================================================================================
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, 2008
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
------------------------ ----------------------
(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, a non-accelerated filer, or a smaller reporting company. See
definition of "accelerated filer," " large accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
(Do not check if a smaller
reporting company)
Smaller reporting company [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 10,
2008 was 8,983,138.
================================================================================
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
April 30, 2008 (unaudited) and January 31, 2008 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended April 30, 2008 and 2007 4
Unaudited Condensed Consolidated Statements of Cash
Flows For the Three Months Ended April 30, 2008 and
2007 5
Notes to the Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION & SIGNATURE
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signature 18
2
PART I - FINANCIAL
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
At At
April 30, January 31,
2008 2008
(unaudited)
------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 2,876,000 $ 2,863,000
Investments 552,000 363,000
Accounts receivable, less allowance for doubtful accounts
of $767,000 at April 30, 2008 and $907,000 at January 31, 2008 24,415,000 23,925,000
Income taxes receivable -- 327,000
Inventories, net 3,461,000 2,915,000
Deferred income taxes 2,361,000 2,216,000
Prepaid expenses 1,539,000 1,330,000
------------------------------
Total current assets 35,204,000 33,939,000
Property, plant and equipment, at cost 99,238,000 106,965,000
Less: accumulated depreciation (64,849,000) (71,914,000)
------------------------------
Net property, plant and equipment 34,389,000 35,051,000
Goodwill 10,668,000 10,471,000
Intangible assets, net 6,710,000 6,677,000
Other assets 4,880,000 4,754,000
==============================
TOTAL ASSETS $ 91,851,000 $ 90,892,000
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,161,000 $ 6,090,000
Accrued expenses 6,049,000 5,857,000
Income taxes payable 126,000 --
Deferred income 2,137,000 959,000
Current installments of long-term debt 2,052,000 1,888,000
==============================
Total current liabilities 15,525,000 14,794,000
Long-term debt, excluding current installments 31,879,000 32,274,000
Deferred income taxes 4,998,000 5,148,000
Deferred compensation 957,000 986,000
Minority interest 330,000 335,000
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, 8,882,000 as of April 30, 2008 and 8,846,000 as of
January 31, 2008 13,974,000 13,769,000
Retained earnings 24,214,000 23,486,000
Accumulated other comprehensive income (loss) (26,000) 100,000
------------------------------
Total shareholders' equity 38,162,000 37,355,000
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 91,851,000 $ 90,892,000
==============================
See accompanying notes to condensed consolidated financial statements.
3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended April 30, 2008 and 2007
2008 2007
------------------------------
Net revenues $ 31,732,000 $ 29,804,000
Cost of sales 24,056,000 22,789,000
==============================
Gross profit 7,676,000 7,015,000
Selling, general and administrative expense 6,108,000 5,782,000
Equity loss (income) from non-consolidated subsidiary 32,000 (56,000)
------------------------------
Operating income 1,536,000 1,289,000
Other income (expense):
Interest expense, net (523,000) (454,000)
Other income, net 201,000 156,000
------------------------------
Total other expense, net (322,000) (298,000)
Income before income taxes and minority interest 1,214,000 991,000
Income taxes 491,000 393,000
------------------------------
Income before minority interest 723,000 598,000
Minority interest 5,000 (7,000)
------------------------------
Net income $ 728,000 $ 591,000
==============================
Earnings per common share:
Basic $ 0.08 $ 0.07
==============================
Diluted $ 0.08 $ 0.06
==============================
Weighted average common shares outstanding 8,868,000 8,744,000
Dilutive effect of stock options 581,000 578,000
==============================
Weighted average common shares outstanding, assuming dilution 9,449,000 9,322,000
==============================
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, 2008 and 2007
2008 2007
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 728,000 $ 591,000
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,701,000 1,491,000
Write-off (recoveries) of receivables (140,000) 108,000
Undistributed (loss) earnings of affiliate (5,000) 7,000
Deferred income taxes (217,000) (194,000)
Tax benefit from stock option exercises 53,000 37,000
Share based compensation 70,000 99,000
Net gain on insurance claim -- (101,000)
Gain on sale of securities (195,000) --
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable (302,000) (2,792,000)
Inventories (546,000) (225,000)
Prepaid expenses (426,000) (164,000)
Other assets (91,000) 215,000
Accounts payable (952,000) (307,000)
Accrued expenses 192,000 (677,000)
Income taxes payable 126,000 (5,000)
Deferred income 1,178,000 1,169,000
Deferred compensation (29,000) 20,000
Income taxes receivable 327,000 --
==============================
Net cash provided by (used in) operating activities 1,472,000 (728,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (875,000) (1,081,000)
Investment in life insurance (35,000) (37,000)
Proceeds from sale of securities 195,000 --
Acquisitions of businesses, net of cash acquired (419,000) --
Net proceeds from insurance claim -- 101,000
Investment in retirement funds (189,000) --
------------------------------
Net cash used in investing activities (1,323,000) (1,017,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 250,000 1,999,000
Repayments of current and long-term debt (481,000) (785,000)
Proceeds from stock options exercised 82,000 111,000
------------------------------
Net cash (used in) provided by financing activities (149,000) 1,325,000
------------------------------
Effect of exchange rate changes on cash 13,000 (1,000)
------------------------------
Net increase (decrease) in cash 13,000 (421,000)
Beginning cash balance 2,863,000 3,221,000
------------------------------
ENDING CASH BALANCE $ 2,876,000 $ 2,800,000
==============================
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, 2009 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, 2008.
The statements presented as of April 30, 2008 and for the three months
ended April 30, 2008 and 2007 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 $491,000 for the three months ended April
30, 2008, and $393,000 for the three months ended April 30, 2007.
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 the 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. The Company's
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 and unrealized gains or losses on marketable
securities. During the three months ended April 30, 2008, total
comprehensive income was $602,000 which is composed of a foreign currency
translation gain of $13,000, unrealized loss on marketable securities of
$13,000 and a reclassification adjustment for realized gains on the sale
of marketable securities of $126,000. 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.
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 during the three months ended April 30,
2008 was $583,000 and $127,000, respectively. Cash paid for interest and
taxes during the three months ended April 30, 2007 was $470,000 and
6
$416,000, 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.
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, 2008.
As of April 30, 2008 and January 31, 2008, the Company had the following
acquired intangible assets:
April 30, 2008 January 31, 2008
------------------------------------------------ ------------------------------------------------
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 $ 849,000 $ 264,000 $ 585,000 3-10 years $ 849,000 $ 225,000 $ 624,000 3-10 years
Customer relationships 6,203,000 296,000 5,907,000 3-15 years 6,012,000 178,000 5,834,000 3-15 years
Acreditations and certifications 20,000 2,000 18,000 5 years 20,000 1,000 19,000 5 years
------------------------------------- -------------------------------------
Total $ 7,072,000 $ 562,000 $ 6,510,000 $ 6,881,000 $ 404,000 $ 6,477,000
===================================== =====================================
Intangible assets not subject
to amortization:
Goodwill $ 10,668,000 $ 10,471,000
Trademarks and tradenames 200,000 200,000
------------- -------------
Total $ 10,868,000 $ 10,671,000
============= =============
9. Employee Equity Incentive Plans
The Company has two employee incentive stock option plans: the "2002 stock
option plan" and the "2006 equity incentive plan." The 2006 equity
incentive plan replaced the 2002 stock option plan, which was terminated
early and no further options will be granted under it.
Additional information with respect to the option plans as of April 30,
2008 is as follows:
Weighted Avg.
Weighted Avg. Remaining Contract Aggregate
Shares Exercise Price Life in years Intrinsic Value
--------------------------- -------------------------------------
Outstanding at January 31, 2008 1,726,459 $ 3.92 3.84 $ 3,793,000
--------------------------- -------------------------------------
Granted -- --
Exercised (36,000) 2.25
Canceled or expired (2,675) 4.16
---------------------------
Outstanding at April 30, 2008 1,687,784 $ 3.95 3.60 $ 3,084,000
=========================== =====================================
Exercisable at April 30, 2008 1,559,784 $ 3.89 3.31 $ 2,947,000
=========================== =====================================
Compensation expense related to stock options was $32,000 and $80,000 for
the three months ended April 30,
7
2008 and 2007, respectively. As of April 30, 2008, there was $89,000 of
unamortized stock-based compensation expense related to unvested stock
options which is expected to be recognized over a remaining period of 21
months.
The Company's non-vested shares vest at 25% per year commencing with the
first anniversary of the grant date. 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 $38,000 for the three months ended April 30,
2008. As of April 30, 2008, 76,216 non-vested shares were outstanding at a
weighted average grant date value of $7.03. As of April 30, 2008, there
was $419,000 of unamortized stock-based compensation cost related to
unvested shares which is expected to be recognized over a remaining period
of 38 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 became effective for the Company
on February 1, 2008. However, on February 12, 2008, the FASB issued FSP
FAS 157-2 which delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis
(at least annually). This FSP partially defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP. The
Company adopted SFAS 157 except as it applies to those nonfinancial assets
and nonfinancial liabilities as noted in FSP FAS 157-2. The partial
adoption of SFAS 157 did not have a material impact on the Company's
consolidated financial position, cash flows, or 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 became effective for the Company on February 1, 2008. The
Company did not elect this new measure for the quarter ended April 30,
2008.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R") and SFAS No. 160, "Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an amendment
of ARB 51" ("SFAS 160"), which will change the accounting for and
reporting of business combination transactions and noncontrolling
interests in consolidated financial statements. SFAS 141R and SFAS 160
will be effective for the Company on February 1, 2009. The Company is
currently evaluating the impact of adopting SFAS 141R and SFAS 160 on its
consolidated financial position, cash flows, and results of operations.
11. Segments
The following table presents summarized information by segment:
8
Three Months Ended
---------------------------------
April 30, 2008 April 30, 2007
-------------- ----------------
Revenues by segment:
Engineering & Evaluation $ 23,313,000 $ 21,409,000
Technical Solutions 8,419,000 8,395,000
-------------- ----------------
Total revenues $ 31,732,000 $ 29,804,000
============== ================
Operating income by segment:
Engineering & Evaluation $ 1,366,000 $ 1,167,000
Technical Solutions 170,000 122,000
-------------- ----------------
Total operating income $ 1,536,000 $ 1,289,000
============== ================
Income before income taxes and minority interest by segment:
Engineering & Evaluation $ 1,065,000 $ 890,000
Technical Solutions 149,000 101,000
-------------- ----------------
Total income before income taxes and minority interest $ 1,214,000 $ 991,000
============== ================
-------------- ----------------
April 30, 2008 January 31, 2008
-------------- ----------------
Assets by segment:
Engineering & Evaluation $ 77,135,000 $ 76,051,000
Technical Solutions 8,661,000 7,876,000
Corporate 6,055,000 6,965,000
-------------- ----------------
Total assets $ 91,851,000 $ 90,892,000
-------------- ----------------
12. Acquisition of International Management Systems, Inc. (IMS)
On April 21, 2008, NQA, USA, a 50% owned consolidated subsidiary of NTS,
acquired the assets of International Management Systems, Inc., located in
Tampa, Florida for a total purchase price of $445,000. IMS has been in
business for over 10 years and is well branded in the registration
industry. The IMS location provides NQA a strategic presence for the
support of its current and new customers in the Southeast region. The
Company paid $267,000 in cash and will pay an additional $178,000 in
earn-out, upon the first anniversary of the Closing Date. The amount of
the earn-out may be adjusted in accordance with certain terms and
conditions specified in the purchase agreement. An additional $25,000 in
working capital adjustment was paid at closing. The preliminary purchase
price including acquisition costs was $301,000 and was allocated $190,000
to customer relationships, $78,000 to goodwill, $48,000 to accounts
receivable, $8,000 to fixed assets, and $23,000 in assumed accounts
payable. The results of operations for IMS are included in the Company's
condensed consolidated statements of income from April 21, 2008 to April
30, 2008.
13. Subsequent Events
Acquisition of Elliott Laboratories, Inc.
On June 6, 2008, the Company acquired Elliott Laboratories, Inc., a
leading San Francisco Bay Area Electromagnetic Compatibility (EMC),
Product Safety and Wireless regulatory testing laboratory with two
full-service facilities. The addition of Elliott Laboratories to the NTS
organization creates one of the largest independent providers of EMC
design, test and evaluation services in North America.
In order to fund the acquisition of Elliott Laboratories, the Company
obtained an additional term loan.
9
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, 2008 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, 2008.
10
RESULTS OF OPERATIONS
REVENUES
Three months ended April 30, 2008 % Change 2007 Diff
--------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 23,313 8.9% $ 21,409 $ 1,904
Technical Solutions 8,419 0.3% 8,395 24
--------- ---------------------
Total revenues $ 31,732 6.5% $ 29,804 $ 1,928
========= =====================
For the three months ended April 30, 2008, consolidated revenues increased
by $1,928,000 or 6.5% when compared to the same period in fiscal 2008.
Engineering & Evaluation:
For the three months ended April 30, 2008, Engineering & Evaluation
segment revenues increased by $1,904,000 or 8.9% when compared to the same
period in fiscal 2008, primarily due to an increase in revenues from the
aerospace and power markets and additional revenues of approximately $1,084,000
from new acquisitions, partially offset by a decrease in revenues in the defense
and automotive markets.
Technical Solutions:
For the three months ended April 30, 2008, Technical Solutions segment
revenues increased by $24,000 or 0.3% when compared to the same period in fiscal
2008, primarily due to an increase in revenues with one major customer partially
offset by a decrease in revenues related to the automotive industry.
GROSS PROFIT
Three months ended April 30, 2008 % Change 2007 Diff
--------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 6,216 12.7% $ 5,517 $ 699
% to segment revenue 26.7% 25.8% 0.9%
Technical Solutions 1,460 (2.5)% 1,498 (38)
% to segment revenue 17.3% 17.8% -0.5%
--------- ---------------------
Total $ 7,676 9.4% $ 7,015 $ 661
========= =====================
% to total revenue 24.2% 23.5% 0.7%
Total gross profit for the three months ended April 30, 2008 increased by
$661,000 or 9.4% when compared to the same period in fiscal 2008.
Engineering & Evaluation:
For the three months ended April 30, 2008, gross profit for the
Engineering & Evaluation segment increased by $699,000 or 12.7% when compared to
the same period in fiscal 2008. This was primarily due to additional gross
profit from the USTL acquisition and the increase in revenues discussed above.
Technical Solutions:
For the three months ended April 30, 2008, gross profit decreased by
$38,000 or 2.5% in the Technical Solutions segment when compared to the same
period in fiscal 2008. This decrease was primarily due to slightly higher direct
costs as a percentage of revenue.
11
SELLING,GENERAL & ADMINISTRATIVE
Three months ended April 30, 2008 % Change 2007 Diff
--------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 4,818 9.4% $ 4,406 $ 412
% to segment revenue 20.7% 20.6% 0.1%
Technical Solutions 1,290 (6.3)% 1,376 (86)
% to segment revenue 15.3% 16.4% -1.1%
--------- ---------------------
Total $ 6,108 5.6% $ 5,782 $ 326
========= =====================
% to total revenue 19.2% 19.4% -0.2%
Total selling, general and administrative expenses increased $326,000 or
5.6% for the three months ended April 30, 2008 when compared to the same period
in fiscal 2008.
Engineering & Evaluation:
For the three months ended April 30, 2008, selling, general and
administrative expenses increased by $412,000 or 9.4% when compared to the same
period in fiscal 2008, primarily due to higher sales and marketing costs
associated with the increased revenues and margins discussed above and
additional sales and marketing costs related to the development of the
engineering services group.
Technical Solutions:
For the three months ended April 30, 2008, selling, general and
administrative expenses decreased by $86,000 or 6.3% when compared to the same
period in fiscal 2008, primarily due to a recovery of bad debt expense and a
decrease in depreciation expense, offset by a slight increase in sales related
compensation expense.
Equity Income from Non-Consolidated Subsidiary:
Engineering & Evaluation:
For the three months ended April 30, 2008, equity loss from XXCAL Japan
was $32,000, compared to equity income of $56,000 for the same period in fiscal
2008. This decrease was primarily due to a decline in revenues from two major
clients and generally weaker economic conditions in Japan. 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, 2008 % Change 2007 Diff
--------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 1,366 17.1% $ 1,167 $ 199
% to segment revenue 5.9% 5.5% 0.4%
Technical Solutions 170 39.3% 122 48
% to segment revenue 2.0% 1.5% 0.6%
--------- ---------------------
Total $ 1,536 19.2% $ 1,289 $ 247
========= =====================
% to total revenue 4.8% 4.3% 0.5%
Operating income for the three months ended April 30, 2008 increased by
$247,000 or 19.2% when compared to the same period in fiscal 2008.
Engineering & Evaluation:
For the three months ended April 30, 2008, operating income in the
Engineering & Evaluation segment increased by $199,000 or 17.1% when compared to
the same period in fiscal 2008, primarily as a result of the increase in gross
12
profit, partially offset by the increase in selling, general and administrative
expenses and the decrease in equity income from non-consolidated subsidiary.
Technical Solutions:
For the three months ended April 30, 2008, operating income in the
Technical Solutions segment increased by $48,000 or 39.3% when compared to the
same period in fiscal 2008, primarily as a result of the decrease in selling,
general and administrative expenses, partially offset by the decrease in gross
profit.
INTEREST EXPENSE
Net interest expense increased by $69,000 to $523,000 in the three months
ended April 30, 2008 when compared to the same period in the prior year,
primarily due to additional borrowings for the USTL acquisition on December 5,
2007, offset by lower interest rates during the quarter ended April 30, 2008.
OTHER INCOME
Other income was $201,000 for the three months ended April 30, 2008,
compared to $156,000 for the same period in the prior year. Other income in the
current year includes gains from securities sold in the current quarter.
INCOME TAXES
The income tax provision rate for the three months ended April 30, 2008
was 40.4% compared to the 39.7% income tax rate in the prior year. 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, 2008 was $728,000 compared
to $591,000 for the same period in fiscal 2008, an increase of $137,000 or
23.2%. This increase was primarily due to the higher operating income, partially
offset by higher interest expense and higher income taxes.
OFF BALANCE SHEET ARRANGEMENTS
None.
BUSINESS ENVIRONMENT
The defense and aerospace markets generate approximately 56% 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, it is anticipated that both the commercial and military aerospace
markets will continue to grow for the next several years. Also, the increase in
government outsourcing activity has created additional opportunities for NTS. An
example of the outsourcing activity is the increase in munitions and ordnance
work NTS has received this year from government bases. This type of work was
historically done by the government directly. The Company is well equipped to
handle this increase in demand.
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 expects an increase in business demand as carriers
upgrade networks packet-based Voice Over Internet Protocol (VOIP) devices. The
Company is currently evaluating the overall compliance requirements for the
deployment of Broadband wireless products
13
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 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. Currently NTS is developing compliance and
interoperabiltiy testing for emerging technologies; Multimedia over Coax Cable
(MoCA), Video Electronics Standards (VESA), WiMedia, satellite radio and
electronic product compliance for Zune applications. In addition, the Company
believes demand will increase for certification of "ZigBee" platforms and
"ZigBee" Alliance-recognized products. The Company believes these compliance
activities will have applicability in both the Asian and US markets.
The transportation market and power markets have been stable with the Company
continuing to experience a decrease in the transportation business at its
Detroit facility, while the Company has recently experienced a moderate increase
in the power business.
In the Technical Solutions segment (TS), the Company provides a variety of
staffing and workforce management services and solutions 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. TS is positioning itself to provide its
clients with resources and solutions from product concept to market entry by
leveraging the Engineering & Evaluation aerospace, defense and
telecommunications customers and aligning its services with the Engineering &
Evaluation sales team.
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.
14
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $1,472,000 in the three
months ended April 30, 2008 primarily consisted of net income of $728,000
adjusted for non-cash items of $1,701,000 in depreciation and amortization,
share based compensation of $70,000, partially offset by changes in working
capital of $523,000 and other non cash items of $504,000. 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.
Cash used for investing activities in the three months ended April 30,
2008 of $1,323,000 was primarily attributable to capital spending of $875,000,
cash used to acquire businesses of $419,000, investment in retirement funds of
$189,000 and investment in life insurance of $35,000, partially offset by net
proceeds from sale of securities of $195,000. 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.
Capital spending is generally comprised of purchases of machinery and equipment,
building, leasehold improvements, computer hardware, software and furniture and
fixtures.
Net cash used in financing activities in the three months ended April 30,
2008 of $149,000 consisted primarily of repayment of debt of $481,000, partially
offset by proceeds from borrowings of $250,000 and proceeds from stock options
exercised of $82,000. 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.
On December 5, 2007, the Company entered into an Amendment No. 9 to the
Revolving Credit Agreement with Comerica Bank, as agent and lender, holding 60%,
and First Bank, as lender, holding 40% (the "Amendment"). This agreement matures
on December 1, 2012. The amendment included the following changes: (a)
$16,500,000 revolving line of credit with interest rate at the agent's prime
rate less 25 basis points, with an option for the Company to convert to loans at
the Libor rate plus 200 basis points for periods ranging from 30 days to 365
days, with minimum advances of $1,000,000. There is an annual fee of 25 basis
points and a quarterly unused credit fee of 25 basis points. The outstanding
balance on the revolving line of credit at April 30, 2008 was $9,500,000. This
balance is reflected in the accompanying consolidated balance sheets as
long-term. The amount available on the line of credit was $7,000,000 as of April
30, 2008. (b) $9,000,000 in Term Loan A which was used to consolidate previous
term loans. The outstanding balance on Term Loan A at April 30, 2008 was
$8,679,000. The interest rate is at the agent's prime rate less 25 basis points,
with an option for the Company to convert to loans at the Libor rate plus 225
basis points for periods ranging from 30 days to 365 days, with minimum advances
of $1,000,000. The principal amount is amortized over a 7 year period. (c)
$12,650,000 in Term Loan B which was used to acquire USTL on December 5, 2007.
The interest rate is at the agent's prime rate less 25 basis points, with an
option for the Company to convert to loans at the Libor rate plus 225 basis
points for periods ranging from 30 days to 365 days, with minimum advances of
$1,000,000. The principal amount is amortized at the rate of 0% during the first
year of the note, 5% in the second year, 10% in the third year and 15% in the
fourth and fifth years.
In addition to the Comerica agreement, the Company has two mortgage notes with
other banks on land and buildings owned by the Company in Massachusetts and
California with interest rates of 5.5% and 9.0% in the aggregate amount of
$1,926,000 and an additional $658,000 in equipment line balances which were used
to finance various test equipment with terms of 60 months for each equipment
schedule at interest rates ranging from 5.56% to 7.47%. The Company was in
compliance with all of the covenants with its banks at April 30, 2008.
The Company's 50% owned subsidiary, NQA, Inc., has total borrowings of $518,000
for the acquisitions of TRA Certification Inc. and International Management
Systems, Inc. (IMS).
Management is not aware of any significant demands for capital funds that may
materially affect short or long-term liquidity in the form of large fixed asset
acquisitions, unusual working capital commitments or contingent liabilities. In
addition, the Company has made no material commitments for capital expenditures.
The Company's long-term debt may be accelerated if the Company fails to meet its
covenants with its banks. The Company believes that the cash flow from
operations and the revolving line of credit will be sufficient to fund its
operations for the next twelve months.
15
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, 2008, filed with the Securities and
Exchange Commission on April 29, 2008.
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 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) under the Exchange Act, 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 Company's first fiscal quarter 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
Company's first fiscal quarter.
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 concluded that the Company's
disclosure controls and procedures were, in fact, effective at the "reasonable
assurance" level as of the end of the period covered by this report.
16
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
operations.
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, 2008 filed with the Securities and Exchange Commission
on April 29, 2008.
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.
17
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, 2008 By: /s/ Raffy Lorentzian
-----------------------
Raffy Lorentzian
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
18