If you visited this page on Aug. 8, chances are you saw my write-up of American Science and Engineering's
On that last point, one reason management may have decided to keep mum became apparent the day after my column was posted, when the company filed its 10-Q report with the SEC. Turns out it didn't generate any free cash flow at all. To the contrary, there was negative free cash flow of $10.3 million -- primarily as a result of a dramatic rise in accounts receivable as goods were shipped and booked for revenues under GAAP but did not result in immediate cash payment. (We'll look for that cash to reappear next quarter.)
But enough about the black-and-white numbers. Today we're going Technicolor for the story behind last week's story. We bring you a rundown of the post-earnings conference call that management held with its investors. So without further ado, ladies and gentle-Fools, I bring you CEO Anthony Fabiano and CFO Ken Galaznik, with their take on the quarter that was:
As is customary in such calls, Fabiano batted first, running down the numbers that added up to a spike in revenues and earnings -- and a 6-percentage-point slide in gross margin. Key to both the former and the latter were large increases in revenues from both CargoSearch (primarily sales of the OmniView Gantry system) and Contract Research and Development (CRAD).
For those not familiar with government contracting, the U.S. government funds targeted research performed by private companies. For example, AS&E makes money under Homeland Security's Cargo Advanced Automated Radiography System (CAARS) program. According to Fabiano, fully half of the decline in gross margin is because these two lower-margin segments, CargoSearch and CRAD, made up 25% of Q1 revenues, while in last year's Q1 they made up only 10%.
How material is material?
Those who caught our first "Fool on Call" with AS&E back in October will recall how flummoxed the analyst community was as it tried to nail down the firm's revenues by tallying up its press releases. Back then, CFO Ken Galaznik clarified that the company was using a $2 million threshold as a rough cutoff for materiality.
And so, with this data in hand, the analysts resumed watching outgoing press releases, worked their calculators furiously to come up with the correct answer before earnings were released -- and still got it wrong. Flummoxed, they complained to Galaznik: "Your bookings say $43 million for the quarter was much stronger than expected. But your press releases add up to just over $12 million!"
And so Galaznik unveiled another piece of the puzzle: "We start looking at press releases ... when it gets above $2 million, but the other challenge we have with that is we have some customers who ask us not to 'press release' anything. Will not allow us to, and if it's below our 8-K requirement we don't do anything with those at all." Galaznik confided that while much of AS&E's revenue may be made up of sub-$2 million orders, the company also got one "substantial" contract from the U.S. government "that we were not allowed to say anything about."
In other words -- AS&E's quarterly revenues are always going to be more than just the sum of their press releases. Get used to being surprised, folks.
Of course, in our ceaseless effort to know the future, we have our old standby: backlog. Orders received, placed in backlog, and expected to be fulfilled over the next year can give us a rough feel for how future sales will look. Of course, not all backlog is created equal. Some is funded, some is not. Most will result in sales within 12 months, some will not. On average, during the past five years AS&E has estimated that about 81% of its orders will result in sales within one year of entry into backlog. Most recently, the estimate was 86% for fiscal 2007 backlog.
With this in mind, it's good to know that as of June 30, backlog stood at $104.4 million -- a 66% year-over-year increase. For reference, backlog is growing even faster than sales, and this does not even count the $53 million in "unfunded contracts" that AS&E expects to record in backlog during the next 12 months.
Also accelerating are new order bookings, which, at $43.2 million for the quarter, grew even faster (up 71% year over year) than overall backlog. And, bucking a trend we've seen at defense contractors such as Lockheed
Lest things get too predictable, and we poor analysts become bored, management did liven up the predictions party with an observation about one of its most popular products, the Z Backscatter Van (ZBV). Putting a wrinkle in the orders-become-backlog-become-sales transition, Fabiano mentioned that AS&E has a really quick turnaround time on ZBV orders. So fast, in fact, that he compared the company to that you-pay-us-before-we-even-order-the-parts standout, Dell
In other words, ZBV revenues will remain pretty opaque as the company can essentially go from order to sale within a single quarter, without the order ever showing up on the backlog radar. Thank goodness. A challenge.
More surprises. Hurray!
Might the company solve all our problems by starting to issue guidance? Perish the thought. Says Fabiano: "Longer international sales cycles and complex financing required to button down international orders [means] you still need to expect lumpiness from us in terms of bookings and revenue." That explains why AS&E still declines to give the kind of short-term, quarterly guidance that we frown upon. But what about annual estimates, at least?
The analysts seem to have pretty much given up on asking for even that concession. But we haven't. Stay tuned to Fool.com, as I'll soon be giving this dead horse one last whack in an upcoming interview with CFO Ken Galaznik.
Want to learn more about AS&E but don't know whom to ask? Join the Foolish community of AS&E investors at Motley Fool Rule Breakers. As an official recommendation of the newsletter, we've got a discussion board set up where investors talk over ideas and a team of analysts follow AS&E's every movement. Growth stock sleuth David Gardner leads the whole shebang. Join us as we attempt to decide if this firm is a true rule breaker or just a faker-breaker. Free 30-day trial memberships are available on request.
Fool contributor Rich Smith finally bit the bullet and bought some shares of AS&E. Upside: At last report he's making a profit on the purchase. Downside: Suspicious looks from TSA when the bullet shows up on Backscatter images at airport security. The Motley Fool's disclosure policy is entirely transparent.