form10q.htm

10-Q 1 form10q.htm NATIONAL TECHNICAL SYSTEMS, INC 10Q 7-31-2009 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 July 31, 2009

£	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 £

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 £ NO £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “ large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £	Accelerated filer £	Non-accelerated filer £	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 £ NO T

The number of shares of common stock, no par value, outstanding as of September 8, 2009 was 9,312,417.

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Index

PART I. FINANCIAL INFORMATION			Page No.

Item 1.	Financial Statements:

		Consolidated Balance Sheets as of July 31, 2009 (unaudited) and January 31, 2009		3

		Unaudited Consolidated Statements of Income For the Six Months Ended July 31, 2009 and 2008		4

		Unaudited Consolidated Statements of Income For the Three Months Ended July 31, 2009 and 2008		5

		Unaudited Consolidated Statements of Cash Flows For the Six Months Ended July 31, 2009 and 2008		6

		Notes to the Unaudited Consolidated Financial Statements		7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			18

Item 4.	Controls and Procedures			18

PART II. OTHER INFORMATION & SIGNATURE

Item 1.	Legal Proceedings			19

Item 1A.	Risk Factors			19

Item 2.	Unregistered Sales of Equity Securities			19

Item 3.	Defaults Upon Senior Securities			19

Item 4.	Submission of Matters to a Vote of Security Holders			19

Item 5.	Other Information			19

Item 6.	Exhibits			19

	Signature			20

Index

PART I – FINANCIAL

ITEM 1. FINANCIAL STATEMENTS

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	At			At
	July 31,			January 31,
	2009			2009
ASSETS	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	5,925,000		$	9,364,000
Investments		1,456,000			958,000
Accounts receivable, less allowance for doubtful accounts of $1,550,000 at July 31, 2009 and $1,274,000 at January 31, 2009		23,524,000			23,973,000
Income taxes receivable		11,000			137,000
Inventories, net		3,999,000			3,473,000
Deferred income taxes		4,110,000			3,983,000
Prepaid expenses		1,526,000			1,462,000
Total current assets		40,551,000			43,350,000

Property, plant and equipment, at cost		107,201,000			104,031,000
Less: accumulated depreciation		(68,859,000	)		(65,709,000	)
Net property, plant and equipment		38,342,000			38,322,000

Goodwill		12,229,000			12,070,000
Intangible assets, net		8,216,000			8,656,000
Other assets		4,164,000			4,124,000

TOTAL ASSETS	$	103,502,000		$	106,522,000

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,027,000		$	6,731,000
Accrued expenses		7,788,000			7,938,000
Income taxes payable		138,000			1,088,000
Deferred income		1,869,000			975,000
Current installments of long-term debt		3,366,000			3,239,000
Total current liabilities		18,188,000			19,971,000

Long-term debt, excluding current installments		31,810,000			33,913,000
Deferred income taxes		7,914,000			7,958,000
Deferred compensation		965,000			1,012,000
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, 9,310,000 as of July 31, 2009 and 9,299,000 as of January 31, 2009		16,498,000			16,421,000
Retained earnings		27,774,000			26,940,000
Accumulated other comprehensive (loss) income		(92,000	)		(110,000	)
Total shareholders' equity		44,180,000			43,251,000
Noncontrolling interests		445,000			417,000
Total equity		44,625,000			43,668,000

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	103,502,000		$	106,522,000

See accompanying notes.

Index

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

for Six Months Ended July 31, 2009 and 2008

	2009			2008

Net revenues	$	57,428,000		$	57,185,000
Cost of sales		41,886,000			41,663,000
Gross profit		15,542,000			15,522,000

Selling, general and administrative expense		12,533,000			11,635,000
Equity income from non-consolidated subsidiary		35,000			4,000
Operating income		2,974,000			3,883,000
Other income (expense):
Interest expense, net		(723,000	)		(1,098,000	)
Other income, net		135,000			235,000
Total other expense, net		(588,000	)		(863,000	)

Income before income taxes and noncontrolling interests		2,386,000			3,020,000
Income taxes		966,000			1,239,000

Income before noncontrolling interests		1,420,000			1,781,000
Income attributable to noncontrolling interests		(28,000	)		(27,000	)

Income from continuing operations		1,392,000			1,754,000

Income from discontinued operations, net of tax		-			104,000

Net income	$	1,392,000		$	1,858,000

Basic earnings per common share
Income from continuing operations	$	0.15		$	0.20
Income from discontinued operations		-			0.01
Net income	$	0.15		$	0.21

Diluted earnings per common share
Income from continuing operations	$	0.15		$	0.18
Income from discontinued operations		-			0.01
Net income	$	0.15		$	0.19

Weighted average common shares outstanding		9,301,000			8,993,000
Dilutive effect of stock options and nonvested shares		285,000			522,000
Weighted average common shares outstanding, assuming dilution		9,586,000			9,515,000

Cash dividends per common share	$	0.06		$	0.02

See accompanying notes.

Index

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

for Three Months Ended July 31, 2009 and 2008

	2009			2008

Net revenues	$	28,736,000		$	30,625,000
Cost of sales		20,600,000			21,855,000
Gross profit		8,136,000			8,770,000

Selling, general and administrative expense		6,440,000			6,462,000
Equity loss (income) from non-consolidated subsidiary		4,000			(28,000	)
Operating income		1,692,000			2,336,000
Other income (expense):
Interest expense, net		(327,000	)		(575,000	)
Other income, net		204,000			34,000
Total other expense, net		(123,000	)		(541,000	)

Income before income taxes and noncontrolling interests		1,569,000			1,795,000
Income taxes		638,000			744,000

Income before noncontrolling interests		931,000			1,051,000
Income attributable to noncontrolling interests		(79,000	)		(32,000	)

Income from continuing operations		852,000			1,019,000

Income from discontinued operations, net of tax		-			111,000

Net income	$	852,000		$	1,130,000

Basic earnings per common share
Income from continuing operations	$	0.09		$	0.11
Income from discontinued operations		-			0.01
Net income	$	0.09		$	0.12

Diluted earnings per common share
Income from continuing operations	$	0.09		$	0.11
Income from discontinued operations		-			0.01
Net income	$	0.09		$	0.12

Weighted average common shares outstanding		9,303,000			9,118,000
Dilutive effect of stock options and nonvested shares		303,000			465,000
Weighted average common shares outstanding, assuming dilution		9,606,000			9,583,000

Dividend per common share
Cash	$	0.06		$	0.02

See accompanying notes.

Index

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

for the Six Months Ended July 31, 2009 and 2008

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,392,000		$	1,858,000

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,597,000			3,599,000
Write-offs (recoveries), net		276,000			(680,000	)
Loss on retirement of assets		8,000			-
Gain on investments		(160,000	)		-
Life insurance premium		37,000			-
Undistributed earnings of affiliate		28,000			27,000
Deferred income taxes		(171,000	)		(403,000	)
Tax benefit from stock option exercises		-			55,000
Share based compensation		135,000			139,000
Gain on sale of securities		-			(195,000	)
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable		173,000			(1,475,000	)
Inventories		(526,000	)		(497,000	)
Prepaid expenses		(64,000	)		(598,000	)
Other assets and intangibles		54,000			96,000
Accounts payable		(1,704,000	)		(564,000	)
Accrued expenses		(150,000	)		141,000
Income taxes payable		(950,000	)		327,000
Deferred income		894,000			936,000
Deferred compensation		(47,000	)		7,000
Income taxes receivable		126,000			698,000
Net cash provided by operating activities		2,948,000			3,471,000

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(3,185,000	)		(3,892,000	)
Investment in life insurance		(118,000	)		(94,000	)
Proceeds from sale of securities		-			195,000
Acquisitions of businesses, net of cash acquired		(159,000	)		(4,478,000	)
Investment in retirement funds		(351,000	)		(348,000	)
Net cash used in investing activities		(3,813,000	)		(8,617,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt		2,328,000			8,650,000
Repayments of current and long-term debt		(4,304,000	)		(3,149,000	)
Cash dividends paid		(558,000	)		-
Proceeds from stock options exercised		-			220,000
Common stock repurchase		(58,000	)		-
Net cash provided (used) by financing activities		(2,592,000	)		5,721,000
Effect of exchange rate changes on cash		18,000			6,000

Net (decrease) increase in cash		(3,439,000	)		581,000
Beginning cash balance		9,364,000			2,863,000

ENDING CASH BALANCE	$	5,925,000		$	3,444,000

See accompanying notes.

Index

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. Minority interests have been re-captioned to noncontrolling interests and have been presented in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” 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, 2010 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, 2009.

The statements presented as of July 31, 2009 and for the three and six months ended July 31, 2009 and 2008 are unaudited. In management's opinion, all adjustments have been made to present fairly the results of such unaudited interim periods. All such adjustments are of a normal recurring nature.

The Company is now reporting as one segment as a result of the sale of the information technology services, which was previously included in the Technical Solutions segment. The remaining business is more closely related to engineering services and has been merged with and into Engineering & Evaluation. Our chief operating decision maker now evaluates results and allocates resources as a single reporting entity. Accordingly, in accordance with FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information”, all periods presented are reported as one entity.

Certain amounts in previously issued financial statements have been reclassified to conform to the current year presentation.

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.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). This Interpretation was effective for the fiscal year beginning February 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires the recognition of penalties and interest on any unrecognized tax benefits. The Company’s policy is to reflect penalties and interest as part of income tax expense when and if they become applicable.

The Company has reviewed its positions in recording income and expenses and has no reason to record a liability under the provisions of FIN 48. The Company files income tax returns in the United States (“U.S.”) on a federal basis and in many U.S. state and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company does not anticipate that its total unrecognized tax benefits will significantly change due to the settlement of examinations or the expiration of statutes of 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 six months ended July 31, 2009, total comprehensive income was $1,400,000 which includes foreign currency translation gain of $18,000. During the six months ended July 31, 2008, total comprehensive income was $1,725,000 which is composed of a foreign currency translation gain of $6,000, unrealized loss on marketable securities of $13,000 and realized gains on the sale of marketable securities of $126,000.

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

Index

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 and diluted net income per common share is presented in conformity with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share” for all periods presented. In accordance with SFAS No. 128, basic earnings per share have been computed using the weighted average number of shares of common stock outstanding during the year. Basic earnings per share exclude any dilutive effects of options, warrants, non-vested restricted shares and convertible securities.

7.	Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” There have been no indications of any impairment through July 31, 2009.

As of July 31, 2009 and January 31, 2009, the Company had the following acquired intangible assets:

	July 31, 2009							January 31, 2009
	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	$	425,000	$	454,000	3-10 years	$	879,000	$	358,000	$	521,000	3-10 years
Customer relationships		8,596,000		1,247,000		7,349,000	3-15 years		8,596,000		876,000		7,720,000	3-15 years
Acreditations and certifications		20,000		7,000		13,000	5 years		20,000		5,000		15,000	5 years
Total	$	9,495,000	$	1,679,000	$	7,816,000		$	9,495,000	$	1,239,000	$	8,256,000

Intangible assets not subject to amortization:

Goodwill					$	12,229,000						$	12,070,000
Trademarks and tradenames						400,000							400,000
Total					$	12,629,000						$	12,470,000

Goodwill increased by $159,000 due to earn-out payment related to the acquisition of International Management Systems, Inc. (IMS) on April 21, 2008.

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 July 31, 2009 is as follows:

	Shares			Weighted Avg. Exercise Price		Weighted Avg. Remaining Contract Life in years		Aggregate Intrinsic Value
Outstanding at January 31, 2009		1,330,386		$	3.59		3.29	$	4,771,000
Granted		-			-
Exercised		-			-
Canceled or expired		(109,688	)		4.23
Outstanding at July 31, 2009		1,220,698		$	3.53		2.95	$	1,227,000
Exercisable at July 31, 2009		1,188,698		$	3.49		2.86	$	1,227,000

Index

For the three months ended July 31, 2009 and 2008, potentially dilutive securities representing approximately 593,062 and 30,417 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.

Compensation expense related to stock options was $17,000 and $58,000 for the six months ended July 31, 2009 and 2008, respectively. As of July 31, 2009, there was $10,000 of unamortized stock-based compensation expense related to unvested stock options which is expected to be recognized over a remaining period of six months.

The Company’s non-vested shares vest at 25% per year commencing with the first anniversary of the grant date. Compensation expense, representing the fair market value of the shares at the date of grant, net of assumptions regarding estimated future forfeitures, is charged to earnings over the vesting period. Compensation expense included in general and administrative expenses in the Company’s consolidated statement of income, relating to these grants was $117,000 for the six months ended July 31, 2009. As of July 31, 2009, 192,900 non-vested shares were outstanding at a weighted average grant date value of $4.54. As of July 31, 2009, there was $876,000 of unamortized stock-based compensation cost related to unvested shares which is expected to be recognized over a remaining period of 48 months.

Effective February 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities. SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements by establishing a fair value 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 under SFAS 157 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 at July 31, 2009:


	Total		(Level 1)		(Level 2)		(Level 3)
SERP investment in mutual funds	$	1,456,000	$	1,456,000	$	-	$	-

Total	$	1,456,000	$	1,456,000	$	-	$	-

9.	Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). The standard clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The adoption of SFAS 160 primarily affected disclosure requirements and did not impact the Company’s financial position or operating results.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”). New requirements under the revised standard include: (i) the fair value of stock provided as consideration be measured as of the acquisition date instead of the announcement date; (ii) acquisition-related costs be recognized separately from the acquisition, generally as an expense, instead of treated as a part of the cost of the acquisition that was allocated to the assets acquired and the liabilities assumed; (iii) restructuring costs that the acquirer expected, but was not obligated to incur, be recognized separately from the acquisition instead of recognized as if they were a liability assumed at the acquisition date; (iv) contingent consideration be recognized at the acquisition date, measured at its fair value at that date, instead of recognized when the contingency was resolved and consideration was issued or became issuable; (v) recognizing a gain when the fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred instead of allocating the “negative goodwill” amount as a pro rata reduction of the amounts that otherwise would have been assigned to particular assets acquired; (vi) research and development assets acquired in a business combination will be recognized at their acquisition-date fair values as assets acquired in a business combination instead of being measured at their acquisition-date fair values and then immediately charged to expense; and (vii) changes in the amount of deferred tax benefits created in a business combination, outside of the valuation period, will be recognized either in income from continuing operations or directly in contributed capital, depending on the circumstances, instead of recognized through a corresponding reduction to goodwill or certain noncurrent assets or an increase in so-called negative goodwill. SFAS 141(R) is effective for the Company for transactions consummated during annual periods beginning after December 15, 2008. The adoption of SFAS 141(R) did not have a material impact on the Company’s financial position or results from operations.

Index

In April 2009 the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 requires additional disclosures about the Company’s financial instruments in interim financials. The adoption of FSP 107-1 did not have a material impact on the Company’s financial position or results from operations.

In May 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which is effective for interim and annual periods ending after June 15, 2009. SFAS 165 provides guidance on management’s assessment of subsequent events, clarifying that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or available to be issued. The adoption of SFAS No. 165 did not have a material impact on the Company’s financial position or results from operations.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”), which is effective for interim and annual periods ending after September 15, 2009. SFAS 168 makes the FASB Accounting Standards Codification (“Codification”) the single authoritative source for U.S. GAAP. The Codification replaces all previous U.S. GAAP accounting standards. The adoption of SFAS 168 will only impact references for accounting guidance, and will not impact the Company’s financial position or results from operations.

10.	Acquisitions

Acquisition of Elliott Laboratories, Inc.

On June 6, 2008, the Company acquired Elliott Laboratories, Inc., a leading San Francisco Bay Area electromagnetic compatibility (EMC), product safety and wireless regulatory testing laboratory with two full-service facilities. The total purchase price consideration through July 31, 2009 was $7,327,000, of which $3,600,000 was paid in cash at closing and $1,974,000 was paid in Company stock. $1,000,000 in cash and stock was held back and is payable 18 months after closing. An additional $75,000 in cash was paid subsequently for working capital adjustment and $61,000 was paid in common stock. Total acquisition costs as of July 31, 2009 were $617,000. The $1,974,000 and $61,000 paid in Company stock consisted of 346,853 shares and 10,790 shares of common stock, respectively, calculated at the average closing price of Company stock during a period prior to the acquisition close date. In addition, the Company agreed to pay to the sellers up to a maximum of $1,275,000 in earn-out consideration, payable in Company stock, 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 if and when the requirements are met and the contingency is removed.

Acquisition of United States Test Laboratory, LLC

On December 5, 2007, the Company acquired the assets and the existing business of United States Test Laboratory, LLC (“USTL”). The purchase price paid for USTL at closing was $12,500,000 cash. The Company has agreed to pay a maximum of $1,800,000 in earn-out consideration, plus interest, in cash on the second anniversary of the date of closing of the acquisition if the company achieves a certain level of revenue. This will be added to the purchase price and result in an increase to goodwill if and when the requirements are met and the contingency is removed.

Index

11.	Subsequent Events

The Company has completed an evaluation of all subsequent events through September 14, 2009, which is the issuance date of these consolidated financial statements and concluded no subsequent events occurred that required recognition or disclosure.

Index

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, 2009 and the consolidated financial statements included elsewhere in this report.

GENERAL

The Company is an integrated engineering services organization that supplies technical services and solutions to a variety of industries including aerospace, defense, automotive, power products, electronics, computers and telecommunications. Through its wide range of testing facilities, solutions and certification services, the Company provides to 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 allows the Company to have its test data accepted in most countries.

The Company operates facilities throughout the United States and in Japan, Canada and Germany, serving a large variety of high technology industries. The Company provides highly trained technical personnel for engineering services, product certification, product safety testing and product evaluation to enable customers to sell their products in world markets. 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 and six-month periods ended July 31, 2009 and 2008.

RESULTS OF OPERATIONS

REVENUES

Six months ended July 31,	2009		% Change			2008
(Dollars in thousands)
Total revenues	$	57,428		0.4	%	$	57,185

For the six months ended July 31, 2009, consolidated revenues increased by $243,000 or 0.4% when compared to the same period in fiscal 2009, primarily due to additional revenues of approximately $2,145,000 from the Elliott Laboratories acquisition and an increase in revenues from the defense market, partially offset by a decrease in revenues in the power products, telecommunications, automotive markets and managed services.

GROSS PROFIT

Six months ended July 31,	2009			% Change			2008
(Dollars in thousands)

Total	$	15,542			0.1	%	$	15,522
% to total revenues		27.1	%					27.1	%

Total gross profit for the six months ended July 31, 2009 increased by $20,000 or 0.1% when compared to the same period in fiscal 2009. This was primarily due to additional gross profit from the defense market and the Elliott acquisition, partially offset by a decrease in revenues in the power products, telecommunications, automotive markets and managed services.

Index

SELLING, GENERAL & ADMINISTRATIVE

Six months ended July 31,	2009			% Change			2008
(Dollars in thousands)

Total	$	12,533			7.7	%	$	11,635
% to total revenues		21.8	%					20.3	%

Total selling, general and administrative expenses increased $898,000 or 7.7% for the six months ended July 31, 2009 when compared to the same period in fiscal 2009. This was primarily due to higher compensation and sales and marketing costs associated with the development of the engineering services group and higher bad debt expense recorded in the first quarter of the current year resulting from the increase in uncollectible accounts resulting from the weak economy. Selling, general and administrative expenses also increased due to software costs related to the development of a new Enterprise Resource Planning (ERP) system, additional accounting costs related to Sarbanes-Oxley Section 404 compliance preparation fees and additional amortization expense related to the Elliott Labs acquisition.

OPERATING INCOME

Six months ended July 31,	2009			% Change			2008
(Dollars in thousands)

Total	$	2,974			(23.4	)%	$	3,883
% to total revenues		5.2	%					6.8	%

Operating income for the six months ended July 31, 2009 decreased by $909,000 or 23.4% when compared to the same period in fiscal 2009, primarily as a result of the increase in selling, general and administrative expenses.

INTEREST EXPENSE

Net interest expense decreased by $375,000 to $723,000 in the six months ended July 31, 2009 when compared to the same period in the prior year, primarily due to lower interest rates in the current year.

OTHER INCOME

Other income was $135,000 for the six months ended July 31, 2009, compared to other income of $235,000 for the same period in the prior year. The income in the current year was primarily due to a gain on investments, partially offset by environmental testing expenses. Other income in the prior year included gains from securities sold.

INCOME TAXES

The income tax provision rate for the six months ended July 31, 2009 was 40.5% compared to the 41.0% income tax rate in the prior year. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities. It is the Company's intention to assess the need for a valuation account by evaluating the realizability of the deferred tax asset quarterly based upon projected future taxable income of the Company.

NET INCOME

Net income for the six months ended July 31, 2009 was $1,392,000 compared to $1,858,000 for the same period in fiscal 2009, a decrease of $466,000 or 25.1%. This decrease was primarily due to the lower operating income, partially offset by lower interest expense and lower income taxes.

REVENUES

Three months ended July 31,	2009		% Change			2008
(Dollars in thousands)
Total revenues	$	28,736		(6.2	)%	$	30,625

Index

For the three months ended July 31, 2009, consolidated revenues decreased by $1,889,000 or 6.2% when compared to the same period in fiscal 2009, primarily due to a decrease in revenues due to weakness in the power products, telecommunications and automotive markets and a decrease in managed services revenues, partially offset by an increase in revenue from large defense related contracts won during the current period.

GROSS PROFIT

Three months ended July 31,	2009			% Change			2008
(Dollars in thousands)

Total	$	8,136			(7.2	)%	$	8,770
% to total revenues		28.3	%					28.6	%

Total gross profit for the three months ended July 31, 2009 decreased by $634,000 or 7.2% when compared to the same period in fiscal 2009. This was primarily due to a decrease in gross profit resulting from weakness in the power products, telecommunications and automotive markets and a decrease in managed services gross profit, partially offset by an increase in gross profit from large defense related contracts won during the current period.

SELLING, GENERAL & ADMINISTRATIVE

Three months ended July 31,	2009			% Change			2008
(Dollars in thousands)

Total	$	6,440			(0.3	)%	$	6,462
% to total revenues		22.4	%					21.1	%

Total selling, general and administrative expenses decreased by $22,000 or 0.3% for the three months ended July 31, 2009 when compared to the same period in fiscal 2009. This was primarily due to a decrease in bad debt expense and a decrease in incentive related expenses in the current quarter, partially offset by higher compensation and sales and marketing costs associated with the development of the engineering services group, increase in software costs and additional accounting costs related to Sarbanes-Oxley Section 404 compliance preparation fees.

OPERATING INCOME

Three months ended July 31,	2009			% Change			2008
(Dollars in thousands)

Total	$	1,692			(27.6	)%	$	2,336
% to total revenues		5.9	%					7.6	%

Operating income for the three months ended July 31, 2009 decreased by $644,000 or 27.6% when compared to the same period in fiscal 2009, primarily as a result of the decrease in gross profit.

INTEREST EXPENSE

Net interest expense decreased by $248,000 to $327,000 in the three months ended July 31, 2009 when compared to the same period in the prior year, primarily due to lower interest rates and lower average debt balance in the current quarter.

OTHER INCOME

Other income was $204,000 for the three months ended July 31, 2009, compared to other income of $34,000 for the same period in the prior year. Other income in the current quarter includes a gain on investments.

Index

INCOME TAXES

The income tax provision rate for the three months ended July 31, 2009 was 40.7% compared to the 41.4% income tax rate in the prior year. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities. It is the Company's intention to assess the need for a valuation account by evaluating the realizability of the deferred tax asset quarterly based upon projected future taxable income of the Company.

NET INCOME

Net income for the three months ended July 31, 2009 was $852,000 compared to $1,130,000 for the same period in fiscal 2009, a decrease of $278,000 or 24.6%. This decrease was primarily due to the lower operating income, partially offset by lower interest expense and lower income taxes.

OFF BALANCE SHEET ARRANGEMENTS

None.

BUSINESS ENVIRONMENT

The defense and aerospace markets generate approximately 59% of the Company’s overall revenues. The U.S. commercial airline industry projects an increase from 19,000 aircraft in 2007 to 35,000 aircraft in 2027, an annual growth rate of 4.4%. In addition, 82% of the world fleet will consist of new airplanes. NTS anticipates the demand for testing aerospace components and systems will remain stable. NTS also anticipates the demand for engineering services will increase significantly as new large and regional commercial aircraft and business aircraft are being designed and built. The defense budget projected for 2009 reflects a decrease of 9% overall. However, R&D spending, the funding relevant to NTS, is projected to increase by 4%. NTS anticipates an increase in demand for engineering and test work specifically in munitions and ordnance as well as component and system qualification and acceptance testing. The Company continues to enhance its capabilities and capacity to support this activity in its laboratories. Recently there has been increased competition from government laboratories, particularly related to body armor testing. To date, NTS has not experienced a slow down in its body armor test business. However, NTS could be impacted negatively on future related military contracts.

The trend in the telecommunications market appears to be declining. 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 anticipates a sustaining market in the telecom business and the acquisition of Elliott Laboratories has provided additional capacity and capability to grow in this market.

NTS is building an engineering business 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’s initial aerospace focus will be developing capability and capacity to support large and regional commercial transport aircraft and business aircraft. The initial defense focus will be developing capability and capacity around weapons systems. We also anticipate a growing demand for engineering services for military aircraft, general aviation, space craft and unmanned vehicles. NTS plans to develop capability and capacity to support these activities once we establish a stronger overall engineering support service.

The power market, particularly the dedication and certification work the Company provides to the international community has been declining recently. However, The Company believes there is a positive outlook for this market as the government and industry search for alternative energy solutions.

The automotive industry has been declining and it is projected to continue to decline. The Company has experienced a decrease in both revenues and earnings as a result of this decline in demand.

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.

Index

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities of $2,948,000 in the six months ended July 31, 2009 primarily consisted of net income of $1,392,000 adjusted for non-cash items of $3,597,000 in depreciation and amortization, write off of receivables of $276,000, share-based compensation of $135,000, life insurance premium of $37,000, undistributed earnings of affiliate of $28,000 and loss on retirement of assets of 8,000, offset by changes in working capital of $2,194,000, deferred income taxes $171,000 and gain on investments of $160,000. Net cash provided by operating activities of $3,471,000 in the six months ended July 31, 2008 primarily consisted of net income of $1,858,000 adjusted for non-cash items of $3,599,000 in depreciation and amortization, share based compensation of $139,000, tax benefit from stock option exercises of $55,000, undistributed earnings of affiliate of $27,000, offset by changes in working capital of $929,000, recoveries of receivables of $680,000, deferred income taxes of $403,000 and gain on sale of securities of $195,000.

Net cash used in investing activities in the three months ended July 31, 2009 of $3,813,000 was primarily attributable to capital spending of $3,185,000, investment in retirement funds of $351,000, acquisitions of businesses, net of cash acquired of $159,000 and investment in life insurance of $118,000. Cash used for investing activities in the six months ended July 31, 2008 of $8,617,000 was primarily attributable to capital spending of $3,892,000, cash used to acquire businesses of $4,478,000, investment in retirement funds of $348,000 and investment in life insurance of $94,000, partially offset by net proceeds from sale of securities of $195,000. Capital spending is generally comprised of purchases of machinery and equipment, building, leasehold improvements, computer hardware, software and furniture and fixtures.

Net cash used in financing activities in the three months ended July 31, 2009 of $2,592,000 consisted of repayment of debt of $4,304,000, cash dividends paid of $558,000 and common stock repurchase of $58,000, partially offset by proceeds from borrowing of $2,328,000. Net cash provided by financing activities in the six months ended July 31, 2008 of $5,721,000 consisted primarily of proceeds from current and long-term debt of $8,650,000 and proceeds from stock options exercised of $220,000, partially offset by repayments of current and long term debt of $3,149,000.

On December 5, 2007, the Company entered into an Amendment No. 9 to the Revolving Credit Agreement with Comerica Bank, as agent and lender, holding 60%, and First Bank, as lender, holding 40% (the "Amendment"). This agreement matures on December 1, 2012. The amendment included:

(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 July 31, 2009 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 July 31, 2009.

(b) $9,000,000 in Term Loan A which was used to consolidate previous term loans. The outstanding balance on Term Loan A at July 31, 2009 was $6,612,000. The interest rate is at the agent’s prime rate less 25 basis points, with an option for the Company to convert to loans at the Libor rate plus 225 basis points for periods ranging from 30 days to 365 days, with minimum advances of $1,000,000. The principal amount is amortized over a seven-year period.

(c) $12,650,000 in Term Loan B which was used to acquire USTL on December 5, 2007. The outstanding balance on Term Loan B at July 31, 2009 was $9,041,000. The interest rate is at the agent’s prime rate less 25 basis points, with an option for the Company to convert to loans at the Libor rate plus 225 basis points for periods ranging from 30 days to 365 days, with minimum advances of $1,000,000. The principal amount is amortized 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.

On June 5, 2008, the Company entered into Amendment No. 10 to the Revolving Credit Agreement to add Term Loan C in the amount of $6,000,000. Proceeds from Term Loan C were used to finance the acquisition of Elliott Laboratories and pay off two existing mortgage notes with other banks. The outstanding balance on Term Loan C at July 31, 2009 was $4,825,000. 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. This agreement matures on May 30, 2013.

The Company has an additional $877,000 in equipment line balances which were used to finance various test equipment with terms of 60 months for each equipment schedule at interest rates ranging from 5.56% to 7.47%. The Company was in compliance with all of the covenants with its banks at July 31, 2009.

The Company’s 50% owned subsidiary, NQA, Inc., has total borrowings of $322,000 at July 31, 2009, for the acquisitions of TRA Certification Inc. and International Management Systems, Inc. (IMS).

Index

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.

Index

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, 2009, filed with the Securities and Exchange Commission on July 31, 2009.

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 third 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.

Index

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, 2009 filed with the Securities and Exchange Commission on April 30, 2009.

Item 2.

Unregistered Sales of Equity Securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

At the Company’s Annual Meeting of shareholders held on July 8, 2009, three nominees of the Board of Directors were elected directors for three year terms as Class I Directors expiring on the date of the annual meeting in 2012. The votes were as follows:

	For	Withheld
John Gibbons	6,287,848	1,007,474
William McGinnis	5,480,031	1,815,291
Donald Tringali	6,269,894	1,025,428

The shareholders of the Company voted to ratify Ernst & Young LLP as auditors for the year ending January 31, 2010. The results of the vote of the shareholders were as follows:

	For	Against	Abstain
Ratify Ernst & Young LLP as auditors for the year ending January 31, 2010	6,619,026	175,181	501,115

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.

Index

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: September 14, 2009		By: /s/ Raffy Lorentzian
		Raffy Lorentzian
		Senior Vice President
		Chief Financial Officer

		(Signing on behalf of the
		registrant and as principal
		financial officer)