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ASEI > SEC Filings for ASEI > Form 10-Q on 9-Feb-2012All Recent SEC Filings

Show all filings for AMERICAN SCIENCE & ENGINEERING, INC.

Form 10-Q for AMERICAN SCIENCE & ENGINEERING, INC.


9-Feb-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "intends", "should" and similar expressions are intended to identify forward-looking statements. The factors discussed under "Item 1A. Risk Factors", among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. We expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

American Science and Engineering, Inc., which is referred to in this report as "we" or "the Company", develops, manufactures, markets, and sells X-ray inspection and other detection products for homeland security and other targeted markets. The Company provides maintenance, warranty, engineering, and training services related to these products.

Our primary technologies are Z Backscatter technology which is used to detect explosives, illegal drugs, and other contraband even when artfully concealed in complex backgrounds, and other technologies that expand the detection capability of our products beyond the material discrimination features of the Z Backscatter technology to include the penetration capability of high-energy transmission X-rays and/or other detection techniques, such as radioactive threat detection.

Net sales and contract revenues for the third quarter of fiscal year ending March 31, 2012, or fiscal 2012, decreased to $57,907,000 compared to revenues of $76,588,000 for the third quarter of fiscal 2011. We reported operating income of $11,241,000 for the third quarter of fiscal 2012 compared to $17,362,000 for the third quarter of fiscal 2011. Net income for the third quarter of fiscal 2012 was $7,535,000 ($0.84 per share, on a diluted basis) compared to net income of $11,782,000 ($1.28 per share, on a diluted basis) for the third quarter of fiscal 2011. These results represent a 24% decrease in revenues, a 36% decrease in net income, and a $0.44 decrease in earnings per share when compared to results for the third quarter of the fiscal 2011.

Net sales and contract revenues for the first nine months of fiscal 2012 decreased by 22% to $163,788,000 compared to revenues of $210,868,000 for the first nine months of fiscal 2011. We reported operating income of $30,013,000 for the first nine months of fiscal 2012 compared to $49,973,000 for the first nine months of fiscal 2011. Net income for the first nine months of fiscal 2012 was $20,079,000 ($2.18 per share, on a diluted basis) compared to net income of $33,252,000 ($3.60 per share, on a diluted basis) for the first nine months of fiscal 2011.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates-which also would have been reasonable-could have been used, which would have resulted in different financial results.

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2011 are policies related to revenue recognition, inventories and related allowances for obsolete and excess inventory, and income taxes. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on June 9, 2011. There have been no changes to our critical accounting policies during the three and nine months ended December 31, 2011.

Results of Operations

Net revenues for the third quarter ended December 31, 2011 decreased by $18,681,000 to $57,907,000 compared to the revenues of $76,588,000 for the third quarter of fiscal 2011. This decrease is attributable primarily to a decrease of $19,746,000 in product sales and contract revenues. Factors contributing to the product sales and contract revenues decrease include: 1) a decrease of $11,323,000 in Z Backscatter system revenues as compared to the corresponding prior year period due to a lower number of units being delivered in the period as compared to the prior year In the quarter ended December 31, 2010, the Company fulfilled one large multi-unit Z Backscatter system order which was not repeated in the third quarter of fiscal 2012; and 2) a decrease of $10,977,000 in Cargo Inspection system revenues as compared to the corresponding prior year period attributable to a decrease in the number of systems delivered and under construction as compared to the prior year. These decreases were offset in part by an increase of $2,455,000 in aftermarket parts revenues due primarily to one large spare parts order fulfilled during the third quarter of fiscal 2012. Contract research and development and Parcel and Personnel Inspection system revenues remained relatively flat as compared to the prior period. Service revenues increased by $1,065,000 to $22,910,000 compared to the third quarter of fiscal 2011 due primarily to increased fixed price service contract revenue as a greater number of systems were under contract as compared to the prior year period.

Net revenues for the nine months ended December 31, 2011 decreased by $47,080,000 to $163,788,000 compared to the


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corresponding period a year ago. This decrease is attributable primarily to a decrease of $50,501,000 in product sales and contract revenues. Factors contributing to the product sales and contract revenues decrease include: 1) a $34,675,000 decrease in Z Backscatter systems revenues on lower volume; and 2) a decrease of $27,475,000 in Cargo Inspection system revenues as compared to the corresponding prior year period attributable to a decrease in the number of systems delivered and comparably fewer systems under construction on certain contracts recognized on a percentage of completion basis. These decreases were offset somewhat by an increase of $9,567,000 in Parcel and Personnel Inspection system revenues due to certain large orders fulfilled in the period and an increase of $1,904,000 in aftermarket parts revenues due primarily to one large spares order fulfilled during the third quarter of fiscal 2012. Contract research and development revenues remained relatively flat as compared to the prior period. Service revenues increased by $3,421,000 to $67,367,000 compared to the nine months ended December 31, 2010 due primarily to increased service contract revenue as a greater number of systems were under contract as compared to the prior year period.

Total cost of sales and contracts for the third quarter of fiscal 2012 decreased by $10,422,000 to $31,462,000 as compared to the corresponding period a year ago. Cost of sales and contracts related to product revenues decreased by $9,810,000 to $20,530,000 as compared to the corresponding period a year ago. Cost of product sales and contract revenues represented 59% of revenues versus 55% of revenues for the corresponding period in the prior year. The resultant decrease in gross margin percentage from the prior year is due primarily to accruals for losses on certain long-term contracts provided for in the period and inventory reserves accrued for during the period. The cost of service revenues for the quarter ended December 31, 2011 decreased by $612,000 to $10,932,000 as compared to the corresponding period a year ago. Cost of service revenues decreased to 48% of revenues from 53% of revenues in the corresponding period due primarily to a decrease in material costs required to support systems under fixed price contracts during the period and reduced labor costs as numerous systems under contract were in the process of being reallocated during the period.

Total cost of sales and contracts for the nine months ended December 31, 2011 decreased by $24,188,000 to $88,320,000 as compared to the corresponding period a year ago. Cost of sales and contracts related to product revenues decreased by $25,845,000 to $53,060,000 as compared to the corresponding period a year ago. Cost of product sales and contract revenues represented 55% of revenues versus 54% of revenues for the corresponding period in the prior year. The resultant decline in gross margin was primarily the result of loss accruals provided for in the period on certain long-term contracts and inventory reserves accrued for during the period. These additional costs were offset in part by improved margins in the Parcel and Personnel Inspection system and Z Backscatter system product lines as compared to the prior period. The cost of service revenues for the nine months ended December 31, 2011 increased by $1,657,000 to $35,260,000 as compared to the corresponding period a year ago. Cost of service revenues represented 52% of revenues in the nine months ended December 31, 2011 as compared to 53% of revenues for the nine months ended December 31, 2010. The resultant improvement in gross margin was primarily the result of lower freight and material costs as a percentage of revenue to support systems under contract as compared to the prior period.

Selling, general and administrative expenses for the third quarter of fiscal 2012 decreased by $1,683,000 to $9,091,000 as compared to the corresponding period a year ago. Selling, general and administrative expenses represented 16% of revenues in the current period compared to 14% for the corresponding period in the prior year. The decrease in selling, general and administrative expenses from the prior period was primarily the result of a decrease in incentive compensation expense of $1,964,000 offset in part by an increase in payroll and payroll-related costs of $378,000 attributable to increased headcount.

Selling, general and administrative expenses for the nine months ended December 31, 2011 decreased by $4,856,000 to $26,728,000 as compared to the corresponding period a year ago. Selling, general and administrative expenses represented 16% of revenues in the current period compared to 15% for the corresponding period in the prior year. The decrease in selling, general and administrative expenses from the prior period was primarily the result of: 1) a decrease in incentive compensation expense of $4,739,000; 2) a decrease in legal fees of $842,000 from the prior year related to due diligence activities on a potential acquisition that was later abandoned; and 3) a decrease in consulting and other professional fees of $373,000 from the prior year. These decreases were offset in part by an increase in payroll and payroll-related costs of $1,075,000 attributable to increased headcount.

Company funded research and development expenses for the third quarter of fiscal 2012 decreased by $455,000 to $6,113,000 as compared to the corresponding period a year ago. Research and development expenses represented 11% of revenues in the current quarter compared to 9% for the corresponding period in the prior year. Research and development expenses decreased as compared to the prior period as in the third quarter of fiscal 2011 the Company had one-time expenditures for acquired subcontracted development work related to one research and development project in the period. Research and development activities performed in the quarter focused on the development of new products, product options and product enhancements.

Company funded research and development expenses for the nine months ended December 31, 2011 increased by $1,924,000 to $18,727,000 as compared to the corresponding period a year ago. Research and development expenses represented 11% of revenues for the nine months ended December 31, 2011 as compared to 8% for the corresponding period last year. The increase in research and development expenses in the period was attributable to increased labor resources being expended on research and development efforts during the period. Research and development activities performed in the period focused on the development of new product options and product enhancements.


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Other income (expense) was $176,000 of income for the third quarter of fiscal 2012 as compared to $26,000 of expense for the corresponding period a year ago.

Other income (expense) was $410,000 of income for the nine months ended December 31, 2011 as compared to $393,000 of income for the corresponding period a year ago.

We reported pre-tax income of $11,417,000 in the three months ended December 31, 2011 as compared to pre-tax income of $17,336,000 in the corresponding period due to the factors described above. We reported pre-tax income of $30,423,000 in the nine months ended December 31, 2011 as compared to pre-tax income of $50,366,000 in the corresponding period due to the factors described above.

Our effective tax rate for the three months ended December 31, 2011 was 34.0% as compared to 32.0% for the corresponding period a year ago. Our effective tax rate for the nine months ended December 31, 2011 was 34.0% as compared to 34.0% for the corresponding period a year ago. The increase in the tax rate for the quarter as compared to the prior quarter is attributable primarily to the research and development tax credit. The research and development tax credit was reinstated in the third quarter of fiscal 2011 retroactively to the beginning of the year resulting in a cumulative tax credit being recognized in the third quarter of fiscal 2011.

We had net income of $7,535,000 for the third quarter of fiscal 2012 as compared to net income of $11,782,000 in the third quarter of fiscal 2011. We had net income of $20,079,000 for the nine months ended December 31, 2011 as compared to net income of $33,252,000 for the nine months ended December 31, 2010. The significant factors contributing to these results are noted in the above sections.

Liquidity and Capital Resources

Our sources of capital include, but are not limited to, our cash flows from operations and cash received from stock issuances related to option exercises. We believe that our operating cash flows and cash and investments on hand are sufficient to fund our working capital requirements, capital expenditures, income tax obligations, dividends to our shareholders and performance guarantee collateralizations for the foreseeable future.

Summary of Cash Activities

Cash and cash equivalents decreased by $30,649,000 to $29,495,000 at December 31, 2011 compared to $60,144,000 at March 31, 2011. This decrease is attributable primarily to:

1) net purchases of short-term investments of $65,848,000 during the period;

2) the repurchase of 320,207 shares of the Company's common stock for $20,050,000 during the period;

3) a decrease of $5,687,000 in accrued expenses and other liabilities due primarily to

a. a $7,211,000 decrease in incentive compensation accruals due to the payment of fiscal year-end bonuses during the year and a reduction in incentive compensation accruals during the year;

b. a $653,000 decrease in warranty reserves from the prior year end due to reduced warranty costs incurred and a decrease in the number of systems under warranty from the year end;

c. offset by a $3,249,000 increase in the accrual of losses on certain long-term contracts during the year;

4) the payment of $9,964,000 in common stock dividends during the year as part of our quarterly dividend program; and

5) net capital expenditures of $3,751,000 during the period attributable primarily to hardware and software purchases during the period.

Offsetting these outflows were other cash inflows including:

1) the net income earned in the period of $20,079,000;

2) a net decrease of $15,830,000 in restricted cash and investments, due to our bank's reduction of the collateral requirement on outstanding standby letters of credit during the period;

3) a decrease of $13,497,000 in unbilled accounts receivable in the period due primarily to the achievement of invoicing milestones on one contract during the period;

4) a decrease of $10,117,000 in accounts receivable as outstanding invoices were collected during the period;

5) an increase of $8,208,000 in customer deposits during the period due to the timing of milestone payments on certain fixed price contracts; and

6) proceeds from the exercise of stock options of $2,835,000 during the period.

In the normal course of business, we may provide certain customers and potential customers with performance guarantees, which are generally backed by standby letters of credit. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations; the probability of which management believes is low. As of December 31, 2011,


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we had outstanding $25,602,000 in standby letters of credit. During the quarter ended June 30, 2011, our bank reduced the collateral requirement on these standby letters of credit. These outstanding standby letters of credit are now cash-secured at amounts ranging from 52% to 65% of the outstanding letters of credit. This resulted in a restricted cash balance of $13,630,000 at December 31, 2011 of which $784,000 was considered long-term restricted cash due to the expiration date of the underlying letters of credit.

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