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ASEI > SEC Filings for ASEI > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for AMERICAN SCIENCE & ENGINEERING, INC.

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


7-Nov-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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "intends", "should" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our 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 second quarter of fiscal year ending March 31, 2013, or fiscal 2013, decreased to $46,253,000 compared to revenues of $54,778,000 for the second quarter of fiscal 2012. We reported operating income of $9,597,000 for the second quarter of fiscal 2013 compared to $10,205,000 for the second quarter of fiscal 2012. Net income for the second quarter of fiscal 2013 was $6,399,000 ($0.76 per share, on a diluted basis) compared to net income of $6,851,000 ($0.74 per share, on a diluted basis) for the second quarter of fiscal 2012. These results represent a 16% decrease in revenues and a 7% decrease in net income when compared to results for the second quarter of fiscal 2012. Earnings per share increased by $0.02 compared to results for the second quarter of the fiscal 2012 due to a reduction in the shares outstanding resulting from the stock repurchase program.

Net sales and contract revenues for the first six months of fiscal year ending March 31, 2013, or fiscal 2013, decreased to $93,597,000 compared to revenues of $105,881,000 for the first six months of fiscal 2012. We reported operating income of $15,957,000 for the first six months of fiscal 2013 compared to $18,772,000 for the first six months of fiscal 2012. Net income for the first six months of fiscal 2013 was $10,601,000 ($1.22 per share, on a diluted basis) compared to net income of $12,544,000 ($1.35 per share, on a diluted basis) for the first six months of fiscal 2012. These results represent a 12% decrease in revenues, a 15% decrease in net income, and a $0.13 decrease in earnings per share when compared to results for first six months of fiscal 2012.

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.


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The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2012 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 8, 2012. There have been no changes to our critical accounting policies during the three and six months ended September 30, 2012.

Results of Operations

Unless otherwise indicated, discussion of results for the three- and six-month periods ended September 30, 2012, is based on a comparison with the corresponding period of 2011

Net revenues for the second quarter of fiscal 2013 decreased by $8,525,000 to $46,253,000 compared to the revenues of $54,778,000 for the corresponding prior period. This decrease is attributable primarily to a decrease of $7,291,000 in product sales and contract revenues from the prior period. This decrease was due primarily to a decrease of $8,033,000 in Z Backscatter system revenues attributable to a lower volume of systems delivered as well as a 21% reduction in the average sales price from the prior period due to the mix of options sold with these systems compared to the prior year. In addition there was a decrease of $1,113,000 in Parcel and Personnel Inspection system revenues due to one multi-unit order fulfilled in the second quarter of fiscal 2012 which was not repeated in the current year. These decreases were offset in part by an increase of $2,371,000 in Cargo Inspection system revenues as compared to the corresponding prior year period due to an increase in the number of systems accepted in the period as compared to the prior period. Contract research and development and aftermarket parts revenues remained relatively flat as compared to the prior period. Service revenues decreased by $1,234,000 to $21,169,000 compared to the second quarter of fiscal 2012 due primarily to a decrease in fixed price service contract revenue from the prior year.

Net revenues for the first six months of fiscal 2013 decreased by $12,284,000 to $93,597,000 compared to the revenues of $105,881,000 for the corresponding prior period. This decrease is attributable primarily to a decrease of $10,631,000 in product sales and contract revenues from the prior period. This decrease was due primarily to a decrease of $12,796,000 in Parcel and Personnel Inspection system revenues. In the first six months of fiscal 2012, the Company fulfilled one large multi-unit Parcel and Personnel Inspection system order which was not repeated in fiscal 2013. In addition, Z Backscatter system revenues decreased $7,753,000 from the prior year due primarily to a lower volume of systems delivered. The average price per system of the Z Backscatter systems remained relatively flat on a year to date basis. This decrease was offset by an increase of $10,243,000 in Cargo Inspection system revenues as compared to the corresponding prior year period due to an increase in the number of systems accepted in the period as compared to the prior period. Contract research and development and aftermarket parts revenues remained relatively flat as compared to the prior period. Service revenues decreased by $1,653,000 to $42,804,000 compared to the prior period due primarily to a decrease in fixed price service contract revenue from the prior year.

Total cost of sales and contracts for the second quarter of fiscal 2013 decreased by $4,401,000 to $25,256,000 as compared to the corresponding period a year ago. Cost of sales and contracts related to product revenues decreased by $1,816,000 to $15,493,000 as compared to the corresponding period a year ago. Cost of product sales and contract revenues represented 62% of revenues versus 53% 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 $1.1 million of accruals for product maintenance costs in the quarter, $0.6 million in write-downs of equipment held in inventory to a lower of cost or net realizable value and increased costs on one multi-unit order delivered in a new market. The cost of service revenues for the quarter ended September 30, 2012 decreased by $2,585,000 to $9,763,000 as compared to the corresponding period a year ago. Cost of service revenues decreased to 46% of revenues from 55% of revenues in the corresponding period due primarily to a reduction in third party services required to support systems under contract during the period.

Total cost of sales and contracts for the first six months of fiscal 2013 decreased by $5,731,000 to $51,127,000 as compared to the corresponding period a year ago. Cost of sales and contracts related to product revenues decreased by $1,913,000 to $30,617,000 as compared to the corresponding period a year ago. Cost of product sales and contract revenues represented 60% of revenues versus 53% 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 $1.1 million of accruals for product maintenance costs, $0.8 million in loss accruals provided for during the year on certain long-term contracts, and $0.6 million expensed for the write-down of certain equipment held in inventory to a lower of cost or net realizable value. The cost of service revenues for the quarter ended September 30, 2012 decreased by $3,818,000 to $20,510,000 as compared to the corresponding period a year ago. Cost of service revenues decreased to 48% of revenues from 55% of revenues in the corresponding period due primarily to a reduction in third party services required to support systems under contract during the period.

Selling, general and administrative expenses for the second quarter of fiscal 2013 decreased by $3,484,000 to $4,895,000 as compared to the corresponding period a year ago. Selling, general and administrative expenses represented 11% 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 a decrease in incentive compensation expense of


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$3,019,000 related to the reversal of certain long term incentive accruals for the President and Chief Executive Officer who announced his retirement during the quarter as well as a reduction in the number of senior executives receiving long-term incentive compensation benefits as compared to the prior year. In addition, there was a decrease in payroll and payroll-related costs of $195,000 attributable to decreased headcount.

Selling, general and administrative expenses for the first six months of fiscal 2013 decreased by $4,744,000 to $12,893,000 as compared to the corresponding period a year ago. Selling, general and administrative expenses represented 14% of revenues in the current period compared to 17% for the corresponding period in the prior year. The decrease in selling, general and administrative expenses from the prior period was the result of a decrease in incentive compensation expense of $3,571,000 related primarily to the reversal of certain long term incentive accruals for the President and Chief Executive Officer who announced his retirement during the quarter as well as a reduction in the number of senior executives receiving long-term incentive compensation benefits as compared to the prior year. In addition, there was a decrease in payroll and payroll-related costs of $254,000 attributable to decreased headcount and a decrease of $300,000 in travel related expenses.

Company funded research and development expenses for the second quarter of fiscal 2013 decreased by $32,000 to $6,505,000 as compared to the corresponding period a year ago. Research and development expenses represented 14% of revenues in the current quarter compared to 12% for the corresponding period in the prior year. 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 first six months of fiscal 2013 increased by $1,006,000 to $13,620,000 as compared to the corresponding period a year ago. Research and development expenses represented 15% of revenues in the current period compared to 12% for the corresponding period in the prior year. Research and development expenses increased as compared to the prior period due to an increase in labor resources focused on research and development programs and an increase in subcontracted engineering services during the period which related primarily to one current research and development program. Research and development activities performed in the period focused on the development of new products, product options and product enhancements.

Other income (expense) was $98,000 of income for the second quarter of fiscal 2013 as compared to $175,000 of income for the corresponding period a year ago.

Other income (expense) was $105,000 of income for the first six months of fiscal 2013 as compared to $234,000 of income for the corresponding period a year ago.

We reported pre-tax income of $9,695,000 in the second quarter of fiscal 2013 as compared to pre-tax income of $10,380,000 in the corresponding period due to the factors described above.

We reported pre-tax income of $16,062,000 in the first six months of fiscal 2013 as compared to pre-tax income of $19,006,000 in the corresponding period due to the factors described above.

Our effective tax rate remained constant at 34% for both the three and six months ended September 30, 2012 and for the corresponding period a year ago.

We had net income of $6,399,000 for the second quarter of fiscal 2013 as compared to net income of $6,851,000 in the second quarter of fiscal 2012. We had net income of $10,601,000 for the first six months of fiscal 2013 as compared to net income of $12,544,000 in the second quarter of fiscal 2012. 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 and also to fund stock repurchases as desired.

Summary of Cash Activities

Cash and cash equivalents increased by $11,175,000 to $35,544,000 at September 30, 2012 compared to $24,369,000 at March 31, 2012. This increase is attributable primarily to:

1) net income of $10,601,000 for the period adjusted for $5,139,000 in non-cash expenditures which included depreciation expense, stock based compensation, amortization of bond premiums, contract losses and inventory and accounts receivable reserves;


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2) net proceeds from sales and maturities of short-term investments of $43,178,000; and

3) an increase of $6,309,000 in customer deposits during the period due to the timing of milestone payments on certain fixed price contracts.

Offsetting these inflows were cash outflows including:

1) the repurchase of 651,327 shares of the Company's common stock for $34,967,000 during the period;

2) the payment of $8,621,000 in common stock dividends during the year as part of our quarterly dividend program;

3) a decrease in deferred revenue of $3,934,000 due to the timing of invoicing on certain service agreements;

4) a net increase of $1,348,000 in restricted cash and investments due to an increase in the amount of outstanding letters of credit; and

5) net capital expenditures of $2,007,000 during the period attributable primarily to software and equipment purchases, and leasehold improvements made 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 September 30, 2012, we had outstanding $32,405,000 in standby letters of credit. These outstanding standby letters of credit are cash-secured at amounts ranging from 52% to 66% of the outstanding letters of credit, resulting in a restricted cash balance of $17,238,000 at September 30, 2012 of which $3,252,000 was considered long-term restricted cash due to the expiration date of the underlying letters of credit.

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