American Science and Engineering (ASEI) develops and manufacturers X-ray detection devices used for security screening at airports and commercial ports. The company has two primary technologies from which it derives the majority of its revenue: the Z Backscatter technology detects plastic explosives, drugs, and other contraband items that may be hidden inside other items, and the Shaped Energy X-ray inspection technology which is able to scan large, dense shipments with less radiation than many other technologies. These technologies are mainly employed in devices screening air cargo, trucks, pallets, and cargo containers; the company also makes products for screening smaller parcels, baggage, mail, and travelers. Sales to the US Government or government subcontractors account for more than 60% of total sales.
Domestic Sales (68% of Net Sales)
International Sales (32% of Net Sales)
ASEI's success is dependent on both its ability to produce effective products but also on governments' spending for homeland defense. The global security industry has seen rapid changes since September 11, 2001 and with the US wars in Iraq and Afghanistan. ASEI's primary customers are governments and government contractors, so they are vulnerable to any changes in government funding for national defense, transportation security and screening, or military operations.
In 2011, sales of devices using the company's Z Backscatter detection system increased $18 million. The increase was driven by higher sales of a militarized detection trailer (introduced in 2009) and the company's mobile backscatter detection van. Two agencies of the US government accounted for 30% and 12% of the company's sales, while sales to an international government accounted for 11% of total sales.
The threat of terrorism jumped to the forefront of American foreign policy and defense spending after September 11, 2001. Since that time, defense spending has increased nearly $200 billion in order to pursue wars in Afghanistan and Iraq, but also to secure the US borders and ensure the safety of air travel and international shipping. ASEI's products are sold to governments and government contractors around the world to assist in the noninvasive X-ray screening of cargo, travelers, and vehicles. A causal relationship between terrorism and levels of defense spending is unclear but so long as governments remain vigilant in guarding the security of their borders, ports, and shipping industries, there will be a demand for screening devices. The company is highly exposed to the forces that govern government spending and any decreased allocations for port, air cargo, or other shipping security would pose a significant challenge to ASEI's continued success. ASEI's reputation and revenue stream would suffer greatly in the event of a failure of its equipment to detect a security threat that later caused harm.
Most of ASEI's products utilize the company's Z Backscatter X-ray technology, which costs more than many of the competitors' traditional transmission X-ray screening devices. However the company maintains that its technology results in significantly more seizures due to its higher resolution and more definitive images. The company acknowledges the difference in pricing but believes that customers are willing to pay for the improved quality. The flip side of this coin however, is that the company's products must perform better than the competition and result in increased safety. The failure of ASEI's equipment to detect a potential threat would significantly challenge the company's ability to continue charging premium prices. The company must also deal with government bureaucracies that may be forced to cut costs, depending on their various budget allocations.