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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
(mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarterly Period Ended July 31, 2002
or
[ ] 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) (IRS Employer
Identification number)
24007 Ventura Boulevard, Suite 200, Calabasas, California
---------------------------------------------------------
(Address of registrant's principal executive office)
(818) 591-0776 91302
------------------------------- ---------
(Registrant's telephone number) (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 [x] NO [ ]
The number of shares of common stock, no par value, outstanding as of September
10, 2002 was 8,656,540.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
July 31, 2002 (unaudited) and January 31, 2002 3
Unaudited Condensed Consolidated Statements of Income
For the Six Months Ended July 31, 2002 and 2001 4
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended July 31, 2002 and 2001 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended July 31, 2002 and 2001 6
Notes to the Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION & SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I - FINANCIAL
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
July 31, January 31,
2002 2002
ASSETS (unaudited)
------ ----------------------------
CURRENT ASSETS:
Cash $ 4,681,000 $ 3,783,000
Accounts receivable, less allowance for doubtful accounts
of $1,176,000 at July 31, 2002 and $1,099,000 at January 31, 2002 15,536,000 17,092,000
Income taxes receivable 370,000 183,000
Inventories 2,030,000 1,552,000
Deferred tax assets 1,020,000 1,158,000
Prepaid expenses 1,411,000 1,032,000
----------------------------
Total current assets 25,048,000 24,800,000
Property, plant and equipment, at cost 74,428,000 73,108,000
Less: accumulated depreciation (47,114,000) (44,819,000)
----------------------------
Net property, plant and equipment 27,314,000 28,289,000
Property held for sale - 544,000
Goodwill 870,000 870,000
Other assets 2,293,000 2,278,000
----------------------------
TOTAL ASSETS $ 55,525,000 $ 56,781,000
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,385,000 $ 3,276,000
Accrued expenses 2,702,000 2,829,000
Deferred income 879,000 497,000
Current installments of long-term debt 1,357,000 1,444,000
----------------------------
Total current liabilities 8,323,000 8,046,000
Long-term debt, excluding current installments 16,231,000 18,657,000
Deferred income taxes 3,988,000 3,682,000
Deferred compensation 822,000 783,000
Minority interest 142,000 136,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized, 20,000,000 shares; issued and
outstanding, 8,657,000 as of July 31, 2002 and 8,667,000 as of
January 31, 2002 12,498,000 12,517,000
Retained earnings 13,572,000 13,011,000
Accumulated other comprehensive income (51,000) (51,000)
----------------------------
Total shareholders' equity 26,019,000 25,477,000
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 55,525,000 $ 56,781,000
============================
See accompanying notes
3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for Six Months Ended July 31, 2002 and 2001
2002 2001
----------------------------
Net revenues $ 37,678,000 $ 38,493,000
Cost of sales 28,418,000 29,083,000
----------------------------
Gross profit 9,260,000 9,410,000
Selling, general and administrative expense 7,681,000 8,184,000
----------------------------
Operating income 1,579,000 1,226,000
Other income (expense):
Interest expense, net (629,000) (961,000)
Other 35,000 9,000
----------------------------
Total other expense (594,000) (952,000)
Income before income taxes and minority interest 985,000 274,000
Income taxes 419,000 109,000
----------------------------
Income before minority interest 566,000 165,000
Minority interest (5,000) -
----------------------------
Net income $ 561,000 $ 165,000
============================
Net income per common share:
Basic $ 0.06 $ 0.02
============================
Diluted $ 0.06 $ 0.02
============================
Weighted average common shares outstanding 8,663,000 8,478,000
Dilutive effect of stock options 12,000 25,000
----------------------------
Weighted average common shares outstanding,
assuming dilution 8,675,000 8,503,000
============================
See accompanying notes
4
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
for Three Months Ended July 31, 2002 and 2001
2002 2001
----------------------------
Net revenues $ 18,410,000 $ 19,117,000
Cost of sales 13,889,000 14,535,000
----------------------------
Gross profit 4,521,000 4,582,000
Selling, general and administrative expense 3,745,000 4,111,000
----------------------------
Operating income 776,000 471,000
Other income (expense):
Interest expense, net (308,000) (459,000)
Other 37,000 36,000
----------------------------
Total other expense (271,000) (423,000)
Income before income taxes and minority interest 505,000 48,000
Income taxes 214,000 17,000
----------------------------
Income before minority interest 291,000 31,000
Minority interest (10,000) -
----------------------------
Net income $ 281,000 $ 31,000
============================
Net income per common share:
Basic $ 0.03 $ 0.00
============================
Diluted $ 0.03 $ 0.00
============================
Weighted average common shares outstanding 8,659,000 8,453,000
Dilutive effect of stock options 41,000 11,000
----------------------------
Weighted average common shares outstanding,
assuming dilution 8,700,000 8,464,000
============================
See accompanying notes
5
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended July 31, 2002 and 2001
2002 2001
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 561,000 $ 165,000
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,295,000 2,345,000
Provisions for losses on receivables 77,000 (7,000)
Undistributed earnings of affiliate 6,000 -
Deferred income taxes 444,000 108,000
Changes in assets and liabilities:
Accounts receivable 1,479,000 1,403,000
Inventories (478,000) 70,000
Income taxes receivable (187,000) 393,000
Prepaid expenses (379,000) (524,000)
Other assets and goodwill 23,000 21,000
Accounts payable 109,000 (1,369,000)
Accrued expenses (127,000) (169,000)
Deferred income 382,000 1,004,000
Deferred compensation 39,000 (3,000)
--------------------------
Net cash provided by operating activities 4,244,000 3,437,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,320,000) (1,878,000)
Investment in life insurance (38,000) -
Sale of property 544,000 -
--------------------------
Net cash used for investing activities (814,000) (1,878,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 129,000 690,000
Repayments of current and long-term debt (2,642,000) (2,904,000)
Common stock repurchase (19,000) (142,000)
--------------------------
Net cash used by financing activities (2,532,000) (2,356,000)
--------------------------
Effect of exchange rate changes on cash and cash equivalents - (9,000)
--------------------------
Net increase (decrease) in cash 898,000 (806,000)
Beginning cash balance 3,783,000 3,344,000
--------------------------
ENDING CASH BALANCE $ 4,681,000 $ 2,538,000
==========================
See accompanying notes
6
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
In accordance with instructions to Form 10-Q, the accompanying
consolidated financial statements and footnotes of National Technical
Systems, Inc. (NTS or the Company) have been condensed and, therefore,
do not contain all disclosures required by generally accepted
accounting principles. These statements should not be construed as
representing pro rata results of the Company's fiscal year 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,
2002.
The statements presented as of and for the three and six months ended
July 31, 2002 and 2001 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 consolidated financial statements include the accounts of the
Company and its wholly owned and financially controlled subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior year amounts have been
reclassified to conform with 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.
3. Comprehensive Income
Accumulated other comprehensive income on the Company's Condensed
Consolidated Balance Sheets consists of cumulative equity adjustments
from foreign currency translation. During the six and three months
ending July 31, 2002 comprehensive income was $561,000 and $281,000
respectively, which was equal to net income as there were no foreign
currency translation adjustments for such periods. During the six and
three months ending July 31, 2001 comprehensive income was $156,000
and $31,000 respectively. The tax effect related to the foreign
currency translation adjustments is immaterial and has not been
recognized as part of comprehensive income or in accumulated other
comprehensive income.
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. Interest and Taxes
Cash paid for interest and taxes for the six months ended July 31,
2002 was $963,000 and $111,000, respectively. Cash paid for interest
and taxes for the six months ended July 31, 2001 was $947,000 and
$89,000 respectively.
7
6. Minority Interest
Minority interest in the Company's NQA, Inc. subsidiary is a result of
50% of the stock of NQA, Inc. being issued to National Quality
Assurance, Ltd. Effective with fiscal 2002, profits and losses are
allocated 51% to NTS, and 49% to National Quality Assurance, Ltd. In
fiscal 2001, profits and losses were allocated 61% to NTS, and 39% to
National Quality Assurance, Ltd.
7. Stock Repurchase
On February 6, 2001, the Company's Board of Directors authorized the
repurchase of shares in the Company's common stock in open market
purchases. During fiscal year 2002, the Company repurchased 88,700
shares leaving a balance of 36,300 available for repurchase subject to
the Company's covenants with its new banks, which permit the use in
fiscal 2003 of an additional maximum amount equal to 75% of the
Company's net profit for fiscal year 2002. As of July 31, 2002, the
Company had purchased an additional 10,700 shares at an average price
of $1.73.
8. Earnings per share
Basic and diluted net income per common share is presented in
conformity with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share"(FAS 128) for all periods presented. In accordance
with FAS 128, basic earnings per share has been computed using the
weighted average number of shares of common stock outstanding during
the year. Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities.
9. Goodwill: Adoption of Statements 141 and 142
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets apart from goodwill.
Under SFAS No. 142, goodwill and intangible assets that have
indefinite useful lives will no longer be amortized but will be tested
at least annually for impairment. The goodwill test for impairment
consists of a two-step process that begins with an estimation of the
fair value of the reporting unit. The first step of the test is a
screen for potential impairment and the second step measures the
amount of impairment, if any. SFAS No. 142 requires an entity to
complete the first step of the transitional goodwill impairment test
within six months of adopting the Statement. The Company adopted SFAS
No. 142 in the first quarter of fiscal 2003. In accordance with SFAS
No. 142, the Company identified two reporting units, the Engineering
and Evaluation unit and the Technical Staffing unit, which constitute
components of its business that include goodwill. The Company
completed the first step of the transitional goodwill impairment test
as of February 1, 2002 and has determined that the fair value of each
of the reporting units exceeded the reporting unit's carrying amount,
and no impairment was indicated.
8
The following table provides the Company's net income and net income
per share had the non-amortization provisions of SFAS No. 142 been
adopted for all periods presented:
Three Months Ended Six Months Ended
July 31, July 31,
------------------ -------------------
2002 2001 2002 2001
------------------ -------------------
Net income, as reported $281,000 $31,000 $561,000 $165,000
Add back: Goodwill amortization - 32,000 - 69,000
Related income tax effect - (13,000) - (28,000)
------------------ -------------------
Adjusted net income $281,000 $50,000 $561,000 $206,000
================== ===================
Net income per share
Basic and diluted net income per common share,
as reported $ 0.03 $ 0.00 $ 0.06 $ 0.02
Add back: Goodwill amortization, net of related
income tax effect - - - -
------------------ -------------------
Adjusted basic and diluted net income per common share $ 0.03 $ 0.01 $ 0.06 $ 0.02
================== ===================
Amortization of goodwill for the full fiscal year 2002 was $133,000
before income taxes.
10. Long-Lived Assets: Adoption of Statement 144
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 144 supersedes
FASB Statement No. 121, "Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and
the accounting and reporting provisions relating to the disposal of a
segment of a business of Accounting Principles Board Opinion No. 30.
The Company has adopted SFAS 144 beginning in the first quarter of
fiscal year 2003. The adoption had no impact on the Company's
consolidated financial position or results of operations.
9
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.
GENERAL
- -------
The Company is a diversified services organization that supplies
technical services and solutions to a variety of industries including aerospace,
defense, automotive, nuclear, electronics, computers and telecommunications.
Through its wide range of testing facilities, staffing solutions and
certification services, the Company provides its customers a market channel 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 in two segments: "Engineering & Evaluation" and
"Technical Staffing". The business of the Company is conducted by a number of
operating units, each with its own organization. Each segment is under the
direction of its own executive and operational management team.
The Engineering & Evaluation segment is one of the largest independent
conformity assessment and management system registration organizations in the
U.S., with facilities throughout the country in Japan, serving a large variety
of high technology industries, including aerospace, defense, automotive,
nuclear, electronics, computers and telecommunications. This segment provides
highly trained technical personnel for product certification, product safety
testing and product evaluation to allow clients to sell their products in world
markets. In addition, it performs management registration and certification
services to ISO related standards.
The Technical Staffing segment provides a variety of staffing and workforce
management services and solutions, including contract services, temporary and
full time placements to meet its clients' information technology ("IT"),
information systems ("IS") and software engineering needs. The Company supplies
professionals in support of customers who need help-desk analysts and managers,
relational database administrators and developers, application and systems
programmers, configuration and project managers, and multiple levels of system
operations personnel.
10
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 National Technical Systems, Inc. for the six
months ended July 31.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Six months ended July 31, 2002 % Change 2001 Diff
(Dollars in thousands) ----------------------------------------
Engineering & Evaluation $ 27,017 (2.5)% $ 27,706 $ (689)
Technical Staffing 10,661 (1.2)% 10,787 (126)
--------- --------------------
Total revenues $ 37,678 (2.1)% $ 38,493 $ (815)
========= ====================
For the six months ended July 31, 2002, consolidated revenues decreased by
$815,000 or 2.1% when compared to the same period in fiscal 2002.
Engineering & Evaluation:
- -------------------------
For the six months ended July 31, 2002, Engineering and Evaluation revenues
decreased by $689,000 or 2.5% when compared to the same period in fiscal 2002,
primarily due to the continued weakness in the technology sector which affected
revenues in the computer testing and telecommunications markets. Revenues were
also affected by the shut down of the Largo, Florida facility during the fourth
quarter of last year and the negative effect on revenues caused by the new
highway taken by Eminent Domain at our Santa Clarita facility as discussed in
the Business Environment section of this report. The decrease in revenues was
partially offset by an increase in the Company's traditional testing business
and revenues derived from the newly established Independent Test Laboratory
(ITL) program that the Company is performing for Verizon.
Technical Staffing:
- -------------------
For the six months ended July 31, 2002, revenues in Technical Staffing decreased
by $126,000 or 1.2% when compared to the same period in fiscal 2002, primarily
due to the continued weakness in the economy, which has negatively impacted
growth in the staffing industry, as many companies remain cautious about
increasing their work force.
GROSS PROFIT
Six months ended July 31, 2002 %Change 2001 Diff
(Dollars in thousands) ----------------------------------------
Engineering & Evaluation $ 7,125 4.0% $ 6,854 $ 271
% to segment revenue 26.4% 24.7% 1.6%
Technical Staffing 2,135 (16.5)% 2,556 (421)
% to segment revenue 20.0% 23.7% -3.7%
--------- --------------------
Total $ 9,260 (1.6)% $ 9,410 $ (150)
========= ====================
% to segment revenue 24.6% 24.4% 0.2%
Total gross profit for the six months ended July 31, 2002 decreased by $150,000
or 1.6% when compared to the same period in fiscal 2002.
11
Engineering & Evaluation:
- -------------------------
For the six months ended July 31, 2002, gross profit for the Engineering &
Evaluation Group increased by $271,000 or 4.0% when compared to the same period
in fiscal 2002, primarily as a result of the implementation of cost cutting
measures and streamlining internal processes.
Technical Staffing:
- -------------------
For the six months ended July 31, 2002, gross profit decreased by $421,000 or
16.5% in the Technical Staffing Group when compared to the same period in fiscal
2002. This decrease was primarily due to the competitive pricing pressures in
the staffing industry.
SELLING, GENERAL & ADMINISTRATIVE
Six months ended July 31, 2002 % Change 2001 Diff
(Dollars in thousands) -----------------------------------------
Engineering & Evaluation $ 5,810 1.2% $ 5,743 $ 67
% to segment revenue 21.5% 20.7% 0.8%
Technical Staffing 1,871 (23.4)% 2,441 (570)
% to segment revenue 17.5% 22.6% -5.1%
-------- -------------------
Total $ 7,681 (6.1)% $ 8,184 $ (503)
======== ===================
% to segment revenue 20.4% 21.3% -0.9%
Total selling, general and administrative expenses decreased $503,000 or 6.1%
for the six months ended July 31, 2002 when compared to the same period in
fiscal 2002.
Engineering & Evaluation:
- -------------------------
For the six months ended July 31, 2002, selling, general and administrative
expenses increased by $67,000 or 1.2% when compared to the same period in fiscal
2002, primarily due to training and consulting costs related to a number of
major initiatives undertaken by the Company to streamline internal processes,
restructure the sales organization and improve the Company's technological
capabilities.
Technical Staffing:
- -------------------
For the six months ended July 31, 2002, selling, general and administrative
expenses decreased by $570,000 or 23.4% when compared to the same period in
fiscal 2002, primarily due to the continued efforts by management to improve
efficiencies and control costs in all aspects of its business.
OPERATING INCOME
Six months ended July 31, 2002 % Change 2001 Diff
(Dollars in thousands) -------------------------------------------
Engineering & Evaluation $ 1,315 18.4% $ 1,111 $ 204
% to segment revenue 4.9% 4.0% 0.9%
Technical Staffing 264 129.6% 115 149
% to segment revenue 2.5% 1.1% 1.4%
--------- -----------------------
Total $ 1,579 28.8% $ 1,226 $ 353
========= ======================
% to segment revenue 4.2% 3.2% 1.0%
Operating income for the six months ended July 31, 2002 increased by $353,000 or
28.8% when compared to fiscal 2002.
12
For the six months ended July 31, 2002, operating income in the Engineering &
Evaluation Group increased by $204,000 or 18.4% when compared to the same period
in fiscal 2002, as a result of the increase in gross profit, partially offset by
a slight increase in selling, general and administrative expenses discussed
above.
For the six months ended July 31, 2002, operating income in the Technical
Staffing Group increased by $149,000 or 129.6% when compared to the same period
in fiscal 2002, as a result of the decrease in selling and general and
administrative expenses discussed above, partially offset by the decrease in
gross profit discussed above.
INTEREST EXPENSE
Net interest expense decreased by $332,000 in the six months ended July 31, 2002
when compared to the same period in fiscal 2002. This decrease was principally
due to lower average debt balances for the six months ended July 31, 2002 and
lower interest rate levels when compared to the same period last year.
INCOME TAXES
The income tax provisional rate of 42.5% for the six months ended July 31, 2002
reflects a rate in excess of the U.S. federal statutory rate primarily due to
the inclusion of state income taxes. This rate is based on the estimated
provision accrual for fiscal year ending January 31, 2003. Management has
determined that it is more likely than not that the deferred tax asset will be
realized on the basis of offsetting it against 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
The increase in net income for the six months ended July 31, 2002, compared to
the same period in fiscal 2002, was primarily due to the lower selling and
administrative expenses and interest expense, partially offset by higher other
expense.
The following information is based upon results for National Technical Systems,
Inc. for the three months ended July 31.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Three months ended July 31, 2002 % Change 2001 Diff
(Dollars in thousands) ----------------------------------------
Engineering & Evaluation $ 13,261 (5.6)% $ 14,041 $ (780)
Technical Staffing 5,149 1.4% 5,076 73
--------- --------------------
Total revenues $ 18,410 (3.7)% $ 19,117 $ (707)
========= ====================
For the three months ended July 31, 2002, consolidated revenues decreased by
$707,000 or 3.7% when compared to the same period in fiscal 2002.
13
Engineering & Evaluation:
- -------------------------
For the three months ended July 31, 2002, Engineering and Evaluation revenues
decreased by $780,000 or 5.6% when compared to the same period in fiscal 2002,
primarily due to the continued weakness in the technology sector which affected
revenues in the computer testing and telecommunications markets. Revenues were
also affected by the shut down of the Largo, Florida facility during the fourth
quarter of last year and the negative effect on revenues caused by the new
highway taken by Eminent Domain at our Santa Clarita facility as discussed in
the Business Environment section of this report. The decrease in revenues was
partially offset by an increase in the Company's traditional testing business
and revenues derived from the newly established Independent Test Laboratory
(ITL) program that the Company is performing for Verizon.
Technical Staffing:
- -------------------
For the three months ended July 31, 2002, revenues in Technical Staffing
increased by $73,000 or 1.4% when compared to the same period in fiscal 2002,
primarily due to the increase in placements with the Company's high-volume
accounts. This increase was offset by a decrease in headcount with the
low-volume accounts.
GROSS PROFIT
Three months ended July 31, 2002 %Change 2001 Diff
(Dollars in thousands) ----------------------------------------
Engineering & Evaluation $ 3,510 4.3% $ 3,366 $ 144
% to segment revenue 26.5% 24.0% 2.5%
Technical Staffing 1,011 (16.9)% 1,216 (205)
% to segment revenue 19.6% 24.0% -4.3%
--------- --------------------
Total $ 4,521 (1.3)% $ 4,582 $ (61)
========= ====================
% to segment revenue 24.6% 24.0% 0.6%
Total gross profit for the three months ended July 31, 2002 decreased by $61,000
or 1.3% when compared to the same period in fiscal 2002.
Engineering & Evaluation:
- -------------------------
For the three months ended July 31, 2002, gross profit for the Engineering &
Evaluation Group increased by $144,000 or 4.3% when compared to the same period
in fiscal 2002, primarily as a result of the implementation of cost cutting
measures and streamlining internal processes.
Technical Staffing:
- -------------------
For the three months ended July 31, 2002, gross profit decreased by $205,000 or
16.9% in the Technical Staffing Group when compared to the same period in fiscal
2002. This decrease was primarily due to the lower margins from the high-volume
accounts due to competitive pricing pressures.
14
SELLING, GENERAL & ADMINISTRATIVE
Three months ended July 31, 2002 % Change 2001 Diff
(Dollars in thousands) -----------------------------------------
Engineering & Evaluation $ 2,863 0.9% $ 2,889 $ (26)
% to segment revenue 21.6% 20.6% 1.0%
Technical Staffing 882 (27.8)% 1,222 (340)
% to segment revenue 17.1% 24.1% -6.9%
-------- -------------------
Total $ 3,745 (8.9)% $ 4,111 $ (366)
======== ===================
% to segment revenue 20.3% 21.5% -1.2%
Total selling, general and administrative expenses decreased $366,000 or 8.9%
for the three months ended July 31, 2002 when compared to the same period in
fiscal 2002.
Engineering & Evaluation:
- -------------------------
For the three months ended July 31, 2002, selling, general and administrative
expenses decreased by $26,000 or 0.9% when compared to the same period in fiscal
2002, primarily due to the continued efforts by management to improve
efficiencies.
Technical Staffing:
- -------------------
For the three months ended July 31, 2002, selling, general and administrative
expenses decreased by $340,000 or 27.8% when compared to the same period in
fiscal 2002, primarily due to improved efficiencies which are helping reduce
overall costs.
OPERATING INCOME
Three months ended July 31, 2002 % Change 2001 Diff
(Dollars in thousands) -------------------------------------------
Engineering & Evaluation $ 647 35.6% $ 477 $ 170
% to segment revenue 4.9% 3.4% 1.5%
Technical Staffing 129 2250.0% (6) 135
% to segment revenue 2.5% (0.1)% 2.6%
--------- -----------------------
Total $ 776 64.8% $ 471 $ 305
========= ======================
% to segment revenue 4.2% 2.5% 1.7%
Operating income for the three months ended July 31, 2002 increased by $305,000
or 64.8% when compared to fiscal 2002.
For the three months ended July 31, 2002, operating income in the Engineering &
Evaluation Group increased by $170,000 or 35.6% when compared to the same period
in fiscal 2002, as a result of the increase in gross profit and the decrease in
selling and general and administrative expenses discussed above.
For the three months ended July 31, 2002, operating income in the Technical
Staffing Group increased by $135,000 when compared to the same period in fiscal
2002, primarily as a result of the decrease in selling and general and
administrative expenses.
INTEREST EXPENSE
Net interest expense decreased by $151,000 in the three months ended July 31,
2002 when compared to the same period in fiscal 2002. This decrease was
principally due to lower average debt balances for the three months ended July
31, 2002 and lower interest rate levels when compared to the same period last
year.
15
INCOME TAXES
The income tax provisional rate of 42.4% for the three months ended July 31,
2002 reflects a rate in excess of the U.S. federal statutory rate primarily due
to the inclusion of state income taxes. This rate is based on the estimated
provision accrual for fiscal year ending January 31, 2003. Management has
determined that it is more likely than not that the deferred tax asset will be
realized on the basis of offsetting it against 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
The increase in net income for the three months ended July 31, 2002, compared to
the same period in fiscal 2002, was primarily due to the lower selling and
administrative expenses and interest expense, partially offset by higher other
expense.
BUSINESS ENVIRONMENT
Engineering & Evaluation:
- -------------------------
The Company's basic service is to provide product certification, product safety
testing and product evaluation to ensure its clients' products meet established
specifications or standards. In recent years, domestic and worldwide political
and economic developments have significantly affected the markets for defense
and advanced technology systems. Homeland security and defeating terrorism are
among the Department of Defense's main initiatives. Budget increases are
projected for operational readiness spending as well as research and development
spending.
The Company has overall realized a significant increase in sales at its
military/aerospace facilities since the September 11 catastrophe. The Company's
Santa Clarita facility, its largest military/aerospace facility, has, however,
experienced a decline in sales during this period, following construction of a
public highway immediately adjacent to the Santa Clarita facility. The highway,
which overlooks the Santa Clarita facility, has heightened the concerns of
customers who require testing of sensitive programs and has caused certain
customers to stop using the facility for those programs. A portion of the
highway was built on real property taken from the Company by eminent domain. NTS
is seeking, through the legal process, appropriate compensation for the taking
of the Company's property. If sufficient compensation is awarded, NTS will
utilize same to implement mitigating measures which NTS hopes will enable the
Company to continue operations at this facility using most of its capabilities.
In an effort to maintain the economic viability of the facility, several new
capabilities have been added which include fuel cell testing, upgraded
acoustical testing, clean environment satellite testing and installation of a
high pressure air system.
Growth for the balance of the year will be dependent on overall economic
conditions and the increases in research and development spending in the
aerospace, defense and telecommunication industries.
Technical Staffing:
- -------------------
The Company provides a variety of staffing and workforce management services and
solutions, including contract, contract-to-hire and full time placements to meet
its clients' needs. One of the strategies for growth is to leverage off the
Engineering & Evaluation clients and provide technical and engineering personnel
as a complete suite of certification, registration and test services we
currently provide. The goal is to align NTS as a complete solution to the
clients' product development needs, which will include consultants and technical
experts provided by the staffing segment.
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.
16
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended July 31, 2002, cash provided by operations increased by
$807,000 when compared to the same period in fiscal 2002. This increase was
primarily due to the reductions in payments in accounts payable, an increase in
net income, partially offset by increases in inventory and a decrease in
deferred income.
Net cash used in investing activities in the six-month period ended July 31,
2002 decreased by $1,064,000 when compared to the same period in fiscal 2002,
primarily due to the effect of changes in capital purchases and sale of
property, partially offset by increases in investment in life insurance, during
the six-month period ended July 31, 2002.
In the six-month period ended July 31, 2002, net cash used by financing
activities increased by $176,000 over the same period in fiscal 2002. Net cash
used by financing activities consisted of the repayment of lines of credit and
short term and long term debt of $2,642,000 and repurchase of common stock of
$19,000, partially offset by increases in proceeds from lines of credit and term
loans of $129,000.
The Company had a credit agreement with United California Bank (formerly Sanwa
Bank California), as agent, and Mellon Bank, which included (1) a $10,000,000
revolving line of credit at an interest rate equal to the agent bank's reference
rate expiring November 1, 2002 and (2) a $6,500,000 term loan at an interest
rate of 8.31% expiring in January 2003. In September 2001, the line of Credit
was reduced to $9,700,000. On November 21, 2001, the Company replaced the
outstanding debt to United California Bank and Mellon Bank with a $16,000,000
reducing revolving line of credit with Comerica Bank California and First Bank,
expiring on August 1, 2004. Comerica, as the agent Bank, is sharing 60% of the
line with First Bank, as the participant Bank, sharing 40% of the line. The
revolving line of credit will be reduced by $1,500,000 on August 1, 2002 and by
$1,750,000 each year thereafter. If during any fiscal year, the Company's net
income equals or exceeds $2,000,000, there will be no reduction in the revolving
line of credit. The interest rate is at the agent bank's prime rate, with an
option for the Company to convert to loans at the Libor rate plus 250 basis
points for 30, 60, 90, 180 or 365 days, with minimum advances of $1,000,000. The
Company paid a 0.5% commitment fee of the total line amount, or $80,000, which
was capitalized and is being amortized as additional interest expense over
twelve months. The Company will also pay an additional 0.25% of the commitment
amount annually and a 0.25% fee for any unused line of credit. The outstanding
balance on the revolving line of credit at July 31, 2002 was $10,402,000. This
balance is reflected in the accompanying consolidated balance sheets as
long-term. This agreement is subject to certain covenants, which require the
maintenance of certain working capital, debt-to-equity, earnings-to-expense and
cash flow ratios. The Company was in full compliance with all of the covenants
with its banks as of July 31, 2002.
The Company has additional equipment line of credit agreements (at interest
rates of 6.02 % to 10.25%) to finance various test equipment with terms of 60
months for each equipment schedule. The outstanding balance at July 31, 2002 was
$3,227,000.
The balance at July 31, 2002 of other notes payable collateralized by land and
building was $3,478,000, and other unsecured notes was $481,000.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.15 - Amendment number one to revolving credit agreement
between NTS and Comerica Bank effective July 17, 2002.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Form 8-K
During the quarter ended July 31, 2002 the registrant did not file
a current report on Form 8-K.
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 12, 2002 By: /s/ Lloyd Blonder
-------------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
18
CERTIFICATION
I, Jack Lin, Chief Executive Officer of the National Technical Systems, Inc.:
1. Have reviewed this quarterly report on Form 10-Q of National Technical
Systems, Inc.: and,
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
/s/ Jack Lin
-------------------------
Jack Lin
Chief Executive Officer
September 12, 2002
CERTIFICATION
I, Lloyd Blonder, Chief Financial Officer, of the National Technical Systems,
Inc.:
1. Have reviewed this quarterly report on Form 10-Q of National Technical
Systems, Inc.: and,
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
/s/ Lloyd Blonder
-------------------------
Lloyd Blonder
Chief Financial Officer
September 12, 2002
19
EXHIBIT 10.15
AMENDMENT NUMBER ONE TO REVOLVING CREDIT AGREEMENT
This AMENDMENT NUMBER ONE TO REVOLVING CREDIT AGREEMENT (this "Amendment"),
dated as of July 17, 2002, is entered into among NATIONAL TECHNICAL SYSTEMS,
INC., a California corporation ("Parent"), NTS TECHNICAL SYSTEMS, a California
corporation, dba National Technical Systems ("NTS"), XXCAL, INC., a California
corporation ("XXCAL"), APPROVED ENGINEERING TEST LABORATORIES, INC., a
California corporation ("AETL"), ETCR, INC., a California corporation ("ETCR"),
ACTON ENVIRONMENTAL TESTING CORPORATION, a Massachusetts corporation ("Acton"),
and one or more Subsidiaries of Parent, whether now existing or hereafter
acquired or formed, which become party to the Agreement (as defined below) by
executing an Addendum in the form of Exhibit 1 of the Agreement (NTS, XXCAL,
AETL, ATCR, Acton and such other Subsidiaries are sometimes individually
referred to herein as a "Subsidiary Borrower" and collectively referred to
herein as "Subsidiary Borrowers", and Subsidiary Borrowers and Parent are
sometimes individually referred to herein as a "Borrower" and collectively
referred to herein as "Borrowers"), the financial institutions from time to time
parties hereto as Lenders, whether by execution hereof or an Assignment and
Acceptance in accordance with Section 11.5(c) of the Agreement, and Comerica
Bank - California, in its capacity as contractual representative for itself and
the other Lenders ("Agent"), with reference to the following facts:
A. Borrowers, Agent and Lenders previously entered into that certain
Revolving Credit Agreement, dated as of November 21, 2001 (the "Agreement");
B. Borrowers, Agent and Lenders desire to amend the Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
hereby agree as follows:
Defined Terms. All initially capitalized terms used but not defined herein
shall have the meanings assigned to such terms in the Agreement.
Amendments to Section 1.1. The definitions of "Permitted Asset Sales",
"Revolving Loans Maturity Date" and "Total Credit" set forth in Section 1.1 of
the Agreement are hereby amended in their entirety as follows:
"Permitted Asset Sales" means (i) the Asset Sale of NTS' Largo Division
located at 7887 Brian Dairy Road, Largo, Florida, (ii) any sales in connection
with eminent domain proceedings affecting the Real Property Collateral, (iii)
the sale of a condominium owned by ETCR located at 76216 Honeysuckle Drive, Palm
Desert, California, (iv) the sale of the San Marcos properties in Vista,
California owned by ETCR (APN 217-161-03 and 217-161-08), provided that the
proceeds of such sale are used by Parent to repurchase Capital Stock of Parent
as set forth in Section 7.10 hereof."
"Revolving Loans Maturity Date" means August 1, 2004."
"Total Credit" means, initially, Sixteen Million Dollars ($16,000,000), as
may be reduced from time to time pursuant to Section 2.14, and also reduced by
One Million Five Hundred Thousand Dollars ($1,500,000) effective August 1, 2002
and by One Million Seven Hundred Fifty Thousand Dollars ($1,750,000) each year
thereafter, if the Consolidated Adjusted Net Income for the most recent fiscal
year is less than Two Million Dollars ($2,000,000)."
20
Amendment to Section 7.10(b). Section 7.10(b) is hereby amended in its
entirety as follows:
"Notwithstanding the terms of Section 7.10(a), (i) any Subsidiary
Borrower may declare and pay Distributions to its parent, (ii) provided
that no Event of Default has occurred and is continuing or will result
therefrom, Parent may declare and pay Distributions for each fiscal year,
and acquire Capital Stock of Parent, in an aggregate amount not to exceed
seventy-five percent (75%) of the Consolidated Adjusted Net Income for such
fiscal year, and (iii) Parent may, using the proceeds aggregating $544,000
from the Permitted Asset Sale of the real property located (APN 217-161-03
and 217-161-08), to repurchase Capital Stock of Parent."
Replacement of Schedule 1.1C. Schedule 1.1C of the Agreement is hereby
amended in its entirety and replaced with the Schedule 1.1C attached hereto and
incorporated hereby.
Conditions Precedent to Effectiveness of Amendment. The effectiveness of
this Amendment is subject to and contingent upon the fulfillment of each and
every one of the following conditions:
Agent shall have received this Amendment, duly executed by Borrowers,
Lenders and Agent;
No Event of Default, Unmatured Event of Default or Material Adverse Effect
shall have occurred; and
All of the representations and warranties set forth herein, in the Loan
Documents and in the Agreement shall be true, complete and accurate in all
respects as of the date hereof (except for representations and warranties which
are expressly stated to be true and correct as of the Closing Date).
Representations and Warranties. In order to induce Agent and Lenders to
enter into this Amendment, each Borrower hereby represents and warrants to Agent
and Lenders that:
No Event of Default or Unmatured Event of Default is continuing;
All of the representations and warranties set forth in the Agreement and
the Loan Documents are true, complete and accurate in all respects (except for
representations and warranties which are expressly stated to be true and correct
as of the Closing Date); and
This Amendment has been duly executed and delivered by Borrowers, and after
giving effect to this Amendment, the Agreement and the Loan Documents continue
to constitute the legal, valid and binding agreements and obligations of
Borrowers, enforceable in accordance with their terms, except as enforceability
may be limited by bankruptcy, insolvency, and similar laws and equitable
principles affecting the enforcement of creditors' rights generally.
21
Counterparts; Telefacsimile Execution. This Amendment may be executed in
any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, shall be deemed to be an original,
and all of which, when taken together, shall constitute but one and the same
Amendment. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
Integration. The Agreement as amended by this Amendment constitutes the
entire agreement and understanding between the parties hereto with respect to
the subject matter hereof and thereof, and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof and thereof.
Reaffirmation of the Agreement. The Agreement as amended hereby and the
other Loan Documents remain in full force and effect.
[Remainder of page intentionally left blank.]
22
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Amendment as of the date first hereinabove written.
NATIONAL TECHNICAL SYSTEMS,
INC.
By
----------------------------------------
Lloyd Blonder, Senior Vice President,
Chief Financial Officer, Treasurer and
Assistant Secretary
NTS TECHNICAL SYSTEMS dba
NATIONAL TECHNICAL SYSTEMS
By
----------------------------------------
Lloyd Blonder, Senior Vice President,
Chief Financial Officer, Treasurer and
Assistant Secretary
XXCAL, INC.
By
----------------------------------------
Lloyd Blonder, Vice President, Treasurer
and Assistant Secretary
APPROVED ENGINEERING TEST
LABORATORIES, INC.
By
----------------------------------------
Lloyd Blonder, Vice President, Treasurer
and Assistant Secretary
ETCR, INC.
By
----------------------------------------
Lloyd Blonder, Vice President, Treasurer
and Assistant Secretary
23
ACTON ENVIRONMENTAL TESTING
CORPORATION
By
----------------------------------------
Lloyd Blonder, Vice President, Treasurer
and Assistant Secretary
COMERICA BANK-CALIFORNIA, in its
capacities as Agent, Issuing Lender and a
Lender
By__________________________________________
Name________________________________________
Title_______________________________________
FIRST BANK & TRUST, in its capacity as
a Lender
By__________________________________________
Name________________________________________
Title_______________________________________
24
Schedule 1.1C
-------------
Schedule of Commitments
- ---------------------- ------------------------------- -----------------------
Revolving Loan Lender Revolving Credit Revolving Credit
Commitment Commitment Percentage
- ---------------------- ------------------------------- -----------------------
Comerica $9,600,000(1) 60%
First Bank & Trust $6,400,000(2) 40%
- ---------------------- ------------------------------- -----------------------
- -------------------------------------
(1) As may be reduced from time to time pursuant to Section 2.14, and
also reduced by $900,000 effective August 1, 2002 and by One Million Fifty
Thousand Dollars ($1,050,000) each year thereafter, if the Consolidated Net
Income for the most recent fiscal year is less than Two Million Dollars
($2,000,000).
(2) As may be reduced from time to time pursuant to Section 2.14,
and also reduced by $600,000 effective August 1, 2002 and by Seven Hundred
Thousand Dollars ($700,000) each year thereafter, if the Consolidated Net Income
for the most recent fiscal year is less than Two Million Dollars ($2,000,000).
25
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NATIONAL TECHNICAL SYSTEMS, INC. (the
"Company") on Form 10-Q for the period ending July 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Jack
Lin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Jack Lin
-----------------------
Jack Lin
Chief Executive Officer
September 12, 2002
26
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NATIONAL TECHNICAL SYSTEMS, INC (the
"Company") on Form 10-Q for the period ending July 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Lloyd
Blonder, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Lloyd Blonder
-----------------------
Lloyd Blonder
Chief Financial Officer
September 12, 2002
27