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ARGON ST Inc. Reports Operating Results (10-Q)

August 06, 2009 | About:

ARGON ST Inc. (STST) filed Quarterly Report for the period ended 2009-06-28.

ARGON ST Inc. designs develops and manufactures electronic intelligence systems communications systems that search identify and capture signals of interest and airborne imaging systems serving domestic and worldwide Command Control Communications Computers Intelligence Surveillance and Reconnaissance markets. ARGON ST Inc. has a market cap of $417.2 million; its shares were traded at around $19.24 with a P/E ratio of 19.2 and P/S ratio of 1.2.

Highlight of Business Operations:

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 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. For the three and nine months ended June 29, 2008, internally funded research and development expenditures were $1.6 million and $5.1 million, respectively, representing 2% of revenues in each period.

Cost of revenues increased approximately $4.3 million or 6% for the three months ended June 28, 2009, as compared to the three months ended June 29, 2008. The increase was primarily due to increased contract activity and increased revenue as described above. As a result of the increased contract activity, direct materials costs, including subcontract costs, increased $1.6 million. Direct labor increased $1.4 million consistent with an increase in contract activity requiring labor and an increase in utilization. Along with the increase in direct labor and direct material costs, other direct costs and overhead costs allocable to such direct costs, excluding stock-based compensation, increased approximately $0.8 million. Cost of revenues as a percentage of total revenue decreased to 80% for the three months ended June 28, 2009 as compared to 82% in the same quarter of fiscal year 2008.

General and administrative expenses increased approximately $1.1 million or 20% for the three months ended June 28, 2009, as compared to the three months ended June 29, 2008. At interim periods, general and administrative expenses are recorded at target rates. The year over year increase is primarily due to timing differences of general and administrative expenses recognized at target rates. Actual general and administrative expenses remained consistent year over year despite a 9.4% increase in business activity. As a percentage of revenue, general and administrative costs have increased nominally to 7% of revenue for the three months ended June 28, 2009 as compared to 6% of revenue for the three months ended June 29, 2008.

Research and development expenses increased approximately $0.8 million or 48% for the three months ended June 28, 2009, as compared to the three months ended June 29, 2008, due to the timing of specific planned research and development projects. Research and development expenditures represented 2.6% and 1.9% of our consolidated revenues for the three months ended June 28, 2009 and June 29, 2008, respectively. We expect that research and development expenditures will continue to represent approximately 2% to 3% of our consolidated revenue in future periods.

The provision for income taxes decreased approximately $0.2 million or 5% for the three months ended June 28, 2009, as compared to the three months ended June 29, 2008. Our effective income tax rate decreased to 30.9% for the three months ended June 28, 2009, compared to an effective rate of 37.5% for the three months ended June 29, 2008. The tax provision for the third quarter of fiscal year 2009 included a benefit for the federal research and development tax credit, which was reinstated in our first quarter of fiscal year 2009, retroactively beginning January 1, 2008. As a result of this renewal, and as compared to the prior year, we realized a reduction in our effective rate of 1.6% related to this tax credit. Additionally, we recognized a reduction in our effective rate of 4.8% for the third quarter of fiscal year 2009, related to two discrete items. We recognized approximately $0.4 million of a tax benefit in the third quarter of fiscal year 2009 as the result of a reduction in our reserve on uncertain tax positions. Additionally, we filed our tax return for fiscal year 2008 in the third quarter of fiscal year 2009 and recognized a return to provision true-up which reduced our effective rate by 0.6%. We expect our annual effective rate to approximate levels closer to a 34% to 36% range for the fiscal year ending September 30, 2009.

Cost of revenues increased approximately $17.5 million or 9% for the nine months ended June 28, 2009 as compared to the nine months ended June 29, 2008. The increase was primarily due to increased contract activity and increased revenue as described above. As a result of the increased contract activity, direct materials costs, including subcontract costs, increased $10.4 million with significant increases in subcontractor costs as a result of increased activity for the OG2 program. Direct labor increased $3.1 million consistent with an increase in contract activity requiring labor and an increase in utilization. Along with the increase in direct labor and direct material costs, other direct costs and overhead costs allocable to such direct costs, excluding stock-based compensation, increased approximately $3.9 million. Cost of revenues as a percentage of total revenue decreased to 81% for the nine months ended June 28, 2009 as compared to 82% of revenue for the nine months ended June 29, 2008.

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