================================================================================
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, 2005
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 8,
2005 was 9,085,472.
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, 2005 (unaudited) and January 31, 2005 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended April 30, 2005 and 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2005 and 2004 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 15
PART II. OTHER INFORMATION & SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I - FINANCIAL
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
April 30, January 31,
2005 2005
ASSETS (unaudited)
----------------------------
CURRENT ASSETS:
Cash $ 5,700,000 $ 6,201,000
Accounts receivable, less allowance for doubtful accounts
of $970,000 at April 30, 2005 and $906,000 at January 31, 2005 19,528,000 18,618,000
Income taxes receivable 378,000 521,000
Inventories 1,846,000 1,612,000
Deferred tax assets 1,511,000 1,529,000
Prepaid expenses 690,000 666,000
----------------------------
Total current assets 29,653,000 29,147,000
Property, plant and equipment, at cost 90,957,000 89,313,000
Less: accumulated depreciation (59,374,000) (58,073,000)
----------------------------
Net property, plant and equipment 31,583,000 31,240,000
Goodwill 2,740,000 2,740,000
Other assets 3,690,000 3,542,000
----------------------------
TOTAL ASSETS $ 67,666,000 $ 66,669,000
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,329,000 $ 3,512,000
Accrued expenses 3,357,000 3,755,000
Deferred income 1,780,000 424,000
Current installments of long-term debt 902,000 975,000
----------------------------
Total current liabilities 9,368,000 8,666,000
Long-term debt, excluding current installments 19,708,000 20,557,000
Deferred income taxes 5,748,000 5,572,000
Deferred compensation 831,000 810,000
Minority interest 121,000 113,000
Commitments and contingencies
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, 9,085,000 as of April 30, 2005 and 9,025,000 as of
January 31, 2005 14,403,000 14,184,000
Retained earnings 17,539,000 16,805,000
Accumulated other comprehensive income (52,000) (38,000)
----------------------------
Total shareholders' equity 31,890,000 30,951,000
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 67,666,000 $ 66,669,000
============================
See accompanying notes.
3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended April 30,
2005 2004
----------------------------
Net revenues $ 27,444,000 $ 27,472,000
Cost of sales 20,846,000 21,434,000
----------------------------
Gross profit 6,598,000 6,038,000
Selling, general and administrative expense 5,215,000 5,156,000
Equity (income) from non-consolidated subsidiary (77,000) (33,000)
----------------------------
Operating income 1,460,000 915,000
Other income (expense):
Interest expense, net (318,000) (252,000)
Other -- 152,000
----------------------------
Total other expense (318,000) (100,000)
----------------------------
Income before income taxes and minority interest 1,142,000 815,000
Income taxes 400,000 328,000
----------------------------
Income before minority interest 742,000 487,000
Minority interest (8,000) 46,000
----------------------------
Net income $ 734,000 $ 533,000
============================
Net income per common share:
Basic $ 0.08 $ 0.06
============================
Diluted $ 0.08 $ 0.06
============================
Weighted average common shares outstanding 9,052,000 8,874,000
Dilutive effect of stock options 494,000 726,000
Weighted average common shares outstanding, ----------------------------
assuming dilution 9,546,000 9,600,000
============================
See accompanying notes.
4
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 2005 and 2004
2005 2004
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 734,000 $ 533,000
Adjustments to reconcile net income from continuing operations to cash
provided by (used for) operating activities:
Depreciation and amortization 1,311,000 1,247,000
Provisions for losses (recoveries) on receivables 64,000 (1,000)
Gain on sale of assets -- (158,000)
Undistributed earnings of affiliate 8,000 (46,000)
Deferred income taxes 194,000 258,000
Changes in assets and liabilities (net of acquisition):
Accounts receivable (934,000) (26,000)
Inventories (234,000) 39,000
Prepaid expenses (24,000) (89,000)
Other assets and intangibles (53,000) 69,000
Accounts payable (282,000) (413,000)
Accrued expenses (431,000) (580,000)
Income taxes payable -- (23,000)
Deferred income 1,356,000 738,000
Deferred compensation 21,000 21,000
Income taxes receivable 143,000 (17,000)
--------------------------
Cash provided by continuing operations 1,873,000 1,552,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,034,000) (1,482,000)
Sale of property, plant and equipment -- 311,000
Investment in life insurance -- (38,000)
Acquisition of business, net of cash (483,000) --
--------------------------
Net cash used for investing activities (1,517,000) (1,209,000)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 646,000 902,000
Repayments of current and long-term debt (1,568,000) (475,000)
Proceeds from stock issuance 79,000 50,000
--------------------------
Net cash provided by (used for) financing activities (843,000) 477,000
--------------------------
Effect of exchange rate changes on cash and cash equivalents (14,000) --
--------------------------
Net increase (decrease) in cash (501,000) 820,000
Beginning cash balance 6,201,000 4,661,000
--------------------------
ENDING CASH BALANCE $ 5,700,000 $ 5,481,000
==========================
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, 2005.
The statements presented as of and for the three months ended April 30,
2005 and 2004 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 amounts in the prior year financial statements have
been reclassified to conform to the current year financial statement
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. The Company
recorded income tax expense of $400,000 for the three months ended April
30, 2005 and $328,000 for the three months ended April 30, 2004.
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 three months ended April 30,
2005, the foreign currency translation adjustment was $14,000.
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 three months ended April 30, 2005
was $398,000 and $65,000, respectively. Cash paid for interest and taxes
for the three months ended April 30, 2004 was $205,000 and $105,000,
respectively.
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 50.1% to NTS,
and 49.9% to National Quality Assurance, Ltd.
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
6
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, 2005.
As of April 30, 2005 and January 31, 2005, the Company had the following
acquired intangible assets:
April 30, 2005 January 31, 2005
----------------------------------------------- -----------------------------------------------
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 $ 88,000 $ 60,000 3-5 years $ 148,000 $ 78,000 $ 70,000 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 $10,000 for the three months ended April 30, 2005 and 2004,
respectively.
9. Stock-Based Compensation
As of April 30, 2005, the Company had outstanding stock options under two
stock-based employee compensation plans, the Amended and Restated 1994
stock option plan (which has no remaining shares reserved for future
grants) 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:
April 30, 2005 April 30, 2004
-------------- --------------
Net Income
As reported $734,000 $533,000
Pro forma $616,000 $406,000
Basic earnings per common share
As reported $0.08 $0.06
Pro forma $0.07 $0.05
Diluted earnings per common share
As reported $0.08 $0.06
Pro forma $0.06 $0.04
10. Acquisition of Phase Seven Laboratories
On March 18, 2005, the Company acquired the outstanding stock of Phase
Seven Laboratories, located in Santa Rosa, California, for a total
purchase price of $652,000, payable in cash and NTS stock. Phase Seven
Laboratories provides carrier-class network interoperability,
functionality and performance testing for new and emerging technologies
and their integration to legacy systems. The results of operations of the
acquired business are included in the accompanying consolidated statement
of
7
operations from March 18, 2005 to April 30, 2005.
The allocation of the purchase price was as follows:
Purchase price:
---------------
Cash $ 29,000
Accounts receivable 40,000
Deposits 105,000
Machinery and equipment 610,000
Accounts payable (99,000)
Accrued expenses (33,000)
---------
Purchase price $ 652,000
=========
Cash flow
---------
Purchase price $ 652,000
Stock issued (140,000)
Cash acquired (29,000)
---------
Net cash paid $ 483,000
=========
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 revenues 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, 2005 % Change 2004
(Dollars in thousands) -------------------------------
Engineering & Evaluation $17,271 8.9% $15,859
Technical Solutions 10,173 (12.4)% 11,613
------- -------
Total revenues $27,444 (0.1)% $27,472
======= =======
For the three months ended April 30, 2005, consolidated revenues decreased by
$28,000 or 0.1% when compared to the same period in fiscal 2005.
Engineering & Evaluation:
For the three months ended April 30, 2005, Engineering and Evaluation revenues
increased by $1,412,000 or 8.9% when compared to the same period in fiscal 2005,
primarily due to increased revenues in the defense, aerospace and automotive
markets and additional revenues of $575,000 from the acquisitions of the
telecommunications test laboratories in Calgary, Canada in August 2004 and Santa
Rosa, California in March 2005. These increases were partially offset by a
decrease in the electronics testing business.
Technical Solutions:
For the three months ended April 30, 2005, Technical Solutions revenues
decreased by $1,440,000 or 12.4% when compared to the same period in fiscal
2005, primarily due to the continued degradation of the IT market staffing
business due to competition from off-shore companies and the loss of certain
customers in geographic areas where the Company discontinued its sales and
marketing efforts.
GROSS PROFIT
Three months ended April 30, 2005 % Change 2004
(Dollars in thousands) -------------------------------
Engineering & Evaluation $ 5,031 18.1% $ 4,260
% to segment revenue 29.1% 26.9%
Technical Solutions 1,567 (11.9)% 1,778
% to segment revenue 15.4% 15.3%
------- -------
Total $ 6,598 9.3% $ 6,038
======= =======
% to total revenue 24.0% 22.0%
Total gross profit for the three months ended April 30, 2005 increased by
$560,000 or 9.3% when compared to the same period in fiscal 2005.
Engineering & Evaluation:
For the three months ended April 30, 2005, gross profit for the Engineering &
Evaluation Group increased by $771,000 or 18.1% when compared to the same period
in fiscal 2005, primarily as a result of the increase in revenues discussed
above and an increase in gross profit as a percentage of revenue to 29.1% in the
current period compared to 26.9% in the same period in the prior year as the
Company continues to improve efficiency in this segment.
Technical Solutions:
For the three months ended April 30, 2005, gross profit decreased by $211,000 or
11.9% in the Technical Solutions Group when compared to the same period in
fiscal 2005. This decrease was due to the lower
10
revenues discussed above and the competitive pricing pressures in the staffing
industry. Gross profit as a percentage of revenue increased to 15.4 % from 15.3%
when compared to the same period in the prior year.
SELLING, GENERAL & ADMINISTRATIVE
Three months ended April 30, 2005 % Change 2004
(Dollars in thousands) ---------------------------
Engineering & Evaluation $3,699 5.8% $3,497
% to segment revenue 21.4% 22.1%
Technical Solutions 1,516 (8.6)% 1,659
% to segment revenue 14.9% 14.3%
------ ------
Total $5,215 1.1% $5,156
====== ======
% to total revenue 19.0% 18.8%
Total selling, general and administrative expenses increased $59,000 or 1.1% for
the three months ended April 30, 2005 when compared to the same period in fiscal
2005.
Engineering & Evaluation:
For the three months ended April 30, 2005, selling, general and administrative
expenses increased by $202,000 when compared to the same period in fiscal 2005,
primarily due to increased compensation, legal, accounting and public relations
expenses.
Technical Solutions:
For the three months ended April 30, 2005, selling, general and administrative
expenses decreased by $143,000 or 8.6% when compared to the same period in
fiscal 2005, primarily due to the reduction in selling costs associated with the
lower revenues discussed above.
Equity Income from Non-Consolidated Subsidiary:
Engineering & Evaluation:
For the three months ended April 30, 2005, equity income from XXCAL Japan was
$77,000, an increase of $44,000 or 133.3% when compared to the same period in
fiscal 2005. This increase was primarily due to the transfer of technology of
computer component testing to the Japanese subsidiary which is 50% owned by NTS
and is accounted for under the equity method since NTS does not have management
or board control.
OPERATING INCOME
Three months ended April 30, 2005 % Change 2004
(Dollars in thousands) --------------------------------
Engineering & Evaluation $ 1,409 77.0% $ 796
% to segment revenue 8.2% 5.0%
Technical Solutions 51 (57.1)% 119
% to segment revenue 0.5% 1.0%
------- -------
Total $ 1,460 59.6% $ 915
======= =======
% to total revenue 5.3% 3.3%
Operating income for the three months ended April 30, 2005 increased by $545,000
or 59.6% when compared to fiscal 2005.
Engineering & Evaluation:
11
For the three months ended April 30, 2005, operating income in the Engineering &
Evaluation Group increased by $613,000 or 77.0% when compared to the same period
in fiscal 2005, as a result of the increase in gross profit, partially offset by
the increase in selling, general and administrative expenses.
Technical Solutions:
For the three months ended April 30, 2005, operating income in the Technical
Solutions Group decreased by $68,000 or 57.1% when compared to the same period
in fiscal 2005, 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 increased by $66,000 in the three months ended April 30,
2005 when compared to the same period in fiscal 2005. This increase was
principally due to higher interest rate levels for the three months ended April
30, 2005, partially offset by slightly lower average debt balances for the three
months ended April 30, 2005 when compared to the same period last year.
OTHER INCOME
Other income decreased by $152,000 in the three months ended April 30, 2005 when
compared to the same period in fiscal 2005, primarily due to the inclusion of a
gain of $158,000 on the sale of real estate in the three months ended April 30,
2004.
INCOME TAXES
The income tax provision rate of 35.0% for the three months ended April 30, 2005
is lower than the federal and state statutory rates, primarily due to the
earnings associated with the Company's equity interest in its foreign
subsidiary. Earnings for this foreign subsidiary are reported on the equity
method, net of tax and are included in income before income taxes. The
associated tax is not separately stated in income taxes. This rate is based on
the estimated provision accrual for fiscal year ending January 31, 2006.
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, 2005 was $734,000, an increase
of $201,000 or 37.7% compared to the same period in fiscal 2005. This increase
was primarily due to the higher operating income, partially offset by higher
interest expense, lower other income and lower minority interest during the
three months ended April 30, 2005.
BUSINESS ENVIRONMENT
In the Engineering & Evaluation segment, The Company tests and certifies high
tech products for seven distinct markets: defense, aerospace,
telecommunications, transportation, power, computer and electronics. The Company
also provides ISO 9000 Quality Management System Registration.
The defense and aerospace markets continue to generate the majority of the
revenue of the overall Engineering and Evaluation revenues. The Company
anticipates steady growth from both of these markets and continues to be well
positioned to handle the expected increase in government outsourcing activity.
The Company has ten well equipped defense and aerospace environmental simulation
laboratories located throughout the United States and is well equipped to handle
this increase in demand. The Company has seen an increase in demand for the
evaluation of military equipment and weapons systems, and this demand continues
to positively affect business at the Company's Arkansas facility. NTS has
installed a new rocket firing range and has upgraded it's capability to handle
large weapons systems as well as maintaining shock machines, centrifuges,
acoustical chambers and hydraulic and electro-dynamic vibration equipment. These
additions allow NTS to provide additional services as well. The Company
anticipates the level of need will
12
increase for the foreseeable future and is also expanding its service offering
at the Tinton Falls, New Jersey facility, to handle the anticipated increase in
demand.
The telecommunications market in the past three years has not been favorable.
The Company has experienced a decline in business in this market. The outlook
for the future appears favorable due to the increase in product certification
outsourcing by the major Regional Bell Operating Companies (RBOCs). The Company
has experienced a monthly average of 15% increase in new orders booked during
this quarter compared to last year. The Company is currently providing telecom
test and certification services at laboratories in California, Massachusetts,
Texas, Alberta, Canada and Germany. The Company expects an increase in business
demand as RBOCs upgrade networks packet-based Voice Over Internet Protocol
(VOIP) devices. As service providers gradually convert to VOIP architectures,
interoperability becomes critical to ensure a seamless transition to next
generation networks. The Company also expects an increase in demand as carriers
begin to deploy "triple play" (voice, video, and broadband) offerings over FTTP
(fiber to the premise) passive fiber networks. The Company recently acquired a
network architecture and interoperability laboratory in Northern California,
Phase Seven laboratories to extend the Company's service offering to handle the
anticipated demand for interoperability testing related to the FTTP deployment.
The transportation and power markets have been stable and continue to remain
stable during the first quarter. The Company anticipates that these two markets
will remain stable with no significant external growth.
The Computer and Electronics markets have been stable with the Company
experiencing growth in the Japan operation. This growth is directly attributed
to the Universal Serial Bus (USB) certification technology transfer that was
completed in fiscal year 2005. The Company anticipates growth in these markets
as the international expansion strategy is deployed in fiscal year 2006.
Development plans include cooperative agreements in Taiwan, Hong Kong and
mainland China. The cooperative agreements will focus on providing USB, USB on
the go, Connector and Zigbee certification to device manufacturers and
industrial products manufactured in Asia.
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 with a
focus on IT development. The IT general services business is extremely
competitive with an increasing portion of this work being outsourced to
off-shore providers. The Company continues to experience a decline in the
general service IT business as a result of the current adverse market trends. To
offset this competitive environment, the Company is deploying a migration
strategy focusing on meeting the anticipated increase in demand for specialized
compliance and engineering support services at Company locations as well as
taking advantage of offshore opportunities. The Company is now offering a
specialized niche oriented compliance and engineering service. This service is
being deployed by cross selling to the clients currently being serviced by the
Engineering and Evaluation segment. The Company has also set up a test and
compliance laboratory in Vietnam for a major US Fortune 500 computer company to
take advantage of the low-cost, highly-skilled labor in Vietnam. The Company
believes it has a competitive advantage because of the existing relationships
with the Engineering and Evaluation clients and anticipates the specialized
compliance and engineering service need will continue to grow both domestically
and internationally as a result of the continued outsourcing trend.
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.
13
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $1,873,000 in the three months
ended April 30, 2005 primarily consisted of net income of $734,000 adjusted for
non-cash items of $1,311,000 in depreciation and amortization offset by a
decrease of $172,000 of changes in working capital. The decrease in working
capital changes was primarily due to the decreases in accounts receivable,
accrued expenses, accounts payable and inventories, partially offset by an
increase in deferred income, deferred taxes and income taxes receivable. The
increase of $321,000 in cash provided by operating activities from the three
months ended April 30, 2004 to the three months ended April 30, 2005 was
primarily the result of the changes in deferred income, accounts payable and the
higher net income in the current year, partially offset by the change in
accounts receivable.
Net cash used for investing activities in the three months ended April 30, 2005
of $1,517,000 was attributable to capital spending of $1,034,000 and cash used
to acquire Phase Seven Laboratories of $483,000. 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, 2004 to
the three months ended April 30, 2005 by $308,000 primarily as a result of the
acquisition of Phase Seven Laboratories.
Net cash used by financing activities in the three months ended April 30, 2005
of $843,000 consisted of repayment of debt of $1,568,000, offset by cash
provided by increased borrowing of $646,000 and proceeds from stock options
exercised of $79,000. Net cash used by financing activities increased from the
three months ended April 30, 2004 to the three months ended April 30, 2005 by
$1,320,000 primarily as a result of the increased repayment of debt and the
reduction in borrowings.
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, retained 60% of the line with First Bank, as the
participant, holding 40% of the line. The revolving line of credit was reduced
by $1,750,000 on August 1, 2003 and was reduced again on August 1, 2004 by
$1,750,000 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'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, 2005 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 was $998,000 as of
April 30, 2005. The Company was in full compliance with all of the covenants
with its banks as of April 30, 2005. The Company is currently in negotiations
with its banks to increase its lines of credit.
The Company has additional equipment line of credit agreements (at interest
rates of 5.56% to 9.82%) to finance various test equipment with terms of 60
months for each equipment schedule. The outstanding balance at April 30, 2005
was $2,373,000. The balance of other notes payable collateralized by land and
building was $2,732,000, and the balance of unsecured notes was $3,000 at April
30, 2005.
14
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.
15
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
None
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, 2005 By: /s/ Lloyd Blonder
------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
16