Table of Contents

 

 

 

**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended June 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’stelephone number, including area code)

 

 

(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 markwhether the 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 July 31,2010 was 9,031,523.

 

 

 

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**TABLE OF CONTENTS**

 
| **Part I —  Financial Information**                                                                                         |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1 — Financial  Statements                                                                                                   | 3      |
| Unaudited  Condensed Consolidated Balance Sheets—June 30, 2010 and March 31,  2010                                     | 3      |
| Unaudited  Condensed Consolidated Statements of Operations—For the Three Months Ended  June 30, 2010 and June 30, 2009 | 4      |
| Unaudited  Condensed Consolidated Statements of Cash Flows—For the Three Months Ended  June 30, 2010 and June 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                                                              | 14     |
| Item 4 — Controls  and Procedures                                                                                                | 15     |
| **Part II — Other  Information**                                                                                            |   |
| Item 1A—Risk Factors                                                                                                             | 15     |
| Item 2 —  Unregistered Sales of Equity Securities and Use of Proceeds                                                            | 15     |
| Item 6 — Exhibits                                                                                                                | 15     |
| **Signatures**                                                                                                                        | 16     |

 

ZBackscatter TM, ZBVTM, CargoSearchTM, MobileSearchTM,  Shaped Energy®, AS&E®, ParcelSearchTM,GeminiTM, OmniviewTM  Gantry, SentryTMPortal, SmartCheck® Inspection 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 SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| **(In  thousands, except share and per share amounts)**                                                                                                                     | ** ** | **June 30,********2010** | ** ** | **March 31,********2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| **Assets**                                                                                                                                                                  | ** ** | ** **               | ** ** | ** **                     | ** ** |
| Current  assets:                                                                                                                                                            |       |                     |       |                           |       |
| Cash  and cash equivalents                                                                                                                                                  |       | $                        | 85,406     |                           | $          | 34,912 |   |
| Restricted  cash                                                                                                                                                            |       | 35                       |       | 35                             |       |
| Short-term  investments, at fair value                                                                                                                                      |       | 75,541                   |       | 144,166                        |       |
| Accounts  receivable, net of allowances of $376 and $330 at June 30, 2010 and March 31,  2010, respectively                                                            |       | 39,717                   |       | 37,735                         |       |
| Unbilled  costs and fees                                                                                                                                                    |       | 1,234                    |       | 2,078                          |       |
| Inventories                                                                                                                                                                 |       | 47,217                   |       | 45,387                         |       |
| Prepaid  expenses and other current assets                                                                                                                                  |       | 9,631                    |       | 8,998                          |       |
| Deferred  income taxes                                                                                                                                                      |       | 1,277                    |       | 2,389                          |       |
| **Total current assets**                                                                                                                                                    |       | 260,058                  |       | 275,700                        |       |
| Building,  equipment and leasehold improvements, net                                                                                                                        |       | 18,257                   |       | 18,216                         |       |
| Deferred  income taxes                                                                                                                                                      |       | 5,273                    |       | 5,171                          |       |
| Other  assets, net                                                                                                                                                          |       | 644                      |       | 766                            |       |
| **Total assets**                                                                                                                                                            |       | $                        | 284,232    |                           | $          | 299,853 |   |
|                                                                                                                                                                        |       |                     |       |                           |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                               | ** ** | ** **               | ** ** | ** **                     | ** ** |
| Current  liabilities:                                                                                                                                                       |       |                     |       |                           |       |
| Accounts  payable                                                                                                                                                           |       | $                        | 9,075      |                           | $          | 10,970 |   |
| Accrued  salaries and benefits                                                                                                                                              |       | 6,419                    |       | 13,663                         |       |
| Accrued  warranty costs                                                                                                                                                     |       | 834                      |       | 965                            |       |
| Accrued  income taxes                                                                                                                                                       |       | 288                      |       | 4,203                          |       |
| Deferred  revenue                                                                                                                                                           |       | 9,365                    |       | 14,975                         |       |
| Customer  deposits                                                                                                                                                          |       | 11,204                   |       | 13,714                         |       |
| Current  portion of lease financing liability                                                                                                                               |       | 1,307                    |       | 1,302                          |       |
| Other  current liabilities                                                                                                                                                  |       | 5,351                    |       | 3,913                          |       |
| **Total current liabilities**                                                                                                                                               |       | 43,843                   |       | 63,705                         |       |
| Lease  financing liability, net of current portion                                                                                                                          |       | 6,747                    |       | 7,075                          |       |
| Long  term deferred revenue                                                                                                                                                 |       | 6,059                    |       | 7,271                          |       |
| Other  long term liabilities                                                                                                                                                |       | 34                       |       | 34                             |       |
| **Total liabilities**                                                                                                                                                       |       | 56,683                   |       | 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; 9,031,523 and  9,013,508 shares issued and outstanding at June 30, 2010 and March 31, 2010,  respectively |       | 6,020                    |       | 6,008                          |       |
| Capital  in excess of par value                                                                                                                                             |       | 99,526                   |       | 97,819                         |       |
| Accumulated  other comprehensive income, net                                                                                                                                |       | 1                        |       | 33                             |       |
| Retained  earnings                                                                                                                                                          |       | 122,002                  |       | 117,908                        |       |
| **Total stockholders’ equity**                                                                                                                                         |       | 227,549                  |       | 221,768                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                                         |       | $                        | 284,232    |                           | $          | 299,853 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                            | ** **    | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|---------------|----------------------------------------------------|------------|
| **(In thousands, except per share amounts)** | ** **    | **June 30, 2010**                        | ** ** | **June 30, 2009** | ** ** |
| **Net sales and contract revenues:**                                  | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Net  product sales and contract revenues                              |          | $                                                  | 32,474     |   | $ | 34,784 |   |
| Net  service revenues                                                 |          | 21,169                                             |       | 19,908 |   |
| Total  net sales and contract revenues                                |          | 53,643                                             |       | 54,692 |   |
|                                                                  |          |                                               |       |   |   |
| **Cost of sales and contracts:**                                      | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Cost  of product sales and contracts                                  |          | 18,790                                             |       | 18,944 |   |
| Cost  of service revenues                                             |          | 11,041                                             |       | 10,128 |   |
| Total  cost of sales and contracts                                    |          | 29,831                                             |       | 29,072 |   |
| **Gross profit**                                                      |          | 23,812                                             |       | 25,620 |   |
|                                                                  |          |                                               |       |   |   |
| **Expenses:**                                                         | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Selling,  general and administrative expenses                         |          | 9,813                                              |       | 8,702 |   |
| Research  and development costs                                       |          | 5,010                                              |       | 5,806 |   |
| Total  operating expenses                                             |          | 14,823                                             |       | 14,508 |   |
|                                                                  |          |                                               |       |   |   |
| **Operating  income**                                                 |          | 8,989                                              |       | 11,112 |   |
|                                                                  |          |                                               |       |   |   |
| **Other income (expense):**                                           | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Interest  and investment income                                       |          | 228                                                |       | 165 |   |
| Interest  expense                                                     |          | (30                                                | )          | (33 | ) |
| Other,  net                                                           |          | 1,196                                              |       | 130 |   |
| Total  other income                                                   |          | 1,394                                              |       | 262 |   |
|                                                                  |          |                                               |       |   |   |
| Income  before provision for income taxes                             |          | 10,383                                             |       | 11,374 |   |
| Provision  for income taxes                                           |          | 3,582                                              |       | 4,038 |   |
|                                                                  |          |                                               |       |   |   |
| Net  income                                                           |          | $                                                  | 6,801      |   | $ | 7,336 |   |
|                                                                  |          |                                               |       |   |   |
| Income  per share                                                     | —Basic   |                                               | $          | 0.75 |   | $ | 0.83 |   |
|                                                                  | —Diluted |                                               | $          | 0.74 |   | $ | 0.81 |   |
|                                                                  |          |                                               |       |   |   |   |
| Weighted  average shares                                              | —Basic   |                                               | 9,021      |   | 8,814 |   |
|                                                                  | —Diluted |                                               | 9,219      |   | 9,010 |   |
| Dividends  declared per share                                         |          | $                                                  | 0.30       |   | $ | 0.20 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(In thousands)**                                                                        | ** ** | **June 30, 2010**                        | ** ** | **June 30, 2009** | ** ** |
| **Cash flows from operating activities:**                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net  income                                                                                    |       | $                                                  | 6,801      |   | $ |  7,336 |   |
| Adjustments  to reconcile net income to net cash provided by (used for) operating  activities: |       |                                               |       |   |   |
| Depreciation  and amortization                                                                 |       | 1,189                                              |       | 1,120 |   |
| Provisions  for contracts, inventory and accounts receivable reserves                          |       | 165                                                |       | 191 |   |
| Amortization  of bond premium                                                                  |       | 595                                                |       | 67 |   |
| Deferred  income taxes                                                                         |       | 1,010                                              |       | 237 |   |
| Mark  to market of foreign currency put option contract                                        |       | (1,142                                             | )          | — |   |
| Stock  compensation expense                                                                    |       | 1,024                                              |       | 1,220 |   |
| Changes  in assets and liabilities:                                                            |       |                                               |       |   |   |
| Accounts  receivable                                                                           |       | (2,029                                             | )          | 4,277 |   |
| Unbilled  costs and fees                                                                       |       | 844                                                |       | 926 |   |
| Inventories                                                                                    |       | (1,948                                             | )          | 2,064 |   |
| Prepaid  expenses and other assets                                                             |       | 631                                                |       | (1,733 | ) |
| Accounts  payable                                                                              |       | (1,895                                             | )          | (330 | ) |
| Accrued  income taxes                                                                          |       | (3,915                                             | )          | 2,896 |   |
| Customer  deposits                                                                             |       | (2,510                                             | )          | 4,638 |   |
| Deferred  revenue                                                                              |       | (6,822                                             | )          | (12,197 | ) |
| Accrued  expenses and other liabilities                                                        |       | (5,717                                             | )          | (5,787 | ) |
| Net  cash (used for) provided by operating activities                                          |       | (13,719                                            | )          | 4,925 |   |
|                                                                                           |       |                                               |       |   |   |
| **Cash flows from investing activities:**                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchases  of short-term investments                                                           |       | (10,571                                            | )          | (52,267 | ) |
| Proceeds  from sales and maturities of short-term investments                                  |       | 78,569                                             |       | 17,565 |   |
| Purchases  of property and equipment                                                           |       | (1,230                                             | )          | (981 | ) |
| Net  cash provided by (used for) investing activities                                          |       | 66,768                                             |       | (35,683 | ) |
|                                                                                           |       |                                               |       |   |   |
| **Cash flows from financing activities:**                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Proceeds  from exercise of stock options                                                       |       | 220                                                |       | 543 |   |
| Repurchase  of shares of common stock                                                          |       | —                                             |       | (2,922 | ) |
| Repayment  of leasehold financing                                                              |       | (323                                               | )          | (286 | ) |
| Payment  of common stock dividend                                                              |       | (2,707                                             | )          | (1,767 | ) |
| Reduction  of income taxes paid due to the tax benefit from employee stock option  expense     |       | 255                                                |       | 57 |   |
| Net  cash used for financing activities                                                        |       | (2,555                                             | )          | (4,375 | ) |
|                                                                                           |       |                                               |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                                          |       | 50,494                                             |       | (35,133 | ) |
| Cash  and cash equivalents at beginning of period                                              |       | 34,912                                             |       | 105,419 |   |
| Cash  and cash equivalents at end of period                                                    |       | $                                                  | 85,406     |   | $ |  70,286 |   |

 

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

 

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.   GENERAL**

 

Thecondensed consolidated financial statements include the accounts of the Companyand its wholly owned subsidiary. All significant intercompany transactions andbalances 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-ray inspectionsystems for critical detection and security screening solutions for saleprimarily to U.S. and foreign government agencies.  The Company has onlyone 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.

 

The other significantaccounting policies followed by the Company and its subsidiary in preparing itsconsolidated financial statements are set forth in Note 1 to the consolidatedfinancial statements included in its Form 10-K for the year ended March31, 2010.  There have been no changes toour critical accounting policies during the three months ended June 30, 2010.

 

**ComprehensiveIncome**

 

Comprehensiveincome is comprised of the following:

 
| ** **                | ** ** | **Three months ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| **(In thousands)**   | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009** | ** ** |
| Net  income               |       | $                                | 6,801      |   | $ | 7,336 |   |
| Other  comprehensive loss |       | (32                              | )          | — |   |
| Comprehensive  income     |       | $                                | 6,769      |   | $ | 7,336 |   |

 

**Stock Repurchase Program**

 

The Board of Directors approved a Stock Repurchase Program whichauthorized the Company to repurchase up to $35.0 million of shares of itscommon stock from time to time on the open market.   During the three months ended June 30, 2010,the Company did not purchase any shares under this Stock RepurchaseProgram.  As of June 30, 2010, themaximum dollar value of shares that may still be purchased under the program is$23,807,000.

 

**Dividends**

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

 

On August 9, 2010, the Company declared a cash dividend of $0.30 pershare. The dividend will be paid on September 2, 2010 to all shareholders ofrecord at the close of business on August 23, 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 Changes**

 

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 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. Earlyadoption 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 our 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 $1,024,000 and $1,220,000 of share-based compensation costsin the consolidated statements of operations for the three months ended June30, 2010 and June 30, 2009, respectively. The income tax benefit recognizedrelated to this compensation for the three months ended June 30, 2010 and June30, 2009 was approximately $363,000 and $430,000, respectively.  Stock compensation for the quarter ended June30, 2010 decreased in comparison to the prior period as the long-term incentiveplan award granted in the current fiscal year will be paid in cash upon theachievement of performance goals, as opposed to a combination of restricted stock,options and/or cash as was awarded in prior years.

 

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

 
| ** **                                         | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**                            | ** ** | **June 30, 2010**                | ** ** | **June 30, 2009** | ** ** |
| Cost  of revenues                                  |       | $                                | 153        |   | $ | 209 |   |
| Selling,  general and administrative expenses      |       | 871                              |       | 1,011 |   |
| Total  share-based compensation expense before tax |       | $                                | 1,024      |   | $ | 1,220 |   |

 

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 volatility overthe expected term; (3) a risk-free interest rate; and (4) the expected dividendyield. The expected term represents the expected period of time the Companybelieves the options will be outstanding based on historical information.Estimates of expected future stock price volatility are based on the historicvolatility of the Company’s common stock and the risk free interest rate isbased on the U.S. Zero-Bond rate. The expected dividend yield was based on theexpectation we would continue paying dividends on our common stock at the samerate for the foreseeable future.

 

Therewere 4,181 and 18,993 options granted in the three month period ended June 30,2010 and June 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:

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009** | ** ** |
| **Assumptions:**         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Option  life             |       | 5  years                         |       | 5  years |   |
| Risk-free  interest rate |       | 2.6                              | %          | 2.3 | % |
| Stock  volatility        |       | 43                               | %          | 49 | % |
| Dividend  yield          |       | 1.6                              | %          | 1.3 | % |

 

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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 June 30, 2010: the 1995Combination Plan, the 1997 Non-Qualified Option Plan, the 1998 Non-QualifiedOption Plan, the 1999 Combination Plan, the 2000 Combination Plan, the 2002Combination Plan, the 2003 Stock Plan for Non-Employee Directors and the 2005Equity and Incentive Plan. There are 3,980,000 shares authorized under theseplans. As of June 30, 2010, 361,000 shares remain available for future issuanceunder 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 theseplans are granted at fair market value and have a term of five or ten yearsfrom the date of grant.

 

**Stock Options**

 

Thefollowing tables summarize stock option activity for the three months endedJune 30, 2010.

 
| ** **                                | ** ** | **Number of********Shares** | ** ** | **Weighted********Average********Exercise********Price** | ** ** | **Weighted********Average********Contractual********Life** | ** ** | **Aggregate  Intrinsic********Value** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | ** **                       | ** ** | ** **                                               | ** ** | ** **                                                 | ** ** | ** **                            | ** ** |
| **Options outstanding at March 31, 2010** |       | 613,934                          |       | $                                                        | 47.38      | ** **                                                 | 5.27       |                                  |       |   |
| Grants                                    |       | 4,181                            |       | 75.82                                                    |       |                                                       |       | $                                     | 2,000      |   |
| Exercises                                 |       | (14,460                          | )          | 15.12                                                    |       |                                                       |       |                                  |       |
| Cancellations                             |       | —                           |       | —                                                   |       |                                                       |       |                                  |       |
| **Options outstanding at June 30, 2010**  |       | 603,655                          |       | $                                                        | 48.35      |                                                       | 5.18       |                                  |       |   |
| **Options exercisable at June 30, 2010**  |       | 529,620                          |       | $                                                        | 46.37      |                                                       |       |                                  | $          | 15,803,000 |   |

 

Informationrelated to the stock options outstanding as of June 30, 2010 is as follows:

 
| **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                  |       | 73,645                           |       | 3.22                                                                                |       | $                                                 | 13.13      |                                                | 73,645     |                                                                 | $          | 13.13 |   |
| $20.01  - $30.00                            |       | 66,634                           |       | 3.99                                                                                |       | 28.13                                             |       | 66,634                                              |       | 28.13                                                                |       |
| $30.01  - $40.00                            |       | 31,650                           |       | 4.43                                                                                |       | 39.07                                             |       | 31,650                                              |       | 39.07                                                                |       |
| $40.01  - $50.00                            |       | 71,000                           |       | 5.08                                                                                |       | 45.84                                             |       | 71,000                                              |       | 45.84                                                                |       |
| $50.01  - $60.00                            |       | 129,921                          |       | 5.14                                                                                |       | 53.33                                             |       | 126,060                                             |       | 53.39                                                                |       |
| $60.01  - $70.00                            |       | 226,624                          |       | 6.25                                                                                |       | 64.45                                             |       | 160,631                                             |       | 65.35                                                                |       |
| $70.01  - $75.82                            |       | 4,181                            |       | 9.85                                                                                |       | 75.82                                             |       | —                                              |       | —                                                               |       |
| $  6.50 - $75.82                  |       | 603,655                          |       | 5.18                                                                                |       | $                                                 | 48.35      |                                                | 529,620    |                                                                 | $          | 46.37 |   |

 

Asof June 30, 2010, there was approximately $591,000 of unrecognized compensationcosts related to options granted. This cost is expected to be recognized over aweighted average period of 1.2 years.  Non-vested common stock options are subject to the risk offorfeiture until the fulfillment of specified conditions.

 

**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 andrestricted stock units may also be granted to other employees with vestingperiods that range from one to three years. In addition, 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. As of June 30, 2010 there was$3,325,000 of total unrecognized compensation cost related to non-vestedrestricted stock and stock

 

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unit awards granted underthe Company’s stock plans. This cost is expected to be recognized over aweighted average period of 1.4 years.

 

Thefollowing table summarizes the status of the Company’s non-vested restrictedstock and stock unit awards for the three months ended June 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                            |       | (2,411                           | )          | 65.44                                                                   |        |
| Forfeited                         |       | —                           |       | —                                                                  |        |
| **Outstanding at June 30, 2010**  |       | 95,195                           |       | $                                                                       | 60.72       |   |

 

**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 June 30, 2010 and March 31, 2010 were as follows:

 
| **(In thousands)**                                   | ** ** | **June 30,******** 2010** | ** **                                                    | **March 31,******** 2010** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------|---------------------------------------------------------------|--------------------------------------|------------|
| Raw  materials, completed sub-assemblies, and spare parts |       | $                                   |           23,622 |                                 | $          |           19,821 |   |
| Work-in-process                                           |       | 20,780                              |                                                          | 15,813                               |       |
| Finished  goods                                           |       | 2,815                               |                                                          | 9,753                                |       |
| Total                                                     |       | $                                   |           47,217 |                                 | $          |           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 endedJune 30, 2010 and June 30, 2009, common stock equivalents of 25,000 and154,000, respectively, are excluded from diluted earnings per share, as theireffect is anti-dilutive.

 
| ** **                                                                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands except per share amounts)**                            | ** ** | **June 30,  2010**          | ** ** | **June 30,  2009** | ** ** |
| **Earnings Per Share - Basic:**                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net  income                                                                                     |       | $                                | 6,801      |   | $ | 7,336 |   |
| Weighted  average number of common shares outstanding — basic                              |       | 9,021                            |       | 8,814 |   |
| Net  income per share — basic                                                              |       | $                                | 0.75       |   | $ | 0.83 |   |
| **Earnings Per Share - Diluted:**                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net  income                                                                                     |       | $                                | 6,801      |   | $ | 7,336 |   |
| Weighted  average number of common shares outstanding                                           |       | 9,021                            |       | 8,814 |   |
| Assumed  exercise of stock options and restricted stock units, using the treasury  stock method |       | 198                              |       | 196 |   |
| Weighted  average number of common and potential common shares outstanding — diluted       |       | 9,219                            |       | 9,010 |   |
| Net  income per share — diluted                                                            |       | $                                | 0.74       |   | $ | 0.81 |   |

 

**5.  LINE OF CREDIT**

 

OnNovember 13, 2009, the Company modified its Loan and Security Agreement withSilicon Valley Bank to extend the facility through November 12, 2010 and todecrease the facility from $40.0 million to $30.0 million to support theCompany’s routine letters of credit and working capital needs.  If the Company maintains 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

 

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certain reserves, and minusthe 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 the amountof outstanding letters of credit adjusted for certain reserves and minus theprincipal 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 June 30, 2010). The credit agreement iscollateralized 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 June 30, 2010, the Company was incompliance 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 June 30, 2010, the Company hadoutstanding $22,322,000 in standby letters of credit against the Loan andSecurity Agreement with $7,678,000remaining availability.  The outstandingletters of credit are primarily for guaranteeing performance on certain internationalprojects.   No amounts have been drawnagainst these letters of credit. At June 30, 2010, the Company had a restrictedcash balance of $35,000 related to certain bank related fees.

 

**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 equity securities,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 June 30, 2010 and March 31, 2010:

 
| **(In thousands)**                            | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| **Level  1 — Financial Assets**               |       |                    |       |                     |       |
| U.S.  Treasury bills                               |       | $                       | 9,999      |                     | $          | 35,005 |   |
| **Level  2 — Financial Assets**               |       |                    |       |                     |       |
| Corporate  debentures/bonds                        |       | 41,546                  |       | 42,588                   |       |
| Government  agency bonds                           |       | —                  |       | 28,589                   |       |
| Commercial  paper                                  |       | 15,993                  |       | 25,983                   |       |
| Money  market funds                                |       | 74,640                  |       | 19,705                   |       |
| Certificates  of deposit                           |       | 12,000                  |       | 12,001                   |       |
| Total  Level 2 Financial Assets                    |       | 144,179                 |       | 128,866                  |       |
| Total  cash equivalents and short-term investments |       | $                       | 154,178    |                     | $          | 163,871 |   |

 

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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 in the Consolidated Statements of Stockholders’ Equity andComprehensive Income.

 
| ** **                    | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** **   |
|-------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|--------------|
| **2010:**                     |       |                |       |                         |       |                          |       |                |         |
| Available  for Sale:          |       |                |       |                         |       |                          |       |                |         |
| Corporate  debentures/bonds   |       | $                   | 41,562     |                         | $          | 8                             |       | $                   | (24          | ) | $ | 41,546 |   |
| Treasury  bills               |       | 9,998               |       | 1                            |       | —                        |       | 9,999               |         |
| Commercial  paper             |       | 11,996              |       | —                       |       | —                        |       | 11,996              |         |
| Certificates  of deposit      |       | 12,000              |       | —                       |       | —                        |       | 12,000              |         |
| Total  short-term investments |       | $                   | 75,556     |                         | $          | 9                             |       | $                   | (24          | ) | $ | 75,541 |   |
| Cash  equivalents:            |       |                |       |                         |       |                          |       |                |         |
| Money  market funds           |       | $                   | 74,640     |                         | $          |  —                  |       | $                   |  — |   | $ | 74,640 |   |
| Commercial  paper             |       | 3,997               |       | —                       |       | —                        |       | 3,997               |         |
| Total  cash equivalents       |       | $                   | 78,637     |                         | $          |  —                  |       | $                   | —       |   | $ | 78,637 |   |

 

**Derivative FinancialInstruments**

 

The Companypurchased in the fourth quarter of fiscal year 2010 a foreign currency putoption contract to manage the risk associated with foreign currency exchangerate fluctuations on an anticipated obligation and transaction, which wasoutstanding at year end.  The foreigncurrency put option contract was paid in full at execution and is related toour activities in Europe. The put option contract provides us with the optionto exchange Euros for U.S. dollars at a fixed exchange rate such that, if theEuro were to depreciate against the U.S. dollar to predetermined levels as setby the contract, we could exercise our option and mitigate our foreign currencyexchange losses. This contract did not qualify for hedge accounting treatmentand is marked-to-market through the results of operations at the end of theperiod. The Company recorded a net gain on this contract of $1,142,000 for thequarter ended June 30, 2010 which is included in other income in the condensedconsolidated statements of operations. The Company had no option contracts outstanding during the quarter endedJune 30, 2009.

 

**7.   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 itsprojections of future income, and records a valuation allowance against any netdeferred tax assets if it is more likely than not that they will not berealized.

 

TheCompany is currently open to audit under the statute of limitations by the InternalRevenue Service for the years ending March 31, 2007 through 2009 and forvarious state taxing authorities for the years ending March 31, 2006 through2009.  The Company recently completed anaudit by the Internal Revenue Service for tax years ended March 31, 2006 and2007, the results of which did not have a material impact on the Company’sfinancial position or results of operations.  The Company believes that there are no uncertain tax positions thatrequired a reserve as of June 30, 2010.

 

**8.   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 monthsended June 30, 2010 and 2009 is as follows:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**                           | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009** | ** ** |
| Warranty  accrual at beginning of period          |       | $                                |  965  |   | $ |  1,130 |   |
| Accruals  for warranties issued during the period |       | 178                              |       | 308 |   |
| Adjustment  of preexisting accrual estimates      |       | (71                              | )          | (455 | ) |
| Warranty  costs incurred during period            |       | (238                             | )          | (175 | ) |
| Warranty  accrual at end of period                |       | $                                |  834  |   | $ |  808 |   |

 

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**9.   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 additionalhigh bay manufacturing space.  The Company was responsible for a portionof the construction costs and was deemed to be the owner of the building duringthe construction period under FASB ASC 840,*Leases.* In January 2007, theCompany 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-LeasebackTransactions*.  Based on this review, it was determined that thelease did not qualify for sale-leaseback treatment in accordance with FASB ASC840-40.  As a result, building and tenant improvement and associated leasefinancing liabilities remain on the Company’s books.  The lease financingliability is being amortized over the lease term based on the paymentsdesignated in the agreement and the building and tenant improvement assets arebeing depreciated on a straight line basis over the lesser of their usefullives or the lease term.

 

**10.   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 in February 2011.Total remaining lease payments at June 30, 2010 totaled $251,000.  Noaccrual for this contingent liability has been recorded at June 30, 2010 asmanagement believes the probability of payment 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’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements that involverisks and uncertainties. The statements contained in this report that are notpurely 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 to us upto, and including, the date of this report, and we assume no obligation toupdate any such forward-looking statements. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of certain 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 Form10-Q. You should carefully review those factors and also carefully review therisks outlined in other documents that we file from time to time with theSecurities and Exchange Commission, or the SEC.

 

**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.

 

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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 first quarter of fiscal 2011 decreased by2% to $53,643,000 compared to the first quarter of fiscal 2010 revenues of$54,692,000. We reported income before provision for income taxes of$10,383,000 for the first quarter of fiscal 2011 compared to income beforeprovision for income taxes of $11,374,000 for the first quarter of fiscal2010.  Net income for the first quarterof fiscal 2011 was $6,801,000 ($0.74 per share, on a diluted basis) as comparedto net income of $7,336,000 ($0.81 per share, on a diluted basis) for the firstquarter of fiscal 2010.

 

**Critical Accounting Policies**

 

We believe that severalaccounting policies are important to understanding our historical and futureperformance. We refer to these policies as “critical” because these specific areas generallyrequire us to make judgments and estimates about matters that are uncertain atthe time we make the estimate, and different estimates—which also would havebeen reasonable—could have been used, which would have resulted indifferent financial results.

 

Thecritical accounting policies we identified in our most recent Annual Report onForm 10-K for the fiscal year ended March 31, 2010 are policies related torevenue recognition, 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 filed withthe SEC on June 9, 2010.  There havebeen no changes to our critical accounting policies during the three monthsended June 30, 2010.

 

**Resultsof Operations**

 

Net revenues for the first quarter ended June 30, 2010 decreased by$1,049,000 to $53,643,000 compared to the corresponding period a yearago.  This decrease is attributable primarily to a decrease of $2,310,000in product sales.  Factors contributingto the product sales decrease include: 1) a $2,275,000 decrease in shipments ofZ Backscatter systems; and 2) a decrease of $4,625,000 in CargoSearch systemrevenues as compared to the corresponding prior year period attributable tolower volume as certain projects’ progress was impeded due to customer sitepreparation delays.  These decreases wereoffset in part by an increase of $4,714,000 in ParcelSearch system revenues as comparedto the prior year related to one multi unit order partially fulfilled in thequarter.  Service revenues increased by$1,261,000 to $21,169,000 compared to the first quarter of fiscal 2010 dueprimarily to increased service contract revenue as a greater number of systemswere under contract as compared to the prior year period.

 

Total cost of sales and contracts for the first quarter of fiscal 2011increased by $759,000 to $29,831,000 as compared to the corresponding period ayear ago. Cost of sales and contracts related to product revenues decreased by$154,000 to $18,790,000 as compared to the corresponding period a yearago.  Cost of product sales and contract revenues represented 58% ofrevenues versus 55% of revenues for the corresponding period last year. The resultant decrease in gross margin percentage from the prior year is dueprimarily to the mix of products sold in the quarter. In the three months endedJune 30, 2010, 52% of product revenues were derived from our higher margin Z BackscatterSystems products as compared to 55% for the three months ended June 30,2009.  In addition in the first quarterof fiscal 2011, a greater percentage of revenues were derived from sales of ourParcelSearch products which realize comparatively lower gross margins. The costof service revenues for the quarter ended June 30, 2010 increased by $913,000to $11,041,000 as compared to the corresponding period a year ago.  Costof service revenues represented 52% of revenues versus 51% for the correspondingperiod last year.  This decrease in grossmargin percentage from the prior year is due primarily to higher materialrequirements to service systems under contract as compared to the correspondingperiod last year.

 

Selling, general and administrative expenses for the first quarter offiscal 2011 increased by $1,111,000 to $9,813,000 as compared to thecorresponding period a year ago.  Selling, general and administrativeexpenses represented 18% of revenues in the current period compared to 16% forthe corresponding 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 attributable to increasedheadcount ($571,000); 2) an increase in incentive compensation expense($216,000); and 3) an increase in sales and marketing related expenses($310,000). Legal fees declined $133,000 as compared to the prior year.  The current quarter included significant legalbills related to due diligence activities on a potential acquisition which hasbeen abandoned.   The prior year quarterincluded significant legal bills related to a patent litigation which wassettled during that quarter.

 

Company funded research and development expenses for the first quarterof fiscal 2011 decreased by $796,000 to $5,010,000 as compared to thecorresponding period last year.  Research and development expensesrepresented 9% of revenues in the current quarter compared to 11% for thecorresponding period last year.  This decrease in research and developmentexpenses in the quarter was forecasted and was attributable to engineeringefforts being expended on other routine, non-research and development,production activities.  Research anddevelopment activities performed in the quarter focused on the development ofnew product options and

 

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productenhancements.

 

Other income was $1,394,000 for the first quarter of fiscal 2011 ascompared to $262,000 for the corresponding period a year ago.  Thisincrease in other income is attributable primarily to a mark to market gainrecognized on a foreign currency put option contract which appreciatedsignificantly during the quarter due to the volatility of the Euro during theperiod.  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 recordedin our Condensed Consolidated Statements of Operations.

 

We reported pre-tax income of $10,383,000 in the three months endedJune 30, 2010 as compared to pre-tax income of $11,374,000 in the correspondingperiod a year due to the factors described above.

 

Our effective tax rate for the three months ended June 30, 2010 was34.5% as compared to 35.5% for the corresponding period a year ago.  Thisdecline in the tax rate is attributable primarily to a reduced state tax apportionmentand an increase in the qualifying manufacturing deduction as compared to theprior year.

 

We had net income of $6,801,000 for the first quarter of fiscal 2011 ascompared to net income of $7,336,000 in the first quarter of fiscal 2010. The significant factors contributing to these results are noted in the abovesections.

 

**Liquidity and Capital Resources**

 

Cashand cash equivalents increased by $50,494,000 to $85,406,000 at June 30, 2010compared to $34,912,000 at March 31, 2010. This increase is attributableprimarily to the net income earned in the period offset by certain non-cashitems and a net decrease of $67,998,000 in short-term investments as weliquidated certain short-term investments into cash equivalents during thequarter.  Offsetting these inflows wereother operating cash outflows including: 1) decreases in deferred revenue of $6,822,000 attributable primarily torevenue earned on prepaid system orders and other prepaid service contracts inthe period; 2) decreases in accrued expenses of $5,717,000 attributableprimarily to the payment of incentive compensation and the payment of certainproject related costs, both of which had been accrued for at year end; 3)decreases in customer deposits of $2,510,000 as revenue was earned againstdeposits received in prior periods; 4) increases in accounts receivable of$2,029,000 due to the timing of certain milestone invoices and payments; and5)  increases in inventories of$1,948,000 from year end. In addition, we paid $2,707,000 in dividends toshareholders as part of our quarterly dividend program.

 

OnNovember 13, 2009, we modified our Loan and Security Agreement with SiliconValley Bank to extend the facility through November 12, 2010 and to decreasethe facility from $40.0 million to $30.0 million to support our routineletters of credit and working capital needs. If we maintain a cash and investments balance of $40.0 million orgreater, then the maximum amount available for borrowing under the facility is$30.0 million minus the amount of all outstanding letters of credit lesscertain reserves, and minus the outstanding principal balance of anyadvances.  If our cash and investmentbalance falls below $40.0 million for a period of 30 consecutive days, then themaximum amount available for borrowings under the facility is the lesser of (i)$30.0 million, 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 June 30, 2010). 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 June 30, 2010, we were in compliance with these covenants.

 

Inthe normal course of business, we may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of 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 June 30, 2010, we had outstanding$22,322,000 in standby letters of credit against the Loan and SecurityAgreement with $7,678,000 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 June 30, 2010, we had a restricted cash balance of$35,000 related to certain bank related fees.

 

**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 statements of operations for the period and wereimmaterial. In addition, at June 30, 2010, we held a foreign currency putoption which provides 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.  The aggregate effect of a hypothetical 10percent increase in the value of the U.S. dollar would be an increase in thefair value of the foreign exchange option contracts of approximately $2.7million. The aggregate effect of a hypothetical 10 percent decrease in the valueof the U.S. dollar would be a decrease in the fair value of the foreignexchange option contracts of approximately

 

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$1.2 million.

 

Asof June 30, 2010, we held short-term investments consisting of U.S. treasurybills, money market funds, commercial paper, corporate debentures/bonds, andcertificates of deposit. Our primary objective with our investment portfolio isto invest available cash while preserving principal and meeting liquidityneeds. These investments have an average interest rate of approximately 0.409%and are subject to interest rate risk. As a result of the average maturity andconservative nature of the investment portfolio, a sudden change in interestrates would not have a material adverse effect on the value of theseinvestments.  To minimize this risk, wemaintain a significant portion of our cash balances in money market funds. Ingeneral, money market funds are not subject to interest rate risk because theinterest paid on such funds fluctuates with the prevailing interest rate.

 

**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 future resultsset forth under Item 1A. “Risk Factors” in our Form 10-K for the yearended March 31, 2010. There have been no material changes from the factorsdisclosed in our Form 10-K for the year ended March 31, 2010, although we maydisclose changes to such factors or disclose additional factors from time totime in our future filings with the Securities and Exchange Commission.

 

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

 

OurBoard of Directors approved a Stock Repurchase Program which authorizes as torepurchase up to $35 million of shares of our common stock from time to time onthe open market.  As of June 30, 2010,the maximum dollar value of shares that may yet be purchased under this programis $23,807,000.

 

Duringthe quarter ended June 30, 2010, we did not purchase any securities under thisStock Repurchase Program.

 

**ITEM 6 — EXHIBITS**

 

Seethe exhibit index following the signature page to this quarterly report.

 

Theinformation required by Exhibit Item 11 (Statement re: Computation ofIncome per Common and Common Equivalent Share) may be found in Note 4 to theUnaudited Condensed Consolidated Financial Statements 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: August 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**                                                                                                                         |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                          |
| 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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