American Science and Engineering: Listen to the Calls

American Science and Engineering’s (ASEI) conference calls provide a good window into the company. The most recent call (2/9/07), which reported the results of Q3 fiscal year 2007, provides a great deal of insight and information about where this company is today and where it is headed. Anthony Fabiano, President and CEO, does a great job of laying out both the current and future landscape. The call left me with the strong feeling that management has its eye on the ball and is methodically pursuing a growth strategy for the future. Their plans are ambitious, but are tempered with prudence and good common sense. I strongly recommend that any investor or potential investor listen to this call. Revenues are lumpy in a business like this. Amidst these unpredictable ups and downs, it is most reassuring to have the sense of constancy which is afforded by a knowledgeable and focused management.

Now for some specifics:

It was noted that total revenue for the quarter was 47.8M and that Z-backscatter systems accounted for 52% of this revenue.

SG&A for the quarter was markedly higher year-over-year. This increase was due to four factors:

1. Adoption of FASB 123R
2. Increased marketing and proposal activities
3. Expansion of international sales channels
4. Commission and incentive compensation expense

The year-over-year decrease in R&D for the quarter was due to the reallocation of resources to the startup of the CAARS program.

There are 21,624 warrants outstanding as of 12/31/2006. If not exercised, these will expire in May, 2007.

Bookings for the quarter came to 37.5M. International customers, especially NATO, account for 85% of this amount.

Attempts to gain market share in the Middle East and Asia Pacific regions are proving very successful and they are making inroads in Europe and Central & Latin America. The expansion of global sales channels is part of their plan to reduce variability or lumpiness ! in quart er to quarter bookings and revenue. This is beginning to occur and will play out slowly over time.

As mentioned above, Z-backscatter systems accounted for more than half the revenue for the quarter. They are driving down the book-to-bill cycle time for ZBV's, both standard models and custom-built ones. This is important for many international customers since they must meet the specific requirements imposed by their governments. Thus a lot of international orders for ZBV's require some element of customization. The shortening of book-to-bill cycle time has increased quarterly throughput and reduces operational costs. This leads to stronger margins and more satisfied customers.

In the quarter, they received an order for 5 ZBV's from a new European customer, one which shows good potential for extensive future orders. They received an order for 1 ZBV from a new Asian customer and an order for 2 ZBV's from a “coveted middle east account.”

To date, they have booked 254 ZBV's with 37% of the total bookings coming from international customers. They expect the ratio of international ZBV bookings to total ZBV bookings to increase significantly. They see this as a positive trend in that the company will be less reliant on DoD orders.

They received a 2.2M U.S. government contract to develop an armor-protected ZBV system for military applications. This system is on fast track to becoming “type-classified” as standard gear for the army. This means it would be incorporated into the annual military budget as a specific line item. No order from the military to date has ever been a standard line item in the budget. Rather, the funds have come from a general funding pool. Once type-classified and listed as a standard line item in the budget, it is much easier for any governmental or military agency to make a purchase.

They are seeing increasing interest from domestic police agencies.

The CAARS program is moving according to plan. They are working on a state of the art prototype system for detecting shielded nuclear threats in cargo containers. Their engineers are working on making this system cost-effective.

With regard to the status of the SmartCheck pilot program, Fabiano stated that “we are on a stand-by-go-live basis.” They will share more information when available.

The company is investing more in SG&A in order to:

1. Increase product demonstrations
2. Better support their proposal requirements so they can bid more opportunities
3. Recruit new talent (they have hired a number of engineers for the purpose of increased R&D for the development of new technologies)
4. Increase the size of their facility (they are now the only tenant in their facility)

One questioner asked if the recent NY Times story about nuclear screening in the New York City area involved ASEI products. The answer was no. The technology being employed detects unshielded or lightly shielded nuclear threats. ASEI's technology detects shielded nuclear threats and is used in their prototype for the CAARS program.

There were many more details in the call than I have covered here, but I hope I have hit some of the more important points. Once again, I highly recommend a listen. It is well worth the time.

Disclosure: Author has a long position in ASEI

ASEI 1-yr chary