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American Science and Engineering, Inc. (NASDAQ:ASEI)

Q4 2014 Results Earnings Conference Call

May 22, 2014 08:30 AM ET

Executives

Ken Galaznik - CFO and Treasurer

Chuck Dougherty - President and CEO

Analysts

Edward Marshall - Sidoti

Josephine Millward - The Benchmark Company

Brian Ruttenbur - CRT Capital

Operator

Good morning, ladies and gentlemen, and welcome to American Science & Engineering's Fourth Quarter and Fiscal Year 2014 Results Conference Call. My name is Andrew, and I will be your conference facilitator today.

At this time, I would like to inform you that this conference call is being recorded and all participants are in a listen-mode and we will be facilitating a question-and-answer session at the end of the presentation. (Operator Instructions).

Mr. Ken Galaznik, Chief Financial Officer and Treasurer, will now begin the conference. Please go ahead.

Ken Galaznik

Good morning, and thank you for joining us for AS&E's fourth quarter and fiscal year 2014 results conference call. I'm joined today by Chuck Dougherty, our President and CEO and Mike Muscatello, our Vice President and General Counsel. I will begin with an overview of the financial results. And Chuck will then offer his comments, after which we will open the call to questions.

Before we begin, I'm obliged to inform me that during the course of this presentation, we will be making certain forward-looking statements based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties and our actual results may differ materially. I encourage you to review the Safe Harbor statements and the risk factors we have identified in our press release and our SEC filings which can be found on our website at www.as-e.com.

For those of you on the webcast, you could see we're incorporating a slide presentation in our call today, which we hope you will find helpful. Please note that you could download these slides from our website at your convenience. Now I would like to asses the results for the fourth quarter. When comparing results to the prior period and unless otherwise stated I will be referring to the corresponding period of the prior year. Also please note that we'll as previous referred to as custom products, will now be referred to as other revenues and we'll consist with custom products, spare parts and other miscellaneous revenues.

Net sales in contract revenues in the March quarter were $65.6 million or 55% above the prior period revenues of $42.3 million. This increase in revenue is attributable to the $17.8 million increase in cargo, primarily due to the completion of a large contract for an integrated port project. Mobile cargo, which increased $15 million over the prior period, primarily driven by the strength we are experiencing in the international markets and a modest increase in parcel.

These increases were offset somewhat by the $11 million decrease in service revenues attributable to the reduced activity and the revise contracting methodology and the war zone discussed on the last conference call. As you can see, the breakout of revenue by product line for the quarter is as follows. Cargo was $30.6 million; mobile cargo was $18.8 million; parcel and personnel was $2.6 million; service revenue was $11 million; and other revenue was $2.5 million.

The gross profit in the quarter was $21.4 million or 32.7% of revenue, as compared to $14.2 million or 33.7% of revenues in the prior quarter. As you may recall, the gross margin as a percent of revenue was negatively impacted 13 points in the prior period due to the resolution of a contract issue and the actions taken to rightsize the organization at that time.

In the current period, margins were impacted by a large integrated port project that produced low margins as it was the first of this type for us. In addition to lower margins of our field service contracts due to higher cost to service fixed price contracts and the reduction in modification of the contracting methodology for war zone services.

Selling, general, and administrative expenses were $9.1 million or 14% of revenue in the quarter, as compared to $8.4 million or 20% of revenue in the prior quarter. This increase is primarily attributable to increases in selling expenses related to our geographic expansion and incentive compensation due to attainment of certain performance related goals.

Company-funded research and development expenditures in the current quarter were $6.4 million or 10% of revenues, as compared to $4.8 million or 11% of revenues in the prior year. We continue to focus on the development of new products while continuing to enhance our current products. The company recorded income tax provision of $2 million in the current quarter, as compared to a $392,000 provision in the prior quarter. The increase is due to the increase in taxable income offset somewhat by decrease in the effective tax rate from 34% in the prior year to 33.5% in the current year. Fully diluted earnings per share in the March quarter was $0.50 as compared to $0.09 in the prior period.

Review of our year-to-date results reflects the following. Revenues increased 2% to $190.2 million in fiscal 2014 as compared to a $186.7 million in the prior year. This increase is attributable to a 26% increase in cargo revenue, a 24% increase in mobile cargo, a 40% increase in personnel offset by a 22% decrease in service revenues and a 7% decrease in other revenues. In summary, product revenues increased 23% while service revenues decreased 22%.

Gross profit decreased $2.8 million in the current year from $79.4 million in the prior year. As a percent of revenue, margins declined 220 basis points going from 42.5% in the prior period to 40.3% in the current period, primarily due to a large low margin project noted earlier and the lower service margins offset somewhat by lower inventory reserves and the lack of the one-time accrual for the contractual reserve recorded in the prior period.

In the current year, SG&A expenses are $31.8 million or 17% of revenues, as compared to $29.5 million or 16% of revenues in the prior year. The increase is primarily attributable to the increase in incentive compensation costs due to attainment in the current year of certain performance related bonuses and the fact that the prior year contained reversal of incentive compensation accruals related to our former President’s retirement.

Research and development expenses decreased to $22.1 million or 12% of revenues from $23.6 million or 13% of revenue in the prior year. Fully diluted earnings per share are $1.91 as compared to $2.07 in the prior year.

A review of our current balance sheet shows that the balance of cash, restricted cash and short-term investments at March 31st was $165.7 million or $3.2 million above prior year end balance.

This increase attributable to the $32.5 million of cash generated from operations offset somewhat by the $12.3 million expended on the repurchase programs, dividend payments of $15.7 million and CapEx of $1.8 million. Cash from operations less CapEx or free cash in the current year was $30.7 million as compared to $27.5 million in the prior year.

DSO at March 31st was 47 days as compared to 61 days at March 31st in the prior year. Year-to-date depreciation and amortization expense was $5.3 million, as to the stock repurchase program this fiscal year we have purchased and retired 201,192 shares for $12.3 million. Therefore the total purchase and retired to-date remains at 2.5 million shares for $140 million at an average purchase price of $56.90 per share. We are currently operating under the fifth $35 million authorization.

Bookings in the fourth quarter came in at $60.8 million, generating a book-to-bill ratio of 0.93, which brings our year-to-date book-to-bill ratio to 0.95. Our backlog at March 31st was $176.1 million or 6% below the March 31, 2013 balance of $186.2 million, and down 3% sequentially from the December quarter.

While not yet reported in backlog, the company has $16 million of unfunded contracts, which are expected to be recorded in backlog in the next 12 months. I am pleased to inform you that at its recent meeting, the Board voted to approve a cash dividend of $0.50 per share. The dividend is payable on June 9th to the holders of record at the close of business on June 2nd.

I will now turn the call over to Chuck for his comments.

Chuck Dougherty

Thanks Ken, and good morning, everyone. What I want to do is give you a brief update on where we're at with our strategic growth initiatives. I feel like we've made significant progress during fiscal year '14 and I want to hit some of the highlights and talk about some of the focal areas as we move forward into the new fiscal year.

As previously communicated, our strategic growth pillars for the company organically are focused on geographic expansion, portfolio expansion, the evolution of our service offerings and inorganically looking at how we expand our reach and portfolio through inorganic efforts, while we develop our organizational capabilities to support the new direction of the company and our growth initiatives.

Let me first touch on geographic expansion. I personally continue to believe that this is the largest opportunity for the business and that is the expansion of our market reach as well as the expansion of the application for our technology into potentially new market applications like traditional public safety markets.

As we look at, as I look back on the fiscal year and looking at what we plan to leverage going forward, a lot of our emphasis has been on strengthening our go-to-market capabilities in key growth regions or markets for the company by upgrading our direct resourcing and target markets as well as strengthening or indirect channel. One of our strategic focal areas for the business has been on the re-advancing and restructuring of our indirect channel globally and we've made significant progress on that during the year.

A good example or proof point of this is the fact that 73% of our bookings this past year were international, that's a significant change for this business and I think is a real good health indicator for the business as we move forward, as U.S. spending recovers even moderate levels, we have a much broader base to build upon as we go forward.

We also, during the year booked 94 ZBVs, 98 % of those were with international customers. So the ZBV platform is now, we now have over 730 of those sold to 135 customers and 65 different countries, that continues to be the industry leading platform and it is also very good entry product for us into new markets and into new customers, where we can establish presence with an industry leading product that we can leverage for broader opportunities as we move forward.

With this significant increase in demand that we're seeing with the ZBV, we're actively focused on ramping our supply chain efforts to meet the increased demand and we anticipate seeing the results of these efforts in our supply chain in the second half of this fiscal year.

To contrast with prior performance, we sold over 3 times or booked over 3 times the number of ZBVs in FY14 than we booked in FY13 and it was more than the last two years combined and the pipeline for the ZBV continues to be very strong in international markets and something that we look to execute on as we move forward.

In the portfolio expansion, our focus is really on expanding our leading position, our Backscatter franchise and our capabilities as well as expanding our portfolio offering to our existing as well and to our new targeted customer base in areas like public safety.

We launched and feel that our new version of the ZBV during the fiscal year of the S-Class ZBV to a number of customers during the year. And in terms of new offerings within the next month we're going to announce, I think an exciting new, will be a family of products that are affordable miniaturize Backscatter products, the first of which will be launched the latter part of June. And again, this will be a family of products that we’re looking to launch and to leverage our leading capabilities in Backscatter detection solutions.

In the service arena, our emphasis as we transition our service business from the DoD in-theater efforts that were significant part of our revenues the last several years is highly focused on our service offering, is highly focused on value-added offerings in the areas of systems integration and capabilities as well as managed services. In systems integration area, we recently completed a major integration effort with the Port of Khalifa in Abu Dhabi. And this integration effort really allows for seamless integration of our products along with portal monitors, lane cameras, video management systems and radiation detection capabilities all in an integrated solution for the Port of Khalifa. And we see that being a growing trend in the marketplace and one that we’re well-positioned to leverage our efforts and our experience in the Port of Khalifa to secure additional business as we move forward for this type of activity.

We also continue to build out organizational capabilities to offer managed service solutions to our customer base. And that continues to be a big emphasis for us and for our pursuit and capture efforts in the sales organization.

On inorganic front, our emphasis, this continues to be an active part of our efforts and our emphasis really is on expanding our market reach and strengthening our portfolio offering to this ever growing channels that we have globally now within the business. And that continues again to be a very active part of our efforts and we’ll continue to provide update as we progress on those initiatives.

In terms of the organizational capability, I am really pleased with the work that we have been doing to both realign and strengthen organization that reflected new direction of the business as our business transitions into truly a more global business, offering higher value added services and solutions. And we’ve made significant progress on strengthening our capabilities in a number of areas in go-to-market; integration; and product development area. So, I am very pleased with the program that we have made to-date and that’s really foundational for what we are trying to do as we move forward.

So with that I will open it up to any questions that you may have. Moderator, if you can open it up please?

Question-and-Answer Session

Operator

Thank you, Mr. Dougherty. The question-and-answer session will begin at this time. (Operator Instructions). And our first question comes from the line of Edward Marshall from Sidoti. Your line is open.

Edward Marshall - Sidoti

Good morning, guys.

Ken Galaznik

Good morning, Ed. How are you doing?

Edward Marshall - Sidoti

Good, how are you?

Ken Galaznik

Fine, thank you.

Edward Marshall - Sidoti

So I was thinking the ZBV that was booked and shipped in the quarter, did you say -- I think you said that’s for the year but did you say it for the actual quarter?

Chuck Dougherty

No, we did not.

Edward Marshall - Sidoti

Did you have that number, those numbers?

Chuck Dougherty

No, we just have the full year number there provided with book 94 during the full year and Ken highlighted the family revenues for that product falls into the mobile cargo platform is highlighted on the WebEx.

Edward Marshall - Sidoti

So like previous calls, you used to give the shipped and booked in the quarter that’s going to happen any longer, is that right?

Ken Galaznik

Correct Ed, we would like to move it to more annual [thoughts] on that. And as always, we’ll disclose the dollars amounts but we would like to get away from the actual quantities.

Edward Marshall - Sidoti

Okay. Can you tell me how many, you booked 94, can you tell me how many were shipped in the year?

Ken Galaznik

Yes. 48, Ed.

Edward Marshall - Sidoti

48? Okay, great.

Ken Galaznik

Yes.

Edward Marshall - Sidoti

When I -- I want to ask a question on inventories, because I see roughly $17 million of cash you generated quarter in quarter was from inventory drawdown. And I just kind of wanted to -- with the bookings being strong as they are, I wanted to kind of get your thoughts surrounding inventories and is that just temporary and transitional and that will return? Because I would assume that as bookings went up you would start to add to inventories and it seems unnatural. So, I'm just kind of curious about your [commitment]?

Ken Galaznik

I think it's an improvement in the [battle] for carrying right now. The significant impact to inventory was through recognition of the large cargo project we've both talked about that was recognized, completing contract, it’s a large project that went on for a period of time. So it accumulated an inventory. So obviously and we [tested] revenue reflects the dollars out of inventory from that standpoint. There is also a significant effort internally to kind of keep an eye those balances and minimize them wherever possible and not higher cash up in inventory unless it’s appropriate thing to do.

Edward Marshall - Sidoti

So, you think you'll go back to your traditional levels of inventory as we move forward or is this kind of the new baseline?

Ken Galaznik

It will -- don' know what comes in, but there is a good chance will go back to the higher levels. I think a big emphasis Ed for us is on ramping our ZBV production, so you’ll probably see some inventory adjustment associated with that as we scale our capacity there.

Edward Marshall - Sidoti

And I wanted to kind of talk about the margin on both I guess the individual segments of product sales and service revenue, if you could kind of develop though. And I think, I don't know if you actually have the sales number, would you give me the sales of each of those divisions and then the margin on those two divisions?

Ken Galaznik

I did the -- the sales, I don't have the margin, I think the second to give that -- for that. But I gave for the quarter and for the year.

Edward Marshall - Sidoti

Well, you gave the individual segments, I guess for cargo ZBV parcel. I was wondering if the product sales or the field service revenue doesn't translate 1 to 1, because there is other part revenue in there as well and generally that number’s just modest change.

Chuck Dougherty

Correct, that's why I commented on as I started my call today is that that's now referred to, that's now a pure number from the service, the service number will tie to what you see in the Ks and Qs going forward. Because in the past, we've included certain parts in that now it's in other revenues. We have ….

Edward Marshall - Sidoti

All right, okay. That can do.

Chuck Dougherty

[Best of] products, other revenues, just give me spare parts and all in that other revenue number now. So that will be direct correlation.

Edward Marshall - Sidoti

So, roughly 65 minus 11 would give me the product sales number?

Chuck Dougherty

Yes sir.

Edward Marshall - Sidoti

And you do or you don't have the margin that pointing out?

Chuck Dougherty

I don't have it in front of me right now from the way you are calculating it.

Edward Marshall - Sidoti

Okay. And then finally I just kind of want to think about a high level thought and maybe as we look at your business overall and we've seen the declines in the services revenue as some of the changes that happen there and that's been well defined.

But, when you are replacing that with product revenue and you have done a good job of getting customers orders, but a little bit lumpier and tends to be a little bit cyclical, do you think that there is added rest to the business model with the changes in the service business being that it's on a lower base in the recurring revenue from those streams are lower. And then ultimately they take time to get that service revenue back as we book out warranties, near term thoughts versus long-term thoughts.

Chuck Dougherty

Well, I think near term, I wouldn't disagree if what you're saying, is just -- who would not prefer to have more consistent recurring revenues on a quarter to quarter basis going forward as we build that back out we'll get it back to but we were before. But in the short term, I wouldn't disagree with that you're saying.

Edward Marshall - Sidoti

Okay. And then, actually if I have one more, is there any change in pricing for you guys, I mean I see the margin and I know there is a lot to do with that cargo sale, but have you changed any of your pricing on this type of booking orders?

Chuck Dougherty

No, not really.

Edward Marshall - Sidoti

Okay. Thanks guys.

Chuck Dougherty

Thanks, Ed.

Operator

Thank you. Our next question comes from the line of Josephine Millward from The Benchmark Company. Your line is open.

Josephine Millward - The Benchmark Company

Good morning.

Chuck Dougherty

Hi Josephine.

Josephine Millward - The Benchmark Company

Hi Chuck. Can you talk about your big ZBV order from the international customer I think it was 33 units.

Chuck Dougherty

Correct.

Josephine Millward - The Benchmark Company

What’s driving the demand there? Congratulations by the way. And is it for infrastructure protection or border security, if you can help us understand if you have other projects like that in the pipeline?

Chuck Dougherty

Yes. No, that’s fine, and it is really what we’re seeing now is a strong shift toward where I can call contraband detection. And there is an emphasis on border security, but one of the trends that I’ll say I am enamored with having come out of the public safety businesses the expanded use and the use of the technology and hopefully one thing we’re trying to drive is the reach of the technology beyond the federal level at governments and down into the state or provincial level at within different regions of the world and that’s a major emphasis of ours. And we’re seeing that as a growing trend. I think that’s going to be a healthy long-term trend for the business and I’ll say for the industry as well.

And so this particular application, it’s actually a mix in terms of the application but I’d say it’s heavily focused on border security.

Josephine Millward - The Benchmark Company

Okay. That’s helpful. Can you give us an update on your expansion into turn-key services and offering integrated solutions? How do you see that impacting your margins going forward as your revenue mix starts to shift?

Chuck Dougherty

Well we think it’s a healthy model. We expect the margins to be certainly at least comparable to what we do today. So we think it’s very healthy and as per Ed’s question I think it provides the potential opportunity for a nice recurring revenue stream obviously in a nice space which is why it’s focal area for our service organization in terms of our offering. These are long sales cycle opportunities as (inaudible) and but there are good number of these types of opportunities out there that we are actively pursuing. So but we do see it the financials being attractive for the company and obviously others in the industry do it as well.

Josephine Millward - The Benchmark Company

Chuck in the past I think you guys talked about being close to winning a turnkey contract sometime this calendar year, are you still comfortable with that or can you give us update on timing?

Chuck Dougherty

I think it’s still realistic for us to do that and we’re dealing with large government agencies on these types of projects and they are very complex. So as I mentioned the sales cycle is long but I still feel good about the time frame.

Josephine Millward - The Benchmark Company

Great, thank you very much.

Chuck Dougherty

Thanks Josephine.

Operator

Thank you. Our next question is from the line of Brian Ruttenbur from CRT Capital Group. Your line is open.

Brian Ruttenbur - CRT Capital

Thank you very much. Couple of questions on bolt-on to Josephine on the [DoD] or the managed services business. Are you seeing competition on these managed services deals, are you coming in as a sole source provider kind of just pitching this new idea to the government?

Chuck Dougherty

No. I think in -- it is a combination, but I think as most of these applications Brian, there is competition, or some level of competition from what I've seen so far. So I think the landscape, is it's a competitive landscape much like our product businesses.

Brian Ruttenbur - CRT Capital

Great. How many people do you have dedicated to this part of your business?

Chuck Dougherty

I can't disclose exactly how many people we have working on that, but I can say we brought in some unique expertise within the past 12 months, they have significant capabilities in [the line] experience and delivering integrated services and operating turnkey services. So I feel like we've made some very key additions and it is part of our mainstream selling effort now as well.

Brian Ruttenbur - CRT Capital

Okay. And are they regionally focused or are they worldwide or the opportunities more South America versus Middle East versus the Eastern Europe versus…?

Chuck Dougherty

We have [criteria], we are pursuing these opportunities in all the regions where we do business. But there is some I will stable clustering that we see in markets and you can imagine that types of market that are looking for this type of solution where there is a financing element to it and it reduces kind of the cost of capital or the initial capital cost I should say for these agencies that are operating that broader support security application. So but we're saying it's pretty broad regionally.

Brian Ruttenbur - CRT Capital

Okay. And then kind of the services business. Do you expect that the services business will be stable at these levels or continue down in the very near-term? Do you expect near-term downward trend or stable?

Chuck Dougherty

I think near term, fairly stable. We do expect and we do have plans as Ken alluded to grow our service business back to its peak levels over the next couple of years. And so we feel really good about some of those programs that we're putting in place.

Brian Ruttenbur - CRT Capital

Okay.

Chuck Dougherty

But near-term, stable.

Brian Ruttenbur - CRT Capital

Okay, good. And then in terms of backlog that's primarily product backlog, but I know that there is some services in there. The backlog is down 6% year-over-year. Should that be a good indication on where you think revenue is going in the near-term or is there something skewed in there?

Chuck Dougherty

No, I think my comment is we are -- as we moved away from the pure DoD, and just I think the company has done a very nice job when you look at the drop off in [newer] spending that has impacted this company over the past several years, building that and backfilling that with the growth in the international business I think is real testament to capabilities of the team.

And the other dynamic that's happening, we are near-term becoming more of a product business. And that has opportunity with it for the service tail that I think Ed referenced. When you look at most of our service business now or contracts on product sets, extending the multiyear contracts on product sales, so we certainly to have a nice tail to it. And I think that's an opportunity. And our business and how we're addressing now our supply chain is becoming more as a product business, more as book ship type of business that we're adjusting to. The demand pipeline is very strong for us right now. And we're adjusting the supply chain to become much more flexible in that type of an environment.

And I’d say that's a dynamic especially as we expand internationally that and like many other businesses that we need to manage through and we’re trying to address that in the supply chain side of the business now. So, I expect our revenues to better follow our bookings as we look forward.

Brian Ruttenbur - CRT Capital

Okay. And then maybe trying to understand the gross margin a little bit especially in the quarter. If we exclude the big order that came through or got shipped this quarter, would gross margins have been in the 40s, like they’ve historically been, or would -- I just trying to understand how big impact the order shipment in the quarter was to gross margin?

Ken Galaznik

Hey Brian, we’ve never broken that out in the past but I mean I can tell you it would be a significant impact to the margins on the product side.

Brian Ruttenbur - CRT Capital

Okay. And you don’t see that repeating, right? You don’t have another big one coming…

Ken Galaznik

No.

Brian Ruttenbur - CRT Capital

Okay. And then just couple other ones on SG&A just trying to understand where you are growing on R&D, SG&A. R&D is down year-over-year in ‘14 versus ‘13 fiscal and just trying to understand are you looking at R&D as a percentage of revenue, are you looking as a dollar amount or which way do you look at this Chuck, kind of going forward?

Ken Galaznik

This is Ken. We’re looking at it more on a dollar basis as opposed to percent of revenue from that standpoint. One of the complexities of it is and it happened to us in the current year with the large revenue project we talked about. It was some integration project, we acquired a lot of engineering and it distracted some of our resources during the first half of the year on that project. As they freed up on that project, they were back on to R&D projects and that’s when you saw the increase going forward -- excuse me, in the current, second half of the year for R&D. So that’s what we -- that’s how we look at it. We’re not, we didn’t look at significant headcount increases or anything else, it’s just a shift from the two.

Brian Ruttenbur - CRT Capital

Okay. And then the same thing on SG&A, trying to understand where you are going on SG&A; I know that you have hired some new people on the managed service side that’s already included in there. Are there other plans to increase SG&A going forward?

Chuck Dougherty

Nothing significant, unless business levels would change materially.

Brian Ruttenbur - CRT Capital

Perfect, thank you very much.

Chuck Dougherty

Thanks Brian.

Operator

Thank you. And I have a follow-up from Mr. Edward Marshall from Sidoti. Your line is open.

Edward Marshall - Sidoti

So, I wanted to ask kind of thought process on international shipments. And historically I mean it looks like if I can back into a number of about 20 to 25 kind of ZBV shipped in the quarter and I am not asking whether or not that number is correct but what I want to know is you generally have been able to ship this product within two weeks as we ship internationally; has that number shifted out just a bit as the customer orders and things like that or?

Chuck Dougherty

Yes. They are much longer cycle Ed in general. And in terms of customization or what I will call homologation of platforms for specific countries, that’s one of the major items that you deal within the supply chain, is -- there are unique fuel standards in different markets around the world that you have to conform with. So when you are dealing with a very diverse space and we have multiple variance of the ZBV platform, we have three basic variance and then you have unique country or regional variance on top of that, there all of sudden you have a proliferation of models that impact the lead time. That’s what we are working through right now within our supply chain and made that mention that we expect to see really the production ramp, results of our production ramp efforts in the second half of our fiscal year.

Edward Marshall - Sidoti

So are you saying that delay is actually coming from your supply chain and not necessarily the demand from the customer side, is that what you’re saying? I mean…

Chuck Dougherty

Yes…

Edward Marshall - Sidoti

So, they would take orders or they would take delivery earlier if they could, your customers?

Chuck Dougherty

It’s hard to say, in some cases yes, but these are longer, there is a basic platform, the mechanicals are longer cycle, longer lead times. So I think that's a pretty fair comment that you made.

Edward Marshall - Sidoti

Okay. And I wanted to see if I can dig in a little bit more to what Ken's comment was, he said it was a significant impact to the margin in the quarter. And I understand for competitive reasons you probably don't want to give that number out. But did you sell that $18 million worth of cargo revenue potentially at a loss, did you underestimate the price of the contract, just curious about kind of how that drag and what that significant impact was in the single margins or was it a double-digit kind to drag? Any kind of color you can give, so we can kind of look for on a go forward basis kind of figure out where margins are going to settle in at. Now we've had a lot of changes in high product service revenue and this particular cargo order coming through really jumbling up the numbers for us.

Ken Galaznik

Yes, I agree. As I pointed out in my conversation, it was a first time type of project for us; very large, it was a lot of integration work going into that; first time see those exercises. It is more competitive market today on some of those fronts. But it wasn't a loss situation if you will. We've been taking losses to any prior quarters, had that been the situation on that contract. So I really can't talk about I think margin on it, it’s very low but it was not a loss situation.

Edward Marshall - Sidoti

You said competition has stepped up and this is the first time you've done it. So, I understand there is a learning curve there. But do you see yourself being able to get down the cost curve and up where you can actually compete with this competition on a go forward basis at maybe some of the pricing that's out there?

Chuck Dougherty

I see no reason why we can't.

Edward Marshall - Sidoti

Okay. Thanks guys.

Chuck Dougherty

Okay. Thank you, Ed.

Ken Galaznik

Thank you.

Operator

Thank you. There are no further questions. Ladies and gentlemen, if you wish to access the replay of this call you may do so by dialing 1-855-859-2056 for U.S. callers, that's 1-855-859-2056. And 1404-537-3406 for international callers, that's 1404-537-3406 with the conference identification number. That number is 344-10-908, that's 344-10-908. An audio replay and the copy of the presentation slides will also be available on AS&E website at ir.as-e.com, that’s ir.as-e.com. 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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