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NATIONAL TECHNICAL SYSTEMS INC /CA/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Except for the historical information contained herein, the matters addressed in
this Item 2 contain forward-looking statements. These forward-looking statements
involve risks and uncertainties, including those described in the Company's
Annual Report on Form 10-K. Actual results, events and performance may differ
materially from those anticipated in the forward looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements. See
the note at the beginning of this report.
Overview
NTS is a leading provider of testing solutions and highly trained technical
personnel for product design and evaluation, safety testing, certification and
supply chain management to enable customers to sell their products in world
markets. NTS is accredited by numerous national and international technical
organizations which allow the Company to have its test data accepted in most
countries. In addition, it performs management registration and certification
services to ISO related standards.
NTS serves customers primarily in the aerospace, defense, telecommunications,
automotive, energy, consumer products, commercial and industrial products and
medical markets. The Company operates facilities throughout the United States
and in Japan, Vietnam and Germany.
The following 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, 2012 and the consolidated quarterly financial statements and notes thereto
contained in this report. All information in this report is based upon unaudited
operating results of the Company for the three and nine-month periods ended
October 31, 2012 and 2011.
Markets
Aerospace.
NTS offers integrated life cycle product services to the aerospace market. These
services include engineering, testing and supply chain management. From concept
development and design, through detail design, certification, production and
in-service life, NTS provides support throughout the full life cycle of the
aerospace product. These integrated services fill the capability gaps that have
developed in the aerospace supply chains after years of large scale integration,
outsourcing and globalization.
NTS' engineering services consist of design and analysis of aerospace
structures, systems, components and detailed parts as part of customers' design
teams or as a fixed-price work package. Specific capabilities include
engineering program management, managed engineering services (on-site management
of customer engineering teams), design engineering, analysis, test engineering,
test system engineering, failure forensics and expert witnessing.
Testing services include a wide range of test capabilities for structures and
airborne equipment. For structures, NTS has extensive capability and expertise
in large component static and fatigue testing, including full scale airframe
static and fatigue, sonic fatigue, vibration, modal, ground vibration, high
pressure/high flow air and fluid compatibility. Airborne equipment testing spans
the full range of RTCA DO-160 requirements, including static and dynamic,
electromagnetic effects (EME, EMI, EMC), electrostatic discharge (ESD),
environmental, material and system compatibility, high intensity radiated field
(HIRF), indirect lightning effects and highly accelerated life testing/stress
screening (HALT/HASS).
Supply chain management services span a wide range of development, oversight,
and certification/accreditation activities including product inspection,
production monitoring and expediting, test witnessing and support, corrective
action follow-up, supplier surveillance, sub-tier supplier management, new
supplier surveys, systems evaluations and audits (including special processes),
development of quality assurance protocols, supplier development and
improvement, quality management system audit, certification and registration.
The Company's initial sector focus in the aerospace market has been in the large
commercial transport, general aviation, and space exploration sectors. In all
sectors NTS tests components and systems for the supply chain supporting the
manufacturers. Also, NTS is increasingly providing engineering services that
design, develop, test, and integrate pods and payloads for unmanned aerial
systems (UAS). This group has expanded from airborne platforms into ground, sea
(surface and subsurface), and robotic platforms. NTS has conducted test programs
for UAS components, systems, payloads and completely integrated air vehicles.
NTS is actively engaged in a variety of unmanned system test programs, and has
performed environmental, vibration and EMI testing on a number of UAS systems.
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Defense.
NTS plays an active role in numerous U.S. defense-related programs, performing a
wide variety of defense technology research, development, test, and evaluation
(RDT&E) services for the Department of Defense (DOD), military, government and
commercial industry. These services evaluate the weapons, ordnance, munitions,
avionics, electronics, hydraulic and pneumatic controls, engines and
communication systems that make up the elements of today's modern battlefield.
The Company's testing platforms for the defense industry include fixed wing
aircraft, helicopters, submarines, aircraft carriers and other naval ships,
tanks and other tracked vehicles, trucks and road vehicles, command, control and
communication systems and missiles and weapons systems. Testing includes
associated system and component level tests of structures, hardware,
electronics, personal protective equipment, armor, weapons and ammunition.
NTS has facilities that are specially constructed to store, handle, and test
ordnance, munitions and hazardous materials. Routine testing includes live fire,
function, environmental, dynamics, safety, MIL-STD-901 shipboard shock,
insensitive munitions (IM), hazard classification, transportation and packaging
safety. These tests are done for prototype, developmental, qualification and
production/lot acceptance testing (LAT). Multiple NTS facilities around the
country provide 200 v/m up to 40 GHz EMI/EMC testing of electronic and
communications equipment. Custom designed NTS data acquisition systems are
capable of collecting data at speeds of 2,000,000 data points per second and
digital photography capability of over 160,000 color photos per second.
NTS' defense group is expanding to include energetic and prototype engineering
services, including 2D and 3D CAD modeling; technical data package (TDP)
development and modification; finite element analysis (FEA), projectile design
and analysis; interior and exterior ballistics analysis, and design and
development of custom test hardware and fixtures. Other services include support
of, and procurement and delivery of precision metal parts and explosive loading
of prototype hardware. Additional defense services include design, development,
fabrication, and fielding of specialized high speed instrumentation and
diagnostics for energetics and hazardous materials and ordnance testing. This
includes custom sensor suite design, fabrication and deployment, often through
specialized test facility design.
Telecommunications.
NTS provides engineering design, test evaluation and certification services for
manufacturers of a broad array of telecommunications networking and storage
equipment intended for commercial data centers, central/telecom office and
customer premise environments. The Company's services are performed in
accordance with domestic and international regulatory standards, the network
equipment building systems (NEBS) specifications and fiber optics general
requirements (GRs) as required by the telecommunications industry. Globally, NTS
represents the largest network of independent test laboratories (ITL) certified
and recognized by most regional bell operating companies' (RBOCs) carriers. The
Company is also certified and accredited to support formal witness testing on
behalf of the RBOC carriers at approved manufacturer's internal test facilities.
NTS has unique test capability in the Wireless telecom industry. As the wireless
telecom industry continues to grow, globally, the need for engineering design,
testing evaluation and certification services for faster and more robust
backhaul networking equipment will continue to increase. The Company is well
positioned to support this accelerated growth currently providing accredited ITL
services at laboratories in California, Massachusetts, New Jersey, Texas, and
Germany.
Automotive.
NTS supports the commercial and military vehicle industries with testing,
including dynamometer operations on power train components, vibration and shock
on mechanical and electrical assemblies, thermal and corrosion exposures on
control and monitoring systems, pressure pulsing and burst on fluid handling
items and fatigue and ultimate strength on mechanical components. NTS performs
testing to support requirements in emerging markets of pure electric vehicles
and electrical hybrid vehicles. This includes electric motors, integrated
motor/transmissions, specialized high speed transmissions, batteries and
control/distribution modules. It also performs highly accelerated life tests
(HALT) and highly accelerated stress screen (HASS). These tests combine extremes
of temperature, rapid temperature change, and multi-axis vibration to rapidly
expose design weaknesses and process flaws. NTS is accredited to ISO 17025
through the American Accreditation of Laboratories Association (A2LA). This
accreditation allows NTS automotive test reports to be accepted throughout the
U.S. and internationally.
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Energy.
NTS offers multi-disciplinary expertise and capabilities to provide smart
solutions to complex engineering, and scientific problems in the areas of
nuclear energy, renewable energy, energy storage and smartgrid. The services
provided are:
· Technical functional knowledge of engineering fundamentals: mechanical,
structural, electrical, reliability, and high technology communication and
security software system test and monitoring solutions.
· Testing on a variety of smart energy/smart grid products with a focus on the
communications functionality and network protocols of smart meters, smart
outlets, thermostats/in-home displays and smart appliances.
· Supply chain management focusing on assuring product integrity through
quality process and product auditing, supplier improvement plans, and
management of quality systems.
· Multi-disciplinary expertise in global compliance and certification for
components, devices, communication products, software/hardware
interoperability, and system security vulnerability assessments and
validation.
· Seismic, environmental, EMI/RFI, radiation, equipment qualification,
commercial grade dedication, mechanical aging, thermal aging, vacuum testing,
leak detection, and high expansion line breaks. Seismic and vibration
simulation tests conducted on our single axis, dependent biaxial systems, or
independent tri-axial and electro-mechanical shaker tables are used for a
variety of customer products.
· Certification and evaluation services to nuclear utilities and suppliers
worldwide.
· A full range of products, engineering and testing services under our NUPIC
and NIAC audited 10CFR50, Appendix B Quality Program.
Consumer Products.
NTS provides engineering design, test evaluation and domestic and international
certification services for a broad array of consumer products normally procured
for use in a residence, school and recreation environments. This typically
includes personal computing, PC peripheral, residential networking and personal
wireless devices. These products are subjected to a wide range of
electromagnetic compatibility, product safety, reliability, usability,
interoperability tests and certifications to assure market compliance,
reliability and effective use. The Company has been approved as an exclusive
independent test laboratory (ITL) to offer Internet TV Set-top Box multimedia
over coax (MoCA) certification. The Company is the exclusive certifications
provider for Sirius/XM Radio Ready program and holds a number of domestic and
international test accreditations throughout its network of commercial
laboratories. NTS is an accredited Telecommunication Certification Body (TCB) in
North America and an appointed Notified Body for wireless devices in the
European Union. With the increased integration of wireless technology into
traditional consumer products, the dramatic population growth, income gains,
global macroeconomic shifts and the urbanization in regions throughout Asia,
Central and South America and Africa, NTS is well positioned to support the
growing market spaces to which manufacturers are seeking to sell. The Company's
service offerings offer a 'one-stop-shop' to the consumer product market,
ensuring a shorter time to market in the fierce 'to market' race manufacturers
find themselves competing within.
Commercial & Industrial.
NTS provides engineering design, testing evaluation and domestic and
international certification services to manufacturers of a broad array of
commercial and industrial products normally procured for light and heavy
industrial applications. This covers a wide range of industries from
shipbuilding, semiconductor manufacturing equipment, automation, robotics,
laboratory and materials handling devices. Various types of commercial grade
electronic, hydraulic and pneumatic systems are subjected to electrical,
environmental and safety testing to ensure regulatory compliance and safe and
reliable use. Special combined mechanical and environmental testing processes
such as highly accelerated life testing (HALT) are used to accelerate the
effects of aging and wear to allow manufacturers to produce a more reliable
product. Once this has been accomplished, similar highly accelerated stress
screening (HASS) testing can be used to ensure consistent quality on the
production line. Market trends are showing increased integration of Wireless
Local Area Network (WLAN) and Wide Wireless Access Network (WWAN) communication
technologies in such product lines. NTS offers a complete turnkey engineering
design, testing evaluation and domestic and international certification services
for industrial products, including customer driven requirements.
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Medical.
NTS provides engineering design, testing evaluation and domestic and
international certification services to manufacturers of a broad array of
medical products typically including non-invasive devices. Services include
electromagnetic compatibility, electrical product safety and quality
control/risk analysis consultation. Through various industry partnerships, the
Company has affiliations with consultants and Notified Bodies to support medical
approval in North America and throughout the European Union. With the increased
integration of wireless communications into traditional medical device products,
NTS is also well equipped to support domestic and international testing and
approvals.
Growth Strategy
Over the last few years, NTS restructured its executive leadership team and
initiated a growth strategy to provide significant focus on corporate
development activities within the mid-to longer-term time horizon, while
continuing to drive efficiencies and market penetration within the shorter-term
fiscal planning time horizon.
NTS' strategies for continued growth include:
· increasing market share through superior service;
· investing in human resources and physical assets to strengthen existing
capabilities;
· enhancing utilization of resources;
· adding new, innovative service offerings;
· identifying, qualifying and acquiring businesses with the potential to add
significant value
Recent Developments
Consolidated revenues for the nine months ended October 31, 2012, were
$140,703,000, an increase of $25,611,000 or 22.3% over the same period last
year. The increased revenues combined with prudent cost controls resulted in net
income for the period of $5,550,000.
During the fiscal quarter ended October 31, 2012, the Company continued the
implementation of an integrated Enterprise Resource Planning or ERP solution
across a number of its operating units. The ERP solution will provide a unified
platform for financial and accounting information that allows aggregation of
financial data, superseding a number of disparate legacy systems. The ERP
solution will enable the Company to conduct more accounting operations on the
system, and reduce the utilization of "off system" records such as accounting
workpapers. Finally the system is designed to provide enhanced project
management for open contracts, improving visibility into the status of
completion and costs for longer term contracts. At October 31, 2012 the ERP
system had been implemented at 26 facilities. The one remaining facility is
expected to be integrated during fiscal 2013.
On April 17, 2012, the Company acquired all of the outstanding common stock of
Garwood Laboratories, Inc. (Garwood), with testing facilities in Pico Rivera and
San Clemente, CA. The acquisition expands NTS' customer relationships and market
share in Southern California as well as the greater Western U.S. region. The
aggregate purchase price was $5,092,000. Cash paid at closing was $3,165,000,
and was funded by a draw down on the Company's acquisition line of credit under
its senior credit facility. The Company also issued a promissory note for
$1,175,000 which is due to the seller on April 17, 2013. The Company has
withheld $750,000 of the purchase price for 18 months after closing to secure
Garwood's indemnification obligations under the purchase agreement. In addition
to the base purchase price, the Company agreed to pay an additional earn-out up
to a maximum amount of $450,000 (earn-out) if Garwood meets certain targets
related to customer retention and revenues for the 24 months following the
purchase date. A liability of $200,000 has been recorded as an estimated fair
value of the earn-out liability at October 31, 2012. A working capital
adjustment receivable has been recorded at a preliminary amount of $198,000. The
Company's consolidated statement of operations includes the operations of
Garwood from April 17, 2012 to October 31, 2012.
On November 8, 2012, after the period covered by this report, the Company
purchased the 49.9% minority interest of Unitek Technical Systems, Inc.,
consolidated subsidiary, for $2,245,000. Unitek is a leading provider of supply
chain management services to primarily aerospace and defense clients.
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Unaudited Results of Operations for the Nine Months Ended October 31, 2012
REVENUES
Nine months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total revenues $ 140,703 $ 115,092 $ 25,611 22.3 %
For the nine months ended October 31, 2012, consolidated revenues increased by
$25,611,000 or 22.3% when compared to the same period in the prior year. Organic
revenues (revenues from businesses owned throughout both reporting periods)
increased by $16,826,000 or 14.6% which was primarily related to an increase in
the aerospace, energy and defense markets. Revenues from acquisitions increased
by $8,785,000 or 7.6% from the purchase of Ingenium Testing on July 20, 2011,
Lightning Technologies on September 1, 2011, and Garwood Laboratories on April
17, 2012.
GROSS PROFIT
Nine months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total $ 38,108 $ 27,797 $ 10,311 37.1 %
% to total revenues 27.1 % 24.2 %
Gross profit for the nine months ended October 31, 2012 increased by $10,311,000
or 37.1% when compared to the same period in the prior year. Gross profit as a
percentage of revenue, or gross margin, increased to 27.1% from 24.2% in the
prior year. This increase in gross profit was primarily due to better leverage
of fixed costs with the increased level in revenues, somewhat offset by pricing
pressure in some markets.
SELLING, GENERAL & ADMINISTRATIVE
Nine months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total $ 26,373 $ 22,537 $ 3,836 17.0 %
% to total revenues 18.7 % 19.6 %
Total selling, general and administrative expenses increased by $3,836,000 or
17.0% for the nine months ended October 31, 2012 when compared to the same
period in the prior year. The increase was primarily due to higher compensation
and incentive related expense, especially in the sales and marketing areas to
support the increasing sales levels, as well as increased amortization expense
as a result of recent acquisitions, partially offset by a decrease in legal and
other expenses.
OPERATING INCOME
Nine months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total $ 11,520 $ 5,250 $ 6,270 119.4 %
% to total revenues 8.2 % 4.6 %
Operating income for the nine months ended October 31, 2012 increased by
$6,270,000 or 119.4% when compared to the same period in the prior year,
primarily as a result of the increase in gross profit, partially offset by the
increase in selling, general and administrative expense.
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Interest Expense
Net interest expense was $2,645,000 in the nine months ended October 31, 2012,
an increase of $1,084,000 when compared to the same period in the prior year.
The increase was due to interest on additional borrowings, higher overall
interest rates, as well as $395,000 in debt issuance cost and debt
discount amortization related to the Mill Road Capital financing and the
Comerica senior credit facility.
Other Income
Other income was $827,000 for the nine months ended October 31, 2012, consisting
primarily of a gain from insurance recovery related to the fire at the Company's
Fullerton facility in November of 2009.
Income Taxes
The income tax provision rate for the nine months ended October 31, 2012 was
42.8% compared to 39.9% for the same period in the prior year. The higher income
tax rate in the current year is primarily due to higher estimated permanent book
to tax differences in the current 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.
Net Income
Net income from continuing operations for the nine months ended October 31, 2012
was $5,553,000 compared to $2,091,000 for the same period in the prior year.
This increase was primarily due to higher operating income and other income,
partially offset by higher interest expense and income taxes.
On October 31, 2011, the Company closed its Calgary facility. Net loss from the
discontinued Calgary operation for the nine months ended October 31, 2012 was
$3,000 compared to $322,000 in the same period in the prior year.
Net income for the nine months ended October 31, 2012 was $5,550,000 compared to
$1,769,000 for the same period in the prior year.
For the nine months ended October 31, 2012, net income attributable to
noncontrolling interests was $808,000 compared to $660,000 for the same period
in the prior year, an increase of $148,000 or 22.4%. This increase was due to
higher net income for the Company's 50% owned NQA, Inc. subsidiary in the
current year.
Net income attributable to NTS for the nine months ended October 31, 2012 was
$4,742,000 compared to $1,109,000 for the same period in the prior year.
Adjusted EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) as
adjusted to remove the effect of share based compensation expense or "adjusted
EBITDA", was $20,617,000 for the first nine months of fiscal 2013 compared to
$11,567,000 in the same period for the prior year.
Management uses adjusted EBITDA to evaluate the Company's core operations
without reference to the impact of interest and tax payments resulting from its
capital structure and tax jurisdictions, or depreciation and amortization which
can fluctuate based on acquisition activity. The Company's senior credit
facility also includes covenants related to adjusted EBITDA.
Adjusted EBITDA is a non-GAAP financial measure. The Company calculates adjusted
EBITDA by taking net income, and adding back the expenses related to interest,
taxes, depreciation, amortization, share based compensation expense and non-cash
impairment loss, as each of those elements are calculated in accordance with
GAAP. A reconciliation of the Company's adjusted EBITDA to net income for the
nine months ended October 31, 2012 and 2011 is included in the table below.
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Nine months ended
October 31,
2012 2011
Net Income $ 5,550,000 $ 1,769,000
Add
Interest 2,645,000 1,561,000
Taxes 4,149,000 1,387,000
Depreciation 5,906,000 5,238,000
Amortization 1,508,000 1,100,000
EBITDA 19,758,000 11,055,000
Add
Share based compensation 859,000 512,000
Adjusted EBITDA $ 20,617,000 $ 11,567,000
Unaudited Results of Operations for the Three Months Ended October 31, 2012
REVENUES
Three months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total revenues $ 49,921 $ 40,498 $ 9,423 23.3 %
For the three months ended October 31, 2012, consolidated revenues increased by
$9,423,000 or 23.3% when compared to the same period in the prior year. Organic
revenues (revenues from businesses owned throughout both reporting periods)
increased by $6,792,000 or 16.8% which was primarily related to an increase in
the aerospace, energy and defense markets. Revenues from acquisitions increased
by $2,631,000 or 6.5% from the purchase of Ingenium Testing on July 20, 2011,
Lightning Technologies on September 1, 2011, and Garwood Laboratories on April
17, 2012.
GROSS PROFIT
Three months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total $ 13,977 $ 9,468 $ 4,509 47.6 %
% to total revenues 28.0 % 23.4 %
Gross profit for the three months ended October 31, 2012 increased by $4,509,000
or 47.6% when compared to the same period in the prior year. Gross profit as a
percentage of revenue, or gross margin, increased to 28.0% from 23.4% in the
prior year. This increase in gross profit was primarily due to better leverage
of fixed costs with the increased level in revenues, somewhat offset by pricing
pressure in some markets.
SELLING, GENERAL & ADMINISTRATIVE
Three months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total $ 9,294 $ 7,681 $ 1,613 21.0 %
% to total revenues 18.6 % 19.0 %
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Total selling, general and administrative expenses increased by $1,613,000 or
21.0% for the three months ended October 31, 2012 when compared to the same
period in the prior year. The increase was primarily due to higher compensation
and incentive related expense, especially in the sales and marketing areas to
support the increasing sales levels, as well as increased amortization expense
as a result of recent acquisitions, partially offset by a decrease in legal and
other expenses.
OPERATING INCOME
Three months ended October 31, 2012 2011 Diff % Change
(Dollars in thousands)
Total $ 4,604 $ 1,778 $ 2,826 158.9 %
% to total revenues 9.2 % 4.4 %
Operating income for the three months ended October 31, 2012 increased by
$2,826,000 or 158.9% when compared to the same period in the prior year,
primarily as a result of the increase in gross profit, partially offset by the
increase in selling, general and administrative expense.
Interest Expense
Net interest expense was $846,000 in the three months ended October 31, 2012, an
increase of $124,000 when compared to the same period in the prior year. The
increase was primarily due to interest on additional borrowings.
Other Income
Other income was $734,000 for the three months ended October 31, 2012,
consisting primarily of a gain from insurance recovery related to the fire at
the Company's Fullerton facility in November of 2009.
Income Taxes
The income tax provision rate for the three months ended October 31, 2012 was
44.6% compared to 26.3% for the same period in the prior year. The higher income
tax rate in the current year is primarily due to higher estimated permanent book
to tax differences in the current year. The prior year income tax rate was low
due to the tax effect from discontinued operations. 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.
Net Income
Net income from continuing operations for the three months ended October 31,
2012 was $2,489,000 compared to $642,000 for the same period in the prior year.
This increase was primarily due to higher operating income and other
income, partially offset by higher interest expense and income taxes.
On October 31, 2011, the Company closed its Calgary facility. Net gain from the
discontinued Calgary operation for the three months ended October 31, 2012 was
$1,000 compared to a net loss of $547,000 in the same period in the prior year.
Net income for the three months ended October 31, 2012 was $2,490,000 compared
to $95,000 for the same period in the prior year.
For the three months ended October 31, 2012, net income attributable to
noncontrolling interests was $304,000 compared to net income of $282,000 for the
same period in the prior year, an increase of $22,000 or 7.8%. This increase was
due to higher net income for the Company's 50% owned NQA, Inc. subsidiary in the
current year.
Net income attributable to NTS for the three months ended October 31, 2012 was
$2,186,000 compared to a net loss of $187,000 for the same period in the prior
year.
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Adjusted EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) as
adjusted to remove the effect of share based compensation expense or "adjusted
EBITDA", was $8,097,000 for the three months ended October 31, 2012 compared to
$3,507,000 in the same period for the prior year.
Management uses adjusted EBITDA to evaluate the Company's core operations
without reference to the impact of interest and tax payments resulting from its
capital structure and tax jurisdictions, or depreciation and amortization which
can fluctuate based on acquisition activity. The Company's senior credit
facility also includes covenants related to adjusted EBITDA.
Adjusted EBITDA is a non-GAAP financial measure. The Company calculates adjusted
EBITDA by taking net income, and adding back the expenses related to interest,
taxes, depreciation, amortization, share based compensation expense and non-cash
impairment loss, as each of those elements are calculated in accordance with
GAAP. A reconciliation of the Company's adjusted EBITDA to net income for the
three months ended October 31, 2012 and 2011 is included in the table below.
Three months ended
October 31,
2012 2011
Net Income $ 2,490,000 $ 95,000
Add
Interest 846,000 722,000
Taxes 2,003,000 229,000
Depreciation 1,972,000 1,835,000
Amortization 499,000 462,000
EBITDA 7,810,000 3,343,000
Add
Share based compensation 287,000 164,000
Adjusted EBITDA $ 8,097,000 $ 3,507,000
Outlook
The Company is increasing its revenue and Adjusted EBITDA guidance for fiscal
year 2013, and maintaining its guidance for gross margin. Revenue is expected
to be between $183 million and $186 million for fiscal year 2013, up from the
previous guidance of between $164 million and $169 million; Adjusted EBITDA is
expected to be between $24 million and $26 million, up from the prior guidance
of between $20 million and $22 million; and gross margins are expected to be
between 26.5% and 27.5% of revenue.
The foregoing outlook is based on management's expectations based on assumptions
about market conditions and the Company's future operating performance, which
the Company believes to be reasonable at this time. The Company's business
involves procuring and performing on large contracts, and the timing of receipt
of those contracts can have a significant impact on operating results for any
quarter. Consequently the Company's results may vary significantly from quarter
to quarter. In addition, changes in macroeconomic conditions, delays in
government spending and other factors can cause actual results to vary from
expectations. See the note on "Forward-Looking Statements" at the beginning of
this report.
Off Balance Sheet Arrangements
None.
Liquidity and Capital Resources
Liquidity
At October 31, 2012 cash and cash equivalents were $6,313,000 compared to
$4,335,000 at January 31, 2012. In addition, at October 31, 2012, investments
and accounts receivable were $3,244,000 and $45,918,000, respectively, compared
to $3,318,000 and $34,775,000 at January 31, 2012. At October 31, 2012 the
Company had working capital of $36,627,000, compared to working capital of
$30,898,000 at January 31, 2012.
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Net cash provided by operating activities was $7,513,000 in the nine months
ended October 31, 2012 and consisted of net income of $5,550,000 adjusted for
depreciation and amortization of $7,414,000, share-based compensation of
$859,000, amortization of debt issuance cost and debt discount of $501,000,
allowance for doubtful accounts of $308,000, deferred income taxes of $218,000
and loss on retirement of assets of $3,000, partially offset by changes in
working capital, net of acquired assets and liabilities of $7,318,000 and gain
on investments of $22,000.
Net cash used in investing activities in the nine months ended October 31, 2012
was $8,320,000 and was partially attributable to capital spending of $5,273,000
and net cash used of $3,116,000 for the acquisition of Garwood. Additional cash
used for investing activities included investment in retirement funds of
$406,000 and investment in life insurance of $1,000, partially offset by cash
surrender of insurance policy of $476,000.
Net cash provided by financing activities in the nine months ended October 31,
2012 was $2,760,000 and consisted of proceeds from borrowing of $11,376,000,
proceeds from stock options exercised of $240,000 and tax benefit from
restricted stock issuance and stock options exercised of $75,000, partially
offset by repayment of debt of $8,732,000 and net cash dividends paid by NQA,
Inc. of $199,000.
Capital Resources
At October 31, 2012, the Company had cash and cash equivalents of $6,313,000 and
working capital of $36,627,000. In addition to its cash and cash generated from
operations, the Company has a $65 million senior credit facility that is
comprised of a $20 million term loan, a $25 million revolving credit line, and a
$20 million acquisition line. The senior credit facility is described in more
detail under "Long-term Debt" below.
Under the revolving credit line the Company can borrow up to 85% of eligible
accounts receivable. At October 31, 2012, 85% of eligible accounts receivable
was $20,988,000.
Under the acquisition line, the Company can borrow for the purposes of financing
eligible machinery or equipment. Advances under the acquisition line can be made
at up to 100% of the invoice cost of new eligible equipment and 80% of the
invoice cost of used eligible equipment.
As of October 31, 2012, the amount of available credit under the revolving
credit line was $14,488,000 and there was no available credit under either the
term or acquisition lines.
Based on our current operating projections, we believe that we will continue to
generate positive cash from operations for at least the next twelve months, and
that our existing capital resources will be sufficient to fund our operations
during that time.
Long-term Debt
On November 10, 2010, the Company obtained a senior credit facility from a
banking group led by Comerica Bank that includes Bank of the West and U.S. Bank.
The credit facility originally included a $20 million term loan, a $25 million
revolving credit line and a $20 million acquisition line. Interest rates under
the credit agreement are at either LIBOR plus a range of 175 to 275 basis
points, or at Comerica Bank's prime rate plus a range of 75 to 175 basis
points. Commitment fees on the revolving credit line and acquisition line are 25
basis points and 35 basis points, respectively.
On June 27, 2011, the Company completed a $14 million private placement of debt
and equity with Mill Road Capital. Of the $14 million, $7 million was in the
form of an interest-bearing, five-year subordinated note.
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Debt as of October 31, 2012 and January 31, 2012 consisted of the following:
October 31, 2012 January 31, 2012
Revolving credit line (a) $ 6,500,000 $ 5,000,000
Term loan (b) 14,800,000 17,150,000
Acquisition and equipment credit line: (c)
Acquisition 16,890,000 14,000,000
Machinery and equipment 1,862,000 2,251,000
Mill Road debt (d) 6,826,000 6,337,000
Secured and other notes payable (e) 6,164,000 5,450,000
Subtotal 53,042,000 50,188,000
Less current installments 5,350,000 4,478,000
Total $ 47,692,000 $ 45,710,000
(a) The Company is required to repay the outstanding principal under the
revolving credit line on November 10, 2015. Interest accrues at the
Company's option at either (i) the Base Rate plus a specified margin ranging
between 75 and 150 basis points depending on the Company's consolidated
total debt to consolidated EBITDA ratio or (ii) the Eurodollar Rate plus a
specified margin ranging between 175 and 250 basis points depending on the
Company's consolidated total debt to consolidated EBITDA ratio. When
interest is incurred at the Base Rate, interest is payable monthly in
arrears on the first day of each month. When interest is incurred at the
Eurodollar Rate, interest is payable at the end of each interest period,
which is defined as one, two, three or six months after the applicable
advance is disbursed to the Company (except that with respect to six month
interest periods, interest is payable at three month intervals).
(b) The Company is required to repay the $20 million five-year term loan in
equal quarterly principal installments of $500,000 commencing on February 1,
2011 until November 10, 2015, the maturity date, when all remaining
outstanding principal plus accrued interest thereon is due and payable in
full. Interest accrues at a specified margin plus either: (i) the greatest
of (a) the prime rate announced by Comerica Bank, (b) the federal funds
effective rate as published by the Federal Reserve Bank of New York plus
1.0%, and (c) a daily adjusting LIBOR rate plus 1.0%; or (ii) a rate based
on LIBOR. The Company refers to the rates described in clauses (i) and (ii)
in the preceding sentence, respectively, as the "Base Rate" and as the
"Eurodollar Rate." The specific per annum interest rate will be, at the
Company's option, either the Base Rate plus a specified margin ranging
between 100 and 175 basis points depending on the Company's consolidated
total debt to consolidated EBITDA ratio or the Eurodollar Rate plus a
specified margin ranging between 200 and 275 basis points depending on the
Company's consolidated total debt to consolidated EBITDA ratio. When
interest is based on the Base Rate, interest is payable monthly in arrears
on the first day of each month. When interest is based on the Eurodollar
Rate, interest is payable at the end of each interest period, which is
defined as one, two, three or six months after the applicable loan is
disbursed to the Company (except that with respect to six month interest
periods, interest is payable at three month intervals). Excess cash flow
payments as required under the credit agreement are applied to the term
loan.
(c) With respect to any credit advance under this line that is used to finance
eligible acquisitions, the Company is required to make quarterly principal
payments commencing one year after the date such credit advance is made,
until November 10, 2015, the maturity date, when all remaining outstanding
principal plus accrued interest thereon is due and payable in full. No
principal payments are due during the first year. The amount of such
quarterly principal payments is 1.25% of the aggregate original principal
amount of such credit advance during the second year, increasing to 2.50%
during the third year and increasing to 3.75% during the fourth and fifth
years.
Interest on the acquisition credit line accrues at the Company's option at
either (i) the Base Rate plus a specified margin ranging between 100 and 175
basis points depending on the Company's consolidated total debt to consolidated
EBITDA ratio or (ii) the Eurodollar Rate plus a specified margin ranging between
200 and 275 basis points depending on the Company's consolidated total debt to
consolidated EBITDA ratio. When interest is based on the Base Rate, interest is
payable monthly in arrears on the first day of each month following the
disbursement of an advance. When interest is based on the Eurodollar Rate,
interest is payable at the end of each interest period, which is defined as one,
two, three or six months after the applicable advance is disbursed to us (except
that with respect to six month interest periods, interest is payable at three
month intervals). The outstanding balance from acquisitions at October 31, 2012
was $16,890,000.
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Table of Contents
With respect to any credit advance under this line that is used to finance the
purchase of eligible machinery and equipment, the Company is required to make
quarterly principal payments in an amount equal to 5% of the aggregate original
principal amount of such credit advance. Such principal payments are due
quarterly after the date such credit advance is made, until November 10, 2015,
the maturity date, when all remaining outstanding principal plus accrued
interest thereon is due and payable in full. The outstanding balance from
equipment credit advances at October 31, 2012 was $1,862,000.
(d) The outstanding principal and accrued and unpaid interest on the Mill Road
subordinated note is due and payable on June 27, 2016. Cash based interest
accrues at a rate of 10.0% per annum and is payable quarterly. Additional
interest accrues at a rate of 5.0% per annum and is added automatically to
the unpaid principal amount of the subordinated note on each date that cash
interest is payable. The outstanding balance at October 31, 2012 was
$6,826,000 calculated based on the fair value of the debt.
(e) The Company has an additional $5,230,000 at October 31, 2012 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
4.39% to 7.42%.
The Company's 50% owned subsidiary, NQA, Inc., has total borrowings of $935,000
at October 31, 2012, stemming from the acquisitions of Unitek Technical
Services, Inc., TRA Certification, Inc. and International Management Systems,
Inc. Advances under the business acquisitions line of credit bear interest, at
the option of NQA, at a fluctuating rate equal to the lender's corporate base
rate plus 0.5% or at a fixed rate based on the Federal Home Loan Bank Advance
Rate plus 3.0%. Advances under the business acquisitions line of credit are due
and payable, at the option of NQA, 3 or 5 years from the advance date and are
subject to additional interest charges in the event of prepayment.
As of October 31, 2012 the Company was in compliance with all its bank
covenants. Substantially all of the Company's assets are pledged as collateral
to secure its outstanding long term debt.
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