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Executives

James W. Green - President and Chief Executive Officer

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

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

Analysts

Larry Solow - CJS Securities

Dave Levenson - Stifel Nicolaus

Dalton Chandler - Needham & Company

Greg Hartley - Kalmar

Josephine Millward - Stanford Group

Doug Fisher - Kennedy Capital

Analogic Corporation (ALOG) F4Q08 Earnings Call September 25, 2008 11:00 AM ET

Operator

Welcome to Analogic Corporation’s fourth quarter and year end investor conference call. (Operator Instructions) The following corporate officers are present: Mr. Jim Green, President and CEO; Mr. John Millerick, Senior Vice President, CFO and Treasurer; and Mr. John Fry, Vice President, General Counsel and Corporate 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 be available until midnight, Thursday, October 16, 2008.

Mr. Green will open the call.

James Green

We’ll begin by asking our Vice President and General Counsel, John Fry to read the Safe Harbor statement. John Millerick and I will then review the fourth quarter and fiscal year ended July 31, 2008 using the supplementary financial presentation available on our website, following which we will take your questions.

John Fry

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

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

In addition, the forward-looking statements included in this presentation represent the company’s views as of September 25, 2008. The company anticipates that subsequent events and developments will cause the company’s views to change. However, while the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the company’s views as of any date subsequent to today.

With that I’ll turn the call back to Jim Green.

James Green

Let’s move to Slide three of the presentation. For a description of our GAAP and non-GAAP definitions please refer to the back of our press release, all the appendix attached to this presentation. So, let us move on to slide four. 2008 was a strong year and a year of positive change. Our consolidated revenues were $413.5 million, up 21% from last year. Our income from operations on a GAAP basis was $24.3 million, up 946% and $36.9 million on a non-GAAP basis which was up 118%.

Our GAAP earnings per share was $1.77, up 61% and $2.26 a share on a non-GAAP basis up 41%. We turned around the loss businesses. We accelerated growth in medical and technology and security. We invested in technology and our people and we invested in our sales and marketing channel.

Moving to slide five and taking a look at the quarter, our consolidated revenues were $117 million, up 26% quarter-over-quarter, approximately 10% of which was organic growth. Non-GAAP income from operations was $10.7 million, up 106%. We showed strong revenue growth in both Medical and Security Technology and the voluntary retirement plan and reduction in force will account for approximately $5 million in annual savings.

Moving to slide six, slide six shows the trend of our last eight quarters in revenue and non-GAAP income from operations. The blue bar indicates strong revenue growth and the black line demonstrate our focus on improved income from operations. Our improved track record and non-GAAP income from op shows our success in moving to profit driven primarily from product revenues.

Moving to slide seven, the black line on the chart shows our non-GAAP earnings per share performance over the past eight quarters. I’ll remind you to consider the positive effect of higher interest rates and a lower tax rate during fiscal year ’07. As an example lower interest in Q4 FY’08 alone, had a negative relative impact of $0.10 per share on both GAAP and non-GAAP earnings per share.

To move onto slide eight, looking to our Medical Technology and starting with our Medical Imaging Segment; we saw revenues of $67.4 million up $15 million driven heavily by our Copley acquisition. We recorded a pre-tax profit of $1.7 million which was impacted unfavorably by $3.2 million due to acquisition related accounting and unfavorably by $4 million from the reduction enforce and restructuring charges, also impacted favorably by $2 million from the gain on sale of ANKE shares.

We saw a lower demand for high-end CT DAS systems from our OEM customers due to the continuing effect of the Deficit Reduction Act. We concluded the customer inventory optimization effort with Copley’s largest OEM customer and on a going forward basis we are on plan. We also made further investments in account management sales and marketing to improve visibility access to OEM opportunities.

On slide number nine, moving to Digital Radiology Segment, we saw a strong growth in amorphous Selenium-based mammography plates. Our revenues doubled to $8.8 million. Our DR business posted its first profitable quarter. We had a pre-tax profit of $0.2 million up $4.7 million from a loss last year of $4.5 million. Our OEM customers are working toward U.S. FDA clearances which will open access to the U.S. market and we continue to see improvement in our yields and our costs.

Moving onto slide 10; for our B-K Medical ultrasound business, our revenues were $25.1 million up 15% with about 9% of it being favorable due to currency effects. Pre-tax profit was $1.1 million down $0.6 million driven by added research and development for our next-generation expanded product platform which we planned to ship starting in Q3.

We’ve released the new specialty transducer for kidney and liver. We are seeing optimism in the market for our unique pelvic floor application for women’s health and we continue to invest in adding sales coverage for this business.

Moving on to slide 11 and our security systems; our revenues were $12.9 million up 27% from prior year and pre-tax profit was $1.4 million up $1.8 million from a loss of $0.4 million last year.

In the COBRA checkpoint systems area, we shipped the first two COBRA Auto-EDS system and 10 additional units are planned to ship between now and February 2009. Our challenge this year is to find a growth niche for the COBRA because of its relative high price compared to inline X-ray systems at the Checkpoint.

At this time, we are investigating with the TSA, the possibility of modifying this system to become a dual use, carry-on and checked unit for small regional airports and we’re investigating the opportunities for a cost reduced model. On the checked baggage side, the eXaminer SX system is in the certification testing process and we expect to start shipping in the second half. The eXaminer XLB system is in pre-certification and we expect to start shipping in the first half of the fiscal year ’10.

Moving on to slide 12, I’ll hand it over to John Millerick to look through the financials.

John Millerick

I’ll now provide details on the company’s financial performance during Q4 and fiscal 2008. I’ll begin with a discussion of our GAAP performance in the quarter. On slide 12, you will see that Q4 revenues of $117 million grew 26% over the prior year. The company’s revenues have been steadily increasing over the last six quarters and in Q4 both our Medical Technology and Security Technology businesses grew at a rate of 27%.

On a GAAP basis our operating margins were up $2.4 million and $2.9 million or 2.1% and 3.1% of revenues in Q4 2008 and 2007 respectively. During the quarter ended July 31, 2008 operating income was adversely impacted by the completion of restructuring program to lower the company’s cost structure. The program included a reduction enforce that resulted in one-time charge of $597,000 and a voluntary retirement program that resulted in a one-time charge of $3.4 million in the fourth quarter.

The company also announced that its amortized Copley-acquisition-related intangible assets and inventory fair value adjustments, which resulted in a $3.2 million charge in the fourth quarter. Q4 diluted earnings per share were $0.25 and $0.60 for fiscal year 2008 and 2007 respectively. The lower EPS in 2008 was primarily the result of lower interest income, extending from lower interest rates and lower cash balances, lower gains on sale of investments and a higher tax rate.

During Q4 of 2008, the company recorded a $2 million gain in other income related to the sale of 20% of its existing 45% equity interest in Shenzhen Anke High Tech Company Limited or SAHCO. During Q4 of the prior year, the company recorded a $4 million gain in other income related to the sale of its investment in Bio-Imaging Research

Moving on to slide 13, we show GAAP performance for the fiscal year-ended July 31, 2008. Net revenues of $413.5 million increased approximately 21% or $73 million as compared to the 12 months ended July 31, 2007. Security Technology Products experienced the largest growth with an increased of 23% and Medical Technology Products grew 22%. For the 12 months ended July 31, 2008, operating margins as a percent of revenue were 5.9% as compared to less than 1% in the prior year.

In the first quarter of ’07, the company recorded an asset impairment charge of $9.7 million related to Digital Radiography business, of which $8.6 million was recorded in the cost of sales and $1.1 million in operating expenses. Diluted earnings per share for 2008, was $1.77 as compared to $1.10 in fiscal 2007.

On the next two slides, we show our non-GAAP financial results. Our non-GAAP adjustments include share-based compensation, asset impairment charges, voluntary retirement restructuring costs, executive transition expenses, acquisition related expenses, gain on sale of other investments and adjustments to related tax impact. I encourage you to review the non-GAAP reconciliation table and notes in the press release and in the appendix to this presentation, for the detail of our adjustments.

On slide 14, you will see that on a non-GAAP basis, operating income increased to 106% from $5.2 million in Q4 of ’07 to $10.7 million in Q4 of ’08. As a percent of revenues, our operating income was 9.1% of net revenues in Q4 of ’08 as compared to 5.6% of net revenues in the prior year. Non-GAAP diluted earning per share was $0.55 in Q4 of ’08 as compared to $0.48 in the prior year.

On slide 15, you will see our full-year non-GAAP results. Operating income was 8.9% of net revenues for fiscal 2008 as compared to 5% in the prior year. Our non-GAAP diluted earnings per share was $2.26 for ’08, an increase of 41% as compared to $1.60 for ’07.

Turning to the Key Financial Data on a GAAP basis on slide 16, cash flow from operations was $15.6 million in Q4 ’08 as compared to $10.5 million in the prior year, a 49% increase. Full-year cash from operations was $47.8 million in ’08 versus $34.2 million compared to the prior year.

Capital spending in the quarter was $5 million as compared to $2.2 million in the prior year. In spite of our positive cash flows, our cash and investment balances of $186 million were approximately $42 million lower than year ago. This is primarily attributable to the acquisition of Copley Controls during Q3 at fiscal year ’08. Working capital is to raise $20 million since the end of fiscal 2007 primarily as a result of lower cash balances.

In summary, the company experience the strong quarter in both sales and operating profits. Net income and earnings per share declined as a function of lower interest income, lower gain on sale of investments and the higher taxes. The company continues to maintain the strong balance sheet and liquidity position.

With respect to company’s Form 10-K for the year ended July 31, 2008, the company will file this report on Monday, September 29, 2008. With that let me turn the call back over to Jim to discuss our business outlook; Jim.

James Green

Looking to slide 17, we’re confident 2009 will be another good year in both revenue and earnings growth, but we see some potential challenges early in the year. We see reduced demand in the first quarter of high-end CT customers recovering the typical levels in Q2. We’re working closely with the key OEM customer in the radiation treatment market to improve their inventory situation and expect reduced demand in the first quarter and a recovery in demand over the following three quarters.

As part of our strategy to expand our ultrasound business, we will accelerate investment to launch our expanded ultrasound product line with production shipments in early calendar ’09. Off that we see growth in the first half driven by Copley and a return to organic driven growth in the second half. I would also mention that there seems to be a lot of speculation about growth expectations in the security market, but I repeat what I’ve said before.

In ’07 we lost $1 million. My position was and is still at a minimum to keep the business profitable, which we’ve done. We developed consistent AN6000 demand, which funds most of the business, though on modest growth. Right now for COBRA, we have line of site to 10 additional shipments for this year and our challenge is to find a good niche market with sustained growth opportunities such as a dual use carry-on and check product over our reduced cost version for carry-on.

What we developed for COBRA is the basis for the eXaminer SX, which we have high hopes for as a mid-tier check unit; however, we’re continuing to work through the certification process. Once this product launches, we expect consistent incremental growth, but not before the second half of the fiscal year.

Now let’s move to our summary on page 18. 2008 was a year of strong growth in both revenue and earnings, while at the same time our backlog improved by 15% excluding Copley. Despite some early challenges we expect 2009 will continue to improve year-over-year in both revenue and earrings.

We’ve transitioned to earnings driven from operations; we’re investing in our people, our technology and our channel; we are a stronger, liener business, and better prepared for the future. Thank you. Now we’ll open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Larry Solow with CJS Securities.

Larry Solow - CJS Securities

Could you maybe just discuss on the imaging side; first of all, it seem like organic growth, there may have been kind of flat sales or maybe a little bit down; could you tell me what Copley contributed. Was it kind of a $20 million kind of run rate minus the $5 million for the inventory reduction?

John Millerick

I think in Q4 Larry, Copley contributed $15 million in revenue.

Larry Solow - CJS Securities

Okay, so that implied kind of maybe flat to slightly down on the imaging side ex-Copley. I know they had been running, 15% plus or less six quarters and clearly there has been slow down at the OEM level for several quarters. Did this kind of all catch up to you in one quarter or is there any more color you can add to that?

John Millerick

I think if you look in quarter-over-quarter medical imaging back in Q4 of ’07 was $52 million versus $67 million this year. I’d say it’s pretty even if you pull Copley out, it’s probably flat.

Larry Solow - CJS Securities

Right, and then my question is we’ve kind of been looking for a slowdown, just based on what’s been going around the industry and where we’ve seen at the OEM level; you have some additional problems with tomotherapy; so my question kind of is you’ve been able to grow revenues even in the last couple of quarters despite the slowdown around you, the 15% even 20% range; why this quarter, not that it suddenly surprised me, but why all of a sudden do you think it’s going flat even slightly down? Did it all kind of catch up to you in one quarter, can you add any color to that?

John Millerick

I would say if you look at the end-user market, depending on whether you’re looking at CT or MR, there is typically somewhere in the neighborhood of a six to 12 month lag from order to shipment. So with the downturn in the OEM side on CT, it actually started at least a year ago. There was some lag in there and that’s why we saw some reduction in the demand at the high-end, mainly driven by the DRA which caused the reduction in demand in the United States, which was pretty much targeted toward high-end CT systems.

Now, we think that’s pretty well washed through at the end-user level and that’s why we see it stabilizing at a somewhat lower level here, but we still have inventory issues to deal with or should I say our customers will have some inventory issues to deal with that they dealt with last quarter and we expect them to deal with them further in this current quarter as they get inline with the new demand level and then we expect to start to see the growth that they are proposing or that they are suggesting in the marketplace and we’ve got to see that start to pick up then from that lower level.

So does that answer your question, why we are watching in a little late?

Larry Solow - CJS Securities

It does. The only thing I’m scratching my head is it seems like there has been a slow down at the end-user level and the OEM level for four to five quarters already and you guys, from your comment I’m trying to read between the lines and do you think you should start seeing more growth maybe only in a quarter or two from now.

So that seems like although that lag is in place, your slowdown seems to be accelerated, only going to happen or concentrated to one or two quarters and then you’ll maybe won’t back to 15% growth, but maybe you can return to the mid-to-high-single digits within a quarter or two; is that a fair assessment?

John Millerick

Well, I think what we saw is with the market as it did turndown at the third-party level; we introduced some new products along that timeframe which helped us soften it. We’re projecting that we’re going to go back to organic based growth in the second-half of this year. So that’s why we do see this continuing here throughout this quarter, we’re starting to improve in the second quarter and then really in the second-half is where we see getting back onto market growth rates.

Larry Solow - CJS Securities

That would be kind of what like five, six mid-single-digits?

John Millerick

Well, I mean if you listen to what we’re seeing in the marketplace and the customers and the various investigative groups, is they’re all projecting for most of our surf market somewhere in the neighborhood starting in the second-half of somewhere around 4% to 6% depending on the modality.

Operator

Your next question comes from the line of [Dave Levenson] with Stifel Nicolaus.

Dave Levenson - Stifel Nicolaus

At any rate, it’s nice to see the progress that you’re making. In terms of the charges and unusual gains, things that you had in fiscal ’08, are those totally cleaned up or do you still expect to have any of those items in 2009?

James Green

Well, with the press release we put out a while back we showed that there was some additional one-time charge in the first quarter of this year. Most of it took place last year, but there was some and Don, do you know what the number was this year …

Dave Levenson - Stifel Nicolaus

No, I’ve got that. I just made away from that.

James Green

You mean other than that; no, I think that’s the only thing we are expecting or projecting right now.

Dave Levenson - Stifel Nicolaus

On the eXaminer SX that you expect to begin shipping in the second-half, do you think those will be domestic buyers or foreign customers?

James Green

Well, we expect it will be a mix. We are hearing from our partner that there is a lot of excitement outside the U.S. because of the fact there is a lot of airports that need technology like this, but really don’t need a very high-end top of the line, which includes baggage handling connections and such. So, I would say we would expect the mix roughly 50-50 though it may actually start to be a little more outside.

Dave Levenson - Stifel Nicolaus

And that’s a big difference from what you’re doing today with the EXACT, right?

James Green

I think with the EXACT, it’s certainly a mix of U.S. and outside U.S. and I don’t know the exact splits, we have to get that from our partner L-3, it’s certainly a combination of both.

Dave Levenson - Stifel Nicolaus

Okay, on ELb it seems like you still don’t have a competitor with anything nearly as far a long; do you expect those deployments will be for new installations or those are going to be replacements for existing systems?

James Green

It’s a new system; it’s a bigger faster system, so we would expect to see more of it applied to new construction airports that are maybe adding a wing or where they’ve got room to put in new systems, but of course we’d expect if they can afford to make the changes to the structure to include this in the system then certainly the way it goes is the security groups.

The leaders in each of these airports they are all going to want the latest and greatest, but some will be able to and some won’t be able to, but in general we expect it mainly targeted to new growth areas and new growing airports.

Dave Levenson - Stifel Nicolaus

And I had two questions for John Millerick; could you give us the depreciation, amortization number in the fourth quarter, please, and I don’t know if I missed it, but I’m also looking for the backlog number?

John Millerick

I want to say we closed out the year with $138 million in backlog and I think on the depreciation, let me just pull the number here. Yes, it’s $5.6 million

Operator

Your next question come Dalton Chandler with Needham & Company

Dalton Chandler - Needham & Company

Between the restructuring charge and the Copley write down, there was about $7.2 million; could you tell us what piece of that was actually cash?

James Green

Well from the 3.2 related to Copley, it was basically a part of what we had capitalize in connection with the purchase and then written down in the fourth quarter and so essentially it becomes a non-cash item and in terms of the restructuring its all cash.

Dalton Chandler - Needham & Company

And then you’ve talked about potentially modifying the COBRA to make it I guess more affordable; is that a response to specific customer requests or push back on the pricing or is that something that you already had in the works?

James Green

Well, we had thought even going back ways that if we wanted to penetrate widely the carry on market, our markets outside of aviation, that there was heavy price sensitivity to that kind of product. So, we were talking with the TSA about their interest in getting the COBRA or getting a cost reduced version into checkpoints.

They’re biggest concern was they’ve got budgets to live within and you take a COBRA, that’s dramatically more a higher price and inline X-ray unit. So, we’re looking with them at what the pricing sensitivity is and what would get us into that kind of business in the U.S. and also at what price we would see some expanded opportunity outside the U.S., but we’re really just at this point looking at what is the opportunity. We have a feel for what we can get it to, but what we’re investigating is the market opportunity at these various pricing segments for a product like that.

Dalton Chandler - Needham & Company

Okay that the 10 COBRAS that you’re expecting to ship, you’re anticipating those will go into airports or…?

James Green

Yes, they’re already planned with the TSA to go into a special carry on lines at various airports, various classes and types and sizes of airports, because the TSA certainly wants to understand how this fits and with this new knowledge, what they’ll be able to do to better optimize throughput for carry-on.

Dalton Chandler - Needham & Company

And then on the Digital Radiography, first of all congratulations on getting to that to breakeven; should we expect going forward that the trend in improvement will continue and we’ll start to see profitability there?

James Green

Well where we see going forward is as our customers get clearance to sell in the United States, that’s going to drive the demand side and the longer we make these products and the more we make of them, the more improvements we would always expect to see in terms of cost and the yields. So, it’s kind of a normal type of curve that we would expect to see there based on growth in that business.

Operator

Your next question comes from Greg Hartley with Kalmar.

Greg Hartley - Kalmar

Can you comment on the amount of revenues in the CT business that are generated outside of the U.S. and presumably not subject to the DRA challenges?

James Green

We would be taking a bit of a guess, because if you look at our customers, we have to look at the splits in their businesses as of what’s U.S. and what’s outside the U.S. I think it’s fair to assume that it’s probably somewhere close to 50/50, but I’ll tell you upfront I’m guessing, it could off, it could be as far off as 60/40 because it just depends on where their channels are selling.

Greg Hartley - Kalmar

And then can you comment; it sound like you’ve been making meaningful investments in marketing and channel development and can you comment a little bit more specifically about what you’re doing and what kind of timeframe should we think of in terms of those investments bearing fruit?

James Green

Okay, yes, just overall one of our strategies is what I would call mining the majors and account management and I would say account management top to bottom. So, that means myself being involved with the various senior folks and our large customers. We have general managers involved at the business levels.

We also now have or in our building and further expanding our account management function to have technical sales type folks with strong technical backgrounds assign to the various large customers for real account management, getting visibility to what’s going on with our major customers and really providing us the opportunity to see it and then to leverage what we’re doing with one development across a much broader spectrum of the opportunities.

We’re doing that for the OEM side and on the direct end customer side with our ultrasound business, we’ve looked at our sales coverage; we’ve expanded that significantly and we’re expanding our overall marketing capability both in the end customer level and with the OEM level and you’re right; there’s certainly an investment there and it takes time like anything as far as how fast it pays off.

Typically in the end-user market, you’ll see faster ability. In the OEM level market, a lot of our products are very high value content and typically have to be designed into the new generations as they come out; so there the time constants are longer, but they are in much larger swings.

Greg Hartley - Kalmar

But the way we should think about the opportunity, is it to do more revenues per unit with an existing customer, is it to do revenues with customers you haven’t been doing business; I mean if you can just kind of help us understand, how the revenue development is likely going to transpire?

James Green

It’s actually both, because in general what you see with our products is you see its adding more content. When you take for instance, in the MR side where we are very strong and a real leader in RF amplifiers, now with the addition Copley Controls, we’re also a recognized leader in gradient amplifiers.

So if you take those two together, you can now provide opportunity to take a bigger, larger part of what we are in each of our OEM customers, so more content, higher value content across the Board that applies to MR that applies to CT it applies virtually across the board.

Then also what we do for a particular OEM large customer, going after, how do we now package that kind of technology and also then go after the other OEMs where maybe they’re either doing it themselves or buying from somebody else or maybe they are not doing at it all yet. So, it’s both leverage and growth of the technical and value content in what we are selling to them.

Greg Hartley - Kalmar

B-K had some strong revenue growth; you had the profitability and at least at the surface it looked like it maybe has opportunities for improvement and I realize you’re making investments, but is there anything structural in that business that is driving, but it appears to be a little bit lower profitability than one might hope for?

James Green

Yes, its really the fact of a level of critical mass. Its an end-user business, but has to stay and has to sustained all of the efforts of an individual business, which includes R&D manufacturing, but then more importantly sales and service. So, the infrastructure to reach all of the customers, and to sell and service those products is a heavy cost.

So the opportunity as I look at it is that on the marginal basis, the contribution is dramatic and that for every additional unit you sell and you’re selling to an end-user, your drop down is dramatically better than many other businesses. So a business like B-K, it really is all about growing that business or maybe acquiring something along with it and leveraging that infrastructure that reaches out to those customers. So it is at the marginal level a very profitable business; it’s just that it needs to be bigger to really see all of that drop down for us.

Greg Hartley - Kalmar

Should we start to see some improvement in the second half of the fiscal year?

James Green

Well, one of the things that I mentioned is that we are introducing a new product platform, that not only will help us penetrate more where we are, but we see it extending us into some adjacencies and into some areas where we haven’t been or maybe haven’t been in a while. So, yes absolutely we are expecting to see a nice growth in that business in the second half with the release of these products driving it.

Greg Hartley - Kalmar

My final question and kind of more of a comment, but I just suppose the graph on page six which shows the revenue and non-GAAP income from operations and the progress that’s been made in the last number of quarters relative to the common stock price and what seems to be a fairly dramatic cyclical trading range and analyst estimates that are frankly all over the map.

I realize the business is hard to forecast and you’re reluctant to provide guidance, but is there a way to kind of give us some conservative reasonable benchmarks in terms of a range of revenue growth and a sense of where operating margins may go fiscal year to fiscal year to help establish some reasonableness within this range?

James Green

A couple of things come to mind when I think about some of this volatility that you are referring to; part of it is more transparency of the business, some of what we’ve done with adding a non-GAAP view, giving a more of a pro forma type of view of the business and you see our focus on sustained income from operations.

Also I think with us giving more of a directional outlook for the business with run times as we see them coming and more understanding of what we see happening in the marketplace with our customers, we think that’s going to give you better transparency of the business. So, if you see more of what we see and when we look out, we think that that’s going to help.

Secondly, as long as we’re driving stable and sustained revenue growth, a lot of it comes down to really establishing a track record and you are seeing we’re heading in the right directions. We have to manage this business for the long haul. This is not a quarter-to-quarter kind of business. We have to make investments for the long-term sustained growth in this business both in revenue and in earnings.

We challenge ourselves to achieve year-over-year growth and that’s both organic and acquired and looking at decisions like the Copley acquisition, I think it’s consistent with this philosophy. We’ve added, acquired growth, but we’ve also expanded our product line, which will be a part of driving our further organic growth.

So, could we move toward more a better outlook or more information about the future? Yes, we can do that and I’d like to talk with my Board about how we do that in a way that doesn’t become overly administrative and lets us focus on growing the business and for all of you to know, what are we trying to do and what should you be looking for because you should be looking at the same kind of things that we’re looking to do. So, I appreciate the question and we will look at what we might be able to do to just give a better view of the future.

Operator

Your next question comes from Josephine Millward with Stanford Group.

Josephine Millward - Stanford Group

Jim I think you said, your backlog is up 15% excluding Copley; is that just medical or your total backlog including security; that’s the $138 million?

James Green

John, you want to take this.

John Millerick

If we look back over the year, we came into the year with a backlog of about $102 million, ended with about $139 million of which Copley represented about $21 million of that.

Josephine Millward - Stanford Group

Yes, I’m sorry, Copley is included in the $139 million?

John Millerick

Yes, it’s included in the $139 million, yes $21 million, but if you back it out we see an apples-and-apples, about 15% growth of Copley.

Josephine Millward - Stanford Group

And that backlog is for both medical and security?

John Millerick

Yes, it is.

Josephine Millward - Stanford Group

And do you expect to ship most of that backlog in the next 12-months?

John Millerick

We do.

Josephine Millward - Stanford Group

Jim can you give us an update on your MRI outlook? I think, previously you said MR was not as much impacted by DRA versus CT; can you give us an update on that, on where you stand?

James Green

Right, MR was not nearly as impacted as CT with what went on; it was less than half the impact in the end user marketplace. Most of our customers and as we look at how things are developing with them, MR seems to be back on an organic growth track, somewhat modest growth track probably somewhere in the order where we understand of around 4% across the entire marketplace.

Now, with MR as with CT, we tend to focus in the high-end, so with the heavy move towards 3T, we think that’s going to help us, but also there is a lot of demand for value MR systems in and outside the United States. So, we’re positioned well now in the MR market, especially with the addition of Copley to our business.

Josephine Millward - Stanford Group

Okay, so based on what you are saying, it looks like your CT outlook is relatively flat for the first half of your fiscal year ’09, but you expect that to pick up to maybe single digit level and you expect MRI to be about mid-single digit growth?

James Green

I think that’s probably fair; low-to-mid-single digit growth of tracking the market in MR and CT and as we’ve said in the first quarter, coming here we see some challenges mainly on the CT side, but we believe its going to correct as we get to Q2 and moving forward, so bend back in line with the market growth.

Josephine Millward - Stanford Group

What about Digital Radiography? You’re currently shipping only to Siemens; when do you anticipate orders from your other OEMs?

John Millerick

Well, Siemens is ahead of the curve. They were the first large customer we had. We know that all of our customers are working to expand their offering around the world, but what we see as the biggest opportunity is as Siemens and Philips get their clearances here in the United States because that has not been available to them yet with this product, so that’s what we are expecting to see some nice growth.

Josephine Millward - Stanford Group

Do you think that’s going to happen in the next three months, six months or a year?

James Green

I guess, it’s difficult for me to comment because these are public companies and I have to be very careful about saying something that might affect their businesses. Again, I would just say that we expect in this fiscal year that these products are going to be shipping in higher volume to these customers that they get access to the United States.

Josephine Millward - Stanford Group

Can you tell us how many units of EXACT you shipped during the quarter and if you can also give us the number of units in your backlog based on the most recent L-3 orders?

James Green

Yes, right now we shipped 15 units in Q4 and at the end of Q4 had a backlog of 40 units. The recent order, the one that we announced today is not include in those numbers.

Josephine Millward - Stanford Group

It’s not included in the 40 units?

James Green

No, it’s no. I mean the 40 essentially is as of July 31 and the order that we received from L-3, we just recently received, which is the first quarter of ’09. So, we are shipping units throughout the quarter and then we just took on the order, which I think is worth in the vicinity of about 20 units in that order.

Josephine Millward - Stanford Group

In terms of your EXACT outlook Jim, are you still looking at roughly 50 units a quarter for fiscal year ’09?

James Green

Yes, that basically what I see at the floor level, 15 units a quarter. There could be some quarters where it could go up some and so yes, that’s kind of how we see it.

Operator

Our next questions comes from Doug Fisher with Kennedy Capital

Doug Fisher - Kennedy Capital

Before I get started echo the comments of a prior caller that it would be helpful I think even if you had moved to quarterly guidance because I understand you’re trying to manage the business for a long-term. If we could get some better direction on kind of full-year expectations in terms of revenue growth on some of the margin components and based on your plan to expand level.

So just to follow on the security question that was just asked, it looks like revenues in that segment balanced between kind of $11 million and $13 million a quarter this past year and I’m just trying to get a sense for whether the way we should think about this in fiscal ’09 and that kind of a base range with upside as these units or these newer products get shipped as the year progresses?

James Green

Yes, that’s how I would see it; that it’s a stable business there at that level. We expect to see replacing business, but not so much in this year, that’s probably another year or so out. So in this year I would say we expect those kind of numbers and then in the second half of the year we hope to start to introduce the new SX system which should start to provide incremental growth, but again I would assume that’s on kind of a modest growth level because it’s new, it takes time for these products to be installed, so again that’s how we would model it.

Doug Fisher - Kennedy Capital

And just to make sure I understood one of the comments made in the presentation; the return to organic growth, I think you said in the second half of ’09, so I just want to make sure that we’re talking about. I guess it doesn’t matter if it’s Medical Imaging business or the total, but for the first half of the year we should be looking for negative organic growth?

James Green

I would say in the first half of the year the majority of our growth is going to be attributable to the Copley acquisition and then as we get into the second half that’s when the overall business we see starting to get back on to an organic basis for organic growth based on the markets therein.

Doug Fisher - Kennedy Capital

Okay and on Copley and I know I’m working with round numbers when you’ve talked about 10% organic growth in the quarter, but if I work through it, I’ll come up with a number for Copley of kind of $13.5, maybe just under $14 million in revenues?

James Green

In the last quarter?

Doug Fisher - Kennedy Capital

Yes, in the fourth quarter. Am I doing something wrong?

James Green

We show about 15, I’m looking at my CFO here.

John Millerick

15 in the fourth quarter.

Doug Fisher - Kennedy Capital

I’m just asking, because I’m trying to get a feel for expectations for Copley and you kind of talked about the end-market, but depending on the assumption I know you kind of had backlog of $4.5 million worth of shipments that were held back?

I was trying to get to kind of run rate for that business and it kind of looks like its closer to the 2006 number that the company put up. If it’s a $13.5 million revenue number and I had the $4.5 million and an annualized that, I get a number that looks more like kind of the 70’s line and the company was running at an ’06. I guess if I take the $15 and gross it up a little bit, I get to about the $80 million number.

John Millerick

Yes, that’s kind of where we see it. Somewhere right around that $20 million a quarter, $80 million ‘ish on an annual basis.

Doug Fisher - Kennedy Capital

Okay and would that be what I should kind of think about for ’09 or should I think about kind of also growing inline with the market and getting maybe some pull through from some of the new products?

John Millerick

I would say like we said that you figure it; it’s at about that rate in the first half; put everything together in the second half we would expect to see everything starting to get some additional organic growth across the line in the second half.

Doug Fisher - Kennedy Capital

On the kind of base, I’ll call it Medical Imaging business of Copley; if I look at that, it looks like it was running at $45 million to $47 million a quarter up until the fourth quarter of ’07 and it stepped up into the $52 million to $55 million range where it’s been running for the last five quarters or so and I’m just trying to think about that.

Again I know you are looking for a pickup in the back half of the year, but it sounds like maybe that if we kind of continue in this range that we seemed to in the last five quarters, we can continue that for the first half of ’09 and then hopefully we start to get the uptick in the back half; is that the way to look at it?

John Millerick

I would say yes, except that as I described in the outlook page, there are some things that are going to be impacting the first quarter. We expect with inventory adjustments on a couple of large medical customers as they get their inventories leaned and then get on track for the average demand, but other than that I would say the numbers you’re suggesting on average would be about right again expect for the end of the Q1 being impacted here as we described.

Doug Fisher - Kennedy Capital

Can you help us get some feel for order magnitude, what those inventories corrections might look like?

James Green

Well, we know there is public knowledge of one of our large customers and what that revenue might look like and so an inventory adjustment with that particular customer is pretty large and I think you all probably need to go do the homework and look at that yourselves rather than have may say much because it’s the other public company.

We do expect that to pretty much correct in the first quarter and then we’ll take in the first quarter with them and then they’ll start to get back online throughout the rest of the year. In the CT business, it’s not as severe and it’s also just a Q1 impact, where we expect to fully recover to our running rates in Q2.

John Millerick

If you look at our backlog as we said earlier, we’ve seen growth year-over-year on the organic backlog. We are pleased to see that growth and it may not all come in the first two quarters. We see that pickup falling into the back-half for the year. So, we see approximately 15% increase in backlog year-over-year. I think those orders, although they may not come through in the first two quarters, will certainly come through in the latter half of the year.

Doug Fisher - Kennedy Capital

Just on the issue of kind of the outlook that end-market customers are reflecting through both key supply. When we talk about the back half of your fiscal ’09, we’re talking about calendar ’09 and I just wonder, do you have a feel historically you’re kind of in an odd situation, where do you have to kind of get a feel for during your budgeting process, what the next calendar year is going to look like, about six months before the people you’re selling into probably go through that same process.

Have they been able to estimate that relatively accurately and I just wonder if the market’s a little bit maybe more dynamic now than it has been in years past; if they really have a good handle on the kind of end-market demand in calendar ’09 at this juncture?

James Green

It’s a tough question because the Medical Imaging market has experienced so many years of just continued strong growth driven by these imaging procedures and which are driven by this demographics and age profile of patients in the United States and now around the world. So, I think it’s a bit of a new thing for some of our OEM customers, but these are big professional groups, who put a lot of effort into forecasting what’s happening in their market segments.

I would hazard that they are pretty good at it, because they put a lot of effort into it and again there are independent groups that help look at what’s happened in various segments with the shares and what’s projected to go forward, so I think they’re in pretty good shape with what they’re expecting. I think that what they’re forecasting is probably going to be pretty close.

For us our Q1 has typically off and on been our weakest, that’s certainly going to be the case for us this year. I hope I answered your question. We’re looking at the various industry data and what the OEMs are saying and they’re all kind of saying the same thing here.

Operator

There are no further questions at this time.

James Green

Okay, well thank you for you interest in Analogic. We invite you to call in again in December when the company will announce its first quarter. Thank you again.

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Source: Analogic Corporation F4Q08 (Qtr End 07/31/08) Earnings Call Transcript
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