Attached files
file | filename |
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EX-31.1 - EX-31.1 - ARGON ST, Inc. | w79488exv31w1.htm |
EX-32.1 - EX-32.1 - ARGON ST, Inc. | w79488exv32w1.htm |
EX-31.2 - EX-31.2 - ARGON ST, Inc. | w79488exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 4, 2010
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.
(Exact name of
registrant as specified in its charter)
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
(Address of principal executive offices)
Registrants telephone number (703) 322-0881
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of August 10, 2010, there were 1,000 shares of the Registrants Common Stock, par value
$.01 per share, outstanding.
ARGON ST, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FORM 10-Q QUARTERLY REPORT
FOR THE THREE AND NINE MONTHS ENDED JULY 4, 2010
TABLE OF CONTENTS
2
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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
July 4, 2010 | September 30, 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 41,720 | $ | 43,108 | ||||
Accounts receivable, net |
109,082 | 116,656 | ||||||
Inventory, net |
10,655 | 6,021 | ||||||
Income tax receivable |
6,806 | | ||||||
Deferred project costs |
613 | 2,296 | ||||||
Deferred income tax assets |
5,361 | 5,137 | ||||||
Prepaids and other |
1,294 | 1,499 | ||||||
TOTAL CURRENT ASSETS |
175,531 | 174,717 | ||||||
Property, equipment and software, net |
26,522 | 28,042 | ||||||
Goodwill |
173,948 | 173,948 | ||||||
Intangibles, net |
2,039 | 2,745 | ||||||
Other assets |
432 | 573 | ||||||
TOTAL ASSETS |
$ | 378,472 | $ | 380,025 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable and accrued expenses |
$ | 21,218 | $ | 32,526 | ||||
Accrued salaries and related expenses |
14,678 | 13,887 | ||||||
Deferred revenue |
7,196 | 5,504 | ||||||
Income taxes payable |
| 4,784 | ||||||
Other current liabilities |
126 | 155 | ||||||
TOTAL CURRENT LIABILITIES |
43,218 | 56,856 | ||||||
Deferred income tax liabilities, long-term |
1,362 | 1,942 | ||||||
Other long-term liabilities |
3,778 | 1,649 | ||||||
Commitments and contingencies |
| | ||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock: |
||||||||
$.01 Par Value, 100,000,000 shares authorized,
23,212,209 and 22,965,952 shares issued
at July 4, 2010 and September 30, 2009, respectively |
232 | 230 | ||||||
Additional paid in capital |
233,277 | 227,288 | ||||||
Treasury stock at cost, 1,219,077 shares at
July 4, 2010 and September 30, 2009 |
(19,923 | ) | (19,923 | ) | ||||
Retained earnings |
116,528 | 111,983 | ||||||
TOTAL STOCKHOLDERS EQUITY |
330,114 | 319,578 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 378,472 | $ | 380,025 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(In thousands, except share and per share amounts)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(In thousands, except share and per share amounts)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
July 4, 2010 | June 28, 2009 | July 4, 2010 | June 28, 2009 | |||||||||||||
CONTRACT REVENUES |
$ | 64,130 | $ | 91,005 | $ | 214,660 | $ | 270,603 | ||||||||
COST OF REVENUES |
61,747 | 72,732 | 183,213 | 219,274 | ||||||||||||
GENERAL AND ADMINISTRATIVE
EXPENSES |
9,597 | 6,400 | 18,356 | 18,316 | ||||||||||||
RESEARCH AND DEVELOPMENT
EXPENSES |
2,680 | 2,341 | 7,959 | 6,478 | ||||||||||||
INCOME (LOSS) FROM OPERATIONS |
(9,894 | ) | 9,532 | 5,132 | 26,535 | |||||||||||
INTEREST INCOME (EXPENSE), NET |
20 | 5 | 27 | (21 | ) | |||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(9,874 | ) | 9,537 | 5,159 | 26,514 | |||||||||||
(BENEFIT) PROVISION FOR INCOME TAXES |
(5,096 | ) | 2,945 | 613 | 8,917 | |||||||||||
NET INCOME (LOSS) |
$ | (4,778 | ) | $ | 6,592 | $ | 4,545 | $ | 17,597 | |||||||
EARNINGS (LOSS) PER SHARE (Basic) |
$ | (0.22 | ) | $ | 0.30 | $ | 0.21 | $ | 0.81 | |||||||
EARNINGS (LOSS) PER SHARE (Diluted) |
$ | (0.22 | ) | $ | 0.30 | $ | 0.20 | $ | 0.80 | |||||||
WEIGHTED-AVERAGE SHARES
OUTSTANDING |
||||||||||||||||
Basic |
21,917,570 | 21,687,149 | 21,849,546 | 21,689,761 | ||||||||||||
Diluted |
21,917,570 | 22,005,663 | 22,295,946 | 21,995,851 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
For the Nine Months Ended | ||||||||
July 4, 2010 | June 28, 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 4,545 | $ | 17,597 | ||||
Adjustments to reconcile net income to net cash used in
operating activities: |
||||||||
Depreciation and amortization |
7,056 | 6,174 | ||||||
Claims resolution |
| 640 | ||||||
Amortization of deferred costs |
126 | 126 | ||||||
Deferred income tax (benefit) |
(917 | ) | (1,348 | ) | ||||
Stock-based compensation |
4,995 | 2,812 | ||||||
Other |
134 | 314 | ||||||
Change in: |
||||||||
Accounts receivable, net |
7,440 | (19,614 | ) | |||||
Inventory |
(4,634 | ) | (1,367 | ) | ||||
Prepaids and other |
1,888 | 2,120 | ||||||
Accounts payable and accrued expenses |
(11,096 | ) | 1,461 | |||||
Accrued salaries and related expenses |
791 | 4,946 | ||||||
Deferred revenue |
1,692 | 4,439 | ||||||
Income taxes |
(11,477 | ) | 2,714 | |||||
Other liabilities |
1,162 | (194 | ) | |||||
Net cash provided by operating activities |
1,705 | 20,820 | ||||||
Cash flows from investing activities |
||||||||
Acquisitions of property, equipment and software |
(4,833 | ) | (6,438 | ) | ||||
Other |
(194 | ) | 68 | |||||
Net cash used in investing activities |
(5,027 | ) | (6,370 | ) | ||||
Cash flows from financing activities |
||||||||
Stock repurchases |
| (1,498 | ) | |||||
Payments on capital leases |
(22 | ) | (45 | ) | ||||
Tax benefit of stock option exercises |
400 | 179 | ||||||
Proceeds from exercise of stock options |
1,499 | 245 | ||||||
Restricted shares reacquired in net share issuance |
(212 | ) | | |||||
Proceeds from employee stock purchase plan purchases |
269 | 251 | ||||||
Net cash provided by (used in) financing activities |
1,934 | (868 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(1,388 | ) | 13,582 | |||||
Cash and cash equivalents, beginning of period |
43,108 | 15,380 | ||||||
Cash and cash equivalents, end of period |
$ | 41,720 | $ | 28,962 | ||||
Supplemental disclosure |
||||||||
Income taxes paid |
$ | 12,607 | $ | 7,353 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (unaudited)
(In thousands, except share data)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (unaudited)
(In thousands, except share data)
Total | ||||||||||||||||||||||||
Common Stock | Common Stock | Additional Paid in | Retained | Stockholders | ||||||||||||||||||||
Number of Shares | Par Value | Capital | Treasury Stock | Earnings | Equity | |||||||||||||||||||
Balance, October 1, 2009 |
22,965,952 | $ | 230 | $ | 227,288 | $ | (19,923 | ) | $ | 111,983 | $ | 319,578 | ||||||||||||
Net income |
| | | | 4,545 | 4,545 | ||||||||||||||||||
Shares issued upon exercise
of stock options |
157,642 | 1 | 1,498 | | | 1,499 | ||||||||||||||||||
Restricted stock units vested |
75,555 | 1 | (213 | ) | | | (212 | ) | ||||||||||||||||
ESPP |
13,060 | | 269 | | | 269 | ||||||||||||||||||
Stock-based compensation |
| | 4,035 | | | 4,035 | ||||||||||||||||||
Tax benefit on stock option
exercises |
| | 400 | | | 400 | ||||||||||||||||||
Balance, July 4, 2010 |
23,212,209 | $ | 232 | $ | 233,277 | $ | (19,923 | ) | $ | 116,528 | $ | 330,114 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
(In thousands, except share and per share amounts)
1. TENDER OFFER AND SUBSEQUENT MERGER
On June 30, 2010, Argon ST, Inc. (Argon or the Company), Vortex Merger Sub, Inc.
(Vortex), a wholly owned subsidiary of The Boeing Company (Boeing) and Boeing entered into an
Agreement and Plan of Merger (the Merger Agreement) pursuant to which Vortex commenced a cash
tender offer (the Offer) at $34.50 per share for all of Argons outstanding shares of common
stock. The tender offer commenced on July 8, 2010 and expired on August 4, 2010. On August 5,
2010, Vortex accepted all of the shares tendered, and Argon subsequently merged (the Merger) with
Vortex on August 5, 2010, at which point Argon became a wholly owned subsidiary of Boeing.
The accompanying unaudited financial statements do not include the effects of the Merger, nor do they include
any adjustments associated with the purchase price allocation of the Merger.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) for interim financial information and the Security and Exchange Commission instructions to
Form 10-Q. Accordingly, they do not include all of the information and disclosures required by
U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for fair presentation have been
included. Operating results for the three and nine month periods ended July 4, 2010, are not
necessarily indicative of the results that may be expected for the fiscal year ending September 30,
2010. Inter-company accounts and transactions have been eliminated in consolidation. For further
information, refer to the consolidated financial statements and footnotes thereto included in Argon
ST, Inc.s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
Reclassifications are made to the prior year financial statements when appropriate, to conform to
the current year presentation.
Argon maintains a September 30 fiscal year-end for annual financial reporting purposes. Argon
presents its interim periods ending on the Sunday closest to the end of the month for each quarter
consistent with labor and billing cycles. As a result, each quarter of each year may contain more
or less days than other quarters of the year. The quarterly periods ending July 4, 2010 and June
28, 2009 each contained 13 weeks. Management does not believe that this practice has a material
effect on quarterly results or on the comparison of such results.
Argon records contract revenues and costs of operations for interim reporting purposes based
on annual targeted indirect rates. At year-end, the revenues and costs are adjusted for actual
indirect rates. During the Companys interim reporting periods, variances may accumulate between
the actual indirect rates and the annual targeted rates due to necessarily uneven rates of spending
throughout the year and from fluctuations in direct labor. When such amounts are believed to be
recoverable, timing-related indirect spending variances are not applied to contract costs, research
and development, and general and administrative expenses, but are included in unbilled receivables
during these interim reporting periods. These rates are reviewed regularly, and the Company
records adjustments for any material, permanent variances in the period they become determinable.
Argons accounting policy for recording indirect rate variances requires management to
forecast and determine whether or not variances accumulated during interim reporting periods will
be absorbed by management actions to control costs during the remainder of the year. The Company
considers the rate variance to be unfavorable when the actual indirect rates are greater than the
Companys annual targeted rates. During interim reporting periods, unfavorable rate variances are
recorded as reductions to operating expenses and increases to unbilled receivables. To the extent
such amounts are recoverable, favorable rate variances are recorded as increases to operating
expenses and decreases to unbilled receivables.
At July 4, 2010, the unfavorable rate variance totaled $7,176. During the three months ended
July 4, 2010, management concluded that the entire rate variance for fiscal year 2010 was
permanent. As a result, the entire rate variance, including the portion accumulated in the first
and second quarters, has been charged to earnings in the third quarter. As of the end of the second
fiscal quarter, management believed that bookings and forecasted direct labor for the remainder of
the year, when coupled with management of indirect costs, would be such that the $5,481 million
variance in existence at that time would be absorbed in the second half of fiscal 2010. During the
third quarter, the Company experienced delays in bookings resulting in lower than anticipated
contract activity and direct labor which outpaced managements ability to reduce indirect spend.
To the extent that the Company is not able to
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
achieve its target rates in the fourth quarter of fiscal 2010, incremental rate variances incurred
in that quarter will be expensed as incurred.
During the third quarter of fiscal 2010, management became aware of facts and circumstances
leading it to change its estimated costs to complete the OG2 program. The resulting estimate
anticipates a loss of $3,193 at the end of the subcontract with Sierra Nevada for the build of the
ORBCOMM Generation Two Payload. Prior to the third quarter of fiscal year 2010, the Company had
recorded approximately $3,207 of accumulated profit with respect to such project. As such,
management recorded an adjustment in the third quarter of fiscal 2010 totaling $6,400 to reduce the
profit recorded on the work and to recognize the anticipated future contract loss. The provision
for the estimated loss on this contract is included in accounts payable and other accrued expenses
on the accompanying consolidated balance sheet at July 4, 2010.
3. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common shares
outstanding during each period. Diluted earnings per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during each period. The
following summary is presented for the three and nine months ended July 4, 2010 and June 28, 2009:
For the three months ended | For the nine months ended | |||||||||||||||
July 4, 2010 | June 28, 2009 | July 4, 2010 | June 28, 2009 | |||||||||||||
Net income (loss) |
$ | (4,778 | ) | $ | 6,592 | $ | 4,545 | $ | 17,597 | |||||||
Weighted average shares outstanding basic |
21,917,570 | 21,687,149 | 21,849,546 | 21,689,761 | ||||||||||||
Basic earnings (loss) per share |
$ | (0.22 | ) | $ | 0.30 | $ | 0.21 | $ | 0.81 | |||||||
Effect of dilutive securities: |
||||||||||||||||
Net shares issuable upon exercise of stock
options and awards |
| 318,514 | 446,400 | 306,090 | ||||||||||||
Weighted average shares outstanding
diluted |
21,917,570 | 22,005,663 | 22,295,946 | 21,995,851 | ||||||||||||
Diluted earnings (loss) per share |
$ | (0.22 | ) | $ | 0.30 | $ | 0.20 | $ | 0.80 |
Stock options and awards that could potentially dilute basic EPS in the future that were not
included in the computation of diluted EPS, because to do so would have been antidilutive, were
2,132,139 and 672,308 for the three and nine months ended July 4, 2010, respectively, and were
955,927 and 1,108,322 for the three and nine months ended June 28, 2009, respectively.
4. STOCK-BASED COMPENSATION
The Company issues stock options, restricted stock units (RSUs) and stock appreciation
rights (SARs) on an annual or selective basis to our directors and key employees. The fair value
of the RSUs is computed using the closing price of the stock on the date of grant. The fair value
of the stock options and the SARs is computed using a binomial option pricing model. Assumptions
related to the volatility are based on an analysis of our historical volatility. The estimated
fair value of each award is included in cost of revenues or general and administrative expenses
over the vesting period during which an employee provides services in exchange for the award.
Stock-based compensation, which includes compensation recognized on stock option grants and
restricted stock awards, has been included in the following line items in the accompanying
condensed consolidated statements of earnings.
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
For the three months ended | For the nine months ended | |||||||||||||||
June 28, | July 4, | June 28, | ||||||||||||||
July 4, 2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of revenues |
$ | 1,315 | $ | 678 | $ | 3,580 | $ | 1,921 | ||||||||
General and administrative expense |
567 | 327 | 1420 | 891 | ||||||||||||
Total pre-tax stock-based compensation included in
income from operations |
1,882 | 1,005 | 5,000 | 2,812 | ||||||||||||
Income tax expense (benefit) recognized for
stock-based compensation |
(563 | ) | (250 | ) | (1,430 | ) | (707 | ) | ||||||||
Total stock-based compensation expense, net of tax |
$ | 1,319 | $ | 755 | $ | 3,570 | $ | 2,105 | ||||||||
As of July 4, 2010, there was $10,343 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements. As a result of the change in control following
completion of Boeings tender offer, all equity-based instruments were cancelled with compensation
paid in lieu as though the instruments had fully vested on August 5, 2010.
Stock Option Activity
The following table summarizes stock option activity for the nine months ended July 4, 2010.
On July 2, 2010, the closing price of our common stock was $34.27.
Weighted-Average | ||||||||||||||||
Weighted-Average | Remaining | Aggregate Intrinsic | ||||||||||||||
Number of Shares | Exercise Price | Contractual Term | Value | |||||||||||||
Shares under option, September 30, 2009 |
1,675,872 | $ | 18.50 | |||||||||||||
Options granted |
155,500 | 21.23 | ||||||||||||||
Options exercised |
(157,642 | ) | 9.51 | $ | 2,798 | |||||||||||
Options cancelled and expired |
(22,870 | ) | 25.24 | |||||||||||||
Shares under option, July 4, 2010 |
1,650,860 | 19.52 | 5.32 | $ | 24,348 | |||||||||||
Options vested at July 4, 2010 |
1,160,503 | 18.75 | 4.35 | $ | 18,011 | |||||||||||
As of July 4, 2010, options that are
vested and expected to vest prior to
expiration |
1,642,610 | $ | 19.49 | 5.32 | $ | 24,274 |
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
Restricted Share Activity
Restricted share awards are those shares issued to the Companys Board of Directors, senior
management and other employees. The following table summarizes restricted share award activity for
the nine months ended July 4, 2010:
Weighted-Average | ||||||||
Grant Date Fair | ||||||||
Number of Shares | Value | |||||||
Unvested shares, September 30, 2009 |
425,663 | $ | 20.37 | |||||
Award shares granted |
152,250 | 21.18 | ||||||
Award shares vested |
(77,555 | ) | 18.31 | |||||
Award shares surrendered for taxes |
(9,954 | ) | 18.31 | |||||
Award shares forfeited |
(11,125 | ) | 22.61 | |||||
Unvested shares, July 4, 2010 |
481,279 | $ | 20.94 | |||||
The Company awarded a total of 40,000 shares to its ten non-employee board members on December
14, 2009. The stock will vest one year after the award date. The grant date market price of these
awards was $21.09 per share and amortization of such fair value is included in General and
Administrative expenses in the accompanying Condensed Consolidated Statements of Earnings.
The Company awarded a total of 112,250 restricted shares to its executive, senior management
and other employees during the nine months ended July 4, 2010. All awards vest on a graded
five-year schedule. The weighted average grant date market value of these awards was $21.22 per
share and the amortization of such fair value is included in Costs of Revenues and General and
Administrative expenses in the accompanying Condensed Consolidated Statements of Earnings.
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of:
July 4 , | September 30, | |||||||
2010 | 2009 | |||||||
Billed and billable |
$ | 39,059 | $ | 46,070 | ||||
Unbilled costs and fees |
63,671 | 64,779 | ||||||
Retainages |
6,352 | 6,109 | ||||||
Reserve |
| (302 | ) | |||||
Accounts receivable, net |
$ | 109,082 | $ | 116,656 | ||||
The unbilled costs, fees, and retainages result from recognition of contract revenue in
advance of contractual or progress billing terms. Retainages include costs and fees on
cost-reimbursable and time and material contracts withheld until audits are completed by Defense
Contract Audit Agency (DCAA) and costs and fees withheld on progress payments on fixed price
contracts. Reserves are determined based on managements best estimate of potentially
uncollectible accounts receivable. The company writes off accounts receivable when such amounts are
determined to be uncollectible.
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
6. INVENTORY
Inventories are stated at the lower of cost or market, determined on the first-in, first-out
basis. Inventories consist of the following at the dates shown below:
July 4, | September 30, | |||||||
2010 | 2009 | |||||||
Raw Materials |
$ | 5,490 | $ | 3,212 | ||||
Component parts, work in process |
3,322 | 797 | ||||||
Finished component parts |
2,134 | 2,303 | ||||||
10,946 | $ | 6,313 | ||||||
Reserve |
(291 | ) | (291 | ) | ||||
Inventory, net |
$ | 10,655 | $ | 6,021 | ||||
7. PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software consist of the following as of:
July 4, | September 30, | |||||||
2010 | 2009 | |||||||
Computer, machinery and test equipment |
$ | 37,434 | $ | 29,841 | ||||
Leasehold improvements |
13,662 | 12,238 | ||||||
Computer software |
5,504 | 5,575 | ||||||
Furniture and fixtures |
1,516 | 1,514 | ||||||
Equipment under capital lease |
170 | 337 | ||||||
Construction in progress |
6,694 | 11,813 | ||||||
64,980 | 61,318 | |||||||
Less accumulated depreciation and amortization |
(38,458 | ) | (33,276 | ) | ||||
$ | 26,522 | $ | 28,042 | |||||
As of July 4, 2010, the Company has capitalized $6,694 of construction in progress primarily
consisting of $5,145 of costs incurred in connection with the construction of two assets to be used
internally for test equipment, demonstration equipment and other purposes. Management is currently
assessing the expected completion date of these assets.
8. REVOLVING LINE OF CREDIT
The Company maintains a $40,000 line of credit with Bank of America, N.A. (the Lender). The
credit facility will terminate no later than February 28, 2012. The credit facility contains a
sublimit of $15,000 to cover letters of credit. In addition, borrowings on the line of credit bear
interest at LIBOR plus 175 basis points. An unused commitment fee of 0.25% per annum, payable in
arrears, is also required.
All borrowings under the line of credit are collateralized by all tangible assets of the
Company. The line of credit agreement includes customary restrictions regarding additional
indebtedness, business operations, permitted acquisitions, liens, guarantees, transfers and sales
of assets, and maintaining the Companys primary accounts with the Lender. Borrowing availability
under the line of credit is equal to the product of 1.5 and the Companys earnings before interest
expense, taxes, depreciation and amortization (EBITDA) for the trailing 12 months, calculated as of
the end of each fiscal quarter. For the fiscal quarter ending July 4, 2010, EBITDA, on a trailing
12 month basis, was $24,352 and as such, the borrowing availability was $36,528. The agreement
requires the Company to comply with a specific EBITDA to Funded Debt ratio, and contains customary
events of default, including the failure to make timely payments and the failure to satisfy
covenants, which would permit the Lender to
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
accelerate repayment of borrowings under the agreement if not cured within the applicable grace
period. As of July 4, 2010, the Company was in compliance with these covenants and the financial
ratio.
On July 4, 2010, there were no borrowings outstanding against the line of credit. Letters of
credit and debt consisting of capital lease obligations at July 4, 2010, amounted to $2,383, and
$34,145 was available on the line of credit. Upon completion of the tender offer by Vortex, on
August 5, 2010, the credit facility terminated.
9. INCOME TAXES
The Company is subject to U.S. federal income tax as well as income tax of multiple state
jurisdictions. The Company has substantially concluded all U.S. state income tax matters for years
through 2005, except for California and Michigan state returns which have a four year statute of
limitations. The Companys consolidated federal income tax return was examined through September
30, 2004, and all matters have been settled.
With respect to income tax uncertainties, based on all known facts and circumstances and
current tax law, the Company believes that the total amount of unrecognized tax benefits on July 4,
2010, is not material to the results of operations, financial condition or cash flows. The Company
also believes that the total amount of unrecognized tax benefits on July 4, 2010, if recognized,
would not have a material impact on the effective tax rate. The Company further believes that there
are no tax positions for which it is reasonably possible that the unrecognized tax benefits will
significantly increase or decrease over the next 12 months producing, individually or in the
aggregate, a material effect on the results of operations, financial condition or cash flows.
During the third quarter of fiscal year 2010, the Company amended its 2006 tax return to take
advantage of an extra-territorial income exclusion. Additionally, the Company intends to file an
amendment to its 2007 through 2009 tax returns. As a result of its amended return, the Company
recorded a $1,226 benefit in the third quarter of fiscal year 2010. The Company has recorded a
$635 benefit associated with additional exclusions to be claimed for the 2007 through 2009 tax
years.
The Companys accounting policy is to recognize interest and penalties related to income tax
matters in income tax expense. The Company had no accrued interest and penalties as of July 4,
2010.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and cash equivalents and SARs. We do not have any
significant non-financial assets and liabilities measured at fair value on July 4, 2010. The
valuation techniques required by the Financial Accounting Standards Board Accounting Standard
Codification (FASB ASC) Topic 820, Fair Value Measurements and Disclosures, are based upon
observable and unobservable inputs. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect internal market assumptions. These two types of inputs
create the following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations whose
inputs are observable or whose significant value drivers are observable.
Level 3 Significant inputs to the valuation model are unobservable.
Our SAR liabilities are valued using Level Two inputs as the valuation is based on a
model-derived valuation. The related liability at July 4, 2010 was $1,281.
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
11. COMMITMENTS AND CONTINGENCIES
On July 2, 2010, Deidre Noelle Sullivan, alleging herself to be a stockholder of Argon, filed
a purported stockholder class action complaint in the United States District Court for the Eastern
District of Virginia, captioned Sullivan v. Argon ST, Inc., et al. (the Sullivan Complaint), in
connection with the Offer and the Merger. The complaint names as defendants Argon and the members
of Argons board of directors. The suit alleges that the members of Argons board of directors
breached their fiduciary duties to Argons shareholders in connection with the sale of Argon and
that Argon aided and abetted the breach of fiduciary duty. The suit sought equitable relief,
including an injunction against the Offer and the Merger and also sought the costs of the action,
including attorneys fees, experts fees and other costs. On July 12, 2010, the plaintiff filed an
amended complaint (the Amended Complaint). The Amended Complaint (i) added Vortex and Boeing as
defendants, (ii) added allegations that the Schedule 14D-9 filed by Argon with the SEC in
connection with the Offer and the Merger contained materially misleading statements and omitted
material information and (iii) alleged that Vortex and Boeing aided and abetted the alleged breach
of fiduciary duty. On July 12, 2010, the plaintiff also filed a motion seeking to expedite
discovery in anticipation of a forthcoming motion for a preliminary injunction to enjoin the
defendants from proceeding with, consummating or otherwise giving effect to the Offer and the
Merger. On July 19, 2010, the plaintiff filed a corrected amended complaint removing certain
allegations from the previous pleading (the Corrected Amended Complaint). On July 20, 2010, the
defendants filed motions to dismiss the Sullivan Complaint and oppositions to the plaintiffs
motion for expedited discovery. On July 23, 2010, the United States District Court for the Eastern
District of Virginia denied the plaintiffs motion for expedited discovery at a hearing held to
consider only that motion. On August 4, 2010, the plaintiff voluntarily dismissed the Corrected
Amended Complaint without prejudice.
The Company is subject to litigation from time to time, in the ordinary course of business
including, but not limited to, allegations of wrongful termination or discrimination. The Company
believes the outcome of such matters will not have a material adverse effect on our results of
operations, financial position or cash flows.
12. RELATED PARTY TRANSACTIONS
On September 30, 2009, in the ordinary course of the Companys business operations, the
Company was awarded a $475 contract to develop a technology related to global positioning for
Strata Products Worldwide, LLC (Strata). Strata designs and manufactures emergency refuge
chambers and innovative underground mining roof support products and provides mine construction
services to underground mining operations. S. Kent Rockwell, a member of our Board of Directors,
owns a significant amount of the voting interests of Strata. The Companys expected profit on the
program is consistent with similar business arrangements that the Company maintains with its other
customers. As of July 4, 2010, the Company has recognized $464 in revenue related to the work
awarded under this contract.
13. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred after July 4, 2010 up through
the issuance of these financial statements. During this period the Company did not have any
significant subsequent events, other than those related to the Offer and the Merger.
14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued an amendment which requires entities to provide more information
about the sale of securitized financial assets and similar transactions in which the entity retains
some risk related to the assets. This amendment is effective for fiscal years beginning after
November 15, 2009. The Company does not believe the adoption of this amendment will have a material
impact on its consolidated financial position, results of operations, or cash flows.
In June 2009, the FASB issued an amendment, which changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting (or similar rights)
should be consolidated. Under this guidance, determining whether a company is required to
consolidate an entity will be based on, among other
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ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share amounts)
things, an entitys purpose and design and a companys ability to direct the activities of the
entity that most significantly impact the entitys economic performance. This amendment is
effective for fiscal years beginning after November 15, 2009. The Company does not believe the
adoption will have a material impact on its consolidated financial position, results of operations,
or cash flows.
In October 2009, the FASB revised the accounting guidance for revenue arrangements with
multiple deliverables. The revision: (1) removes the objective-and-reliable-evidence-of-fair-value
criterion from the separation criteria used to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, (2) provides a hierarchy that entities must
use to estimate the selling price, (3) eliminates the use of the residual method for allocation,
and (4) expands the ongoing disclosure requirements. This guidance is effective for the Company
beginning October 1, 2010 and can be applied prospectively or retrospectively. The Company does not
believe the adoption will have a material impact on its consolidated financial position, results of
operations, or cash flows.
In October 2009, the FASB revised the accounting guidance for multi-deliverable software
arrangements. The revision provides an exclusion from software revenue recognition rules for
tangible products that contain both software and non-software components that function together to
deliver a products essential functionality. The revision is effective prospectively for revenue
arrangements entered into or materially modified in our fiscal year beginning October 1, 2010.
Early adoption is permitted. The Company does not believe the adoption will have a material impact
on its consolidated financial position, results of operations, or cash flows.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion provides information which management believes is relevant to an
assessment and an understanding of the Companys operations and financial condition. This
discussion should be read in conjunction with the attached unaudited condensed consolidated
financial statements and accompanying notes as well as our annual report on Form 10-K for the
fiscal year ended September 30, 2009.
Forward-looking Statements
Statements in this filing which are not historical facts are forward-looking statements under
the provision of the Private Securities Litigation Reform Act of 1995. These statements may contain
words such as expects, could, believes, estimates, intends, may, envisions, targets
or other similar words. Forward-looking statements are not guarantees of future performance and are
based upon numerous assumptions about future conditions that could prove not to be accurate.
Forward-looking statements are subject to numerous risks and uncertainties, and our actual results
could differ materially as a result of such risks and other factors. In addition to those risks
and uncertainties specifically mentioned in this report and in the other reports filed by the
Company with the Securities and Exchange Commission (including our Form 10-K for the fiscal year
ended September 30, 2009), such risks and uncertainties include, but are not limited to: the
availability of U.S. and international government and commercial funding for our products and
services, including total estimated remaining contract values and the U.S. governments procurement
activities related thereto; changes in the U.S. federal government procurement laws, regulations,
policies and budgets (including changes to respond to budgetary constraints and cost-cutting
initiatives as well as changes increasing internal costs for monitoring, audit and reporting
activity); changes in appropriations types and amounts due to the expenditures priorities in
Washington; the future impact of the Merger and our ability to realize anticipated synergies
related to the Merger; the governments ability to hire and retain contracting personnel; the
number and type of contracts and task orders awarded to us; the exercise by the U.S. government of
options to extend our contracts; our ability to retain contracts during any rebidding process;
decisions by government agencies on the methods of seeking contractor support; the timing of
Congressional funding on our contracts; any delay or termination of our contracts and programs;
difficulties in developing and producing operationally advanced technology systems; our ability to
secure business with government prime contractors; our ability to maintain adequate and unbroken
supplier performance; the timing and customer acceptance of contract deliverables; our ability to
attract and retain qualified personnel, including technical personnel and personnel with required
security clearances; charges from any future impairment reviews; the competitive environment for
defense and intelligence information technology products and services; the ability, because of the
global economy and issues in the banking industry, to secure financing when and if needed; the
financial health and business plans of our commercial customers; general economic, business and
political conditions domestically and internationally; and other factors affecting our business
that are beyond our control. All of the forward-looking statements should be considered in light
of these factors. You should not put undue reliance on any forward-looking statements. We
undertake no obligation to update these forward-looking statements to reflect new information,
future events or otherwise.
Tender Offer and Merger
On June 30, 2010, the Company entered into the Merger Agreement, as further described in note
1 above to the Companys condensed consolidated financial statements. The Merger Agreement was
filed as an exhibit to a Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 30, 2010. The description of the Merger Agreement in note 1 above is qualified
in its entirety by reference to the full text of the Merger Agreement.
General
We are a leading systems engineering and development company providing full-service C5ISR
(command, control, communications, computers, combat systems, intelligence, surveillance and
reconnaissance) systems in several markets, including without limitation maritime defense, airborne
reconnaissance, ground systems, tactical communications and network systems. These systems and
services are provided to a wide range of defense and
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intelligence customers, including commercial
enterprises. Our systems provide communications intelligence, electromagnetic intelligence,
electronic warfare and information operations capabilities that enable our defense and intelligence
customers to detect, evaluate and respond to potential threats. These systems are deployed on a
range of military and strategic platforms including surface ships, submarines, unmanned underwater
vehicles (UUV), aircraft, unmanned aerial vehicles (UAV), land mobile vehicles, fixed site
installations and re-locatable land sites.
As a result of shifts in governmental budgets and priorities over the last two years, we have
continually reviewed our technology and capability offerings. We continue to believe that the U.S.
government will retain prioritization of and focus on C5ISR spending as sources of threat have
increased in both quantity and complexity. However, during fiscal year 2009 and in 2010, we have
experienced delays in the government procurement and contract administration cycles, which has
resulted in lower than anticipated bookings.
While we continue to see opportunities across a broad spectrum of our technology and
capability offerings, including international opportunities, our operating results have been
negatively impacted by both our revenue performance as well as our indirect rate variances.
Impacts from booking delays, coupled with the additional costs associated with the pursuit of
strategic alternatives and a change in estimate on our OG2 program, resulted in a loss for the
third quarter of fiscal 2010.
Revenues
Our revenues are generated from the entire life cycle of complex systems under contracts
primarily with the U.S. government and major domestic prime contractors, but also with foreign
governments, agencies and defense contractors. This life cycle spans the design, development,
production, installation and support of the system.
Our government contracts can be divided into three major types: cost reimbursable,
fixed-price, and time and materials. Cost reimbursable contracts are primarily used for system
design and development activities involving considerable risks to the contractor, including risks
related to cost estimates on complex systems, performance risks associated with real time signal
processing, embedded software, high performance hardware, and requirements that are not fully
understood by the customer or us, the development of technology that has never been used, and
interfaces with other systems that are in development or are obsolete without adequate
documentation. Fees under these contracts are usually fixed at the time of negotiation; however, in
some cases the fee is an incentive or award fee based on cost, schedule, and performance or a
combination of those factors. Although the U.S. government customer assumes the cost risk on these
contracts, the contractor is not allowed to exceed the cost ceiling on the contract without the
approval of the customer.
Fixed-price contracts are typically used for the production of systems. Lower risk development
activities are also usually covered by fixed-price contracts. In these contracts, cost risks are
borne entirely by the contractor. Some fixed-price contracts include an award fee or an incentive
fee as well as the negotiated profit. Most foreign customers, and some U.S. customers, use
fixed-price contracts for design and development work even when the work is considered high risk.
Time and material contracts are based on hours worked, multiplied by pre-negotiated labor
rates, plus other costs incurred, allocated and approved.
The following table represents our revenue concentration by contract type for the three and
nine months ended July 4, 2010 and June 28, 2009:
Three Months Ended | Nine Months Ended | |||||||||||||||
Contract Type | July 4, 2010 | June 28, 2009 | July 4, 2010 | June 28, 2009 | ||||||||||||
Fixed-price contracts |
43 | % | 52 | % | 51 | % | 53 | % | ||||||||
Cost reimbursable contracts |
54 | % | 42 | % | 46 | % | 41 | % | ||||||||
Time and material contracts |
3 | % | 6 | % | 3 | % | 6 | % |
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Our primary business model is to capture the full life cycle of a system beginning with
concept development and progressing through development, production and end of cycle support and
logistics. Additional cycles developing and producing next generation systems are sought to
provide multi-year and multi-decade opportunities. Early cycle programs are typically cost-type
contracts carrying lower margins while production cycle programs are typically fixed-price type
contracts carrying higher margins. End of cycle programs can be of a variety of contract types.
Through our business model, we optimize the long-term growth of the company by leveraging
long-term relationships into multiple cycles each carrying higher margin production cycles. As
such, much of our current production work has been derived from programs for which we have
performed the initial development work. With the current higher cost-type contract mix, we are
continuing to lay the groundwork for future low-rate and high-rate production orders and future
generation development and production cycles. Cost-reimbursable mix has increased as a percentage
of total revenue over the past few years, primarily as a result of our continued work on certain
large and long-run development programs, including Ships Signal Exploitation Equipment (SSEE)
Increment F, Operational Test-Tactical Engagement System (OT-TES) and Common Range Integrated
Instrumentation System (CRIIS), and the mix of contracts acquired in recent business
combinations. In all three of these programs we have either completed or are near completion of
the test and integration phases. We believe we will receive production orders during the coming
fiscal years. These production orders could cause a significant impact to our mix of contract
types and may result in larger percentages of more desirable and potentially higher margin fixed
price work although the capture of new development work generally on cost-type contracts may keep
our mix closer to current levels and provide opportunity for future production contracts. Further,
the ORBCOMM Generation Two Payload (OG2) development program, a fixed price contract, entered the
final testing phases in late 2009 and early 2010 which caused a decrease in fixed price work in
fiscal 2010. During these final testing phases, the level of effort of both labor and materials
are much less than the large level of efforts needed during the development work which continued in
the first quarter of fiscal year 2009. Additionally, due to the transition of our final lots of the
SSEE Increment E program to the initial production of the SSEE increment F lots, we have
experienced less fixed price work associated with SSEE program as a whole in fiscal 2010.
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Backlog
We define backlog as the funded and unfunded amount provided in our contracts, less previously
recognized revenue. Contract options are estimated separately and not included in backlog until
they are exercised and funded. Backlog does not include the value of a contract where the customer
has given permission to begin or continue working, but where a formal contract or contract
extension has not yet been signed.
Our funded backlog does not include the full value of our contracts, because Congress often
appropriates funds for a particular program or contract on a yearly or quarterly basis, or less,
even though the contract may call for performance that is expected to take a number of years.
From time to time, we will exclude from backlog portions of contract values of very long or
complex contracts where we believe revenue could be jeopardized by a change in government policy.
Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at
any particular date is not necessarily representative of actual sales to be expected for any future
period, and actual sales for the year may not meet the backlog represented. We may experience
significant contract cancellations that were previously booked and included in backlog.
Our backlog at the dates shown was as follows (in thousands):
July 4, | September 30, | |||||||
2010 | 2009 | |||||||
Funded |
$ | 151,882 | $ | 137,947 | ||||
Unfunded |
84,037 | 95,413 | ||||||
Total |
$ | 235,919 | $ | 233,360 | ||||
During 2009 and continuing in the early part of fiscal 2010, we have experienced delays in the
government procurement process, which has resulted in lower than anticipated bookings. We do not
believe that this represents an indication of any long-term impact to our programs, but rather is
due to changes in the administrative process of getting programs through the bid to final contract
stages.
Cost of Revenues
Cost of revenues consist of direct costs incurred on contracts such as labor, materials,
travel, subcontracts and other direct costs and indirect costs associated with overhead expenses
such as facilities, fringe benefits and other costs that are not directly related to the execution
of a specific contract. We plan our spending of indirect costs on an annual basis and on cost
reimbursable contracts, we receive government approval to bill those costs as a percentage of our
direct labor, other direct costs and direct materials as we execute our contracts. The U.S.
government approves the planned indirect rates as provisional billing rates near the beginning of
each fiscal year.
General and Administrative Expenses
Our general and administrative expenses include administrative salaries, costs related to
proposal activities and other administrative costs.
Research and Development
We conduct internally funded research and development into complex signal processing, system
and software architectures, and other technologies that are important to continued advancement of
our systems and are of interest to our current and prospective customers. The variance from year to
year in internal research and development is caused by the status of our product cycles and the
level of complementary U.S. government funded research and development. For the three and nine
months ended July 4, 2010, internally funded research and development expenditures were $2.7
million and $8.0 million, respectively, representing approximately 4% of
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revenues in both periods.
For the three and nine months ended June 28, 2009, internally funded research and development
expenditures were $2.3 million and $6.5 million, respectively, representing approximately 3% and 2%
of revenues in each period, respectively.
Internally funded research and development is a small portion of our overall research and
development, as government funded research and development constitutes the majority of our
activities in this area.
Interest Income and Expense
Interest income is derived solely from interest earned on cash reserves maintained in
short-term investment accounts and are therefore subject to short-term interest rates that have
minimal risk.
Interest expense relates to interest charged on borrowings against our line of credit and
capital leases.
Critical Accounting Practices and Estimates
General
Our discussion and analysis of our financial condition and results of operations are based
upon our financial statements. These financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those estimates. We believe that
the estimates, assumptions, and judgments involved in the accounting practices described below have
the greatest potential impact on our financial statements and, therefore, consider these to be
critical accounting practices.
Revenue and Cost Recognition
General
The majority of our contracts, which are with the U.S. government, are accounted for in
accordance with the Financial Accounting Standards Board Accounting Standard Codification (FASB
ASC) Topic 605-35-25, Revenue Recognition Construction-Type and Production-Type Contracts
General. These contracts are transacted using written contractual arrangements, most of which
require us to design, develop, manufacture and/or modify complex products and systems, and perform
related services according to specifications provided by the customer. We account for fixed-price
contracts by using the percentage-of-completion method of accounting and for substantially all
contracts, the cost-to-cost method is used to measure progress towards completion. Under this
method, contract costs are charged to operations as incurred. A portion of the contract revenue,
based on estimated profits and the degree of completion of the contract as measured by a comparison
of the actual and estimated costs, is recognized as revenue each period. In the case of contracts
with materials requirements, revenue is recognized as those materials are applied to the production
process in satisfaction of the contracts end objectives. We account for cost reimbursable
contracts by charging contract costs to operations as incurred and recognizing contract revenues
and profits by applying the negotiated fee rate to actual costs on an individual contract basis.
In certain circumstances, and based on correspondence with the end customer, management
authorizes work to commence or to continue on a contract option, addition or amendment prior to the
signing of formal modifications or amendments. We recognize revenue to the extent it is probable
that the formal modifications or amendments will be finalized in a timely manner and that it is
probable that the revenue recognized will be collected.
Contract revenue recognition inherently involves estimation. Examples of estimates include
the contemplated level of effort to accomplish the tasks under the contract, the cost of the
effort, and an ongoing assessment of our progress toward completing the contract. From time to
time, as part of our management processes, facts develop that require us to revise our estimated
total costs or revenue. To the extent that a revised estimate affects contract profit or revenue
previously recognized, we record the cumulative effect of the revision in the period in which the
facts requiring the revision become known.
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Anticipated losses on contracts are also recorded in the period in which they become
determinable. Unexpected increases in the cost to develop or manufacture a product, whether due to
inaccurate estimates in the bidding process, unanticipated increases in material costs,
inefficiencies, or other factors are borne by us on fixed-price contracts, and could have a
material adverse effect on results of operations and financial condition. Unexpected cost increases
in cost reimbursable contracts may be borne by us for purposes of maintaining customer
relationships. If the customer agrees to fund cost increases on cost type contracts, the additional
work does not have any profit and therefore dilutes margin.
Indirect rate variance
We record contract revenues and costs of operations for interim reporting purposes based on
annual targeted indirect rates. At year-end, the revenues and costs are adjusted for actual
indirect rates. During our interim reporting periods, variances may accumulate between the actual
indirect rates and the annual targeted rates. Timing-related indirect spending variances are not
applied to contract costs, research and development, and general and administrative expenses, but
are included in unbilled receivables during these interim reporting periods. These rates are
reviewed regularly, and we record adjustments for any material, permanent variances in the period
they become determinable.
Our accounting policy for recording indirect rate variances requires management to forecast
and determine whether or not variances accumulated during interim reporting periods will be
absorbed by management actions to control costs during the remainder of the year. We consider the
rate variance to be unfavorable when the actual indirect rates are greater than our annual targeted
rates. During interim reporting periods, unfavorable rate variances are recorded as reductions to
operating expenses and increases to unbilled receivables. Favorable rate variances are recorded as
increases to operating expenses and decreases to unbilled receivables.
If we anticipate that actual contract activities will be different than planned levels, there
are alternatives we may use to absorb the variance: we may adjust planned indirect spending during
the year, modify our billing rates to our customers, or record adjustments to expense for the
portion of rate variance deemed to be permanent.
If our rate variance is expected to be unfavorable for the entire fiscal year, any
modification of our indirect rates will likely increase revenue and operating expenses. Profit
percentages on fixed-price contracts will generally decline as a result of an increase to indirect
costs unless compensating savings can be achieved in the direct costs to complete the projects.
Profit percentages on cost reimbursement contracts will generally decline as a percentage of total
costs as a result of an increase in indirect costs even if the cost increase is funded by the
customer. If our rate variance is favorable, any modification of our indirect rates will decrease
revenue and operating expenses. In this event, profit percentages on fixed-price contracts will
generally increase. Profit percentages on cost-reimbursable contracts will generally be unaffected
as a result of any reduction to indirect costs, due to the fact that programs will typically expend
all of the funds available. Any impact on operating income, however, will depend on a number of
other factors, including mix of contract types, contract terms and anticipated performance on
specific contracts.
At July 4, 2010, the unfavorable rate variance totaled $7.2 million. During the three months
ended July 4, 2010, management concluded that the entire rate variance for fiscal year 2010 was
permanent. As a result, the entire rate variance, including the portion accumulated in the first
and second quarters, has been charged to earnings in the third quarter. As of the end of the second
fiscal quarter, management believed that bookings and forecasted direct labor for the remainder of
the year, when coupled with management of indirect costs, would be such that the $5.5 million
variance in existence at that time would be absorbed in the second half of fiscal 2010. During the
third quarter, the Company experienced delays in bookings resulting in lower than anticipated
contract activity and direct labor which outpaced managements ability to reduce indirect spend.
To the extent that the Company is not able to achieve its target rates in the fourth quarter of
fiscal 2010, incremental rate variances incurred in that quarter will be expensed as incurred.
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Award Fee Recognition
Our practice for recognizing interim fees on our cost-plus-award-fee contracts is based on
managements assessment as to the likelihood that the award fee or an incremental portion of the
award fee will be earned on a contract-by-contract basis. Managements assessments are based on
numerous factors including: contract terms, nature of the work performed, our relationship and
history with the customer, our history with similar types of projects, and our current and
anticipated performance on the specific contract. No award fee is recognized until management
determines that it is probable that an award fee or portion thereof will be earned. Actual fees
awarded are typically within managements estimates. However, changes could arise within an award
fee period causing management to either lower or raise the award fee estimate in the period in
which it occurs.
Goodwill
Costs in excess of the fair value of tangible and identifiable intangible assets acquired and
liabilities assumed in a business combination are recorded as goodwill. In accordance with FASB
ASC Topic 350-20, Goodwill, we test for impairment at least annually using a two-step approach.
Impairment of goodwill is tested at the reporting unit level by comparing the reporting units
carrying amount, including goodwill, to the fair value of the reporting unit. The Company operates
as a single reporting unit. The fair value of the reporting unit is estimated using a market
capitalization approach. If the carrying amount of the unit exceeds its fair value, goodwill is
considered impaired and a second step is performed to measure the amount of impairment loss, if
any. We performed the test during the fourth quarter of fiscal year 2009 and found no impairment to
the carrying value of goodwill.
Long-Lived Assets (Excluding Goodwill)
We follow the provisions of FASB ASC topic 360-10-35, Impairment or Disposal of Long-Lived
Assets in accounting for long-lived assets such as property and equipment and intangible assets
subject to amortization. This topic requires that long-lived assets be reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset may not be fully
recoverable. An impairment loss is recognized if the sum of the long-term undiscounted cash flows
is less than the carrying amount of the long-lived asset being evaluated. Impairment losses are
treated as permanent reductions in the carrying amount of the assets.
Accounts Receivable
We are required to estimate the collectability of our accounts receivable. Judgment is
required in assessing the realization of such receivables, and the related reserve requirements are
based on the best facts available to us. Since most of our revenue is generated under U.S.
government contracts, our current accounts receivable reserve is not significant to our overall
receivables balance.
Stock-Based Compensation
We issue stock options, restricted stock units (RSUs) and stock appreciation rights (SARs)
on an annual or selective basis to our directors and key employees. The fair value of the RSUs is
computed using the closing price of the stock on the date of grant. The fair value of the stock
options and the SARs is computed using a binomial option pricing model. Assumptions related to the
volatility are based on an analysis of our historical volatility. The estimated fair value of each
award is included in cost of revenues or general and administrative expenses over the vesting
period during which an employee provides services in exchange for the award.
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Historical Operating Results
Three months ended July 4, 2010 compared to three months ended June 28, 2009
The following table sets forth certain items, including consolidated revenues, cost of
revenues, general and administrative expenses, income tax expense and net income, and the changes
in these items for the three months ended July 4, 2010, and June 28, 2009 (in thousands):
Three months ended | ||||||||||||||||
Amount of | % | |||||||||||||||
July 4, | June 28, | increase | increase | |||||||||||||
2010 | 2009 | (decrease) | (decrease) | |||||||||||||
Contract revenues |
$ | 64,130 | $ | 91,005 | ( $26,875 | ) | -30 | % | ||||||||
Cost of revenues |
61,747 | 72,732 | (10,985 | ) | -15 | % | ||||||||||
General and administrative expenses |
9,597 | 6,400 | 3,197 | 50 | % | |||||||||||
Research and development expenses |
2,680 | 2,341 | 339 | 14 | % | |||||||||||
Interest income, net |
20 | 5 | 15 | 300 | % | |||||||||||
Provision for income taxes |
(5,096 | ) | 2,945 | (8,041 | ) | -273 | % | |||||||||
Net income (loss) |
($4,778 | ) | $ | 6,592 | ( $11,370 | ) | -172 | % |
Revenues
Revenues decreased approximately $26.9 million or 30% for the three months ended July 4, 2010,
as compared to the three months ended June 28, 2009. In the third quarter of fiscal 2010,
we continued to experience delays in our bookings as we work to replenish beginning of year backlog
levels. The timing of
these bookings has impacted our year over year revenue metrics. The decline in these year over
year revenue metrics was driven by three key areas: the development and production of ORBCOMM
Generation Two payload (OG2), our SSEE program, and the undersea technology offerings.
The OG2 program was a significant contribution to fiscal 2009 revenue. We continued the
development and production of the satellite payloads during the first half of fiscal 2009, which
required substantial levels of effort. Entering fiscal 2010, the OG2 program was in its test and
integration phases, and we expect to begin delivery of the final payloads in the second half of
fiscal 2010, and early fiscal year 2011. The final test, integration and delivery stages have a
lower level of effort than the development and production phases. As a result, revenue for the OG2
program decreased approximately $10.9 million in the third quarter of fiscal 2010 as compared to
the same quarter in fiscal 2009.
Throughout 2009, we continued to transition from the SSEE Increment E program to the SSEE
Increment F program. During fiscal 2009, including the third quarter, we worked aggressively on
the final stages of development and began the integration and test phases of SSEE Increment F. At
the end of fiscal year 2009, we were completing work on the final production lot of Increment E and
were in the final test and integration phases of the development work for Increment F. While the
booking of the initial lot of the SSEE Increment F program in the second quarter of fiscal 2010 has
resulted in a significant amount of work performed during the third quarter, the combined aspects
of this transition resulted in a $3.2 million decrease in revenue in the quarterly year over year
metrics. We anticipate an aggressive work schedule on the initial production lots of
SSEE Increment F in the remainder of fiscal 2010 as well as 2011.
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In the undersea technology offerings, we experienced an $8.9 million decrease in revenue in
the third quarters of fiscal 2010 as compared to fiscal 2009. While we maintained a strong revenue
stream on backlog on our ISCRS technology, including international opportunities, we have seen a
decline on contract backlog and resulting work on other undersea signal detection and finding
offerings.
There were other revenue decreases of $3.9 million in the third quarter of fiscal 2010 as
compared to fiscal 2009 due to timing and lower backlog across many other programs.
Cost of Revenues
Cost of revenues decreased approximately $11.0 million or 15% for the three months ended July
4, 2010, as compared to the three months ended June 28, 2009. The decrease was primarily due to
decreased contract activity and decreased revenue as described above. As a result of the decreased
contract activity, direct materials costs, including subcontract costs, decreased $8.4 million
consistent with lower material costs in the undersea technology offerings and lower subcontractor
costs with the OG2 contract, among others. All other direct costs and direct labor decreased
approximately $3.9 million. These decreases were partially offset by an increase in indirect costs
of $1.3 million driven by depreciation charges from increased investment over the past several
years as well as a $0.5 million increase in stock-based compensation driven by the impact of our
increased stock price on our liability based instruments.
Additionally, in the third fiscal quarter of fiscal 2010, management became aware of facts and
circumstances leading it to change its estimated costs to complete the OG2 program. The resulting
estimate anticipates a loss of $3.2 million at the end of the OG2 program. Prior to the third
quarter of fiscal year 2010, the Company had recorded approximately $3.2 million of accumulated
profit on the program, resulting in a $6.4 million loss in the third fiscal quarter.
As a result of the OG2 program change in estimate and the increased stock-based compensation,
cost of revenues as a percentage of total revenue was 96% for the three months ended July 4, 2010
and 80% for the three months ended June 28, 2009.
General and Administrative Expenses
General and administrative expenses increased approximately $3.2 million or 50% for the three
months ended July 4, 2010, as compared to the three months ended June 28, 2009. At interim
periods, we typically record our general and administrative costs at targeted annual rates.
However, during the third fiscal quarter of 2010, the Company determined that the entire rate
variance, including the portion allocable to general and administrative expenses would not be
absorbed due to lower than anticipated contract activity needed to absorb the level of generally
fixed cost general and administrative expenses. As a result, the portion of general administrative
costs associated with rate variance increased $2.4 million as compared to the third quarter of
fiscal year 2009. Additionally, the bid and proposal costs increased $0.3 million in the third
quarter of fiscal 2010 as compared to the same quarter of the prior year as the Company invested
resources to replenish its backlog levels. The stock-based compensation attributable to general
and administrative expenses increased $0.2 million in the third quarter of fiscal 2010 as compared
to the same quarter of the prior year driven by the impact of our increased stock price on our
liability based instruments. As a result, general and administrative costs were 15% of revenue for
the three months ended July 4, 2010 compared to 7% for the three months ended June 28, 2009.
Research and Development Expenses
Research and development expenses increased approximately $0.3 million or 14% for the three
months ended July 4, 2010, as compared to the three months ended June 28, 2009, due to the timing
of specific planned research and development projects. Research and development expenditures
represented 4% and 3% of our consolidated revenues for the three months ended July 4, 2010 and June
28, 2009, respectively. We expect that research and development expenditures will continue to
represent approximately 3% to 4% of our consolidated revenue in future periods.
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Provision for Income Taxes
The provision for income tax decreased approximately $8.0 million for the three months ended
July 4, 2010, as compared to the three months ended June 28, 2009. In the third quarter of fiscal
year 2010, the Company recorded a $1.8 million benefit related to amending, or intending to amend
its prior year tax returns. Exclusive of this one-time adjustment, the effective rate would have
been 32.7% for the third fiscal quarter of fiscal 2010 as compared to 30.9% for the third fiscal
quarter of 2009. The fiscal 2009 effective rate was reduced by a $0.4 million one-time reduction
of a reserve on uncertain tax positions as a statute of limitations expired.
Net Income
As a result of the above, net income decreased approximately $11.4 million for the three
months ended July 4, 2010, compared to the three months ended June 28, 2009.
Nine months ended July 4, 2010 compared to nine months ended June 28, 2009:
The following table sets forth certain items, including consolidated revenues, cost of
revenues, general and administrative expenses, income tax expense and net income, and the changes
in these items for the nine months ended July 4, 2010 and June 28, 2009 (in thousands):
Nine months ended | ||||||||||||||||
Amount of | % | |||||||||||||||
July 4, | June 28, | increase | increase | |||||||||||||
2010 | 2009 | (decrease) | (decrease) | |||||||||||||
Contract revenues |
$ | 214,660 | $ | 270,603 | $ | (55,943 | ) | -21 | % | |||||||
Cost of revenues |
183,213 | 219,274 | (36,061 | ) | -16 | % | ||||||||||
General and administrative expenses |
18,356 | 18,316 | 40 | 0 | % | |||||||||||
Research and development expenses |
7,959 | 6,478 | 1,481 | 23 | % | |||||||||||
Interest income, net |
27 | (21 | ) | 48 | -229 | % | ||||||||||
Provision for income taxes |
613 | 8,917 | (8,304 | ) | -93 | % | ||||||||||
Net income |
4,545 | 17,597 | (13,052 | ) | -74 | % |
Revenues
Revenues decreased approximately $55.9 million or 21% for the nine months ended July 4, 2010,
as compared to the nine months ended June 28, 2009. We entered fiscal 2010 with a lower backlog
than fiscal 2009, which began with record backlog numbers. As a result, the work performed on
beginning backlog during fiscal 2009 outpaced the work performed on beginning backlog during the
first nine months of fiscal 2010. Further, the timing of bookings has impacted our year over year revenue metrics. The decline in these
year over year revenue metrics was driven by four key areas: our SSEE program, OG2, our undersea
technology offerings, and other intelligence surveillance technologies.
Throughout 2009, we continued to transition from the SSEE Increment E program to the SSEE
Increment F program. During fiscal 2009, we worked aggressively on the final stages of development
and began the integration and test phases of SSEE Increment F. At the end of fiscal year 2009, we
were completing work on the final production lot of Increment E and were in the final test and
integration phases of the development work for Increment F. While the booking of the initial lot
of the SSEE Increment F program has resulted in a significant amount of work performed during the
nine months of fiscal 2010, the combined aspects of this transition resulted in an $16.4 million
decrease in revenue in the year over year metrics. We anticipate an aggressive work schedule on the initial production lots of
SSEE Increment F in the remainder of fiscal 2010 as well as 2011.
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Likewise, the OG2 program was a significant contribution to fiscal 2009 revenue. We continued
the development and production of the satellite payloads during the first half of fiscal 2009,
which required substantial levels of effort. Entering fiscal 2010, the OG2 program was in its test
and integration phases, and we expect to begin delivery of the final payloads later in fiscal 2010
and in the early parts of fiscal 2011. The final test, integration and delivery stages have a
lower level of effort than the development and production phases. As a result, revenue for the OG2
program decreased approximately $16.9 million in the first nine months of fiscal 2010 as compared
to 2009.
In the undersea technology offerings, we experienced a $7.8 million decrease in revenue in the
first three quarters of fiscal 2010 as compared to fiscal 2009. While we maintained a strong
revenue stream on backlog on our Integrated Submarine Communications Receiving System (ISCRS)
technology, including international opportunities, we have seen a decline on contract backlog and
resulting work on other undersea signal detection and finding offerings.
Other intelligence surveillance technologies revenue declined $9.9 million due to two main
contracts that matured in 2010, but were significant 2009 revenue contributors.
There were other revenue decreases of $5.5 million in the first nine months of the fiscal 2010
compared to fiscal 2009 due to timing and lower backlog across many other programs.
Cost of Revenues
Cost of revenues decreased approximately $36.1 million or 16% for the nine months ended July
4, 2010 as compared to the nine months ended June 28, 2009. The decrease was primarily due to
decreased contract activity and decreased revenue as described above. As a result of the decreased
contract activity, direct materials costs, including subcontract costs, decreased $32.2 million
consistent with lower material costs in the undersea technology offerings, our SSEE program and
lower subcontractor costs with the OG2 contract, among others. All other direct costs and direct
labor decreased approximately $5.4 million. Additionally, stock-based compensation increased $1.3
million in the first nine months of fiscal 2010 as compared to the same period of 2009 driven by
increases in our stock price and its impact on our liability based equity instruments. All other
indirect costs decreased $2.8 million driven by a decrease in our incentive compensation.
In the third fiscal quarter of fiscal 2010, management became aware of facts and circumstances
leading it to believe it would incur a loss of $3.2 million at the end of the OG2 program. Prior
to the fiscal year 2010, the Company had recorded approximately $2.6 million, resulting in a $5.8
million loss in the first nine months of fiscal 2010.
As a result of the OG2 program change in estimate and the increased stock-based compensation,
cost of revenues as a percentage of total revenue was 85% for the nine months ended July 4, 2010
and 81% for the nine months ended June 28, 2009.
General and Administrative Expenses
General and administrative expenses remained flat for the first nine months of fiscal 2010 as
compared to the same period of fiscal 2009. We invested an additional $1.3 million in bid and
proposal costs in the first nine months of fiscal 2010 as compared to the same period of fiscal
2009, and we experienced an increase of $0.5 million in our stock-based compensation primarily
attributable to increases in stock prices and its impact on our liability-based equity instruments.
However, other general and administrative costs decreased driven by a decrease in legal fees as
compared to 2009. Legal fees were elevated in 2009 as a result of our defense of claims. As a
percentage of revenue, general and administrative costs have increased to 9% of revenue for the
nine months ended July 4, 2010 as compared to 7% of revenue for the nine months ended June 28,
2009, primarily driven by lower revenue volume in the first nine months of fiscal 2010 as compared
to the same period of 2009.
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Research and Development Expenses
Research and development expenses increased approximately $1.5 million or 23% for the nine
months ended July 4, 2010, as compared to the nine months ended June 28, 2009 due to the timing of
specific planned research and development projects. Research and development expenditures
represented 4% and 2% of our consolidated revenues for the nine months ended July 4, 2010 and June
28, 2009, respectively. We expect that research and development expenditures will continue to
represent approximately 2% to 4% of our consolidated revenue in future periods.
Provision for Income Taxes
The provision for income taxes decreased approximately $8.3 million for the nine months ended
July 4, 2010, as compared to the nine months ended June 28, 2009. In the third quarter of fiscal
year 2010, the Company recorded a $1.8 million benefit related to amending, or intending to amend
its prior year tax returns. Exclusive of this one-time adjustment, the effective rate would have
been 48.0% for the nine months ended July 4, 2010 as compared to 33.6% for the first nine months of
2009. Our fiscal year 2010 effective rate has been negatively impacted by the fixed nature of our
permanent differences on a low pre-tax income. Specifically, we experienced a 10.5% increase to
our effective rate in fiscal year 2010 as a result of a return to provision adjustment in the third
quarter of fiscal 2010. Additionally, the fiscal 2009 effective rate was reduced by a $0.4 million
one-time reduction of a reserve on uncertain tax positions as a statute of limitations expired
Net Income
As a result of the above, net income decreased approximately $13.1 million, or 74%, for the
nine months ended July 4, 2010 compared to the nine months ended June 28, 2009.
Analysis of Liquidity and Capital Resources
Our liquidity requirements relate primarily to the funding of working capital requirements
supporting operations, capital expenditures and strategic initiatives including potential future
acquisitions and research and development activities.
Cash
At July 4, 2010, we had cash of $41.7 million compared to cash of $43.1 million at September
30, 2009. The $1.4 million decrease in cash during the year was primarily the result of $5.0
million of cash paid for acquisitions of property, equipment, software and intangibles, partly
offset by $1.7 million of cash provided by operating activities as well as $1.9 million of cash
provided by financing activities.
Cash Flows
Net cash provided by operating activities for the nine months ended July 4, 2010 was $1.7
million compared to $20.8 million provided by operating activities for the nine months ended June
28, 2009. Cash provided by operating activities in the nine months ended July 4, 2010 was
primarily comprised of $15.9 million of net income as adjusted for non-cash reconciling items
including depreciation and amortization, changes in deferred income taxes, and stock-based
compensation. Net income, as adjusted for non-cash reconciling items was reduced by $14.2 million
as a result of changes in operating assets and liabilities. This change was mainly driven by a
$11.1 million decrease in accounts payable and a $11.5 million increase in income taxes receivable,
offset by $7.4 million of cash generation from decreases in our accounts receivable. These changes
were further offset by a $1.0 million increase in other operating assets and liabilities.
Our cash from operations is highly dependent on the balance of our billed and unbilled
receivables, along with deferred revenue. As discussed in more detail below under Contractual
Billing Provisions, the timing of contractual milestone billing terms has a significant impact on
our unbilled receivable balances. We use days sales outstanding (DSO) as a measure to assess the
impact of milestone billings on our cash balances. We calculate DSO using the trailing twelve
months of revenue. As of July 4, 2010, our DSO was 179 days as compared to 116
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days at September
30, 2009. While our receivable balances were lower at July 4, 2010 as compared to September 30,
2009, our trailing twelve months revenue was significantly lower. Our DSO measure continues to be
impacted by the level of receivables on a certain program. Exclusive of this one program, our DSO
was 145 days and 97 days at July 4, 2010 and September 30, 2009, respectively.
Net cash used in investing activities for the nine months ended July 4, 2010 was $5.0 million
compared to $6.4 million for the nine months ended June 28, 2009. Investing activities included
$4.8 million and $6.4 million of cash used to purchase property and equipment during the first nine
months of fiscal 2010 and 2009, respectively. We expect to make additional investments in property
and equipment as we upgrade and replace older equipment, as our employee base increases and as we
invest in advanced C5ISR technology assets.
Net cash provided by financing activities for the nine months ended July 4, 2010 was $1.9
million compared to $0.9 million of cash used in financing activities for the nine months ended
June 28, 2009. In fiscal year 2010, approximately $1.9 million of cash was generated from stock
option exercises and related tax benefits compared to $0.4 million for the nine months ended June
28, 2009.
We believe that the combination of internally generated funds, cash and cash equivalents on
hand and available bank credit will provide the required liquidity and capital resources necessary
to fund ongoing operations, customary capital expenditures and other working capital needs over the
next 12 months.
Line of Credit
The Company maintains a $40.0 million line of credit with Bank of America, N.A. (the
Lender). The credit facility will terminate no later than February 28, 2012. The credit
facility contains a sublimit of $15,000 to cover letters of credit. In addition, borrowings on the
line of credit bear interest at LIBOR plus 175 basis points. An unused commitment fee of 0.25% per
annum, payable in arrears, is also required.
All borrowings under the line of credit are collateralized by all tangible assets of the
Company. The line of credit agreement includes customary restrictions regarding additional
indebtedness, business operations, permitted acquisitions, liens, guarantees, transfers and sales
of assets, and maintaining the Companys primary accounts with the Lender. Borrowing availability
under the line of credit is equal to the product of 1.5 and the Companys earnings before interest
expense, taxes, depreciation and amortization (EBITDA) for the trailing 12 months, calculated as of
the end of each fiscal quarter. For the fiscal quarter ending July 4, 2010, EBITDA, on a trailing
12 month basis, was $24.4 million. The agreement requires the Company to comply with a specific
EBITDA to Funded Debt ratio, and contains customary events of default, including the failure to
make timely payments and the failure to satisfy covenants, which would permit the Lender to
accelerate repayment of borrowings under the agreement if not cured within the applicable grace
period. As of July 4, 2010, the Company was in compliance with these covenants and the financial
ratio.
In addition to the terms of the line of credit, the credit facility includes a guidance line
facility, which provides the option to expand the total borrowing capacity to $60.0 million. While
the credit facility still requires the Lenders final approval of a request to borrow an additional
$20 million, this provision provides an expeditious medium for expanded borrowing capacity.
At July 4, 2010, there were no borrowings outstanding against the line of credit. Letters of
credit and debt consisting of capital lease obligations at July 4, 2010 amounted to $2.4 million,
and $34.1 million was available on the line of credit. The credit facility terminated upon
completion of the Offer on August 5, 2010.
Contractual Billing Provisions
Many of our fixed-price contracts contain provisions under which our customers are required to
make payments when we achieve certain milestones. In many instances, these milestone payments
occur after we have incurred the associated costs to which the payments will be applied. For
example, under some of our contracts providing certain deliverables constitutes a milestone for
which we receive a significant payment near the end of the contract, but we incur costs to complete
the deliverables ratably over the life of the contract. After considering any
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significant risks
associated with achieving the specific milestone, we recognize revenue as costs are incurred and
revenue recognition criteria are met, with a corresponding increase in unbilled receivables.
The time lag between our receipt of a milestone payment and our incurrence of associated costs
under the contract can be several months. Therefore, milestone payments under fixed-price
contracts can significantly affect our cash position at any given time. The receipt of milestone
payments will temporarily increase our cash on hand and decrease our unbilled receivables. As
milestone payments under the contract are billed and received, cash will increase and unbilled
receivables associated with the payment will decrease. Over the years, these milestone payments
have had a significant effect on our comparative cash balances. We expect that fluctuations in
unbilled receivables and deferred revenue will occur based on the particular timing of milestone
payments under our fixed-price contracts and our incurrence of costs under the contracts. Due to
these fluctuations, our cash position at the end of any fiscal quarter or year may not be
indicative of our cash position at the end of subsequent fiscal quarters or years.
Contractual Obligations and Commitments
As of July 4, 2010, our contractual cash obligations were as follows (in thousands):
Due in 1 | Due in 2 | Due in 3 | Due in 4 | Due in 5 | ||||||||||||||||||||||||
Total | year | years | years | years | years | Thereafter | ||||||||||||||||||||||
Capital leases |
$ | 20 | $ | 20 | | | | | | |||||||||||||||||||
Operating leases |
33,160 | 7,641 | 7,383 | 7,165 | 6,780 | 4,191 | | |||||||||||||||||||||
Total |
$ | 33,180 | $ | 7,661 | $ | 7,383 | $ | 7,165 | $ | 6,780 | $ | 4,191 | | |||||||||||||||
As of July 4, 2010, our other commercial commitments were as follows:
(in thousands) | Total | Less Than 1 Year | 1-3 Years | |||||||||
Letters of credit |
$ | 2,365 | $ | 1,612 | $ | 753 |
We have no long-term debt obligations, capital lease obligations, other operating lease
obligations, contractual purchase obligations, or other long-term liabilities other than those
shown above. We also have no off-balance sheet arrangements of any kind.
Market Risks
In addition to the risks inherent in our operations, we are exposed to financial, market, and
economic risks. The following discussion provides additional detail regarding our exposure to
credit, interest rates and foreign exchange rates.
Cash and Cash Equivalents
All unrestricted, highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents. We maintain cash and cash equivalents with
various financial institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. We believe that any credit risk related to our cash and cash equivalents is minimal.
Access to Bank Credit
Our liquidity position is influenced by our ability to obtain sufficient levels of working
capital. Continuing access to bank credit for the purposes of funding operations during periods in
which cash fluctuates is an important factor in our overall liquidity position. We have a line of
credit with Bank of America effective through February 2012 and we believe we have a good working
relationship with Bank of America (see Analysis of Liquidity and
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Capital ResourcesLine of Credit
above). However, as recent events in the financial markets have demonstrated, dramatic shifts in
market conditions could materially impact our ability to continue to secure bank credit, and a
continued steep deterioration in market conditions could materially impact our liquidity position
and current banking relationship. Absent these dramatic shifts and steep deteriorations in market
conditions, we believe we have access to sufficient bank credit through alternative lending sources
if needed.
Interest Rates
Our line of credit financing provides available borrowing to us at a variable interest rate
tied to the LIBOR rate. There were no outstanding borrowings under this line of credit at July 4,
2010. Accordingly, we do not believe that any movement in interest rates would have a material
impact on future earnings or cash flows. In the event that we borrow on our line of credit in
future periods, we will be subject to the risks associated with fluctuating interest rates.
Foreign Currency
We have contracts to provide services to certain foreign countries approved by the U.S.
government. Our foreign sales contracts generally require payment in U.S. dollars, and therefore
are not affected by foreign currency fluctuations. We occasionally issue orders or subcontracts to
foreign companies in local currency. The current obligations to foreign companies are of an
immaterial amount and we believe the associated currency risk is also immaterial.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information called for by this item is provided under Item 2 Managements Discussion
and Analysis of Financial Condition and Results of Operations.
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. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this Quarterly Report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. | ||
(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. |
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 11 above to the Companys condensed consolidated financial statements for a
description of litigation brought (and subsequently dismissed) in connection with the Offer and the
Merger.
We are subject to litigation from time to time, in the ordinary course of business including,
but not limited to, allegations of wrongful termination or discrimination.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors disclosed in our Form 10-K for the
fiscal year ended September 30, 2009, filed on December 4, 2009, except to the extent related to
the Offer, the Merger and the fact that upon completion of the Offer and the Merger, the Company is
no longer a publicly traded company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit | ||
Number | Description of Exhibit | |
2.1
|
Agreement and Plan of Merger, dated as of June 30, 2010, among The Boeing Company, Vortex Merger Sub, Inc. and Argon ST, Inc. (incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K, filed June 30, 2010) | |
2.2
|
Tender and Voting Agreement, dated as of June 30, 2010, by and among The Boeing Company, Vortex Merger Sub, Inc. and Terry L. Collins (and certain affiliates) (incorporated by reference to Exhibit 2.2 of the Companys Current Report on Form 8-K, filed June 30, 2010) | |
2.3
|
Tender and Voting Agreement, dated as of June 30, 2010, by and among The Boeing Company, Vortex Merger Sub, Inc. and Victor F. Sellier (and certain affiliates) (incorporated by reference to Exhibit (e)(3) of the Companys Schedule 14D-9, filed July 8, 2010) | |
2.4
|
Tender and Voting Agreement, dated as of June 30, 2010, by and among The Boeing Company, Vortex Merger Sub, Inc. and Thomas E. Murdock (and certain affiliates) (incorporated by reference to Exhibit (e)(4) of the Companys Schedule 14D-9, filed July 8, 2010) | |
3.1
|
Amended and Restated Certificate of Incorporation of Argon ST, Inc. (incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K, filed August 5, 2010) | |
3.2
|
Amended and Restated By-Laws of Argon ST, Inc. (incorporated by reference to Exhibit 3.2 of the Companys Current Report on Form 8-K, filed August 5, 2010) | |
31.1*
|
Certification of the Companys Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act | |
31.2*
|
Certification of the Companys Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act | |
32.1**
|
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 |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARGON ST, INC. (Registrant) |
||||
By: | /s/ Terry L. Collins | |||
Terry L. Collins, Ph.D. | ||||
President and Chief Executive Officer | ||||
By: | /s/ Aaron N. Daniels | |||
Aaron N. Daniels | ||||
Chief Financial Officer | ||||
Date:
August 12, 2010
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