##### 



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 December 31, 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.)
 
  (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 DECEMBER 31, 2006
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at December 31, 2006 and September 30, 2006
    
    
    3Condensed Consolidated Statements of Earnings for the
fiscal quarters ended December 31, 2006 and January 1, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the
fiscal quarters ended December 31, 2006 and January 1, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9-17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risks
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    19Item 1A.
    
    Risk Factors
    
    
    19Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3.
    
    Defaults Upon Senior Securities
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.
    
    Other Information
    
    
    19Item 6.
    
    Exhibits
    
    
    19Signatures
    
    
    21Exhibits
    
    
    22-24
 2




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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
 December 31, 2006
    
    
    September 30, 2006(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    30,508
    
    
    $
    33,498Accounts receivable, net
    
    
    85,220
    
    
    
    86,842Inventory
    
    
    4,294
    
    
    
    3,954Income taxes receivable
    
    
    
    
    
    
    23Deferred project costs
    
    
    63
    
    
    
    5,597Deferred income tax asset
    
    
    2,283
    
    
    
    2,083Prepaids and other
    
    
    1,270
    
    
    
    1,481TOTAL CURRENT ASSETS
    
    
    123,638
    
    
    
    133,478Property, equipment and software, net
    
    
    16,646
    
    
    
    16,726Goodwill
    
    
    148,771
    
    
    
    148,719Intangibles, net
    
    
    12,624
    
    
    
    13,200Other assets
    
    
    1,466
    
    
    
    1,408TOTAL ASSETS
    
    $
    303,145
    
    
    $
    313,531LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    10,373
    
    
    $
    19,124Accrued salaries and related expenses
    
    
    9,739
    
    
    
    10,678Deferred revenue
    
    
    4,091
    
    
    
    13,053Income taxes payable
    
    
    1,626
    
    
    
    Other liabilities
    
    
    389
    
    
    
    452TOTAL CURRENT LIABILITIES
    
    
    26,218
    
    
    
    43,307Deferred income tax liability, long term
    
    
    3,401
    
    
    
    2,937Deferred rent and other liabilities
    
    
    1,601
    
    
    
    1,591Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares
authorized,
22,391,159 and 22,313,709 shares issued
at December 31, 2006 and September 30,
2006
    
    
    224
    
    
    
    223Additional paid in capital
    
    
    213,655
    
    
    
    212,610Treasury stock at cost, 126,245 shares
    
    
    (534
    )
    
    
    (534
    )Retained earnings
    
    
    58,580
    
    
    
    53,397TOTAL STOCKHOLDERS EQUITY
    
    
    271,925
    
    
    
    265,696TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    303,145
    
    
    $
    313,531
  3




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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(In Thousands, Except Per Share Data)
 For the Fiscal Quarter EndedDecember 31, 2006
    
    
    January 1, 2006CONTRACT REVENUES
    
    $
    60,405
    
    
    $
    68,107COST OF REVENUES
    
    
    45,754
    
    
    
    52,752GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    6,943
    
    
    
    6,108INCOME FROM OPERATIONS
    
    
    7,708
    
    
    
    9,247INTEREST INCOME, NET
    
    
    330
    
    
    
    INCOME BEFORE INCOME TAXES
    
    
    8,038
    
    
    
    9,247PROVISION FOR INCOME TAXES
    
    
    2,855
    
    
    
    3,644NET INCOME
    
    $
    5,183
    
    
    $
    5,603EARNINGS PER SHARE (Basic)
    
    $
    0.23
    
    
    $
    0.27EARNINGS PER SHARE (Diluted)
    
    $
    0.23
    
    
    $
    0.27WEIGHTED-AVERAGE SHARES
OUTSTANDINGBasic
    
    
    22,228
    
    
    
    20,382Diluted
    
    
    22,724
    
    
    
    21,103
  4




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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In Thousands)
 Fiscal Quarter EndedDecember 31, 2006
    
    
    January 1, 2006Cash flows from operating activitiesNet income
    
    $
    5,183
    
    
    $
    5,603Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,893
    
    
    
    1,373Deferred income tax expense (benefit)
    
    
    276
    
    
    
    (68
    )Stock-based compensation
    
    
    390
    
    
    
    368Bad debt expense
    
    
    30
    
    
    
    Loss on sale of equipment
    
    
    2
    
    
    
    Change in:Accounts receivable
    
    
    1,528
    
    
    
    (9,764
    )Inventory
    
    
    (340
    )
    
    
    (311
    )Deferred project costs
    
    
    5,534
    
    
    
    Prepaids and other
    
    
    211
    
    
    
    (281
    )Accounts payable and
accrued expenses
    
    
    (8,786
    )
    
    
    (11,108
    )Accrued salaries and
related expenses
    
    
    (939
    )
    
    
    (150
    )Deferred revenue
    
    
    (8,962
    )
    
    
    (202
    )Income taxes payable
    
    
    1,649
    
    
    
    3,180Net cash used in operating activities
    
    
    (2,331
    )
    
    
    (11,360
    )Cash flows from investing activitiesAcquisitions of property, equipment and software
    
    
    (1,242
    )
    
    
    (729
    )Cash acquired in Radix acquisition
    
    
    
    
    
    
    1,107Deposits and other assets
    
    
    (60
    )
    
    
    299Proceeds from sale of equipment
    
    
    5
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (1,297
    )
    
    
    677Cash flows from financing activitiesRepayment on line of credit, net of borrowings
    
    
    
    
    
    
    (11,000
    )Payment on note payable
    
    
    
    
    
    
    (56
    )Payments on capital leases
    
    
    (18
    )
    
    
    (3
    )Tax benefit of stock option exercises
    
    
    231
    
    
    
    530Proceeds from exercise of stock options
    
    
    425
    
    
    
    606Proceeds from secondary offering
    
    
    
    
    
    
    46,768Net cash provided by financing activities
    
    
    638
    
    
    
    36,845Net (decrease) increase in cash and cash equivalents
    
    
    (2,990
    )
    
    
    26,162Cash and cash equivalents, beginning of period
    
    
    33,498
    
    
    
    4,064Cash and cash equivalents, end of period
    
    $
    30,508
    
    
    $
    30,226Supplemental disclosureIncome taxes paid
    
    $
    699
    
    
    $
    Interest expense paid
    
    $
    2
    
    
    $
    127
  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
  Fiscal quarter endedDecember 31, 2006
    
    January 1, 2006Net Income
    
    $
    5,183
    
    
    $
    5,603Weighted Average Shares Outstanding  Basic
    
    
    22,228
    
    
    
    20,382Basic Earnings per Share
    
    $
    0.23
    
    
    $
    0.27Effect of Dilutive Securities:Net Shares Issuable Upon Exercise of Stock
Options
    
    
    496
    
    
    
    721Weighted Average Shares Outstanding  Diluted
    
    
    22,724
    
    
    
    21,103Diluted Earnings per Share
    
    $
    0.23
    
    
    $
    0.27
 3. STOCK-BASED COMPENSATION
 Adoption of SFAS No. 123R
   Stock Awards
  7




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4. INVENTORIES
  December 31, 2006
    
    
September 30, 2006Raw Materials
    
    $
    2,248
    
    
    $
    1,940Component parts, work in process
    
    $
    1,937
    
    
    $
    1,919Finished component parts
    
    $
    151
    
    
    $
    137$
    4,336
    
    
    $
    3,996Reserve
    
    
    (42
    )
    
    
    (42
    )Total
    
    $
    4,294
    
    
    $
    3,954
 5. REVOLVING LINE OF CREDIT
    6. INCOME TAXES
  8




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-looking Statements
  Overview
 General
  Revenues
   9




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Fiscal Quarter Ended
    
    Fiscal Quarter EndedContract Type
    
    December 31, 2006
    
    January 1, 2006Fixed-price contracts
    
    
    65
    %
    
    
    75
    %Cost reimbursable contracts
    
    
    27
    %
    
    
    17
    %Time and material contracts
    
    
    8
    %
    
    
    8
    %
  Backlog
    10




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December 31, 2006
    
    
    January 1, 2006Funded
    
    $
    171,287
    
    
    $
    154,458Unfunded
    
    
    67,364
    
    
    
    76,633Total
    
    $
    238,651
    
    
    $
    231,091
 Cost of Revenues
  Stock-Based Compensation Expense
    General and Administrative Expenses
  Interest Income and Expense
   11




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Research and Development
   Deferred Revenue
    Critical Accounting Practices and Estimates
 General
  Revenue and Cost Recognition
 General
 Accounting for Performance of Construction-Type and Production-Type Contracts.
 12




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.
  Indirect rate variance
      13




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Award Fee Recognition
  Goodwill
   Stock-based Compensation
  Historical Operating Results
 Fiscal quarter ended December 31, 2006 compared to Fiscal quarter ended January 1, 2006
  Fiscal quarter ended
    
    IncreaseDecember 31, 2006
    
    January 1, 2006
    
    (Decrease)Contract revenues
    
    $
    60,405
    
    
    $
    68,107
    
    
    
    ($7,702
    )Cost of revenues
    
    $
    45,754
    
    
    $
    52,752
    
    
    
    ($6,998
    )General and
administrative expenses
    
    $
    6,943
    
    
    $
    6,108
    
    
    $
    835Interest income and
interest expense
    
    $
    330
    
    
    $
    0
    
    
    $
    330Provision for income taxes
    
    $
    2,855
    
    
    $
    3,644
    
    
    
    ($789
    )Net income
    
    $
    5,183
    
    
    $
    5,603
    
    
    
    ($420
    )
 14




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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
  15




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Line of Credit
    Cash Flows
    Contractual Obligations and Commitments
  Total
    
    
    Due in 2007
    
    
    Due in 2008
    
    
    Due in 2009
    
    
    Due in 2010
    
    
    Due in 2011
    
    
    ThereafterCapital leases
    
    $
    68
    
    
    $
    18
    
    
    $
    25
    
    
    $
    23
    
    
    $
    2
    
    
    
    
    
    
    
    Operating leases
    
    
    25,885
    
    
    
    5,514
    
    
    
    7,534
    
    
    
    5,151
    
    
    
    2,385
    
    
    
    1,831
    
    
    
    3,470Total
    
    $
    25,953
    
    
    $
    5,532
    
    
    $
    7,559
    
    
    $
    5,174
    
    
    $
    2,387
    
    
    $
    1,831
    
    
    $
    3,470
  Total
    
    Less Than 1 Year
    
    1-3 YearsLetters of credit
    $1,040
    
    $977
    
    $63
 16




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Market Risks
  Cash and Cash Equivalents:
  Interest Rates:
  Foreign Currency:
  Recent Developments
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  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 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 of 1934 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.
 17




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18




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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
  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 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)
 19




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ExhibitNumber
    
    Description of Exhibit10.1
    
    
    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
April 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 20




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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  21