##### 



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 April 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 12701 Fair Lakes Circle, Suite 800, Fairfax, Virginia 22033
 (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 APRIL 1, 2007
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at April 1, 2007 and September 30, 2006
    
    
    3Condensed Consolidated Statements of Earnings for the
three and six months ended April 1, 2007 and April 2, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the
six months ended April 1, 2007 and April 2, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-11Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12-21Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risks
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24Exhibits
    
    
    25-27
 2




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##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
 April 1, 2007
    
    
    September 30, 2006(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    34,735
    
    
    $
    33,498Accounts receivable, net
    
    
    92,553
    
    
    
    86,842Inventory
    
    
    3,992
    
    
    
    3,954Income taxes receivable
    
    
    267
    
    
    
    23Deferred project costs
    
    
    
    
    
    
    5,597Deferred income tax asset
    
    
    2,553
    
    
    
    2,083Prepaids and other
    
    
    996
    
    
    
    1,481TOTAL CURRENT ASSETS
    
    
    135,096
    
    
    
    133,478Property, equipment and software, net
    
    
    17,203
    
    
    
    16,726Goodwill
    
    
    149,171
    
    
    
    148,719Intangibles, net
    
    
    12,037
    
    
    
    13,200Other assets
    
    
    1,715
    
    
    
    1,408TOTAL ASSETS
    
    $
    315,222
    
    
    $
    313,531LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    17,460
    
    
    $
    19,124Accrued salaries and related expenses
    
    
    10,943
    
    
    
    10,678Deferred revenue
    
    
    4,066
    
    
    
    13,053Other liabilities
    
    
    552
    
    
    
    452TOTAL CURRENT LIABILITIES
    
    
    33,021
    
    
    
    43,307Deferred income tax liability, long term
    
    
    3,334
    
    
    
    2,937Deferred rent and other liabilities
    
    
    1,405
    
    
    
    1,591Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares authorized,
22,488,165 and 22,313,709 shares issued
at April 1, 2007 and September 30, 2006
    
    
    225
    
    
    
    223Additional paid in capital
    
    
    215,028
    
    
    
    212,610Treasury stock at cost, 126,245 shares
    
    
    (534
    )
    
    
    (534
    )Retained earnings
    
    
    62,743
    
    
    
    53,397TOTAL STOCKHOLDERS EQUITY
    
    
    277,462
    
    
    
    265,696TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    315,222
    
    
    $
    313,531
  3




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##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(In Thousands, Except Per Share Data)
 Second Quarter Ended
    
    
    Six Months EndedApril 1, 2007
    
    
    April 2, 2006
    
    
    April 1, 2007
    
    
    April 2, 2006CONTRACT REVENUES
    
    $
    64,310
    
    
    $
    55,681
    
    
    $
    124,715
    
    
    $
    123,788COST OF REVENUES
    
    
    51,901
    
    
    
    43,686
    
    
    
    97,655
    
    
    
    96,438GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    5,908
    
    
    
    5,096
    
    
    
    12,851
    
    
    
    11,204INCOME FROM OPERATIONS
    
    
    6,501
    
    
    
    6,899
    
    
    
    14,209
    
    
    
    16,146INTEREST INCOME, NET
    
    
    267
    
    
    
    355
    
    
    
    597
    
    
    
    355INCOME BEFORE INCOME TAXES
    
    
    6,768
    
    
    
    7,254
    
    
    
    14,806
    
    
    
    16,501PROVISION FOR INCOME TAXES
    
    
    2,605
    
    
    
    2,732
    
    
    
    5,460
    
    
    
    6,376NET INCOME
    
    $
    4,163
    
    
    $
    4,522
    
    
    $
    9,346
    
    
    $
    10,125EARNINGS PER SHARE (Basic)
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.48EARNINGS PER SHARE (Diluted)
    
    $
    0.18
    
    
    $
    0.20
    
    
    $
    0.41
    
    
    $
    0.46WEIGHTED-AVERAGE SHARES
OUTSTANDINGBasic
    
    
    22,332
    
    
    
    22,006
    
    
    
    22,280
    
    
    
    21,185Diluted
    
    
    22,779
    
    
    
    22,618
    
    
    
    22,755
    
    
    
    21,855
  4




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##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In Thousands)
 Six Months EndedApril 1, 2007
    
    
    April 2, 2006Cash flows from operating activitiesNet income
    
    $
    9,346
    
    
    $
    10,125Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,772
    
    
    
    2,715Deferred income tax benefit
    
    
    (61
    )
    
    
    (471
    )Stock-based compensation
    
    
    865
    
    
    
    886Bad debt expense
    
    
    30
    
    
    
    Loss on sale of equipment
    
    
    2
    
    
    
    Change in:Accounts receivable
    
    
    (5,805
    )
    
    
    26,851Inventory
    
    
    (38
    )
    
    
    (357
    )Deferred project costs
    
    
    5,597
    
    
    
    Prepaids and other
    
    
    485
    
    
    
    (267
    )Accounts payable and accrued expenses
    
    
    (1,664
    )
    
    
    (17,709
    )Accrued salaries and related expenses
    
    
    265
    
    
    
    411Deferred revenue
    
    
    (8,987
    )
    
    
    (2,686
    )Income taxes receivable
    
    
    (244
    )
    
    
    1,285Deferred rent
    
    
    (135
    )
    
    
    159Net cash provided by operating activities
    
    
    3,428
    
    
    
    20,942Cash flows from investing activitiesAcquisitions of property, equipment and software
    
    
    (3,091
    )
    
    
    (1,909
    )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
    )Proceeds from sale of equipment
    
    
    5
    
    
    
    Deposits and other assets
    
    
    (309
    )
    
    
    298Net cash used in investing activities
    
    
    (3,795
    )
    
    
    (2,358
    )Cash flows from financing activitiesRepayment on line of credit, net of borrowings
    
    
    
    
    
    
    (11,000
    )Payment on note payable
    
    
    
    
    
    
    (56
    )Payments on capital leases
    
    
    49
    
    
    
    (10
    )Tax benefit of stock option exercises
    
    
    438
    
    
    
    1,512Proceeds from exercise of stock options
    
    
    722
    
    
    
    1,932Proceeds from employee stock purchase plan exercises
    
    
    395
    
    
    
    444Proceeds from secondary offering
    
    
    
    
    
    
    46,768Net cash provided by financing activities
    
    
    1,604
    
    
    
    39,590Net increase in cash and cash equivalents
    
    
    1,237
    
    
    
    58,174Cash and cash equivalents, beginning of period
    
    
    33,498
    
    
    
    4,064Cash and cash equivalents, end of period
    
    $
    34,735
    
    
    $
    62,238Supplemental disclosureIncome taxes paid
    
    $
    5,389
    
    
    $
    4,051Interest expense paid
    
    $
    3
    
    
    $
    161
  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
  Second Quarter Ended
    
    Six Months EndedApril 1, 2007
    
    April 2, 2006
    
    April 1, 2007
    
    April 2, 2006Net Income
    
    $
    4,163
    
    
    $
    4,522
    
    
    $
    9,346
    
    
    $
    10,125Weighted Average Shares Outstanding  Basic
    
    
    22,332
    
    
    
    22,006
    
    
    
    22,280
    
    
    
    21,185Basic Earnings per Share
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.48Effect of Dilutive Securities:Net Shares Issuable Upon Exercise of Stock Options
    
    
    447
    
    
    
    612
    
    
    
    475
    
    
    
    670Weighted Average Shares Outstanding  Diluted
    
    
    22,779
    
    
    
    22,618
    
    
    
    22,755
    
    
    
    21,855Diluted Earnings per Share
    
    $
    0.18
    
    
    $
    0.20
    
    
    $
    0.41
    
    
    $
    0.46
 3. STOCK-BASED COMPENSATION
 Adoption of SFAS No. 123R
   Stock Awards
   7




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##### 



Stock Options
 Fair Value Determination
   Expected Volatility.
 Risk-free Interest Rate.
 Dividend Yield.
 Expected Term.
 Exercise Factor.
 Post-vest Percentage.
 Stock Option Expense
   8




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##### 



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
    
    
    (155,010
    )
    
    
    $  4.65
    
    
    
    $ 2,881Options cancelled and expired
    
    
    (44,440
    )
    
    
    $17.22Shares under option, April 1, 2007
    
    
    1,977,513
    
    
    
    $16.92
    
    
    
    $12,597Options exercisable at April 1, 2007
    
    
    1,035,410
    
    
    
    $13.92
    
    
    
    $ 9,702Shares reserved for equity awards at
April 1, 2007
    
    
    650,587
  Weighted-AverageRemaining
    
    Weighted-AverageRange of Exercise Price
    
    Options Outstanding
    
    Contractual Life
    
    Exercise Price$0.10 $0.90
    
    
    153,658
    
    
    4.1 years
    
    $
    0.62$2.25 $4.63
    
    
    277,250
    
    
    
    5.1
    
    
    
    4.04$5.00 $6.88
    
    
    248,640
    
    
    
    6.5
    
    
    
    5.70$7.54  $17.63
    
    
    204,000
    
    
    
    6.0
    
    
    
    12.26$20.40  $29.87
    
    
    1,093,965
    
    
    
    8.5
    
    
    
    25.89
 Weighted-AverageRemaining
    
    Weighted-AverageRange of Exercise Price
    
    Options Exercisable
    
    Contractual Life
    
    Exercise Price$0.10 $0.90
    
    
    153,658
    
    
    4.1 years
    
    $
    0.62$2.25 $4.63
    
    
    136,102
    
    
    
    4.6
    
    
    
    3.97$5.00 $6.88
    
    
    114,960
    
    
    
    6.5
    
    
    
    5.72$7.54  $17.63
    
    
    204,000
    
    
    
    6.0
    
    
    
    12.26$20.40  $29.87
    
    
    426,690
    
    
    
    7.4
    
    
    
    24.87
 Employee Stock Purchase Plan
  9




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##### 



4. ACCOUNTS RECEIVABLE
  April 1, 2007
    
    
    September 30, 2006Billed and Billable
    
    $
    31,360,000
    
    
    $
    43,314,000Unbilled Costs and Fees
    
    
    56,811,000
    
    
    
    33,333,000Retainages
    
    
    4,662,000
    
    
    
    10,475,000Reserves
    
    
    (280,000
    )
    
    
    (280,000
    )$
    92,553,000
    
    
    $
    86,842,000
   5. REVOLVING LINE OF CREDIT
    6. INCOME TAXES
  10




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##### 



7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  11




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##### 



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




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##### 



Second Quarter Ended
    
    Six Months EndedContract Type
    
    April 1, 2007
    
    April 2, 2006
    
    April 1, 2007
    
    April 2, 2006Fixed-price contracts
    
    
    60
    %
    
    
    58
    %
    
    
    63
    %
    
    
    67
    %Cost reimbursable
contracts
    
    
    35
    %
    
    
    28
    %
    
    
    31
    %
    
    
    23
    %Time and material
contracts
    
    
    5
    %
    
    
    14
    %
    
    
    6
    %
    
    
    10
    %
  Backlog
    13




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##### 



April 1, 2007
    
    
    April 2, 2006Funded
    
    $
    231,917
    
    
    $
    187,592Unfunded
    
    
    77,367
    
    
    
    31,005Total
    
    $
    309,284
    
    
    $
    218,597
 Cost of Revenues
  Stock-Based Compensation Expense
    General and Administrative Expenses
  Interest Income and Expense
   14




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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.
 15




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##### 



.
  Indirect rate variance
      16




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##### 



Award Fee Recognition
  Goodwill
   Stock-based Compensation
  Historical Operating Results
 Fiscal quarter ended April 1, 2007 compared to fiscal quarter ended April 2, 2006
  Fiscal quarter ended
    
    IncreaseApril 1, 2007
    
    April 2, 2006
    
    (Decrease)Contract revenues
    
    $
    64,310
    
    
    $
    55,681
    
    
    
    8,629Cost of revenues
    
    $
    51,901
    
    
    $
    43,686
    
    
    
    8,215General and administrative expenses
    
    $
    5,908
    
    
    $
    5,096
    
    
    
    812Provision for income taxes
    
    $
    2,605
    
    
    $
    2,732
    
    
    
    (127
    )Net income
    
    $
    4,163
    
    
    $
    4,522
    
    
    
    (359
    )
 17




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##### 



Revenues:
  Cost of Revenues:
  General and Administrative Expenses:
  Income Tax Expense:
  Net Income:
  Six Months Ended April 2, 2007 compared to Six Months Ended April 2, 2006
  Six Months Ended
    
    IncreaseApril 1, 2007
    
    April 2, 2006
    
    (Decrease)Contract revenues
    
    $
    124,715
    
    
    $
    123,788
    
    
    $
    927Cost of revenues
    
    
    97,655
    
    
    
    96,438
    
    
    
    1,217General and administrative
expenses
    
    
    12,851
    
    
    
    11,204
    
    
    
    1,647Provision for income taxes
    
    
    5,460
    
    
    
    6,376
    
    
    
    (916
    )Net income
    
    
    9,346
    
    
    
    10,125
    
    
    
    (779
    )
 18




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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
  Line of Credit
  19




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##### 



Cash Flows
      20




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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
    
    $
    123
    
    
    $
    22
    
    
    $
    46
    
    
    $
    43
    
    
    $
    12
    
    
    
    
    
    
    Operating leases
    
    
    24,737
    
    
    
    3,736
    
    
    
    7,667
    
    
    
    5,288
    
    
    
    2,526
    
    
    
    1,970
    
    
    
    3,550Total
    
    $
    24,860
    
    
    $
    3,758
    
    
    $
    7,713
    
    
    $
    5,331
    
    
    $
    2,538
    
    
    $
    1,970
    
    
    $
    3,550
  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:
  21




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##### 



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 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
  22




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##### 



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)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
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 23




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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  24