- The Washington Times - Monday, December 18, 2006

It has been a rough year for Argon ST Inc., a provider of intelligence, surveillance and reconnaissance systems, but the Fairfax company says 2007 will be different.

Argon last week reported a fourth-quarter profit of $4.1 million (18 cents per diluted share) compared with $6.1 million (29 cents) a year ago — a 32 percent drop. For the fiscal year ended Sept. 30, earnings fell 11 percent to $19.4 million (87 cents) from $21.8 million ($1.06) in 2005.

“It was a disappointing year,” Terry Collins, Argon’s president, chairman and chief executive officer, told analysts and reporters on a conference call Thursday. “It was made up of an unusually large number of things that happened to us that don’t normally happen.”

Mr. Collins cited two reasons that kept the company from meeting its financial guidance. First, in January, the U.S. Army unexpectedly terminated the Aerial Common Sensor Development Contract, under which Argon was a subcontractor to Lockheed Martin Corp.

The loss amounted to a $15 million to $20 million hole on Argon’s balance sheet, according to Chris Donaghey, an equity research director at SunTrust Robinson Humphrey in Atlanta.

Argon was dealt a second blow when the U.S. Navy delayed its award of the Surface Ship Torpedo Defense SLQ-25A contract, which has a base-year value of $17.65 million, from the summer to November, after the close of fiscal 2006.

Despite the unfavorable year-end results, Argon’s future remains rosy in the eyes of Wall Street. Seven of the eight analysts who cover the company have a “buy” rating, while the remaining analyst has a “hold,” according to Bloomberg News.

“The general thesis on Argon has been that this should be one of the fastest-growing defense companies in the industry,” said Mr. Donaghey, who doesn’t own any shares. “It’s just that unfortunately, in 2006, they ran into the perfect storm.”

Argon is the largest “pure play,” or highly specialized firm, in the intelligence, surveillance and reconnaissance market, which is the fastest-growing segment of defense spending, Mr. Donaghey said.

The company has been successful in taking market share from larger, diversified contractors because it provides customers with a solution that is more cost-effective over the long term, said Michael Lewis, a senior vice president of equity research at BB&T; Capital Markets in Vienna, Va. Unlike some of its competitors, Argon uses “commercial off-the-shelf” (or COTS) hardware, focusing instead on software system products.

“When the Defense Department puts out a new requirement for a new system, you don’t have to rebuild the entire box, you just have to improve or update the existing software and reload that into the hardware component,” said Mr. Lewis, whose company does investment banking for Argon.

Mr. Collins said the company is optimistic about 2007 now that it has three contract vehicles: the torpedo defense contract along with an extension and a new award under the Navy’s Ship’s Signal Exploitation Equipment contracts. In addition, he said, international customers desiring interoperability with U.S. systems are eyeing the company’s technology.

Analysts agreed that Argon’s recent disappointments will be reversed next year.

“As we now move forward in 2007, given their positioning, given that they have a pretty successful track record at winning business, I’m still comfortable that this should be one of the fastest organic growth stories,” Mr. Donaghey said.

Shares of Argon closed down 7 cents yesterday on the Nasdaq Stock Market at $20.49.

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