Earnings Notes And News

American Science & Engineering [ASEI]

Despite a 27% jump in sales, profits fell due to lower gross margins on product mix, new product development costs and an 81% increase in research and development spending. Part of the reason for the profit decline stems from difficulties in site construction and installation of three cargo inspection systems. The company has only sold a few of the systems and has undertaken a rigorous lessons learned effort to avoid future cost overruns here, Anthony Fabiano, AS&E’s president and CEO, says. While sales of Z Backscatter Vans (ZBV) to the U.S. military were way down, the company’s focus on expanding its product line and customer base is paying off. In the quarter, the revenue breakout was: Field Service, $17.3M; Z Backscatter Systems, $7.M; Cargo, $7.6M; Contract Research and Development, $2.9M; and Parcel, $1.9M. Sales were about $6M below AS&E’s expectations because of an international ZBV order that has slipped to an undetermined time. Contract R&D revenues were up 81%, reflecting a return to a normal run rate due to the company hiring new engineers. In particular AS&E says it has hired new engineers with skills aimed at reducing the time to market for new products. Regarding the lower ZBV sales, Fabiano says this doesn’t reflect a trend, noting that the non-military pipeline of domestic and international opportunities augurs for growth and that the U.S. military’s “top brass” has a “stronger” than ever interest in the system, including the ruggedized version in development. AS&E delivered a prototype of the ruggedized version to the military to begin operational test and evaluation in 3Q. Fabiano sees ZBV sales recovering in the second half of the fiscal year. Stanford Equity analyst Josephine Millward doesn’t think the company will see its next large ZBV order from the military until later this year or early next due to delays in congressional approvals of the FY ’08 Defense Appropriations and war supplemental bills. While she likes AS&E’s diversification strategy, she expects that the military will still be a key growth driver over the next year. Backlog stands at a record $122.1M, 4% higher than a year ago. The company has $63M in unfunded contract options it hopes to move into backlog during the next year. Headcount was 339 at the end of the quarter–16% higher than a year ago–and is expected to grow throughout the fiscal year.

Cepheid [CPHD]

Sales increased on a 258% increase in clinical product revenues on increased installations of GeneXpert System modules and available test cartridges, particularly for rapid detection of MRSA. The increase in clinical sales easily offset a 26% decline to $8.9M in anthrax test cartridge sales, which is due to a planned decrease in the purchase price of the cartridges under a recent five-year contract with Northrop Grumman [NOC] for the supply of the cartridges to the U.S. Postal Service Bio-hazard Detection Systems. The drop in biothreat sales is also related to a shift in the distribution of the quarterly purchase volumes during fiscal year 2007. Under the new anthrax test cartridge contract, Cepheid will supply about 2 million of the cartridges in the federal fiscal year 2008, a run rate similar to recent quarters. Losses widened due to stock compensation expense and the amortization of acquired intangibles.

Cogent Systems [COGT]

Net income fell 28% on $3.7M in legal expenses and $611K in share based compensation charges and a 4% drop in sales. Sales dropped on lower than expected follow-on orders from Los Angeles County, a delay in recognizing revenues on a contract with the State of Maryland, and a non-award from Algeria for a criminal Automated Fingerprint Identification System which is being bundled as part of a bid for a larger program. While the weak results were a disappointment to both Cogent and analysts, one bright spot was the company’s announcement of a one-year $100M authorization to buy back its stock. Unlike a previous $30M share repurchase plan that was largely untapped, this time company officials say Cogent will be “aggressive” in buying its stock. The weak quarter, combined with the further slippage of expected sales into 2008, led Cogent to reduce guidance from $120M in sales and 39 to 45 cents EPS to between $105M and $110M in sales and between 37 to 40 cents EPS. Stanford Equity Group analyst Jeremy Grant says the quarter was, “Icky, but we think the bulk of the base news is out.” Looking into next year Cogent has a slew of domestic and international opportunities, some of them in the $10M range, plus the planned expansion of the U.S. VISIT program from two to 10 fingerprints. Grant cautions that the U.S. VISIT transition may be delayed due to the ongoing Continuing Resolution affecting the FY ’08 federal budget. Cogent also expects an announcement in the first half of next year on an AFIS provider for the FBI’s Next Generation Identification project and downselect to several contractors for a U.K. biometric visa program competition. The company also expects to begin seeing revenues from its now concluded legal settlement with Northrop Grumman [NOC]. Cogent also says it is spending research and development monies on its own livescan offerings and adding more functionality and modality to its BlueCheck devices. Cogent’s headcount at the end of 3Q was 249 versus 231 in 2Q as the company develops new products, expands its sales and marketing staff over a wider geographic area and staffs up on new contracts.

L-1 Identity Solutions [ID]

L-1 swung to a small profit on strong growth in organic sales–which was 32%–driven by increases across each of its divisions. Improved gross margins also contributed to the profit gain, led by sales of higher margin multi-modal products such as HIIDE and licensing agreements. Demand remains strong for multi-modal biometric solutions and special intelligence services, says Robert LaPenta, L-1’s chairman, president and CEO. The company believes its intelligence business will grow at least 30% organically next year, he says. L-1 is also aiming to gain market share in the drivers’ license arena, and has launched a marketing campaign to go to all states to demonstrate its solutions, LaPenta says. There are about 18 states–including seven to 10 next year–that will be requesting bids for drivers license identity solutions where L-1 isn’t the incumbent, he says. The company also sees increasing opportunities in Latin America, particularly for multi-modal Automated Biometric Identification System databases. For 2007 L-1 expects sales between $395M to $405M, with 23% organic growth, and losses between 2 cents and 8 cents EPS. Next year sales are expected in the $540M to $560M range, with organic growth over 20%. Free cash flow in the quarter was $14M and backlog at the end of the quarter was over $650M. L-1 expects its backlog to grow further in 4Q. Stephens Inc. analyst Tim Quillin says he remains uncertain about L-1’s long-term growth prospects given a lack of “concrete evidence.” The merger and acquisition pipeline remains full but LaPenta says L-1 will be selective in deals and is aiming for firms that provide access control, secure software and training with software.

OSI Systems [OSIS]

The 13% increase in sales was driven by a 19% jump in Security revenues to $48.8M, which was driven by a 69% increase in cargo sales. OSI Systems doesn’t break out its Security revenues by product. The Healthcare division, and to a lesser extent the Optoelectronics and Manufacturing division, also helped drive sales gains. Losses narrowed as the company continues to realize benefits from its cost restructuring program and due to a swing to profitability in Healthcare. Spending on research and development (R&D) declined but will trend upward as the fiscal year progresses, company officials say. The company has identified another $5 million in annualized cost savings, which will begin to be implemented in the second half of FY ’08, and will largely be targeted at the Security division. Security losses narrowed in the quarter to $696K from $1.8M a year ago. Security profitability is hampered somewhat by the increase in low margin cargo sales and by increased R&D spending on the Real Time Tomography (RTT) system OSI is developing for high- speed computer-based screening of checked bags at airports. The company feels even better today than it did six to 12 months ago about the progress being made on the RTT system, says Deepak Chopra, OSI’s chairman and CEO. Future profits in the Security business will be driven by the cost savings plans, improved manufacturing and supply chain efficiency, and better leveraging current infrastructure as economies of scale increase, says Alan Edrick, OSI’ chief financial officer. The company also set a goal of 5% net margins in FY ’10 versus the current negative net margins. Backlog rose 7% to a record $224M since the end of OSI’s fiscal year 2007. Security backlog was up 4% to $122M during that time. More than half of the Security backlog, $63M, is in cargo systems. OSI maintained FY ’08 sales guidance of between $580M to $595M and introduced earnings guidance of between 66 and 75 cents per share. The company expects to take a restructuring charge at some point in the future related to the additional cost savings.

RAE Systems [RAE]

RAE posted a loss due to a $3.3 million ($0.05 EPS) charge taken to quit the company’s digital video business. Excluding the loss from discontinued operations, income from continuing operations increased 50% to $875K from $585K on higher sales. Operating expenses as a percentage of sales declined 2% to 48%. Sales were a record and increased 37% driven equally by the creation of a joint venture in China a year ago to target the coal mine safety market there and higher sales to the industrial, first responder, energy and U.S. military markets. International sales continue to make up more of the company’s revenues mix, with Asia accounting for 45% of the business, the America’s 43% and Europe 12%. The top end of sales guidance was lowered by $2M for 2007 to between $90M and $93M and company officials declined to provide 4Q profit guidance. Next year RAE expects to increase sales and be profitable. So far this year RAE has lost $7.2M. The company expects China to increase spending over the next 12 to 18 months on mine safety, which should help RAE. Company officials also say that they that more customers are asking for its radiation detection products. RAE has created a U.S. government sales group to put all of its products and solutions “front and center” across the range of government opportunities, says Robert Chen, RAE’s CEO. Morgan Keegan analyst Brian Ruttenbur sees RAE’s near-term future based on its growth potential in China and continued improvement in operating performance.