Earnings News and Notes

American Science and Engineering [ASEI]

Net income increased 45% on an improved product mix mainly related to sales of Z Backscatter Vans (ZBV) and ZBV military trailers, and controlling growth in operating costs. The 9% increase in sales was driven by shipments in ZBVs and ZBV Mil Trailers and related field service support. Sales of cargo systems were relatively flat while parcel and government funded research and development revenues were down. AS&E only has a handful of Mil Trailers left to deliver to its Marine Corps customer. The trailers are “highly successful” in the field and given the continued use of car bombs by enemy insurgents there is a compelling need for them so “I’m optimistic” that there will be additional demand for the systems, Anthony Fabiano, AS&E’s president and CEO, tells analysts. Bookings were a robust $90.3M and backlog stood at $187.4M, up 21% since the start of the fiscal year but down 5% from a year ago. More than 50% of the backlog is from international orders and “we see the international business becoming more and more attractive to us,” says Fabiano. AS&E is finding more customers and more opportunities internationally and believes this market will keep growing, he adds. AS&E has also scored well domestically with recent orders from Customs and Border Protection (CBP) for ZBVs and a new cargo and vehicle inspection system, MobileSearch High Energy. With the Transportation Security Administration awarding OSI Systems [OSIS] a recent contract for its backscatter-based whole body imaging system, AS&E says it will also make another attempt to get into this market with the agency. Overall, AS&E’s potential sales pipeline is growing and is higher than in recent quarters, Fabiano says. Some analysts expect CBP to make another award to AS&E using Recover Act funds and Dougherty Markets defense and security analyst Josephine Millward believes there is an upcoming opportunity with the U.S. Army in Afghanistan.

Cogent Systems [COGT]

The 17% drop in sales was due in large part to a $4M slip into the fourth quarter of a purchase by the Hong Kong police department for a fingerprint and palm print identification system. Net income plummeted 53% on the lower sales, a decline in gross margins due to product mix, and a nearly $1M non-cash charge related to share-based compensation. Margins were impacted on how revenue is recognized on maintenance for a contract with Maryland, company officials say. The Department of Homeland Security was the largest customer in terms of sales, representing 45% of the quarter. Cogent officials believe they are well positioned in the U.S.-VISIT program even if another competitor is brought in to also supply biometric software matching capabilities. “But we’ve been told that we will be involved in the production system [for 10 print matching] and well will continue to provide the matching for the overall system,” says James Jasinski, Cogent’s executive vice president for Federal and State Systems. It’s up to DHS whether another Automatic Fingerprint Identification System vendor is brought into the program but the “most important part” is that “they’ve told us we are in the production system,” he says. Despite being unhappy with the performance in the quarter, Cogent maintained its outlook for the year with sales expected to be in the range of $130M to $134M and earnings between 33 and 40 cents EPS. Cogent didn’t offer guidance for 2010 but says it likes its pipeline of domestic and international opportunities and that DHS will remain a major customer.

L-1 Identity Solutions [ID]

L-1 swung to a profit that was in line with guidance due to a sales mix that favored its higher margin intellectual property and biometrics solutions, in particular for Automated Fingerprint Identification and Automated Biometric Identification Systems. The 12% increase in sales included organic growth of 9%, lower than expected with the shortfall coming in the area of lower margin Enrollment Services, which are up 45% year-to-date and are expected to continue growing as L-1 expands its number of enrollment centers throughout the country–over 1,000 currently. The revenue shortfall led to a reduction in full-year sales guidance to between $670M and $680M versus the prior outlook of between $700M and $725M. The culprits in the lower sales are a leveling of revenues from the Transportation Worker Identification Credential program, the slow ramp up of a New York State enrollment program, and erosion in government intelligence work due to insourcing, particularly at the CIA, says L-1 Chief Robert LaPenta. He believes that opportunities in cyber security will eventually help bolster the company’s intelligence business. Earnings guidance is unchanged. L-1’s unlevered free cash flow was $7.8M, lower than expected due to signing a contract with California sooner than expected for secure driver’s license solutions. The contract requires an upfront $12M investment and the company expected to receive a $3M-$4M milestone payment that won’t happen now until early 2010, LaPenta says. L-1 has won its last 17 of 17 competitions in the secure credentialing space and expects there to be six major competitions for secure driver’s licenses in 2010, he says. So far there no new competitors in this secure credentialing market, he adds. As for other key upcoming opportunities, LaPenta says L-1 is teamed with Hewlett Packard [HLP] for a national ID effort in Mexico, a potential prime contract on a renewed Registered Traveler effort, and is headed for a recompete next year for handheld multi-biometric systems for the U.S. military. Backlog stood at $1.2 billion, up $200 million from a year ago. L-1 introduced its 2010 guidance, with sales expected to be in the range of $750M to $775M, with organic growth between 10% and 15%. Earnings are expected to be between 2 cents and 9 cents EPS.

OSI Systems [OSIS]

Despite a 10% decline in sales, earnings growth was strong due to the company’s restructuring and cost cutting initiatives, which are largely complete, and a return to profitability in the Healthcare division. Earnings topped consensus estimates by 7 cents. Free cash flow as $9M. The sales decline was led by a 19 percent drop in revenues at the Secuirty division to $47.3M followed by a double-digit drop at the Healthcare business. Company officials say lower security sales were due to timing issues and they expect double-digit growth in the division in FY ’10. The division had $77M in bookings in the quarter–a 1.6 book-to-bill ratio–and achieved a record backlog of $146M, up 26% from the end of FY ’09. Operating profits at Security tumbled 33% to $2M. The bustle of business activity that helped drive the strong bookings is remains robust both in the U.S. and internationally, says OSI’s Chairman and CEO Deepak Chopra. He expects business related to air cargo security to pick up around January as companies scamper to meet the Aug. 2010 deadline for 100% of cargo destined for passenger planes be screened for explosives. The company also expects further security business with Recovery Act funding. As for the healthcare business, which has struggled through the difficult economy, company officials see the business turning around and expect sales growth through the rest of the fiscal year. OSI raised its earnings guidance for this year to between $1.14 and $1.23 EPS, excluding the impact of restructuring and other charges incurred in FY ’09. The previous earnings outlook was between $1.08 and $1.18 EPS. Sales are forecast between $620M and $640M.