American Science & Disclosure Issues

Fools, I'm on a winning streak. And I intend to press my luck.

So before we get into the meat of discussing Rule Breakers pick American Science & Engineering's (Nasdaq: ASEI  ) fiscal Q3 2008 earnings report (Remember AS&E? This is a song about AS&E), I want to say a little something on the subject of disclosure. Over the past few months, I have twice called out public companies for failing to include cash flow statements with their earnings releases. First, I chastised Symantec (Nasdaq: SYMC  ) . Then I chided Applied Materials (Nasdaq: AMAT  ) . In each case, the companies promptly began including this information in their releases.

Now, I don't know if the one had anything to do with the other. Maybe my comments pushed these companies to get religion about disclosure. Maybe it was sheer coincidence -- like when you carry an umbrella, you can pretty much guarantee it ain't gonna rain. Either way, whether we're talking shareholder pressure or sheer holder coincidence, it's time to ask AS&E to join the crowd and start anteing up cash flow statements.

It's not like AS&E couldn't do it if it wanted to. When the company published its earnings on Monday, it simultaneously filed its 10-Q statement with the SEC, and that statement contained -- you guessed it -- the very cash flow statement missing from the press release. There's just no earthly reason for that. No justification for making shareholders hunt through SEC filings for information that management already has in hand. So consider this my public call for AS&E to give Bill Mann's classic column The Perfect Earnings Report a good hard read, and shape up.

And now, back to our regularly scheduled programming
So what exactly was in that cash flow statement, anyway? Basically, it was bad news. So far this year, AS&E has generated all of $10.5 million in free cash flow -- less than half its tally of yesteryear. Worse, the healthy relationship between this free cash flow and the net earnings AS&E reports under GAAP inverted. Last year, free cash flow exceeded accounting earnings. So far this year, free cash flow is back up barely 71% of net earnings. Not good.

The way I read the firm's balance sheet, the culprit for this lies primarily in inventories, which grew 110% year over year, versus a mere 16% rise in revenues. Worse still, we see the fastest growth in the worst sort of inventories, finished goods, which are up more than sevenfold over this time last year. Putting this data in the best light, we can hope that AS&E has a bunch of contracts to execute; it has the goods in hand to fill the orders, and could book the revenue (and profits) at any moment. Viewed under the shade, however, the inventory picture suggests that AS&E is building goods that are not selling, and tying up its cash flow in the process.

Listen -- as a shareholder myself, I'm pleased as punch to see the shares actually rise after this report came out. But I can't for the life of me explain why it's happening. Color me unimpressed.

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