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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------------
(Mark One)
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For transition period from ________________ to _________________
0-16438
-------------------------
(Commission File Number)
NATIONAL TECHNICAL SYSTEMS, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4134955
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(State of incorporation) (I.R.S. Employer
Identification No.)
24007 Ventura Boulevard, Suite 200, Calabasas, California
---------------------------------------------------------------
(Address of principal executive offices)
(818) 591-0776 91302
- ---------------------------------------------------- --------------
(Registrant's telephone number, including area code) (Zip code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The number of shares of common stock, no par value, outstanding as of June 11,
2007 was 8,800,672
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
April 30, 2007 (unaudited) and January 31, 2007 3
Unaudited Condensed Consolidated Statements of Income
For the Three months Ended April 30, 2007 and 2006 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three months Ended April 30, 2007 and 2006 6
Notes to the Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION & SIGNATURE
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
Signature 17
2
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
At At
April 30, January 31,
2007 2007
(unaudited)
-----------------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 2,800,000 $ 3,221,000
Accounts receivable, less allowance for doubtful accounts
of $799,000 at April 30, 2007 and $691,000 at January 31, 2007 24,584,000 21,900,000
Inventories, net 3,117,000 2,892,000
Deferred income taxes 1,737,000 1,690,000
Prepaid expenses 1,122,000 958,000
------------------------------
Total current assets 33,360,000 30,661,000
Property, plant and equipment, at cost 102,570,000 101,489,000
Less: accumulated depreciation (67,527,000) (66,055,000)
------------------------------
Net property, plant and equipment 35,043,000 35,434,000
Goodwill 4,126,000 4,126,000
Other assets 4,421,000 4,618,000
------------------------------
TOTAL ASSETS $ 76,950,000 $ 74,839,000
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,536,000 $ 5,843,000
Accrued expenses 4,536,000 5,213,000
Income taxes payable 396,000 401,000
Deferred income 2,001,000 832,000
Current installments of long-term debt 3,396,000 3,285,000
------------------------------
Total current liabilities 15,865,000 15,574,000
Long-term debt, excluding current installments 20,341,000 19,238,000
Deferred income taxes 4,905,000 5,052,000
Deferred compensation 966,000 946,000
Minority interest 257,000 250,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 2,000,000 shares authorized; none issued -- --
Common stock, no par value. Authorized, 20,000,000 shares; issued and
outstanding, 8,753,000 as of April 30, 2007 and 8,717,000 as of January 31, 2007 13,110,000 12,863,000
Retained earnings 21,562,000 20,971,000
Accumulated other comprehensive loss (56,000) (55,000)
------------------------------
Total shareholders' equity 34,616,000 33,779,000
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 76,950,000 $ 74,839,000
==============================
See accompanying notes to condensed consolidated financial statements.
3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for Three Months Ended April 30, 2007 and 2006
2007 2006
------------------------------
Net revenues $ 29,804,000 $ 28,151,000
Cost of sales 22,789,000 21,913,000
------------------------------
Gross profit 7,015,000 6,238,000
Selling, general and administrative expense 5,782,000 5,410,000
Equity income from non-consolidated subsidiary (56,000) (75,000)
------------------------------
Operating income 1,289,000 903,000
Other income (expense):
Interest expense, net (454,000) (361,000)
Other income, net 156,000 6,000
------------------------------
Total other expense (298,000) (355,000)
Income before income taxes and minority interest 991,000 548,000
Income taxes 393,000 204,000
------------------------------
Income before minority interest 598,000 344,000
Minority interest (7,000) 8,000
------------------------------
Net income $ 591,000 $ 352,000
==============================
Earnings per common share
Basic $ 0.07 $ 0.04
==============================
Diluted $ 0.06 $ 0.04
==============================
Weighted average common shares outstanding 8,744,000 8,892,000
Dilutive effect of stock options 578,000 683,000
------------------------------
Weighted average common shares outstanding,
assuming dilution 9,322,000 9,575,000
==============================
See accompanying notes to condensed consolidated financial statements.
4
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 2007 and 2006
2007 2006
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 591,000 $ 352,000
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization 1,491,000 1,417,000
Recoveries on receivables 108,000 98,000
Undistributed earnings of affiliate 7,000 (8,000)
Deferred income taxes (net of acquisitions) (194,000) (185,000)
Tax benefit from stock option exercises 37,000 26,000
Share based compensation 99,000 168,000
Net gain on insurance claim (101,000) --
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable (2,792,000) (2,306,000)
Inventories (225,000) 95,000
Prepaid expenses (164,000) (7,000)
Other assets and intangibles 215,000 (84,000)
Accounts payable (307,000) 574,000
Accrued expenses (677,000) (1,942,000)
Income taxes payable (5,000) (594,000)
Deferred income 1,169,000 952,000
Deferred compensation 20,000 12,000
Income taxes receivable -- (155,000)
------------------------------
Net cash used by operations (728,000) (1,587,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,081,000) (1,667,000)
Investment in life insurance (37,000) (35,000)
Acquisitions of businesses, net of cash -- (380,000)
Net proceeds from insurance claim 101,000 --
------------------------------
Cash used for investing activities (1,017,000) (2,082,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 1,999,000 9,543,000
Repayments of current and long-term debt (785,000) (4,181,000)
Proceeds from stock options exercised 111,000 100,000
Common stock repurchase -- (3,893,000)
------------------------------
Net cash provided by (used for) financing activities 1,325,000 1,569,000
------------------------------
Effect of exchange rate changes on cash (1,000) (5,000)
------------------------------
Net decrease in cash (421,000) (2,105,000)
Beginning cash balance 3,221,000 4,196,000
------------------------------
ENDING CASH BALANCE $ 2,800,000 $ 2,091,000
==============================
See accompanying notes to condensed consolidated financial statements.
5
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
In accordance with instructions to Form 10-Q, the accompanying
consolidated financial statements and footnotes of National Technical
Systems, Inc. ("NTS" or the "Company") have been condensed and, therefore,
do not contain all disclosures required by U.S. generally accepted
accounting principles. These statements should not be construed as
representing pro rata results of the Company's fiscal year ending January
31, 2008 and should be read in conjunction with the financial statements
and notes thereto included in the Company's Form 10-K for the year ended
January 31, 2007.
The statements presented as of and for the three months ended April 30,
2007 and 2006 are unaudited. In management's opinion, all adjustments have
been made to present fairly the results of such unaudited interim periods.
All such adjustments are of a normal recurring nature.
The consolidated financial statements include the accounts of the Company
and its wholly owned and financially controlled subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
2. Income Taxes
Income taxes for the interim periods are computed using the effective tax
rates estimated to be applicable for the full fiscal year, as adjusted for
any discrete taxable events that occur during the period. The Company
recorded income tax expense of $393,000 for the three months ended April
30, 2007, and $204,000 for the three months ended April 30, 2006.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109" ("FIN 48"). This Interpretation
was effective for our fiscal year beginning February 1, 2007. FIN 48
prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 requires the recognition of
penalties and interest on any unrecognized tax benefits. Our policy is to
reflect penalties and interest as part of income tax expense when and if
they become applicable.
The Company has reviewed its positions in recording income and expenses
and has no reason to record a liability under the provisions of FIN 48.
The Company files income tax returns in the United States ("U.S.") on a
federal basis and in many U.S. state and foreign jurisdictions. Certain
tax years remain open to examination by the major taxing jurisdictions to
which the Company is subject. The Company does not anticipate that its
total unrecognized tax benefits will significantly change due to the
settlement of examinations or the expiration of statutes of limitations
during the next twelve months.
3. Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) on the Company's Condensed
Consolidated Balance Sheets consists of cumulative equity adjustments from
foreign currency translation. During the three months ended April 30, 2007
the foreign currency translation adjustment resulted in a loss of $1,000
and total comprehensive income was $590,000. During the three months ended
April 30, 2006 the foreign currency translation adjustment was $5,000 and
total comprehensive income was $347,000.
4. Inventories
Inventories consist of accumulated costs applicable to uncompleted
contracts and are stated at actual cost which is not in excess of
estimated net realizable value.
5. Interest and Taxes
Cash paid for interest and taxes for the three months ended April 30, 2007
was $470,000 and $416,000, respectively. Cash paid for interest and taxes
for the three months ended April 30, 2006 was $255,000 and
6
$20,000, respectively.
6. Minority Interest
Minority interest in the Company's NQA, Inc. subsidiary is a result of 50%
of the stock of NQA, Inc. being issued to National Quality Assurance, Ltd.
Effective with fiscal 2002, profits and losses are allocated 50.1% to NTS,
and 49.9% to National Quality Assurance, Ltd.
7. Earnings per share
Basic and diluted net income per common share is presented in conformity
with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" for all periods presented. In accordance with SFAS
No. 128, basic earnings per share have been computed using the weighted
average number of shares of common stock outstanding during the year.
Basic earnings per share excludes any dilutive effects of options,
warrants, non-vested restricted shares and convertible securities.
8. Intangible Assets
The Company accounts for goodwill and other intangible assets in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
There have been no indications of any impairment through April 30, 2007.
As of April 30, 2007 and January 31, 2007, the Company had the following
acquired intangible assets:
April 30, 2007 January 31, 2007
--------------------------------------------- ---------------------------------------------
Gross Net Estimated Gross Net Estimated
Carrying Accum. Carrying Useful Carrying Accum. Carrying Useful
Amount Amort. Amount Life Amount Amort. Amount Life
Intangible assets subject
to amortization:
Covenants not to compete $ 299,000 $146,000 $ 153,000 3-5 years $ 299,000 $135,000 $ 164,000 3-5 years
Customer relationships 105,000 23,000 82,000 3 years 105,000 15,000 90,000 3 years
--------------------------------- ---------------------------------
Total $ 404,000 $169,000 $ 235,000 $ 404,000 $150,000 $ 254,000
================================= =================================
Intangible assets not subject
to amortization:
Goodwill $4,126,000 $4,126,000
========== ==========
Amortization expense for intangible assets subject to amortization was
$19,000 and $2,000 for the three months ended April 30, 2007 and 2006,
respectively.
9. Employee Equity Incentive Plans
The Company has two employee incentive stock option plans: the "2002 stock
option plan" and the "1994 stock option plan." The Company presented a new
equity incentive plan for shareholder vote at its June 29, 2006 annual
shareholders' meeting and it was approved by the shareholders. This new
2006 equity incentive plan replaced the 2002 stock option plan, which was
terminated early and no further options will be granted under it. The 1994
stock option plan expired by its own terms in 2004.
Additional information with respect to the option plans as of April 30,
2007 is as follows:
Weighted Avg.
Shares Exercise Price
---------------------------
Outstanding at February 1, 2007 1,861,842 $ 3.90
Granted -- --
Exercised (40,708) 3.41
Canceled or expired -- --
--------------------------
Outstanding at April 30, 2007 1,821,134 $ 3.91
==========================
Exercisable at April 30, 2007 1,528,396 $ 3.77
==========================
7
Compensation expense related to stock options was $80,000 for the three
months ended April 30, 2007. As of April 30, 2007, there was $277,000 of
unamortized stock-based compensation expense related to unvested stock
options which is expected to be recognized over a remaining period of 33
months.
The Company's non-vested shares have a vesting period of four years.
Compensation expense, representing the fair market value of the shares at
the date of grant, net of assumptions regarding estimated future
forfeitures, is charged to earnings over the vesting period. Compensation
expense included in general and administrative expenses in the Company's
consolidated statement of income, relating to these grants was $19,000 for
the first quarter of fiscal 2008. There were no transactions related to
non-vested shares during the first quarter of fiscal 2008. As of April 30,
2007, there was $255,000 of unamortized stock-based compensation cost
related to unvested shares which is expected to be recognized over a
remaining period of 40 months.
10. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which clarifies the definition of fair value, establishes
guidelines for measuring fair value, and expands disclosures regarding
fair value measurements. SFAS 157 does not require any new fair value
measurements and eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 will be effective for the
Company on February 1, 2008. The Company is currently evaluating the
impact of adopting SFAS 157 on its financial position, cash flows, and
results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities"("SFAS 159") which permits
entities to choose to measure many financial instruments and certain other
items at fair value that are not currently required to be measured at fair
value. SFAS 159 will be effective for the Company on February 1, 2008. The
Company is currently evaluating the impact of adopting SFAS 159 on its
financial position, cash flows and results of operations.
11. Segments
The following table presents summarized information by segment:
Three Months Ended
-------------------------------
April 30, 2007 April 30, 2006
-------------- --------------
Revenues by segment:
Engineering & Evaluation $ 21,409,000 $ 19,124,000
Technical Solutions 8,395,000 9,027,000
-------------- --------------
Total revenues $ 29,804,000 $ 28,151,000
============== ==============
Operating income by segment:
Engineering & Evaluation $ 1,167,000 $ 941,000
Technical Solutions 122,000 (38,000)
-------------- --------------
Total operating income $ 1,289,000 $ 903,000
============== ==============
Income before income taxes and minority interest by segment:
Engineering & Evaluation $ 890,000 $ 607,000
Technical Solutions 101,000 (59,000)
-------------- --------------
Total income before income taxes and minority interest $ 991,000 $ 548,000
============== ==============
Assets by segment:
Engineering & Evaluation $ 63,649,000 $ 56,419,000
Technical Solutions 8,219,000 9,314,000
Corporate 5,082,000 4,345,000
-------------- --------------
Total assets $ 76,950,000 $ 70,078,000
============== ==============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
addressed in this Item 2 contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements can be
identified by the use of forward-looking words such as "may", "will", "expect",
"anticipate", "intend", "estimate", "continue", "behave" and similar words.
Financial information contained herein, to the extent it is predictive of
financial condition and results of operations that would have occurred on the
basis of certain stated assumptions, may also be characterized as
forward-looking statements. Although forward-looking statements are based on
assumptions made, and information believed by management to be reasonable, no
assurance can be given that such statements will prove to be correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties occur, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated.
These forward-looking statements are not guarantees of future performance.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. This discussion should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's Annual Report on
Form 10-K for the year ended January 31, 2007 and the condensed consolidated
financial statements included elsewhere in this report.
GENERAL
The Company is a diversified business to business services organization
that supplies technical services and solutions to a variety of industries
including aerospace, defense, automotive, power products, electronics, computers
and telecommunications. Through its wide range of testing facilities, solutions
and certification services, the Company provides its customers the ability to
sell their products globally and enhance their overall competitiveness. NTS is
accredited by numerous national and international technical organizations which
allow the Company to have its test data accepted in most countries.
The Company operates in two segments: "Engineering & Evaluation" and
"Technical Solutions". The business of the Company is conducted by a number of
operating units, each with its own organization. Each segment is under the
direction of its own executive and operational management team. In making
financial and operational decisions, NTS relies on an internal management
reporting process that provides revenues and operating cost information for each
of its operating units. Revenues and booking activities are also tracked by
market type.
The Engineering & Evaluation segment is one of the largest independent
conformity assessment and management system registration organizations in the
U.S., with facilities throughout the United States and in Japan, Canada and
Germany, serving a large variety of high technology industries, including
aerospace, defense, automotive, power products, electronics, computers and
telecommunications. This segment provides highly trained technical personnel for
product certification, product safety testing and product evaluation to allow
customers to sell their products in world markets. In addition, it performs
management registration and certification services to ISO related standards.
The Technical Solutions segment provides professional and specialty
staffing services, including contract services, temporary and full time
placements and specialty solutions services to its customers specifically in the
areas of information technology, information systems, software engineering and
construction. Technical Solutions supplies professionals in support of customers
who need help-desk analysts and managers, relational database administrators and
developers, application and systems programmers, configuration and project
managers, engineering personnel and multiple levels of system operations
personnel.
The following discussion should be read in conjunction with the
consolidated quarterly financial statements and notes thereto. All information
is based upon operating results of the Company for the three month period ended
April 30, 2007.
9
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Three months ended April 30, 2007 % Change 2006 Diff
------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $21,409 11.9% $ 19,124 $ 2,285
Technical Solutions 8,395 (7.0)% 9,027 (632)
------- --------------------
Total revenues $29,804 5.9% $ 28,151 $ 1,653
======= ====================
For the three months ended April 30, 2007, consolidated revenues increased
by $1,653,000 or 5.9% when compared to the same period in fiscal 2007.
Engineering & Evaluation:
For the three months ended April 30, 2007, Engineering & Evaluation
segment revenues increased by $2,285,000 or 11.9% when compared to the same
period in fiscal 2007, primarily due to additional revenues of $1,033,000 from
the acquisition on June 9, 2006 of B & B Technologies and increased revenues
primarily from our telecommunications, defense and registration markets.
Technical Solutions:
For the three months ended April 30, 2007, Technical Solutions segment
revenues decreased by $632,000 or 7.0% when compared to the same period in
fiscal 2007, primarily due to the continued price compression in this market.
GROSS PROFIT
Three months ended April 30, 2007 % Change 2006 Diff
------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 5,517 14.1% $ 4,834 $ 683
% to segment revenue 25.8% 25.3% 0.5%
Technical Solutions 1,498 6.7% 1,404 94
% to segment revenue 17.8% 15.6% 2.3%
------- --------------------
Total $ 7,015 12.5% $ 6,238 $ 777
======= ====================
% to total revenue 23.5% 22.2% 1.4%
Total gross profit for the three months ended April 30, 2007 increased by
$777,000 or 12.5% when compared to the same period in fiscal 2007.
Engineering & Evaluation:
For the three months ended April 30, 2007, gross profit for the
Engineering & Evaluation segment increased by $683,000 or 14.1% when compared to
the same period in fiscal 2007, primarily due to the increased revenues
discussed above and cost reduction efforts at certain facilities.
Technical Solutions:
For the three months ended April 30, 2007, gross profit increased by
$94,000 or 6.7% in the Technical Solutions segment when compared to the same
period in fiscal 2007. This increase was due to the higher mix of permanent
placement revenues when compared to the prior year. Gross profit on permanent
placement revenues is generally higher than contract revenues. Gross profit, as
a percentage of revenues, increased by 2.3% to 17.8%.
10
SELLING, GENERAL & ADMINISTRATIVE
Three months ended April 30, 2007 % Change 2006 Diff
------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 4,406 11.0% $ 3,968 $ 438
% to segment revenue 20.6% 20.7% (0.2)%
Technical Solutions 1,376 (4.6)% 1,442 (66)
% to segment revenue 16.4% 16.0% 0.4%
------- --------------------
Total $ 5,782 6.9% $ 5,410 $ 372
======= ====================
% to total revenue 19.4% 19.2% 0.2%
Total selling, general and administrative expenses increased $372,000 or
6.9% for the three months ended April 30, 2007 when compared to the same period
in fiscal 2007.
Engineering & Evaluation:
For the three months ended April 30, 2007, selling, general and
administrative expenses increased by $438,000 or 11% when compared to the same
period in fiscal 2007, primarily due to the effects of selling costs associated
with the increased revenues discussed above and additional costs related to
professional and accounting fees.
Technical Solutions:
For the three months ended April 30, 2007, selling, general and
administrative expenses decreased by $66,000 or 4.6% when compared to the same
period in fiscal 2007, primarily due to the reduction in selling costs
associated with the lower revenues discussed above.
Equity Income from Non-Consolidated Subsidiary:
Engineering & Evaluation:
For the three months ended April 30, 2007, equity income from XXCAL Japan
was $56,000, compared to $75,000 for the same period in fiscal 2007. XXCAL Japan
is 50% owned by NTS and is accounted for under the equity method since NTS does
not have management or board control.
OPERATING INCOME
Three months ended April 30, 2007 % Change 2006 Diff
------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 1,167 24.0% $ 941 $ 226
% to segment revenue 5.5% 4.9% 0.5%
Technical Solutions 122 421.1% (38) 160
% to segment revenue 1.5% (0.4)% 1.9%
------- --------------------
Total $ 1,289 42.7% $ 903 $ 386
======= ====================
% to total revenue 4.3% 3.2% 1.1%
Operating income for the three months ended April 30, 2007 increased by
$386,000 or 42.7% when compared to the same period in fiscal 2007.
Engineering & Evaluation:
For the three months ended April 30, 2007, operating income in the
Engineering & Evaluation segment increased by $226,000 or 24.0% when compared to
the same period in fiscal 2007, primarily as a result of the increase in gross
profit, partially offset by the increase in selling, general and administrative
expenses.
11
Technical Solutions:
For the three months ended April 30, 2007, operating income in the
Technical Solutions segment increased by $160,000 or 421.1% when compared to the
same period in fiscal 2007, as a result of the increase in gross profit and
decrease in selling, general and administrative expenses.
INTEREST EXPENSE
Net interest expense increased by $93,000 in the three months ended April
30, 2007 when compared to the same period in the prior year, primarily due to
higher interest rate levels for the three months ended April 30, 2007 and higher
average debt balances for the three months ended April 30, 2007 when compared
with the same period last year.
OTHER INCOME
Other income increased by $150,000 in the three months ended April 30,
2007 when compared to the same period in the prior year, primarily due to
proceeds received from insurance recoveries.
INCOME TAXES
The income tax provision rate of 39.7% for the three months ended April
30, 2007 is based on the estimated provision accrual for fiscal year ending
January 31, 2008. Management has determined that it is more likely than not that
the deferred tax assets will be realized on the basis of offsetting them against
the reversal of deferred tax liabilities. It is the Company's intention to
assess the need for a valuation account by evaluating the realizability of the
deferred tax asset quarterly based upon projected future taxable income of the
Company.
NET INCOME
Net income for the three months ended April 30, 2007 was $591,000, an
increase of $239,000 when compared to the same period in fiscal 2007. This
increase was primarily due to the higher operating income and other income,
partially offset by higher interest expense.
OFF BALANCE SHEET ARRANGEMENT
None.
BUSINESS ENVIRONMENT
In the Engineering & Evaluation segment, the Company tests and certifies
high tech products for seven distinct markets: defense, aerospace,
telecommunications, transportation, power, computer and electronics. The Company
also provides ISO 9000 Quality Management System Registration.
The defense and aerospace markets generate approximately 60% of the
Company's overall Engineering and Evaluation revenues. In recent years, domestic
and worldwide political and economic developments have impacted positively the
market demands for defense and advanced technology systems. Government research
and development funding specifically for defense has increased this year. In
addition, both the commercial and military aerospace markets are strengthening
and it is anticipated that this growth will continue for the next several years.
Also, the increase in government outsourcing activity has created additional
opportunities for NTS. The Company has ten fully equipped defense and aerospace
environmental simulation laboratories located throughout the United States and
is well equipped to handle this increase in demand. The Company has experienced
an increase in demand for the evaluation of military equipment and weapons
systems, which has positively affected business at its laboratories. The Company
is experiencing a moderate increase in its aerospace business this year.
The trend in the telecommunications market appears to be stable in the
short term and is expected to grow in the future. Carriers are deploying voice,
video and data using fiber networks. This may increase the demand for
certification of suppliers' premises equipment, and certification of additional
central office equipment. The Company has been approved as an Independent Test
laboratory (ITL) by the regional bell operating companies (RBOCs) to test and
certify
12
central office equipment developed by manufactures to the Network Equipment
Building Specifications (NEBS). The Company is currently providing this service
at laboratories in California, Massachusetts, Texas, Alberta, Canada and
Germany. The Company has been approved as an (ITL) to offer Digital Subscriber
Line (DSL) certification. This service currently is being provided at
laboratories in California. The Company expects an increase in business demand
as RBOCs upgrade networks packet-based Voice Over Internet Protocol (VOIP)
devices. As service providers gradually convert to VOIP architectures,
interoperability becomes critical to ensure a seamless transition to next
generation networks. The Company also expects an increase in demand as carriers
begin to deploy "triple play" (voice, video, and broadband) offerings over FTTP
(fiber to the premises) passive fiber networks (PON). The Company is currently
evaluating the overall compliance requirements for the deployment of Broadband
wireless products and how best to position NTS to service the anticipated growth
of this technology. The Company anticipates a moderate increase in the telecom
business.
The transportation market and power markets have been stable with the
Company continuing to experience a slight decrease in the transportation
business, while the Company has recently experienced a moderate increase in the
power business.
The computer and electronics markets have been stable. The Company
anticipates growth in these markets as it captures additional market share due
to the planned international expansion. NTS has signed cooperative agreements in
Taiwan with SGS, Korea with TTA and Hong Kong and mainland China with STC. The
cooperative agreements will focus on providing USB, USB on the go, Connector and
Zigbee certification to device manufacturers and industrial products
manufactured in Asia. The Company believes that the demand for these
certification activities will increase in Asia.
In the Technical Solutions segment (TS), the Company provides a variety of
staffing and workforce management services and solutions, including contract,
contract-to-hire and full time placements to meet its customers' needs with a
focus on IT and engineering. Over the past few years, the IT general services
business transferred to off-shore facilities and became a commodity service for
some of the Company's largest competitors. In 2003, the Company deployed a
transformation strategy which focused on meeting the anticipated increase in
demand for specialized IT, compliance, engineering support services at Company
locations as well as taking advantage of offshore opportunities. As part of this
strategy, the Company developed a proprietary database and put in place a
customer service team which maintains relationships and manages the availability
of the technical experts who support these specialized services. The Company has
also set up a test and compliance laboratory in Vietnam to support the needs of
a major US Fortune 500 computer company and to take advantage of the low cost,
highly-skilled labor in Vietnam. The Company is now expanding this offshore
offering to additional clients. TS continues to differentiate itself from its
competitors by using NTS' testing, engineering and compliance capabilities to
maximize its customers' return on human assets.
Notwithstanding the foregoing, and because of factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance.
13
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities of $728,000 in the three months
ended April 30, 2007 primarily consisted of net income of $591,000 adjusted for
non-cash items of $1,491,000 in depreciation and amortization, share based
compensation of $99,000, partially offset by other non cash items of $143,000
and changes in working capital of $2,766,000. Net cash used for operating
activities of $1,587,000 in the three months ended April 30, 2006 consisted of
net income of $352,000 adjusted for non-cash items of $1,417,000 in depreciation
and amortization, stock based compensation of $168,000, offset by other non cash
items of $69,000 and changes in working capital of $3,455,000.
Cash used for investing activities in the three months ended April 30,
2007 of $1,017,000 was primarily attributable to capital spending of $1,081,000
and investment in life insurance of $37,000, partially offset by net proceeds
from insurance claim of $101,000. Cash used for investing activities in the
three months ended April 30, 2006 of $2,082,000 was attributable to capital
spending of $1,667,000 and cash used to acquire American International
Registrars Corporation ("AIR") of $380,000 and investment in life insurance of
$35,000.
Net cash provided by financing activities in the three months ended April
30, 2007 of $1,325,000 consisted primarily of proceeds from borrowings of
$1,999,000, proceeds from stock options exercised of $111,000, partially offset
by repayment of debt of $785,000. Net cash provided by financing activities in
the three months ended April 30, 2006 of $1,569,000 consisted primarily of
proceeds from borrowings of $9,543,000, proceeds from stock options exercised of
$100,000, offset by repayment of debt of $4,181,000, and common stock repurchase
of $3,893,000 from a former executive officer and director of the Company.
The Company has a $16,500,000 revolving line of credit under its credit
agreement with Comerica Bank California and First Bank. Comerica Bank
California, as the agent, holds 60% of the line with First Bank, as the
participant, holding 40% of the line. The interest rate is at the agent's prime
rate minus 25 basis points, with an option for the Company to convert to loans
at the Libor rate plus 225 basis points for 30, 60, 90, 180 or 365 days, with
minimum advances of $1,000,000. The outstanding balance on the revolving line of
credit at April 30, 2007 was $10,843,000. This balance is reflected in the
accompanying condensed consolidated balance sheets as long-term. The amount
available on the line of credit was $5,657,000 as of April 30, 2007. This
agreement is subject to certain covenants, which require the maintenance of
certain working capital, debt-to-equity, earnings-to-expense and cash flow
ratios. The Company was in compliance with all of the covenants with its banks
at April 30, 2007.
The credit agreement with Comerica Bank California and First Bank also
includes a $2,500,000 term loan to be repaid in 60 equal monthly payments and an
equipment line of credit for $2,000,000. On March 29, 2006, the Company
increased the term loan by an additional $3,900,000 to fund the repurchase of
792,266 shares of common stock from a former executive officer and director. On
September 21, 2006, the agreement was amended again to include an additional
equipment line of credit of $2,000,000 and an additional $2,000,000 term loan,
to be repaid in 48 equal monthly payments, to fund the purchase of Dynamic Labs.
The aggregate outstanding balance on the term loans at April 30, 2007 was
$6,094,000. The aggregate outstanding balance on the equipment line of credit at
April 30, 2007 was $3,316,000. The Company has additional equipment line of
credit agreements (at interest rates of 5.56% to 7.47%) to finance various test
equipment with terms of 60 months for each equipment schedule. The outstanding
balance at April 30, 2007 was $1,119,000.
The balance of other notes payable collateralized by land and building was
$2,365,000 at April 30, 2007.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's quantitative and
qualitative market risk since the disclosure in the Company's Annual Report on
Form 10-K for the year ended January 31, 2007, filed with the Securities and
Exchange Commission on April 30, 2007.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer carried
out an evaluation with the participation of the Company's management, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, the Company's
disclosure controls and procedures were effective.
Changes in Internal Controls Over Financial Reporting
As required by Rule 13a-15(d), the Company's Chief Executive Officer and
Chief Financial Officer, with the participation of the Company's management,
also conducted an evaluation of the Company's internal controls over financial
reporting to determine whether any changes occurred during the quarter ended
April 30, 2007 that have materially affected, or are reasonably likely to
affect, the Company's internal controls over financial reporting. Based on that
evaluation, there has been no such change during the quarter ended April 30,
2007.
Limitations of the Effectiveness
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the internal
control system are met. Because of the inherent limitations of any internal
control system, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected. Notwithstanding
these limitations, the Company's disclosure controls and procedures are designed
to provide reasonable assurance of achieving their objectives. The Company's
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are, in fact, effective at the
"reasonable assurance" level.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company may be involved in judicial or
administrative proceedings concerning matters arising in the ordinary
course of business. Management does not expect that any of these matters,
individually or in the aggregate, will have a material adverse effect on
the Company's business, financial condition, cash flows or results of
operation.
Item 1A. Risk Factors
There have been no material changes in the Company's risk factors since
the disclosure in the Company's Annual Report on Form 10-K for the year
ended January 31, 2007 filed with the Securities and Exchange Commission
on April 30, 2007.
Item 2. Unregistered Sales of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
31.1 - Certification of the Principal Executive Officer pursuant to rule
13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of the Principal Financial Officer pursuant to rule
13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of the Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification of the Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
16
SIGNATURE
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.
NATIONAL TECHNICAL SYSTEMS, INC.
Date: June 13, 2007 By: /s/ Raffy Lorentzian
-----------------------
Raffy Lorentzian
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
17