American Science Does It Again

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.

© 2009 UCLICK, L.L.C.