UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the Quarterly Period Ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 000-49890
MTC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 02-0593816 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 4032 Linden Avenue, Dayton, Ohio | 45432 | |
| (Address of principal executive offices) | (Zip Code) |
(937) 252-9199
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of Common Stock, $0.001 par value, of the registrant outstanding as of April 30, 2004 was 15,597,019.
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
2
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands, except share and per share amounts)
| March 31, 2004 |
December 31, 2003 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 72,371 | $ | 15,050 | ||||
| Accounts receivable, net |
49,777 | 46,004 | ||||||
| Costs and estimated earnings in excess of amounts billed on uncompleted contracts |
4,639 | 2,249 | ||||||
| Work-in-process inventories |
606 | 2,488 | ||||||
| Prepaid expenses and other current assets |
1,808 | 1,957 | ||||||
| Total current assets |
129,201 | 67,748 | ||||||
| Property, plant and equipment, net |
2,396 | 2,382 | ||||||
| Goodwill, net |
23,869 | 23,817 | ||||||
| Intangible assets, net |
7,737 | 8,164 | ||||||
| Other assets |
109 | 156 | ||||||
| $ | 163,312 | $ | 102,267 | |||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 16,582 | $ | 18,572 | ||||
| Compensation and related items |
8,813 | 9,774 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts |
371 | 481 | ||||||
| Amounts due under earn out agreements |
1,100 | 5,668 | ||||||
| Income taxes payable and other current liabilities |
2,853 | 714 | ||||||
| Total current liabilities |
29,719 | 35,209 | ||||||
| Deferred income tax liabilities |
1,677 | 1,823 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $0.001 par value; 50,000,000 shares authorized; 15,596,353 and 13,210,946 shares issued and outstanding, at March 31, 2004 and December 31, 2003, respectively |
16 | 13 | ||||||
| Paid-in capital |
116,624 | 53,751 | ||||||
| Retained earnings |
16,637 | 12,832 | ||||||
| Treasury stock |
(1,361 | ) | (1,361 | ) | ||||
| Total stockholders’ equity |
131,916 | 65,235 | ||||||
| $ | 163,312 | $ | 102,267 | |||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(dollar amounts in thousands except share and per share amounts)
| Three months ended March 31, | ||||||
| 2004 |
2003 | |||||
| Revenue |
$ | 59,868 | $ | 36,109 | ||
| Cost of revenue |
50,534 | 29,766 | ||||
| Gross profit |
9,334 | 6,343 | ||||
| General and administrative expenses |
2,692 | 2,404 | ||||
| Intangible asset amortization |
428 | 119 | ||||
| Operating income |
6,214 | 3,820 | ||||
| Interest income |
81 | 75 | ||||
| Income before income tax expense |
6,295 | 3,895 | ||||
| Income tax expense |
2,490 | 1,540 | ||||
| Net income |
$ | 3,805 | $ | 2,355 | ||
| Basic and diluted earnings per share |
$ | 0.26 | $ | 0.18 | ||
| Weighted average common shares outstanding: |
||||||
| Basic |
14,361,947 | 12,914,781 | ||||
| Diluted |
14,406,556 | 13,095,552 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Condensed Consolidated Statements of Cash Flows
(dollar amounts in thousands)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 3,805 | $ | 2,355 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
| Deferred income taxes |
(146 | ) | — | |||||
| Depreciation and amortization |
583 | 219 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(3,825 | ) | (1,426 | ) | ||||
| Costs and estimated earnings in excess of billings on uncompleted contracts |
(2,390 | ) | (2,304 | ) | ||||
| Inventory |
1,882 | — | ||||||
| Prepaid expenses and other assets |
196 | 148 | ||||||
| Accounts payable |
(1,990 | ) | (996 | ) | ||||
| Compensation and related items |
(961 | ) | 100 | |||||
| Billings in excess of costs and estimated earnings on uncompleted contracts |
(110 | ) | (63 | ) | ||||
| Income taxes payable and other current liabilities |
2,137 | — | ||||||
| Net cash used in operating activities |
(819 | ) | (1,967 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Payments for acquired businesses |
(1,005 | ) | — | |||||
| Purchase of property and equipment |
(169 | ) | (99 | ) | ||||
| Net cash used in investing activities |
(1,174 | ) | (99 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Issuance of common stock |
59,314 | 421 | ||||||
| Repurchase of common stock |
— | (409 | ) | |||||
| Net cash provided by financing activities |
59,314 | 12 | ||||||
| Net increase (decrease) in cash |
57,321 | (2,054 | ) | |||||
| Cash and cash equivalents at beginning of period |
15,050 | 21,950 | ||||||
| Cash and cash equivalents at end of period |
$ | 72,371 | $ | 19,896 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 1 . Financial Statements
Notes to Condensed Consolidated Financial Statements
A. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Interim financial information—The consolidated financial statements as of March 31, 2004 and for the three month periods ended March 31, 2004 and 2003 are unaudited and have been prepared on the same basis as our audited consolidated financial statements. MTC Technologies, Inc. (MTC or the Company) has continued to follow the accounting principles set forth in the consolidated financial statements included in its 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary to present fairly the periods indicated. Results of operations for the interim periods ended March 31, 2004 and 2003 are not necessarily indicative of the results for the full year.
Business Segment—We operate as one segment, delivering a broad array of services primarily to the federal government in four areas, which are offered separately or in combination across our customer base. These services are Systems Engineering and Technical Services, Information Technology, Intelligence and Program Management. Although we offer the services referred to above, revenue is internally reviewed by our management primarily on a contract basis. Therefore, it would be impracticable to determine revenue by services offered.
B. STOCKHOLDERS’ EQUITY
The Company and a selling stockholder completed a public offering of 2,250,000 primary and 1,500,000 secondary shares of our common stock in February 2004. The primary shares were issued by the Company and the secondary shares were sold by the selling stockholder. The Company did not receive any proceeds from the sale of the shares by the selling stockholder. The Company received net proceeds of $59.3 million from the offering, after deducting the Company’s portion of expenses and the underwriting discount.
We intend to use the proceeds from the offering (together with cash on hand and additional borrowings) for working capital and general corporate purposes including possible strategic acquisitions.
In the first quarter of 2004, we issued 133,074 shares of our common stock, with a value of $3.6 million, in connection with the fourth quarter 2003 acquisition of International Consultants, Inc. See Note C. Acquisitions.
C. ACQUISITIONS
International Consultants, Inc.
On October 1, 2003, we signed a stock purchase agreement and acquired International Consultants, Inc. (ICI) from ICI’s shareholders. Essentially all of ICI’s work is in the defense industry where its main focus has been to support the United States Army. ICI specializes in program management, information technology and logistics services and operations.
The initial purchase price for 100% of the outstanding common stock of ICI was $10.2 million, which was paid with $2.4 million in MTC Common Stock, $7.5 million in assumption of ICI debt (of which approximately $3.0 million arose in connection with payments to ICI’s selling shareholders) and $0.3 million for related acquisition costs, all of which was immediately paid with cash on hand. In the
6
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 1 . Financial Statements
Notes to Condensed Consolidated Financial Statements
first quarter of 2004, we paid additional consideration of $4.6 million, which consisted of shares of our common stock with a value of $3.6 million and $1.0 million in cash, to the former shareholders of ICI as a result of the achievement of certain performance goals under an earn-out provision in the stock purchase agreement. We could be required to pay the former shareholders of ICI up to an additional $4.5 million under such provision, payable in a combination of our common stock and cash, if certain other performance goals are achieved through 2005. If all contingent amounts are earned, the total acquisition price could reach $19.3 million. Any future payments will also be paid in a combination of our common stock and in cash. If the maximum purchase price is paid, the total payments will have been made 50% in cash or debt assumption and 50% in our common stock. Shares of our common stock issued in connection with our acquisition of ICI are exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.
Vitronics Inc.
Effective October 24, 2003, we acquired all of the outstanding stock of Vitronics Inc. (Vitronics) from Vitronics’ shareholders. All of Vitronics’ work is in the defense industry where its main focus has been to support the United States Army. Vitronics specializes in research and development, systems engineering, information technology, software development, and system integration services.
The initial purchase price for 100% of the common stock of Vitronics and related acquisition costs was $9.0 million, which was paid from cash on hand at closing on October 31, 2003. Vitronics’ former shareholders may receive additional cash payments through 2007 if certain operating goals are achieved or contracts are awarded. Based on our current estimates, we expect the total purchase price will be approximately $9.7 million.
D. RELATED PARTY TRANSACTIONS
We subcontract to, purchase services from, rent a portion of our facilities from, and utilize aircraft from various entities that are controlled by Mr. Rajesh K. Soin, a significant stockholder and Chairman of the Board of Directors. The following is a summary of transactions with related parties:
| Three months ended March 31, | ||||||
| (dollars in thousands) | ||||||
| 2004 |
2003 | |||||
| Included in general and administrative expenses: |
||||||
| Aircraft usage charges paid to Soin International, LLC |
$ | 58 | $ | — | ||
| Rent and maintenance costs paid to related parties |
6 | 118 | ||||
| $ | 64 | $ | 118 | |||
| Rent included in cost of revenues paid to related parties |
$ | 13 | $ | 36 | ||
| Subcontracting services purchased from related parties: |
||||||
| GTIC India, Private, Ltd. |
$ | 118 | $ | 113 | ||
| Subcontract services provided to related parties: |
||||||
| Integrated Information Technology Corporation |
$ | 309 | $ | 550 | ||
| International Consultants, Inc. (1) |
$ | — | $ | 56 | ||
| (1) | Amounts for subcontract services provided to ICI in 2003 were prior to our acquisition of ICI as discussed in above in Note C. |
7
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 1 . Financial Statements
Notes to Condensed Consolidated Financial Statements
We jointly own certain aircraft with Soin Aviation, LLC. We have also entered into a sharing arrangement with Soin Aviation under which we are responsible for a pro-rata share of the fixed and marginal costs associated with the jointly owned aircraft. In addition, we lease one facility from an entity related to Mr. Soin.
We believe that our subcontracting, lease, and other agreements with each of the related parties identified above reflect prevailing market conditions at the time they were entered into and contain substantially similar terms to those that might be negotiated by independent parties on an arm’s-length basis.
At March 31, 2004 and December 31, 2003, amounts due from related parties were $365,000 and $259,000, respectively. At March 31, 2004 and December 31, 2003, amounts payable to related parties were $95,000 and $180,000 respectively.
E. STOCK-BASED COMPENSATION
We apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for our stock option plans. Accordingly, no compensation cost has been recognized for the stock options issued under the 2002 Equity and Performance Incentive Plan because the options were granted with an exercise price equal to the stock price on the date of grant. Had compensation costs been determined based on the fair value of the options on the grant dates consistent with the methodology prescribed by Statement of Financial Accounting Standard No. 123, Accounting for Stock Based Compensation (SFAS No. 123), our net income and earnings per share would have been reduced to the pro forma amounts indicated below.
Because future stock option awards may be granted and because it is unlikely that actual events will ever exactly match the assumptions used in making these calculations, the pro forma impacts shown below are not necessarily indicative of the impact in future years.
Pro forma disclosure:
| Three months ended March 31, | ||||||
| (dollar amounts in thousands, | ||||||
| 2004 |
2003 | |||||
| Net income, as reported |
$ | 3,805 | $ | 2,355 | ||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
251 | 89 | ||||
| Pro forma net income |
$ | 3,554 | $ | 2,266 | ||
| Earnings per share: |
||||||
| Basic – as reported |
$ | 0.26 | $ | 0.18 | ||
| Basic – pro forma |
$ | 0.25 | $ | 0.18 | ||
| Diluted – as reported |
$ | 0.26 | $ | 0.18 | ||
| Diluted – pro forma |
$ | 0.25 | $ | 0.17 | ||
8
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 1 . Financial Statements
Notes to Condensed Consolidated Financial Statements
F. EARNINGS PER COMMON SHARE
Basic earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired, if any, during the period are weighted for the portion of the period during which they were outstanding. The weighted average shares for the three months ended March 31, 2004 and 2003 are as follows:
| Three months ended March 31, | ||||
| 2004 |
2003 | |||
| Basic weighted average common shares outstanding |
14,361,947 | 12,914,781 | ||
| Effect of potential exercise of stock options |
44,609 | 180,771 | ||