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National Technical Systems 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
___________________________

(Mark One)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2010

or

o
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  T  NO  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232,405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
YES  o  NO  o

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 o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company T
   
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  o  NO  T
 
The number of shares of common stock, no par value, outstanding as of June 9, 2010 was 9,535,712.
 


 
 

 

NATIONAL TECHNICAL SYSTEMS, INC.  AND SUBSIDIARIES


Index


PART  I.   FINANCIAL INFORMATION
     
Page No.
         
         
Item 1.
Financial Statements:
   
         
     
3
         
     
4
         
     
5
         
     
6
         
         
Item 2.
 
9
         
Item 3.
 
14
         
Item 4.
 
14
         
         
PART  II.   OTHER INFORMATION & SIGNATURE
   
         
Item 1.
 
15
         
Item 1A. 
 
15
         
Item 2.
 
15
         
Item 3.
 
15
         
Item 4.
 
15
         
Item 5.
 
15
         
Item 6.
 
15
         
   
16

 
2


PART I – FINANCIAL
ITEM 1. FINANCIAL STATEMENTS

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

   
At
   
At
 
   
April 30,
   
January 31,
 
   
2010
   
2010
 
ASSETS
 
(unaudited)
       
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 10,850,000     $ 7,102,000  
Investments
    1,950,000       1,893,000  
Accounts receivable, less allowance for doubtful accounts of $1,040,000 at April 30, 2010 and  $1,000,000 at January 31, 2010
    30,160,000       27,777,000  
Income taxes receivable
    90,000       115,000  
Inventories, net
    3,437,000       2,659,000  
Deferred income taxes
    3,786,000       3,561,000  
Prepaid expenses
    1,196,000       963,000  
Total current assets
    51,469,000       44,070,000  
                 
Property, plant and equipment, at cost
    106,885,000       107,550,000  
Less: accumulated depreciation
    (67,827,000 )     (68,804,000 )
Net property, plant and equipment
    39,058,000       38,746,000  
                 
Goodwill
    14,780,000       14,769,000  
Intangible assets, net
    8,134,000       8,374,000  
Other assets
    3,150,000       4,042,000  
                 
TOTAL ASSETS
  $ 116,591,000     $ 110,001,000  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 6,766,000     $ 5,798,000  
Accrued expenses
    9,934,000       10,920,000  
Income taxes payable
    2,181,000       -  
Deferred income
    2,372,000       1,437,000  
Current installments of long-term debt
    4,224,000       3,910,000  
Total current liabilities
    25,477,000       22,065,000  
                 
Long-term debt, excluding current installments
    30,571,000       31,560,000  
Deferred income taxes
    8,044,000       7,835,000  
Deferred compensation
    1,217,000       1,169,000  
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, 9,500,000 as of April 30, 2010 and  9,449,000 as of January 31, 2010
    17,615,000       17,297,000  
Retained earnings
    33,225,000       29,679,000  
Accumulated other comprehensive loss
    (153,000 )     (127,000 )
Total shareholders' equity
    50,687,000       46,849,000  
Noncontrolling interests
    595,000       523,000  
Total equity
    51,282,000       47,372,000  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 116,591,000     $ 110,001,000  

See accompanying notes.

 
3


NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income
for the Three Months Ended April 30, 2010 and 2009

   
2010
   
2009
 
             
Net revenues
  $ 36,132,000     $ 28,692,000  
Cost of sales
    25,348,000       21,286,000  
Gross profit
    10,784,000       7,406,000  
                 
Selling, general and administrative expense
    7,442,000       6,093,000  
Equity loss from non-consolidated subsidiary
    17,000       31,000  
Operating income
    3,325,000       1,282,000  
Other income (expense):
               
Interest expense, net
    (296,000 )     (396,000 )
Other income (expense), net
    2,991,000       (69,000 )
Total other income (expense), net
    2,695,000       (465,000 )
                 
Income before income taxes and noncontrolling interests
    6,020,000       817,000  
Income taxes
    2,402,000       328,000  
                 
Income before noncontrolling interests
    3,618,000       489,000  
Net (income) loss attributable to noncontrolling interests
    (72,000 )     51,000  
                 
Net income
  $ 3,546,000     $ 540,000  
                 
Net income per common share:
               
Basic
  $ 0.37     $ 0.06  
Diluted
  $ 0.35     $ 0.06  
                 
Weighted average common shares outstanding
    9,465,000       9,299,000  
Dilutive effect of stock options and nonvested shares
    559,000       152,000  
Weighted average common shares outstanding, assuming dilution
    10,024,000       9,451,000  

See accompanying notes.

 
4


NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 2010 and 2009

   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 3,546,000     $ 540,000  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,787,000       1,781,000  
Bad debt write-offs, net
    40,000       169,000  
Gain on sale of assets
    (3,017,000 )     -  
Loss on retirement of assets
    13,000       -  
Gain on investments
    (69,000 )     (44,000 )
Life insurance premium
    12,000       12,000  
Undistributed earnings of affiliate
    72,000       (51,000 )
Deferred income taxes
    (16,000 )     (131,000 )
Share based compensation
    241,000       64,000  
Tax benefit from stock options exercised
    14,000       -  
Changes in operating assets and liabilities (net of acquisitions):
               
Accounts receivable
    (2,307,000 )     433,000  
Inventories
    (778,000 )     (108,000 )
Prepaid expenses
    (233,000 )     (170,000 )
Other assets and intangibles
    -       10,000  
Accounts payable
    968,000       (1,252,000 )
Accrued expenses
    981,000       265,000  
Income taxes payable
    2,181,000       (576,000 )
Deferred income
    935,000       882,000  
Deferred compensation
    48,000       (94,000 )
Income taxes receivable
    25,000       2,000  
Net cash provided by operating activities
    4,443,000       1,732,000  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (2,123,000 )     (1,414,000 )
Investment in life insurance
    -       (50,000 )
Proceeds from sale of life insurance
    1,826,000       -  
Acquisitions of businesses, USTL earn-out payment
    (2,053,000 )     -  
Proceeds from sale of property
    2,293,000       -  
Investment in retirement funds
    -       (176,000 )
Net cash used in investing activities
    (57,000 )     (1,640,000 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from current and long-term debt
    508,000       -  
Repayments of current and long-term debt
    (1,183,000 )     (1,070,000 )
Proceeds from stock options exercised
    63,000       -  
Net cash used by financing activities
    (612,000 )     (1,070,000 )
Effect of exchange rate changes on cash
    (26,000 )     (15,000 )
                 
Net increase (decrease) in cash and cash equivalents
    3,748,000       (993,000 )
Beginning cash and cash equivalents balance
    7,102,000       9,364,000  
                 
ENDING CASH BALANCE
  $ 10,850,000     $ 8,371,000  

See accompanying notes.

 
5


NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements

1.
Basis of Presentation

The consolidated financial statements include the accounts of National Technical Systems, Inc. (“NTS” or the “Company”) and its majority-owned or otherwise controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the consolidated balance sheets.  These statements should not be construed as representing pro rata results of the Company’s fiscal year ending January 31, 2011 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, 2010.

The statements presented as of April 30, 2010 and for the three months ended April 30, 2010 and 2009 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.

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 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 or obligations will significantly change due to the settlement of examinations or the expiration of statutes of limitation during the next twelve months.

3.
Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) on the Company’s 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, 2010, total comprehensive income was $3,520,000 which includes foreign currency translation gain of $26,000.  During the three months ended April 30, 2009, total comprehensive income was $525,000 which includes foreign currency translation loss of $15,000.

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.
Noncontrolling Interests

Noncontrolling interest in the Company’s NQA, Inc. subsidiary is a result of 50% of the stock of NQA, Inc. being issued to NICEIC Group Limited (“NICEIC, Ltd.”) (formerly NQA, Ltd.).  Profits and losses are allocated 50.1% to NTS, and 49.9% to NICEIC Ltd.

6.
Earnings Per Share

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 exclude any dilutive effects of options, warrants, non-vested restricted shares and convertible securities.

7.
Intangible Assets

The following table summarizes the Company’s intangible assets:

 
6


As of April 30, 2010  and January 31, 2010, the Company had the following acquired intangible assets:

   
April 30, 2010
 
January 31, 2010
   
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
  $ 879,000     $ 523,000     $ 356,000  
3-10 years
  $ 879,000     $ 490,000     $ 389,000  
3-10 years
Customer relationships
    9,147,000       1,829,000       7,318,000  
3-15 years
    9,147,000       1,628,000       7,519,000  
3-15 years
Accreditations and certifications
    20,000       10,000       10,000  
5 years
    20,000       9,000       11,000  
5 years
Trademarks and tradenames
    58,000       8,000       50,000  
3 years
    58,000       3,000       55,000  
3 years
Total
  $ 10,104,000     $ 2,370,000     $ 7,734,000       $ 10,104,000     $ 2,130,000     $ 7,974,000    
                                                     
Intangible assets not subject to amortization:
                                                   
                                                     
Goodwill
                  $ 14,780,000                       $ 14,769,000    
Trademarks and tradenames
                    400,000                         400,000    
Total
                  $ 15,180,000                       $ 15,169,000    

8.
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, 2010 is as follows:

   
Shares
   
Weighted Avg. Exercise Price
   
Weighted Avg. Remaining Contract Life in years
   
Aggregate Intrinsic Value
 
Outstanding at January 31, 2010
    1,071,617     $ 3.53       2. 85     $ 2,269,000  
Granted
    -       -                  
Exercised
    (20,500 )     3.07                  
Canceled, forfeited or expired
    (1,500 )     3.25                  
Outstanding at April 30, 2010
    1,049,617     $ 3.54       2. 63     $ 1,803,000  
Exercisable at April 30, 2010
    1,049,617     $ 3.54       2. 63     $ 1,803,000  

For the three months ended April 30, 2010 and 2009, potentially dilutive securities representing approximately 1,000 and 630,187 shares of common stock, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive.

There was no compensation expense related to stock options in the current quarter compared to $9,000 for the three months ended April 30, 2009. As of April 30, 2010, there was no unamortized stock-based compensation expense related to unvested stock options.

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 $76,000 for the three months ended April 30, 2010.  As of April 30, 2010, 181,000 non-vested shares were outstanding at a weighted average grant date value of $4.38. As of April 30, 2010, there was $715,000 of unamortized stock-based compensation cost related to unvested shares which is expected to be recognized over a remaining period of 39 months.

The Company recognized $165,000 in compensation expense related to the issuance of common stock for services rendered.

 
7


9.
Fair Value Measurement

The accounting standard for fair value establishes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement at Reporting Date Using

 
Level 1
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 
Level 2
Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 
Level 3
Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The following inputs were used to determine the fair value of the Company’s investment securities and contingent consideration obligations at April 30, 2010:

   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
SERP investment in mutual funds
  $ 1,950,000     $ 1,950,000     $ -     $ -  
Earn-out for Unitek acquisition
    797,000       -       -       797,000  
Total
  $ 2,747,000     $ 1,950,000     $ -     $ 797,000  

The fair value of the contingent consideration related to the Unitek acquisition was estimated by applying the income approach.  That measure is based on significant inputs not observable in the market, which are referred to as Level 3 inputs.  Key assumptions include the discount rate and probability adjusted revenues.

10.
Elliott Laboratories, Inc. Earn-Out Consideration

The acquisition of Elliott Laboratories, Inc., on June 6, 2008, included an agreement to pay the sellers up to a maximum of $1,275,000 in earn-out consideration, plus $84,000 in additional consideration for tax benefits that resulted from the acquisition transaction, payable in Company stock and cash contingent upon the achievement by Elliott Laboratories of certain targets over the 24 months immediately following the closing of the transaction.  This will be added to the purchase price and result in an increase to goodwill in the second quarter of fiscal 2011.


11.
United States Test Laboratory, LLC earn-out payment

Payment of earn-out consideration for United States Test Laboratory, LLC (USTL) of $2,053,000 was made on March 5, 2010. The earn-out consideration was previously added to the purchase price and recorded as an increase to goodwill in fiscal 2010.

12.
Sale of Virginia Property

On April 22, 2010, the Company sold its property in Fredericksburg, Virginia for a sales price of $3,395,000.  $1,000,000 will be paid to the Company in 120 monthly installments under a promissory note at an 8.5% interest rate.  The remaining balance of $2,300,000 net of costs was held in a trust account until June 9, 2010. The gain of $3,017,000 from the sale of the property was included in other income in the current quarter.

13.
Subsequent Events

Subsequent events have been evaluated up to and including the date these financial statements were issued.

 
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, 2010 and the  consolidated financial statements included elsewhere in this report.
 
GENERAL>

The Company is a diversified business to business services organization that supplies technical services to the defense, aerospace, telecommunications, automotive, energy and high technology markets. Through its wide range of testing facilities and certification services, the Company’s services allow 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 facilities throughout the United States and in Japan, Vietnam, Canada and Germany, providing highly trained technical personnel for engineering services, product certification, product safety testing and product evaluation. In addition, it performs management registration and certification services to ISO related standards.

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 periods ended April 30, 2010 and 2009.

RESULTS OF OPERATIONS
REVENUES
Three months ended April 30,
 
2010
   
% Change
   
2009
   
Diff
 
(Dollars in thousands)
                       
Total revenues
  $ 36,132       25.9 %   $ 28,692     $ 7,440  

For the three months ended April 30, 2010, consolidated revenues increased by $7,440,000 or 25.9% when compared to the same period in fiscal 2010, primarily due to the  solid performance in the aerospace and defense markets in the current quarter compared to the same period in the prior year.  $2,303,000 of the increase was from the acquisition of Unitek Technical Services on November 30, 2009. The strong organic growth of $5,137,000 or 17.9% was as a result of several factors: capital investments on unique capabilities, capacity expansion, recent large contract wins and improved efficiencies.

GROSS PROFIT
Three months ended April 30,
 
2010
   
% Change
   
2009
   
Diff
 
(Dollars in thousands)
                       
                         
Total
  $ 10,784       45.6 %   $ 7,406     $ 3,378  
% to total revenues
    29.8 %             25.8 %     4.0 %

Total gross profit for the three months ended April 30, 2010 increased by $3,378,000 or 45.6% when compared to the same period in fiscal 2010.  Gross profit margin, as a percentage of revenues increased by 4.0%, primarily due to the strong increase in revenues in the defense market, which normally carries higher margin contracts.  In addition, this increase was also due to fixed costs not increasing proportionately with revenues.

 
9


SELLING, GENERAL & ADMINISTRATIVE
Three months ended April 30,
 
2010
   
% Change
   
2009
   
Diff
 
(Dollars in thousands)
                       
                         
Total
  $ 7,442       22.1 %   $ 6,093     $ 1,349  
% to total revenues
    20.6 %             21.2 %     (0.6 )%

Total selling, general and administrative expenses increased by $1,349,000 or 22.1% for the three months ended April 30, 2010 when compared to the same period in fiscal 2010. Selling, general and administrative expenses at Unitek, acquired on November 30, 2009, were $335,000. The remaining increase of $1,014,000 or 16.6% in selling, general and administrative expenses was primarily due to (1) costs and incentive compensation related to the increase in revenues, (2) compensation and other sales costs  associated with the investment in the engineering services group, innovation and marketing activities, (3) additional expenses related to the development of a new Enterprise Resource Planning (ERP) system and (4) additional accounting costs related to Sarbanes-Oxley Section 404 compliance preparation fees.

OPERATING INCOME
Three months ended April 30,
 
2010
   
% Change
   
2009
   
Diff
 
(Dollars in thousands)
                       
                         
Total
  $ 3,325       159.4 %   $ 1,282     $ 2,043  
% to total revenues
    9.2 %             4.5 %     4.7 %

Operating income for the three months ended April 30, 2010 increased by $2,043,000 or 159.4% when compared to the same period in fiscal 2010, primarily as a result of the increase in gross profit, partially offset by the increase in selling, general and administrative expenses. Operating income as a percentage of revenues increased by 4.7% to 9.2% in the current quarter compared to the same period in the prior year.

INTEREST EXPENSE

Net interest expense decreased by $100,000 to $296,000 in the three months ended April 30, 2010 when compared to the same period in the prior year, primarily due to lower interest rates and lower average debt balances in the current quarter compared to the same period in the prior year.

OTHER INCOME

Other income was $2,991,000 for the three months ended April 30, 2010, compared to other expense of $69,000 for the same period in the prior year. The income in the current year was primarily due to the gain on the sale of the Company’s Virginia property of $3,017,000 and the net gain recognized from insurance recovery of $269,000 related to the fire at the Company’s Fullerton facility in the prior year, partially offset by other non-recurring expenses.

INCOME TAXES

The income tax provision rate for the three months ended April 30, 2010 was 39.9% compared to the 40.1% income tax rate for the same period 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. The Company analyzes the value of the deferred income tax asset quarterly in conjunction with external reporting.

NET INCOME

Net income for the three months ended April 30, 2010 was $3,546,000 compared to $540,000 for the same period in fiscal 2010, an increase of $3,006,000 or 556.7%. This increase was primarily due to the $3,060,000 increase in other income and the $2,043,000 increase in operating income, partially offset by higher income taxes.

OFF BALANCE SHEET ARRANGEMENTS

None.

 
10


BUSINESS ENVIRONMENT

The aerospace and defense markets generate approximately 69% of the Company’s overall revenue.  Commercial airplane deliveries have slowed due to the global economic conditions of the past two years, exacerbated by Airbus’ and Boeing’s inability to field the A380 and B787, respectively.  Market conditions, however, are expected to rebound with the B787 (Dreamliner), now in flight test and aging fleets needing replacement by more fuel efficient aircraft.  Forecasts call for some 29,000 new aircraft valued at over $3.2 trillion through 2020.  Original Equipment Manufacturers continue to move toward large scale integration, consolidation around core competencies, outsourcing, and globalization.  We expect these trends to continue to present significant opportunity for NTS to fill capability gaps that emerge in the product development cycles of its customers.  The careful positioning of NTS’ Life Cycle Product Services—engineering, testing, and supply chain services—allows the Company to profit in both down and up markets.  In the down market, NTS fills the capability gaps that its customers cannot afford to maintain on a full-time basis.  When the market is up, NTS fills capacity gaps during surge periods.

The defense market is subject to the funding vagaries of the current administration and a greater propensity for in-sourcing in certain areas.  Recently, NTS has seen increased activity from government laboratories in competition with its body armor testing. To date, there has been no decline in business, but NTS could be impacted negatively on future, related body armor contracts.  Other high-profile programs have been eliminated, but Defense Research, Development, Testing, and Evaluation (RDT&E) spending is expected to be up 4% at around $80 billion in the current year.  Severe political pressure has increased cost consciousness in the Department of Defense.  Today, there is heavy scrutiny on maintaining test and production schedules leading toward increased outsourcing from Government-run test facilities to independent private sector test labs.  NTS’ competitive cost structure and significant breadth of capability have resulted in increased market share.  As is the case in the aerospace market, the Company’s unique Life Cycle Product Services value proposition acts counter to defense market economic cycles, providing opportunity to fill gaps in growing and declining conditions.

The telecommunications market remains relatively flat with some signs of improvement, particularly in the Silicon Valley market. However the wireless market, a subset of the telecommunications market, is showing a strong rebound. Carriers are delivering voice, video and data using fiber networks. New means of delivery may increase the demand for certification of suppliers’ premises equipment, and certification of new central office equipment. The Company, with multiple EMI and EMC facilities, including its recent acquisition of Elliott Laboratories in the Silicon Valley, is well equipped to grow in this market.

NTS made substantial investments in the last two years in engineering services and the Company is now well positioned to support the anticipated increased demand for integrated engineering services in the aerospace and defense markets as a result of continued outsourcing activity. The Company has developed capability and capacity to support large and regional commercial transport aircraft and business aircraft. The focus within the defense market is on developing capability and capacity around weapons systems. The Company anticipates a growing demand for engineering services for military aircraft, general aviation, space craft and unmanned vehicles.

The energy market, is improving in both nuclear and solar energy, including power generation and distribution. The Company also provides dedication and certification work for the international community. The Company believes there is a positive outlook for this market as the government and industry search for alternative energy solutions.

In the automotive industry, alternative fuel vehicle testing is showing signs of growth; however the industry in general remains weak.  The Company has experienced a decrease in both revenues and earnings in recent years as a result of troubles in the automotive industry.

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.

 
11


LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities of $4,443,000 in the three months ended April 30, 2010 primarily consisted of net income of $3,546,000, adjusted for changes in working capital of $1,820,000, non-cash items of $1,787,000 in depreciation and amortization,  share-based compensation of $241,000 and other adjustments of $66,000,  partially offset by gain on sale of assets of $3,017,000.  Net cash provided by operating activities of $1,732,000 in the three months ended April 30, 2009 primarily consisted of net income of $540,000 adjusted for non-cash items of $1,781,000 in depreciation and amortization and write off of receivables of $169,000, partially offset by changes in working capital of $608,000, deferred income taxes $131,000 and other adjustments of $19,000.

Net cash used in investing activities in the three months ended April 30, 2010 of $57,000 was primarily attributable to capital spending of $2,123,000 and cash used to acquire businesses of $2,053,000, partially offset by proceeds from sale of property of $2,293,000 and proceeds from sale of life insurance of $1,826,000.  Net cash used in investing activities in the three months ended April 30, 2009 of $1,640,000 was primarily attributable to capital spending of $1,414,000, investment in retirement funds of $176,000 and investment in life insurance of $50,000.

Net cash used in financing activities in the three months ended April 30, 2010 of $612,000 consisted of repayment of debt of $1,183,000, partially offset by proceeds from borrowing of $508,000 and proceeds from stock options exercised of $63,000.  Net cash used in financing activities in the three months ended April 30, 2009 of $1,070,000 consisted of repayment of debt of $1,070,000.

The Company has a Revolving Credit Agreement with Comerica Bank, as agent and lender, holding 60%, and Bank of the West, as lender, holding 40%. This agreement matures on December 1, 2012. The credit facility is structured as follows:

(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, 2010 was $13,500,000. This balance is reflected in the accompanying consolidated balance sheets as long-term. The amount available on the line of credit was $3,000,000 as of April 30, 2010.

(b)
$9,000,000 in Term Loan A which was used to consolidate previous term loans. 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.  Interest and principal payments of $321,000 are made quarterly with the remaining principal due at the maturity date. The outstanding balance on Term Loan A at April 30, 2010 was $5,648,000.

(c)
$12,650,000 in Term Loan B which was used to acquire United States Test Laboratory 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.  Interest is paid quarterly and 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.  The remaining principal is due at the maturity date. The outstanding balance on Term Loan B at April 30, 2010 was $8,409,000.
 
(d)
$6,000,000 in Term Loan C which was used to acquire Elliott Laboratories and pay off two existing mortgage notes with other banks. The interest rate is at the agent’s prime rate with an option for the Company to convert to loans at the Libor rate plus 250 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 seven-year period. The outstanding balance on Term Loan C at April 30, 2010 was $3,967,000.

In addition to the Comerica agreement, the Company has an additional $2,059,000 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 compliant with all bank covenants as of April 30, 2010.

The Company’s 50% owned subsidiary, NQA, Inc., has total borrowings of $1,212,000 at April 30, 2010, for the acquisitions of Unitek Technical Services, Inc., TRA Certification, Inc. and International Management Systems, Inc. (IMS).

 
12


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.  The Company has from time to time made acquisitions of other businesses.  The Company believes that it has adequate borrowing capability to absorb such acquisitions.

 
13


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, 2010, filed with the Securities and Exchange Commission on April 30, 2010.

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 current 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.

 
14


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, 2010 filed with the Securities and Exchange Commission on April 30, 2010.

Item 2.
Unregistered Sales of Equity Securities

The Company granted 25,000 and 5,000 shares of common stock to Donald Tringali and John Gibbons, respectively for services performed outside of their normal responsibilities.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
(Removed and Reserved)


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.

 
15


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 14, 2010
 
By:         /s/ Raffy Lorentzian
     
Raffy Lorentzian
     
Senior Vice President
     
Chief Financial Officer
       
     
(Signing on behalf of the
     
registrant and as principal
     
financial officer)
 
 
16

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