American Science & Engineering, Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

American Science & Engineering, Inc. (ASEI)

F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

August 11, 2008 4:30 pm ET

Executives

Anthony Fabiano – President and CEO

Ken Galaznik – CFO and Treasurer

Analysts

Steve Levenson – Stifel Nicolaus

Josh Jabs – Roth Capital

Brian Ruttenbur – Morgan Keegan

Tim Quillin – Stephens, Inc.

Josephine Millward – Stanford Group

Michael Kim – Imperial Capital

Frank Hart [ph] – Janney Montgomery Scott

Presentation

Operator

Good day, ladies and gentlemen, and welcome to American Science and Engineering first quarter fiscal year 2009 results conference call. My name is Marcia and I will be your conference facilitator today.

At this time, I would like to inform you that this conference is being recorded and all participants are in listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. Mr. Fabiano, President and Chief Executive Officer, will now begin the conference. Please go ahead.

Anthony Fabiano

Good afternoon. This is Anthony Fabiano and welcome and thank you for joining us for our first quarter fiscal year ‘09 results conference call. I am joined by Ken Galaznik, our CFO and Treasurer. Ken will report the financial results for the quarter and I will follow with an overview of the business areas. When we’re done with the presentation, we’ll open the lines for questions and answers.

I’ll now turn the call over to Ken.

Ken Galaznik

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

Before we begin, I’m obliged to share our Safe Harbor guidelines with you. Forward-looking statements made during the course of this conference call are modified in their entirety by the risk factors we have identified in our press release and in our SEC filings.

Now I’d like to discuss the results of the first quarter.

Net sales and contract revenues in the June '08 quarter were $39,494,000 which represents an 11% decrease from the first quarter revenues in the prior year of $44,471,000. To break our revenue by product line for the quarter is as follows: Cargo was $4,845,000, down 41% from Q1 FY08; Z Backscatter Systems were $9,659,000, down 33% from Q1 FY08; Parcel was $3,296,000, up 51% over the prior year Q1; Field service was $18,700,000, up 10% over the prior year; and contract research and development was $2,994,000, up 14% over the prior year.

The decrease in cargo revenue is attributable to customer delays related to site preparation while the decrease in the Z Backscatter systems revenue is attributable to the timing of orders as demonstrated by the orders that were announced subsequent to quarter end. The increases noted in parcel, field service and contract research and development represent the continued diversification of our product lines.

The gross profit in the June ’08 quarter was $14,529,000 as compared to $17,401,000 in the June '07 quarter. This decrease in margin is a result of the decreased revenues noted earlier, as well as the margin decline of 2 percentage points in the current quarter which is primarily attributable to product mix.

It is significant to note that as a percentage of sales, gross margin in the current quarter was 6 percentage points higher than the March 31, 2008 quarter. Selling, general and administrative expenses were $7,699,000 or 19% of revenue in the June ’08 quarter as compared to $6,483,000 or 15% of revenue in the June ’07 quarter. The increase in G&A, SG&A is primarily the result of increases in trade shows, demos, travel, incentive compensation and consulting in the June ’08 quarter.

Company-funded research and development expenditures in the current quarter of $3,563,000 were 29% above the June ’07 expenditures of $2,757,000. This increase is in line with our planned activities and is comparable to the March 31, 2008 quarter, (inaudible) run rate at 9% of revenues.

Other income in the June ’08 quarter was $935,000 or down 50% from the June ’07 quarter amount of $1,874,000. This decrease is primarily attributable to the reduction of interest rates in the current quarter and the reduction in the cash investments primarily due to the stock repurchase program and the quarterly dividend program.

The company reported an income tax provision of $1,513,000 in the current quarter as compared to $3,863,000 provision in the June ’07 quarter. The decrease from the June ’07 quarter is due to the decrease in taxable income resulting from the factors noted earlier and a reduction in the effective tax rate from 38.5% in the prior year quarter to 36% in the current quarter. This reduction in effective tax rate is primarily due to the increase in international revenues.

Fully diluted earnings per share in the June ’08 quarter was $0.30 as compared to earnings per share in the June ’07 quarter of $0.66. It is interesting to note that the fully diluted shares in the June ’08 quarter were 8,907,000 as compared to 9,397,000 in the June ’07 quarter. This reduction of 490,000 shares is primarily attributable to the stock repurchase program.

The balance of cash and investments and restricted cash at June 30, 2008 was $105,277,000 or $22,351,000 below the March 31, 2008 balance. This decrease is due to the stock repurchase program of $10.8 million, $1.7 million of cash dividends and $9.5 million used by operating activities.

DSO at June 30 was 62 days, as compared to 59 days at March 31, 2008 quarter. Inventory increased $4,304,000 over the March 31 balance, $2.2 million of the increase was related to cargo orders which will remain in inventory until final acceptance by the customer and the remainder is primarily attributable to spending in anticipation of orders in the pipeline. In the first quarter of fiscal ’09, we invested $425,000 in CapEx and depreciation and amortization expense was $1,044,000.

As to the status of the stock repurchase program, we have now completed the first $35 million repurchase plan and are operating under the second $35 million plan authorized by the Board. To date, we have repurchased 27,448 shares for $1,000,365 under the second plan.

Bookings for Q1 were a record high at $99.9 million, compared to $43.2 million from Q1 last year. After this outstanding booking quarter, we remain very excited about the remaining opportunities in our pipeline. Our backlog at June 30, 2008 was a record high of $159,992,000 or 53% above the June 30, 2007 balance of $104,383,000. While not yet recorded in backlog, the company has $24.8 million of unfunded contracts which are expected to be recorded in backlog in the next 12 months.

I will now return the meeting to Anthony for his comments.

Anthony Fabiano

Thank you, Ken. We continue to break new ground this quarter with international contracts driving bookings and backlog to record highs as Ken just explained to you. The record bookings were driven by our focus on product diversification and increased investment in international sales.

Our expanded product mix has lead to more international opportunities for our cargo, parcel and Z Backscatter business areas, and we achieved exceptional quarterly booking results driving backlogs to $160 million. Now you can tell that Ken is the accountant and I’m not because my next statement is bookings, Q1 bookings were $100 million, ‘cause I rounded it up, which were the highest recorded in AS&E history. 88% of the first quarter product bookings were for international regions, including the Middle East, Africa, Central and Latin America, and the Asia Pacific region as well as Europe. Bookings for AS&E's cargo inspection products continue to grow with first quarter bookings from two very strategic customers: Abu Dhabi Customs for our full-range of cargo products and NATO for multiple Z Backscatter portal screening systems.

We continued our trend of adding new international clients for ZBVs to our installed base around the world, with orders for customs and police agencies in Central and South America, and from the Middle East. Quantities were relatively small per customer but, as we’ve said before, we need to make first sale or breakthrough orders of one or two units before we can sell additional quantities to these customers. So overall, we did a really good job of turning over stones for ZBVs in the quarter.

Backlog. With our record bookings, backlog also reached a new high of $160 million in spite of the fact that we did not book three significant ZBV orders anticipated in Q1. Two of these three orders have been booked in Q2 and the third is imminent.

Recent orders. In addition to the backlog recorded at the end of Q1, we have had significant recent order activity that will be recorded in Q2. We recently booked 10 ZBVs for South America. This is one that we’ve been expecting for several months. This region is becoming an important market for our products. A $2.6 million order for multiple ZBVs for Middle East government agency to be utilized for VIP security. This is a new agency with the government and has strong potential for additional future orders. The service and maintenance contract from the U.S. government valued up to $15.5 million and funded for $7.6 million, was also awarded. And last, a $2.6 million service and maintenance contract for cargo systems.

So let’s review the business areas for the quarter starting with Z Backscatter systems. Well, we booked 18 ZBVs for the quarter with 17 of them going to international customers. However, this quantity was significantly below our expectations for Q1, which as stated before we expect to make up in Q2.

You know, the timing has always been an issue in this industry. We’ve said a million times we’re a lumpy business. In this quarter, we traded lumps. One boosted us permanently, Abu Dhabi, and one hurt us temporarily by not coming in in Q1 and they were all ZBV orders.

Since its introduction, 43% of our ZBV sales have been for international regions. We received two significant contracts in the quarter for Latin American custom agencies, one valued at $9.2 million, the other for two systems for an undisclosed amount. Both customs agencies will utilize the ZBVs at ports and borders to screen vehicles for drugs, weapons, stowaways, and other contraband.

CALA or Central and Latin America is proving to be a very important region for AS&E with the installed base in that region steadily increasing. Additionally at the end of the quarter, we booked multiple ZBVs for Abu Dhabi Customs. This significant $55.1 million contract also includes orders for our latest offerings of state-of-the-art cargo inspection products, the Z Backscatter portal and Omni View Gantry systems.

So let’s go to cargo. This was our largest bookings quarter for Omni View and Z Portal systems with two significant orders. The first cargo order again was from Abu Dhabi, the largest Emirate of the United Arab Emirates. The order includes multiple Omni View systems, Z Portals, and Z Backscatter vans for scanning cargo trucks, passenger vehicles and containers at strategic checkpoints. And just as a side note, in an interview with a UAE publication, the General Manager for Abu Dhabi Customs said he decided to purchase A&E cargo systems because “AS&E offered the best imaging quality he had seen.” Our proprietary combination of scanning technologies coupled with photo-like imaging of the inside of cargo containers displays the most information about the contents of a container versus other products in the market.

The Z Portal. Additionally, NATO placed its second order for Z Backscatter portal X-ray screening systems for checkpoint security. Contract was valued at $6.2 million and was a highly competitive procurement process. The first units were ordered in November of 2006 in the earlier orders. The Z Portal’s three-sided backscatter imaging has proven invaluable for comprehensive checkpoint security in high-threat environments.

Next, the U.S. government client has begun testing the Z Portal at a major checkpoint. Initial reports are very encouraging. The same U.S. government agency conducted an environmental assessment, also known as an EA, to evaluate the technology and environmental consequences expected to result from the deployment of a Z Portal at a point of entry and in the study they said and I quote, “in comparison to the technology currently used by this government agency, the Backscatter capability provides a much clearer image of low-density objects that may be hidden in car fenders, tires, trucks, gas tanks and under the hood.”

In addition, another U.S. government agency has installed the Z Portal under a pilot program for inspecting vehicles at maritime crossings and other transportation modes unrelated to maritime.

The pipeline for the Omni View and Z Portal continues to be very strong, particularly in the international arena. We remain very optimistic about the potential for both of these unique products with AS&E's proprietary Z Backscatter technology. Margins on these relatively new cargo products are improving as we have been working hard to reduce costs over the last quarter.

Parcel, Gemini System. Gemini continues to gain traction in the U.S. government high-threat market with several breakthrough bookings in the quarter in addition to orders for the U.S. military. The Gemini systems for the Olympics were successfully installed and operators trained. We look forward to successful reports from the field for this very important installation.

The pipeline for Gemini continues to be strong with new domestic and global opportunities. This is good news as we worked successfully to drive down Gemini unit production costs which we expect to improve profit margins.

Personal screening, our SmartCheck system. As you know, TSA expanded pilot testing of privacy enhanced SmartCheck personal screening systems at LAX and JFK this quarter. We continue to receive positive reports from the field. We continue to believe that SmartCheck's Privacy Enhanced Technology provides the best detection capability and should prove to be the personal screening system of choice for all classes of secured locations.

Field service. Another very strong quarter for service. The U.S. government completed funding for a multi-year ZBV service contract with two orders in the quarter, a $3.4 million contract with a $14.3 million contract for ZBV service and maintenance. Total value of this contract is $46.2 million. Field service continues to do an excellent job servicing these units deployed for critical counterterrorism missions. Service growth not only reflects a higher base of installed products but also the continued commitment by our field service teams to achieve the highest customer satisfaction ratings. Margins continue to meet expectations in this business area.

We announced last week that we received SAFETY Act; SAFETY an acronym for Support Anti-Terrorism by Fostering Effective Technology certification from the U.S. Department of Homeland Security for a range of cargo and parcel x-ray inspection products and associated services. Established as part of the Homeland Security Act of 2002, the SAFETY Act provides incentives for the development and deployment of anti-terrorism technologies.

The key point, this is a very important development for us because designation provides legal liability protection to AS&E and its customers for our designated and certified products related to an act of terrorism. This is an essential facet of our corporate risk mitigation process. This certification validates AS&E’s role in the fight against terrorism and demonstrates that AS&E’s products have been developed to meet the highest possible quality standards for protecting people, assets, and critical infrastructure.

So, let’s summarize the quarter. Well, we’re disappointed that orders were not received in time to favorably impact the quarter’s bottom line results; however, we’re very excited to receive these orders in Q2 and are prepared to execute them rapidly and efficiently.

We continue the ramp up in R&D spending, increasing 29% from the same quarter last year. We continue to make excellent progress on key programs with very close attention to our time-to-market metrics both internally and for externally-funded projects. The record $100 million in bookings is an affirmation of our strategy to grow and diversify our business through increased investment in international sales, new products, and exploring and introducing new customer applications for existing Z Backscatter products and technology. These results are consistent with our mission and underlying strategies to grow revenue and earnings in order to increase shareholder value over the long term.

We continue to generate strong positive cash flow to finance new product development and to reward our shareholders in ways such as –Ken spoke earlier the repurchase of shares of stock and a cash dividend of $0.20 per share that was approved for the quarter at a recent Board of Directors' meeting. The dividend will be paid on September 5, 2008 to shareholders of record at the close of business on August 18, 2008.

Just one closing comment. As you know, we had an important change in governance this quarter with the passing of the Chairman of the Board, Lieutenant General William E. Odom. In accordance with an existing succession plan, the Board named current board member, Dennis Brown as the new Chairman. Named to AS&E's Board of Directors in June 2004, Mr. Brown is currently a private investor and advisor to a start-up company serving the idea market. He has had a long and distinguished career as a top executive in defense technology and commercial manufacturing that began in 1970 after his service as a U.S. naval officer. We are very fortunate to have someone with Mr. Brown's extensive leadership credentials to serve as our Chairman. And the management team and I are looking forward to an outstanding working relationship with Mr. Brown like the one we enjoyed with General Odom.

Thank you. I will now turn the call back to the operator for your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Fabiano. The question-and-answer session will begin at this time. (Operator instructions) And our first question comes from the line of Steve Levenson from Stifel Nicolaus. Please proceed.

Steve Levenson – Stifel Nicolaus

Thanks. Good afternoon, Anthony and Ken.

Anthony Fabiano

How was today, Steve?

Ken Galaznik

Hi, Steve.

Steve Levenson – Stifel Nicolaus

Always interesting. In terms of the orders that you mentioned that you booked in the second quarter, obviously there's a supplemental Defense Appropriations Bill passed. Can we make a correlation between the two?

Anthony Fabiano

Why don't you be a little clear, Steve?

Steve Levenson – Stifel Nicolaus

Are these the military orders that people have been waiting for that you're alluding to?

Anthony Fabiano

Yes. We have an order for potentially 22 Z Backscatter Vans from PMFPS [ph] that we have been expecting for the last couple of weeks that is in the final stages of procurement. We had hoped to have the order by the time of this call. We couldn't receive it before the end of the call, but we'll probably have it tomorrow or the day after but there's been a glitch with the procurement agency with their computer system that's held us up a little bit. But we're told that's push of the button away. So does that answer your question?

Steve Levenson – Stifel Nicolaus

I take it that's one of the three you mentioned?

Anthony Fabiano

No. Actually, when I mentioned three, two of the three came in – two were international. The third was the PMFPS order we just talked about.

Steve Levenson – Stifel Nicolaus

Okay.

Anthony Fabiano

I think the other point that you're alluding to is the supplemental budget funding requirement for the – I believe it's 66 Z Backscatter Mil Trailers.

Steve Levenson – Stifel Nicolaus

Right.

Anthony Fabiano

And we're tracking that like everybody else. We're hopeful that that order could come in this quarter or the following quarter.

Steve Levenson – Stifel Nicolaus

Okay. Thanks. What do you think is taking customs and border patrol so long with their test of the Z Portals that they've got?

Anthony Fabiano

Well, I can't really answer your question. All I could tell you is that the program's going very, very well.

Steve Levenson – Stifel Nicolaus

Okay. In terms of the Abu Dhabi order, do you think that's something that can be repeated with other people running those ports? Do you think it's single-digit times, double-digit times or do you think this is a one-shot deal?

Anthony Fabiano

Well, Steve, all I could tell you is that it’s a breakthrough order for us in an area that we’re becoming known better and better everyday. I believe that the region presents tremendous opportunities for AS&E, that there are future opportunities with Abu Dhabi Customs assuming that we perform and we do our job and we become a good partner for that customer. Nothing is carved in stone but we’re very optimistic about our future.

Steve Levenson – Stifel Nicolaus

Okay. Thank you. And last you mentioned some new products, are there any descriptions you can give us or is it a little early for that?

Anthony Fabiano

Well, its competition-sensitive information, but this is a year we’re really excited about. It's an opportunity to fill in some gaps and also bring out some new products that we think are going to be in high demand over the next year or two.

Steve Levenson – Stifel Nicolaus

Okay, and last one for Ken. Is the 10b5-1 plan related to the repurchase agreement? I'm sorry, the repurchase authorizations still in place.

Anthony Fabiano

Yes, it is, Steve.

Steve Levenson – Stifel Nicolaus

Okay. Thank you very much.

Anthony Fabiano

You’re welcome.

Operator

And your next question comes from the line of Josh Jabs from Roth Capital. Please proceed.

Josh Jabs – Roth Capital

Hey, good afternoon.

Anthony Fabiano

Hey Josh.

Josh Jabs – Roth Capital

Ken, did you mention what percentage of the backlog right now is international?

Ken Galaznik

I did not. We typically don’t break it out, but a substantial portion is now international with the recent bookings we’ve had.

Josh Jabs – Roth Capital

Okay. So the backlog and bookings numbers are up pretty huge here, given you’ve had a few quarters of acceleration on the international side, can you give us a better idea of what you’re seeing as far as how the shipments are likely to go out of backlog and maybe how much of the backlog you'd expect to ship over the next 12 months?

Ken Galaznik

As you know, I’d love to be able to talk more about it but I can’t try and respond to your question on what percentage would roll out in the next 12 months. At this point, we’re probably looking in the, quick thought, it’s somewhere in the 75%, 80% range would go in the next 12 months.

Josh Jabs – Roth Capital

Okay, and just as far as the – in looking at the Abu Dhabi order, can you give us any better breakout of how much was in each product group?

Ken Galaznik

I really can’t, Josh. I mean, as we said earlier, it’s a large cargo order multi-products across the product lines.

Anthony Fabiano

It's too competition-sensitive to do that.

Josh Jabs – Roth Capital

Okay. How about in looking at the manufacturing? I believe currently you’re manufacturing majority of the products out of your facility outside of Austin.

Ken Galaznik

Correct. With these, obviously there’s a lot going out here to the Middle East. Has there been any thought of establishing a manufacturing presence in the Middle East at this point?

Anthony Fabiano

Well, you know a lot of that depends upon the supply chain. We have an international supply chain set up and we’re always looking at opportunities where we can ship products. But right now, given the state of the dollar and the currency, it doesn’t make the most common sense factoring the cost of shipping which is very high and that has an impact in the other direction as you might imagine. But bottom line is we’re very secure with what we’re doing right now. If at some later date circumstances dictate we make that kind of change, we would be prepared to do it.

Josh Jabs – Roth Capital

Okay, and then last one here. The $9.2 million ZBV order, was that shipped in the quarter?

Ken Galaznik

I really couldn’t respond to that Josh.

Josh Jabs – Roth Capital

Okay. All right. Great, thanks guys.

Ken Galaznik

Thank you.

Anthony Fabiano

Sure.

Operator

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

Brian Ruttenbur – Morgan Keegan

Okay, thank you. First question, can you just repeat the amount of ZBV revenue in the quarter and can you tell us then the number of ZBVs shipped?

Ken Galaznik

Brian, I can do that. The Backscatter System revenue was $9,659,000 and that was on 12 units.

Brian Ruttenbur – Morgan Keegan

Great. Next question, SG&A going forward, with $7.7 million which was much higher than what were anticipating, was there anything extraordinary in there? You mentioned that there's a lot more trade shows you’re going to, other things like that, no extraordinary legal or anything else. So we should expect that number going forward?

Ken Galaznik

No, I think it was a little heavy when you talk about the trade shows. We had a biannual sales conference in this quarter, so we had a few charges like that but nothing of any substance as far as one-offs.

Brian Ruttenbur – Morgan Keegan

Okay. So you would think that sequentially it would drop because you wouldn't have the same trade shows but then kind of from the 7 plus million level is kind of your core SG&A? Can I get a kind of core number?

Ken Galaznik

I don’t know if I can really respond to that in that fashion. We had those items that I described that are kind of unusual risk quarter, nothing else probably is as far as I could go.

Brian Ruttenbur – Morgan Keegan

Okay. The next question I had was on R&D, $3.6 million, is that a good number to use going forward? There was nothing extraordinary in that either?

Ken Galaznik

Again, Brian, I can’t talk about what it will be going forward. But as you can see, we’re running about that rate for the last couple of quarters.

Brian Ruttenbur – Morgan Keegan

Okay. Very good. The next question I have is on – your stock has been – you are finished with the first set of repurchasing stocks. You’ve gone on to, what, another $35 million. You’re a couple of million into that. Is the plan – or what is the plan? Is it to continue to repurchase stock at certain levels or can you elaborate on what the plan is?

Ken Galaznik

We have a matrix in place. Steve alluded to earlier and talked about the 10b5-1 concept, and we have a matrix in place that establishes how many shares we purchase at different prices.

Brian Ruttenbur – Morgan Keegan

Okay. And $9 million of cash burn that you had in the quarter from operations, is that correct?

Anthony Fabiano

It is correct.

Brian Ruttenbur – Morgan Keegan

Why would that happen?

Ken Galaznik

As you can see, we had the $4 million increase of inventory that took a piece of cash. You can see the lower net income number that we started with. If we would have had some of these orders earlier, we would have a different story in that area. You can also see, I think it was $3.8 million related to what I will call the recognition of the deferred revenue, where the cash we received in the prior quarter. So we have the revenue impact this quarter but not the cash impact and that’s the bulk of it in my mind.

Brian Ruttenbur – Morgan Keegan

Okay. And there was a reclassification of cash in the quarter, if I’m correct, was it $13 plus million?

Ken Galaznik

No, there were $16 million that's called restrictive cash that’s sitting down as long-term assets. And what that is, is that cash that was set aside to secure LCs that were put in place with these large orders we’ve been receiving.

Brian Ruttenbur – Morgan Keegan

Was that a change from last quarter?

Ken Galaznik

It was in a firm [ph] magnitude standpoint, yes.

Brian Ruttenbur – Morgan Keegan

Okay. Where did it go from and to [ph] ?

Ken Galaznik

Once it was – $2 million to $16 million I believe was the change.

Brian Ruttenbur – Morgan Keegan

Okay. And that’s all related to international orders?

Ken Galaznik

Yes, sir. Securing the LCs we had to put in place to support their LCs if you will – to back their – to give them a corresponding LC on advanced pace in these types of things.

Brian Ruttenbur – Morgan Keegan

Okay. The other question I had was on the DoD upcoming orders. All those DoD orders you anticipate to have to book and ship within six months, something like that, or [ph] typical?

Ken Galaznik

We’ll ship in accordance with their instructions, Brian, whenever we finally get the final agreements there.

Anthony Fabiano

Yes, we’re obviously anxious to ship as much as we can but it’s going to be dictated by their ability to take delivery, Brian. That’s typically the case.

Brian Ruttenbur – Morgan Keegan

Is it typical that they take delivery within six months?

Anthony Fabiano

Historically, they have. I think that’s about right.

Brian Ruttenbur – Morgan Keegan

Okay. And then, last question and I’ll shut up, is field services. Is there any reason that you would have a different field service? It looks like that you’ve had pretty much sequential growth going forward. Is there any reason that you would have a fall-off in these levels?

Anthony Fabiano

Not anticipating any.

Brian Ruttenbur – Morgan Keegan

Outstanding. Thank you very much.

Anthony Fabiano

Thank you.

Operator

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

Tim Quillin – Stephens, Inc.

Good afternoon.

Anthony Fabiano

Hey, Tim.

Ken Galaznik

Tim, how are you doing?

Tim Quillin – Stephens, Inc.

Good. Just in terms of the funding and the potential order that you’re tracking and we’re tracking from the U.S. Marine Corps, how are you thinking about that in terms of your level of confidence that will eventually translate into orders? It’s a matter of when not if, or how do you view that when you think about that in your pipeline?

Anthony Fabiano

That’s a tough question. When I look at our pipeline historically, everything that we have forecasted to the rate of 98%, 99%, we won but we’ve been off miserably on timing. This quarter is the same thing. In this case, you’ve got a funded requirement through the supplemental budget. You have a compelling need on the part of the customer but you never know. And until that order’s in the door, I wouldn’t want to venture a guess as to whether or not it’s in the bag. Strange things happen. We’ve had money stolen by MRAP programs and other things in the past. But I think we got a great product. The customer thinks we have a great product. I’m optimistic but I couldn’t make any predictions.

Tim Quillin – Stephens, Inc.

Okay. And then, I guess, I wasn’t expecting any kind of rapid feedback from CBP on the Z Portal, but I’m wondering when do you think we might get a better sense of their plans for Z Portal?

Anthony Fabiano

It’s really hard for me to answer that because of there's kind of a gag order on us to talk about it.

Tim Quillin – Stephens, Inc.

Okay.

Anthony Fabiano

I can tell you that we’re very pleased with the progress but that’s all I can tell you.

Tim Quillin – Stephens, Inc.

When was the system actually up and functional? When did you start running? When did they start running a pilot?

Anthony Fabiano

If I told you that, you might figure out when the pilot would be over and I would be breaking my word.

Tim Quillin – Stephens, Inc.

Okay. Well, great bookings quarter. Congratulations.

Anthony Fabiano

Thank you very much.

Operator

And our next question comes from the line of Josephine Millward from Stanford Group. Please proceed.

Josephine Millward – Stanford Group

Good afternoon.

Anthony Fabiano

Hello, Josephine.

Josephine Millward – Stanford Group

Hi, Anthony. Congratulations on your record bookings.

Anthony Fabiano

Well, thank you.

Josephine Millward – Stanford Group

I just want to clarify, so you haven’t included the upcoming military ZBV order in this $100 million bookings?

Anthony Fabiano

No, ma'am.

Josephine Millward – Stanford Group

So it will be in addition to the backlog you have right now. That’s great news.

Anthony Fabiano

Yes.

Josephine Millward – Stanford Group

And also could you give us an update on the $4.4 million orders that you shipped early this year but had nor recognized at the end of March? Have you shipped part of that – have you recognized part of that?

Ken Galaznik

Josephine, we’re talking about earlier with the revenue recognition for Cargo in Q1.

Josephine Millward – Stanford Group

Right.

Ken Galaznik

We still have the delay because of the – we had the delay at that point because of the customer sightings preparation and that’s currently where we stand.

Josephine Millward – Stanford Group

So that’s the entire $4.4 million? Because I think you said you still have $2.2 million in inventory or –

Ken Galaznik

That was the increase of the inventory in this quarter, was part of that.

Josephine Millward – Stanford Group

I see. Got it. Okay. So you’re still waiting for that systems to be accepted?

Ken Galaznik

Yes.

Josephine Millward – Stanford Group

Do you think that could happen during this quarter?

Ken Galaznik

Hard to say, Josephine.

Josephine Millward – Stanford Group

You know I had to ask you that, Ken.

Ken Galaznik

It’s part of what we do here.

Josephine Millward – Stanford Group

Right. And the $25 million unfunded contract that you talked about, are those the two government service contracts? You said you expect them to be funded within the year.

Ken Galaznik

A part of it is, yes.

Josephine Millward – Stanford Group

What’s the other part?

Ken Galaznik

We have really – we’ve got about – I’m looking at about seven contracts that make up that for unfunded portions.

Josephine Millward – Stanford Group

Okay.

Anthony Fabiano

We’re chipping away at it, Josephine. Pretty successfully.

Josephine Millward – Stanford Group

You’re very busy.

Anthony Fabiano

Never fast enough though.

Josephine Millward – Stanford Group

I’m sorry; I think somebody asked this earlier. So do you expect R&D and SG&A to, the trend for growing – SG&A and R&D to stay around the same level going forward?

Anthony Fabiano

All I could tell you is that one of our highest priorities is to bring new products to markets. So as we improve our earnings quarter-to-quarter and feel more comfortable with that, it’s very possible that we would spend more money on R&D, provided the opportunities pass the test, the financial gauge that we have to verify whether or not it’s a good investment of shareholders' dollars.

Josephine Millward – Stanford Group

Great. And can you give us an update on CARs [ph]. I know the other program ASE has been under serious scrutiny by Congress, but I haven’t heard anything about CARs, so what’s going on there?

Anthony Fabiano

We’re pleased with our progress. We believe that the customer is pleased. That’s our opinion. But I for one think our people are doing a great job and we’re on track and we’ve met all of our commitments thus far.

Josephine Millward – Stanford Group

What should we be looking for next in CARs?

Anthony Fabiano

It’s hard to say and if I knew, they probably wouldn’t let me tell you.

Josephine Millward – Stanford Group

All right. Thank you.

Operator

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

Michael Kim – Imperial Capital

Good afternoon, gentlemen. I have three questions. First in regards to pricing, any sense of you’ve a seen a change in the pricing environment for any of particular products or category? Second question is, I don’t know if you went into this in any detail, but if you could provide a breakdown on the mix of your backlogs that you indicated at quarter end. And then the third question, given how the timing component and the lumpiness from quarter to quarter, if you are sense of the fiscal first half for this year would look sort of comparable to the fiscal first half of last year.

Ken Galaznik

Okay. Michael, this is Ken. As to the pricing, we’re in a situation where really just about all of our products are GSA price-listed, so that sets the floor if you will from that standpoint. So we don’t feel the pressure that others and other commercial entities may experience. So we really haven’t felt the pricing pressure that you are referring to. As to the backlog mix, we don’t breakout backlog by product line. It’s just a standing tradition here that we have not done and it would be very difficult for me to comment to compare the first half of this fiscal year, what we are expecting as to how it will compare to the last half, so I really don’t know how to give you any color on that at this time.

Anthony Fabiano

The only thing I could tell you is that our pipeline continues to grow and after winning a $55 million contract, it has held steady from where it was 90 days ago, so that means that we’ve got more and more things coming into the funnel and we have a pretty scrutinous [ph] process to put things in our pipeline. So I am feeling very good about where we’re going. You just never know about the timing, that’s the problem.

Michael Kim – Imperial Capital

Okay, fair enough. Great one. Thank you very much.

Anthony Fabiano

Thank you. Welcome aboard, by the way.

Michael Kim – Imperial Capital

Thanks.

Operator

And our next question comes from the line of Frank Hart [ph] from Janney Montgomery Scott. Please proceed.

Frank Hart – Janney Montgomery Scott

Hi there, guys. How are you?

Anthony Fabio

Hello Frank, how are you?

Frank Hart – Janney Montgomery Scott

Good to hear your voices again and great bookings on the quarter there. I was mostly – interestingly enough with an announcement that actually didn’t have anything to do with bookings but with the SAFETY Act certification from DHS. Could you elaborate a little bit on sort of the significance of this? And I guess the other question I have is – and this may be, I think you called it competitive-sensitive or competition sensitive – but do you see this certification having an especially positive impact on any new particular products. I noticed they've pretty much certified you guys across the board, but do you think any one or more of your products benefits more from this than any other?

Anthony Fabio

That’s a really interesting question. Let me start with the SAFETY Act. Let me tell you, I am not a procurement expert on the act and I am not an attorney, okay? But, we went after the SAFETY Act for the very simple reason that when you look at the defense contractors that build ammunition and explosives for example, or tanks and other type of weaponry, they have a complete exemption of liability, product liability, for anything that is used in war zone and nothing really existed for people that were building security systems and selling them in the continent of United States. So, it's an anti-terrorism act and to promote more companies to get into this area without fear of having their own product liability coverage, having to cover catastrophic lawsuit, the government created the SAFETY Act with extremely stringent requirements for contractors like us to get in. And we’ve been working on this for many, many months and we finally received our designations in some cases, and certifications, and it’s extremely important to us and it’s important to our shareholders that we have that protection.

Frank Hart – Janney Montgomery Scott

Absolutely.

Anthony Fabio

So you are absolutely right, that is a big breakthrough and that’s why we announced it. As far as particular products, there really isn’t any differentiation of products other than if you look at the products that we have where we might suffer higher risk, if there was an issue, obviously we’re happy to get the products approved across the board. And so it’s a pretty darn good move and we’re very pleased.

Frank Hart – Janney Montgomery Scott

And I thought that was one of those announcements that becomes increasingly significant as we go forward but thank you.

Anthony Fabio

Yes.

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 – is 22093365. An audio replay will also be available on the AS&E web site 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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