An X-Ray Look Inside AS&E

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A few weeks back, The Motley Fool's Rich Smith spoke with Ken Galaznik, CFO of Motley Fool Rule Breakers recommendation American Science & Engineering (Nasdaq: ASEI). Our Rule Breakers subscribers have already heard Ken's thoughts on his company, the future of synfuel credits in America, and the challenges of developing our nation's coal resources in an era of global warming. Now you can, too. Here's an excerpt from the interview.

Rich Smith: Ken, for those of us not yet familiar with American Science & Engineering, can you give us a thumbnail sketch of what the company does?

Ken Galaznik: We produce a variety of X-ray scanning equipment for security purposes, using patented technology, selling to a global customer base, and utilizing a worldwide service and support group. Our operations break down into cargo, parcel, and personnel scanning, mobile scanning, and of course, contract research and development, such as the CAARS program.

Smith: In layman's terms, can you explain the difference between the kind of X-rays we get at the dentist's office and AS&E's backscatter technology?

Galaznik: Sure. I've been talking with our CTO to try and come up with the best way to describe this in layman's terms. Basically, the difference is this: When you get a dental X-ray, a powerful blast of X-rays is transmitted from outside your head, and there's a detector -- the dental plate -- inside your mouth that records an image left by the radiation. So the image you get at the end of the process is an image formed by X-rays that pass through the tissue.

Now, the X-ray blast is localized and brief in that instance. Consequently, it is a lot more powerful than what we use in backscatter. To put things in perspective, the radiation dosage used in a dental X-ray is approximately 16,000 times that used in a backscatter scan. The reason for the difference in magnitude is that in backscatter, what we're doing is reading the X-rays that are "scattered" off the target, rather than those that pass through it. We're reading the image formed by the X-rays that bounce back. These lower energy levels also enable the system to produce the more photo-like images that we have demonstrated.

Smith: Kind of like how radar forms images from bouncing sound waves off a target?

Galaznik: Yes, I think that's a pretty close analogy.

Smith: Along with L-3 Communications (NYSE: LLL) and SAIC (NYSE: SAI), AS&E is working for the Homeland Security department on the Cargo Advanced Automated Radiography System (CAARS) to detect radiological threats hidden behind lead cargo containers. What can you tell us about CAARS -- milestones, timelines, best- and worst-case scenarios for how much revenue it might produce for you?

Galaznik: Not a lot, unfortunately. That's just the nature of the contract and the customer. I can tell you that it's a $28.8 million IDIQ [indefinite-delivery, indefinite-quantity] contract to perform research and development. I can tell you that we're making progress, and that the customer is pleased with what we've accomplished. And I can say that we're excited about this win because it was a highly competitive program. As you said, only SAIC, L3, and AS&E made it through. I think there were eight other entrants, some big names that I'm sure you would recognize, who did not.

Smith: Your 10-K doesn't go into a lot of detail about AS&E's competition. From what I can gather, it looks like the most credible rivals include General Electric (NYSE: GE), L-3, OSI Systems (Nasdaq: OSIS), and SAIC. Am I missing anyone?

Galaznik: NucTech in China, for one. We both collaborate and compete with them. And Smiths Group in the U.K. You may have noticed that they teamed up with GE to form a joint venture in the detection and homeland protection markets earlier this year.

Smith: The Electronic Privacy Information Center has criticized SmartCheck as an unreasonable invasion of the privacy of air travel passengers. It has even gone so far as to imply that backscatter X-ray technology is intended to be "more than just a means of detecting terrorists" -- a lightly veiled reference, I take it, to the technology's potential to detect illicit drugs carried on a passenger's body. Can you shed any light on the government's intentions here? Is it really just interested in security, or are there, shall we say, ulterior motives?