Earnings Notes And News

American Science & Engineering [ASEI]

Results were lower than analysts expected with revenues falling 11% due to a 50% decline in sales of Z Backscatter Vans (ZBV), which was partially offset by increases in all other product and service areas. Profits fell 51% on the lower sales, a shift toward lower margin products, a substantial increase in R&D spending, “unusually high” materials costs in the service area, and a $1.7M ($0.12) charge for an unrecoverable note related to funding of another company’s technology that didn’t pan out, Ken Galaznik, AS&E’s chief financial officer. Analysts are expecting one or two large ZBV orders from the U.S. military–Marine Corps and Army–sometime in the first half of 2008 although the timing remains uncertain. Galaznik says the military’s testing of the company’s new ruggedized ZBV trailer is ongoing and appears to be going well. AS&E shipped 17 ZBVs and booked 12 in the quarter. R&D costs were up 119% to $3.1M as AS&E is committing resources to developing and commercializing new technologies and products. The company has added 22 employees in the past year in the area of science, technology and engineering, Galaznik says. Backlog reached a record $125M and bookings from international customers accounted for 71% of total product bookings. Sales and bookings of the Gemini X-Ray parcel screening system are going well both in the U.S. and internationally. The company expects the Transportation Security Administration to soon release another Request for Proposals for checkpoint X-Ray systems, which will give it another opportunity to offer Gemini for the X-Ray Advanced Technology requirement. Gemini wasn’t selected by TSA last year. The revenue breakout by product was cargo ($6.3M), ZBV ($12.4M), parcel ($4.8M), field service ($16.8M), and R&D ($2.4M). Free cash flow was $10.5M. Regarding the write down for the uncollectible note, Galaznik says AS&E doesn’t have any similar arrangements for technology development with other firms.

L-1 Identity Solutions [ID]

Net income was propelled by a one-time tax benefit of $27.8M, which more than offset asset impairment charges of $5M. Sales fell below company and analysts’ expectations due to delays in securing a contract with Panama and closing a deal for HIIDE devices with a customer in the Middle East, and a change in State Department invoice processing that shifted the recognition of some revenues into 2008. Parts of L-1’s business are lumpy and will remain so, company officials say. Organic growth was 11%. Despite the weaker than expected sales and 1Q08 guidance that is also softer than expected, L-1 stuck to its outlook for 2008 with sales expected to be between $540M-$560M and losses between $0.03-$0.06 EPS, excluding impacts from pending and future acquisitions. By the end of 2009 L-1 expects to be doing over $900M in sales and by the end of 2010 $1B in sales, says Robert LaPenta, the company’s chairman, president and CEO. Those gains will be fueled by 20% annual organic growth and $200 million worth of acquisitions, he says. The acquisition pipeline is “full” and L-1 is currently reviewing two potential “game changing” deals, LaPenta says. A small but growing part of L-1’s growth in 2007 came from international sales, which accounted for $28M of revenues, an 87% increase over 2006. LaPenta says the pending sale of HIIDEs to a Mid East customer is a big deal for the company, which would open office space in the region and add engineers and marketing staff there as well. LaPenta also believes L-1 is close to ending litigation with LG Electronics related to iris technology, which is costing the company $1M per month in legal expenses. If a deal is done LG would be “somewhat of a partner” going forward, he says. Free cash flow for the year was $39.7M and backlog increased to $715M from $650M at the end of September.

OSI Systems [OSIS]

Benefiting from the results of an ongoing restructuring campaign and a 19% surge in sales, OSI swung to a profit. The results were generally lauded by analysts who believe the restructuring, which is now mainly targeted at its Security division, is moving the company on the path to profitability after three straight years of losses. Stephens analyst Tim Quillin says, “The ship still looks like its heading in the right direction.” Morgan Keegan’s Brian Ruttenbur says, “We believe the company is truly turning around its business and are very excited for its future prospects…” And Josephine Millward of the Stanford Group calls the quarter “strong” and sees “improving profitability” in the second half of the year. The second iteration of the cost cutting, which is expected to amount to $8M in annualized savings, remains on track, OSI officials say. The cost cuts have focused on reducing headcount and consolidating facilities. Restructuring charges were $2.1M in the quarter, and were preceeded by $2.2M in charges in 1Q08. The second half of the fiscal year is expected to see charges in the $2M range. The restructuring, combined with an eventual lowering of research and development expenses, expected strong sales of the company’s multi-view X-Ray imaging systems for checkpoint security, and the introduction of a new solid-state Real Time Tomography (RTT) Explosive Detection System to screen checked baggage, could eventually lead to double-digit operating margins, OSI believes. Excluding the charge, operating margins were 4.3% in the second quarter. Company officials say the full benefit of the cost cuts will be apparent in FY ’09. Security sales leaped 44% to $63.9M mainly on record deliveries of cargo inspection systems. Operating income in the division was $871K versus a $30M loss a year ago. Cargo will be the fastest growing product line in Security until RTT production kicks in, at which point both product lines will drive future growth, OSI officials say. Cargo demand is being driven by Customs and Border Protection, the Defense Department and international customers. The company is “happy” with the RTT development and expects to begin “showcasing” it to potential customers sometime during FY ’09, the officials say. Customer interest, including the Transportation Security Administration, is high, they say. Overall backlog reached a record $232M with the security component at $110M, which is down about $12M since the end of 1Q. Healthcare sales increased 8% to $67.9M and with operating profits of $6.2M versus a $1.4M loss a year ago. Optoelectronics sales jumped 13% to $44.7M with profits up slightly to $3.1M. OSI increased its EPS guidance by slightly to between $0.65 to $0.77 on 1H08 strength and its sales guidance by $10M to between $590M to $606M on strength in recent bookings.