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Executives

Anthony Fabiano - President and CEO

Ken Galaznik - CFO and Treasurer

Analysts

Steve Levenson - Stifel Nicolaus

Brian Ruttenbur - Morgan Keegan

Tim Quillin - Stephens Inc.

Josephine Millward - Stanford Group

Michael Kim - Imperial Capital

American Science & Engineering Inc. (ASEI) F2Q09 (Qtr End 09/30/08) Earnings Call November 10, 2008 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the American Science and Engineering's second quarter of fiscal 2009 conference call. My name is Michelle, and I will be your conference facilitator today. (Operator Instructions). Mr. Anthony Fabiano, President and Chief Executive Officer will now begin the conference. Please go ahead.

Anthony Fabiano

Good afternoon. This is Anthony Fabiano. Welcome and thank you for joining us for our second quarter of fiscal year 2009 results conference call. I'm joined by Ken Galaznik, our CFO and Treasurer. Ken will report the financial results for the quarter and I will follow with an overview of the business. When we are done with the presentation, we will open the lines for questions and answers.

I'll now turn the call over to Ken.

Ken Galaznik

Thank you, Anthony, and welcome everyone to our quarterly conference call. Today we released the results of our second quarter of fiscal year 2009 which ended September 30, 2008. A copy of this press release was emailed or faxed to those of you on our mailing list and it has been posted on our Website.

Before we begin, I'm obliged to share our Safe Harbor guidelines with you. Forward-looking statements made during the course of this conference call are modified in their entirety by the risk factors we have identified in our press release and in our SEC filings. Now, I would like to discuss the results of the second quarter. Net sales and contract revenues in the September '08 quarter were $56.293 million which represents a new record quarter and a 50% increase over the second quarter revenues in the prior year of $37.627 million.

This increase in revenue is attributable to increases across all product lines except for Contract Research and Development which was down $835,000 in the current quarter. The increase across the product lines is attributable to our efforts to expand and diversify the business with new and enhanced product offerings.

The breakout of revenue by product line for the quarter is as follows. Cargo was $10.713 million. Z Backscatter system was $21.679 million, Parcel was $2.475 million, Field Service was $19.325 million and Contract Research and Development was $2.101 million.

The gross profit in the September '08 quarter was $22.527 million as compared to $14.078 million in the September '07 quarter. This increase in gross margin is a result of the increased revenues previously noted and a margin contribution increase of 2.6 percentage points in the current quarter as compared to the prior year quarter.

The improvement in gross margin as a percentage of revenues is attributable to continued attention to cost reduction and the product mix in the current quarter, offset somewhat by lower margins in our service revenues.

The lower margin in service revenues in the current quarter is attributable to increased freight and travel expenses under fixed-price service contracts as well as the company having entered into some lower margin contracts in some international markets.

Selling, general and administrative expenses were $7.394 million or 13.1% of revenues in the September '08 quarter, as compared to $5.851 million or 15.6% of revenue in the September '07 quarter. The increase in SG&A is a result of increases in salary and benefits related to headcount increases, incentive compensation expense and legal expenses relating to ongoing litigation.

Company funded research and development expenditures in the current quarter were $4.176 million which was 51% above the prior year expenditure of $2.773 million, reflecting our continued expanded effort related to the development of new product offerings and the enhancement of existing offerings.

Interest and investment income in the current quarter was $685,000 as compared to $1.742 million in the prior year quarter. This 61% decrease is attributable to reduced yields on investments and a decrease in cash available for investment in the current quarter, partially due to the increase in restricted cash which is cash utilized to back issued LCs.

The company is currently expanding its line of credit from $20 million to $40 million to eliminate the need to utilize cash to back issues LCs. This will unrestrict the $18.6 million in cash that will be invested at market rates.

The company recorded income tax provision of $4.140 million in the current quarter as compared to $2.538 million provision in the September '07 quarter. The increase from the September '07 quarter is due to the increase in taxable income attributable to the factors noted earlier as the effective tax rate remained constant at 36% in the current quarter.

Fully diluted earnings per share in the September '08 quarter was $0.83 as compared to earnings per share in the September '07 quarter of $0.48. A review of our year-to-date results will reflect the following:

Revenues have increased 16.7% to $95.787 million in the current year from $82.098 million in the prior year. This increase is attributable to increases in the Parcel, Z Backscatter systems and Field Service product lines.

Cargo revenues remained relatively constant and we experienced a slight decrease in Contract Research and Development revenues. Gross profit increased to $37.056 million in the current year from $31.479 million in the prior year. The increase is due to increased revenues and an increase of four tenths of a point in margin as a percent of revenue.

In the current year, SG&A expenses are $15.093 million or 15.8% of revenues, as compared to $12.334 million or 15% of revenues in the prior year. The increase is primarily attributable to salaries and benefits due to headcount increases, increased incentive compensation expense and legal expenses related to ongoing litigation.

Research and development expenses increased 40% to $7.739 million or 8.1% of revenue, from $5.530 million or 6.7% of revenues in the prior year. Interest and investment income decreased 56% in the current year to $1.636 million from $3.758 million reported in the prior year. This decrease is primarily attributable to reduced yields experienced in the current year, and a decrease in cash available for investment partially due to the increase in restricted cash.

Fully diluted earnings per share in the current year is $1.13, as it was in the prior year. The balance in cash, restricted cash and short-term investments at September 30, 2008, was $122.066 million or $5.562 million below the March 31 balance. This decrease is primarily attributable to expenditures of $11.398 million related to the stock repurchase program, and dividend payments of $3.509 million, offset somewhat by the $8.397 million of cash provided by operations.

Free cash in the current period was $7.604 million as compared to negative $9.911 million in the prior year. DSO at September 30 was 62 days, as compared to 59 days at March 31. Inventory increased $1.746 million over the March 31 balance.

In fiscal year 08, we've invested $793,000 in CapEx and depreciation and amortization expense was $2.142 million. As to the status of the stock repurchase program, we are currently operating under the second $35 million authorization by the Board and to-date we have purchased and retired 74,948 shares for $4.041 million under this program.

Our backlog at September 30, 2008, was a record $197.183 million, or 61% above the September 30, 2007, balance of $122.315 million. While not yet recorded in backlog, the company has $26.4 million of unfunded contracts which are expected to be recorded in backlog in the next 12 months.

I will now turn the meeting back to Anthony for his comments.

Anthony Fabiano

Thank you, Ken. Q2 was a powerful quarter. To sum things up, revenue, operating margins and bookings were up significantly over the corresponding quarter in FY '08. In addition, backlog reached a record high. So starting with revenue, Q2 revenue was 50% higher than last year, driven by increased revenues across all primary business areas. In addition, product line mix was more balanced through higher percentage revenue increases in cargo and Parcel products. Margins.

Gross margins have improved 60% in Q2 versus last year. In spite of higher raw material and energy costs. And those include freight and travel that have been experienced over the past year. These improvements are the result of planned and aggressive cost reductions on each product line.

Our continued focus and execution of strategic priorities, for example, new products, new market channels and overall operating efficiencies have driven revenue growth which has resulted in a 100% increase in operating income and greatly improved earnings per share over Q2 from last year.

Bookings and backlog. We are very pleased with the very strong bookings this quarter following a record quarter in Q1 at $100 million. Bookings for Q2 were $93.5 million versus $55.6 million in the prior fiscal year, a 68% increase. This high volume of new orders reflected the continued and growing market demand for our Z Backscatter Van for force protect, counter drug and anti terrorism applications.

Additionally, our field service business reported record bookings in the quarter reflecting an increased product install base and continued high level of customer satisfaction with our products and services. The continued strong quarterly bookings has increased order backlog by 61% from Q2 of last fiscal year to over $197 million, a new company record.

Sales pipeline. With two consecutive outstanding booking quarters, one would expect the sales pipeline to dip. However, in the last 30 days our pipeline has actually increased almost 15% and stands about 8% higher than at the end of Q1, which ended June 30.

Pipeline growth has been the result of several growth strategies, especially the expansion into both, new domestic and international sales territories showing a strong interest in our unique products. We continue to ramp up R&D spending increasing 50% from the same quarter last year. These increases are the result of extensive market analysis that has uncovered strategic market gaps that can be filled with our existing products as well as new products.

We are making excellent progress proving out new technologies and bringing high demand new products to market on schedule and on budget. So let's switch gears and review some developments and highlights in the business areas for the quarter starting with Z Backscatter systems. The ZBV, let's start with development. We had a great quarter for ZBV Systems, AS&E's proprietary Z Backscatter technology continues to achieve market recognition as a premiere technology to detect explosives, drugs and other contraband.

We booked 47 ZBVs in the quarter pushing the total to 385 ZBVs booked since its introduction. Bookings mix for the quarter was 62% domestic and 38% international. As a point of reference booking mix for the 385 ZBVs booked since introduction is 58% domestic and 42% international. So you can see over time we've really done a good job of booking more and more ZBVs overseas in spite of very robust orders from the US Government. For anybody that is counting, we shipped 27 units in the quarter, in case you wanted to know.

Highlights. The long awaited order for 22 ZBVs from the US Government was received in this quarter. This significant order adds to their fleet of ZBVs for counter terrorism applications. The order reaffirms the continued value the US Government places on the detection capability of Z Backscatter technology for vehicle born improvised explosive devices, VBIEDs. Another US Government agency reordered multiple ZBVs valued at $4.4 million to support counter drug and anti terrorism programs on border crossings.

This government agency is having great success with the ZBV for detecting drugs, contraband and illegal immigrants entering our borders. Additionally the ongoing focus on international markets resulted in robust ZBV bookings for our emerging sales territories including reorders for 10 ZBVs in the quarter for a South American government agency.

The Middle East continues to be a very strong market for the ZBV. We received a $2.6 million order from the Middle East government agency for multiple ZBVs. This is the third order from this country in the Middle East, a clear indication of the ZBVs value to detect threat and contraband as well as the customer's satisfaction with the product performance to support their mission. Additional systems were ordered from key regions including Africa, the Pacific Rim and Latin America.

Switching over to the Z Military Trailer; a new product. In ongoing field testing, the ZBV Military Trailer has continued its outstanding performance in harsh field environments. To-date, it is operating at greater than a 98% uptime in theater and is demonstrating spot-on performance in meeting this demanding customer's needs.

As you probably know, Fed Biz Ops recently published the Marine Corps intent to negotiate a sole source contract with AS&E for our ZBV Mill Trailer. We look forward to receiving this high priority contract to serve this customer and support and protect our troops in harms way.

Cargo, the Z Portal. The Z Portal cargo and vehicle screening system has received a lot of very positive activity in the last few months. In October, Customs and Border Protection or CBP has announced the deployment of Z Portal on the southwest border in San Isidro, California.

In a press release issued from Customs, the Assistant Commissioner for Field Operations said that, and I quote, "The Z Portal complements currently deployed technology by providing clearer images of low density materials that maybe hidden in vehicle fenders, tires, trucks, gas tanks or under the hood", unquote.

The Z Portal is assisting customs officers in preventing contraband, including illegal drugs, illegal immigrants and terrorist weapons from entering the United States while helping to optimize the flow of legitimate trade and travel.

The early results have been outstanding, and in public reports customs has said that they are very satisfied with the system thus far. In numerous press accounts at the end of October, the Z Portal is credited with multiple seizures of stowaways and more than 3,000 pounds of narcotics hidden in cars in just two weeks of operations, and that's pretty good.

In an unrelated product market opportunity in August, the TSA conducted their own thirty day test pilot of the Z Portal at Cherry Branch ferry in North Carolina. The Z Portal's ability to produce highly readable photo-like images coupled with its small footprint and high throughput capacity makes it an effective tool to scan cars and trucks for explosive materials prior to boarding a ferry. Initial reports are very encouraging and we await the formal results of the trial.

The application presents excellent worldwide niche market potential. Also NATO announced that the first Z Portal they purchased is now operational at Qandahar air field in Afghanistan, 12 weeks ahead of schedule.

The Z Portal allows security personnel to scan incoming vehicles for explosives at save distance. We are very pleased that we could team with this high potential customer and meet their critical operating requirements well ahead of schedule. AS&E's proprietary Z Backscatter Portal with its outstanding value proposition for customers with manned vehicle scanning applications has great growth potential for our company.

Turning our attention to Parcel, Gemini bookings were solid in Q2 with strategic multiunit orders for high threat US Government facilities and some new international new orders establishing beachheads with key accounts.

These orders reinforce the fact that Gemini, a differentiated product with our patented Z Backscatter technology is viewed as an excellent value proposition by discriminating customers in the very competitive parcel inspection market. We are meeting our production goals for Gemini and continue to improve margins in accordance with our targets.

Personnel Screening; starting with SmartCheck. Nothing new to report here on the domestic front, however, we do see continued interest from other countries as demonstrated by the recent pilot in Australia.

Australia's Department of Infrastructure is currently testing AS&E's SmartCheck Personal Screening system at the Sidney International Airport. As with our systems with TSA, we are confident that Australia's Department of Infrastructure will find the SmartCheck's privacy enhanced images offer the best detection capability for [WBI] while assuring passenger's privacy.

Service; we had another great quarter for service with both record bookings and revenues. Exceptional bookings are very encouraging for two reasons. One, they reflect continued customer satisfaction with AS&E products and services, and two; they represent higher and more predictable overall revenues and margins.

Some key bookings are as follows: We received two significant US Government service contracts in the quarter. The first was a $22 million two-phased service renewal contract from the United States Government to support their fleet of ZBVs.

The first phase of the contract is funded at $18.3 million. This is the fourth year in a row that AS&E has provided support for the US Government's fleet of Z Backscatter vans in high risk overseas areas. The US Government also ordered a phased contract valued up to $15.5 million to service the ZBVs and parcel X-ray inspection systems.

On the international front, a key Middle East client awarded us a $12.5 million order to provide service, maintenance, and training and spare parts for multiple cargo systems including the OmniView, Gantry, the Z Portal and the ZBV.

So let's summarize our quarter. We achieved a bullish growth milestone of record backlog during a quarter of increased revenues, operating margins and EPS. That's one I'm really proud of. Our backlog in earnings coupled with an increasing and more diversified mix of products and customers, provides improved visibility for the remainder of the year.

We've established that we can diversify product lines and geographical sales regions to achieve strong increases in revenue while delivering gross margin performance in the 40% range. Our four year revenue and earnings performance has delivered a compound annual growth rate of 22% for revenue and 31% for backlog, and 57%, nearly six times for cash balance.

We have increased investments in our IRAD program to accelerate future growth based upon the outstanding return on investments achieved to date with new products over the last five years. In a similar way, we continue to increase annual investments in sales and marketing capabilities to grow and expand our reach worldwide. These investments over the past few years have proven to be successful based upon our very strong backlog growth, as well as our balanced mix of domestic and international revenue.

We continue to deliver strong fundamental operating performance since FY '05, evidenced by strong balance sheet, no debt, $14 in cash per share, a history of revenue and earnings growth, and the consistent generation of annual free cash flow, which has allowed us to increase shareholders value through a share repurchase program of 752,000 shares since its inception in June of 2007 and payment of an annual stock dividend of $0.80 per share since September '07.

Excuse me. I need a little drink here. That's water, by the way.

One of the key metrics that we follow closely is customer satisfaction and an excellent measure of customer satisfaction is none other than repeat orders. We have noted that our percent of repeat orders is increasing annually and contributing significantly to our strong results. We celebrated our 50th anniversary in Q2 and reflecting on our first 50 years in business, we'd like to thank our shareholders and customers for their continued support in new business.

Going forward, we remain confident in our abilities to execute our strategies, to develop and innovate best in class security detection solutions, to increase shareholder value in this rapidly evolving marketplace.

And now, I will turn the call back to our operator for Q&A. Michelle?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Steve Levenson of Stifel Nicolaus. Please proceed.

Steve Levenson - Stifel Nicolaus

Thanks, good afternoon. And thanks Anthony and Ken for all the disclosure and all the detailed information. A few questions, one, little housekeeping one, the Letters of Credit as established as performance guarantees for international customers, or are those for purchases of material?

Ken Galaznik

That's for, it's the payment terms related to our international customers, Steve, where we receive a deposit we are required to put up an LC to secure their deposit.

Steve Levenson - Stifel Nicolaus

Okay. Thank you. On the Z Portal, I guess that news from San Isidro came in the current quarter. Was that enough that you could recognize some of the revenue on the Z Portals that have been out there in the quarter you just reported or is that something that's still to come?

Ken Galaznik

Some of those did come through in the current quarter.

Steve Levenson - Stifel Nicolaus

Okay. So it was, it's not part of the revenue in the quarter you've just reported?

Ken Galaznik

Yes, that one is.

Steve Levenson - Stifel Nicolaus

Okay. And I guess there's at least one more out there and they talked about installing a second one at San Isidro. Can you give us an update on how that goes?

Anthony Fabiano

Well, Steve, Anthony here, I can't really tell you what the forecast is for the product, but like I mentioned in my update the customer is very, very, satisfied with the product. We are working very, very closely with them to ensure that all possible scenarios to out fox the equipment cannot occur and we are working with them in a very methodical and patient way to ensure that we have the optimum product and I think that it will be a very successful product for us.

Steve Levenson - Stifel Nicolaus

Hope so, thanks. And the new products and the increase in R&D, do you feel you've got all the people in place now that you need and/or the new products going to be extensions using Z Backscatter technology or is there something new that your working on?

Anthony Fabiano

Very interesting question. Good question. In answer to the first part it's yes, we do have the people in place to do the job and the support of outside assistance in the way of companies and other technical resources. As far as the products moving forward, the way we really move is to find application where our Z Backscatter technology delivers value where competing technologies cannot. So we continue to develop Z Backscatter technology in a more sophisticated way that will tackle new markets.

And we are also coming out with products that are differentiated, but similar to what competitors have in some of the other markets that we are in or endeavoring to be in as well.

Steve Levenson - Stifel Nicolaus

Sounds great. Thanks. Last item and it's sort of a two-part question. How do you think the new administration will impact business for American Science? And with the domestic and international requirements to screen cargo on passenger aircraft do you see an opportunity there?

Anthony Fabiano

Okay. The first question is, how the new administration will affect us, Steve. I really don't know. I think it's really too early to the make that call for just about anyone. Obviously we have a lot of serious budgetary problems in the country. There are concerns about budget cuts, but at the same token as you just said there's a mandate for air cargo screening going to 50%, eventually 100%. And an eventual mandate for screening at 100% for cargo.

So there's kind of a paradox there as to how that will play out. We are not sure how that's going to go, but we are quite prepared as I would imagine our competitors are to optimize on the situation if it ramps up.

Steve Levenson - Stifel Nicolaus

Great. Thanks very much and talk to you again soon.

Anthony Fabiano

Thank you.

Operator

Your next question or comment comes from the line of Brian Ruttenbur of Morgan Keegan. Please proceed.

Brian Ruttenbur - Morgan Keegan

Great, thank you very much. Couple questions, first of all on SG&A, it was down sequentially yet you guys produced more in the quarter than the last quarter. Can you tell us what was going there, why SG&A was down?

Ken Galaznik

Brian, I'm not sure what you're looking at.

Brian Ruttenbur - Morgan Keegan

I think that in the June period had you $7.7 million in SG&A, maybe there's some one time items?

Ken Galaznik

Okay, I'm with you now. The first quarter we were pretty heavy on, we had our international sales conference. We had some heavy trade show expenditures during that first quarter. There were some other activity going on at that time, but that was the lion's share of that.

Brian Ruttenbur - Morgan Keegan

Okay. So this $7.4 million that you report in SG&A expense, it should be that or higher and should ramp with, can you give me some kind of percent of revenue that you're shooting for as a goal?

Ken Galaznik

Brian, I've got one but I really can't go there. As I said, in the current quarter and the increases in the legal costs and the incentive compensation costs, we'll see how that goes forward. If we stay on track for our plans, then the incentive compensation will maintain or possibly increase.

If we come off that track internally, then we'll be backing some of those numbers out. So I really can't give you a go-forward number on that as a percent of sales.

Brian Ruttenbur - Morgan Keegan

How about on R&D, can you give me anything to go off of? You did $4.2 million roughly. Can you talk a little bit about what your plans are for the going-forward period? Are you going to try to model that as a percent of revenue or is it just dollar amount?

Ken Galaznik

We have a plan in place that we are working towards, and we are closely monitoring our revenue results as we go forward to that. If one of those comes off the track then obviously throws it off. I think the only thing I could really share with you on that is, if you look at the current year, we are running about 8.1% of revenue and revenues are at an all time high at the halfway point. So that's showing an expansion of effort on our part. We are still not satisfied with our product portfolio, and we would like to expand it as much as possible. So we are going to be as aggressive as we can with that.

Anthony Fabiano

Exactly right.

Brian Ruttenbur - Morgan Keegan

And then another question, has there been on the militarized ZBV, has there been a protest, has there been a delay? You said that in the award that you are waiting on, it basically sole sources American Science Engineering. Can you talk about what's going on there?

Ken Galaznik

It does, and Brian the only thing I could really refer you to on that is, as you know, all protests are handled through GAO as I understand it, and any protests that have been registered or lodged, you can find them on their Website.

Brian Ruttenbur - Morgan Keegan

So, are you aware of a protest?

Ken Galaznik

When I looked at the Website today I saw nothing.

Brian Ruttenbur - Morgan Keegan

Okay.

Anthony Fabiano

Brian, if I could just make a comment there.

Brian Ruttenbur - Morgan Keegan

Sure.

Anthony Fabiano

This is a very, very high priority with US Marine Corps, and I know that people protest from time to time. It's typical in our industry. We as a company don't normally do that as a course of business because it usually doesn't result in anything, and it's a big waste of taxpayer's dollars, that's my personal opinion.

When you think about what the mission of this equipment is, which is to keep American soldiers in the field out of harms way, and that the end user is dying to get his hands on the equipment, a protest is the worst thing that can happen for America. So I don't think that anyone would want to see something like that happen.

Brian Ruttenbur - Morgan Keegan

Okay. Thank you. And then on a going-forward basis, can you give us any clarity about how quick you see some of this backlog coming out?

Ken Galaznik

Brian, I could go to my standard response of taking kind of a rough cut at it. Of what you see in backlog right now, probably 70% of that in the next 12 months.

Brian Ruttenbur - Morgan Keegan

Okay. Thank you very much.

Ken Galaznik

Thank you.

Anthony Fabiano

You are welcome.

Operator

And your next question or comment comes from the line of Tim Quillin of Stephens Incorporated. Please proceed.

Tim Quillin - Stephens Inc.

Hi, good afternoon. Nice results.

Anthony Fabiano

Thanks, Tim.

Tim Quillin - Stephens Inc.

Do you have a sense now of when you might get that Marine Corps order and how it might ship over two or three quarters?

Anthony Fabiano

All I can say is I've never seen the government move as fast and I've never seen us move as fast to turnaround paperwork, so there's a high sense of urgency at a very, very high level in the military to place this contract for the security reasons that I mentioned earlier. So I would anticipate a contract very soon but I can never tell you that. I don't know. I don't know the details of the procurement process here and how many people need to sign off on this thing.

As far as the shipment of it, I can't really articulate that at this point in time. A lot depends upon where the units are going to go and exactly how they want them deployed and that has not been fully explained to us yet.

Tim Quillin - Stephens Inc.

Okay, that's fair. Thank you.

Anthony Fabiano

Whatever it is, we'll get it done.

Tim Quillin - Stephens Inc.

Okay, good. In terms of gross margin, should we consider the service gross margin to be abnormally low in the quarter? Or how should we think about that going forward?

Ken Galaznik

I would say that the current quarter was lower than it should have been and we are going to put corrective actions in place to address that going forward, so we hope to see some improvement in that in the future quarters.

Anthony Fabiano

He's being very polite here. Most of the blame is on me, and one of the reasons for this is that we have several new products out in the field as you know, and we've made it a point of serving the customer and serving the equipment extremely well to ensure that the equipment performs. And I think it's a great policy that we are doing it. It sacrifices a little bit on the margin side but I think in the long run, and we are running the business for the long run, it's the right thing to do for the customer. And we won't always be doing this but at this point in time it's important to do so.

Tim Quillin - Stephens Inc.

The Product's and Contract gross margin was also high or higher than I expected during the quarter and, it's not all just that there was a lot of Z Backscatter Van shipped, There's other things going on there and I think you alluded to that a little bit, but how sustainable is that level of gross margin in other product areas?

Anthony Fabiano

I think you look at just Products in general, non-service contract related at that product mix level, I think it's very sustainable.

Tim Quillin - Stephens Inc.

Okay. And if you should happen to ship more Z Backscatter Vans over the next two or three quarters then presumably the gross margin could be higher than that?

Ken Galaznik

I qualified my response by saying and saying at that product mix, it's sustainable. If the higher margin product lines go up, then that's going to drive it north. If those drop off for a quarter, then we'll see a little southern exposure.

Anthony Fabiano

Yes. There's been a little bit of a myth out there, Tim, that that certain product lines or product categories like cargo have to be low margin and everybody has to lose money. We don't necessarily believe that.

Tim Quillin - Stephens Inc.

I like that attitude. Lastly, Ken, can you remind me what the nature of your cash investments are? I know you have on the balance sheet, both the short-term investment and the cash and cash equivalents. If you can just through what's in there? Thanks.

Ken Galaznik

The best I can tell you is, they are extremely conservative. We've got a lot of government securities. You've got the most secure non-risk that you can possibly have. We all know today's condition, and what's going on, what's considered secure today may change tomorrow. But I can share with you there's been a lot of attention all the way up through our Board members in the last few months on this subject because our approach is to have as many eyes looking at that as we possibly can.

The people who handle those investments for us are instructed that the preservation of capital is the number one priority. If they take a risk and we pick up another half of a point, I could care less. It's meant to be a very conservative approach.

And it's served us well so far to date keeping us out of the scenarios with the auction rate securities, some of the riskier corporate paper that's out there today. It's an extremely conservative package.

Anthony Fabiano

We make our money selling equipment. We certainly don't want to lose it on investments.

Tim Quillin - Stephens Inc.

Thanks, congratulations, guys.

Anthony Fabiano

Thank you.

Ken Galaznik

Thank you very much.

Operator

Your next question or comment comes from the line of Josephine Millward of Stanford Group. Please proceed.

Josephine Millward - Stanford Group

Good afternoon. Congratulations on a fantastic quarter. Now your bookings came in stronger than expected or what you reported. Anthony, can you talk about those new bookings, were they primarily international orders? If you can give us a little more color on what was not reported?

Anthony Fabiano

Yes, Josephine, they were primarily international orders on the ZBV side. I made a comment earlier about repeat orders and new beachheads. We actually booked one Z., two Z requirements with a half a dozen new customers outside CONIS in this part quarter and we booked repeat orders for two or three ZBVs from customers that we've dealt with overseas. So we were very, very happy about that because that's been one of our critical success factors.

And also the Parcel orders that we booked were mostly domestic from some really choice agencies that we were trying to recapture market share in. And have reestablished some beachheads there which is important. As well as some international business in that area as well. So it was a lot of trickling brooks that made a big river there between the difference of what you thought we were going to get, and what we actually delivered.

Josephine Millward - Stanford Group

That's good news. That's a lot of ZBV orders.

Anthony Fabiano

Yes.

Josephine Millward - Stanford Group

This is probably a question for both you and Ken, if you can discuss your plans for cash. We haven't seen a lot of share repurchase, it's nice to have money in today's environment, if you can just talk about what you might do to deploy that money.

Ken Galaznik

Josephine, I don't know really what I could say here. We have this two repurchase program, we have a matrix in place that we put it in place prior to the window closing and it stays in place during that time. We can't modify that until the window opens at that point in time. There's different philosophy as to how to look at it at this point in time, but that's what we are doing right now on that front.

As to any other possible uses of cash there's always the obvious, we can keep your eyes and ears open from those standpoints, but it's an interesting market right now. It's an interesting times and it's not a bad thing to be used to kind of sitting on that cash a little bit and see how everything shakes out.

Josephine Millward - Stanford Group

I was just wondering if you could talk about areas you might be interested in terms of acquisitions if that's an area you are investigating.

Anthony Fabiano

Josephine, let me make two comments here and I can't tell you too much because it's too competition sensitive. But, number one, we are seeing valuations in the industry finally start to come down to a more realistic numbers, which makes it attractive to us because we have a lot of dry powder and a strong currency in our stock price. But there is an area or too that we think is critical to the sustained and long-term growth of our industry that we are very interested in and we are going to be exploring that. We've actually created a new position here, a Vice President of Strategic Planning, several months ago, who works directly with me to explore those possibilities. So it's in our radar. The fog hasn't lifted yet.

Josephine Millward - Stanford Group

And would this be a new area for you or it's an extension of your existing product line?

Anthony Fabiano

I'm going to be fuzzy here, but it's a combination of both.

Josephine Millward - Stanford Group

Thank you, Anthony.

Anthony Fabiano

You're welcome.

Operator

And your next question comes from the line of Michael Kim of Imperial Capital. Please proceed.

Michael Kim - Imperial Capital

Hi, guys, good afternoon.

Anthony Fabiano

Good afternoon. Just to revisit a couple of areas. First, on the ZBV Mil Trailer. Assuming you do get awarded the contract here in the not too distant future, would you expect all 66 systems to be shipped within a twelve-month period or would you expect to be extended beyond that?

Anthony Fabiano

Again, Michael, it's really hard to tell. It depends upon the customers mission and we are completely committed to their mission and I can't tell you at this point how they want the systems deployed or where.

Michael Kim - Imperial Capital

Just going back to the IRAD spending and the ramp up there. Can you talk about a little bit more detail with the strategic focus for that IRAD spending where you specifically see the opportunities, any more color or more detail?

Ken Galaznik

Michael, I really don't think we could at this time without getting into areas which we wouldn't be comfortable talking about that from a competitor's standpoint. I think we've demonstrated products that have come out of the IRAD pipeline in recent history and you can see the dollars going in. So just a question of are we doing the proper investments. I think our path would show that we are and we are still on that path moving forward, and I'm not trying to be cagey or anything else, but it's really kind of a stay tuned because we would rather not discuss it with our competitors.

Michael Kim - Imperial Capital

That's fair. Would we, I guess should we expect to see the output of the IRAD spend in next fiscal year or is it more longer term investment on your part?

Anthony Fabiano

One of the things that we've said many times before is that when we come out with new products that there's always about lag of a year before they get any kind of legs. So I wouldn't want to over encourage anybody in that regard. I think what happens and you've seen it many times with us before is we get a product out there, the customer tests it for six months and uses it, then they determine they like it, they miss the budget cycle by the time we get into it. It's the next year before they actually buy a few more. So it takes a little while for these things to weed out. But we are very, very excited about the things that we are doing.

Ken Galaznik

I know we sound like a broken record sometimes, but it truly is a long-term scenario here and it's for the patient person.

Michael Kim - Imperial Capital

That's certainly fair. And then just going back to the Z Portal opportunities at the San Isidro crossing, it sounds like that's going fairly well for you. You talked a little about it before, but assuming you'll continue to success there that ZBV might bring this pretty much all the major border crossing within a couple year time frame or is it something that you would expect to be a longer lead time product?

Anthony Fabiano

Boy, if you can figure that one out for me, we would be very interested in buying you lunch. It's a tough one, a lot has to do with budgets. A lot has to do with how well the equipment continues to perform. It's kind of, what are you doing for me today. So I really don't know. It's too early to the make that kind of call, but I know where you are going. We think about it all the time.

Michael Kim - Imperial Capital

Okay, great. Thank you very much.

Anthony Fabiano

Thank you.

Operator

And this does conclude the question-and-answer session. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-286-8010 for the US, and 617-801-6888 for international callers with conference identification number, 12125895. An audio replay will also be available on the AS&E Website at www.as-e.com, in the Investor Information section.

This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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Source: American Science & Engineering F2Q09 (Qtr End 09/30/08) Earnings Call Transcript
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