performance in the first half of the year. Net revenues have increased nearly 18% or $29.6 million the first half of 2008 as compared to the first half of 2007.

Security technology products experienced the largest growth an increase of 51% versus the prior year while medical technology products grew 14%.

For the six months ended 2008, operating margins were 7% as compared to 4% operating loss in the prior year to date period.

For the first quarter in 2007, the Company recorded an asset payment charge of $9.7 million related to the digital radiography business of which 8.6 million was recorded in cost of sales and 1.1 million in operating expenses.

Diluted earnings per share in the first six months of 2008 were $1.02 as compared to break even in the first six months of 2007.

In the next three slides, we show our non-GAAP operating results. Our non-GAAP adjustments include stock based compensation, asset and payment charges, executive transition expenses, acquisition related expenses and gains and losses from the sale of assets and investments. I encourage you to review the non-GAAP reconciliation table and notes in the press release in the appendix to this presentation for detail of our adjustments.

On a non-GAAP basis, operating income increased 96% from 4.7 million in Q2 fiscal year 2007 to 9.3 million in Q2 fiscal year 2008. As a percentage of revenues, operating income was 9.4 % of net revenues in Q2 2008 as compared to 5.4% of net revenues in the prior year.

As gross margin as percent of sales have grown slightly, we have held operating spending flat thereby leveraging our operating margins. Non-GAAP diluted earnings were share was $0.59 in Q2 fiscal year 2008 as compared to $0.46 in the prior year.

On the next slide, we will see our first half non-GAAP results. Operating income was 8.7% of revenues in the first six months for fiscal year 2008 as compared to 3% in the same period last year.

Our diluted earnings per share are $1.12 in fiscal year 2008 an increase of 93% as compared to $0.58 the first half of 2008.

On slide 11, we show revenues in GAAP pre-taxing income for our reportable segments. As previously mentioned, the medical technology products segment grew 16% in the second quarter of 2008. This compared with the same period last year.

Medical imaging business with revenues of 53.6 million grew 15.5% over the prior year. We continue to experience strong demand in multi-slice big acquisition systems and data management systems used as sub systems in CTs.

Revenues for patient monitors and OEM ultra sound probes and transducers were also up. Revenues from power systems or MRI were flat and medical CT revenues were down due to short-term delay in supplier shipments. Our digital radiography business with revenues of 5.8 million grew 45% benefitting from InRand’s successful introduction of a flat panel digital mammography detector to a major OEM customer, which started in Q1 fiscal year 2008 and continued to ramp up during Q2 2008.

Revenues for our B-K Medical subsidiary specializing in clinical ultra sound were 24.7 million up 12% over the prior year due primarily to exchange rates.

Security technology revenues for quarter were 12.9 million down slightly from the year earlier. During the quarter, the Company shipped 18 EXACT systems to L-3 Communications. The same quantity shipped during the second quarter of 2007. The slight decrease in revenues was due to a decline in funded engineering revenue. Just there for the close of the quarter, Analogic announced it had received a $15 million order from Healthy Exact systems begin shipping in June of 2008.

During to the balance sheet data on chart 12, cash flow from operations was $7.4 million in Q2, 2008 as compared to 3.1 million the prior year a 139% increase.

Year to day cash from operations is 19.4 million in fiscal year 2008 versus 10.2 million last year. Capital spending for the quarter was 3.2 million as compared to 2.7 million in the prior year. Despite of the favorable cash flows, our cash and investment balances of $240.5 million were approximately $22 million lower than a year ago. This is primarily attributable to the $60 million share repurchase that was completed in the fourth quarter of fiscal 2007.

With respect to the quality control acquisition, the Company will fund this transaction from its available cash and investment balances.

Working capital has increased $18.1 million since the end of 2007 primarily as a result of higher cash balances.

The end of Q2 to a growth of 2008, net receivables of 57.9 million representing 49 days of the ending a day lower than last years second quarter and four days lower than previous quarter. During the quarter, we received certain cash remittances from a foreign customer that previously had been written off. Inventory balances of 58.3 million increased slightly sequentially but with 3.8 million higher than the prior year.

Net inventory turns of 5.1 were a slight improvement over the first quarter turns of 5.0 over flat year over year.

To summarize, the Company has strong quarter in both sales and earnings and continues to maintain a strong balance sheet liquidity position. With respect to the Company’s form 10Q for the quarter ended January 31, 2008, the Company will file this report on Friday, March 7.

With that let me turn the call back over to Jim to discuss quarterly business highlights, Jim.

Jim Green

Thanks, John, move to slide 13 looking at our Company highlights; I will start with medical technology. A major OEM customer of ours launched their 320-slice DT product using our data acquisition system. We signed a contract for the development of a new 64-slice detector dash system for a major OEM with production expected to start in 2009. We started development of the power link system for a large medical CT customer of ours with productions starting in calendar year ’09 and we are ramping production of new generation precision 3T RF amplifiers for two major OEM customers.

From the B-K Medical side, we signed a collaboration agreement with Advanced Medical Diagnostics with their technology, we will be bundling their histo scanning tissue characterization technology with our system for prostate breaking therapy guide. Indiginal Radiography both Siemens and Phillips launched their new digital mammography systems that RS to name in late 2007 incorporating our InRand Selenium based flat panel detectors. The production ramp for the mammography flat panel detectors is progressing nicely.

Moving on to page 14, taking a look at our security business. Starting with the checkpoint systems the Cobra, we delivered our third pilot system to Dallas-Ft Worth Airport and we initiated the auto EDS contract with the TSA and anticipate U.S. delivery of our first production systems this summer.

On the check baggage side, we received a $15 million from L-3 with shipments beginning in June 2008 for our AM 6000 system. In looking at the XLB and King Cobra, we signed an agreement giving L-3 worldwide rights to market, sell and service these systems for airport check baggage applications. With the King Cobra, we expect to complete certification this spring and for XLB we expect to complete certification in the fall.

Moving on to slide 15, looking at recent leadership changes. Ed Voboril, prior Chairman of Greatbatch Inc. has assumed the Chairman of the Board position here. Jerry Wilson the former Dean of Engineering at the Massachusetts of Technology is now the Vice Chairman and also Chairman of our new Technology Committee. Fred Parks becomes the Chairman of our Compensation Committee.

Let’s move on now to page 16 and some exciting news for Analogic. Yesterday, we signed a purchase and sale agreement for the acquisition of Copley Controls. We expect to close in early April 2008, subject to normal closing conditions and Hart-Scott-Rodino Act Filing Requirements. Analogic will acquire 100% of the outstanding stock of Copley for a sum of $70.5 million adjusted at closing to a working capital of 16.2 million.

Excluding non-cash one time purchasing accounting adjustments, this acquisition becomes a creative to our earnings in Analogic’s fiscal year 2008 and years thereafter. For tax purposes, the transition will take the form of an asset purchase under section 338, page 10, which will enable Analogic to benefit from depreciation deductions.

Moving on to slide 17, let’s take a quick look at the Company. I just want to say a few words about the Company itself. Copley Controls was established in 1984; the headquarters are in Canton, Massachusetts, about 40 miles south of Peabody, Massachusetts. In calendar year 2007, their revenues were $82.8 million, EBIT of 8.3 million and EBITDA of 9.8 million. Copley designs, manufactures and sells power amplifiers based on pulse width modulation for MRI and motion control systems. Copley fits everything we would look for in an acquisition. Copley is a well run profitable business. Their gradient amplifiers for MRI fill out our portfolio and provide access to new customers. Copley’s motion control business puts us into a new area of potential growth. Motion control similar to our current technology is based on precision signal processing and many of our current and future products require feedback controls that use this kind of technology.

Moving on to page 18 and in closing, I just want to say that we are resolving the lost businesses, we are building a strong leadership team, we are declassifying the Board of Directors; we are completing here and excellent acquisition; we are focusing on growth and profitability for our businesses and we are investing in the future.

Operator at this time, we will move to questions and answers.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen the floor is now open to questions. (Operator Instructions)

Your first call is from the line of Dalton Chandler with Needham & Company.

Dalton Chandler with Needham & Company

Good morning and congratulations on a nice quarter.

Jim Green

Thank you.

Dalton Chandler with Needham & Company

Let me start with the acquisition and just try to understand how this fits with your business. Were you not supplying gradient amplifiers previously or had you been buying them as a sub component from another vendor?

Jim Green

For MRI sub systems, our strength has been RF amplifiers and gradient amplifiers we have a very small amount of business in gradient amplifiers; we are familiar with the technology but we are not at all…we had not been at all a strong player in that market. Gradient amplifiers are a prime component of an MRI system, this really helps us fill out our product portfolio, and it positions us for really being a major leader in an area like this for sub systems supply.

Dalton Chandler with Needham & Company

Okay and I assume there’s a fair amount of customer overlap between you and Copley?

Jim Green

There is in some areas; Copley does sell to some major OEM customers but they also sell their MRI sub systems like this to a number of customers who we don’t currently do business with.

On their motion control system, in that area, it’s a brand new area for us it opens up a whole new area of growth.

Dalton Chandler with Needham & Company

Okay and then you are expecting it to be accretion this year, can you just give us a sense of the magnitude of the accretion year you are expecting?

Jim Green

John, do you want to comment on that, it is kind of hard to come in early on because there is going to be all of the accounting.

John Millerick

Yes, we have looked at it and kind of mauled about and it is accretive but at this point, I really don’t want to get into specific details around that.

Dalton Chandler with Needham & Company

Then let me move on to the new Gillsabel Three, can we assume that the EXACT deal has been very profitable for you or are you expecting similar margins from the new products?

Jim Green

Yes, I would say the new products, we of course expect them to be good margin products. L-3 is so much stronger than us as far as their reach in terms of sales and service around the world. Their reach to end customers, it just makes a lot of sense for us to extend that relationship and leverage that relationship to introduce these new products.

Dalton Chandler with Needham & Company

Okay and is there any implication in this for how you plan to go to market with the Cobra?

Jim Green

With the Cobra, the Cobra is still at this point a product that we are selling directly to the TSA and we are starting to see and hear about a lot more interest outside of the TSA and around the world. As far as L-3 goes, we are still discussing with them what kind of offering we might do with them in terms of a Cobra also. At this point, we are the prime on it but if it turns out that L-3 is a good opportunity for us to sell additional and incremental Cobras certainly we are interested in talking about that.

Dalton Chandler with Needham & Company

Okay and let me ask that one last area and then I will give someone else a shot here. The digital radiography had a really nice ramp in revenue but it looks like you also had a big ramp in expenses. Could you talk about in the quarter end report?

Jim Green

Yes, I had projected last quarter and I think the quarter before that we expected that particular business line to be breaking even as we exit the year. We are seeing a spike ramp up in demand as production grows and as production grows we have to make and had planned to make investments to provide the ability to meet that capacity or to upgrade our capacity to meet that demand as it grows. I would say that we are still on track as we expect. If anything, we are seeing the demand grow probably even stronger than we had initially projected. We are very happy about this product, the growth is right on track and we see demand continuing to grow.

Dalton Chandler with Needham & Company

Okay and just to clarify, Siemens is selling worldwide if I understand correctly, Phillips right now is only selling in Europe?

Jim Green

Actually, they are both just selling in Europe or should I say they are both not selling yet in the U.S. They both have to get FDA clearance to sell in the U.S. but the initial demand at this point is really for outside the U.S. installations for both.

Dalton Chandler with Needham & Company

Okay, thanks a lot.

John Millerick

To be clear, Dalton, both companies obviously Phillips and Siemens sell mammography systems worldwide. It is this particular product with the InRand detector in it that is being sold outside the U.S. at this point.

James Green

Until they get the FDA clearances.

Dalton Chandler with Needham & Company

I though Siemens had been selling in the U.S. with their old detector plate. They have to go through an approval process again because they have changed detector plates?

James Green

It’s their new generation system has to go through the approvals to sell in the United States.

Dalton Chandler with Needham & Company

I know this is really more a Siemens question but do you know if this is just a supplemental filing or are they going to have to go back to the drawing board?

James Green

I guess I probably shouldn’t comment on the kind of filings that they are doing with the FDA. It’s really nothing new other than it’s typical if you’re going to sell this type of gear in the U.S., you have to get the appropriate clearances.

Dalton Chandler with Needham & Company

Okay, thanks again.

James Green

Thank you.

Operator

(Operator Instructions) Your next call is from the line of Josephine Millward of Stanford Group Company.

Josephine Millward – Stanford Group Company

Hi, good morning.

James Green

Hi Josephine.

Josephine Millward – Stanford Group Company

Can you confirm how many units of EXACT you currently have in your backlog? Is it around 42 units?

James Green

John is looking at it right here. It looks to be about 45 units right now in the backlog.

Josephine Millward – Stanford Group Company

Do you expect to ship 100% of everything else we order before the end of your fiscal year?

James Green

At this point, what I have been saying is that we are very comfortable that we will ship at least the 15 units per quarter. That being said, is there opportunity for more in our final quarter? In our final quarter, there is certainly opportunity to sell some more there but at this point I am just sticking with the prime commitment of the 15 a quarter.

Josephine Millward – Stanford Group Company

Okay and what about your existing Cobra order, you have about 12 units. Do you think you will ship all of that before the end of your fiscal year ’08?

James Green

I doubt it; I think at this point with the time it takes to prepare the lines and the check points and such, we are right now on track as far as having the product ready for shipment but again I would expect we would see those starting to ship here as we get into the late spring and summer. It will be on a fairly slow ramp from there and then it will start to ramp.

Josephine Millward – Stanford Group Company

You mentioned you expecting Cobra and the King Cobra to get certified in the spring, can you walk us through what you think might happen once you receive certification. Does that mean you could receive additional orders from the TSA or does that position you to sell your products overseas? If you can give us a flavor of what could happen after you receive certification.

James Green

Sure, on the King Cobra, the advantage of the product is really designed to fit nicely into the smaller and mid tier airports and it’s also certified check baggage system. What we are doing with L-E is we are working to get the message out to market not only in the U.S. but around the world that this system as it completes the certification process will be available for production shipments for any airports that are required to have certified check baggage in with that type of demand and volume. With the certification completing in the spring we would expect to start shipping units like that in the summer. Again it will depend on how good of a job we do reaching out to the customers and selling that particular product.

On the Cobra itself that is going through a qualification phrase as you probably know and for the check point, the requirement is that it be qualified not a full certified automatic EDS system that you are required to see in check baggage but that certification is on also in that same time frame here over the next few months and we expect to start shipping those again in fairly low volume starting in the summer time.

Josephine Millward – Stanford Group Company

Okay, great, thank you.

James Green

You’re welcome, good to talk with you.

Operator

(Operator Instructions)

Your next call is from the line of Ed Fowler of Small Cap Report.

Ed Fowler of Small Cap Report

Good morning John and Jim.

James Green

Hi, Ed.

Ed Fowler of Small Cap Report

Excellent quarter, I mean Analogic looks like a new Company and the new management a much better shareholder reporting; it was just excellent.

Just a couple of questions relative to George Bush’s budget for security equipment looks to be like a substantial number there. I think it was 1.2 billion. What is your feeling on this with regard to…are you getting any clarity on this issue at this time?

James Green

One of the things that I came to realize quickly here, we are not used to dealing with the government and I felt like we needed to team with somebody who is good and has the reach and connections so reaching out and working closely with L-3 in my mind is going to really get us good access to the budget that they put together there. That budget as you know is spread across lots of different kinds of equipment but you know certainly we the exact system shipping in a nice stable manner. We’ve talked in the past about the development of the replacement demand starting to develop as we get into next year for the EXACT system. Now introducing King Cobra for checked baggage into the smaller niche airports where they’re really isn’t much today. We see this budget coming out as the opportunity for us to very quickly in check baggage for King Cobra along with our partner L-3 and then also separately looking at getting and selling the Cobra system into various check point applications. As you now with the change coming up in leadership in Washington, it’s a bit of a crap shoot as to how that’s all really going to unfold. I feel like we are well positioned with the best possible product, we are teamed with a good partner and we are working together to get our message out that this is the right product to put into these applications.

Ed Fowler of Small Cap Report

Yes, I understand that the 3D filial cone type system. I haven’t heard anybody else making this type of product. Is that correct?

James Green

In for check baggage there’s really our primary competition would be the GE Envision System that has been out there for awhile. When it comes to the mid these smaller airports and then for check point, Envision has some smaller systems and Reveal is a small Company that also has a product that they sell into those types of places but again we are teamed with L-3. We feel like we are in a good position to put forth the best possible product.

Ed Fowler of Small Cap Report

I know you don’t like to guess but do you think that King Cobra will out sell the Cobra in ’09 in smaller airports?

James Green

I hate to guess but I when you look at what the law states that checked baggage has to be certified, I think the opportunity in these smaller and mid type airports very well could be a bigger opportunity and a closer-in opportunity while the TSA sorts out exactly what they want to do for the check point given there’s going to be some changes in those appointments as to who is in what positions in Washington as we get past the election. I feel like the upfront real opportunity here that is developing quickly is this opportunity for something like the King Cobra into these smaller airports.

Ed Fowler of Small Cap Report

Then as you go into ’09 and ’10, the XLB will…The budget states that they want to increase the through put by 300% that leads me to think the XLB will be the replacement machine for the EXACT when these machines that were shipped in 2003 get kind of old and tired.

James Green

I think you are right; we are certainly hearing a lot of concern in Washington that they’ve got to increase the capacity. The large airports that are coming online and the new wings that are being added. In new applications, we’ve seen the SLB add the right kind of product for new installations. Now for replacement, there it will be a mixed bag of is it easier and is it more practical to replace let’s say an EXACT system with a new unit as it comes out or are they better off to upgrade the entire wing of the airport or upgrade the baggage handling system and go with a higher speed. At that point, I would expect to see a mix of what’s going to go into a new high speed applications would be the XLB and then also in addition to that, some of the replacement units could be a mix of both SLB or the 6000.

Ed Fowler of Small Cap Report

Last question, on you last call I think you mentioned something about these Medical Clinics being left out and are you still seeing eight to ten months visibility in medical imaging or is there any slow down there at all?

James Green

If you look at our medical imaging side, we do get nice long view of the demand. Certainly we are looking out multiple months and I think you question kind of comes back to the DRA and the Deficit Reduction Act. Most of our large customers feel like they are moving through that now. The demand for procedure growth has continued to grow; it even grew in ’07 and it continues to grow through ’08. We expect that to be washing through here and to get back on to the kind of demand that you would expect purely based on the growth and procedures. As procedures grow, the demand for the equipment grows.

Ed Fowler of Small Cap Report

Thank you, Jim, great quarter.

James Green

Thank you, Ed.

Operator

Your next call is from the line of from Greg Hartly with Kilmore Investments.

Greg Hartly – Kilmore Investments

Good day. Jim, could you just comment on the one sentence in the press release related to the medical CQ revenue challenge with the supplier shipment issue?

James Green

One of the systems that we make is a large CT sub system that coupled to a radiation treatment system and we had had some problems with one of our suppliers to meet the demand for that product. We experienced a delay in the number of shipments last quarter. At this point, we feel like we’ve got the supply back online where it needs to be and we expect to catch up with those.

Greg Hartly – Kilmore Investments

Okay, that’s helpful and then there’s also an additional comment related to the Copley transaction. The comments about MRI opportunities in Asia, could you expand on that please?

James Green

Sure, a couple of things that happed over the past few month, you probably saw that we had reached an agreement with [UNKE] a group in China where we had a relationship and in my mind there was enough of a conflict with the relationship we had with [UNKE] in China that was causing us to almost avoid some new opportunities in China until we cleared up that entire situation with [UNKE]. At this point, that has been cleared up so our ability now to really go after opportunities in China is now wide open. With Copley, Copley had quite a large number of customers in as we know is the fastest growing economy in the world and that’s medical equipment growth in China. A lot of those are new customers for us and new opportunities not only for what Copley brings to the table but also for the systems that we currently sell. It is a nice win-win for us.

Greg Hartly – Kilmore Investments

Okay, that is helpful. Leveraging off of Ed’s question, now that it appears that we are closer to a ramping in production of the A380, it is my understand is these large jumbo jets are going to require faster through-put of checked luggage just because of the sheer size and number of passengers that fly on these planes. Is there a chance that the authorities, if you will, will begin to understand the constraint that is staring them in the face and start to move on some of these upgrade opportunities for check?

James Green

I think you are right. I know first hand that the folks in Washington, they realize that there is a need for moving to a very high volume automatic scanning especially in the large airports. We are hearing and we are seeing a lot more action there from Washington working closely with us and with L-3 to really move toward getting the XLB system ready for field release. You are right, there is certainly demand and certainly, the folks in Washington understand it and are pressing for it. They’ve got their bureaucratic complications on how they accomplish what they have to do and I’ve got my complications on how I get it all paid for. Certainly, the demand is there; the product is well positioned for it and we feel comfortable that there is going to be a nice product for us as we move there into the ’09 and ’10 timeframe.

Greg Hartly – Kilmore Investments

As a follow on, in terms of the challenges that we seem to be constantly facing in terms of what’s going on in Washington, can you just expand a little bit about how you and L-3 are looking at the opportunity with King Cobra outside of the U.S. market and a sense of the size. I took ability of the product and how quickly we might get traction once presumably we get TSA certification qualification on King.

James Green

We have been working now to get our message out. As I said, L-3 is very strong around the world. We are starting to get a lot of interest even outside the U.S. in aviation for the King Cobra. They see it as a great product, it will be a certified check baggage unit, it fits well into the smaller airports and into airports where they don’t have the space, the luxury of a lot of space, and they have to put the systems maybe out in the lobby area. It is a good fit for that; the demand is developing. Again, I think we are at the right place at the right time with the right product for that and we are able to leverage what we have done for the base Cobra to introduce it to a whole new incremental opportunity.

Greg Hartly – Kilmore Investments

My final question really is a clarification of Dalton’s earlier question and that is that my understanding is that I think both Phillips and Siemens have clinical trials underway regarding their digital mammography it’s almost synthesis capable product. Am I right in thinking that the next step really for non-[Tomos] synthetic product sales are these two OEs in U.S. is more of a 5 10K approval as opposed to the clinical issue for Tomos Synthetic.

James Green

I really can’t comment on whether the current first iteration of this system, what level of clearance the FDA’s going to require. I suspect that if you were to look at Siemens or Phillip’s and many of their previous communications that they would be talking about it. The way I look at it, I do know that we are first going to be delivering this system and then we will be adding on the ability to turn it on for Tomo synthesis. The good new, of course, is that it’s able to do both and then from my perspective, the fact that it’s initially ramping outside the U.S. that actually works in my favor because it gives us the time to make sure that we’ve worked out any issues and we are able to ramp up our production capacity to meet the demand because when it hits the U.S. that’s a big growth opportunity for products like that.

Greg Hartly – Kilmore Investments

Thank you very much.

James Green

Thank you and good talking with you Greg.

Operator

(Operator Instructions)

Your next call is from the line of Matthew McKay with Jefferies & Company.

Matthew McKay with Jefferies & Company

Good morning guys.

I am curious to hear a little bit more just in terms of the feedback you get when you were talking about the TSA about the XLB. Now that you have an L-3 relationship on the XLB as well, what kind of feedback you are getting in terms of how we would integrate into sort of the larger systems, conveyer belt systems, others screens that are going on for check baggage? Is that having any impact in terms of the actual development of the product or the tweak that you are going to have to make here? For example, would there be opportunities in sort of the existing installations to maybe consolidate conveyer belts or is it opening up other opportunities for the TSA or L-3 to start to package other security screens with the XLB?

James Green

It mainly depends on the airport and the size of the airport and whether or not they have the newer generation of high-speed automatic baggage handling systems either in their systems or plan to go into their system. Most of the newer large airports are planning to move to the high speed, 1000 bags per hour kind of speeds for automatic baggage handling and that is the places where the demand for a high volume system like the XLB is perfect. Certainly, the TSA knows they’ve got to increase the capacity there. In having the opportunity to provide a handful of different product offerings that meet various speeds and various demand sizes as far as how fast the baggage system is running and whether or not they are using automatic baggage or not, it positions us in L-3 to have a wide nice offering of mobile products to fit whatever application they’ve got. I think the question you had is just do we see that as a growth areas and the answer is absolutely yes. Certainly, the TSA understands that they’ve been a bit of a bottleneck on this and now they want to push hard and quickly to get this system ready to go.

We went through the initial development of the product essentially as a prototype that we would take to the TSA and their laboratories for testing to certify that it could meet the requirement of performance speed in detection and that’s the phase the product is in right now. This next step is to move it, first to get the funding established and then to move it to hardening it for production release and ready for field release.

That’s where we are with it now and yes, it is well along the way to being to where we would like it to be here for the next couple of years.

Matthew McKay with Jefferies & Company

There is actually two parts to the question. In the sense that as L-3 came into this relationship you have with the TSA, were there additional requirements added that are causing you to invest more money into to evolve the system a little bit more. Then the second part of that is, you are putting yourself in all three shoes, was there a track from L-3 side where when you talk to GE or even OSI system, they increasingly talk about systems not just like one like scanning products but the whole system from when the bag enters to when it exists. I am wondering from L-3’s perspective if they saw the potentially not only the XLB revenue but maybe adding or hinging more stuff around it to drive more revenue on their side too.

James Green

Yes, the first part of your question, the system was designed extent ally able to meet the demand and to meet the requirement of the government and L-3. L-3 has not really asked for additional, it’s not really additional things that we have to do other than harden it and finish the design work for really having it ready for field use for 18 hours per day kind of use.

As far as L-3 being able to add new things to it, they are certainly interested in and I know that they’ve been looking at what kinds of add-ons that would make sense to put onto a system like this along with the baggage handling system to provide a very thorough full system capability for any kind detection of the bags as they go through the check system. The first answer is no, the system is ready to go; there’s no new requirements and the other part is yes, they are interested in adding new things that will generate additional revenue for them.

Matthew McKay with Jefferies & Company

That’s great; thanks a lot guys.

James Green

All right, thank you.

Operator

There are no further questions at this time. I will turn the call back to Mr. Green for closing comments.

Jim Green

Thank you all for your interest in Analogic today. We invite you to join us for our third quarter investor call in June. Thank you.

Operator

For listeners who may have come in late, this call has been recorded. Access to telephone replay by dialing 1-877-919-4059 or 1-334-323-7226 for international caller and entering conference ID 13103403. The telephone replay will be available at that number beginning two hours from now and running through midnight, ET, Thursday, March 27, 2008.

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, March 27, 2008.

Investor Conference Call presentation will also be available on the Investor Relations page of our website at www.analogic.com through Thursday, March 27.

Thank you for joining Analogic Corporation’s second quarter investor conference call.

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