October 03, 2013

By Calvin Biesecker

Chicago—Looking to expand its presence in key growth areas, American Science and Engineering's [ASEI] new chief executive says the company will be examining potential acquisitions both to broaden its product portfolio and increase its market presence in areas such as aviation security.

In August, Charles Dougherty, who became AS&E's president and CEO last spring, highlighted ports and border security as one key growth area and aviation security as another (HSR, Aug. 14).

In the aviation security market, growth can be both organic and inorganic, he tells HSR at the annual ASIS International conference here. He says about 10 percent of the company's current sales come through aviation security, which includes international sales of its Gemini X-Ray parcel screening system, Z Backscatter Van and Sentry Portal for screening of air cargo.
In its last fiscal year AS&E posted nearly $187 million in sales.

In the U.S. the Transportation Security Administration (TSA) is testing the company's whole body imaging system, the SmartCheck Advanced Personnel Screener along with offerings from L-3 Communications [LLL] and Smiths Detection for a potential contract award to screen passengers at aviation security checkpoints. Dougherty says this award has helped the company establish a "beachhead" with TSA.

While there is no guarantee of a contract for SmartCheck, Dougherty says that AS&E is "building a great reputation" within TSA related to the testing around the body scanner. He said the agency "raves about our execution" from a program perspective.

"As we acquire a broader portfolio, TSA will become even more comfortable with us," Dougherty said.

TSA previously pilot tested an earlier version of SmartCheck for use in secondary screening but in 2009 and 2010 the agency awarded deployment contracts to L-3 and OSI Systems' [OSIS] Rapiscan division for the body scanners, leaving AS&E to pursue business with the U.S. military and international customers for the system. Earlier this year TSA removed Rapiscan's Advanced Imaging Technology systems from the nation's airports because it was unable to meet new privacy requirements.

Dougherty said on the company's first quarter earnings call in August that boosting its presence in the ports and borders, and aviation security markets will help smooth out AS&E's revenue stream, which is often lumpy, and has been dependent on military sales and strong demand from international customers.

Some of that military business is slowing and Dougherty said that the aviation market offers "the highest degree of certainty in attaining growth projections" as air travel continues to expand. He sees a more "consistent run rate" for the company by broader and deeper penetration of the aviation space.

Targeted Acquisitions

The broader portfolio that AS&E is eying could include a targeted acquisition for doing checked baggage screening, which is currently done with computed tomography explosive detection systems in the U.S., Dougherty said. The ideal acquisition is to obtain established positions with products that are qualified by either the TSA or European regulators or both, he said.

AS&E is interested in filling out its product portfolio with additional point detection products, not just in aviation security but elsewhere, Dougherty said. He's also interested in systems that can do radiation detection and providing customers with a broader offering of transmission X-Ray products along with AS&E's bread-and-butter backscatter-based imaging systems to meet opportunities for integrated screening solutions and turnkey screening services.

Dougherty said that AS&E wants to be one of the top two companies in the ports and borders, and aviation security markets.

Currently only one of AS&E's key competitors, Rapiscan, is providing turnkey services to customers. Depending on the customer, Rapiscan provides different imaging systems, and then provides the services to screen cargo and containers on a fee-for-scan basis. OSI Systems projects that this turnkey model will not only help it grow over the long-term but provide more revenue stability and predictability.

Dougherty believes that AS&E can be a player in the turnkey services space eventually. The danger, though, is that the market opportunities are in areas with riskier political climates, which means the company will have to approach these opportunities with caution, he says.

Still, he says the company has "framed" the appropriate sized opportunities it will pursue in providing turnkey services and expects to go after at least one opportunity in the next year or two.
Rapiscan acquired a small company that provided screening services to help create its turnkey services model. Dougherty says AS&E has hired an individual with expertise in this space to help the company establish its business here.