Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(****MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition periodfrom      to      **

 

**Commission File Number 1-6549**

 

**American Science and Engineering, Inc.**

(Exactname of Registrant as specified in its charter)

 

| **Massachusetts**                                                     | ** ** | **04-2240991**                         |
|-----------------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer  Identification No.) |
|                                                                  |       |                                   |
| **829 Middlesex Turnpike**                                            | ** ** | ** **                             |
| **Billerica, Massachusetts**                                          | ** ** | **01821**                              |
| (Address  of principal executive offices)                             |       | (Zip  Code)                            |

 

**(978) 262-8700**

 (Registrant’s telephone number, including areacode)

 

 

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x     No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes  o     No   o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).   Yes  o     No  x

 

The number of shares of theregistrant’s common stock, $0.66 2/3 par value, outstanding as of November 2,2010 was 8,986,289.

 

 

 

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**TABLE OF CONTENTS**

 
| **Part I —  Financial Information**                                                                                                           |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1 —  Financial Statements                                                                                                                     |   | 3      |
| Unaudited  Condensed Consolidated Balance Sheets—September 30, 2010 and  March 31, 2010                                                  |   | 3      |
| Unaudited Condensed  Consolidated Statements of Operations—For the Three and Six Months Ended  September 30, 2010 and September 30, 2009 |   | 4      |
| Unaudited Condensed  Consolidated Statements of Cash Flows—For the Six Months Ended  September 30, 2010 and September 30, 2009           |   | 5      |
| Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                         |   | 6      |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                               |   | 12     |
| Item 3 — Quantitative and Qualitative Disclosure About  Market Risk                                                                                |   | 16     |
| Item 4 — Controls and Procedures                                                                                                                   |   | 16     |
| **Part II  — Other Information**                                                                                                              |   |   |
| Item  1A—Risk Factors                                                                                                                              |   | 16     |
| Item 2 — Unregistered Sales of Equity Securities and  Use of Proceeds                                                                              |   | 17     |
| Item  4 — [Removed and Reserved]                                                                                                                   |   | 17     |
| Item 6 —  Exhibits                                                                                                                                 |   | 17     |
| **Signatures**                                                                                                                                          |   | 18     |

 

ZBackscatter TM, ZBVTM, CargoSearchTM, MobileSearchTM,  Shaped Energy®, AS&E®, ParcelSearchTM,GeminiTM, OmniviewTM  Gantry, SentryTMPortal, SmartCheck® Personnel Screening System, Z GantryTM, Z Portal®  and all AS&E product names and theAS&E logos are either registered trademarks or trademarks of AmericanScience and Engineering, Inc. in the United States and/or other countries.Other product and company names mentioned herein may be the trademarks of theirrespective owners.

 

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**PART I— FINANCIAL INFORMATION**

**ITEM 1 —FINANCIAL STATEMENTS**

 

**AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| **(In thousands, except share and per share amounts)**                                                                                                  | ** ** | **September 30,********2010** | ** ** | **March 31,********2010** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| **Assets**                                                                                                                                                                                 | ** ** | ** **                         | ** ** | ** **                     | ** ** |
| Current  assets:                                                                                                                                                                           |       |                               |       |                           |       |
| Cash  and cash equivalents                                                                                                                                                                 |       | $                                  | 54,186     |                           | $          | 34,912 |   |
| Restricted  cash                                                                                                                                                                           |       | 35                                 |       | 35                             |       |
| Short-term  investments, at fair value                                                                                                                                                     |       | 114,694                            |       | 144,166                        |       |
| Accounts  receivable, net of allowances of $413 and $330 at September 30, 2010 and  March 31, 2010, respectively                                                                 |       | 44,350                             |       | 37,735                         |       |
| Unbilled  costs and fees                                                                                                                                                                   |       | 15,367                             |       | 2,078                          |       |
| Inventories,  net                                                                                                                                                                          |       | 52,010                             |       | 45,387                         |       |
| Prepaid  expenses and other current assets                                                                                                                                                 |       | 6,734                              |       | 8,998                          |       |
| Deferred  income taxes                                                                                                                                                                     |       | 1,876                              |       | 2,389                          |       |
|                                                                                                                                                                                       |       | 289,252                            |       | 275,700                        |       |
| **Total current assets**                                                                                                                                                                   |       |                               |       |                           |       |
| Building,  equipment and leasehold improvements, net                                                                                                                                       |       | 18,719                             |       | 18,216                         |       |
| Deferred  income taxes                                                                                                                                                                     |       | 4,529                              |       | 5,171                          |       |
| Other  assets, net                                                                                                                                                                         |       | 428                                |       | 766                            |       |
| **Total assets**                                                                                                                                                                           |       | $                                  | 312,928    |                           | $          | 299,853 |   |
|                                                                                                                                                                                       |       |                               |       |                           |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                              | ** ** | ** **                         | ** ** | ** **                     | ** ** |
| Current  liabilities:                                                                                                                                                                      |       |                               |       |                           |       |
| Accounts  payable                                                                                                                                                                          |       | $                                  | 16,796     |                           | $          | 10,970 |   |
| Accrued  salaries and benefits                                                                                                                                                             |       | 9,332                              |       | 13,663                         |       |
| Accrued  warranty costs                                                                                                                                                                    |       | 705                                |       | 965                            |       |
| Accrued  income taxes                                                                                                                                                                      |       | 790                                |       | 4,203                          |       |
| Deferred  revenue                                                                                                                                                                          |       | 16,589                             |       | 14,975                         |       |
| Customer  deposits                                                                                                                                                                         |       | 11,276                             |       | 13,714                         |       |
| Current  portion of lease financing liability                                                                                                                                              |       | 1,311                              |       | 1,302                          |       |
| Other  current liabilities                                                                                                                                                                 |       | 6,436                              |       | 3,913                          |       |
| **Total current liabilities**                                                                                                                                                              |       | 63,235                             |       | 63,705                         |       |
| Lease  financing liability, net of current portion                                                                                                                                         |       | 6,417                              |       | 7,075                          |       |
| Long  term deferred revenue                                                                                                                                                                |       | 5,085                              |       | 7,271                          |       |
| Other  long term liabilities                                                                                                                                                               |       | 34                                 |       | 34                             |       |
| **Total liabilities**                                                                                                                                                                      |       | 74,771                             |       | 78,085                         |       |
|                                                                                                                                                                                       |       |                               |       |                           |       |
| **Stockholders’ equity:**                                                                                                                                                             | ** ** | ** **                         | ** ** | ** **                     | ** ** |
| Preferred  stock, no par value, 100,000 shares authorized; no shares issued                                                                                                                |       | —                             |       | —                         |       |
| Common  stock, $0.66 2/3 par value, 20,000,000 shares authorized; 8,989,498 and  9,013,508 shares issued and outstanding at September 30, 2010 and  March 31, 2010, respectively |       | 5,992                              |       | 6,008                          |       |
| Capital  in excess of par value                                                                                                                                                            |       | 98,129                             |       | 97,819                         |       |
| Accumulated  other comprehensive income, net                                                                                                                                               |       | 73                                 |       | 33                             |       |
| Retained  earnings                                                                                                                                                                         |       | 133,963                            |       | 117,908                        |       |
| **Total stockholders’ equity**                                                                                                                                                        |       | 238,157                            |       | 221,768                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                        |       | $                                  | 312,928    |                           | $          | 299,853 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In thousands, except per share amounts)** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009**   | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| **Net sales and contract revenues:**                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  product sales and contract revenues                              |       | $                                | 59,705     |                           | $          | 42,189 |   | $ | 92,179 |   | $ | 76,973 |   |
| Net  service revenues                                                 |       | 20,932                           |       | 19,059                         |       | 42,101 |   | 38,967 |   |
| Total  net sales and contract revenues                                |       | 80,637                           |       | 61,248                         |       | 134,280 |   | 115,940 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Cost of sales and contracts:**                                      |       |                             |       |                           |       |   |   |   |   |
| Cost  of product sales and contracts                                  |       | 29,775                           |       | 21,790                         |       | 48,565 |   | 40,734 |   |
| Cost  of service revenues                                             |       | 11,018                           |       | 10,004                         |       | 22,059 |   | 20,132 |   |
| Total  cost of sales and contracts                                    |       | 40,793                           |       | 31,794                         |       | 70,624 |   | 60,866 |   |
| **Gross profit**                                                      |       | 39,844                           |       | 29,454                         |       | 63,656 |   | 55,074 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Expenses:**                                                         |       |                             |       |                           |       |   |   |   |   |
| Selling,  general and administrative expenses                         |       | 10,997                           |       | 8,009                          |       | 20,810 |   | 16,711 |   |
| Research  and development costs                                       |       | 5,225                            |       | 4,951                          |       | 10,235 |   | 10,757 |   |
| Total  operating expenses                                             |       | 16,222                           |       | 12,960                         |       | 31,045 |   | 27,468 |   |
| **Operating  income**                                                 |       | 23,622                           |       | 16,494                         |       | 32,611 |   | 27,606 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Other income (expense):**                                           |       |                             |       |                           |       |   |   |   |   |
| Interest  and investment income                                       |       | 135                              |       | 138                            |       | 363 |   | 303 |   |
| Interest  expense                                                     |       | (28                              | )          | (33                            | )          | (58 | ) | (66 | ) |
| Other,  net                                                           |       | (1,082                           | )          | (18                            | )          | 114 |   | 112 |   |
| Total  other income (expense)                                         |       | (975                             | )          | 87                             |       | 419 |   | 349 |   |
| **Income  before provision for income taxes**                         |       | 22,647                           |       | 16,581                         |       | 33,030 |   | 27,955 |   |
| Provision  for income taxes                                           |       | 7,978                            |       | 5,886                          |       | 11,560 |   | 9,924 |   |
| **Net  income**                                                       |       | $                                | 14,669     |                           | $          | 10,695 |   | $ | 21,470 |   | $ | 18,031 |   |
| **Income  per share — Basic**                                    |       | $                                | 1.63       |                           | $          | 1.21 |   | $ | 2.38 |   | $ | 2.04 |   |
| **Income  per share — Diluted**                                  |       | $                                | 1.59       |                           | $          | 1.18 |   | $ | 2.33 |   | $ | 2.00 |   |
| **Weighted average shares — Basic**                              |       | 9,020                            |       | 8,857                          |       | 9,020 |   | 8,836 |   |
| **Weighted average shares — Diluted**                            |       | 9,221                            |       | 9,064                          |       | 9,219 |   | 9,037 |   |
| **Dividends  declared per share**                                     |       | $                                | 0.30       |                           | $          | 0.20 |   | $ | 0.60 |   | $ | 0.40 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                                                    | ** ** | **September 30,  2010**                     | ** ** | **September 30,  2009** | ** ** |
| **Cash flows from operating activities:**                                                  | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net  income                                                                                |       | $                                                | 21,470     |   | $ | 18,031 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:         |       |                                             |       |   |   |
| Depreciation  and amortization                                                             |       | 2,396                                            |       | 2,251 |   |
| Provisions  for contracts, inventory and accounts receivable reserves                      |       | 465                                              |       | 948 |   |
| Amortization  of bond premium                                                              |       | 1,041                                            |       | 207 |   |
| Deferred  income taxes                                                                     |       | 1,155                                            |       | 313 |   |
| Mark-to-market  of foreign currency put option contract                                    |       | (122                                             | )          | — |   |
| Stock  compensation expense                                                                |       | 2,563                                            |       | 2,658 |   |
| Changes  in assets and liabilities:                                                        |       |                                             |       |   |   |
| Accounts  receivable                                                                       |       | (6,698                                           | )          | 5,455 |   |
| Unbilled  costs and fees                                                                   |       | (13,289                                          | )          | 4,502 |   |
| Inventories                                                                                |       | (7,005                                           | )          | 4,029 |   |
| Prepaid  expenses and other assets                                                         |       | 2,724                                            |       | (184 | ) |
| Accounts  payable                                                                          |       | 5,826                                            |       | (1,520 | ) |
| Accrued  income taxes                                                                      |       | (3,413                                           | )          | 1,620 |   |
| Customer  deposits                                                                         |       | (2,438                                           | )          | 3,103 |   |
| Deferred  revenue                                                                          |       | (572                                             | )          | (17,945 | ) |
| Accrued  expenses and other liabilities                                                    |       | (1,848                                           | )          | (8,099 | ) |
| Net  cash provided by operating activities                                                 |       | 2,255                                            |       | 15,369 |   |
|                                                                                       |       |                                             |       |   |   |
| **Cash flows from investing activities:**                                                  | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Purchases  of short-term investments                                                       |       | (99,224                                          | )          | (102,178 | ) |
| Proceeds  from sales and maturities of short-term investments                              |       | 127,695                                          |       | 46,265 |   |
| Purchases  of property and equipment                                                       |       | (2,899                                           | )          | (1,390 | ) |
| Net  cash provided by (used for) investing activities                                      |       | 25,572                                           |       | (57,303 | ) |
|                                                                                       |       |                                             |       |   |   |
| **Cash flows from financing activities:**                                                  | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Increase  in restricted cash and investments                                               |       | —                                           |       | (1,832 | ) |
| Proceeds  from exercise of stock options                                                   |       | 366                                              |       | 545 |   |
| Repurchase  of shares of common stock                                                      |       | (3,381                                           | )          | (2,922 | ) |
| Repayment  of leasehold financing                                                          |       | (649                                             | )          | (574 | ) |
| Payment  of common stock dividend                                                          |       | (5,415                                           | )          | (3,539 | ) |
| Reduction  of income taxes paid due to the tax benefit from employee stock option  expense |       | 526                                              |       | 57 |   |
| Net  cash used for financing activities                                                    |       | (8,553                                           | )          | (8,265 | ) |
|                                                                                       |       |                                             |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                                      |       | 19,274                                           |       | (50,199 | ) |
| Cash  and cash equivalents at beginning of period                                          |       | 34,912                                           |       | 105,419 |   |
| Cash  and cash equivalents at end of period                                                |       | $                                                | 54,186     |   | $ | 55,220 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.   GENERAL**

 

Thecondensed consolidated financial statements include the accounts of the Companyand its wholly owned subsidiaries. All significant intercompany transactionsand balances have been eliminated.

 

Theunaudited condensed consolidated financial statements have been prepared inaccordance with the requirements of Form 10-Q and consequently do notinclude all disclosures required by Form 10-K. These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes included in the Company’sAnnual Report on Form 10-K for the fiscal year ended March 31, 2010.

 

Theunaudited condensed consolidated financial statements, in the opinion ofmanagement, include all necessary adjustments, consisting solely of normalrecurring adjustments, to present fairly the Company’s financial position,results of operations and cash flows.  These quarterly results are notnecessarily indicative of the results to be expected for the entire year.

 

**Natureof Operations**

 

TheCompany is engaged in the development and manufacture of sophisticated X-rayinspection systems for critical detection and security screening solutions forsale primarily to U.S. and foreign government agencies.  The Company hasonly one reporting segment, X-ray screening products.

 

**SignificantAccounting Policies**

 

Forsystems that are produced in a standard manufacturing operation and haveshorter order to delivery cycles, the Company recognizes sales when titlepasses and when other revenue recognition criteria (such as transfer of riskand customer acceptance) are met. Revenues on cost reimbursable and custom long-term fixed price contractsare generally recorded as costs are incurred using the percentage of completionmethod.

 

Theother significant accounting policies followed by the Company and itssubsidiaries in preparing its consolidated financial statements are set forthin Note 1 to the consolidated financial statements included in itsForm 10-K for the year ended March 31, 2010.  There have been no changes to our critical accountingpolicies during the three and six months ended September 30, 2010.

 

**ComprehensiveIncome**

 

Comprehensiveincome is comprised of the following:

 
| ** **                  | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|-----------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **(In thousands)**     | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** |
| Net  income                 |       | $                                  | 14,669     |                               | $          | 10,695 |   | $ | 21,470 |   | $ | 18,031 |   |
| Other  comprehensive income |       | 72                                 |       | 11                                 |       | 40 |   | 11 |   |
| Comprehensive  income       |       | $                                  | 14,741     |                               | $          | 10,706 |   | $ | 21,510 |   | $ | 18,042 |   |

 

**Stock Repurchase Program**

 

TheBoard of Directors approved a Stock Repurchase Program which authorized theCompany to repurchase up to $35.0 million of shares of its common stock fromtime to time on the open market.   Duringthe six months ended September 30, 2010, a total of 46,500 shares wererepurchased at an average price of $72.72 per share.  As of September 30, 2010, the maximumdollar value of shares that may still be purchased under the program is$20,423,000.

 

**Dividends**

 
| ** **              | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|-------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **(In thousands)** | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** |
| Dividends  declared     |       | $                                  | 0.30       |                               | $          | 0.20 |   | $ | 0.60 |   | $ | 0.40 |   |
| Dividends  paid         |       | $                                  | 0.30       |                               | $          | 0.20 |   | $ | 0.60 |   | $ | 0.40 |   |

 

On November 9, 2010, the Company declared a cash dividend of $0.30per share. The dividend will be paid on December 2, 2010 to allshareholders of record at the close of business on November 22, 2010.  Future dividends will be declared at thediscretion of the Board of Directors and will depend upon such factors as theBoard of Directors deems relevant.

 

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**Concentrations of Credit Risk**

 

Financial instruments, whichpotentially subject the Company to concentrations of credit risk, consistprimarily of cash and cash equivalents, investments and accounts and unbilledreceivables.  At times, the Companymaintains cash balances in excess of insured limits. The Company maintains itscash and cash equivalents with major financial institutions.  The Company’s credit risk is managed byinvesting its cash in high quality U.S. treasury bills, high quality moneymarket funds, commercial paper, investment grade corporate debentures / bonds,U.S. Government agency bonds and certificates of deposit.

 

**Recent Accounting Pronouncements**

 

InOctober 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update 2009-14, *RevenueRecognition (Topic 605)—Applicability of AICPA Statement of Position 97-2 toCertain Arrangements That Include Software Elements*(ASU 2009-14).ASU 2009-14 excludes tangible products containing software components andnon-software components that function together to deliver the product’sessential functionality from the scope of FASB Accounting Standards Codification (“ASC”) 605-985, *Software-Revenue Recognition*. ASU 2009-14shall be applied on a prospective basis to revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010.Early adoption is permitted. Upon adoption, the Company must apply ASU 2009-14retrospectively to the beginning of the fiscal year of adoption or to allperiods presented. The Company is currently evaluating the impact of thepending adoption of ASU 2009-14 on its Consolidated Financial Statements.

 

**2.  ACCOUNTING FOR STOCK-BASED COMPENSATION**

 

TheCompany accounts for stock based awards made to employees and its Board ofDirectors in accordance with FASB ASC718, *Compensation—Stock Compensation*, whichrequires the measurement and recognition of all compensation costs for stockbased awards made to employees and the Board of Directors based upon fair valueover the requisite service period for awards expected to vest.

 

TheCompany recognized $1,539,000 and $1,438,000 of share-based compensation costsin the consolidated statements of operations for the three months ended September 30,2010 and September 30, 2009, respectively. The Company recognized$2,563,000 and $2,658,000 of share-based compensation costs in the consolidatedstatements of operations for the six months ended September 30, 2010 and September 30,2009, respectively. The income tax benefit recognized related to thiscompensation for the three months ended September 30, 2010 and September 30,2009 was approximately $532,000 and $510,000, respectively.  The income tax benefit related to thiscompensation for the six months ended September 30, 2010 and September 30,2009 was approximately $895,000 and $940,000, respectively.

 

Thefollowing table summarizes share-based compensation costs included in theCompany’s consolidated statement of operations:

 
| ** **                                         | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **(In thousands)**                            | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** |
| Cost  of revenues                                  |       | $                                  | 242        |                               | $          | 199 |   | $ | 395 |   | $ | 408 |   |
| Selling,  general and administrative               |       | 1,297                              |       | 1,239                              |       | 2,168 |   | 2,250 |   |
| Total  share-based compensation expense before tax |       | $                                  | 1,539      |                               | $          | 1,438 |   | $ | 2,563 |   | $ | 2,658 |   |

 

TheCompany deems the Black-Scholes option pricing model as the most appropriatemethod for determining the estimated fair value for the stock awards. TheBlack-Scholes method of valuation requires several assumptions: (1) theexpected term of the stock award; (2) the expected future stock volatilityover the expected term; (3) a risk-free interest rate; and (4) theexpected dividend yield. The expected term represents the expected period oftime the Company believes the options will be outstanding based on historicalinformation. Estimates of expected future stock price volatility are based onthe historic volatility of the Company’s common stock and the risk freeinterest rate is based on the U.S. Zero-Bond rate. The expected dividend yieldwas based on the expectation we would continue paying dividends on our commonstock at the same rate for the foreseeable future.

 

Therewere 56,181 and 63,993 options granted in the six month period ended September 30,2010 and September 30, 2009, respectively. The fair value of the options at date of grant was estimated with thefollowing assumptions for grants made during the period presented:

 
| ** **               | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **September 30,  2010**   | ** ** | **September 30,  2009** | ** ** |
| **Assumptions:**         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Option  life             |       | 5  years                       |       | 5  years |   |
| Risk-free  interest rate |       | 1.5                            | %          | 2.4 | % |
| Stock  volatility        |       | 44                             | %          | 46 | % |
| Dividend  yield          |       | 1.6                            | %          | 1.24 | % |

 

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**Stock Option and Other Compensation Plans**

 

TheCompany has various stock option and other compensation plans for non-employeedirectors, officers, and employees. The Company had the following stock optionand other compensation plans outstanding as of September 30, 2010: the1995 Combination Plan, the 1997 Non-Qualified Option Plan, the 1998Non-Qualified Option Plan, the 1999 Combination Plan, the 2000 CombinationPlan, the 2002 Combination Plan, the 2003 Stock Plan for Non-Employee Directorsand the 2005 Equity and Incentive Plan. There are 3,980,000 shares authorizedunder these plans. As of September 30, 2010, 309,000 shares remainavailable for future issuance under these plans.  Vesting periods are at the discretion of theCompensation Committee of the Board of Directors, or their designee, andtypically range between one and three years. Options under these plans aregranted at fair market value and have a term of five or ten years from the dateof grant.

 

**Stock Options**

 

Thefollowing tables summarize stock option activity for the six months ended September 30,2010.

 
| ** **                                         | ** ** | **Number of********Shares** | ** ** | **Weighted********Average********Exercise********Price** | ** ** | **Weighted********Average********Contractual********Life********(years)** | ** ** | **Aggregate  Intrinsic********Value** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------|------------|
|                                               |       |                             |       |                                                     |       |                                                                      |       |                                  |       |
| **Options outstanding at March 31, 2010**     |       | 613,934                          |       | $                                                        | 47.38      |                                                                      | 5.27       |                                  |       |   |
| Grants                                             |       | 56,181                           |       | 74.87                                                    |       |                                                                      |       |                                  |       |
| Exercises                                          |       | (18,035                          | )          | 20.29                                                    |       |                                                                      |       | $                                     | 962,000    |   |
| Cancellations                                      |       | —                           |       | —                                                   |       |                                                                      |       |                                  |       |
| **Options outstanding at September 30, 2010** |       | 652,080                          |       | $                                                        | 50.49      |                                                                      | 5.33       |                                  |       |   |
| **Options exercisable at September 30, 2010** |       | 575,226                          |       | $                                                        | 47.88      |                                                                      |       |                                  | $          | 14,833,000 |   |

 

Informationrelated to the stock options outstanding as of September 30, 2010 is asfollows:

 
| **Range of Exercise Prices** | ** ** | **Number of********Shares** | ** ** | **Weighted-  Average********Remaining********Contractual******** Life (years)** | ** ** | **Weighted-  Average********Exercise Price** | ** ** | **Exercisable********Number of********Shares** | ** ** | **Exercisable********Weighted-Average********Exercise Price** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| $ 6.50 - $20.00                        |       | 73,070                           |       | 2.97                                                                                      |       | $                                                 | 13.14      |                                                | 73,070     |                                                               | $          | 13.14 |   |
| $20.01  - $30.00                            |       | 65,834                           |       | 3.73                                                                                      |       | 28.12                                             |       | 65,834                                              |       | 28.12                                                              |       |
| $30.01  - $40.00                            |       | 31,650                           |       | 4.18                                                                                      |       | 39.07                                             |       | 31,650                                              |       | 39.07                                                              |       |
| $40.01  - $50.00                            |       | 71,000                           |       | 4.83                                                                                      |       | 45.84                                             |       | 71,000                                              |       | 45.84                                                              |       |
| $50.01  - $60.00                            |       | 127,721                          |       | 4.88                                                                                      |       | 53.33                                             |       | 123,860                                             |       | 53.38                                                              |       |
| $60.01  - $70.00                            |       | 226,624                          |       | 5.99                                                                                      |       | 64.45                                             |       | 205,631                                             |       | 64.72                                                              |       |
| $70.01  - $75.82                            |       | 56,181                           |       | 9.92                                                                                      |       | 74.87                                             |       | 4,181                                               |       | 75.82                                                              |       |
| $ 6.50 - $75.82                        |       | 652,080                          |       | 5.33                                                                                      |       | $                                                 | 50.49      |                                                | 575,226    |                                                               | $          | 47.88 |   |

 

Asof September 30, 2010, there was approximately $1,479,000 of unrecognizedcompensation costs related to options granted. This cost is expected to berecognized over a weighted average period of 0.9 years.   Non-vested common stock options aresubject to the risk of forfeiture until the fulfillment of specifiedconditions.

 

**RestrictedStock and Restricted Stock Units**

 

TheCompany has instituted long term incentive plans for certain key employees.These plans call for the issuance of restricted stock which vests upon theachievement of certain performance-based goals as well as service timeincurred.  Restricted stock and restrictedstock units may also be granted to other employees with vesting periods thatrange from one to three years.  Inaddition, annually on January 10th the Board ofDirectors is granted restricted stock. These restricted stock shares vest on apro-rata basis on service time performed over a one-year period.  The fair values of these restricted stockawards are equal to the market price per share of the Company’s common stock onthe date of grant.

 

Non-vestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. 

 

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As of September 30,2010 there was $2,258,000 of total unrecognized compensation cost related tonon-vested restricted stock and stock unit awards granted under the Company’sstock plans. This cost is expected to be recognized over a weighted averageperiod of 1.2 years.

 

Thefollowing table summarizes the status of the Company’s non-vested restrictedstock and stock unit awards for the six months ended September 30, 2010:

 
| ** **                                 | ** ** | **Number of********Shares** | ** ** | **Weighted Average********Grant Date  Fair Value** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------|------------|
| **Outstanding at March 31, 2010**     |       | 97,240                           |       | $                                                                 | 60.78      |   |
| Granted                                    |       | 366                              |       | 75.82                                                             |       |
| Vested                                     |       | (4,018                           | )          | 66.51                                                             |       |
| Forfeited                                  |       | —                           |       | —                                                            |       |
| **Outstanding at September 30, 2010** |       | 93,588                           |       | $                                                                 | 60.59      |   |

 

**3.****       ****INVENTORIES**

 

Inventoriesconsist of material, labor and manufacturing overhead and are recorded at thelower of cost, using the weighted average cost method, or net realizable value.Excessive manufacturing overhead costs attributable to idle facility expenses,freight, handling costs and wasted material (spoilage) attributable toabnormally low production volumes (levels that materially differ from budgetedproduction plans due primarily to changes in customer demand) are excluded frominventory and recorded as an expense in the period incurred.

 

Thecomponents of inventories at September 30, 2010 and March 31, 2010were as follows:

 
| **(In thousands)**                                   | ** ** | **September 30,********2010** | ** ** | **March 31,********2010** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| Raw  materials, completed sub-assemblies, and spare parts |       | $                                  | 28,631     |                           | $          | 19,821 |   |
| Work-in-process                                           |       | 19,611                             |       | 15,813                         |       |
| Finished  goods                                           |       | 3,768                              |       | 9,753                          |       |
| Total                                                     |       | $                                  | 52,010     |                           | $          | 45,387 |   |

 

**4.   INCOME PER COMMON AND COMMON EQUIVALENTSHARE**

 

Basicearnings per common share is computed by dividing net income available tocommon stockholders by the weighted average number of shares of common stockoutstanding during the period.  Diluted earnings per share include thedilutive impact of options and restricted stock units using the average shareprice of the Company’s common stock for the period. For the three months ended September 30,2010 and September 30, 2009, common stock equivalents of 77,000 and94,000, respectively, are excluded from diluted earnings per share, as theireffect is anti-dilutive. For the six months ended September 30, 2010 and September 30,2009, common stock equivalents of 78,000 and 146,000, respectively, areexcluded from diluted earnings per share, as their effect is anti-dilutive.

 
| ** **                                                                                      | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **(In thousands except per share amounts)**                            | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** |
| **Income Per Share**                                                                            | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic:**                                                                                      | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                                     |       | $                                  | 14,669     |                               | $          | 10,695 |   | $ | 21,470 |   | $ | 18,031 |   |
| Weighted  average number of common shares outstanding — basic                              |       | 9,020                              |       | 8,857                              |       | 9,022 |   | 8,836 |   |
| Net  income per share — basic                                                              |       | $                                  | 1.63       |                               | $          | 1.21 |   | $ | 2.38 |   | $ | 2.04 |   |
| **Diluted:**                                                                                    | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                                     |       | $                                  | 14,669     |                               | $          | 10,695 |   | $ | 21,470 |   | $ | 18,031 |   |
| Weighted  average number of common shares outstanding                                           |       | 9,020                              |       | 8,857                              |       | 9,020 |   | 8,836 |   |
| Assumed  exercise of stock options and restricted stock units, using the treasury  stock method |       | 201                                |       | 207                                |       | 199 |   | 201 |   |
| Weighted  average number of common and potential common shares outstanding — diluted       |       | 9,221                              |       | 9,064                              |       | 9,219 |   | 9,037 |   |
| Net  income per share — diluted                                                            |       | $                                  | 1.59       |                               | $          | 1.18 |   | $ | 2.33 |   | $ | 2.00 |   |

 

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**5.  LINE OF CREDIT**

 

TheCompany is party to a Loan and Security Agreement with Silicon Valley Bankproviding a $30.0 million facility to support the Company’s routine letters ofcredit and working capital needs.  If theCompany maintains a cash and investments balance of $40.0 million or greater,then the maximum amount available for borrowing under the facility is $30.0million minus the amount of all outstanding letters of credit less certainreserves, and minus the outstanding principal balance of any advances.  If the Company’s cash and investments balancefalls below $40.0 million for a period of 30 consecutive days, then the maximumamount available for borrowings under the facility is the lesser of (i) $30.0million, or (ii) 80% of eligible domestic accounts receivable minus theamount of outstanding letters of credit adjusted for certain reserves and minusthe principal balance of any advances.

 

Thecredit facility bears an interest rate of the greater of 4.0% or the SiliconValley Bank prime rate (4.0% at September 30, 2010). The credit agreementis collateralized by certain assets of the Company and contains certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequires the maintenance of certain financial covenants.  As of September 30, 2010, the Companywas in compliance with these covenants.

 

Inthe normal course of business, the Company may provide certain customers andpotential customers with performance guarantees, which are generally backed bystandby letters of credit. In general, the Company would only be liable for theamount of these guarantees in the event of default in the performance of ourobligations; the probability of which management believes is low.   As of September 30, 2010, the Companyhad outstanding $27,668,000 in standby letters of credit against the Loan andSecurity Agreement with $2,332,000 remaining availability.  The outstanding letters of credit are primarilyfor guaranteeing performance on certain international projects.   No amounts have been drawn against theseletters of credit. At September 30, 2010, the Company had a restrictedcash balance of $35,000 related to certain bank related fees.

 

TheLoan and Security Agreement is set to expire on November 12, 2010 and theCompany has decided not to renew this facility as it is not currently neededgiven its cash flows from operations and available cash and investmentsbalance.  Outstanding standby letters ofcredit will be collateralized with restricted cash and investments uponexpiration of the Loan and Security Agreement.

 

**6.  FAIR VALUE MEASUREMENTS**

 

TheCompany has categorized its financial assets, based on the priority of theinputs to the valuation technique, into a three-level fair value hierarchy asset forth below. If the inputs used to measure the financial instruments fallwithin different levels of the hierarchy, the categorization is based on thelowest level input that is significant to the fair value measurement of theinstrument.

 

Financialassets recorded on the Condensed Consolidated Balance Sheets are categorizedbased on the inputs to the valuation techniques as follows:

 

**Level 1** - Financialassets whose values are based on unadjusted quoted prices for identical assetsor liabilities in an active market that the Company has the ability to accessat the measurement date (examples include actively exchange-traded equitysecurities, listed derivatives, and most U.S. Government and agency securities).

 

**Level 2** - Financialassets whose values are based on quoted prices in markets where trading occursinfrequently or whose values are based on quoted prices of instruments withsimilar attributes in active markets. Level 2 inputs include the following:

 

·             Quoted pricesfor identical or similar assets or liabilities in non-active markets (examplesinclude corporate and municipal bonds which trade infrequently);

 

·             Inputs otherthan quoted prices that are observable for substantially the full term of theasset or liability (examples include interest rate and currency swaps); and

 

·             Inputs that arederived principally from or corroborated by observable market data forsubstantially the full term of the asset or liability (examples include certainsecurities and derivatives).

 

**Level 3** - Financialassets whose values are based on prices or valuation techniques that requireinputs that are both unobservable and significant to the overall fair valuemeasurement. These inputs reflect management’s own assumptions about theassumptions a market participant would use in pricing the asset or liability.The Company currently does not have any Level 3 financial assets orliabilities.

 

Thefollowing table presents the financial assets and liabilities the Companymeasures at fair value on a recurring basis, based on the fair value hierarchyas of September 30, 2010 and March 31, 2010:

 

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| **(In thousands)**                            | ** ** | **September 30,  2010** | ** ** | **March 31,  2010** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| **Level  1 — Financial Assets**               |       |                         |       |                     |       |
| U.S.  Treasury bills                               |       | $                            | 15,134     |                     | $          | 35,005 |   |
| **Level  2 — Financial Assets**               |       |                         |       |                     |       |
| Corporate  debentures/bonds                        |       | 51,387                       |       | 42,588                   |       |
| Government  agency bonds                           |       | 22,253                       |       | 28,589                   |       |
| Commercial  paper                                  |       | 35,417                       |       | 25,983                   |       |
| Money  market funds                                |       | 20,203                       |       | 19,705                   |       |
| Certificates  of deposit                           |       | —                       |       | 12,001                   |       |
| Total  Level 2 Financial Assets                    |       | 129,260                      |       | 128,866                  |       |
| Total  cash equivalents and short-term investments |       | $                            | 144,394    |                     | $          | 163,871 |   |

 

Theseinvestments are classified as available-for-sale and are recorded at their fairmarket values using the specific identification method. The unrealized holdinggains or losses on these securities are included as a component ofcomprehensive income as outlined in Note 1.

 
| ** **                    | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **2010:**                     |       |                |       |                         |       |                          |       |                |       |
| Available  for Sale:          |       |                |       |                         |       |                          |       |                |       |
| Corporate  debentures/bonds   |       | $                   | 51,358     |                         | $          | 45                            |       | $                   | (16        | ) | $ | 51,387 |   |
| Treasury  bills               |       | 15,111              |       | 23                           |       | —                        |       | 15,134              |       |
| Commercial  paper             |       | 33,418              |       | —                       |       | —                        |       | 33,418              |       |
| Government  agency bonds      |       | 14,749              |       | 8                            |       | (2                            | )          | 14,755              |       |
| Total  short-term investments |       | $                   | 114,636    |                         | $          | 76                            |       | $                   | (18        | ) | $ | 114,694 |   |
|                          |       |                |       |                         |       |                          |       |                |       |
| Cash  equivalents:            |       |                |       |                         |       |                          |       |                |       |
| Money  market funds           |       | $                   | 20,203     |                         | $          | —                        |       | $                   | —     |   | $ | 20,203 |   |
| Commercial  paper             |       | 1,999               | ** ** | **—**                   |       | —                        |       | 1,999               |       |
| Government  agency bonds      |       | 7,500               | ** ** | **—**                   |       | (2                            | )          | 7,498               |       |
| Total  cash equivalents       |       | $                   | 29,702     |                         | $          | —                        |       | $                   | (2         | ) | $ | 29,700 |   |

 

**7.  DERIVATIVEFINANCIAL INSTRUMENTS**

 

The Company purchased in the fourth quarter offiscal year 2010 a foreign currency put option contract to manage the riskassociated with foreign currency exchange rate fluctuations on an anticipatedobligation and transaction, which was outstanding at year end.  The foreign currency put option contract waspaid in full at execution and was related to our activities in Europe. The putoption contract provided us with the option to exchange Euros for U.S. dollarsat a fixed exchange rate such that, if the Euro were to depreciate against theU.S. dollar to predetermined levels as set by the contract, we could exerciseour option and mitigate our foreign currency exchange losses. This contract didnot qualify for hedge accounting treatment and was marked-to-market through theresults of operations until it was settled during the current fiscal period.The Company recorded a net mark-to-market income (expense) for this contract of$(1,020,000) and $122,000 for the three and six months ended September 30,2010, respectively, which is included in other income and expense in thecondensed consolidated statements of operations.  The Company had no option contractsoutstanding during the three and six months ended September 30, 2009.

 

**8.   INCOME TAXES**

 

TheCompany accounts for income taxes in accordance with FASB ASC 740, *Income Taxes* and recognizes deferredincome taxes based on the expected future tax consequences of differencesbetween the financial statement basis and the tax basis of assets andliabilities, calculated using enacted tax rates in effect for the year in whichthe differences are expected to be reflected in the tax return. The Companyevaluates the need for a valuation allowance against its net deferred taxassets at year end based upon its three year cumulative income and its projectionsof future income, and records a valuation allowance against any net deferredtax assets if it is more likely than not that they will not be realized.

 

TheCompany is currently open to audit under the statute of limitations by theInternal Revenue Service for the years ending March 31, 2007 through 2009and for various state taxing authorities for the years ending March 31,2006 through 2009.  The Company recentlycompleted an audit by the Internal Revenue Service for tax years ended March 31,2006 and 2007, the results of which did not have a material impact on theCompany’s financial position or results of operations.   The Company believes that there were nouncertain tax positions that required a reserve as of September 30, 2010.

 

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**9.     GUARANTEES**

 

Certainof the Company’s products carry a one-year warranty, the costs of which areaccrued for at time of shipment or delivery.  Accrual rates are based uponhistorical experience over the preceding twelve months and management’sjudgment of future exposure.  Warranty experience for the three and sixmonths ended September 30, 2010 and 2009 is as follows:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In thousands)**                           | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009**   | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| Warranty  accrual - beginning of period           |       | $                                | 834        |                           | $          | 808 |   | $ | 965 |   | $ | 1,130 |   |
| Accruals  for warranties issued during the period |       | 293                              |       | 470                            |       | 471 |   | 778 |   |
| Adjustment  of preexisting accrual estimates      |       | (90                              | )          | (239                           | )          | (161 | ) | (694 | ) |
| Warranty  costs incurred during the period        |       | (332                             | )          | (148                           | )          | (570 | ) | (323 | ) |
| Warranty  accrual — end of period            |       | $                                | 705        |                           | $          | 891 |   | $ | 705 |   | $ | 891 |   |

 

**10.   LEASE COMMITMENTS**

 

InMarch 2005, the Company renewed its lease agreement for its corporateheadquarters and manufacturing facilities in Billerica, Massachusetts.  Aspart of the lease agreement, the Company’s landlord agreed to certainrenovations to the Billerica facility including the construction of additional highbay manufacturing space.  The Company was responsible for a portion of theconstruction costs and was deemed to be the owner of the building during theconstruction period under FASB ASC 840,*Leases.* In January 2007,the Company amended this lease agreement to expand its lease to include theremaining available space in the building.  A total of $7,182,000 wascapitalized to record the facility on its books with an offsetting credit tothe lease financing liability.  In addition, amounts paid for constructionwere capitalized to fixed assets and the landlord construction allowances of$6,009,000 were recorded as additional lease financing liability.

 

Atthe completion of the construction of the initial renovations in February 2006,the lease was reviewed for potential sale-leaseback treatment in accordancewith FASB ASC 840-40,*Leases —Sale-Leaseback Transactions*.  Based on this review, it wasdetermined that the lease did not qualify for sale-leaseback treatment inaccordance with FASB ASC 840-40.  As a result, building and tenantimprovement and associated lease financing liabilities remain on the Company’sbooks.  The lease financing liability is being amortized over the leaseterm based on the payments designated in the agreement and the building andtenant improvement assets are being depreciated on a straight line basis overthe lesser of their useful lives or the lease term.

 

**11.   COMMITMENTS AND CONTINGENCIES**

 

**Lease Liability**

 

Inconjunction with the sale of certain assets and contracts of the Company’s HighEnergy Systems Division in January of 2005, the lease for the Californiaoperations of the High Energy Systems Division was assigned toAccuray, Incorporated.  The Company remains secondarily liable forthe remaining lease payments in the event of default byAccuray, Incorporated during the lease term which expires inFebruary 2011. Total remaining lease payments at September 30, 2010totaled $143,000.  No accrual for this contingent liability has beenrecorded at September 30, 2010 as management believes the probability ofpayment of this liability is low.

 

**Deferred Revenue**

 

TheCompany offers to its customers extended warranty and service contracts. Thesecontracts typically cover a period of one to five years, and include advancepayments that are recorded as deferred revenue. Revenue is recognized asservices are performed over the life of the contract, which represents theperiod over which these revenues are earned. Costs associated with theseextended warranty and service contracts are expensed to cost of goods sold asincurred.

 

**ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements thatinvolve risks and uncertainties. The statements contained in this report thatare not purely historical are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. Without limiting the foregoing, the words “may,”“will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,”“estimates,” “predicts,” “potential” and similar expressions are intended toidentify forward-looking statements. All forward-looking statements included inthis Quarterly Report on Form 10-Q are based on information available tous up to, and including, the date of this report, and we assume no obligationto 

 

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updateany such forward-looking statements. Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofcertain factors, including the following: significant reductions or delays or cancellation (in full or inpart) in procurements of our systemsby the United States and other governments; disruption in the supply of anysource component incorporated into our products; litigation seeking to restrictthe use of intellectual property we use; potential product liability claimsagainst us; global political trends and events which affect public perceptionof the threat presented by drugs, explosives and other contraband; globaleconomic developments and the ability of governments and private organizationsto fund purchases of our products to address such threats; the potentialinsufficiency of our resources, including human resources, capital, plant andequipment and management systems, to accommodate any future growth; futuredelays in federal funding; and other factors discussed in “Item 1A **—**Risk Factors” and elsewhere in this Form 10-Q.You should carefully review those factors and also carefully review the risksoutlined in other documents that we file from time to time with the Securitiesand Exchange Commission.

 

**Overview**

 

AmericanScience and Engineering, Inc., which is referred to in this report as “we”or “the Company”, develops and manufactures state-of-the-art X-ray inspectionsystems for homeland security, force protection, and other critical defenseapplications.   We provide maintenance,warranty, research, engineering, and training services related to thesesolutions.

 

Ourprimary technologies are: (1) Z Backscatter technology which is used todetect plastic explosives, illegal drugs, and other contraband even whenartfully concealed in complex backgrounds; and (2) Shaped Energy X-rayinspection technology which provides high penetration of dense cargoes withoutexcess radiation, eliminating the need for extensive exclusion zones.

 

Netsales and contract revenues for the second quarter of fiscal 2011 increased by32% to $80,637,000 compared to the second quarter of fiscal 2010 revenues of$61,248,000. We reported income before provision for income taxes of $22,647,000for the second quarter of fiscal 2011 compared to $16,581,000 for the secondquarter of fiscal 2010.  Net income forthe second quarter of fiscal 2011 was $14,669,000 ($1.59 per share, on adiluted basis) as compared to net income of $10,695,000 ($1.18 per share, on adiluted basis) for the second quarter of fiscal 2010.

 

Netsales and contract revenues for the first six months of fiscal 2011 increasedby 16% to $134,280,000 compared to the first six months of fiscal 2010 revenuesof $115,940,000. We reported income before provision for income taxes of$33,030,000 for the first six months of fiscal 2011 compared to $27,955,000 forthe first six months of fiscal 2010.  Netincome for the first six months of fiscal 2011 was $21,470,000 ($2.33 per share,on a diluted basis) as compared to net income of $18,031,000 ($2.00 per share,on a diluted basis) for the first six months of fiscal 2010.

 

**Critical Accounting Policies**

 

Webelieve that several accounting policies are important to understanding our historicaland future performance. We refer to these policies as “critical” because thesespecific areas generally require us to make judgments and estimates aboutmatters that are uncertain at the time we make the estimate, and differentestimates—which also would have been reasonable—could have been used, whichwould have resulted in different financial results.

 

Thecritical accounting policies we identified in our most recent Annual Report on Form 10-Kfor the fiscal year ended March 31, 2010 are policies related to revenuerecognition, inventories and related allowances for obsolete and excessinventory, and income taxes. It is important that the discussion of ouroperating results that follows be read in conjunction with the criticalaccounting policies disclosed in our Annual Report on Form 10-K, as filedwith the SEC on June 9, 2010.  Therehave been no changes to our critical accounting policies during the six monthsended September 30, 2010.

 

**Resultsof Operations**

 

Netrevenues for the second quarter ended September 30, 2010 increased by$19,389,000 to $80,637,000 compared to the corresponding period a yearago.  This increase is attributable primarily to an increase of$17,516,000 in product sales and contract revenues.  Factors contributing to the product sales andcontract revenues increase include: 1) a $10,402,000 increase in CargoSearchsystem revenues as compared to the corresponding prior year period attributableto the delivery of numerous systems accounted for on a completed contract basis;and 2) an increase of $5,830,000 in Z Backscatter system revenues  due to a higher number of units beingdelivered in the period as compared to the prior year; and 3) an increase of$847,000 in aftermarket parts revenue due to a higher volume of orders fulfilled in the period. ParcelSearchrevenues and contract research and development revenues also increased over theprior period and accounted for $436,000 of the revenue increase.  Service revenues increased by $1,873,000 to$20,932,000 compared to the second quarter of fiscal 2010 due primarily toincreased service contract revenue as a greater number of systems were undercontract as compared to the prior year period.

 

Netrevenues for the six months ended September 30, 2010 increased by$18,340,000 to $134,280,000 compared to the corresponding period a yearago.  This increase is attributable primarily to an increase of$15,206,000 in product sales and contract revenues.  Factors contributing to the product sales andcontract revenues increase include: 1) a $3,554,000 increase in  Z Backscatter 

 

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systems revenues on highervolume; and 2) an increase of $5,778,000 in CargoSearch system revenues ascompared to the corresponding prior year period attributable to an increase inthe number of systems delivered and comparably greater progress on certaincontracts recognized on a percentage of completion basis; and 3) an increase of$4,978,000 in ParcelSearch system revenues as compared to the prior yearrelated to one multi unit order fulfilled in the period.  Contract research and development andaftermarket parts revenues also experienced increases over the prior period andtogether accounted for $895,000 of the revenue increase.   Service revenues increased by $3,134,000 to$42,101,000 compared to the six months ended September 30, 2009 dueprimarily to increased service contract revenue as a greater number of systems wereunder contract as compared to the prior year period.

 

Totalcost of sales and contracts for the second quarter of fiscal 2011 increased by$8,999,000 to $40,793,000 as compared to the corresponding period a year ago.Cost of sales and contracts related to product revenues increased by $7,985,000to $29,775,000 as compared to the corresponding period a year ago.  Costof product sales and contract revenues represented 50% of revenues versus 52%of revenues for the corresponding period last year.  The resultantincrease in gross margin percentage from the prior year is due primarily toimproved margins from our CargoSearch product line in the period.  We delivered multiple CargoSearch systems inthe quarter which had comparably lower unit costs due to manufacturingefficiencies achieved from certain cost-cutting and streamlining effortsimplemented over the past 18 months.  Thecost of service revenues for the quarter ended September 30, 2010increased by $1,014,000 to $11,018,000 as compared to the corresponding perioda year ago.  Cost of service revenues remained flat at 53% of revenues forboth fiscal periods.

 

Totalcost of sales and contracts for the six months ended September 30, 2010increased by $9,758,000 to $70,624,000 as compared to the corresponding perioda year ago. Cost of sales and contracts related to product revenues increasedby $7,831,000 to $48,565,000 as compared to the corresponding period a yearago.  Cost of product sales and contract revenues represented 53% ofrevenues in both the six months ended September 30, 2010 and the sixmonths ended September 30, 2009.  Although the gross marginpercentage remained flat over the two periods, there was a shift in product mixbetween the two periods with a greater percentage of revenues deriving from thelower margined CargoSearch and ParcelSearch product lines.  These product lines experienced improvedmargins as compared to the prior fiscal period due primarily to manufacturingefficiencies achieved over the prior periods. The cost of service revenues for the six months ended September 30,2010 increased by $1,927,000 to $22,059,000 as compared to the correspondingperiod a year ago.   Cost of servicerevenues remained flat at 52% of revenues for both the six months ended September 30,2010 and the six months ended September 30, 2009.

 

Selling,general and administrative expenses for the second quarter of fiscal 2011increased by $2,988,000 to $10,997,000 as compared to the corresponding perioda year ago.  Selling, general and administrative expenses represented 14%of revenues in the current period compared to 13% for the corresponding periodlast year.   The increase in selling,general and administrative expenses over the prior period was primarily theresult of:  1) an increase in payroll andpayroll-related costs of $503,000 attributable to increased headcount; 2) anincrease in incentive compensation expense of $1,556,000 attributable to theincreased financial performance levels; 3) an increase in legal fees of$493,000 related primarily to due diligence activities on a potentialacquisition which was abandoned during the quarter, and 4) an increase intravel related expenses of $232,000 related to sales and marketing relatedtravel.

 

Selling,general and administrative expenses for the six months ended September 30,2010 increased by $4,099,000 to $20,810,000 as compared to the correspondingperiod a year ago.  Selling, general and administrative expensesrepresented 15% of revenues in the current period compared to 14% for thecorresponding period last year.  Theincrease in selling, general and administrative expenses over the prior periodwas primarily the result of:  1) anincrease in payroll and payroll-related costs of $1,074,000 attributable toincreased headcount; 2) an increase in incentive compensation expense of$1,771,000 attributable to the increased financial performance levels; 3) anincrease in legal fees of $360,000 related primarily to due diligenceactivities on a potential acquisition which was abandoned during the quarter;4) an increase in travel related expenses of $429,000 related primarily tosales and marketing related travel and 5) an increase in sales and marketingrelated expenses of $403,000 related to increased sales demo activity and salesconferences held during the period.

 

Companyfunded research and development expenses for the second quarter of fiscal 2011increased by $274,000 to $5,225,000 as compared to the corresponding periodlast year.  Research and development expenses represented 6% of revenuesin the current quarter compared to 8% for the corresponding period lastyear.  The research and development expenses in the quarter were slightlyunder budget and were attributable to engineering efforts being expended onother routine, non-research and development, production activities.  Research and development activities performedin the quarter focused on the development of new product options and productenhancements.

 

Companyfunded research and development expenses for the six months ended September 30,2010 decreased by $522,000 to $10,235,000 as compared to the correspondingperiod last year.  Research and development expenses represented 8% ofrevenues for the six months ended September 30, 2010 as compared to 9% forthe corresponding period last year.  This decrease in research anddevelopment expenses in the period was attributable to engineering effortsbeing expended on other routine, non-research and development, productionactivities.  Research and developmentactivities performed in the period focused on the development of new productoptions and product enhancements.

 

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Otherincome (expense) was $975,000 of expense for the second quarter of fiscal 2011as compared to $87,000 of income for the corresponding period a yearago.  This expense is attributable primarily to a mark-to-market lossof $1,020,000 recognized on a foreigncurrency put option contract which depreciated significantly during thequarter due to the volatility of the Euro during the period.  This contract had appreciated significantlyin the first quarter of fiscal 2010 resulting in a $1,142,000 gain in thatperiod.  This contract did not qualifyfor hedge accounting treatment under the Derivatives and Hedging Topic of theFASB ASC. Therefore, all gains or losses on the foreign currency put option contract were recorded in ourCondensed Consolidated Statements of Operations.  This put option was sold during the quarterended September 30, 2010 at a price near cost resulting in no materialgain or loss.

 

Otherincome was $419,000 of income for the six months ended September 30, 2010as compared to $349,000 of income for the corresponding period a yearago.  This increase in other income is attributable primarily to anincrease in investment income due to an increase in the average investmentbalance as compared to the prior period.

 

Wereported pre-tax income of $22,647,000 in the three months ended September 30,2010 as compared to pre-tax income of $16,581,000 in the corresponding perioddue to the factors described above.  Wereported pre-tax income of $33,030,000 in the six months ended September 30,2010 as compared to pre-tax income of $27,955,000 in the corresponding perioddue to the factors described above.

 

Oureffective tax rate for the three months ended September 30, 2010 was 35.2%as compared to 35.5% for the corresponding period a year ago. Oureffective tax rate for the six months ended September 30, 2010 was 35.0%as compared to 35.5% for the corresponding period a year ago.   This decline in the tax rate is attributableprimarily to a reduced state tax apportionment and an increase in thequalifying manufacturing tax credits as compared to the prior year offset inpart by an increase in non-deductible executive compensation under Section 162(m) ofthe Internal Revenue Code.

 

Wehad net income of $14,669,000 for the second quarter of fiscal 2011 as comparedto net income of $10,695,000 in the second quarter of fiscal 2010.   We had net income of $21,470,000 for the sixmonths ended September 30, 2010 as compared to net income of $18,031,000in the six months ended September 30, 2009.   The significant factors contributing to theseresults are noted in the above sections.

 

**Liquidity and Capital Resources**

 

Oursources of capital include, but are not limited to, our cash flows fromoperations, our line of credit, and cash received from stock issuances fromoption exercises.  As is noted below, ourline of credit is set to expire in November of 2010 and we have decidednot to renew this facility at that time. We believe that our operating cash flows and cash and investments onhand are sufficient to fund our working capital requirements, capitalexpenditures, income tax obligations, dividends to our shareholders,performance guarantee collateralizations, and share repurchases for the foreseeable future.

 

***Summary of Cash Activities***

 

Cashand cash equivalents increased by $19,274,000 to $54,186,000 at September 30,2010 compared to $34,912,000 at March 31, 2010. This increase isattributable primarily to:  1) the netincome earned in the period adjusted for certain non-cash items; 2) a netdecrease of $28,471,000 in short-term investments as we liquidated certainshort-term investments into cash equivalents during the period; and 3) anincrease in accounts payable of $5,826,000 attributable to an increase in endof period purchasing activity.  Offsettingthese inflows were other operating cash outflows including: 1) increases inunbilled receivables of $13,289,000 due to the milestone invoicing terms oncertain contracts delivered during the current quarter; 2) increases inaccounts receivable of $6,698,000 attributable to the higher revenue in theperiod and the timing of certain contract milestone invoices and payments;  3) increases in inventories of $7,005,000from year end attributable to a buildup of inventory to meet delivery schedulesof orders in backlog; and 4) decreases in customer deposits of $2,438,000during the period as milestone payments received in the prior year were earnedand converted to revenue in the current fiscal year.  In addition, we paid $5,415,000 in dividendsto shareholders as part of our quarterly dividend program and used $3,381,000to repurchase 46,500 shares of common stock as part of our Stock RepurchaseProgram.

 

***Credit Facility***

 

Weare party to a Loan and Security Agreement with Silicon Valley Bank providinga$30.0 million facility to support our routine letters of credit and workingcapital needs.  If we maintain a cash andinvestments balance of $40.0 million or greater, then the maximum amountavailable for borrowing under the facility is $30.0 million minus the amount ofall outstanding letters of credit less certain reserves, and minus theoutstanding principal balance of any advances. If our cash and investment balance falls below $40.0 million for aperiod of 30 consecutive days, then the maximum amount available for borrowingsunder the facility is the lesser of (i) $30.0 million, or (ii) 80% ofeligible domestic accounts receivable minus the amount of outstanding lettersof credit adjusted for certain reserves and minus the principal balance of anyadvances.

 

Thecredit facility bears an interest rate of the greater of 4.0% or the SiliconValley Bank prime rate (4.0% at September 30, 2010). 

 

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The credit agreement iscollateralized by certain of our assets and contains certain restrictions,including limitations on the amount of distributions that can be made tostockholders, and the disposition or encumbrances of assets, and requires themaintenance of certain financial covenants. As of September 30, 2010, we were in compliance with thesecovenants.

 

Inthe normal course of business, we may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standby lettersof credit. In general, we would only be liable for the amount of theseguarantees in the event of default in the performance of our obligations; theprobability of which management believes is low.   As of September 30, 2010, we hadoutstanding $27,668,000 in standby letters of credit against the Loan andSecurity Agreement with $2,332,000 remaining availability.  The outstanding letters of credit areprimarily for guaranteeing performance on certain international projects.   No amounts have been drawn against theseletters of credit. At September 30, 2010, we had a restricted cash balanceof $35,000 related to certain bank related fees.

 

TheLoan and Security Agreement is set to expire on November 12, 2010 and wehave decided not to renew this facility as it is not currently needed given ourcash flows provided from operations and our available cash and investmentsbalance.   We have not drawn on thisfacility to fund operations since June of 2002 and have used this creditfacility exclusively to issue standby letters of credit.  Upon expiration of the Loan and SecurityAgreement, outstanding standby letters of credit will be collateralized withrestricted cash and investments.

 

**ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Thecash accounts for our operations in Hong Kong, England, the Netherlands, andAbu Dhabi are maintained in Hong Kong dollars, pounds sterling, Euros anddirham, respectively. The gains and losses from foreign currency transactionsare included in the condensed consolidated statements of operations for theperiod and were immaterial. During the six months ended September 30,2010, we held a foreign currency put option which provided us with the option to exchange Euros for U.S. dollars at a fixedexchange rate such that, if the Euro were to depreciate against the U.S. dollarto predetermined levels as set by the contract, we could exercise our optionand mitigate our foreign currency exchange losses. This put option wassold during the quarter ended September 30, 2010 at a price near costresulting in no material gain or loss.  Ahypothetical 10 percent change in foreign currency rates would not have amaterial impact on our results of operations or financial condition.

 

Asof September 30, 2010, we held short-term investments consisting of U.S.treasury bills, money market funds, commercial paper, corporatedebentures/bonds, and government agency bonds. Our primary objective with ourinvestment portfolio is to invest available cash while preserving principal andmeeting liquidity needs. These investments have an average interest rate ofapproximately 0.354% and are subject to interest rate risk. As a result of theaverage maturity and conservative nature of the investment portfolio, a suddenchange in interest rates would not have a material adverse effect on the valueof these investments.

 

**ITEM 4 — CONTROLS AND PROCEDURES**

 

a)  Evaluation of disclosure controls and procedures

 

Asof the end of the period covered by this report, under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer, the Company reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures pursuant toRule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934 as amended (the “Exchange Act”). Based upon their evaluation, our ChiefExecutive Officer and our Chief Financial Officer concluded that, as of the endof the period covered by this report, our disclosure controls and procedureswere effective to provide reasonable assurance that information required to bedisclosed by the Company in the reports filed and submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

b)  Changes in internal control over financial reporting

 

Therehave been no changes in our internal control over financial reporting as suchterm is defined in Rule 13a-15(f) and 15d-15(f) of the ExchangeAct during the period covered by this report that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM 1A —RISK FACTORS**

 

Youshould carefully review and consider the information regarding certain factorswhich could materially affect our business, financial condition or futureresults set forth under Item 1A. “Risk Factors” in our Form 10-K forthe year ended March 31, 2010. There have been no material changes fromthe factors disclosed in our Form 10-K for the year ended March 31,2010, although we

 

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may disclose changes to suchfactors or disclose additional factors from time to time in our future filingswith the Securities and Exchange Commission.

 

**ITEM 2 —UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

The following table provides information about ourpurchases during the quarter ended September 30, 2010 of equity securities thatare registered by us pursuant to Section 12 of the Exchange Act.

 
| **Quarter ended September 30, 2010** | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced  Programs** | ** ** | **Approximate  Dollar Value of  Shares that May  Yet Be  Purchased  Under the  Programs** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| July 1 — July 31                                    |       | —                                           |       | $                                            | —     |                                                                                                      | —     |                                                                                                                    | $          | 23,807,000 |   |
| August 1 — August 31                                |       | 22,500                                           |       | 71.88                                        |       | 22,500                                                                                                    |       | 22,190,000                                                                                                              |       |
| September 1 — September 30                          |       | 24,000                                           |       | 73.51                                        |       | 24,000                                                                                                    |       | 20,423,000                                                                                                              |       |
| **Total**                                                |       | 46,500                                           |       | $                                            | 72.72      |                                                                                                      | 46,500     |                                                                                                                    | $          | 20,423,000 |   |

 

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(1)          OnMay 13, 2008, our Board ofDirectors announced a Stock Repurchase Program which authorizes us torepurchase up to $35 million of shares of our common stock from time to time onthe open market.  As of September 30,2010, the maximum dollar value of shares that may yet be purchased under thisprogram is $20,423,000.

 

**ITEM 4 — [REMOVED AND RESERVED]**

 

**ITEM 6 — EXHIBITS**

 

Seethe exhibit index following thesignature page to this quarterly report.

 

The information required by Exhibit Item 11(Statement re: Computation of Income per Common and Common Equivalent Share)may be found in Note 4 to the Unaudited Condensed Consolidated FinancialStatements in this quarterly report.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisReport to be signed on its behalf by the undersigned hereunto duly authorized.

 
|                   | AMERICAN SCIENCE AND  ENGINEERING, INC.                       |
|------------------------|---------------------------------------------------------------|
|                   |                                                          |
| Date: November 9, 2010 | /s/ Kenneth J. Galaznik                                       |
|                   | Kenneth J. Galaznik                                           |
|                   | Senior Vice President,  Chief Financial Officer and Treasurer |

 

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**EXHIBIT INDEX**

 
| **Exhibit********Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                         |
|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                          |
| 10.1                      |       | Form of  Indemnification Agreement between American Science and Engineering, Inc.  and each of its directors and executive officers (filed as Exhibit 10.1 to  the Company’s Report on Form 8-K dated September 8, 2010 and incorporated  herein by reference) |
|                      |       |                                                                                                                                                                                                                                                                          |
| 31.1                      |       | Certification by Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                          |
| 31.2                      |       | Certification by Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                          |
| 32.1                      |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                          |
| 32.2                      |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 |

 

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