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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 April 30, 2003
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES | | NO |X|
The number of shares of common stock, no par value, outstanding as of June 9,
2003 was 8,631,311.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
April 30, 2003 (unaudited) and January 31, 2003 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended April 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2003 and 2002 5
Notes to the Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION & SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 17
2
PART I - FINANCIAL
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
April 30, January 31,
2003 2003
ASSETS (unaudited)
------ ---------------------------------
CURRENT ASSETS:
Cash $ 2,688,000 $ 3,559,000
Accounts receivable, less allowance for doubtful accounts
of $1,362,000 at April 30, 2003 and $1,298,000 at January 31, 2003 20,672,000 20,252,000
Income taxes receivable - 110,000
Inventories 2,539,000 2,471,000
Deferred tax assets 1,302,000 1,469,000
Prepaid expenses 1,350,000 1,110,000
---------------------------------
Total current assets 28,551,000 28,971,000
Property, plant and equipment, at cost 78,092,000 77,634,000
Less: accumulated depreciation (50,046,000) (48,857,000)
---------------------------------
Net property, plant and equipment 28,046,000 28,777,000
Goodwill 870,000 870,000
Other assets 2,825,000 2,716,000
---------------------------------
TOTAL ASSETS $ 60,292,000 $ 61,334,000
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,337,000 $ 4,666,000
Accrued expenses 3,225,000 3,585,000
Income taxes payable 64,000 -
Deferred income 804,000 175,000
Current installments of long-term debt 1,224,000 1,253,000
---------------------------------
Total current liabilities 8,654,000 9,679,000
Long-term debt, excluding current installments 19,534,000 19,863,000
Deferred income taxes 4,357,000 4,428,000
Deferred compensation 813,000 796,000
Minority interest 154,000 151,000
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized, 20,000,000 shares; issued and
outstanding, 8,629,000 as of April 30, 2003 and 8,610,000 as of January 31, 2003 12,674,000 12,638,000
Retained earnings 14,157,000 13,830,000
Accumulated other comprehensive income (51,000) (51,000)
---------------------------------
Total shareholders' equity 26,780,000 26,417,000
---------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,292,000 $ 61,334,000
=================================
See accompanying notes.
3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for Three Months Ended April 30, 2003 and 2002
2003 2002
----------------------------
Net revenues $ 26,812,000 $ 19,268,000
Cost of sales 21,166,000 14,529,000
----------------------------
Gross profit 5,646,000 4,739,000
Selling, general and administrative expense 4,759,000 3,936,000
----------------------------
Operating income 887,000 803,000
Other income (expense):
Interest expense, net (307,000) (321,000)
Other 1,000 (2,000)
----------------------------
Total other expense (306,000) (323,000)
Income before income taxes and minority interest 581,000 480,000
Income taxes 251,000 205,000
----------------------------
Income before minority interest 330,000 275,000
Minority interest (3,000) 5,000
----------------------------
Net income $ 327,000 $ 280,000
============================
Net income per common share:
Basic $ 0.04 $ 0.03
============================
Diluted $ 0.04 $ 0.03
============================
Weighted average common shares outstanding 8,616,000 8,667,000
Dilutive effect of stock options 288,000 -
----------------------------
Weighted average common shares outstanding,
assuming dilution 8,904,000 8,667,000
============================
See accompanying notes.
4
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 2003 and 2002
2003 2002
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 327,000 $ 280,000
Adjustments to reconcile net income from continuing operations to
cash provided by operating activities:
Depreciation and amortization 1,189,000 1,154,000
Provisions for losses on receivables 64,000 70,000
Undistributed earnings of affiliate 3,000 (5,000)
Deferred income taxes 96,000 187,000
Changes in assets and liabilities:
Accounts receivable (484,000) 964,000
Inventories (68,000) 288,000
Prepaid expenses (240,000) (197,000)
Other assets and intangibles (71,000) (180,000)
Accounts payable (1,329,000) (433,000)
Accrued expenses (360,000) 332,000
Income taxes payable 64,000 -
Deferred income 629,000 806,000
Deferred compensation 17,000 21,000
Income taxes receivable 110,000 (64,000)
---------------------------
Cash provided by (used for) operating activities (53,000) 3,223,000
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (458,000) (724,000)
Investment in life insurance (38,000) (38,000)
---------------------------
Net cash used for investing activities (496,000) (762,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 4,000 114,000
Repayments of current and long-term debt (362,000) (1,230,000)
Proceeds from stock options exercised 36,000 -
Common stock repurchase - (7,000)
---------------------------
Net cash used for financing activities (322,000) (1,123,000)
---------------------------
Net increase (decrease) in cash (871,000) 1,338,000
Beginning cash balance 3,559,000 3,783,000
---------------------------
ENDING CASH BALANCE $ 2,688,000 $ 5,121,000
===========================
See accompanying notes
5
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, 2003.
The statements presented as of and for the three months ended April 30,
2003 and 2002 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. 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.
4. Interest and Taxes
Cash paid for interest and taxes for the three months ended April 30, 2003
was $361,000 and $71,000, respectively. Cash paid for interest and taxes
for the three months ended April 30, 2002 was $371,000 and $85,000
respectively.
5. 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.
6. 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. As of April 30, 2003, the Company had purchased 145,600 shares
at an average price of $2.24 per share. The Company's covenants with its
banks permit the use in fiscal 2004 of an additional maximum amount equal
to 75% of the Company's net profit for fiscal year 2003.
6
7. 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 have 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.
8. Intangible Assets
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2003 in
accordance with Statement of Financial Accounting Standards No. 142
("SFAS No. 142"), "Goodwill and Other Intangible Assets."
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 first step of the transitional goodwill impairment test
includes a comparison of the fair value of each reporting unit that has
associated goodwill with the carrying value of the reporting unit. 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
in the Engineering and Evaluation segment and one reporting unit in the
Technical Staffing segment, which constitute components of its business
that include goodwill. The Company completed the goodwill impairment test
as of January 31, 2003 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. There have been no indications of any
impairments through April 30, 2003.
As of April 30, 2003 and January 31, 2003, the Company had the following acquired intangible assets:
April 30, 2003 January 31, 2003
------------------------------------------ --------------------------------------------
Gross Net Estimated Gross Net Estimated
Carrying Accum. Carrying Useful Carrying Accum. Carrying Useful
Amount Amort. Amount Life Amount Amort. Amount Life
Intangible assets subject
to amortization:
Covenant not to compete 89,000 16,000 73,000 3 years 89,000 9,000 80,000 3 years
============================== ================================
Intangible assets not
subject to amortization:
Goodwill 1,667,000 797,000 870,000 1,667,000 797,000 870,000
============================== ================================
Amortization expense for Intangible assets subject to amortization was $7,000 and $0 for the three months ended
April 30, 2003 and 2002 respectively.
7
9. 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.
10. Stock-Based Compensation
As of April 30, 2003, the Company had two stock-based employee
compensation plans, the Amended and Restated 1994 stock option plan and
the 2002 stock option plan. The Company accounts for these plans under the
intrinsic value method recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
this plan had an exercise price equal to or greater than the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and net income per share as if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation using the
Black-Scholes option pricing model:
April 30, 2003 April 30, 2002
Net Income -------------- --------------
As reported $ 327,000 $ 280,000
Stock compensation expense, net of tax $ (74,000) $ (85,000)
-------------------------------
Pro forma $ 253,000 $ 195,000
Basic earnings per common share
As reported $ 0.04 $ 0.03
Pro forma $ 0.03 $ 0.02
Diluted earnings per common share
As reported $ 0.04 $ 0.03
Pro forma $ 0.03 $ 0.02
11. Recently Issued Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145"). This statement, among other
amendments and corrections, rescinds Statement 4, "Reporting Gains and
Losses from Extinguishment of Debt - an amendment of APB Opinion 30,"
which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002, with early application encouraged. The
Company adopted SFAS No. 145 the first quarter of fiscal 2004. The impact
of its application requires the reclassification of the loss related to
early retirement of debt, which occurred in fiscal 2002, into other income
(expense).
8
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146,"Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity" (including Certain Costs Incurred in a Restructuring).
SFAS No. 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002 and did not have a material impact on the results
of operations or the financial position of the Company.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure--an amendment of FASB Statement No. 123" ("SFAS No. 148").
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide three alternative methods of transition for an
entity that voluntarily adopts the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, SFAS
No. 148 amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information.
The provisions related to the alternative transition methods and the new
disclosure requirements were effective for the Company as of December 31,
2002. There was no impact on the Company's financial condition or results
of operations as a result of the adoption of SFAS No. 148, but the
Company's disclosures related to stock-based compensation have been
modified in accordance with the new requirements. The interim reporting
provisions of SFAS No. 148 were effective for the Company as of April 30,
2003, and management has modified the Company's quarterly disclosures in
accordance with the new requirements.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities", effective as of the first
interim period beginning after June 15, 2003. The impact upon adoption of
the standard is not expected to have a material impact on the results of
operations or the financial position of the Company.
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 business to business services organization
that supplies technical services and solutions to a variety of industries
including aerospace, defense, automotive, power products, electronics, computers
and telecommunications. Through its wide range of testing facilities, 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 become the gateway for
customers to sell their regulated products in world markets.
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, Japan and Germany serving a large
variety of high technology industries, including aerospace, defense, automotive,
power products, 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 is a national provider of professional and
specialty staffing services including contract services, temporary and full time
placements, providing specialty staffing services to its customers specifically
in the area of information technology, information systems, software engineering
and construction needs. Technical Staffing 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, engineering personnel 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 the Company for the three months ended April
30.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Three months ended April 30, 2003 % Change 2002
(Dollars in thousands) ---------------------------------
Engineering & Evaluation $ 14,219 3.4% $ 13,756
Technical Staffing 12,593 128.5% 5,512
------------ ------------
Total revenues $ 26,812 39.2% $ 19,268
============ ============
For the three months ended April 30, 2003, consolidated revenues increased by
$7,544,000 or 39.2% when compared to the same period in fiscal 2003.
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2003, Engineering and Evaluation revenues
increased by $463,000 or 3.4% when compared to the same period in fiscal 2003,
primarily due to an increase in the Company's defense related testing business
at its Camden, Arkansas facility, partially offset by a decrease in business in
the computer testing and automotive markets due to a continuing weakness in
these markets. Revenues were also adversely impacted by the taking of a portion
of the Company's land at the Santa Clarita facility by eminent domain for a new
highway (see business environment section).
Technical Staffing:
- -------------------
For the three months ended April 30, 2003, Technical Staffing revenues increased
by $7,081,000 or 128.5% when compared to the same period in fiscal 2003, due to
the acquisition of the staffing and engineering business of TRS Staffing
Solutions effective October 14, 2002.
GROSS PROFIT
Three months ended April 30, 2003 % Change 2002
(Dollars in thousands) ---------------------------------
Engineering & Evaluation $ 3,692 2.1% $ 3,615
% to segment revenue 26.0% 26.3%
Technical Staffing 1,954 73.8% 1,124
% to segment revenue 15.5% 20.4%
------------ ------------
Total $ 5,646 19.1% $ 4,739
============ ============
% to total revenue 21.1% 24.6%
Total gross profit for the three months ended April 30, 2003 increased by
$907,000 or 19.1% when compared to the same period in fiscal 2003.
11
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2003, gross profit for the Engineering &
Evaluation Group increased by $77,000 or 2.1% when compared to the same period
in fiscal 2003, primarily as a result of the revenue increase in the Company's
Camden, Arkansas, facility offset by the decrease in revenue from the automotive
and computer testing business. Gross profit as a percentage of revenue remained
approximately the same at 26.0% when compared to the same period in the prior
year.
Technical Staffing:
- -------------------
For the three months ended April 30, 2003, gross profit increased by $830,000 or
73.8% in the Technical Staffing Group when compared to the same period in fiscal
2003. This increase was due to the acquisition of the ongoing information
technology staffing and engineering business of TRS Staffing Solutions. Gross
profit as a percentage of revenue decreased to 15.5 % from 20.4% when compared
to the same period in the prior year, primarily due to the competitive pricing
pressures in the staffing industry, and a historically lower average gross
margin percentage from the newly acquired business.
SELLING, GENERAL & ADMINISTRATIVE
Three months ended April 30, 2003 % Change 2002
(Dollars in thousands) ---------------------------------
Engineering & Evaluation $ 2,947 0.0% $ 2,947
% to segment revenue 20.7% 21.4%
Technical Staffing 1,812 83.2% 989
% to segment revenue 14.4% 17.9%
------------ ------------
Total $ 4,759 20.9% $ 3,936
============ ============
% to total revenue 17.7% 20.4%
Total selling, general and administrative expenses increased 823,000 or 20.9%
for the three months ended April 30, 2003 when compared to the same period in
fiscal 2003.
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2003, selling, general and administrative
expenses were unchanged when compared to the same period in fiscal 2003. A
slight increase in selling expenses was offset by a decrease in general and
administrative expenses.
Technical Staffing:
- -------------------
For the three months ended April 30, 2003, selling, general and administrative
expenses increased by $823,000 or 83.2% when compared to the same period in
fiscal 2003, due to the additional expenses related to the newly acquired
staffing and engineering business of TRS Staffing Solutions which has allowed
Technical Staffing to expand into new geographic markets with a significantly
expanded sales force. Technical Staffing now operates sales and recruiting
business centers in ten locations and it has fully integrated the accounting and
operating systems.
12
OPERATING INCOME
Three months ended April 30, 2003 % Change 2002
(Dollars in thousands) ---------------------------------
Engineering & Evaluation $ 745 11.5% $ 668
% to segment revenue 5.2% 4.9%
Technical Staffing 142 5.2% 135
% to segment revenue 1.1% 2.4%
------------ ------------
Total $ 887 10.5% $ 803
============ ============
% to total revenue 3.3% 4.2%
Operating income for the three months ended April 30, 2003 increased by $84,000
or 10.5% when compared to fiscal 2003.
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2003, operating income in the Engineering &
Evaluation Group increased by $77,000 or 11.5% when compared to the same period
in fiscal 2003, as a result of the increase in gross profit.
Technical Staffing:
- -------------------
For the three months ended April 30, 2003, operating income in the Technical
Staffing Group increased by $7,000 or 5.2% when compared to the same period in
fiscal 2003, as a result of the increase in gross profit offset by the increase
in selling and general and administrative expenses discussed above.
INTEREST EXPENSE
Net interest expense decreased by $14,000 in the three months ended April 30,
2003 when compared to the same period in fiscal 2003. This decrease was
principally due to lower interest rate levels for the three months ended April
30, 2003 offset by higher average debt balances for the three months ended April
30, 2003 when compared to the same period last year.
INCOME TAXES
The income tax provision rate of 43.2% for the three months ended April 30, 2003
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, 2004. 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 April 30, 2003, compared
to the same period in fiscal 2003, was primarily due to the higher gross profit,
offset by higher selling and administrative expenses.
13
BUSINESS ENVIRONMENT
Engineering & Evaluation:
- -------------------------
The Company provides 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. The Company anticipates budget
increases for operational readiness spending as well as research and development
spending.
The Company has realized a significant increase in sales at its
military/aerospace facilities since the September 11, 2001 catastrophe. The
Company's Camden facility has experienced a major increase in bookings of
significant military testing. One major military contract is in excess of $1
million. During the first quarter, based upon these programs, Camden revenues
have more than doubled. 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. A portion of the highway was built on real property
taken from the Company by eminent domain. The Company is seeking, through the
legal process, appropriate compensation for the taking of the Company's
property. 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.
Although the Company expects, based on its current bookings, to have increased
military weapons testing activity, especially at its Camden location, growth for
the balance of the year will be largely dependent on improved economic
conditions.
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 customers' needs. One of the strategies for growth is to extend the
offering of the Company's technical staffing services to the Engineering &
Evaluations segment's customers to provide them with technical and engineering
personnel as part of a complete suite of certification, registration and test
services. The goal is to offer a complete solution to the customers' product
development needs, which will include consultants and technical experts provided
by the Technical 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.
14
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended April 30, 2003, cash provided by operations decreased
by $3,276,000 when compared to the same period in fiscal 2003. This decrease was
primarily due to an increase in accounts receivables and inventories and a
decrease in accounts payable and accrued expenses.
Net cash used in investing activities in the three-month period ended April 30,
2003 decreased by $266,000 when compared to the same period in fiscal 2003,
primarily due to a decrease in cash paid for the purchase of equipment, during
the three-month period ended April 30, 2003.
In the three-month period ended April 30, 2003, net cash used by financing
activities decreased by $801,000 over the same period in fiscal 2003. Net cash
used by financing activities consisted of the repayment of lines of credit and
short term and long term debt of $362,000, partially offset by proceeds from
stock options exercised of $36,000 and proceeds from lines of credit and term
loans of $4,000.
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.
On November 25, 2002, the Company amended the revolving line of credit with
Comerica Bank California and First Bank increasing it to $20,000,000. Comerica
Bank California, 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 $1,750,000 on August 1, 2003 and each year thereafter. If
during any fiscal year, the Company's net income equals or exceeds $2,000,000,
there will be no required 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 and is paying 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 April 30, 2003 was
$14,502,000. 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 April 30, 2003.
The Company has additional equipment line of credit agreements (at interest
rates of 7.60 % to 10.21%) to finance various test equipment with terms of 60
months for each equipment schedule. The outstanding balance at April 30, 2003
was $2,296,000.
At April 30, 2003, the balance of other notes payable collateralized by land and
building was $3,370,000, and the balance of unsecured notes was $590,000.
15
ITEM 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures
Within the 90-day period prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934
(the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the date of evaluation, our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act filings.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objections is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
Changes in Internal Controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls, known to the Chief
Executive Officer or Chief Financial Officer, subsequent to the date we carried
out its evaluation.
16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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) Reports on Form 8-K
On May 1, 2003, the Company filed a current report on Form 8-K
related to the announcement of its financial results for the year
ended January 31, 2003.
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: June 12, 2003 By: /s/ Lloyd Blonder
------------- -------------------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
17
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
CERTIFICATION
I, Jack Lin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Technical
Systems, Inc.;
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Jack Lin
-------------------------------
Jack Lin
Principal Executive Officer and
Chairman of the Board
June 12, 2003
18
CERTIFICATION
I, Lloyd Blonder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Technical
Systems, Inc.;
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Lloyd Blonder
-----------------------------------
Lloyd Blonder
Senior Vice President and Treasurer
(Principal Financial Officer)
June 12, 2003
19