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American Science and Engineering Inc. (NASDAQ:ASEI)

F2Q2011 (Qtr End 09/30/2010) Earnings Call

November 9, 2010 4:30 pm ET

Executives

Anthony Fabiano - President and CEO

Ken Galaznik - CFO and Treasurer

Analysts

Tim Quillin - Stephens Inc.

Stephen Levenson -Stifel Nicolaus

Brian Ruttenbur - Morgan Keegan

Edward Marshall - Sidoti & Company

Josephine Millward - The Benchmark Company

Michael Kim - Imperial Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to American Science and Engineering second quarter of fiscal year 2011 results conference call. (Operator Instructions)

Mr. Anthony Fabiano, President and Chief Executive Officer, will now begin the conference.

Anthony Fabiano

Good afternoon. This is Anthony Fabiano. Welcome and thank you for joining us for our second quarter fiscal year 2011 results conference call. I am joined by Ken Galaznik, our CFO and Treasurer. Ken will report the financial results and I will follow with comments.

I will now turn the call over to Ken, our CFO and Treasurer.

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 2011, which ended September 30.

As you are aware, a press release indicated that earnings would be released after the market closed today; however, at noon today, our printing firm inadvertently released the 8-K filing to the SEC. We would give the press release shortly after that. A copy of this press release was e-mailed or faxed to those of you on our mailing list, and it has been posted on our website.

Before we begin, I am 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.

As we discuss the results of the quarter, you will see this has been a very exciting quarter for all of us here, as we have achieved new records in quarterly and year-to-date revenues, earnings per share, quarterly bookings and backlog.

Now I would like to discuss the results of the second quarter. Net sales and contract revenues in the September '10 quarter were a record $80.6 million or 32% above the second quarter revenues in the prior year of $61.2 million. This increase in revenue is attributable to increases in revenue across all product lines. We're very pleased with this across the board performance, as it demonstrates the acceptance of our product portfolio.

The breakout of revenue by product line for the quarter is as follows: Cargo was $20.9 million, up 99% over the prior year quarter. Z Backscatter systems were $34.2 million, up 21%. Parcel was $1.4 million, up 23%. Field service was $23.1 million, up 13%. And contract research and development was $1.1 million, up 19% over the prior year.

The gross profit in the September quarter was $39.8 million as compared to $29.5 million in the prior year quarter. This increase in gross margin resulted from the increased revenues and a margin contribution increase of 1.3 percentage points in the current quarter as compared to the prior year quarter. The margin improvement was primarily related to delivery to multiple cargo systems which had a comparatively lower unit cost due to streamlining efforts that have been achieved.

Selling, general and administrative expenses were $11 million or 13.6% of revenue in the September '10 quarter as compared to $8 million or 13.1% of revenue in the September '09 quarter. The $3 million increase in SG&A over the prior year quarter is a result of increases in incentive compensation expense attributable to the increased financial performance, travel expenses related to sales and marketing activities, salaries and benefits related to headcount increases and legal fees related to a terminated acquisition opportunity.

Company-funded research and development expenditures in the current quarter were $5.2 million or 6.5% of revenue, and they were 5.5% above the prior year expenditure of $5 million.

Other income and expense in the current quarter was an expense of $975,000 as compared to income of $87,000 in the prior year quarter. This change is primarily attributable to the mark-to-market loss related to a foreign currency put that was closed out in the second quarter. As you will recall, we reported a $1.1 million gain on this put in the first quarter. In the second quarter, we are recording a $1.1 million expense due to the volatility of the euro during this fiscal year.

The company recorded an income tax provision of $8 million in the current quarter as compared to $5.9 million provision in the September '09 quarter. The increase from the September '09 quarter is due to the increase in taxable income offset by a slight decrease in the effective tax rate from 35.5% in the prior year quarter to 35.2% in the current year quarter. At this time, we anticipate the effective tax rate for the remainder of the year to be 35%.

Fully diluted earnings per share in the September '10 quarter were $1.59 as compared to earnings per share in the September '09 quarter of $1.18.

A review of our year-to-date results would reflect the following. Revenues increased 16% to a new record of $134.3 million in the first six months of fiscal 2011 as compared to $115.9 million in the prior year. This increase is attributable to increases across all product lines.

Gross profit increased to $63.7 million for the first six months of fiscal 2011 from $55.1 million in the prior year. While the gross margin percentages remained relatively flat over the period, cargo and parcel were a larger percentage of revenues in the current period. These product lines experienced improved margins, primarily due to manufacturing efficiencies achieved during the period.

In the current year, SG&A expense was $20.8 million or 15.5% of revenues as compared to $16.7 million or $14.4% of revenues in the prior year. This increase is primarily attributable to increased incentive compensation expenses attributable to the increased financial performance, sales and marketing expenses, salaries and benefits related to headcount expenses and legal expenses related to terminated due diligence activities.

Research and Development expense decreased 5% to $10.2 million or 8% of revenue from $10.8 million or 9% of revenue in the prior year. Other Income expense remained relatively flat during the period. Diluted earnings per share in the current year was a record at $2.33 compared to $2 in the prior year.

Now let's take a look at the balance sheet. The balance in cash, restricted cash and short term investments at September 30 was $168.9 million or $10.2 million below the March 31 balance. This decrease is primarily attributable to the expenditures of $3.4 million related to the stock repurchase program, dividend payments of $5.4 million and CapEx expenditures of $2.9 million in this period, offset by $2.3 million of cash provided from operations.

It should be noted that the cash flow from operations was significantly impacted by a $6.7 million increase in accounts receivable related to the record revenues in the quarter, a $7 million increase in inventory, primarily related to meeting the requirements of our new record backlog and in an increase in unbilled cost and fees of $13.3 million related to invoicing terms in the contracts.

Free cash in the current period was a negative $600,000 as compared to $14 million in the prior year period. DSO at September 30 was 49 days as compared to 48 days at March 31. And FY '11 to date, depreciation and amortization expense was $2.4 million.

As to the status of the repurchase program, we are currently operating under the second $35 million authorization by the Board. In the current quarter, we purchased and retired 46,500 shares for $3.4 million, bringing the total purchased and retired to $250,447 shares for $14.6 million under this program, leaving $20.4 million available for future purposes.

Our backlog at September 30 was a new record at $254.3 million or 30% above the March 31, 2010 balance of $195.7 million. While not yet recorded in backlog, the company has $12.2 million of unfunded contracts, which are expected to be recorded in backlog in the next 12 months.

As noted in our press release, at their recent meeting, the Board voted to approve a cash dividend of $0.30 per share, payable on December 2, 2010 to the holders of record at the close of business on November 22, 2010.

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

Anthony Fabiano

Thank you, Ken. Well, ladies and gentlemen, as you know I normally have a script that I read and I'll do the same. But I have to just kind of get offline here and tell you a little bit that my heart's swelling with pride this quarter. This is a quarter where Team AS&E's process improvements, hard work, special work with customers - you name it, every program, process that we've been killing ourselves to excel at, all clicked.

And it clicked us up a notch in performance in terms of the financials that you heard from Ken. But our financial and operating results were outstanding for the quarter, with records set across the board for bookings, backlog, revenue and earnings per share.

This quarter, our aggressive growth strategies and advances in innovations, vigorous execution and the benefits of our high, yet increasing level of customer satisfaction, all clicked.

Our revenue growth of 32% and the $0.41 increase in EPS was the result of increases in revenues from all business areas, a testament to our continued efforts to expand product offerings, and our desire to meet and exceed the expectations of both repeat and new customers. I know I say that every time, but I measure it every month.

Gross margins and operating income: I'm very pleased with our margin improvements in the quarter, primarily due to our increases in cargo revenue over last year, and at much better margins. We continue to improve our bottom line with manufacturing efficiencies and operating cost reductions, increasing gross margins to 49.4% in the quarter from 48.1% in the same quarter in the prior fiscal year. Nice job, Team AS&E.

Operating incomes significantly increased in the quarter, with improved gross margins from higher revenues, improvements in cargo and other gross margins and our continued focus on controlling overhead costs and expenses. We're relentless.

We continue to prove that we can diversify product lines and expand geographical sales regions to achieve strong increases in revenue for our unique differentiated products. While still delivering gross margin performance and significant improvement in operating income. Not an easy thing to do when you're trying to get new market share, you all know that.

So sales and marketing, we continue to increase investments in sales and marketing, especially internationally in order to increase market share in our targeted channels and to expand our global reach. This includes an awakening in the APAC region to the capabilities of Backscatter technology with multiple Gemini and ZBV bookings in the quarter.

Even as APAC tends to be a very cost conscious region, and I'm sure most of you know that, and you've heard that from our competitors. It's been tough for us as well, but they're really starting to buy in to our value proposition. They're really getting it and they really like the equipment. So I'm pretty excited about that.

Also, we are finding more and more that the critical infrastructure market vertical is choosing Backscatter for its enhanced explosives detection capabilities over other technologies. These are our customers with critical requirements and very high standards for detection, believe me. The advantages of Backscatter technology with or without transmission x-ray are crystal clear to these customers, who understand the capabilities and superior value proposition, when the two technologies have been used together. And we've been preaching this for five years.

Bookings and backlog, both set records. Bookings reached an all time high in the quarter. We reported record bookings of $116,156,000 this quarter, an increase of 29% from the second quarter of the prior fiscal year. For the first six months of fiscal year 2011, we ended September 30, 2010 bookings with an increase of 30% over the same period in the fiscal year 2010.

As a note, bookings of $192.9 million in FY '11 versus $148 million in fiscal year '010, just a few years ago $192 million would be enough bookings to support entire fiscal year. So this is pretty exciting, I hope I was clear about those numbers.

Our record bookings in the quarter included $23 million order for our SmartCheck personal inspection systems for harsh environments. And record bookings from our field service group, which helped drive backlog to a new high well over $250 million. These record breaking bookings resulted from our strong relationships with existing customers, our broadening partnerships with new customers worldwide and our best-in-class service and support. We cannot underestimate the power of customer intimacy and the results that trading investment into this discipline are yielding for team AS&E.

As you know, backlog is a good predictor of future business results, and backlog in the quarter reached another record high. Backlog as of September 30, 2010, increased 36% to a record $254, 311,000 as compared with backlog of $187,427,000 at this time in the prior fiscal year, not bad. This is not only great news for the prospects of meeting our internal business plan in FY '11, but also should contribute to a potentially strong fiscal year '12.

Sales pipeline, even with the record revenue in the quarter, our sales pipeline has increased from last quarter, with a diversified mix of product demand in all of our key sales regions throughout the world. This is a testament to the success that our sales team has had in increasing global sales channels, which is an area that I personally watch very closely.

So let's review some highlights and opportunities in our product areas for the first quarter. Starting with Z Backscatter system, we achieved record revenue at $34.2 million for Z Backscatter systems in the quarter. We shipped 19 ZBVs and 17 ZBV Mil Trailers in the one quarter.

If we look at ZBV bookings, we booked 24 ZBVs in the quarter. And as you know, I'm typically ecstatic when we book 20 or more. Brining our total system sold from inception to 520 as of the end of the second quarter. Orders included a $5.3 million follow-on order for a Latin American customs agency. This customer is very pleased with the system and has ordered additional units to secure checkpoints and land borders.

A $2.8 million order for ZBV systems from the APAC region for Customs and Border applications, there's APAC again, a $7.3 million order from the U.S. government for multiple ZBV systems, a $4.5 million follow on order for upgradeable options for Z Backscatter Vans.

The ZBV was introduced five years ago, and we continue to book new orders for new and repeat customers. One may question the reality of this highly successful run, but the bookings and revenue numbers really speak for themselves. The system's versatility, mobility and ease of use for a multitude of applications in a variety of markets, coupled with its attractive price point make for a superior mobile X-ray product. I kid my wife; I tell her that ZBV is like the Energizer Bunny for us. It just keeps going and going and going.

Likewise, it's no surprise to us that the ZBV Mil Trailer has been a stunning success with the military, and with positive expectations for international customers as well as with the recent shipment of the first ZBV Mil Trailers to a new international customer. This product was designed to be highly responsive to the needs, wants and expectations of our customers, of course, no surprise, but the end users are demanding more of them. They protect the lives of our soldiers in the field, and their bomb detection capability is unsurpassed. Ask the end users; don't ask me.

Cargo Systems: Cargo bookings were light in the quarter, but Cargo revenue almost doubled from the same period in the prior fiscal year with the delivery and installation of several systems in the quarter. If you recall, last quarter, we had lower Cargo revenues due to customer delays in preparing sites for installation. In Q2 that constraint started to loosen up and is now on a better trajectory. Note, we had $20.9 million in Cargo revenue for Q2 FY'11 versus $10.5 million in Cargo revenue for Q2 FY'10.

On the product development side, we have redesigned the OmniView Gantry. This one's getting really exciting. And built a sleek new system that provides high performance, high energy cargo inspection with optional Z Backscatter imaging for best-in-class overall detection. This system offers penetration performance of more than 400 mm through steel - and we can prove it - while maintaining superior quality images. The unique arc structure which houses the detector - I don't know if any of have seen pictures of this, but it's a beauty, was designed to minimize X-ray scatter and create a more uniform image. The state-of-the-art detector design provides superior image contrast and resolution, which our customers' tell us surpasses anything they have seen yet. So we are extremely excited about this advanced cargo inspection product.

The Z portal continues to be a very reliable seller for us, and in my humble opinion has tremendous upside potential. Thus far, we have a core group of customers who are steadily purchasing the system because they are experiencing much higher seizure rates of drugs, contraband and explosives and at much higher throughput rates in the same old types of transmission (technality) that's been on the market for many years. Also, the system's robustness and performance reliability has now been clearly established with proven up-time data.

Turning to Parcel systems and Personnel systems, bookings were the story in this business area. We received a milestone $23 million order in the quarter for a significant quantity of ruggedized, SmartCheck Personnel Screening Systems from a government agency. The systems will be deployed in harsh environments and will provide security officials with a fast, reliable, and safe way to screen people for a wide variety of threats.

Sales of our Gemini systems are modest but growing, especially internationally, as customers see the advantages of Gemini real time and read live demos versus the conventional dual-energy transmission systems on the market. They are buying the Gemini line in larger quantities.

Service: The Service business continued to soar with a very strong revenue quarter. If we look at bookings, Service also set a bookings record in the quarter. This was driven by a $42.2 million service and maintenance renewal order from the U.S. government to extend support of the U.S. government's fleet of AS&E screening systems. Also, the U.S. government placed a separate $10 million order for the service and the maintenance of ZBV Mil Trailers.

With our higher bookings and the introduction of new products, our installed base continues to grow. With this, we expect our service business to continue to make a significant contribution to our overall profitability.

Last, I know that this success probably would not be possible without the outstanding performance, cost reduction initiatives and innovations of our Service Business Group. This is a very spirited and confident group that is striving for performance perfection.

Contract Research and Development, CRAD, we received an important CRAD award from the U.S government for a robotic, Z Backscatter module for the detection and defeat of remote IEDs, improvised explosive devices. This is what I have been waiting for a long time. This is a groundbreaking capability for IED defeat technology, allowing bomb technicians to perform, diagnose and defeat IEDs without risk to personnel.

In addition to this being very big news, it certainly is a potential catalyst for expansive growth. I know I don't have to tell you about the potential for a safe, reliable and effective IED detect and defeat product in the current world environment, especially in hostile countries and war zones. Just you look at the U.S government budget for IED detect systems.

If we look at IRAD, Internal Research and Development, first, we have a bulls eye focused on both the short, medium and long-term technologies that will meet customer expectations and potentially lead the marketplace. These are directly linked to our strategic plans for accelerated growth. Second, we have expanded our science and technology capability with top-notch individuals that are delivering innovative ideas and inventions that are in development, which we plan to bring to market at a faster pace from time of incubation than in prior years.

Third, one or two of the growth strategies that I alluded to could further be accelerated by putting some of our cash to work through smaller acquisitions of technology companies, where there are IP alone (09:02.33). Ladies and gentlemen, our innovation engine is revving up.

Now to summarize the quarter, we achieved record results across the board. Our growth rate continues to be in the double digits and with a very strong EVA. The combination should result in higher returns on adjusted net assets.

We continue to diversify our revenue base through more new products and customers, which is resulting in strong momentum and leading to market leadership in targeted areas. Our processes for product improvements, employee involvement for cost reductions and the growth of our company culture to build stronger customer intimacy are in high gear and are all delivering better and better results.

I am extremely proud of Team AS&E, their commitment to excellence and their desire to delight our customers. AS&E is a challenging and exciting place to work. We set the performance bar high in all areas, and I'm proud to say that our people continue to step up and meet the challenges. Their accomplishments are most praiseworthy.

Last, we are once again rewarding our loyal shareholders with a quarterly cash dividend of $0.30 per share. I'm confident in our abilities to execute our long term plan to bring to market best-in-class detection solutions to our customers in a rapidly evolving security requirements environment.

Thank you. And I'll now turn the call back to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tim Quillin from Stephens Inc.

Tim Quillin - Stephens Inc.

Could you maybe help us a little bit regarding the timing of shipments out of backlog? I think especially regarding the ruggedized body scanners and additional cargo shipments, and I guess my assumption is maybe we are a little bit abnormally high on Cargo. And what should we look for over the next couple of quarters?

Ken Galaznik

That's a tough one to get too specific with you on, but there is a schedule. There is a contractual requirement on the body imagers that we'll be shipping out. And that will take place over the next nine to 12 months.

As far as the cargo orders, we had a little hold up last quarter. We had improvement in this quarter, and the backlog is very strong. As you know, we don't break it out by product lines, but it's very strong and we should continue in this fashion.

Tim Quillin - Stephens Inc.

Okay, that was cryptic enough. Thank you.

Anthony Fabiano

The point is that was like last quarter, this quarter performed like it was supposed to.

Tim Quillin - Stephens Inc.

Okay, I like that. That's the CEO's description.

Anthony Fabiano

Sorry, about that.

Tim Quillin - Stephens Inc.

Just a couple other questions; one, Ken, just a specific question, there was $1 million in other non-operating income in the quarter. What was that?

Ken Galaznik

That was the expense; we're talking about on the put, foreign currency put. That's based Tim, as I said that's the $1.1 million pick-up we had in the first quarter. We're out of that position in the second quarter, but we recognized the $1.1 million expense in the second quarter and that transaction is completed.

Tim Quillin - Stephens Inc.

And then just lastly, Anthony you talked about maybe small more technology-focused acquisitions. Maybe if you can give us a little flavor of what you're thinking about there?

Anthony Fabiano

I sure can. I'll be very open about this. We've been looking for the last couple of years for acquisitions, we've been a player in a couple of deals and we won't overbid; we're more of a value investor unless we really see solid value there. And in this industry, very difficult to get long term visibility, I don't have to tell you that.

So, we've kind of taken a different tack, and we have five pillars in our strategic plan. And one or two of those are very innovation and technology oriented. So we're really looking now at some smaller companies that have technology that flanks or is adjacent to what we're doing that we could pick up at a fair price. And if not, the company, if the culture isn't a good fit then the technology (itself too).

Operator

And your next question comes from the line of Stephen Levenson from Stifel Nicolaus.

Stephen Levenson -Stifel Nicolaus

Could you please break down for us if possible the mix between domestic and international orders during the quarter and the backlog?

Ken Galaznik

Off the top of my head, Steve what I can say is that there was quite a bit of domestic orders in the current quarter. The service contract orders that we released were a significant part of those bookings as well as the (same) order, the whole body imaging order we talked about.

So it was, off the top of my head, 75% domestic in the current quarter, which is going to bring our backlog to something like a 75-25 domestic at this point in time.

Stephen Levenson -Stifel Nicolaus

On the new Cargo products, the redesign of the Omniview, were there new patents filed or is this just an extension of the old patent?

Anthony Fabiano

Steve, off the top of my head, I don't know, but we'll get you the answer to that. There were a lot of technological advancements, whether or not we patented any of them, I don't know, which would mean that there is probably no stellar breakthrough. But it's a combination of really cool things that we've done between our science and engineering people, to put together a butt-kicking system.

Stephen Levenson -Stifel Nicolaus

And on the robot, is there any idea of timing and does the military consider this an urgent need. If you think it could begin generating revenue, I mean not this year, but maybe in the next fiscal year?

Anthony Fabiano

Well I would hope so. I've been waiting for a project like this for about three years. I've been a big fan of miniaturization, as you guys probably know with our technology. But the truth is, as you get contracts from the government you move pretty much at their base, you go through a lot of reviews. I can honestly say that the technology that we're working on is pretty well-developed already.

So if the testing goes well, if things go well, it could be that we can have a fast wrap on this one. But I don't know yet, too early to call. But that's something that you can ask me in six to 10 months from now, and I'd be able to give you better answer.

Stephen Levenson -Stifel Nicolaus

Last one is with the cargo situation. Particularly air freight, has the recent news stirred up any activity either domestically or internationally or something you're hearing on the regulatory front?

Anthony Fabiano

Internationally, yes quite a bit. Domestically, somewhat, not a whole lot more noise than anything else. And regulatory wise I haven't seen anything yet. And I mean you know, what the guidelines are, what the TSA mandates are and where they stand as well as I do, Steve, in air cargo. But we haven't seen anything yet to change it. I think so a new information came out today, is that true? But noting significant that we change our approach to the business.

By the way Steve, I'm sorry. Someone just pointed out to me that we did not have any specific patents filed on that system.

Operator

And your next question comes from the line of Brian Ruttenbur from Morgan Keegan.

Brian Ruttenbur - Morgan Keegan

Let me just follow-up, I have a couple of questions, but I'd like to follow-up on the last series of questions on the robot. Is this is miniaturized ZBV going on to an iRobot or something along those lines, is that what they are thinking?

Anthony Fabiano

Well, I wouldn't call it a miniaturized ZBV, because they don't have wheels on it, you know. But it's a robotic system and it's a miniaturized Backscatter system, doesn't really resemble the ZBV. And then with other equipment produced by a partner, it serves another mechanism of a function that I really can't discuss. So we've got the whole capability of diagnosed detect, defeat on a robotic system that can be sent out and unmanned.

Brian Ruttenbur - Morgan Keegan

This is for Ken, more than likely on legal fees. Can you breakout the termination fees. I'm just trying to figure out SG&A kind on a going forward basis as any kind of onetime expenses?

Ken Galaznik

We had about $500,000 of expense in the current quarter related to those activities.

Brian Ruttenbur - Morgan Keegan

So you would anticipate that nothing else changed unless you can see it or something else happens that SG&A would drop by about $500,000 all things being equal.

Ken Galaznik

All things being equal, I guess a fair assumption.

Brian Ruttenbur - Morgan Keegan

The gross margins were high, because I assume the mixture of the revenue, primarily ZBV revenue, is that right?

Ken Galaznik

We had a great ZBV quarter, no doubt. But as a percent of revenue, this quarter it actually has a lower percentage of ZBV revenue than Q2 of last year did. I think Anthony hit the nail on the head earlier, when he was talking about all the products, hitting on all cylinders at this time. And if I look at the doubling of cargo revenue in the current quarter, additional $10 million coming from cargo, parcel was very alike in the first half of last year. And we're doing much better in that this year.

So what we're seeing is, is we're getting a better blend of our products and we're getting an improved margins on those products, because of streamlining has taken place in manufacturing efficiencies. And so we're really seeing improvements in some of these other product lines.

Brian Ruttenbur - Morgan Keegan

So do you anticipate these levels going forward and can they be maintained at these levels?

Ken Galaznik

At 49%, Brian, that's pretty aggressive. If we hit on all cylinders and everything is fantastic, I guess you could say we can do that again. But there is competitive issues and other markets to look at, that would be a bit of a challenge to step up to.

Brian Ruttenbur - Morgan Keegan

And any of your new business that's coming in, like whole body imager or anything like that. Would any of that erode that 49% gross margin?

Anthony Fabiano

We're pleased with the projects we have in backlog right now and there is nothing looming that's concerning me as of today.

Brian Ruttenbur - Morgan, Keegan

You said there's nothing that you know of that's currently in backlog that would erode those margins.

Ken Galaznik

At the same mix, at the same performance I think that's a fair assumption.

Brian Ruttenbur - Morgan, Keegan

Then moving on to another series of questions. Parcel, can you repeat the number that you did in the quarter?

Ken Galaznik

Yes, I can. Parcel in the current quarter was $1.4 million.

Brian Ruttenbur - Morgan, Keegan

Okay. So that was down significantly from first quarter, which was $5.1 million and it was more in line with last year's numbers. Is that something seasonal? Can you help me out with what's going on there?

Anthony Fabiano

Well, as we said at last quarter we had $5 million of parcel revenue in Q1 of this year, and that was the completion of the delivery of a significant international project that we had done.

So our parcel business is extremely lumpy, depending on those contracts that you see. We talked about the whole body imaging order that we just booked. So you'll see that coming through in the upcoming quarters.

Brian Ruttenbur - Morgan, Keegan

Whole body imagers are all going to get booked under the parcel revenue, correct?

Anthony Fabiano

Right.

Brian Ruttenbur - Morgan, Keegan

So we should see, as that flows through, that alone, not counting the Gemini, will increase revenues?

Ken Galaznik

I would certainly expect it to.

Brian Ruttenbur - Morgan, Keegan

Okay. And then just R&D. You're holding steady as a dollar amount around the $5 million mark. $5.2 I think is what you reported this quarter. You are talking about additional investments and other things like that.

Are you adding more people? I mean, should we see a significant ramp in R&D? Should we see a stabilization at these levels? I'm just trying to get some kind of idea on that.

Ken Galaznik

Well, as Anthony commented, we have added people to the Science and Technology Group. I would certainly hope and expect to see projects coming out of those guys, and the question now is being able to support that while we are getting revenue projects out the door at the same time.

So if we've got to control our own destiny in that area, I would expect to see that number go up a bit.

Anthony Fabiano

We are going to be as aggressive as we can there, Brian, but we're not going to get off the reservation. As the business grows and we can afford to invest more, that's the place to put it.

Brian Ruttenbur - Morgan, Keegan

Okay, because it's cheaper to do that than it is to go out and acquire. Is that the thought process?

Anthony Fabiano

Well, it could be in some respects. It depends upon what you're buying and how quickly that's going to bring you into a new market, how creative it would be and what the potential growth rate is. So we're always weighing those things out.

Brian Ruttenbur - Morgan, Keegan

Last question as I hit you with a ton, acquisitions, it was already asked about acquisitions. It sounds like you're going to lead a way at least from the big acquisitions and try to make some smaller ones that have technology place, those can be dilutive to earnings. Is that the way you're looking at them, maybe it'd be six months dilutive or a year dilutive. What's the financial model when you are looking at a technology acquisition?

Ken Galaznik

I really don't look at it that way. I look it in terms of what it can do for us, but I don't like the word dilutive.

Brian Ruttenbur - Morgan, Keegan

Are you willing to do something that would hurt earnings per share for a year in order to get an acquisition in?

Ken Galaznik

We would consider something like that if the rate of return in the deal and the risk levels met our expectations.

Anthony Fabiano

Brian, another look at the same apple, if you will, I look at as an expanded I rad program. If you got into that and if you saw something that really made sense. And I'm not talking about three or four years out, but if it made sense to invest in something currently and depending on how the business is doing, and how the pipelines are looking and all those factors considered. Definitely, I've taken a look at it.

Operator

And your next question comes from the line of Edward Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company

To follow-up on the last question on acquisitions, what metrics do you consider when looking at acquisitions return on invested capital? How do you think about and what's the most important metrics?

Anthony Fabiano

Well, that's interesting, Ed. More than we look it metrics, we look at what it means to a strategic way. And it really comes down to like the earlier conversation is, can we develop something. If we have a killer product that we can develop, but its going to take four or five years and we're able to purchase that technology. And its already available and its ready for primetime. You just have to look at the time value of money and the rates of return. Those would be the types of metrics that we would compare.

Plus the risk of us, doing it ourselves versus the surety that somebody else has the product if in due diligence it indicates that the in fact do, so that's really when it comes down to. After that, I think like Ken said, we're not gunslingers here. If we do acquisitions, it's not because we have to or we have a goal to make acquisitions, not at all. We have a goal to grow the business. And if the right thing comes along and the numbers fit, we'll buy it.

Edward Marshall - Sidoti & Company

Maybe looking at it from another way, I think earlier you said, to respond some another question, but you're looking for the right value fit for you. I guess, asking, looking at that from a different angle, other than the technology and the strategic fit it brings, what would be the value?

Ken Galaznik

Let me just say this to you that there's not a lot of deal flow in our industry right now, among the minimum number of players as you've probably seen. You just can't go out and pick anyone of these companies and purchase them, the valuations are pretty high. So I think what we're finding is that their companies overseas and in other places that are doing some pretty interesting things. And they could be purchased for a better return on earnings, then some of the companies that are in our space right now. That's about as much as I can say about.

Anthony Fabiano

We're out there and we're aggressively looking.

Edward Marshall - Sidoti & Company

Then I guess, going past that and saying that, the potential for acquisitions is there, but noting that they're not coming cheaply. With cash deployment and I know we've recently raised the dividend about three quarters or so. But what are the ways that you're considering cash deployment back to shareholders?

Ken Galaznik

Ed, we're continuing on with the repurchase program. As I mentioned earlier, we still have $20 million left in that program. And again, we've got a little more aggressive on the dividend program. At this point we're happy, where we are in that program. And we'll continue to keep the powder dry for potential opportunities that may come before us.

Edward Marshall - Sidoti & Company

Could I get an update on the SmartCheck and the prototype that you have with TSA?

Anthony Fabiano

There's not a whole lot to say there, at TSA, so far so good. And we're just waiting to hear the results. They've got a large backlog of work down there and it just takes a while.

Edward Marshall - Sidoti & Company

I don't know if you'll give it to me, but you said bookings are a record for field services. Could you either give the total number of orders for field service in the quarter or the backlog number that's split between maybe products and field services?

Anthony Fabiano

We don't break those out, but the two releases that we did do, very clearly you can see that there is about $52 million of service orders in the current quarter that releases were done on. There was one for about $42 million and one for $10 million. So you can see there was a substantial part of bookings in the current quarter.

Operator

And your next question comes from the line of Josephine Millward from The Benchmark Company.

Josephine Millward - The Benchmark Company

Anthony, given your backlog and the strong demand we're seeing in security, would you consider providing guidance or some sort of qualitative outlook going forward? How comfortable are you with double-digit growth for fiscal year '11 and in the coming year?

Anthony Fabiano

Josephine, the answer is, on the guidance, I am sorry no. I am very comfortable having double-digit growth, but I wish I could predict it would continue. And I hate to use the 'or' word. It is a lumpy business and it's just really hard to see long term in this industry.

Josephine Millward - The Benchmark Company

I understand, but I think, as you know, a lot of industries would like to have a little better visibility. From your perspective, Anthony, do you see your addressable market growing 15% to 20% a year in the next three to five years?

Anthony Fabiano

Well, are you asking about the market or our market share?

Josephine Millward - The Benchmark Company

The market. You can also talk about your view on your potential market share. I am sure everybody would be very interested in your view on that.

Anthony Fabiano

I'll only give you my opinion. The homeland security market I see continuing to grow at the same levels it has over the last couple of years or more. And a lot depends upon now. We have a new Congress. That's a wildcard that could change a lot of things.

As far as our ability to gain market share, it's a really tough question, because anybody can buy more market share than we have right now. But we've always focused on being the more profitable company in our industry, and I think we want to continue to increase EPS and grow shareholder value. And I am not as hung up about numbers and market share as I am about total performance.

Josephine Millward - The Benchmark Company

Now you have a lot of irons in your fire in your business development pipeline. Can you talk about where you see the most opportunities in the coming year? Is it border protection or the military? In the past, I think you were excited about critical infrastructure. If you can help us prioritize what you think are the most near term and exciting opportunities?

Anthony Fabiano

In terms of what's exciting, critical infrastructure I find to be very, very exciting because of the terrorist threats since the Christmas Day bomber, the issues that have recently happened in Yemen. People in the Middle East are scared, and there is lot of wealthy people around the world that want to protect their infrastructure, their businesses, critical facilities. Even in the United States, that has strategic missions. So I think there is a lot of potential in the critical infrastructure in the U.S. and worldwide.

Josephine Millward - The Benchmark Company

Our border protection, the military, given that we could have a much delayed budget this year with a new Congress, do you see any impact or you still anticipating the same level of business flow from your traditional U.S. government customers?

Anthony Fabiano

I am a little concerned about the DoD business only, because I don't expect to see the type of supplemental budgets that we have seen in the past, and that's helped us some, but it hasn't impacted us like it has the big defense contractors that are building weapon systems. But generally, even if there is a drawdown in Iraq, in Afghanistan, as you're hearing about, I really believe that our type of equipment fits the peacekeeper role and whether it's worn or used by other countries and peacekeeping forces, NATO, U.S., there is still going to be the man for that equipment. So I feel pretty bullish about that.

As far as border protection, that to me is an area that's still going to continue to grow not only in the United States, but I am seeing more and more concern about that worldwide, and I see that as a good growth opportunity for us.

Operator

(Operator Instructions) And your next question comes from the line of Michael Kim from Imperial Capital.

Michael Kim - Imperial Capital

First on Z Backscatter systems, can you talk about the international mix on the 19 ZBV deliveries in the quarter, or was it mostly domestic, or was there a good component of international?

Ken Galaznik

Let me look into that and I'll get back to you on that one.

Michael Kim - Imperial Capital

And then just on ZBV Mil Trailers, do you have any visibility on the opportunity for follow-on orders, are they with the U.S. Military or with NATO or other military users in the next 12 months?

Anthony Fabiano

It's really tough to say. Again, like I said we've got a new congress, they're talking about cutting spending. I don't know what that means. There is a defense budget for next year. You can read it and see what the requirements are for Mil Trailers. The question is, is couldn't we sell more than that. I am guardedly optimistic that there'll be an increased need for that product, but who really knows.

Michael Kim - Imperial Capital

And then switching gears to cargo, can you talk about customer side prep, and if the pace of that preparation is comparable to where we were in the prior quarter. And especially in light of the first fiscal quarter, where one or more of your customers were a little bit behind the curve? Do you have a sense if they kind of caught up and maybe just in general terms (inaudible 19-01:34) that your (stand that) cargo revenue should be at least flat sequentially in current quarter?

Anthony Fabiano

Well, the first piece is that it's certainly picking up and that's good news. And the reason is, is not that there's anything wrong with the customers is that these are new programs for them and its taking them a while to come up to learn a curve.

So that's really the key point Michael. So I'm pretty optimistic that things are going to continue along the trend of them being prepared for us. Of course, as we book new projects, as we hope to do with new accounts, we're going to go through that learning curve with them again as well. So, I think you're going to see a mix of that kind of activity going forward. Some of them are going to be moving better and better. So repeat customers easy, new customers hard.

Michael Kim - Imperial Capital

And then lastly, maybe for you Ken, on the backlog I believe earlier in the conference call you talked about potential benefit into fiscal '12. Can you talk a little about the duration of the backlog, and how much maybe visibility have in recognizing revenue add to that backlog in the current fiscal year, and maybe how much it would carry over to next fiscal year?

Ken Galaznik

I'd tell you, Michael, we've never commented on the fiscal year. We've always talked in terms of the next 12 months. Looking at it, there is probably 75% to 80% of that return in the next 12 months.

Operator

There are no further questions. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-286-8010 for U.S. callers and 617-801-6888 for international callers with the conference identification number as 69474915. 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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