American Science and Engineering: Watch This Stock Closely

I opened yesterday’s Wall Street Journal and upon looking at the front page saw the photo of the aftermath of a terrorist attack in Spain and was reminded again that that terrorism can strike anywhere in the world at any time. Countries all over the world face the challenge of thwarting attacks before they happen. Technology plays an important role in this fight and one of the companies in this space is American Science and Engineering (ASEI) on the Nasdaq. In 2004, I found the stock after reading about their backscatter technology. Back then, it traded on the Amex and late during that summer, I remember the company receiving a large number of contracts for the Z Backscatter Van. If my memory serves me correctly, I think that the August through October period is when the company received a substantial number of their contracts from the US government.

What They Do From 10K: Going through the 10K, for the period ending March 31st 2009, which was when their fiscal year of 2009 ended: American Science and Engineering “develops, manufactures, markets and sells x-ray inspection and other detection solutions for homeland security and other targeted markets. It provides maintenance, warranty, research, engineering and training services related to these solutions.” The company’s products and services are in 4 main areas: cargo search, mobile search via the Z backscatter van, parcel search which inspects baggage and service and support. The company’s main customers are governments and government agencies who use ASEI’s products to thwart terrorism, drug trafficking and other concealed crimes. To grow the business, American Science and Engineering will look to expand into seaports, borders, and corporate facilities.

American Science and Engineering uses “backscatter technology which is an x-ray technique that can find hard to detect materials such as weapons, explosives and illegal drugs.” The company has 40 patents and ASEI believes that its patents and proprietary technology give it a strong competitive position. The US government makes up 63% of its FY 2009 revenues and because of that large percentage, American Science and Engineering faces big risks if the US government cuts back on its spending in this space. International revenues make up the remaining 37%. 85% of the international revenues come from the Middle East and 7% from the Pac Rim. The company’s two largest customers made up $39,187,000 and $34,635,000 of revenues in FY 2009.

Competition includes several L3 (LLL) and OSI (OSIS) systems. The company’s financials tend to be lumpy. I have been watching the company and stock closely since August 2004 and the company’s results and share price both bounce around sharply. The main driver for this company has always seemed to be the backlog rather than the sales and earnings as the sales and earnings will follow the backlog over time. Their fiscal year is a little different too ending on March 31st. For the FY 2009, revenues came in at $218,367,000 up 31% from FY 2008 and earnings came in at $28,353,000 vs $17,478,000. EPS for 2009 came in at $3.18 and for 2008 came in at $1.87. Even at the $3.18 in EPS for FY 2009, the company had noncash items which reduced EPS. The balance sheet improved even further in 2009 as the company has no debt and the cash went to $105,419,00 up from $53,001,000.

The company pays a quarterly dividend of 20 cents per share, has a clean balance sheet with no debt and cash of $105,419,000. The company has a share purchase plan in place and has about $26,372,000 left on the buy back. The company’s backlog is at $155,349,000 vs $99,606,000 in the prior fiscal year. With the stock at 69.59 and its shares outstanding at 8.844 million, the market cap is at $616 million. The PE is at about 22 and the PS is at about 3. With so few shares outstanding, this is both bad and good for the shareholder. Good because thin stocks tend to move much more quickly than thicker stocks. But this is a double edged sword and if something goes wrong this stock can move quickly down too.

The next earning quarter comes out on August 6th. I mentioned above that a big
risk would be if the government cut back its purchases in this space but another risk is if the government uses the “Partial termination for convenience” clause it has in its contracts with ASEI. This is a standard clause in government contracts but it is still something to be aware of. ASEI is a story to watch long term with some great technology and earnings power and a great balance sheet. It would be helpful for the company to expand away from the US government and possibly into the non-government space as well as continue to expand into the international arena. Before doing anything with the stock it might make sense for the reader to listen to the company comments at this upcoming earnings call to see how its US government work looks going out over the next year and thereafter.

Disclosures: None.

Comments

[Ben G.:]

"another risk is if the government uses the “Partial termination for convenience” clause it has in its contracts with ASEI. This is a standard clause in government contracts but it is still something to be aware of. "

Not true. Recently there was a specific contract which had been protested by OSIS (Rapiscan divsision).That contract saw about 30% of the total contract cancelled. Government contracts don't carry this clause. Terminations are done for a variety of reasons. With any government contractor you have budget risk. Prior to the partial cancellation of their Military ZBV order with the Marines, the stock had been trading at a 3 year high while the market was just off its 12 year lows....

Jul 31 01:14 PM

[Ben G.:]

The company's growth has largely been fueled by international penetration of markets in Asia and Latin America. Since 2006 the company has focused much its efforts in diversify its product mix and customer base. In FY 2009, a record year, 37% of sales were international.

And its flagship "Z Backscatter Van™ (ZBV) has gained an unprecedented level of worldwide success as the number one selling non-intrusive mobile inspection system on the market with over 400 ZBV systems sold to 85 customers in 46 countries. The number of ZBV success stories from around the world continues to grow, from seizures of large quantities of drugs, to the detection of stowaways and bulk explosives in war zones. Introduced in 2003, AS&E’s ZBV is faster, more effective, and less expensive than any other mobile X-ray screening solution available. In the last year alone, AS&E gained 16 new ZBV customers in 7 countries."

Jul 31 01:34 PM

[The Inflect...:]

Thanks for the comment.

On February 23 2009, American Science and Engineering came out with an announcement titled,

American Science and Engineering, Inc. Announces Receipt of Partial Termination for Convenience on its U.S. Government ZBV Military Trailer Order

The press release also says the following and I quote here exactly:

" Termination for Convenience is a standard clause in government contracts which gives the government the right to terminate the contract in whole or part, when the government determines that it is in its best interest, and without fault of the contractor."

Sure the risks of budget curts is a risk, and although I am not sure how often the government would decide to use this "termination for convenience clause" against ASEI, it seems that from American Science and Engineering's perspective that this is a standard clause that they are well aware of.

Thanks again for the comment.

Tom Henderson
On Jul 31 01:14 PM Ben G. wrote:

> "another risk is if the government uses the “Partial termination
> for convenience” clause it has in its contracts with ASEI. This is
> a standard clause in government contracts but it is still something
> to be aware of. "
>
> Not true. Recently there was a specific contract which had been protested
> by OSIS (Rapiscan divsision).That contract saw about 30% of the total
> contract cancelled. Government contracts don't carry this clause.
> Terminations are done for a variety of reasons. With any government
> contractor you have budget risk. Prior to the partial cancellation
> of their Military ZBV order with the Marines, the stock had been
> trading at a 3 year high while the market was just off its 12 year
> lows....

Jul 31 01:58 PM

[The Inflect...:]

Thanks for the comment.

I am an engineer by original training and I love the ZB Van. It is great to see the van get traction overseas. Still the US government is the 800 pound customer and diversificaiton into other areas and customers over time will be important.

Thanks again for the comment,

Tom Henderson


On Jul 31 01:34 PM Ben G. wrote:

> The company's growth has largely been fueled by international penetration
> of markets in Asia and Latin America. Since 2006 the company has
> focused much its efforts in diversify its product mix and customer
> base. In FY 2009, a record year, 37% of sales were international.
>
>
> And its flagship "Z Backscatter Van™ (seekingalpha.com/symbo...)
> has gained an unprecedented level of worldwide success as the number
> one selling non-intrusive mobile inspection system on the market
> with over 400 ZBV systems sold to 85 customers in 46 countries. The
> number of ZBV success stories from around the world continues to
> grow, from seizures of large quantities of drugs, to the detection
> of stowaways and bulk explosives in war zones. Introduced in 2003,
> AS&E’s ZBV is faster, more effective, and less expensive than
> any other mobile X-ray screening solution available. In the last
> year alone, AS&E gained 16 new ZBV customers in 7 countries."
>
>
>
>
>

Jul 31 02:02 PM

[oldetimer:]

People who follow AS&E understandably talk about past and present performance. This of course is usually the case and always quite helpful (if you want to know the future, know the past). I have been involved with this company many, many years. In my opinion one of the company's greatest assets (if not the greatest) is its engineers and their creativity. They are constantly developing new, state of the art, products. This is why they will continue to succeed, even with their regular peaks and troughs. But this factor is highly subjective, and does not lend itself to objective measurement. However, with this particular company, I would value this asset extremely highly.

Jul 31 03:17 PM

[The Inflect...:]

Hi Oldetimer,

Thanks for the comment. I have a degree in Civil Engineering and love companies that utilize state of the art technology. I will be watching AS&E very closely over the coming months and years. A great American engineering story.

Good luck and thanks again for the comment.

Tom Henderson


On Jul 31 03:17 PM oldetimer wrote:

> People who follow AS&E understandably talk about past and present
> performance. This of course is usually the case and always quite
> helpful (if you want to know the future, know the past). I have been
> involved with this company many, many years. In my opinion one of
> the company's greatest assets (if not the greatest) is its engineers
> and their creativity. They are constantly developing new, state of
> the art, products. This is why they will continue to succeed, even
> with their regular peaks and troughs. But this factor is highly subjective,
> and does not lend itself to objective measurement. However, with
> this particular company, I would value this asset extremely highly.

Jul 31 03:38 PM