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Third Quarter Operating Income grows by 26% to $6.1 Million

Bookings Up 21%, Driven by Growth in IEWS and Network Intelligence

 

Sunnyvale, CA.  August 31, 2010 – Applied Signal Technology, Inc. (NASDAQ – APSG) announced operating results for the third quarter of fiscal 2010, ended July 30, 2010. Revenues for the third quarter increased 14% to $56,410,000 compared to the year-ago period’s revenues of $49,500,000. This increase resulted from growth in revenues generated by the Company’s network intelligence division, offset somewhat by lower product sales.

 

Earnings per share in the quarter increased to $0.26 per share versus $0.25 per share during the year-ago period. This increase came despite significant acquisition-related expenses. The Company noted that on a non-GAAP basis, excluding expenses related to acquisitions, earnings per share increased by 32% to $0.33 versus $0.25 in the year-ago period. The company further noted that the current quarter’s tax rate of 41.3% increased when compared to the year-ago quarter’s tax rate of 31.8%. The lower tax rate experienced during the third quarter of fiscal 2009 was due primarily to certain one-time, tax benefits.

 

William Van Vleet, President and Chief Executive Officer of Applied Signal Technology, Inc., commented, “We executed well during the third quarter.  In our core broadband communications business, we earned significant award fees on several key contracts and achieved excellent profitability. We are also excited to have reinforced our position as a leading cybersecurity solutions provider through the Seismic acquisition. We have now achieved scale in this business that effectively positions us for a wide range of programs, including as a prime contractor.”

 

The Company reported a 21% increase in new orders received during the third quarter, which rose to $61,963,000 compared to $51,235,000 of new orders received during the third quarter of fiscal year 2009. The increase in new orders during the third quarter was primarily due to new development orders received in the tactical wireless and the network intelligence divisions. New orders for the first nine months of fiscal year 2010 increased by 15% to $162,613,000 compared to new orders of $140,810,000 for the same period of fiscal year 2009. 

 

Mr. Van Vleet continued, “We are excited to see continued strength in demand for a variety of our products and services. We believe that the funding environment for each of our operating groups remains strong and that we are well positioned to continue to capture new business. We are also pleased that we are beginning to realize benefits from our recent acquisitions of Pyxis Engineering and Seismic, LLC.”

 

The Company’s operating income for the third quarter of fiscal 2010 grew by 26% to $6,105,000 compared to $4,844,000 in the year-ago quarter. On a non-GAAP basis, excluding acquisition-related expenses, operating income for the third quarter of fiscal 2010 rose 50.5% to $7,371,000 compared to the same quarter in the prior year.

 

Mr. Van Vleet concluded, “We believe that the market for intelligence, surveillance and reconnaissance continues to hold significant opportunities, both in the immediate future and over the long term. We believe our position as a highly capable technology leader is advantageous and that we have a highly differentiated and compelling array of solutions across the full spectrum of ISR activities. It is our goal to drive value to all the stakeholders of our business, including both customers and shareholders.”

 

Forward Looking Guidance
Applied Signal Technology now anticipates that fiscal 2010 revenues are likely to be toward the lower end of its prior range of $223 million and $233 million. At the same time, it believes that operating income, measured on a GAAP basis, is likely to approach the high end of its prior guidance of $18 million to $21 million. These estimates anticipate a fiscal 2010 effective tax rate of between 38-39% and assume the R&D tax credit is extended.

 

Applied Signal adopted the revised accounting standard for business combinations (ASC Topic 805) during fiscal year 2010 and therefore must expense, rather than capitalize the Seismic acquisition costs. Other acquisition related costs including the amortization of intangibles, retention bonuses and compensation expense related to a potential earn-out will also be expensed. In addition, Applied Signal continues to protect its intellectual property aggressively and anticipates increased litigation expenses this fiscal year compared to the prior year.

 

Year to Date Results
Revenues for the first nine months of fiscal 2010 were $162,653,000 compared to $148,384,000 during the first nine months of fiscal 2009.  Operating income for the first nine months of fiscal 2010 was $16,757,000 compared to $16,947,000 in the same period of the prior year. Net income for the first nine months of fiscal year 2010 was $9,999,000 or $0.74 per diluted share compared to the year-ago level of $10,919,000 or $0.83 per diluted share. Net income on a non-GAAP basis, excluding the impact of acquisition-related expenses, for the first nine months of fiscal year 2010 was $11,779,000 or $0.87 per diluted share compared to the year-ago level of $10,983,000 or $0.83 per diluted share. A detailed reconciliation between GAAP and non-GAAP results is provided in a table following the GAAP financial statements below.

 

Use of Non-GAAP Financial Information
To help investors understand past financial performance and project future results, the Company supplements the financial results provided in accordance with generally accepted accounting principles, or on a GAAP basis, with certain non-GAAP financial measures. To supplement the consolidated financial results prepared under GAAP, the Company uses a non-GAAP conforming, or non-GAAP, measure of net loss that is GAAP net income and earnings per share adjusted to exclude certain costs related to completed acquisitions including the transaction costs, the amortization of intangibles, retention bonuses and compensation expense related to a potential earn-out. Non-GAAP net income and earnings per share gives an indication of the baseline performance before acquisition expenses that are considered by management to be outside the core operating results.  These measures are not in accordance with, or an alternative for, GAAP and may be materially different from non-GAAP measures used by other companies.  Non-GAAP net income is computed by adjusting GAAP net income for acquisition-related expenses.  These non-GAAP results should be read only in conjunction with the consolidated financial statements prepared in accordance with GAAP. AST management regularly uses supplemental non-GAAP financial measures to internally understand, manage and evaluate the business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning and forecasting future periods. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of operations that, when viewed with GAAP results, provide a more complete understanding of factors and trends affecting the business. Management compensates for the limitations in the use of non-GAAP financial measures by relying on comparable GAAP financial measures and providing investors with a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures. Investors are encouraged to review the reconciliation of our non-GAAP financial measures to the comparable GAAP results attached to this earnings release.

 

Attached to this news release are condensed, consolidated statements of income, balance sheets, statements of cash flows and a reconciliation between net income on a GAAP basis and non-GAAP net income for the third quarter and first nine months of fiscal year 2010 ended July 30, 2010.

 

Investor Conference Call
The Company will host a conference call on August 31, 2010 to discuss third quarter fiscal 2010 results.  If you wish to participate in the conference call, please dial 1-877-407-8031 for domestic callers or 1-201-689-8031 for international callers on August 31, 2010 at 5:00 p.m. eastern time/2:00 p.m. pacific time. There is no pass code required.  This call may be listened to simultaneously at the Web site www.InvestorCalendar.com.  A rebroadcast of the call will be available upon its completion and will remain available for a limited time.

Applied Signal Technology, Inc. provides advanced intelligence, surveillance and reconnaissance (ISR) products, systems and services to enhance global security. For further information about Applied Signal Technology visit our website at www.appsig.com.

 

Except for historical information contained herein, matters discussed in this news release may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Statements relating to our ability to effectively position the company for a wide range of programs, including as a prime contractor, the funding environment for our business areas, our ability to continue to capture new business, our ability to realize the full benefits from our recent acquisitions, continued growth opportunities in the intelligence, surveillance and reconnaissance (ISR) and cyber-security markets, our ability to provide customers with differentiated and compelling solutions across the full array of ISR activities, as well as statements regarding our estimating preliminary results for the fiscal year are forward-looking statements. The risks and uncertainties associated with these statements include the ability to achieve the anticipated benefits of the acquisitions, the ability to capture organic growth opportunities and to utilize the strategic advantages of a strong capital position; the ability to obtain new orders from procurers, including the U. S. Government when anticipated and to successfully perform and achieve profitability on such contracts; the ability to hire qualified staff as needed; and other risks detailed from time to time in the Company’s SEC reports including the latest Form 10-K filed for the fiscal year ended October 31, 2009. The Company assumes no obligation to update the information provided in this news release.

 

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Applied Signal Technology, Inc.

Condensed Consolidated Statements of Income

for the Periods Ended July 30, 2010 and July 31, 2009

(in thousands except per share data)

 

	Three Months Ended		Nine Months Ended
	July 30, 2010	July 31, 2009	July 30, 2010	July 31, 2009
Revenues from contracts	$54,494	$47,845	$157,326	$143,150
Revenues from royalties	1,916      ----------	1,655      ----------	5,327      ----------	5,234      ----------
Total revenues	56,410	49,500	162,653	148,384
Operating expenses:
Contract costs	40,078	35,347	114,928	104,367
Research and development	4,003	3,757	11,096	10,629
General and administrative	6,224      ----------	5,552      ----------	19,872      ----------	16,441      ----------
Total operating expenses	50,305      ----------	44,656      ----------	145,896      ----------	131,437      ----------
Operating income	6,105	4,844	16,757	16,947
Interest income/(expense), net	(37)     ----------	41      ----------	(74)     ----------	222      ----------
Income before provision for income taxes	6,068	4,885	16,683	17,169
Provision for income taxes	2,504      ----------	1,555      ----------	6,684      ----------	6,250      ----------
Net income	$3,564      =======	$3,330      =======	$9,999      =======	$10,919      =======
Net income per share – basic	$0.27	$0.25	$0.75	$0.84
Average shares – basic	13,150	12,947	13,103	12,851
Net income per share – diluted	$0.26	$0.25	$0.74	$0.83
Average shares – diluted	13,282	13,170	13,242	13,042

 

 

 

 

Applied Signal Technology, Inc.
Condensed Consolidated Balance Sheets
(in thousands)

 

	July 30, 2010	July 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$12,323	$4,102
Short term investments	20,180      ----------	43,454      ----------
Cash, cash equivalents, and short term investments	32,503	47,556
Accounts receivable	42,588	47,063
Inventory	13,212	8,378
Receivable – Pyxis acquisition related	—	1,093
Other current assets	11,483      ----------	9,424      ----------
Total current assets	99,786	113,514
Property and equipment, at cost	73,796	70,400
Accumulated depreciation and amortization	(59,043)     ----------	(55,405)     ----------
Net property and equipment	14,753	14,995
Goodwill	55,408	33,158
Intangible assets, net	5,023	1,904
Long-term deferred tax asset, net	3,454	4,196
Long term investment	500	2,129
Other assets	1,514      ----------	1,104      ----------
Total assets	$180,438      =======	$171,000      =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued payroll and benefits	$20,862	$22,158
Notes payable	1,429	1,429
Income taxes payable	2,005	444
Other accrued liabilities	5,138       ----------	2,298       ----------
Total current liabilities	29,434	26,329
Long-term liabilities:
Long-term notes payable	1,429	2,500
Other long-term liabilities	2,985       ----------	3,146       ----------
Total long-term liabilities	$4,414	$5,646
Shareholders' equity	146,590       ----------	139,025       ----------
Total liabilities and shareholders' equity	$180,438      =======	$171,000      =======

 

 

 

 

Applied Signal Technology, Inc.
Condensed Statements of Cash Flows
Increase in Cash and Cash Equivalents
(in thousands)

 

	Nine Months Ended
	2010	2009
OPERATING ACTIVITIES
Net Income	$9,999	$10,919
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,370	4,658
Stock-based compensation	1,474	1,516
Excess tax benefits from stock-based payment arrangements	(124)	(287)
Changes in:
Accounts receivable	7,885	309
Inventory, prepaid expenses, and other assets	(6,364)	(619)
Accounts payable, taxes payable and accrued liabilities	(973)      ----------	(2,975)      ----------
Net cash provided by operating activities	17,267	13,521
INVESTING ACTIVITIES
Cash paid for business acquired, net	(24,327)	—
Cash received from Pyxis's escrow account, net	673	—
Purchase of available-for-sale securities	(54,486)	(52,112)
Maturity and sale of available-for-sale securities	78,751	45,725
Additions to property and equipment	(3,736)      ----------	(3,557)      ----------
Net cash used in investing activities	(3,125)	(9,944)
FINANCING ACTIVITIES
Issuance of Common Stock	1,581	3,534
Shares repurchased for tax withholding of vested restricted stock awards	(332)	(240)
Excess Tax Benefits From Stock-based Payment Arrangements	124	287
Term Loans	(2,311)	(1,072)
Dividends Paid	(4,983)      ----------	(4,861)      ----------
Net cash used in financing activities	(5,921)	(2,352)
Net increase in cash and cash equivalents	8,221	1,225
Cash and cash equivalents, beginning of period	4,102      ----------	4,668      ----------
Cash and cash equivalents, end of period	$12,323      =======	$5,893      =======
Supplemental disclosure of cash flow information:
Interest paid	$153	$219
Income taxes paid	$4,862	$6,785

 

 

 

 

Applied Signal Technology, Inc.
GAAP to Non-GAAP Reconciliation
For the Periods Ended July 30, 2010 and July 31, 2009

 

		Three Months Ended		Nine Months Ended
		July 30, 2010	July 31, 2009	July 30, 2010	July 31, 2009
CONTRACT COSTS
GAAP contract costs		$40,078	$35,347	$114,928	$104,367
Non-GAAP acquisition expenses:
Compensation expense	c	(960)  ----------	—   ----------	(960)  ----------	—   ----------
Total non-GAAP acquisition expenses		(960)	—	(960)	—
Non-GAAP contract costs		39,118   =======	35,347   =======	113,968   =======	104,367   =======
GENERAL AND ADMINISTRATIVE OPERATING EXPENSES
GAAP general and administrative expenses		$6,224	$5,552	$19,872	$16,441
Non-GAAP acquisition expenses:
Transaction costs	a	(31)	(36)	(942)	(44)
Amortization of intangibles	b	(456)	(18)	(841)	(54)
Compensation expense	c	181   ----------	—   ----------	(115)  ----------	—   ----------
Total non-GAAP acquisition expenses		(306)	(54)	(1,898)	(98)
Non-GAAP general and administrative expenses		5,918   =======	5,498   =======	17,974   =======	16,343   =======
OPERATING EXPENSES
GAAP operating expenses		50,305	44,656	145,896	131,437
Non-GAAP acquisition expenses:
Transaction costs	a	(31)	(36)	(942)	(44)
Amortization of intangibles	b	(456)	(18)	(841)	(54)
Compensation expense	c	(779)  ----------	—   ----------	(1,075)  ----------	—   ----------
Total non-GAAP acquisition expenses		(1,266)	(54)	(2,858)	(98)
Non-GAAP operating expenses		49,039   =======	44,602   =======	143,038   =======	131,339   =======
OPERATING INCOME
GAAP operating income		6,105	4,844	16,757	16,947
Non-GAAP acquisition expenses:
Transaction costs	a	31	36	942	44
Amortization of intangibles	b	456	18	841	54
Compensation expense	c	779   ----------	—   ----------	1,075   ----------	—   ----------
Total non-GAAP acquisition expenses		1,266	54	2,858	98
Non-GAAP operating income		7,371   =======	4,898   =======	19,615   =======	17,045   =======
NET INCOME
GAAP net income		3,564	3,330	9,999	10,919
Non-GAAP acquisition expenses:
Transaction costs	a	31	36	942	44
Amortization of intangibles	b	456	18	841	54
Compensation expense	c	779	—	1,075	—
Income tax effect on non-GAAP adjustments	d	(402)  ----------	(17)  ----------	(1,078)  ----------	(34)  ----------
Total non-GAAP acquisition expenses		864	37	1,780	64
Non-GAAP net income		$4,428   =======	$3,367   =======	$11,779   =======	$10,983   =======
Non-GAAP net income per share – basic		$0.33	$0.26	$0.88	$0.84
Average shares – basic		13,150	12,947	13,103	12,851
Non-GAAP net income per share – diluted		$0.33	$0.25	$0.87	$0.83
Average shares – diluted		13,282	13,170	13,242	13,042

a.	Transaction Costs. Transaction costs are primarily legal, due diligence, and other consulting costs that are incurred directly as a result of the acquisition activities.
b.	Amortization of intangibles. Amortization of intangibles arise from current and prior acquisitions and is non-cash in nature.
c.	Compensation Expense. Compensation expense includes the retention and performance bonuses payable to the employees of the acquired Seismic and Pyxis businesses.
d.	Income tax effect on non-GAAP adjustments. This amount adjusts the provision for income taxes to reflect the effect of the non-GAAP adjustments on non-GAAP net income.