##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the Quarterly Period Ended July 1, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition period from  to
 Commission File Number 000-08193
 ARGON ST, INC.
  Delaware
    
    38-1873250(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
  (703) 322-0881
  þ o
  o þ o
  o þ




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##### 



ARGON ST, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
 FOR THE QUARTER ENDED JULY 1, 2007
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at July 1, 2007 and September 30, 2006
    
    
    3Condensed Consolidated Statements of Earnings for the three and nine months ended July 1, 2007 and July 2, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended July 1, 2007 and July 2, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11-20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risks
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    21Item 1A.
    
    Risk Factors
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3.
    
    Defaults Upon Senior Securities
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 5.
    
    Other Information
    
    
    21Item 6.
    
    Exhibits
    
    
    22Signatures
    
    
    23Exhibits
    
    
    24-26
 2




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##### 



ARGON ST, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
 July 1, 2007
    
    
    September 30, 2006(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    47,669
    
    
    $
    33,498Accounts receivable, net
    
    
    95,917
    
    
    
    86,842Inventory
    
    
    4,076
    
    
    
    3,954Income taxes receivable
    
    
    369
    
    
    
    23Deferred project costs
    
    
    
    
    
    
    5,597Deferred income tax asset
    
    
    2,870
    
    
    
    2,083Prepaids and other
    
    
    1,296
    
    
    
    1,481TOTAL CURRENT ASSETS
    
    
    152,197
    
    
    
    133,478Property, equipment and software, net
    
    
    18,747
    
    
    
    16,726Goodwill
    
    
    148,818
    
    
    
    148,719Intangibles, net
    
    
    11,452
    
    
    
    13,200Other assets
    
    
    1,906
    
    
    
    1,408TOTAL ASSETS
    
    $
    333,120
    
    
    $
    313,531LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    19,275
    
    
    $
    19,124Accrued salaries and related expenses
    
    
    14,122
    
    
    
    10,678Deferred revenue
    
    
    11,364
    
    
    
    13,053Other liabilities
    
    
    570
    
    
    
    452TOTAL CURRENT LIABILITIES
    
    
    45,331
    
    
    
    43,307Deferred income tax liability, long term
    
    
    3,836
    
    
    
    2,937Deferred rent and other liabilities
    
    
    1,295
    
    
    
    1,591Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares authorized,
22,532,265 and 22,313,709 shares issued
at July 1, 2007 and September 30, 2006
    
    
    225
    
    
    
    223Additional paid in capital
    
    
    215,938
    
    
    
    212,610Treasury stock at cost, 126,245 shares
    
    
    (534
    )
    
    
    (534
    )Retained earnings
    
    
    67,029
    
    
    
    53,397TOTAL STOCKHOLDERS EQUITY
    
    
    282,658
    
    
    
    265,696TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    333,120
    
    
    $
    313,531
  3




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##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(In Thousands, Except Per Share Data)
 Third Quarter Ended
    
    
    Nine Months EndedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006CONTRACT REVENUES
    
    $
    73,660
    
    
    $
    68,902
    
    
    $
    198,375
    
    
    $
    192,690COST OF REVENUES
    
    
    61,599
    
    
    
    56,383
    
    
    
    159,254
    
    
    
    152,821GENERAL AND
ADMINISTRATIVE
EXPENSES
    
    
    5,631
    
    
    
    4,660
    
    
    
    18,482
    
    
    
    15,864INCOME FROM
OPERATIONS
    
    
    6,430
    
    
    
    7,859
    
    
    
    20,639
    
    
    
    24,005INTEREST INCOME, NET
    
    
    341
    
    
    
    544
    
    
    
    938
    
    
    
    899INCOME BEFORE
INCOME TAXES
    
    
    6,771
    
    
    
    8,403
    
    
    
    21,577
    
    
    
    24,904PROVISION FOR
INCOME TAXES
    
    
    2,485
    
    
    
    3,237
    
    
    
    7,945
    
    
    
    9,613NET INCOME
    
    $
    4,286
    
    
    $
    5,166
    
    
    $
    13,632
    
    
    $
    15,291EARNINGS PER SHARE
(Basic)
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.61
    
    
    $
    0.71EARNINGS PER SHARE
(Diluted)
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.60
    
    
    $
    0.69WEIGHTED-AVERAGE
SHARES
OUTSTANDINGBasic
    
    
    22,399
    
    
    
    22,120
    
    
    
    22,319
    
    
    
    21,495Diluted
    
    
    22,819
    
    
    
    22,717
    
    
    
    22,788
    
    
    
    22,127
  4




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##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In Thousands)
 Nine Months EndedJuly 1, 2007
    
    
    July 2, 2006Cash flows from operating activitiesNet income
    
    $
    13,632
    
    
    $
    15,291Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,399
    
    
    
    4,054Deferred
income tax provision (benefit)
    
    
    124
    
    
    
    (985
    )Stock-based compensation
    
    
    1,489
    
    
    
    1,489Bad debt expense
    
    
    30
    
    
    
    Loss on sale of equipment
    
    
    2
    
    
    
    Change in:Accounts receivable
    
    
    (9,169
    )
    
    
    18,808Inventory
    
    
    (122
    )
    
    
    (613
    )Deferred project costs
    
    
    5,597
    
    
    
    Prepaids and other
    
    
    185
    
    
    
    (416
    )Accounts payable and accrued expenses
    
    
    151
    
    
    
    (13,464
    )Accrued salaries and related expenses
    
    
    3,444
    
    
    
    2,734Deferred revenue
    
    
    (1,689
    )
    
    
    (3,211
    )Income taxes receivable
    
    
    7
    
    
    
    1,927Deferred rent
    
    
    (208
    )
    
    
    114Net cash provided by operating activities
    
    
    18,872
    
    
    
    25,728Cash flows from investing activitiesAcquisitions of property, equipment and software
    
    
    (5,613
    )
    
    
    (2,941
    )Reduction in advances and cash held in escrow
    
    
    
    
    
    
    10,900Radix Technologies, Inc. acquisition
    
    
    (400
    )
    
    
    (9,935
    )Acquisitions of ProDesign Solutions, LLC net of cash acquired
    
    
    
    
    
    
    (1,712
    )Deposits and other assets
    
    
    (504
    )
    
    
    339Net cash used in investing activities
    
    
    (6,517
    )
    
    
    (3,349
    )Cash flows from financing activitiesRepayment on line of credit, net of borrowings
    
    
    
    
    
    
    (11,000
    )Payment on note payable
    
    
    
    
    
    
    (56
    )Payments on capital leases
    
    
    (25
    )
    
    
    (14
    )Tax benefit of stock option exercises
    
    
    535
    
    
    
    1,691Proceeds from exercise of stock options
    
    
    911
    
    
    
    2,238Proceeds from employee stock purchase plan exercises
    
    
    395
    
    
    
    444Proceeds from secondary offering
    
    
    
    
    
    
    46,768Net cash provided by financing activities
    
    
    1,816
    
    
    
    40,071Net increase in cash and cash equivalents
    
    
    14,171
    
    
    
    62,450Cash and cash equivalents, beginning of period
    
    
    33,498
    
    
    
    4,064Cash and cash equivalents, end of period
    
    $
    47,669
    
    
    $
    66,514Supplemental disclosureIncome taxes paid
    
    $
    7,344
    
    
    $
    6,982Interest expense paid
    
    $
    8
    
    
    $
    165
  5




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##### 



ARGON ST, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 1. BASIS OF PRESENTATION
      6




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##### 



2. EARNINGS PER SHARE
  Third Quarter Ended
    Nine Months EndedJuly 1, 2007
    
    July 2, 2006
    
    July 1, 2007
    
    July 2, 2006Net Income
    
    $
    4,286
    
    
    $
    5,166
    
    
    $
    13,632
    
    
    $
    15,291Weighted Average Shares
Outstanding  Basic
    
    
    22,399
    
    
    
    22,120
    
    
    
    22,319
    
    
    
    21,495Basic Earnings per Share
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.61
    
    
    $
    0.71Effect of Dilutive Securities:Net Shares Issuable Upon
Exercise of Stock Options
    
    
    420
    
    
    
    597
    
    
    
    469
    
    
    
    632Weighted Average Shares
Outstanding  Diluted
    
    
    22,819
    
    
    
    22,717
    
    
    
    22,788
    
    
    
    22,127Diluted Earnings per Share
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.60
    
    
    $
    0.69
 3. STOCK-BASED COMPENSATION
 Adoption of SFAS No. 123R
   Stock Awards
  7




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##### 



Stock Options
 Fair Value Determination
  Stock Option Expense
   Stock Option Activity
   Aggregate IntrinsicWeighted-Average
    
    ValueNumber of Shares
    
    Exercise Price
    
    (in thousands)Shares under option, September 30, 2006
    
    
    1,859,088
    
    
    $
    14.78Options granted
    
    
    317,875
    
    
    $
    24.01Options exercised
    
    
    (199,110
    )
    
    $
    4.57
    
    
    $
    3,905Options cancelled and expired
    
    
    (88,560
    )
    
    $
    18.19Shares under option, July 1, 2007
    
    
    1,889,293
    
    
    $
    17.25
    
    
    $
    11,260Options exercisable at July 1, 2007
    
    
    975,660
    
    
    $
    14.41
    
    
    $
    8,586Shares reserved for equity awards at July 1, 2007
    
    
    650,587
 8




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##### 



Weighted-AverageRemaining
    
    Weighted-AverageRange of Exercise Price
    
    Options Outstanding
    
    Contractual Life
    
    Exercise Price$0.10  $0.90
    
    
    124,138
    
    
    3.8 years
    
    $
    0.61$2.25  $4.63
    
    
    267,170
    
    
    
    4.8
    
    
    
    4.04$5.00  $6.88
    
    
    226,800
    
    
    
    6.3
    
    
    
    5.70$7.54  $17.63
    
    
    201,500
    
    
    
    5.8
    
    
    
    12.20$20.40  $29.87
    
    
    1,069,685
    
    
    
    8.3
    
    
    
    25.88
  Weighted-AverageRemaining
    
    Weighted-AverageRange of Exercise Price
    
    Options Exercisable
    
    Contractual Life
    
    Exercise Price$0.10  $0.90
    
    
    124,138
    
    
    3.8 years
    
    $
    0.61$2.25  $4.63
    
    
    128,822
    
    
    
    4.2
    
    
    
    3.96$5.00  $6.88
    
    
    103,040
    
    
    
    6.2
    
    
    
    5.72$7.54  $17.63
    
    
    201,500
    
    
    
    5.8
    
    
    
    12.20$20.40  $29.87
    
    
    418,160
    
    
    
    7.2
    
    
    
    24.93
 Employee Stock Purchase Plan
  4. ACCOUNTS RECEIVABLE
  July 1, 2007
    
    
    September 30, 2006Billed and Billable
    
    $
    44,540,000
    
    
    $
    43,314,000Unbilled Costs and Fees
    
    
    47,373,000
    
    
    
    33,333,000Retainages
    
    
    4,284,000
    
    
    
    10,475,000Reserves
    
    
    (280,000
    )
    
    
    (280,000
    )$
    95,917,000
    
    
    $
    86,842,000
   9




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##### 



5. REVOLVING LINE OF CREDIT
    6. INCOME TAXES
  7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  8. SUBSEQUENT EVENT
  10




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-looking Statements
  Overview
 General
  Revenues
  11




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##### 



Third Quarter Ended
    
    Nine Months EndedContract Type
    
    July 1, 2007
    July 2, 2006
    July 1, 2007
    July 2, 2006Fixed-price contracts
    
    
    59
    %
    
    
    68
    %
    
    
    61
    %
    
    
    67
    %Cost reimbursable
contracts
    
    
    38
    %
    
    
    22
    %
    
    
    34
    %
    
    
    23
    %Time and material
contracts
    
    
    3
    %
    
    
    10
    %
    
    
    5
    %
    
    
    10
    %
  Backlog
    12




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##### 



July 1, 2007
    
    
    July 2, 2006Funded
    
    $
    222,502
    
    
    $
    194,980Unfunded
    
    
    61,021
    
    
    
    40,454Total
    
    $
    283,523
    
    
    $
    235,434
 Cost of Revenues
  Stock-Based Compensation Expense
    General and Administrative Expenses
  Interest Income and Expense
   13




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##### 



Research and Development
   Deferred Revenue
    Critical Accounting Practices and Estimates
 General
  14




---



##### 



Revenue and Cost Recognition
 General
 Accounting for Performance of Construction-Type and Production-Type Contracts. .
  Indirect rate variance
      15




---



##### 



Award Fee Recognition
  Goodwill
   Stock-based Compensation
  Historical Operating Results
 Fiscal quarter ended July 1, 2007 compared to fiscal quarter ended July 2, 2006
  Fiscal quarter ended
    
    IncreaseJuly 1, 2007
    
    July 2, 2006
    
    (Decrease)Contract revenues
    
    $
    73,660
    
    
    $
    68,902
    
    
    $
    4,758Cost of revenues
    
    
    61,599
    
    
    
    56,383
    
    
    
    5,216General and
administrative expenses
    
    
    5,631
    
    
    
    4,660
    
    
    
    971Provision for income taxes
    
    
    2,485
    
    
    
    3,237
    
    
    
    (752
    )Net income
    
    
    4,286
    
    
    
    5,166
    
    
    
    (880
    )
 16




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##### 



Revenues:
  Cost of Revenues:
  General and Administrative Expenses:
  Income Tax Expense:
  Net Income:
  Nine Months Ended July 2, 2007 compared to Nine Months Ended July 2, 2006
  Nine Months Ended
    
    IncreaseJuly 1, 2007
    
    July 2, 2006
    
    (Decrease)Contract revenues
    
    $
    198,375
    
    
    $
    192,690
    
    
    $
    5,685Cost of revenues
    
    
    159,254
    
    
    
    152,821
    
    
    
    6,433General and
administrative expenses
    
    
    18,482
    
    
    
    15,864
    
    
    
    2,618Provision for income taxes
    
    
    7,945
    
    
    
    9,613
    
    
    
    (1,668
    )Net income
    
    
    13,632
    
    
    
    15,291
    
    
    
    (1,659
    )
 17




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##### 



Contract Revenues:
  Cost of Revenues:
  General and Administrative Expenses:
  Provision for Income Taxes:
  Net Income:
  Analysis of Liquidity and Capital Resources
  Cash
  18




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##### 



Line of Credit
    Cash Flows
      19




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##### 



Contractual Obligations and Commitments
  Total
    
    
    Due in 2007
    
    
    Due in 2008
    
    
    Due in 2009
    
    
    Due in 2010
    
    
    Due in 2011
    
    
    ThereafterCapital leases
    
    $
    116
    
    
    $
    13
    
    
    $
    47
    
    
    $
    44
    
    
    $
    12
    
    
    
    
    
    
    
    Operating leases
    
    
    22,914
    
    
    
    1,889
    
    
    
    7,660
    
    
    
    5,287
    
    
    
    2,526
    
    
    
    1,969
    
    
    
    3,583Total
    
    $
    23,030
    
    
    $
    1,902
    
    
    $
    7,707
    
    
    $
    5,331
    
    
    $
    2,538
    
    
    $
    1,969
    
    
    $
    3,583
  Total
    
    Less Than 1 Year
    
    1-3 YearsLetters of credit
    
    $
    1,040
    
    
    $
    977
    
    
    $
    63
  Recent Accounting Pronouncements
  Market Risks
  Cash and Cash Equivalents:
  Interest Rates:
  Foreign Currency:
  20




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  ITEM 4. CONTROLS AND PROCEDURES
 (a)
    
    Our management has evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of such date, our disclosure
controls and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
  PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5. OTHER INFORMATION
  21




---



##### 



ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description of Exhibit2.1
    
    Agreement and Plan of Merger dated as of June 7,
2004, by and between Sensytech, Inc. and Argon
Engineering Associates, Inc. (incorporated by
reference to Exhibit 2.1 of the Companys
Registration Statement on Form S-4 filed on July
16, 2004, Registration Statement No. 333-117430)2.2
    
    Agreement and Plan of Merger, Dated as of June 9,
2006, by and among Argon ST, Inc., Argon ST Merger
Sub, Inc., San Diego Research Center, Incorporated,
Lindsay McClure, Thomas Seay and Harry B. Lee,
Trustee of the HBL and BVL Trust (incorporated by
reference to the Companys Current Report on Form
8-K, filed June 14, 2006)3.1
    
    Amended and Restated Certificate of Incorporation
of the Company (incorporated by reference to
Exhibit 3.1 of the Companys Registration Statement
on Form S-1 (Registration Statement No. 333-98757)
filed on August 26, 2002)3.1.1
    
    Amendment, dated September 28, 2004, to the
Companys Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit
3.1 the Companys Current Report on Form 8-K filed
October 5, 2004 covering Items 2.01, 5.01, 5.02,
8.01 and 9.01 of Form 8-K).3.1.2
    
    Amendment, dated March 15, 2005 to the Companys
Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1.2 to the
Companys Quarterly Report on Form 10-Q for the
quarterly period ended July 5, 2005, filed May 11,
2005)3.2
    
    Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 13(a)(i) of
the Companys Annual Report on Form 10-KSB for the
fiscal year ended September 30, 2001)4.1
    
    Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.3 to the Companys
Registration Statement on Form S-3 (Registration
Statement No. 333-128211) filed on September 9,
2005)10.1
    
    Second Amended and Restated Line of Credit
Agreement with Bank of America (incorporated by
reference to Exhibit 10.1 of the Companys
Registration Statement on Form S-1 (Registration
Statement No. 333-98757) filed on August 27, 2002)10.1.1
    
    Fifth Amendment to Second Amended and Restated
Financing and Security Agreement, dated as of March
31, 2006 (incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed
July 6, 2006)10.2+
    
    Argon ST, Inc. 2002 Stock Incentive Plan, as
amended (incorporated by reference to Appendix A to
the Companys definitive proxy statement on
Schedule 14A for its 2006 annual meeting of
stockholders, filed January 27, 2006)10.2.1
    
    Form of Stock Option Agreement under Argon ST 2002
Stock Incentive Plan (incorporated by reference to
Exhibit 10.2.1 to the Companys Annual Report on
Form 10-K for the fiscal year ended September 30,
2005, filed December 14, 2005)10.3+
    
    Argon Engineering Associates, Inc. Stock Plan
(incorporated by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the fiscal
year ended September 30, 2004, filed December 14,
2004)31.1*
    
    Certification of the Companys Chief Executive
Officer pursuant to Rule 13a-14(a)/15d-14(a) under
the Securities Exchange Act31.2*
    
    Certification of the Companys Chief Financial
Officer pursuant to Rule 13a-14(a)/15d-14(a) under
the Securities Exchange Act32.1**
    
    Certification pursuant to Rule 13a-14(b)/15d-14(b)
under the Securities Exchange Act and Section 1350
of Chapter 63 of Title 8 of the United States Code
 
 *
    
    Filed herewith**
    
    Furnished herewith+
    
    Indicates management contract or compensatory plan or arrangement 22




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SIGNATURES
  ARGON ST, INC.
(Registrant)By:
    /s/ Terry L. CollinsTerry L. Collins, Ph.D.Chairman, Chief Executive Officer and PresidentBy:
    /s/ Victor F. SellierVictor F. SellierVice President, Chief Financial Officer, Secretary
and Treasurer  23