Mtc Technologies Inc - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2008

¨	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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Smaller reporting company ¨

(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 x

The number of shares of Common Stock, $0.001 par value, of the registrant outstanding as of April 30, 2008 was 15,169,906.

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Index:


PART I. F INANCIAL I NFORMATION

ITEM 1.	Financial Statements	1

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	19

ITEM 4.	Controls and Procedures	20

PART II. O THER I NFORMATION

ITEM 1.	Legal Proceedings	20

ITEM 4.	Submission of Matters to a Vote of Security Holders	21

ITEM 6.	Exhibits	22

S IGNATURES		23

E XHIBIT I NDEX		24

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 1.

Financial Statements

Consolidated Balance Sheets


(Dollar amounts in thousands, except per share amounts)	(unaudited) March 31, 2008			December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	1,423		$	1,143
Restricted cash		1,648			2,689
Accounts receivable, net		78,648			84,430
Costs and estimated earnings in excess of amounts billed on uncompleted contracts		22,678			24,755
Work-in-process inventories		9,701			13,847
Prepaid expenses and other current assets		4,611			8,424

Total current assets		118,709			135,288
Property and equipment, net		27,765			26,403
Goodwill, net		155,367			155,373
Intangible assets, net		24,282			25,571
Other assets		1,082			1,410

Total assets	$	327,205		$	344,045


Liabilities and stockholders’ equity
Current liabilities:
Current maturities of long-term debt	$	15,380		$	11,820
Accounts payable		21,287			37,514
Compensation and related items		14,376			18,823
Billings in excess of costs and estimated earnings on uncompleted contracts		8,115			9,054
Income taxes payable and other current liabilities		9,234			4,398

Total current liabilities		68,392			81,609

Long-term debt		49,770			68,080
Deferred income taxes and other long-term liabilities		9,314			9,036

Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 15,864,476 and 15,852,476 shares issued at March 31, 2008 and December 31, 2007, respectively; 15,169,906 and 15,157,906 shares outstanding at March 31, 2008 and December 31, 2007, respectively		16			16
Paid-in capital		122,967			122,612
Retained earnings		92,043			77,826
Other comprehensive loss		(368	)		(205	)
Treasury stock		(14,929	)		(14,929	)

Total stockholders’ equity		199,729			185,320

Total liabilities and stockholders’ equity	$	327,205		$	344,045

See accompanying Notes to Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 1.

Financial Statements

Consolidated Statements of Income (Unaudited)


(Dollar amounts in thousands, except per share amounts)	Three months ended March 31,
	2008			2007
Revenue	$	103,059		$	100,094
Cost of revenue		86,618			84,734

Gross profit		16,441			15,360
General and administrative expenses		8,899			6,944
Intangible asset amortization		1,514			1,536

Operating income		6,028			6,880
Interest income		174			13
Interest expense		(1,251	)		(1,499	)

Interest expense, net		(1,077	)		(1,486	)

Other income, net		18,744			—

Income before income tax expense		23,695			5,394
Income tax expense		9,478			2,114

Net income	$	14,217		$	3,280

Basic earnings per share	$	0.94		$	0.22

Diluted earnings per share	$	0.93		$	0.22

Weighted average common shares outstanding:
Basic		15,169,115			15,206,583
Diluted		15,233,528			15,234,588

See accompanying Notes to Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 1.

Financial Statements

Consolidated Statement of Cash Flows (Unaudited)


(Dollar amounts in thousands)	Three months ended March 31,
	2008			2007
Cash flows from operating activities:
Net income	$	14,217		$	3,280
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,718			2,551
Stock compensation expense		231			203
Deferred income taxes		(74	)		(72	)
Other		65			3
Changes in operating assets and liabilities:
Accounts receivable		5,782			7,215
Costs and estimated earnings in excess of billings on uncompleted contracts		2,077			(1,223	)
Inventory		4,146			2,840
Prepaid expenses and other assets		4,174			962
Accounts payable		(16,227	)		(6,772	)
Compensation and related items		(4,447	)		(4,301	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(939	)		1,294
Income taxes payable and other current liabilities		4,965			739

Net cash provided by operating activities		16,688			6,719

Cash flows from investing activities:
Payments for acquired businesses		(375	)		(375	)
Purchase of property and equipment		(2,661	)		(3,635	)
Proceeds from sale of property and equipment		77			1

Net cash used in investing activities		(2,959	)		(4,009	)

Cash flows from financing activities:
Issuance of common stock		207			—
Gross borrowings on the revolving credit facility		38,100			46,100
Gross repayments on the revolving credit facility		(49,900	)		(48,500	)
Payments on long-term borrowing		(2,750	)		(2,125	)
Proceeds from issuance of bonds, net of restricted cash of $1,648 and $7,608 respectively		865			2,166
Excess tax benefits from share-based payments		29			—
Repurchase of common stock		—			(1,542	)

Net cash used in financing activities		(13,449	)		(3,901	)

Net increase (decrease) in cash		280			(1,191	)
Cash and cash equivalents at beginning of period		1,143			3,342

Cash and cash equivalents at end of period	$	1,423		$	2,151

See accompanying Notes to Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information —The consolidated financial statements as of March 31, 2008 and 2007 and for the three-month periods ended March 31, 2008 and 2007 are unaudited and have been prepared on the same basis as our audited consolidated financial statements. MTC Technologies, Inc. (we, us, MTC or the Company) has continued to follow the accounting principles set forth in the consolidated financial statements included in its 2007 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, 2008 and 2007 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: modernization and sustainment; professional services; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR); and logistics solutions. We offer these services separately or in combination across our customer base. Accordingly, revenue and profit are internally reviewed by our management primarily on a contract basis, making it impracticable to determine revenue and profit by services offered.

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 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, 2008 and 2007 are as follows:


	Three months ended March 31,
	2008	2007
Basic weighted average common shares outstanding	15,169,115	15,206,583
Effect of potential exercise of stock options	64,413	28,005

Diluted weighted average common shares outstanding	15,233,528	15,234,588

Comprehensive Income — The components of comprehensive income are as follows (in thousands):


	Three months ended March 31,
	2008			2007
Net income	$	14,217		$	3,280
Change in fair value of interest rate swap, net of tax (benefit) expense of ($113) and $28, respectively		(163	)		43

Comprehensive income	$	14,054		$	3,323

Recent Accounting Pronouncements — In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.157, Fair Value Measurements (SFAS No.157). SFAS No.157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement. SFAS No.157 was effective for us on January 1, 2008 on a prospective basis. We have determined that there is no impact on our consolidated financial statements due to the adoption of SFAS No.157.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

On February 12, 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, which delays the effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. With this deferral, we have not applied the provisions of SFAS No. 157 to goodwill and intangible assets. We are still assessing the impact the adoption of SFAS No. 157 for nonfinancial assets and liabilities will have on our consolidated financial statements. See Note D for further details.

Stock-Based Compensation — We did not grant any stock options or restricted stock units during the three months ended March 31, 2008. No stock options or restricted stock units expired, were forfeited or exercised during the three months ended March 31, 2008.

B. 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, Chief Executive Officer, and Chairman of the Board of Directors of MTC. The following is a summary of transactions with related parties (in thousands):


	Three months ended March 31,
	2008		2007
Included in general and administrative expenses:
Aircraft usage charges paid to Soin International, LLC	$	3	$	—
Rent and maintenance costs paid to related parties		17		16
Other administrative costs		3		—

	$	23	$	16

Sub-contracting services paid to related parties:
Corbus, LLC	$	—	$	45

Revenues from related parties:
Corbus, LLC	$	—	$	411

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, 2008 and December 31, 2007, there were no amounts due from related parties. At March 31, 2008 and December 31, 2007, amounts payable to related parties were $0 and $16,000, respectively.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

C. LONG-TERM DEBT

In April 2005, we entered into a five-year Credit and Security Agreement, dated as of April 21, 2005 (the Credit Agreement), with National City Bank, Branch Banking and Trust Company, KeyBank National Association, Fifth Third Bank, JPMorgan Chase Bank, N.A., Comerica Bank, and PNC Bank, N.A. We have subsequently amended the Credit Agreement on three occasions to permit certain actions taken by us and to modify certain covenants in the Credit Agreement. The Credit Agreement, which is scheduled to expire on March 31, 2010, allows us to borrow up to $145.0 million in the form of an $85.0 million revolving loan and a $60.0 million term loan. The interest rates on borrowings under the term loan range from the prime rate to the prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) rate plus 125 to 225 basis points, and under the revolving loan are the prime rate, or the LIBOR rate plus 100 to 200 basis points, depending in most instances on the ratio of our consolidated funded debt to consolidated pro forma earnings before interest, taxes, depreciation, and amortization (EBITDA). The Credit Agreement provides for the issuance of letters of credit for amounts totaling up to $5.0 million. At March 31, 2008 and December 31, 2007, we had outstanding letters of credit of $4.0 million.

The borrowing availability at March 31, 2008 under the revolving loan portion of our Credit Agreement was $69.4 million. Borrowings under our Credit Agreement are secured by a general lien on our consolidated assets. In addition, we are subject to certain restrictions, and we are required to meet certain financial covenants. These covenants require that we, among other things, maintain certain financial ratios and minimum net worth levels. As of March 31, 2008, we were in compliance with these covenants. We have entered into a merger agreement, discussed in Note F, that requires the debt outstanding under the Credit Agreement to be repaid in full upon consummation of the merger.

The following table summarizes our total debt and current maturities at March 31, 2008:


	March 31, 2008 (in thousands)
Credit agreement, due March 31, 2010
Term loan	$	39,750
Revolving loan		15,600
Bonds payable, due March 1, 2018		9,800

Total debt		65,150
Less—current maturities		(15,380	)

	$	49,770

In October 2005, we entered into an interest rate swap agreement with National City Bank under which we exchange floating-rate interest payments for fixed-rate interest payments on our term loan. The amount of the interest rate swap is equal to 50% of the outstanding balance of our term loan, or $19.9 million as of March 31, 2008, and is reduced as the loan amortizes. The swap provides for payments over approximately a four-year period that began in December 2005 and is settled on a quarterly basis. The fixed interest rate provided by the agreement is 4.87% plus our spread at March 31, 2008 of 200 basis points, or 6.87%. At March 31, 2008, the interest rate on the portion of the term loan that was not subject to the interest rate swap agreement was 5.25%.

On March 30, 2007, MTC Technologies, Inc., an Ohio corporation and our wholly owned subsidiary, entered into a guaranty in connection with the issuance of $10 million in principal amount of Variable Rate Industrial Development Bonds (Bonds) by the Industrial Development Board of the City of Albertville, Alabama (IDB) on behalf of Aerospace Integration Corporation (AIC). The Bonds were issued to finance the construction by AIC of an aircraft completion center at the Albertville, Alabama airport. AIC received $2.2 million in proceeds from the Bonds at the closing and paid transaction costs of $0.2 million. AIC received an additional $6.2 million in proceeds as project reimbursements through March 31, 2008. The remaining $1.6 million of proceeds is held in

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

escrow and will be paid to AIC as additional capital expenditures are made on the aircraft completion center in Albertville, Alabama. The parcel of land on which such construction is occurring has been leased to AIC by the City of Albertville.

Concurrently with the issuance of the Bonds, AIC entered into a lease agreement with the Industrial Development Board of the City of Albertville, Alabama (Lease Agreement) whereby AIC will complete the construction of and furnish the equipment for the aircraft completion center located at the airport. The Lease Agreement provides that AIC will make lease payments sufficient to pay the principal of and interest on the Bonds. The Bonds are secured by a direct pay letter of credit issued by National City Bank (Bank), which expires on March 16, 2010 subject to extensions as agreed to by AIC and the Bank. In consideration for the issuance of the Letter of Credit, AIC has entered into a Reimbursement Agreement (Reimbursement Agreement) obligating AIC to pay the Bank for all drawings made on the Letter of Credit. In addition, the Company has entered into a guaranty with the Bank guaranteeing the payment and performance of AIC under the Reimbursement Agreement. AIC’s obligations under the Reimbursement Agreement are secured by a mortgage of its leasehold interest in the ground lease and a security interest in its personal property. The Company’s obligations under the guaranty are secured by a security interest in its personal property.

The Bonds are scheduled to mature on March 1, 2018. AIC paid only the interest on the Bonds for a period of one year, followed by 10 years of quarterly principal and interest payments which began on March 1, 2008. The interest rate on the Bonds is determined on a weekly basis by the remarketing agent for the Bonds, NatCity Investments, Inc. AIC has the right to convert the variable weekly interest rates to a fixed interest rate upon written notice to the trustee for the Bonds, the Bank and NatCity Investments, Inc. Principal payments, the initial one of which was made on March 1, 2008, will continue through the maturity date (or such earlier date on which the Bonds may be redeemed). The Bonds may be redeemed at the option of AIC and are subject to mandatory redemption in the event that the interest on the Bonds is determined to be subject to income taxation under the Internal Revenue Code.

The Reimbursement Agreement contains customary events of default, including failure to make required payments when due, failure to comply with certain covenants, breaches of certain representations and warranties, certain events of bankruptcy and insolvency, amendments to the Lease Agreement without the prior consent of the Bank, and an “event of default” under the Credit Agreement. Upon any such event of default, the maturity of the Bonds can be accelerated, causing payment by the Bank under the Letter of Credit and an immediate reimbursement obligation of AIC for the amount of accelerated Bonds pursuant to the Reimbursement Agreement.

Effective March 30, 2007, AIC entered into an interest rate swap agreement with the Bank under which it exchanged floating-rate interest payments for fixed-rate interest payments. The amount of the interest rate swap is equal to the full amount of the Bonds and ends March 1, 2017. The swap provides for payments over 10 years and is settled on a quarterly basis commencing June 1, 2007. The fixed interest rate provided by the agreement is 3.91%.

We account for our interest rate swap agreements under the provisions of SFAS No. 133, and have determined that the swap agreements qualify as effective hedges. Accordingly, the fair value of the swap agreements is recorded in other long-term or short-term liabilities, based on their maturity dates, on our consolidated balance sheet, and the effective portion of the change in fair value, net of income tax effect, is reported in other comprehensive income or loss on the consolidated balance sheet.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

D. FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, “ Fair Value Measurements ” (“SFAS No.157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No.157 was effective for us on January 1, 2008 for all financial assets and liabilities and for non-financial assets and liabilities recognized or disclosed at fair value in our consolidated financial statements on a recurring basis (at least annually). For all other non-financial assets and liabilities, SFAS No. 157 is effective for us on January 1, 2009. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements.

The following table summarizes the bases used to measure certain financial assets and liabilities at fair value on a recurring basis as of March 31, 2008 (in thousands):


	March 31, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Deferred compensation plan assets (1)	$	312	$	312	$	—	$	—

Total assets at fair value	$	312	$	312	$	—	$	—

Deferred compensation plan liabilities (1)	$	413	$	413	$	—	$	—
Derivative liabilities (2)	$	751	$	—	$	751	$	—

Total liabilities at fair value	$	1,164	$	413	$	751	$	—

(1)

We maintain a self-directed, non-qualified deferred compensation plan for certain executives. The deferred plan assets represent the cash surrender value of the company-owned life insurance policy, which equates to the fair value on March 31, 2008. The deferred compensation liability is the outstanding unfunded liability of the Company at March 31, 2008.

(2)

We derive the value of our interest rate derivatives from proprietary or other fair value models which may require us to calculate the present value of future cash flows and make reasonable estimates about relevant future market conditions. We include these derivative financial instruments in long term or short term liabilities, based on their maturity dates, in the consolidated balance sheets. For additional information about our derivative financial instruments, refer to Note A of the Notes to Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2007.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

E. RESTRUCTURING ACTIVITIES

In June 2007, management approved a restructuring plan to consolidate the Company’s organizational structure to improve customer focus and operational effectiveness. The measure, which consisted of workforce reductions, was intended to improve efficiency and reduce expenses. As a result of this action, the Company recorded a pre-tax restructuring charge in the second quarter of 2007 as a component of operating income in the income statement totaling approximately $1.5 million to cover costs associated with staff reductions, which were completed in 2007, with payments concluding in the in the first quarter of 2008.

A rollforward of the restructuring reserve in association with this initiative follows (in thousands):


Restructuring reserve as of December 31, 2007	$	335
Cash payments in 2008		335

Restructuring reserve as of March 31, 2008	$	—

F . AGREEMENT AND PLAN OF MERGER

On December 21, 2007, we entered into an Agreement and Plan of Merger (Merger Agreement) with BAE Systems, Inc., a Delaware corporation (BAE Systems), and Mira Acquisition Sub Inc., a wholly-owned subsidiary of BAE Systems and a Delaware corporation (Merger Sub). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into MTC (Merger), with MTC continuing as the surviving corporation and as a wholly-owned subsidiary of BAE Systems.

At the effective time and as a result of the Merger, each outstanding share of MTC common stock will be converted into the right to receive $24.00 in cash payable to the holder of such share. All outstanding options to purchase shares of MTC common stock, whether or not then vested, will be converted into the right to receive a cash payment equal to the product of (1) the excess, if any, of the $24.00 per share price over the exercise price per share of common stock subject to such option and (2) the number of shares of common stock subject to such option; provided that any option for which the per share exercise price exceeds the $24.00 per share price shall be canceled without any payment. All outstanding restricted stock units (RSUs) will be entitled to receive for each share of MTC common stock subject to such RSU, a cash payment of $24.00. All such cash payments for shares, options or RSUs shall be made without interest.

Consummation of the Merger is subject to the satisfaction or waiver of the closing conditions, including (1) expiration or termination of the applicable Hart-Scott-Rodino waiting period and certain other regulatory approvals, (2) the absence of any law or order prohibiting the consummation of the Merger, (3) subject to certain exceptions, the accuracy of representations and warranties of MTC, BAE Systems and Merger Sub, (4) the performance or compliance by MTC, BAE Systems and Merger Sub with their respective covenants and agreements to be performed or complied with prior to or on the closing date, (5) the absence of a Material Adverse Effect (as defined in the Merger Agreement) on MTC, (6) the absence of certain specified litigation and (7) the modification or transfer of certain government contracts to which MTC is a party.

At the special meeting of MTC stockholders held on February 28, 2008, approximately 99.9% of the MTC common stock that voted (or approximately 90% of the total number of shares of MTC stock outstanding), were voted in favor of the proposal to adopt the Merger Agreement.

The Merger Agreement may be terminated by MTC and BAE Systems in certain circumstances, including termination (1) by either party, if, the Merger has not been consummated on or before April 30, 2008, (which date was automatically extended to July 31, 2008), (2) by either party if a permanent injunction or other order that is final and non-appealable has been issued prohibiting

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

the consummation of the merger, and (3) by either party, if the other party breaches or fails to perform or comply with any of its representations, warranties, agreements or covenants contained in the Merger Agreement and the breach or failure would give rise to the failure of the relevant closing condition, subject to cure rights. Upon termination of the Merger Agreement under specified circumstances, MTC would be required to pay BAE Systems a termination fee of approximately $12.9 million.

On March 11, 2008, we entered into asset purchase agreements with two separate purchasers to divest of certain contracts within the Professional Services group, as provided for as one of the closing conditions in the Merger Agreement. We closed the transactions effective March 14 and 15, respectively, and concurrently received aggregate proceeds from the sale of the contracts of approximately $19 million. Income from sale of the two contracts is included in Other income on the consolidated statements of income for the three months ended March 31, 2008. The gain on sale of the contracts is included in net cash provided by operating activities in the consolidated statement of cash flows for the three months ended March 31, 2008.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL OVERVIEW

The following discussion summarizes the significant factors affecting the consolidated operating results of MTC Technologies, Inc. and its subsidiaries (MTC or the Company) for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 and the financial condition of MTC at March 31, 2008 compared to December 31, 2007. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this Quarterly Report.

We provide sophisticated modernization and sustainment; professional services; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR); and logistics solutions, focusing primarily on U.S. federal government agencies such as the Department of Defense, various intelligence agencies and other companies that serve these same markets. Our services encompass the full system life cycle from requirements definition, design, development and integration, to upgrade, sustainment and support for mission critical information and weapons systems. For the three-month period ended March 31, 2008, approximately 99% of our revenue was derived ultimately from our customers in the Department of Defense and the intelligence community, including the U.S. Air Force, U.S. Army and joint military commands, compared to approximately 98% for the same period in 2007.

In July 2001, we were one of six awardees of the Flexible Acquisition and Sustainment Tool (FAST) contract with a ceiling of $7.4 billion and with a period of performance, including option years, which extends to 2008. Our revenue under the FAST contract was approximately 19% and 18% of total revenue for the three months ended March 31, 2008 and 2007, respectively. For the three months ended March 31, 2008, FAST revenue was comprised of 41 separate task orders, the largest of which amounted to approximately 6% of total revenue for that period. In prior years, we performed some of the work we are now performing on the FAST contract on other contract vehicles. While the FAST contract represents a significant percentage of our total revenue, we believe that the broad array of engineering, technical and management services we provide to the federal government through various contract vehicles allows for diversified business growth. No other task order, including individual contracts under our General Services Administration (GSA) vehicles, accounted for more than 7% of revenue for the three months ended March 31, 2008.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

As of March 31, 2008, we have been awarded multiple individual task orders under the FAST contract with a funded backlog of approximately $72 million. The FAST contract ends in September 2008; however, we are actively pursuing a position on the recompete of the FAST contract. Although we believe the FAST contract presents an opportunity for significant additional growth and expansion of our services, we expect that many of the task orders we may be awarded under the FAST contract will be for lead system integrator and program management services, which historically have been less profitable than our other activities because these activities typically involve a significantly greater use of subcontractors. Margins on subcontractor-based revenue are typically lower than the margins on our direct work.

Our federal government contracts are subject to government audits of our direct and indirect costs. The incurred cost audits have been completed through December 31, 2005 and the rates have been agreed to. We do not anticipate any material adjustment to our consolidated financial statements in subsequent periods for audits not yet completed.

For the three months ended March 31, 2008 and 2007, approximately 62% and 64%, respectively, of our revenue came from work provided to our customers as a prime contractor and the balance came from work provided as a subcontractor. Approximately 78% and 77% of our revenue for the three months ended March 31, 2008 and 2007, respectively, consisted of the work of our employees, and the balance was provided by the work of subcontractors. Our work as a prime contractor on the FAST contract has resulted, and is expected to continue to result, in a significant use of subcontractors. The increased use of subcontractors on the FAST contract has been partially offset by the business model of our recent acquisitions, which typically have not used subcontractors to a great extent, and also allowed us to internalize work previously performed by subcontractors.

Our federal government contracts are subject to funding availability and current market conditions, such as the ongoing war on terror and other factors. These conditions are causing delays in the bidding/award process, are affecting funding availability and the availability of assets to be repaired or upgraded.

We typically provide our services under contracts with a base term, often of three years, and option terms, typically two to four additional one-year terms or more, which the customer can exercise on an annual basis. We also have contracts with fixed terms, some extending as long as five or six years. Although we occasionally obtain government contracts for which the contracting agency obligates funding for the full term of the contract, most of our government contracts receive incremental funding, which subjects us to the risks associated with the government’s annual appropriations process.

On December 21, 2007, we entered into an Agreement and Plan of Merger (Merger Agreement) with BAE Systems, Inc., a Delaware corporation (BAE Systems), and Mira Acquisition Sub Inc., a wholly-owned subsidiary of BAE Systems and a Delaware corporation (Merger Sub). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into MTC, with MTC continuing as the surviving corporation and as a wholly-owned subsidiary of BAE Systems.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Contract Types. When contracting with our government customers, we enter into one of three basic types of contracts: time-and-materials, fixed-price and cost-plus:

•

Time-and-materials contracts . Under a time-and-materials contract, we receive a fixed hourly rate for each direct labor hour worked, plus reimbursement for our allowable direct costs. To the extent that our actual labor costs vary significantly from the negotiated rates under a time-and-materials contact, we can either make more or less money than we originally anticipated.

•

Fixed-price contracts . Under fixed-price contracts, we agree to perform specified work for a firm fixed price. If our actual costs exceed our estimate of the costs to perform the contract, we may generate less profit or incur a loss. A portion of our fixed-price contract work is under a fixed-price level-of-effort contract, which represents a similar level of risk to our time-and-materials contracts, under which we agree to perform certain units of work for a fixed price per unit. We generally attempt to avoid undertaking high-risk work, such as software development or research and development efforts, under fixed-price contracts.

•

Cost-plus contracts . Under cost-plus contracts, we are reimbursed for allowable costs and receive a supplemental fee, which represents our profit. Cost-plus fixed fee contracts specify the contract fee in dollars or as a percentage of anticipated costs. Cost-plus incentive fee and cost-plus award fee contracts provide for increases or decreases in the contract fee, within specified limits, based upon actual results as compared to contractual targets for factors such as cost, quality, schedule and performance.

The following table provides information about the revenue and percentage of revenue attributable to each of these types of contracts for the periods indicated:


	Three months ended March 31,
	2008		2007
Time-and-materials	42	%	50	%
Fixed-price	47	%	35	%
Cost-plus	11	%	15	%

Total	100	%	100	%

Funded Backlog. We define funded backlog as the portion of total backlog (our estimate of the total potential value of all orders for services under existing signed contracts and task orders, assuming, where appropriate, the exercise of all options and add-ons relating to those contracts and task orders, subject to available ceiling remaining on those contracts and task orders) for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing authority, less the amount of revenue we have previously recognized. Funded backlog excludes options and add-ons to existing contracts for which we have not yet received funding. Our funded backlog does not include the full potential value of our contracts, because funds for a particular program or contract are regularly funded on a yearly or even shorter basis, even though the contract may call for performance over a number of years.

The primary source of our backlog is contracts to perform work for the federal government. Our estimated funded backlog at March 31, 2008 was approximately $247 million as compared to approximately $261 million at March 31, 2007. The approximate

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

$14 million decrease in funded backlog resulted primarily due to the sale of certain contracts within the Professional Services group in the first quarter of 2008, which in the same period in the prior year had a funded backlog of over $9.8 million.

Our funded backlog at March 31, 2008 was approximately 58% of our trailing twelve-month revenue, which is comparable to the typical industry averages for funded backlog of 40% to 60% of trailing twelve-month revenue.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition. Our critical accounting policies primarily concern revenue recognition and related cost estimation. We recognize revenue under our government contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collection of the contract price is considered probable and can be reasonably estimated. Revenue is earned under time-and-materials, fixed-price and cost-plus contracts.

We recognize revenue on time-and-materials contracts to the extent of billable rates times hours delivered, plus expenses incurred. For fixed-price contracts within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue is recognized on the percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services, as appropriate. For fixed-price-completion contracts that are not within the scope of SOP 81-1, revenue is generally recognized as earned according to contract terms as the service is provided. We will provide our customer with a number of different services that are generally documented through separate negotiated task orders that detail the services to be provided and our compensation for these services. Services rendered under each task order represent an independent earnings process and are not dependent on any other service or product sold. We recognize revenue on cost-plus contracts to the extent of allowable costs incurred plus a proportionate amount of the fee earned, which may be fixed or performance-based. We consider fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract, which generally corresponds to the timing of contractual billings. We record provisions for estimated losses on uncompleted contracts in the period in which we identify those losses. We consider performance-based fees, including award fees, under any contract type to be earned only when we can demonstrate satisfaction of a specific performance goal or we receive contractual notification from a customer that the fee has been earned.

Contract revenue recognition inherently involves estimation. From time to time, facts develop that require us to revise the total estimated costs or revenues expected. In most cases, these changes relate to changes in the contractual scope of the work and do not significantly impact the expected profit rate on a contract. We record the cumulative effects of any revisions to the estimated total costs and revenues in the period in which the facts become known.

Our work-in-process inventory relates to costs accumulated under fixed-price-type contracts primarily accounted for under certain output measures, such as units delivered, of the percentage-of-completion method. Inventories are stated at the lower of cost or market, computed on an average cost basis.

Goodwill and Intangible Assets. Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired companies. Purchase price allocated to intangible assets is amortized using the straight-line method over the estimated terms of the contracts, which range from three to eight years. We perform impairment reviews on an annual basis. We have elected to conduct our annual impairment reviews as of the fourth quarter of each year. We base our assessment of possible impairment on the discounted present value of the operating cash flows of our consolidated operating unit. We determined that no impairment charge was required in 2007.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Income Taxes. We calculate our income tax provision using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date. We have recorded valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of estimated future taxable income and establishment of tax strategies. Future taxable income, reversals of temporary differences, available carryback periods, the results of tax strategies and changes in tax laws could impact these estimates.

FORWARD-LOOKING STATEMENTS

Portions of this Quarterly Report that are not statements of historical or current fact are forward-looking statements. The forward-looking statements in this Quarterly Report involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this document should be read as applying to all related forward-looking statements wherever they appear. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause our actual results to differ materially from those anticipated include, but are not limited to, the following: strains on resources and decreases in operating margins; federal government audits and cost adjustments; differences between authorized amounts and amounts received by us under government contracts; government customers’ failure to exercise options under contracts; changes in federal government (or other applicable) procurement laws, regulations, policies and budgets; delays in the bidding/award process; our ability to attract and retain qualified personnel; our ability to retain contracts during re-bidding processes; pricing pressures; undertaking acquisitions that might increase our costs or liabilities or be disruptive; integration of acquisitions; and changes in general economic and business conditions.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

The following table sets forth, for each period indicated, the revenue (in millions) and percentage of items in the consolidated statements of income in relation to revenue:


	Three months ended March 31,
	2008				2007
Revenue	$	103.0	100.0	%	$	100.1	100.0	%
Cost of revenue		86.6	84.1			84.7	84.7

Gross profit		16.4	15.9			15.4	15.3
General and administrative expenses		8.9	8.6			7.0	6.9
Intangible asset amortization		1.5	1.5			1.5	1.5

Operating income		6.0	5.8			6.9	6.9
Net interest expense		1.1	1.1			1.5	1.5
Other income, net		18.8	18.3			—	—

Net income before income taxes		23.7	23.0			5.4	5.4
Income tax expense		9.5	9.2			2.1	2.1

Net income	$	14.2	13.8	%	$	3.3	3.3	%

THREE MONTHS ENDED MARCH 31, 2008

COMPARED TO THREE MONTHS ENDED MARCH 31, 2007

Revenue. Revenue for the three months ended March 31, 2008 increased 3.0%, or $3.0 million, as compared to the same period in 2007 due primarily to deliveries on the Santa Rosa Cable project and the PM Soldier project which contributed additional revenues of $6.6 million and $2.4 million respectively in the quarter. These increases were partially offset by a net decrease in revenue due to our inability to compete in the current year for certain small business set-aside contracts.

Gross profit. Gross profit for the three months ended March 31, 2008 increased 7.0%, or $1.1 million, as compared to the same period in 2007. This increase primarily relates to increased revenue. Gross profit as a percentage of revenue increased to 15.9% in the first quarter of 2008, primarily due to variations in our business mix.

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2008 increased 28.2%, or $2.0 million, as compared to the same period in 2007. The increase was due primarily to $1.4 million in costs related to the merger. General and administrative expenses as a percentage of revenue increased from 6.9% of revenue for the three months ended March 31, 2007 to 8.6% for the three months ended March 31, 2008.

Intangible asset amortization. Intangible asset amortization for the three months ended March 31, 2008 remained constant compared to the same period in 2007 as we did not have any additional acquisitions in 2007 or 2008.

Operating income. Operating income for the three months ended March 31, 2008 decreased 12.4%, or $0.9 million, as compared to the three months ended March 31, 2007. This decrease in operating income primarily reflects the increased general and administrative expenses due to the merger costs, partially offset by the increased gross profit due to higher revenues. Operating income as a percentage of revenue decreased from 6.9% of revenue for the three months ended March 31, 2007 to 5.8% for the three months ended March 31, 2008, primarily for the reasons addressed above.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Net interest expense. The $0.4 million decrease in net interest expense primarily related to lower borrowings during the three months ended March 31, 2008 compared to the same period in 2007, as well as lower interest rates in 2008 due to rate cuts by the federal government. Lower borrowings resulted from higher cash collections in the three months ended March 31, 2008 along with cash received from the sale of contracts in March 2008.

Other income. Other income of $18.8 million primarily relates to the gain on sale of two contracts under our Professional Services group. On March 11, 2008, we entered into asset purchase agreements with two separate purchasers to divest of certain contracts, as required by the Merger Agreement. Aggregate proceeds from the sale of the contracts of approximately $19 million were received in March 2008.

Income tax expense. Income tax expense for the three months ended March 31, 2008 increased approximately $7.4 million, as compared to the same period in 2007 mainly due to higher income generated from the sale of contracts as stated above. Our effective income tax rates for the quarters ended March 31, 2008 and 2007 were 40.0% and 39.2%, respectively.

Net income. Net income for the three months ended March 31, 2008 increased by approximately $10.9 million, as compared to the three months ended March 31, 2007. This increase in net income was primarily the result of the increase in other income and lower net interest expense, offset by lower operating income and higher income tax expense as outlined above.

QUARTERLY FLUCTUATIONS

Our results of operations, particularly our revenue, gross profit and cash flow, may vary significantly from quarter to quarter depending on a number of factors, including the progress of contract performance, revenue earned on contracts, the number of billable days in a quarter, the timing of customer orders or deliveries, changes in the scope of contracts and billing of other direct and subcontract costs, timing of funding of task orders, the commencement and completion of contracts we have been awarded, general economic conditions and timing of government awards. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity, as well as in the number of contracts or task orders commenced or completed during any quarter, may cause significant variations in operating results from quarter to quarter.

The federal government’s fiscal year ends September 30. If a federal budget for the next fiscal year has not been approved by that date in each year, our customers may have to suspend engagements that we are working on until a budget has been approved. Any suspensions may cause us to realize lower revenue in the fourth quarter of the year, and possibly ensuing quarters of the following year. In addition, a change in Presidential administration, Congressional majority or in other senior federal government officials may negatively affect the rate at which the federal government purchases technology and engineering services. The federal government’s fiscal year end can also trigger increased purchase requests from customers for equipment and materials. Any increased purchase requests we receive as a result of the federal government’s fiscal year end would serve to increase our fourth quarter revenues, but will generally decrease profit margins for that quarter, as these activities typically are not as profitable as our normal service offerings. As a result of the above factors, period-to-period comparisons of our revenue and operating results may not be meaningful. Potential investors should not rely on these comparisons as indicators of future performance as no assurances can be given that quarterly results will not fluctuate, causing a material adverse effect on our operating results and financial condition.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

Historically, our positive cash flow from operations, our proceeds from stock offerings, and borrowings under our credit facilities have provided us adequate liquidity and working capital to fund our operational needs and support our acquisition activities.

Our cash and cash equivalents balance was $1.4 million and $1.1 million on March 31, 2008 and December 31, 2007, respectively. Our working capital was approximately $50.3 million at March 31, 2008 and approximately $53.7 million at December 31, 2007. Our working capital decreased $3.4 million in the first three months of 2008 primarily due to:

•

a net $12.0 million decrease in accounts receivable, inventories and cost and estimated earnings in excess of amounts billed on uncompleted contract, driven by higher contract deliveries and higher collections,

•

a $4.8 million increase in income taxes payable and other current liabilities mainly due to higher income taxes payable as a result of increased pre-tax income,

•

a $3.8 million decrease in prepaid expense and other current assets, mainly due to the income tax receivable at December 31, 2007 becoming an income tax payable at March 31, 2008, and

•

a $3.6 million increase in current maturities of long-term debt due to higher scheduled loan repayments in 2009,

•

partially offsetting the above items is a $20.7 million decrease in net accounts payable and compensation and related items, due to payment of trade payables, merger costs and bonuses accrued at year end.

Our operating activities provided net cash of approximately $16.7 million for the three months ended March 31, 2008. The cash provided by operations primarily represented net income of $14.2 million adjusted for depreciation and amortization of $2.7 million and changes in working capital as discussed above. For the three months ended March 31, 2007, our operating activities provided net cash of approximately $6.7 million, primarily represented by net income of $3.3 million adjusted for depreciation and amortization of $2.6 million and changes in working capital. The change in working capital for the three months ended March 31, 2007 was mainly due to a $7.6 million increase in restricted cash held in escrow from the issuance of $10 million in industrial development bonds, a $6.7 million decrease in accounts payable, primarily in trade payables, partially offset by an $8.6 million decrease in net accounts receivable, primarily in trade receivables.

Our investing activities used net cash of approximately $3.0 million for the three months ended March 31, 2008 as a result of approximately $2.7 million of capital expenditures, $1.1 million of which related to construction of the aircraft completion center described below. We currently anticipate 2008 aggregate capital expenditures will range between $10 and $11 million for additional facilities, software tools and computer equipment to support our growth, including approximately $2 million of capital expenditures expected for the completion of the construction of the hangar in Albertville, Alabama and the related site equipment. Net cash used by investing activities for the three months ended March 31, 2007 of $4.0 million consisted of $3.6 million in capital expenditures, $2.2 million of which related to the construction of the aircraft completion center described below.

Our financing activities used net cash of approximately $13.4 million for the three months ended March 31, 2008, which primarily consisted of $14.6 million in net repayments of debt under our Credit Agreement from the proceeds from the sale of contracts, offset by $0.9 million of proceeds from the issuance of bonds to finance construction of the aircraft completion center. Our financing activities used net cash of approximately $3.9 million for the three months ended March 31, 2007, which consisted of $4.5 million in net repayments of debt under our Credit Agreement and repurchase of outstanding MTC common stock during the period for $1.5 million, offset by $2.2 million of proceeds from the issuance of bonds to finance construction of the aircraft completion center.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

In April 2005, we entered into a five-year Credit and Security Agreement, dated as of April 21, 2005 (the Credit Agreement), with National City Bank, Branch Banking and Trust Company, KeyBank National Association, Fifth Third Bank, JPMorgan Chase Bank, N.A., Comerica Bank, and PNC Bank, N.A. We have subsequently amended the Credit Agreement on three occasions to permit certain actions taken by us and to modify certain covenants in the Credit Agreement. The Credit Agreement, which is scheduled to expire on March 31, 2010, allows us to borrow up to $145.0 million in the form of an $85.0 million revolving loan and a $60.0 million term loan. The interest rates on borrowings under the term loan range from the prime rate to the prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) rate plus 125 to 225 basis points, and under the revolving loan are the prime rate, or the LIBOR rate plus 100 to 200 basis points, depending in most instances on the ratio of our consolidated funded debt to consolidated pro forma earnings before interest, taxes, depreciation, and amortization (EBITDA). The Credit Agreement provides for the issuance of letters of credit totaling upto $5.0 million. At March 31, 2008, we had outstanding letters of credit of $4.0 million.

As of March 31, 2008, we had $55.4 million outstanding under the Credit Agreement, compared to $69.9 million outstanding as of December 31, 2007.

Borrowings under the Credit Agreement are secured by a general lien on our consolidated assets. We are also subject to certain restrictions, and are required to meet certain financial covenants. These covenants require that we, among other things, maintain certain financial ratios and minimum net worth levels. As of March 31, 2008, we were in compliance with these covenants.

On March 30, 2007, MTC Technologies, Inc., an Ohio corporation and our wholly owned subsidiary, entered into a guaranty in connection with the issuance of $10 million in principal amount of Variable Rate Industrial Development Bonds (Bonds) by the Industrial Development Board of the City of Albertville, Alabama (IDB) on behalf of AIC. The Bonds are being issued to finance the construction by AIC of an aircraft completion center at the Albertville, Alabama airport. AIC received $2.2 million in proceeds from the Bonds at the closing, and paid transaction costs of $0.2 million. AIC has received an additional $6.2 million in project reimbursements as of March 31, 2008, and the remaining $1.6 million is being held in escrow and will be paid to AIC as additional capital expenditures are made on the aircraft completion center in Albertville, Alabama. The parcel of land on which such construction is occurring has been leased to AIC by the City of Albertville.

Concurrently with the issuance of the Bonds, AIC entered into a lease agreement with the IDB (Lease Agreement) whereby AIC will complete the construction of and furnish the equipment for the aircraft completion center located at the airport. The Lease Agreement provides that AIC will make lease payments sufficient to pay the principal of and interest on the Bonds. The Bonds are secured by a direct pay letter of credit (Letter of Credit) issued by National City Bank (Bank), which expires on March 16, 2010 subject to extensions as agreed to by AIC and the Bank. In consideration for the issuance of the Letter of Credit, AIC has entered into a Reimbursement Agreement (Reimbursement Agreement) obligating AIC to pay the Bank for all drawings made on the Letter of Credit. In addition, the Company has entered into a guaranty with the Bank guaranteeing the payment and performance of AIC under the Reimbursement Agreement. AIC’s obligations under the Reimbursement Agreement are secured by a mortgage of its leasehold interest in the ground lease and a security interest in its personal property. The Company’s obligations under the guaranty are secured by a security interest in its personal property.

The Bonds are scheduled to mature on March 1, 2018. AIC will pay only the interest on the Bonds for a period of one-year, followed by 10 years of quarterly principal and interest payments which began on March 1, 2008. The interest rate on the Bonds is determined on a weekly basis by the remarketing agent for the Bonds, NatCity Investments, Inc. AIC has the right to convert the

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

variable weekly interest rates to a fixed interest rate upon written notice to the trustee for the Bonds, the Bank and NatCity Investments, Inc. Principal payments have been made on the Bonds beginning March 2008 and will continue through the maturity date (or such earlier date on which the Bonds may be redeemed). The Bonds may be redeemed at the option of AIC and are subject to mandatory redemption in the event that the interest on the Bonds is determined to be subject to income taxation under the Internal Revenue Code.

From time to time, we may pursue strategic acquisitions of businesses. Historically, we have financed our acquisitions with the proceeds from our public stock offerings, cash on hand, borrowings under credit facilities, and shares of our common stock. We expect to finance any future acquisitions, if any, with proceeds from cash generated by operations, additional sales or issuances of shares of our common stock, borrowings under our Credit Agreement or a combination of the foregoing.

Management believes that the cash generated by operations and amounts available under our Credit Agreement will be sufficient to fund our working capital requirements, debt service obligations, purchase price commitments for completed acquisitions and capital expenditures for the next twelve months and through March 2010, when our Credit Agreement matures.

Our ability to generate cash from operations depends to a significant extent on winning new and re-competed contracts and/or task orders from our customers in competitive bidding processes. If a significant portion of our government contracts were terminated or if our win rate on new or re-competed contracts and task orders were to decline significantly, our operating cash flow would decrease, which would adversely affect our liquidity and capital resources.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk relates to changes in interest rates for borrowings under our Credit Agreement and bonds payable. As of March 31, 2008, we had $55.4 million of borrowings outstanding under the Credit Agreement and $9.8 million in bonds payable. We have offset a portion of our interest rate risk by entering into interest rate swap agreements.

In October 2005, we entered into an interest rate swap agreement with the Bank under which we exchange floating-rate interest payments for fixed-rate interest payments. The amount of the interest rate swap is equal to 50% of the outstanding balance of our term loan, or $19.9 million as of March 31, 2008, and is reduced as the loan amortizes. The swap provides for payments over approximately a four-year period that began in December 2005 and is settled on a quarterly basis. The fixed interest rate provided by the agreement is 4.87% plus our spread at March 31, 2008 of 200 basis points, or 6.87%. At March 31, 2008, the interest rate on the portion of the term loan that was not subject to the interest rate swap agreement was 5.25%.

The weighted average interest rate for the portion of the revolving loan that is not subject to the interest rate swap, as of March 31, 2008, was 5.25 %.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

On March 30, 2007, MTC Technologies, Inc., an Ohio corporation and our wholly owned subsidiary, entered into a guaranty in connection with the issuance of $10 million in principal amount of Bonds by the IDB on behalf of AIC. The Bonds are being issued to finance the construction by AIC of an aircraft completion center at the Albertville, Alabama airport. AIC entered into a 10-year interest rate hedge on the full amount of the bonds at a fixed rate of 3.91% rate. The all-in interest rate is approximately 5.4%, including amortization of issuance costs. The bonds are interest only for the first year with quarterly principal payments that began in March 2008 and will be ending in March 2018. The first quarter consolidated balance sheet reflects the $9.8 million of bonds payable principal outstanding as well as $1.6 million of restricted cash that will be released as AIC makes additional capital expenditures on the aircraft completion center.

Although the Company’s financial results are affected by changes in short-term interest rates on its borrowings, the effects of interest rate changes are limited by the use of interest rate swaps. A hypothetical 100 basis point increase in interest rates, for example, would have resulted in an increase in interest expense of approximately $78,000 on borrowings not subject to the interest rate swaps for the three months ended March 31, 2008.

ITEM 4.

Controls and Procedures

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) evaluated, together with other members of senior management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2008. Based on this review, our CEO and CFO have concluded that, as of March 31, 2008, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and were effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in our internal control over financial reporting during the three months ended March 31, 2008 that materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

Legal Proceedings

From time to time, we are involved in legal proceedings arising in the ordinary course of business. We do not believe that any pending litigation will have a material adverse effect on our financial condition, results of operations, or cash flows.

On January 25, 2008, Superior Partners, an alleged MTC stockholder, filed a purported class action lawsuit on behalf of all MTC stockholders in the Court of Common Pleas for Montgomery County, Ohio (General Division) against MTC, all of the members of the Board of Directors of MTC, and BAE Systems (Shareholder Action). The Shareholder Action generally alleges that, in connection with approving the merger, the MTC directors breached their fiduciary duties of care, good faith, loyalty and disclosure owed to the MTC stockholders, and that BAE Systems aided and abetted the MTC directors in the breach of their fiduciary duties. In addition to nominal, compensatory and/or rescissory damages, the plaintiff seeks a certification of the lawsuit as a class action, a declaration that the plaintiff is a proper class representative, a declaration that the defendants breached their fiduciary duties to the plaintiff and the other stockholders of MTC and/or aided and abetted such breaches, an award of the costs and disbursements of the lawsuit, including reasonable attorneys’ and experts’ fees and other costs, and such other and further relief as the court may deem just and proper.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

On February 22, 2008, counsel for the plaintiff in the Shareholder Action and counsel for the defendants entered into a memorandum of understanding (MOU) with regard to the settlement of the Shareholder Action. The settlement contemplated by the MOU is subject to the execution by the parties of a definitive settlement agreement, and the approval of that agreement by the Court after notice to stockholders. The settlement contemplated by the MOU is conditioned upon the consummation of the merger.

The defendants deny all liability with respect to the facts and claims alleged in the shareholder complaint, and specifically deny that any further supplemental disclosure was required under any applicable rule, statute, regulation or law. However, the defendants considered it desirable that the action be settled primarily to avoid the substantial burden, expense, inconvenience and distraction of continued litigation and to fully and finally resolve all of the claims that were or could have been brought in the action being settled.

ITEM 4.

Submission of Matters to a Vote of Security Holders

A special meeting of MTC stockholders was held on February 28, 2008. The following items were voted upon at the special meeting.

Item 1: To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of December 21, 2007, by and among BAE Systems, Inc., Mira Acquisition Sub Inc., a wholly owned subsidiary of BAE Systems, Inc., and MTC Technologies, Inc. As a result of the merger, MTC will become a wholly owned subsidiary of BAE Systems, Inc. and each outstanding share of MTC common stock, subject to certain exceptions, will be converted into the right to receive $24.00 in cash, without interest.

Item 2: To approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to adopt the merger agreement.

A summary of the voting for each of the items noted above at the special meeting is as follows:


Matter	For	Against or Withheld	Abstain	Broker Non-Votes
Item 1	13,583,423	8,183	130	1,578,170
Item 2	13,428,271	162,610	855	1,578,170

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 6.

Exhibits


Exhibit No.		Description
10.1		MTC Technologies, Inc. 2007 Amended and Restated Deferred Compensation Plan, an executive nonqualified excess plan, effective January 1, 2008 (incorporated by reference to Exhibit 4.1 to MTC Technologies, Inc.’s Registration Statement on Form S-8 (Registration No. 333-141371) filed on January 17, 2008).

10.2		The Executive Nonqualified “Excess” Plan Adoption Agreement, dated as of November 15, 2007, by MTC Technologies, Inc. and adopted by MTC Technologies Services, Inc. and Manufacturing Technology, Inc. (incorporated by reference to Exhibit 4.2 to MTC Technologies, Inc.’s Registration Statement on Form S-8 (Registration No. 333-141371) filed on January 17, 2008).

10.3		Trust Agreement, dated as of November 15, 2007, by and between MTC Technologies, Inc. and Delaware Charter Guarantee & Trust Company, conducting business as Principal Trust Company (incorporated by reference to Exhibit 4.3 to MTC Technologies, Inc.’s Registration Statement on Form S-8 (Registration No. 333-141371) filed on January 17, 2008).

31.1		Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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S IGNATURES

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.


	MTC TECHNOLOGIES, INC.

Date: May 12, 2008
	By:	/s/ Michael I. Gearhardt
		(Signature)
		Michael I. Gearhardt
		Chief Financial Officer
		(Duly authorized officer and Principal Financial Officer)

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E XHIBIT I NDEX


Exhibit No.		Description
10.1		MTC Technologies, Inc. 2007 Amended and Restated Deferred Compensation Plan, an executive nonqualified excess plan, effective January 1, 2008 (incorporated by reference to Exhibit 4.1 to MTC Technologies, Inc.’s Registration Statement on Form S-8 (Registration No. 333-141371) filed on January 17, 2008).

10.2		The Executive Nonqualified “Excess” Plan Adoption Agreement, dated as of November 15, 2007, by MTC Technologies, Inc. and adopted by MTC Technologies Services, Inc. and Manufacturing Technology, Inc. (incorporated by reference to Exhibit 4.2 to MTC Technologies, Inc.’s Registration Statement on Form S-8 (Registration No. 333-141371) filed on January 17, 2008).

10.3		Trust Agreement, dated as of November 15, 2007, by and between MTC Technologies, Inc. and Delaware Charter Guarantee & Trust Company, conducting business as Principal Trust Company (incorporated by reference to Exhibit 4.3 to MTC Technologies, Inc.’s Registration Statement on Form S-8 (Registration No. 333-141371) filed on January 17, 2008).

31.1		Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.