American Science Does It Again

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I did not think it possible for American Science & Engineering (Nasdaq: ASEI) to thrill me again, as it did earlier this year.

I was wrong.

AS&E reported fiscal-second-quarter results last night. Judging from the stock price, the crowd has gone wild -- and rightly so:

• Second-quarter sales rose a modest 9%. But through a combination of cost controls and good product mix, AS&E transformed single-digit sales growth into a 42% surge in profits -- $1.18 per share.
• The company achieved a simply stellar 17.5% net profit margin for the quarter, well above the margins that X-ray rivals L-3 (NYSE: LLL), OSI Systems (Nasdaq: OSIS), and even General Electric (NYSE: GE) regularly achieve.
• Even better, free cash flow for the first half nearly doubled what AS&E raked in during the first half of last year -- a cool $14 million. This brings the firm's trailing-12-month free cash flow up to $39.2 million -- comfortably ahead of what it reported as "net income" under GAAP.
• Last but not least, the good times look primed to keep rolling. Whereas AS&E recorded $61.2 million in sales during Q2, it booked $90.3 million in new orders. This more than replenished all work performed during the quarter, and indeed, increased the backlog of work waiting to be done. (And paid for. And profited from.)

The rapid buildup in backlog suggests we will likely see accelerating sales in future quarters. Moreover, with backlog now above $187 million, more than three quarters' worth of revenues are "in the bag."

Investors frustrated by the company's historically lumpy revenues can therefore take comfort. While CEO Anthony Fabiano did drop "the L bomb" a few times during his post-earnings conference call, he made much less liberal use of it than in quarters past.

Why? Because AS&E is evolving. Primarily a U.S. government contractor in years past, AS&E has over time become a firm that does 45% of its business outside U.S. borders -- and may soon do the majority of its business abroad. And while Fabiano cautions that international contracts can themselves cause lumpiness "due to the longer selling cycles and the more complex financing requirements," diversifying the revenue stream should, over time, help to smooth out those lumps.

Foolish takeaway
This, in turn, should do good things for the stock. Investors abhor uncertainty, after all. The less guessing we are forced to do about AS&E's future, the better for the stock.