##### 



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 January 1, 2006
 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.)
 12701 Fair Lakes Circle, Suite 800, Fairfax, Virginia 22033
  (703) 322-0881
  Yes þ
    
    No o
  Large accelerated filer  o
    
    Accelerated filer  þ
    
    Non-accelerated filer  o
  Yes o
    
    No þ




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
 FOR THE QUARTER ENDED JANUARY 1, 2006
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at January 1, 2006 and September 30, 2005
    
    
    3Condensed Consolidated Statements of Earnings for the fiscal quarters ended January 1, 2006 and January 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the fiscal quarters ended January 1, 2006 and January 2, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-11Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12-20Item 3. Quantitative and Qualitative Disclosures about Market Risks
    
    
    20Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    21Signatures
    
    
    23Exhibits
    
    
    24-26
 2




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 January 1, 2006
    
    
    September 30, 2005(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    30,226,000
    
    
    $
    4,064,000Accounts receivable, net
    
    
    114,774,000
    
    
    
    103,577,000Inventory
    
    
    1,477,000
    
    
    
    1,166,000Income taxes receivable
    
    
    
    
    
    
    2,464,000Deferred income tax asset
    
    
    1,712,000
    
    
    
    1,742,000Prepaids and other
    
    
    1,101,000
    
    
    
    888,000TOTAL CURRENT ASSETS
    
    
    149,290,000
    
    
    
    113,901,000Property, equipment and software, net
    
    
    15,112,000
    
    
    
    14,896,000Advances and cash held in escrow
    
    
    
    
    
    
    10,900,000Goodwill
    
    
    116,141,000
    
    
    
    107,956,000Intangibles, net
    
    
    2,016,000
    
    
    
    1,219,000Other assets
    
    
    703,000
    
    
    
    962,000TOTAL ASSETS
    
    $
    283,262,000
    
    
    $
    249,834,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESLine of Credit
    
    $
    
    
    
    $
    11,000,000Accounts payable and accrued expenses
    
    
    15,725,000
    
    
    
    26,857,000Accrued salaries and related expenses
    
    
    9,480,000
    
    
    
    8,848,000Deferred revenue
    
    
    6,937,000
    
    
    
    7,139,000Notes payable  current portion
    
    
    
    
    
    
    56,000Capital lease obligations  current
    
    
    19,000
    
    
    
    19,000Income taxes payable
    
    
    716,000
    
    
    
    Deferred rent
    
    
    160,000
    
    
    
    61,000TOTAL CURRENT LIABILITIES
    
    
    33,037,000
    
    
    
    53,980,000Deferred income tax liability, long term
    
    
    2,504,000
    
    
    
    1,979,000Deferred rent
    
    
    1,658,000
    
    
    
    1,799,000Capital lease obligations  net of current
    
    
    60,000
    
    
    
    63,000Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares
authorized,
21,979,917 and 20,153,878 shares issued
at January 1, 2006 and September 30, 2005
    
    
    220,000
    
    
    
    202,000Additional paid in capital
    
    
    206,712,000
    
    
    
    158,458,000Treasury stock at cost, 126,245 shares
    
    
    (534,000
    )
    
    
    (534,000
    )Retained earnings
    
    
    39,605,000
    
    
    
    34,002,000Accumulated other comprehensive loss
    
    
    
    
    
    
    (115,000
    )TOTAL STOCKHOLDERS EQUITY
    
    $
    246,003,000
    
    
    $
    192,013,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    283,262,000
    
    
    $
    249,834,000
  3




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
 For the Fiscal Quarter EndedJanuary 1, 2006
    
    

January
2, 2005CONTRACT REVENUES
    
    $
    68,107,000
    
    
    $
    56,510,000COST OF REVENUES
    
    
    52,885,000
    
    
    
    45,338,000GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    5,975,000
    
    
    
    3,335,000INCOME FROM OPERATIONS
    
    
    9,247,000
    
    
    
    7,837,000OTHER INCOME (EXPENSE)Interest income
    
    
    127,000
    
    
    
    140,000Interest expense
    
    
    (127,000
    )
    
    
    (2,000
    )
    
    
    
    138,000INCOME BEFORE INCOME TAXES
    
    
    9,247,000
    
    
    
    7,975,000PROVISION FOR INCOME TAXES
    
    
    3,644,000
    
    
    
    3,055,000NET INCOME
    
    $
    5,603,000
    
    
    $
    4,920,000EARNINGS PER SHARE (Basic)
    
    $
    0.27
    
    
    $
    0.25EARNINGS PER SHARE (Diluted)
    
    $
    0.27
    
    
    $
    0.24WEIGHTED-AVERAGE SHARES
OUTSTANDINGBasic
    
    
    20,382,000
    
    
    
    19,423,000Diluted
    
    
    21,103,000
    
    
    
    20,415,000
  4




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 Fiscal Quarter EndedJanuary 1, 2006
    
    
    January 2, 2005Cash flows from operating activitiesNet income
    
    $
    5,603,000
    
    
    $
    4,920,000Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,373,000
    
    
    
    1,369,000Deferred income tax benefit
    
    
    (68,000
    )
    
    
    (211,000
    )Stock-based compensation
    
    
    368,000
    
    
    
    Tax benefit of stock option exercises
    
    
    
    
    
    
    2,370,000Change in:Billed accounts receivable
    
    
    (9,109,000
    )
    
    
    1,039,000Unbilled accounts receivable
    
    
    (655,000
    )
    
    
    (7,786,000
    )Inventory
    
    
    (311,000
    )
    
    
    (348,000
    )Prepaids and other
    
    
    18,000
    
    
    
    (166,000
    )Accounts payable and accrued expenses
    
    
    (11,066,000
    )
    
    
    1,170,000Accrued salaries and related expenses
    
    
    (150,000
    )
    
    
    (2,193,000
    )Deferred revenue
    
    
    (202,000
    )
    
    
    16,959,000Income taxes payable
    
    
    3,180,000
    
    
    
    (5,105,000
    )Deferred rent
    
    
    (42,000
    )
    
    
    Net cash (used in) provided by operating activities
    
    
    (11,061,000
    )
    
    
    12,018,000Cash flows from investing activitiesAcquisitions of property, equipment and software
    
    
    (729,000
    )
    
    
    (1,613,000
    )Cash acquired in Radix acquisition
    
    
    1,107,000
    
    
    
    Net cash provided by (used in) investing activities
    
    
    378,000
    
    
    
    (1,613,000
    )Cash flows from financing activitiesRepayment on line of credit, net of borrowings
    
    
    (11,000,000
    )
    
    
    Payment on note payable
    
    
    (56,000
    )
    
    
    (56,000
    )Payments on capital leases
    
    
    (3,000
    )
    
    
    Tax benefit of stock option exercises
    
    
    530,000
    
    
    
    Proceeds from exercise of stock options
    
    
    606,000
    
    
    
    1,872,000Proceeds from employee stock purchase plan exercises
    
    
    
    
    
    
    476,000Proceeds from secondary offering
    
    
    46,768,000
    
    
    
    Net cash provided by financing activities
    
    
    36,845,000
    
    
    
    2,292,000Net increase in cash and cash equivalents
    
    
    26,162,000
    
    
    
    12,697,000Cash and cash equivalents, beginning of period
    
    
    4,064,000
    
    
    
    29,732,000Cash and cash equivalents, end of period
    
    $
    30,226,000
    
    
    $
    42,429,000Supplemental disclosureIncome taxes paid
    
    $
    
    
    
    $
    6,000,000Interest expense paid
    
    $
    127,000
    
    
    $
    
  5




---



##### 



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




---



##### 



2.
    
    EARNINGS PER SHARE
  Fiscal quarter endedJanuary 1, 2006
    
    
    January 2, 2005Net Income
    
    $
    5,603,000
    
    
    $
    4,920,000Weighted Average Shares Outstanding  Basic
    
    
    20,382,000
    
    
    
    19,423,000Basic Earnings per Share
    
    $
    0.27
    
    
    $
    0.25Effect of Dilutive Securities:Net Shares Issuable Upon Exercise of Stock
Options
    
    
    721,000
    
    
    
    992,000Weighted Average Shares Outstanding  Diluted
    
    
    21,103,000
    
    
    
    20,415,000Diluted Earnings per Share
    
    $
    0.27
    
    
    $
    0.24
 3.
    
    STOCK-BASED COMPENSATION
     Fair Value Determination
  7




---



##### 



Expected Volatility.
 Risk-free Interest Rate.
 Dividend Yield.
 Expected Term.
 Exercise Factor.
 Post-vest Percentage.
 Stock Compensation Expense
    Stock Option Activity
  8




---



##### 



AggregateIntrinsicNumber
    
    
    Weighted-Average
    
    
    Valueof Shares
    
    
    Exercise Price
    
    
    (in thousands)Shares under option, September 30, 2005
    
    
    1,741,127
    
    
    $
    8.75Options granted
    
    
    484,350
    
    
    
    29.46Options exercised
    
    
    (101,039
    )
    
    
    5.99
    
    
    $
    2,324Options cancelled and expired
    
    
    (14,000
    )
    
    
    26.72Shares under option, January 1, 2006
    
    
    2,110,438
    
    
    $
    13.53
    
    
    $
    32,627Options exercisable at January 1, 2006
    
    
    1,065,892
    
    
    $
    10.64
    
    
    $
    19,559Shares reserved for equity awards at
January 1, 2006
    
    
    23,922
  Weighted-AverageOptions
    
    Remaining
    
    Weighted-AverageRange of Exercise Price
    
    Outstanding
    
    Contractual Life
    
    Exercise Price$  0.10
 $  0.90
    
    
    317,988
    
    
    
    5.3
    years
    
    $
    0.57$  2.25
 $  4.63
    
    
    398,600
    
    
    
    6.4
    
    
    
    4.04$  5.00
 $  6.88
    
    
    329,600
    
    
    
    7.8
    
    
    
    5.70$  7.54  $17.63
    
    
    246,800
    
    
    
    7.4
    
    
    
    13.05$20.40  $29.87
    
    
    817,450
    
    
    
    9.4
    
    
    
    26.48
 Weighted-AverageOptions
    
    Remaining
    
    Weighted-AverageRange of Exercise Price
    
    Exercisable
    
    Contractual Life
    
    Exercise Price$  0.10
 $  0.90
    
    
    240,228
    
    
    
    5.1
    years
    
    $
    0.47$  2.25
 $  4.63
    
    
    176,944
    
    
    
    5.9
    
    
    
    3.96$  5.00
 $  6.88
    
    
    108,320
    
    
    
    7.7
    
    
    
    5.73$  7.54  $17.63
    
    
    246,800
    
    
    
    7.4
    
    
    
    13.05$20.40  $29.87
    
    
    293,600
    
    
    
    8.7
    
    
    
    22.76
 Pro Forma Disclosures
  9




---



##### 



Fiscal quarter endedJanuary 2, 2005Net Income
    
    $
    4,920,000Add: Stock-based employee compensation expense included
In reported net income, net of related tax effects
    
    
    Less: Total stock-based employee compensation expense
determined under fair value method of all awards, net
of related tax effects
    
    
    348,000Pro forma net income
    
    $
    4,572,000Earnings per share:Basic  as reported
    
    $
    0.25Basic  pro forma
    
    $
    0.24Earnings per share:Diluted  as reported
    
    $
    0.24Diluted  pro forma
    
    $
    0.22
 4.
    
    REVOLVING LINE OF CREDIT
   5.
    
    MERGER
   10




---



##### 



Current assets
    
    $
    2,614,000Property, plant and equipment
    
    
    591,000Other assets
    
    
    40,000Other intangibles
    
    
    1,066,000Goodwill
    
    
    8,184,000Total assets acquired
    
    
    12,495,000Liabilities assumed
    
    
    1,454,000Total purchase price
    
    $
    11,041,000
  6.
    
    RELATED PARTY TRANSACTIONS
  7.
    
    SECONDARY OFFERING
  11




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-looking Statements
  Overview
 General
  Revenues
   12




---



##### 



Fiscal Quarter Ended
    
    Fiscal Quarter EndedContract Type
    
    January 1, 2006
    
    January 2, 2005Cost reimbursable contracts
    
    
    17
    %
    
    
    16
    %Fixed-price contracts
    
    
    75
    %
    
    
    79
    %Time and material contracts
    
    
    8
    %
    
    
    5
    %
  Backlog
     13




---



##### 



January 1,
    
    
    January 2,2006
    
    
    2005Funded
    
    $
    154,458,000
    
    
    $
    218,022,000Unfunded
    
    
    76,633,000
    
    
    
    1,842,000Total
    
    $
    231,091,000
    
    
    $
    219,864,000
  Cost of Revenues
  Stock-Based Compensation Expense
     14




---



##### 



General and Administrative Expenses
  Interest Income and Expense
   Research and Development
   Deferred Revenue
    Critical Accounting Practices and Estimates
 General
  15




---



##### 



Revenue and Cost Recognition
 General
 Accounting for Performance of Construction-Type and Production-Type Contracts.
  Indirect rate variance
     16




---



##### 



Award Fee Recognition
  Goodwill
  Stock-based Compensation
  Historical Operating Results
 Fiscal quarter ended January 1, 2006 compared to Fiscal quarter ended January 2, 2005
  Fiscal quarter ended
    
    
    IncreaseJanuary 1, 2006
    
    
    January 2, 2005
    
    
    2006 Compared To 2005Contract revenues
    
    $
    68,107,000
    
    
    $
    56,510,000
    
    
    $
    11,597,000Cost of revenues
    
    $
    52,885,000
    
    
    $
    45,338,000
    
    
    $
    7,547,000General and
administrative expenses
    
    $
    5,975,000
    
    
    $
    3,335,000
    
    
    $
    2,640,000Provision for income taxes
    
    $
    3,644,000
    
    
    $
    3,055,000
    
    
    $
    589,000Net income
    
    $
    5,603,000
    
    
    $
    4,920,000
    
    
    $
    683,000
 17




---



##### 



Revenues:
  Cost of Revenues:
  General and Administrative Expenses:
  Interest Income and Interest Expense:
  Income Tax Expense:
  Net Income:
  Analysis of Liquidity and Capital Resources
 Cash
  18




---



##### 



Line of Credit
    Cash Flows
    Contractual Obligations and Commitments
  Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in
    
    
    Due inTotal
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterCapital leases
    
    $
    79,000
    
    
    $
    14,000
    
    
    $
    21,000
    
    
    $
    21,000
    
    
    $
    21,000
    
    
    $
    2,000
    
    
    
    Operating leases
    
    
    26,825,000
    
    
    
    4,535,000
    
    
    
    6,023,000
    
    
    
    6,038,000
    
    
    
    3,827,000
    
    
    
    1,675,000
    
    
    
    4,727,000Total
    
    $
    26,904,000
    
    
    $
    4,549,000
    
    
    $
    6,044,000
    
    
    $
    6,059,000
    
    
    $
    3,848,000
    
    
    $
    1,677,000
    
    
    $
    4,727,000
 19




---



##### 



Total
    
    
    Less Than 1 Year
    
    
    1-3 YearsLetters of credit
    
    $
    1,516,000
    
    
    $
    1,516,000
    
    
    
    
  Market Risks
  Cash and Cash Equivalents:
  Interest Rates:
  Foreign Currency:
  Recent Developments
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  20




---



##### 



ITEM 4. CONTROLS AND PROCEDURES
 (a)
    
    Our management has evaluated, with the participation of the our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures 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 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
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported
within the time periods specified in Securities and Exchange Commission rules and forms.(b)
    
    During the last quarter, there were no significant changes in our internal
controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) that have materially affected these
controls, or are reasonably likely to materially affect these controls subsequent to
the evaluation of these controls.
 PART II  OTHER INFORMATION
 ITEM 5. OTHER INFORMATION
  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)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 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 April 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
    
    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 26, 2002,10.1.1
    
    Third Amendment to
Second Amended and
Restated Financing
and Security
Agreement
(incorporated by
reference to Exhibit
10.1 of the Companys
Quarterly Report on
Form 10-Q for the
quarter ended March
31, 2004, Commission
File No. 000-08193)10.2+
    
    Argon ST, Inc. 2002
Stock Incentive Plan
(incorporated by
reference to the
Companys Schedule
14A filed with the
Commission on April
22, 2002, Commission
File No. 000-08193)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 fiscal year ended September 30, 2005,
filed December 14,
2005)
 21




---



##### 



ExhibitNumber
    
    Description of Exhibit10.3+
    
    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)10.4+
    
    Retention Agreement
dated February 17,
2004, by and between
the Company and
Donald F. Fultz
(incorporated by
reference to Exhibit
10.3 of the Companys
Registration
Statement on Form S-4
(Registration
Statement No.
333-117430) filed on
July 16, 2004)10.5+
    
    Retention Agreement
dated February 17,
2004, by and between
the Company and S.
Kent Rockwell
(incorporated by
reference to Exhibit
10.4 of the Companys
Registration
Statement on Form S-4
(Registration
Statement No.
333-117430) filed on
July 16, 2004016.1
    
    Letter of
PricewaterhouseCoopers
LLP regarding change
in certifying
accountant
(incorporated by
reference to Exhibit
16.1 to the Companys
Current Report on
Form 8-K covering
Items 4.01 and 9.01
of Form 8-K, filed
October 5, 2004)16.2
    
    Letter of Watkins,
Meegan, Drury &
Company, L.L.C.
regarding change in
certifying accountant
(incorporated by
reference to Exhibit
16.2 to the Companys
Current Report on
Form 8-K covering
Items 4.01 and 9.01
of Form 8-K, filed
October 5, 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. Collins

Terry L. Collins, Ph.D.Chairman, Chief Executive Officer and PresidentBy: /s/ Victor F. Sellier

Victor F. SellierVice President, Business Operations, Chief Financial
Officer,Secretary and Treasurer
  23