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National Technical Systems, Inc. (NASDAQ:NTSC)

F1Q09 Earnings Call

June 13, 2008 1:00 pm ET

Executives

William C. McGinnis – Chairman and Chief Executive Officer

Raffy Lorentzian – Chief Financial Officer

Analysts

Joe Silva – Unknown Firm

David Gabai – Unknown Firm

Operator

Welcome to National Technical Systems First Quarter Fiscal Year 2009 Conference Call. (Operator Instructions) I would now like to turn the conference over to Arthur Wood.

Arthur Wood

Thank you. Good day! My name is Arthur Wood, and I will be the moderator for today's presentation, which is being recorded and will be accessible for 90 days via the company's website at www.ntscorp.com. Thank you for your interest in National Technical Systems. With me today are the President and Chief Executive Officer of the Company, Bill McGinnis, and Raffy Lorentzian, Chief Financial Officer. Mr. McGinnis and Mr. Lorentzian are going to discuss the Company's financial results for the fiscal fourth quarter of 2009 ended April 30, 2008. At the conclusion of the prepared remarks, we'll open the conference for questions.

In compliance with SEC requirements, I must read the following statement. Forward-looking statements: Certain matters discussed during the conference call will include forward-looking statements within the meaning of Section 21E of the United States Securities and Exchange Act of 1934 as amended. All statements regarding potential results and future plans and objectives of the company are forward-looking statements that involve various risks and uncertainties. There are no assurances that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from the Company's expectations include, but are not limited to, those factors that are discussed under the heading "Risk Factors" and elsewhere in the company's documents filed from time to time with the United States Securities and Exchange Commission and other regulatory authorities. Forward-looking statements that are made during today's call are only made as of the date of this conference call, and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Gentlemen, please proceed.

William C. McGinnis

Thank you, Arthus. Good morning! I really appreciate everybody joining us today. I’ll make a few comments, and then I’ll turn it over to Raffy for a financial presentation.

I am pleased with the first quarter results. We had some facilities perform extremely well. The market that continues to remain very strong for us is aerospace. Our backlog is strong, and our new order book remains steady. Even though we performed very well financially in the first quarter, we did experience delays in receiving test items from manufacturers mainly in the defense industry. This affected operational performance at our Camden and Wichita facilities. We believe this is a temporary situation and should reverse itself during the balance of the year. We have added additional environmental test capabilities at our Wichita facility to respond to increased test requirements due to a specification change. We have also added a new range to handle the expected increase in work. At this time, the Wichita facility is experiencing a steady increase in workload.

In addition, we did reduce head count in our technical resources segment, and as a result, we have improved financial performance. We are investing time and dollars to build and develop and engineering service sector using many of the technical resources segment staff. As a result, we are seeing an increase in activity from two of our major technical resources engineering clients.

Finally, as announced earlier this week, we acquired Elliott Laboratories, a highly reputable EMC testing organization. This gives us a strong hold in Northern California from an EMC technology perspective. It also gives us a strong base to build additional environmental capability to service the local telecom and aerospace and defense markets in that region.

I’ll now turn it over to Raffy for a financial overview.

Raffy Lorentzian

Thanks, Bill. I’ll start with a high-level summary. Our revenues increased by 6.5% to $31.7 million in this quarter, compared to $29.8 million in the same quarter last year, while net income increased by 23.2% to $728,000 in this quarter, compared to $591,000 in the same quarter last year, and corresponding earnings per share on a diluted basis increased to $0.08 per share in the current quarter, from $0.06 per share in the same quarter last year.

Getting into more detail, our Engineering & Evaluation segment revenues grew by 8.9% to $23.3 million in this quarter, compared to $21.4 million in the same quarter last year. Approximately $1.1 million of this growth came from acquisitions. Our organic growth was lower than expected, primarily due to delays in receiving test items from manufacturers in the defense industry. In our Technical Solutions segment, revenues were unchanged at $8.4 million for the current quarter compared to the same quarter last year. Our total gross profit increased by 9.4% to $7.7 million. Gross profit as a percentage of revenues grew by 0.7% to 24.2% from 23.5%. Selling and G&A expenses increased by 5.6% to $6.1 million. Equity income from our 50% share in the Japan subsidiary decreased from a $56,000 income to a $32,000 loss. This was primarily attributed to the weak economic environment in Japan.

Operating income increased by 19.2% to $1.5 million. Interest expense increased from $454,000 to $523,000. This was primarily due to additional borrowings for the USDL acquisition, partially offset by lower interest rate. Other income increased from $156,000 to $201,000.

Income before income taxes and minority interest increased by 22.5% to $1,214,000 in this quarter, compared to $991,000 in the same quarter last year. Our tax rate was about the same for both periods at 40%. Our net income increased by 23.2% to $728,000 from $591,000, and $0.08 per share in the current quarter from $0.06 in the same quarter last year.

Balance sheet is still strong with approximately $2.9 million in cash, $92 million in total assets, and about $38.2 million in shareholders equity. Our orders in the E&E group remains strong with a backlog of $45.5 million at April 30, 2008, compared to $38.7 million at April 30, 2007, an increase of 17.5%. That’s it for my report. The 10-Q will be filed later today.

William C. McGinnis

Great! Thanks Raffy. Why don’t we go to Q&A?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of [Joe Silva].

Joe Silva – Unknown Firm

I have maybe two questions with a followup. The $201,000 as other income, where exactly did that come from? If you could explain that to me please.

Raffy Lorentzian

We had some securities that were being held for investment, and we sold those securities and about $195,000 of our other income is made up of the gain from the sale of securities.

Joe Silva – Unknown Firm

So, you’re adding that to the $500,000, so realistically you guys made the same thing as last year, and you’re saying you made $0.08 versus $0.06, but if you deduct the $200,000, you’re back to $0.06. Is that correct?

Raffy Lorentzian

Well, last year we also had other income of about $156,000, so on a comparative basis, it’s not quite the same, but for this quarter, you could say that that did help the bottom line. Yes.

Joe Silva – Unknown Firm

The next question is how do you intend to pay this new company, Elliott, when you still have not paid the company that we purchased a while back?

Raffy Lorentzian

We haven’t paid them?

Joe Silva – Unknown Firm

The question I had about a year and a half ago or a year ago was when the purchase of one property was supposed to be paid off by the sale of their land.

Raffy Lorentzian

We have a very nice credit facility and are actually using that for investments.

Joe Silva – Unknown Firm

So, we’re using the credit facility to pay off this Elliott Laboratories?

William C. McGinnis

That’s certainly part of it. We haven’t announced how we structure the deal, but certainly credit facility and some equity.

Joe Silva – Unknown Firm

Okay, and is there any news on the land?

William C. McGinnis

None to report today unfortunately.

Operator

Your next question comes from the line of David Gabai.

David Gabai – Unknown Firm

I’m curious. We were holding securities in another company that we sold at a profit which equaled about $201,000, or 28% of the whole quarter, of income.

Raffy Lorentzian

Yes.

David Gabai – Unknown Firm

If the profit was $201,000, the principal including the profit must have been a heck of a lot more than that. We reinvested that, and/or would we consider buying some of our own securities, like some NTS?

William C. McGinnis

We are actually as I think depicted by our acquisition of Elliott, we continue to invest from an acquisition standpoint. We continue to invest as we migrate the company towards an engineering service organization, so we’re investing pretty aggressively for growth, David, and we think that serves us well as our E&E revenues continue to grow as depicted by the results.

David Gabai – Unknown Firm

Are we holding any other securities at this time?

Raffy Lorentzian

Very little. Nothing significant.

David Gabai – Unknown Firm

That was pretty significant if it was $200,000 of profit. I don’t know what the principal was, but what did we sell. Was it $1 million?

Raffy Lorentzian

Actually the base was very low, so most of the amount that was made was because of the earnings that were earned in prior years and then we just sold them this year. You can’t recognize the gain until you sell them.

David Gabai – Unknown Firm

Can you elaborate at all on this Elliott acquisition as far as cost and/or forward-looking or call it backward-looking maybe income, what we might expect from it?

William C. McGinnis

We haven’t disclosed the purchase price for competitive reasons, but the revenue for that acquisition is in and around $6.5 million, so it’s a very nice lab acquisition for us. It gets us in a nice branding way to handle the aerospace and telecom business out there. What I really like about this business is they are real pros in EMI/EMC testing, and we can augment that capability to provide some environmental testing and handle GR-63 telecom spec, I think it will be great play for us, David. So, it’s a very, very strategic acquisition, and from my perspective should work real well for us once we get it integrated.

David Gabai – Unknown Firm

When it’s up and running, what kind of margin would you expect from it?

William C. McGinnis

I think it’s a typical E&E margin. What are we running margin-wise?

Raffy Lorentzian

We are right now at about 27%.

William C. McGinnis

Yes. A very nice well-run lab, David, so it should be certainly equivalent to our other well-run laboratories.

David Gabai – Unknown Firm

Just a couple more. I noticed we spent about, not a lot of money, but $10,600 at MTI. I know it’s Bob Lin’s company. I wonder what that was for.

Raffy Lorentzian

We do a lot of that. We’re moving the company real marketing oriented. What we did a number of years ago, we were a very production oriented, and we weren’t growing. We developed a national sales organization that I’ve mentioned in a number of previous calls, and we really need to drive the company from a marketing standpoint as we grow and integrate these acquisitions, so they support us from a marketing standpoint with some literature and things along those lines, at a very cost effective price.

David Gabai – Unknown Firm

Alright. I’m not going to get into my usual routine, but I invite anyone that didn’t hear me last time to go on your website and listen to the last call. I still believe in all of it, and in looking at the proxy, I just can’t believe that we spent a quarter making five-eighths of what the two top dogs at NTS made last year, as a whole company, and so without getting into it, the company I know is undervalued, the company I know is probably worth $10 to $12 or even more, but we’re sitting at $6, and I continue to just not see the real benefit of remaining shareholders other than that I think we should lead to a transaction, and that’s I’m looking for, and that’s why I’m still here.

William C. McGinnis

Thanks for your support, David, and as we’ve talked many a times, the management is committed to executing the growth strategy. We think once we get the revenues, being a small microcap company, to a level, we’re going to see significant value. We continue to add value every day, and that’s our game plan, and we understand people have different opinions, and we certainly respect your opinion, and we always have a listening ear as you know.

David Gabai – Unknown Firm

I look forward to that sooner than later.

William C. McGinnis

We do too, David. Thank you.

Operator

Arthur, I’m sure that there are no further questions.

Arthur Wood

Bill, do you have any concluding remarks?

William C. McGinnis

Again, just to take on what I just said. We are aggressively and have by our results continuing on the M&A route. We’re growing this company organically. Our aerospace market remains strong, and we’re anticipating it to continue to remain strong. I think a point that wasn’t brought up during the question is we did have some product delays in this quarter, and if we didn’t, I think the results would have been considerably better, and we anticipate that issue resolving itself in the near term, so we think the outlook for NTS is favorable, pretty exciting, and will continue to remain favorable, and I want to thank everybody for their time this morning.

Operator

Thank you. Once again, we thank you all for joining today. You may now disconnect, and have a nice day!

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Source: National Technical Systems, Inc. F1Q09 (Qtr End 04/30/08) Earnings Call Transcript
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