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, 2004
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
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(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 4,
2004 was 8,880,887.
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, 2004 (unaudited) and January 31, 2004 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended April 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2004 and 2003 5
Notes to the Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION & SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 15
2
PART I - FINANCIAL
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
April 30, January 31,
2004 2004
ASSETS (unaudited)
---------------------------
CURRENT ASSETS:
Cash $ 5,481,000 $ 4,661,000
Accounts receivable, less allowance for doubtful accounts
of $939,000 at April 30, 2004 and $938,000 at January 31, 2004 18,849,000 18,822,000
Income taxes receivable 337,000 320,000
Inventories 1,956,000 1,995,000
Deferred tax assets 1,122,000 1,184,000
Prepaid expenses 916,000 827,000
------------ ------------
Total current assets 28,661,000 27,809,000
Property, plant and equipment, at cost 84,602,000 83,312,000
Less: accumulated depreciation (54,535,000) (53,357,000)
------------ ------------
Net property, plant and equipment 30,067,000 29,955,000
Goodwill 2,740,000 2,740,000
Other assets 3,067,000 3,128,000
------------ ------------
TOTAL ASSETS $ 64,535,000 $ 63,632,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,072,000 $ 4,485,000
Accrued expenses 2,934,000 3,514,000
Income taxes payable - 23,000
Deferred income 923,000 185,000
Current installments of long-term debt 1,064,000 1,052,000
------------ ------------
Total current liabilities 8,993,000 9,259,000
Long-term debt, excluding current installments 20,169,000 19,754,000
Deferred income taxes 5,071,000 4,875,000
Deferred compensation 820,000 799,000
Minority interest 67,000 113,000
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 2,000,000 shares authorized; none issued - -
Common stock, no par value. Authorized, 20,000,000 shares; issued and
outstanding, 8,881,000 as of April 31, 2004 and 8,863,000 as of
January 31, 2004 13,810,000 13,760,000
Retained earnings 15,656,000 15,123,000
Accumulated other comprehensive income (51,000) (51,000)
------------ ------------
Total shareholders' equity 29,415,000 28,832,000
------------ ------------
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 64,535,000 $ 63,632,000
============ ============
See accompanying notes.
3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended April 30,
2004 2003
----------- ------------
Net revenues $27,301,000 $ 26,812,000
Cost of sales 21,328,000 21,166,000
----------- ------------
Gross profit 5,973,000 5,646,000
Selling, general and administrative expense 5,058,000 4,759,000
----------- ------------
Operating income 915,000 887,000
Other expense:
Interest expense, net (252,000) (307,000)
Other 152,000 1,000
----------- ------------
Total other expense (100,000) (306,000)
Income before income taxes and minority interest 815,000 581,000
Income taxes 328,000 251,000
----------- ------------
Income before minority interest 487,000 330,000
Minority interest 46,000 (3,000)
----------- ------------
Net income $ 533,000 $ 327,000
=========== ============
Net income per common share:
Basic $ 0.06 $ 0.04
=========== ============
Diluted $ 0.06 $ 0.04
=========== ============
Weighted average common shares outstanding 8,874,000 8,616,000
Dilutive effect of stock options 726,000 288,000
Weighted average common shares outstanding, ----------- ------------
assuming dilution 9,600,000 8,904,000
=========== ============
See accompanying notes.
4
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 2004 and 2003
2004 2003
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 533,000 $ 327,000
Adjustments to reconcile net income from continuing operations to cash
provided by (used for) operating activities:
Depreciation and amortization 1,247,000 1,189,000
Provisions for losses (recoveries) on receivables (1,000) 64,000
Gain on sale of assets (158,000) -
Undistributed earnings of affiliate (46,000) 3,000
Deferred income taxes 258,000 96,000
Changes in assets and liabilities (net of acquisition):
Accounts receivable (26,000) (484,000)
Inventories 39,000 (68,000)
Prepaid expenses (89,000) (240,000)
Other assets and intangibles 69,000 (71,000)
Accounts payable (413,000) (1,329,000)
Accrued expenses (580,000) (360,000)
Income taxes payable (23,000) 64,000
Deferred income 738,000 629,000
Deferred compensation 21,000 17,000
Income taxes receivable (17,000) 110,000
-------------------------------
Cash provided by (used for) operating activities 1,552,000 (53,000)
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,482,000) (458,000)
Sale of property, plant and equipment 311,000 -
Investment in life insurance (38,000) (38,000)
-------------------------------
Net cash used for investing activities (1,209,000) (496,000)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 902,000 4,000
Repayments of current and long-term debt (475,000) (362,000)
Proceeds from stock issuance 50,000 -
Proceeds from stock options exercised - 36,000
-------------------------------
Net cash provided by (used for) financing activities 477,000 (322,000)
-------------------------------
Net increase (decrease) in cash 820,000 (871,000)
Beginning cash balance 4,661,000 3,559,000
-------------------------------
ENDING CASH BALANCE $ 5,481,000 $ 2,688,000
===============================
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 accounting principles
generally accepted in the United States. 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, 2004.
The statements presented as of and for the three months ended April 30,
2004 and 2003 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.
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. The
Company recorded income tax expense of $328,000 for the three months
ended April 30, 2004 and $251,000 for the three months ended April 30,
2003.
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,
2004 was $205,000 and $105,000, respectively. Cash paid for interest
and taxes for the three months ended April 30, 2003 was $361,000 and
$71,000, 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 50.1% to NTS, and 49.9% 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 January 31, 2004, the Company had purchased 169,750
shares at an average price of $2.54 per share. The Company elected to
discontinue the repurchase of shares as of September 29, 2003;
therefore no shares were repurchased during the current quarter.
6
7. Earnings per share
Basic and diluted net income per common share is presented in
conformity with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" for all periods presented. In accordance
with SFAS No. 128, basic earnings per share have been computed using
the weighted average number of shares of common stock outstanding
during the year. Basic earnings per share 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 SFAS No. 142, "Goodwill and Other Intangible Assets."
There have been no indications of any impairments through April 30,
2004.
As of April 30, 2004 and January 31, 2004, the Company had the following acquired intangible assets:
April 30, 2004 January 31, 2004
-------------------------------------------------- ---------------------------------------------
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 $ 148,000 $ 49,000 $ 99,000 3-5 years $ 148,000 $ 39,000 $ 109,000 3-5 years
====================================== ==================================
Intangible assets not
subject to amortization:
Goodwill $3,537,000 $ 797,000 $2,740,000 $3,537,000 $797,000 $2,740,000
====================================== ==================================
Amortization expense for intangible assets subject to amortization was $10,000 and $7,000 for the three months ended April 30, 2004
and 2003, respectively.
9. Long-Lived Assets: Adoption of Statement 144
In August 2001, the Financial Accounting Standards Board ("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 No. 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 No. 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.
7
10. Stock-Based Compensation
As of April 30, 2004, 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 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
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation using the Black-Scholes option pricing model:
Net Income April 30, 2004 April 30, 2003
-------------- --------------
As reported $ 533,000 $ 327,000
Stock compensation expense, net of tax $ (127,000) $ (74,000)
-------------- --------------
Pro forma $ 406,000 $ 253,000
Basic earnings per common share
As reported $ 0.06 $ 0.04
Pro forma $ 0.05 $ 0.03
Diluted earnings per common share
As reported $ 0.06 $ 0.04
Pro forma $ 0.04 $ 0.03
11. Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46) Until this interpretation, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests.
FIN 46 requires a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns. The
adoption of FIN 46 for provisions effective during fiscal year 2004 did
not have a material impact on the Company's financial position, cash
flows or results of operations.
8
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, solutions
and certification services, the Company provides its customers the ability to
sell their products globally and enhance their overall competitiveness. NTS is
accredited by numerous national and international technical organizations which
allow the Company to have its test data accepted in most countries.
The Company operates in two segments: "Engineering & Evaluation" and
"Technical Solutions". 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. In making
financial and operational decisions, NTS relies on an internal management
reporting process that provides revenue and operating cost information for each
of its operating units. Revenues and booking activities are also tracked by
market type.
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 United States and in 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
customers to sell their products in world markets. In addition, it performs
management registration and certification services to ISO related standards.
The Technical Solutions segment is a national provider of professional
and specialty staffing services including contract services, temporary and full
time placements, providing specialty solutions services to its customers
specifically in the area of information technology, information systems,
software engineering and construction needs. Technical Solutions 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.
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.
9
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Three months ended April 30, 2004 % Change 2003
-------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 15,688 10.3% $ 14,219
Technical Solutions 11,613 (7.8)% 12,593
--------- ---------
Total revenues $ 27,301 1.8% $ 26,812
========= =========
For the three months ended April 30, 2004, consolidated revenues increased by
$489,000 or 1.8% when compared to the same period in fiscal 2004.
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2004, Engineering and Evaluation revenues
increased by $1,469,000 or 10.3% when compared to the same period in fiscal
2004, primarily due to the additional revenue of $819,000 from the acquisition
of DTI Holdings, LLC which was effective on January 1, 2004 and the increases in
the Company's testing business on space programs at the Los Angeles facility and
the automotive testing in Detroit, Michigan. These increases were partially
offset by a decrease in the military testing business at the Camden, Arkansas
facility.
Technical Solutions:
- --------------------
For the three months ended April 30, 2004, Technical Solutions revenues
decreased by $980,000 or 7.8% when compared to the same period in fiscal 2004,
due to the continuing weak demand for full-time and contract help in the IT
market and a decrease in engineering personnel at a major customer.
GROSS PROFIT
Three months ended April 30, 2004 % Change 2003
------------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 4,195 13.6% $ 3,692
% to segment revenue 26.7% 26.0%
Technical Solutions 1,778 (9.0)% 1,954
% to segment revenue 15.3% 15.5%
----------------- ------------------
Total $ 5,973 5.8% $ 5,646
================= ==================
% to total revenue 21.9% 21.1%
Total gross profit for the three months ended April 30, 2004 increased by
$327,000 or 5.8% when compared to the same period in fiscal 2004.
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2004, gross profit for the Engineering &
Evaluation Group increased by $503,000 or 13.6% when compared to the same period
in fiscal 2004, primarily as a result of the revenue increases discussed above
and an increase in gross profit as a percentage of revenue to 26.7% in the
current period compared to 26.0% in the same period in the prior year.
Technical Solutions:
- --------------------
For the three months ended April 30, 2004, gross profit decreased by $176,000 or
9.0% in the Technical Solutions Group when compared to the same period in fiscal
2004. This decrease was due to the lower revenues discussed above and the
competitive pricing pressures in the staffing industry. Gross profit as a
percentage of revenue decreased to 15.3 % from 15.5% when compared to the same
period in the prior year.
10
SELLING, GENERAL & ADMINISTRATIVE
Three months ended April 30, 2004 % Change 2003
-------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 3,399 15.3% $ 2,947
% to segment revenue 21.7% 20.7%
Technical Solutions 1,659 (8.4)% 1,812
% to segment revenue 14.3% 14.4%
------------ ------------------
Total $ 5,058 6.3% $ 4,759
============ ==================
% to total revenue 18.5% 17.7%
Total selling, general and administrative expenses increased 299,000 or 6.3% for
the three months ended April 30, 2004 when compared to the same period in fiscal
2004.
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2004, selling, general and administrative
expenses increased by $452,000 when compared to the same period in fiscal 2004,
primarily due to research and development costs associated with the development
of new test specifications for the emerging wireless technologies and the
development of new capabilities to perform testing on new DSL services as
specified by DSL forum TR-067. Selling, general and administrative expenses also
increased due to the addition of new sales and customer service representatives
and additional costs related to the improvement of the Company's internal IT
infrastructure and website.
Technical Solutions:
- --------------------
For the three months ended April 30, 2004, selling, general and administrative
expenses decreased by $153,000 or 8.4% when compared to the same period in
fiscal 2004, primarily due to the reduction in selling costs associated with the
lower revenues and other administrative cost reductions that the Company made to
remain profitable.
OPERATING INCOME
Three months ended April 30, 2004 % Change 2003
--------------------------------------------
(Dollars in thousands)
Engineering & Evaluation $ 796 6.8% $ 745
% to segment revenue 5.1% 5.2%
Technical Solutions 119 (16.2)% 142
% to segment revenue 1.0% 1.1%
------------- ------------------
Total $ 915 3.2% $ 887
============= ==================
% to total revenue 3.4% 3.3%
Operating income for the three months ended April 30, 2004 increased by $28,000
or 3.2% when compared to fiscal 2004.
Engineering & Evaluation:
- -------------------------
For the three months ended April 30, 2004, operating income in the Engineering &
Evaluation Group increased by $51,000 or 6.8% when compared to the same period
in fiscal 2004, as a result of the increase in gross profit, partially offset by
the increase in selling, general and administrative expenses.
11
Technical Solutions:
- --------------------
For the three months ended April 30, 2004, operating income in the Technical
Solutions Group decreased by $23,000 or 16.2% when compared to the same period
in fiscal 2004, as a result of the decrease in gross profit, partially offset by
the decrease in selling, general and administrative expenses discussed above.
INTEREST EXPENSE
Net interest expense decreased by $55,000 in the three months ended April 30,
2004 when compared to the same period in fiscal 2004. This decrease was
principally due to lower interest rate levels for the three months ended April
30, 2004 offset by slightly higher average debt balances for the three months
ended April 30, 2004 when compared to the same period last year.
OTHER INCOME
Other income increased by $151,000 in the three months ended April 30, 2004 when
compared to the same period in fiscal 2004, primarily due to the gain of
$158,000 on the sale of real estate.
INCOME TAXES
The income tax provision rate of 40.2% for the three months ended April 30, 2004
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, 2005. 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
Net income for the three months ended April 30, 2004 was $533,000, an increase
of $206,000 or 63.0% compared to the same period in fiscal 2004. This increase
was primarily due to the higher gross profit, lower interest expense and higher
other income, during the three months ended April 30, 2004, partially offset by
higher selling and administrative expenses.
BUSINESS ENVIRONMENT
In the Engineering & Evaluation segment, 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. The Company anticipates budget increases for operational
readiness spending as well as research and development spending and has expanded
its military testing capabilities, particularly at its Camden, Arkansas
facility. Although the general telecommunications market is still weak, the
Company is pursuing several opportunities that are developing, particularly in
the expanding wireless technology. The Company is actively involved in the
development of new industry standards. Zigbee members approved NTS as one of
only two companies to provide product certification for the new generation
wireless monitoring and control products. NTS was also approved for Universal
Serial Bus On-The-Go (USB OTG) device to device communications for wireless
products.
In the Technical Solutions segment, 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 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 Solutions segment.
12
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $1,552,000 in the three months
ended April 30, 2004 primarily consisted of net income of $533,000 adjusted for
non-cash items of $1,247,000 in depreciation and amortization offset by a
decrease of $70,000 of changes in working capital and the effect of the gain on
sale of assets of $158,000. The decrease in working capital changes was
primarily due to the decreases in accrued expenses and accounts payable,
partially offset by an increase in deferred income and deferred taxes. The
increase of $1,605,000 in cash provided by operating activities from the three
months ended April 30, 2003 to the three months ended April 30, 2004 was
primarily the result of the changes in accounts receivable, accounts payable and
the higher net income in the current year.
Net cash used for investing activities in the three months ended April 30, 2004
of $1,209,000 was attributable to capital spending of $1,482,000 and cash used
in life insurance of $38,000, offset by cash provided from the sale of property
of $311,000. Capital spending is generally comprised of purchases of machinery
and equipment, building, leasehold improvements, computer hardware, software and
furniture and fixtures. Cash used in investing activities increased from the
three months ended April 30, 2003 to the three months ended April 30, by
$713,000 primarily as a result of the increase in capital spending in the
current year.
Net cash provided by financing activities in the three months ended April 30,
2004 of $477,000 consisted of proceeds from borrowings of debt of $902,000,
proceeds from stock options exercised of $50,000, offset by cash used for
repayment of debt of $475,000. Net cash provided by financing activities
increased from the three months ended April 30, 2003 to the three months ended
April 30, by $799,000 primarily as a result of the increase in borrowings of
debt.
On November 25, 2002, the Company increased the revolving line of credit with
Comerica Bank California and First Bank to $20,000,000. Comerica Bank
California, as the agent Bank, retained 60% of the line with First Bank, as the
participant Bank, holding 40% of the line. The revolving line of credit was
reduced by $1,750,000 on August 1, 2003 and will be reduced 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 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, 2004 was
$15,502,000. This balance is reflected in the accompanying condensed
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 amount available
on the line of credit is $2,748,000 as of April 30, 2004. The Company was in
full compliance with all of the covenants with its banks as of April 30, 2004.
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,
2004 was $2,049,000. The balance of other notes payable collateralized by land
and building was $3,095,000, and the balance of unsecured notes was $587,000 at
April 30, 2004.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls And Procedures
The Company's Chief Executive Officer and Chief Financial Officer
carried out an evaluation with the participation of the Company's management, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures 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 objectives 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 was no change in the Company's internal control over financial
reporting, known to the Chief Executive Officer or Chief Financial Officer that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 - Certification of the Principal Executive Officer pursuant
to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 - Certification of the Principal Financial Officer pursuant
to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 - Certification of the Principal Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 - Certification of the Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 22, 2004, the Company filed a current report on Form
8-K/A related to the pro forma financial information required for
the acquisition of all of the assets and business of DTI Holdings,
LLC.
On April 28, 2004, the Company filed a current report on Form 8-K
related to the announcement of its financial results for the year
and quarter ended January 31, 2004.
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 10, 2004 By: /s/ Lloyd Blonder
---------------------------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
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