Don't say you weren't warned. Last week, I previewed the first-quarter earnings report out of American Science & Engineering
Sales for the quarter slipped 11%, landing around $39.5 million. Profits fell even harder as AS&E's operating margin dropped to about 8.3%. While that's better than Analogic
Indeed. AS&E missed Wall Street's revenue target, its earnings target -- basically, any threshold it was supposed to cross, it tripped over instead. But remember the caveat to my warning: I also said "the future sure looks bright" for this Motley Fool Rule Breakers recommendation. It still does.
The real story of the quarter, you see, was not actually what AS&E earned. It's what it might earn going forward.
Backlog's the key
One of the great things about investing in defense contractors, as opposed to, say, a consumer-goods giant like Coke, is that the former reports a metric that the latter cannot: its backlog of orders awaiting fulfillment. I've yet to see a consumer contract to buy a Coke months in advance, but advance contracts to buy big-ticket equipment are de rigeur -- they're a long "tail" that we can follow in search of a company's likely future revenue. So how long is AS&E's tail?
- The company booked $100 million in new orders during Q1.
- That's about 2.3 times as much as it booked in last year's Q1.
- It replaces orders that AS&E fulfilled in this year's Q1 two-and-a-half times over.
- And it brings total backlog up to $160 million through the end of fiscal Q1 2009.
This backlog increased 53% year over year, even as sales slipped -- which tells us that the slip was only temporary, and AS&E will resume growing over the course of this year.
Good to know, but it's not the end of the good news. I spent some hours studying AS&E's post-earnings conference call transcript last night, comparing it to the earnings release and to recent press releases. Without boring you with the details, here's the upshot: The $160 million in backlog as of June 30 includes the massive $55 million deal that we discussed previously, selling a whole passel of security equipment to the United Arab Emirates. It does not, however, include a raft of contracts awarded over the course of July, during Q2. These include:
- As much as $15.5 million in service and maintenance (S&M) work for the U.S. government on AS&E's ZBV X-Ray vans.
- $2.6 million in additional S&M work on cargo systems.
- $2.6 million in ZBV orders for a "Middle East government agency."
- And most recently, 10 ZBVs sold south of the border for an undisclosed sum (that I'm estimating to be approximately $4.1 million).
That all adds up to some $25 million in "extra" backlog, and appears to put total backlog as of today closer to $185 million -- more than AS&E booked in annual revenue last year. Furthermore, AS&E expects to receive additional orders for more ZBVs any moment now. That could push backlog to within spitting distance of $200 million.
Long story short, AS&E is at little risk of disappearing any time soon.
One risk down, one to go ... oh, that one's gone, too
In closing, let's look at a risk that I didn't even know existed. On the conference call, AS&E CEO Anthony Fabiano elaborated on one of his company’s few recent press releases that did not carry a multimillion-dollar price tag: Its DHS SAFETY ("Support Anti-terrorism by Fostering Effective Technology") Act Certification.
Fabiano tells us that government contractors that manufacture weapons systems -- firms like Lockheed Martin
So the objective of the SAFETY Act was to make this protection available for companies that could meet its standards. As of this month, AS&E has secured this protection for several of its most popular cargo-inspection products, such as the ZBV van and the Gemini system.
Personally, I expect that the liability concerns involving tanks, aircraft carriers, and guided missiles are somewhat greater than those for X-ray machines. Still, any reduction in risk is a good reduction in risk.
Further Foolish musings on AS&E are available in: