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 October 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from ________________ to _________________
0-16438
(Commission File Number)
NATIONAL TECHNICAL SYSTEMS, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4134955
---------------------- ----------------------
(State of Incorporation) (IRS Employer
Identification number)
24007 Ventura Boulevard, Suite 200, Calabasas, California
---------------------------------------------------------
(Address of registrant's principal executive office)
(818) 591-0776 91302
----------------------------- ---------
(Registrant's telephone number) (Zip code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [x] NO [ ]
The number of shares of common stock, no par value, outstanding as of December
11, 2001 was 8,422,925.
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
October 31, 2001 (unaudited) and January 31, 2001 3
Unaudited Condensed Consolidated Statements of Income
For the Nine Months Ended October 31, 2001 and 2000 4
Unaudited Condensed Consolidated Statements of Operations
For the Three Months Ended October 31, 2001 and 2000 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended October 31, 2001 and 2000 6
Notes to the Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION & SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consoliated Balance Sheets
October 31, January 31,
2001 2001
(unaudited)
----------------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 4,371,000 $ 3,344,000
Accounts receivable, less allowance for doubtful accounts
of $876,000 at October 31, 2001 and $1,230,000 at January 31, 2001 15,950,000 19,856,000
Income taxes receivable 434,000 676,000
Inventories 1,292,000 1,714,000
Deferred tax assets 1,388,000 1,387,000
Prepaid expenses 1,456,000 740,000
----------------------------
Total current assets 24,891,000 27,717,000
Property, plant and equipment, at cost 72,256,000 69,997,000
Less: accumulated depreciation 43,700,000 40,313,000
----------------------------
Net property, plant and equipment 28,556,000 29,684,000
Property held for sale 544,000 544,000
Intangible assets 895,000 997,000
Other assets 2,223,000 2,379,000
----------------------------
TOTAL ASSETS $ 57,109,000 $ 61,321,000
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,164,000 $ 4,900,000
Accrued expenses 3,019,000 3,367,000
Deferred income 718,000 127,000
Current installments of long-term debt 3,761,000 3,572,000
----------------------------
Total current liabilities 10,662,000 11,966,000
Long-term debt, excluding current installments 16,982,000 19,782,000
Deferred income taxes 3,547,000 3,534,000
Deferred compensation 831,000 806,000
Minority interest 106,000 106,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized, 20,000,000; issued and outstanding
8,423,000 as of October 31, 2001 and 8,512,000 as of January 31, 2001 12,209,000 12,381,000
Retained earnings 12,816,000 12,798,000
Accumulated other comprehensive income (44,000) (52,000)
----------------------------
Total shareholders' equity 24,981,000 25,127,000
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,109,000 $ 61,321,000
============================
See accompanying notes.
3
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Nine Months Ended October 31, 2001 and 2000
2001 2000
----------------------------
Net Revenues $ 56,496,000 $ 63,899,000
Cost of sales 43,185,000 46,522,000
----------------------------
Gross profit 13,311,000 17,377,000
Selling, general and administrative expense 11,950,000 13,594,000
----------------------------
Operating income 1,361,000 3,783,000
Other income (expense):
Interest expense, net (1,411,000) (1,487,000)
Other 81,000 (82,000)
----------------------------
Total other expense (1,330,000) (1,569,000)
Income before income taxes and minority interest 31,000 2,214,000
Income taxes 13,000 863,000
----------------------------
Income before minority interest 18,000 1,351,000
Minority interest - (15,000)
----------------------------
Net income $ 18,000 $ 1,336,000
============================
Net income per common share:
Basic $ 0.00 $ 0.16
============================
Diluted $ 0.00 0.16
============================
Weighted average common shares outstanding 8,463,000 8,493,000
Dilutive effect of stock options 17,000 58,000
----------------------------
Weighted average common shares outstanding,
assuming dilution 8,480,000 8,551,000
============================
See accompanying notes.
4
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended October 31, 2001 and 2000
2001 2000
----------------------------
Net Revenues $ 18,003,000 $ 22,103,000
Cost of sales 14,102,000 16,363,000
----------------------------
Gross profit 3,901,000 5,740,000
Selling, general and administrative expense 3,766,000 4,498,000
----------------------------
Operating income 135,000 1,242,000
Other income (expense):
Interest expense, net (450,000) (500,000)
Other 72,000 (26,000)
----------------------------
Total other expense (378,000) (526,000)
Income (loss) before income taxes and minority interest (243,000) 716,000
Income taxes (benefit) (96,000) 281,000
----------------------------
Income (loss) before minority interest (147,000) 435,000
Minority interest - (11,000)
----------------------------
Net income (loss) $ (147,000) $ 424,000
============================
Net income per common share:
Basic $ (0.02) $ 0.05
============================
Diluted $ (0.02) 0.05
============================
Weighted average common shares outstanding 8,435,000 8,509,000
Dilutive effect of stock options - 22,000
----------------------------
Weighted average common shares outstanding,
assuming dilution 8,435,000 8,531,000
============================
See accompanying notes.
5
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 31, 2001 and 2000
2001 2000
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 18,000 $ 1,336,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 3,551,000 3,086,000
Provisions for losses on receivables (7,000) 132,000
Undistributed earnings of affiliate - 15,000
Deferred income taxes 12,000 1,000
Changes in assets and liabilities:
Accounts receivable 3,913,000 (919,000)
Inventories 422,000 (1,527,000)
Prepaid expenses (716,000) (549,000)
Other assets and Intangibles 156,000 (259,000)
Accounts payable (1,736,000) (661,000)
Accrued expenses (348,000) 1,746,000
Deferred income 591,000 241,000
Deferred compensation 25,000 188,000
Income taxes receivable 242,000 1,202,000
--------------------------
Net Cash provided by operating activities 6,123,000 4,032,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,321,000) (4,757,000)
--------------------------
Net cash used for investing activities (2,321,000) (4,757,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 2,568,000 5,516,000
Repayments of current and long-term debt (5,179,000) (4,939,000)
Cash dividends paid - (338,000)
Proceeds from stock options exercised - 148,000
Common stock repurchase (172,000) -
--------------------------
Net cash provided (used) by financing activities (2,783,000) 387,000
--------------------------
Effect of exchange rate changes on cash and cash equivalents 8,000 (51,000)
--------------------------
Net increase (decrease) in cash 1,027,000 (389,000)
Beginning cash balance 3,344,000 3,133,000
--------------------------
ENDING CASH BALANCE $ 4,371,000 $ 2,744,000
==========================
See accompanying notes
6
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
In accordance with instructions to Form 10-Q, the accompanying
consolidated financial statements and footnotes of National Technical
Systems, Inc. (NTS or the Company) have been condensed and, therefore, do
not contain all disclosures required by generally accepted accounting
principles. These statements should not be construed as representing pro
rata results of the Company's fiscal year and should be read in
conjunction with the financial statements and notes thereto included in
the Company's Form 10-K for the year ended January 31, 2001.
The statements presented as of and for the three and nine months ended
October 31, 2001 and 2000 are unaudited. In Management's opinion, all
adjustments have been made to present fairly the results of such
unaudited interim periods. All such adjustments are of a normal recurring
nature.
The consolidated financial statements include the accounts of the Company
and its wholly owned and financially controlled subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation. Certain prior year amounts have been reclassified to
conform with the current year presentation.
2. Income Taxes
Income taxes for the interim periods are computed using the effective tax
rates estimated to be applicable for the full fiscal year.
3. Comprehensive Income
Accumulated other comprehensive income on the Company's Condensed
Consolidated Balance Sheets consists of cumulative equity adjustments
from foreign currency translation. During the nine months ended October
31, 2001 and 2000, total comprehensive income was $26,000 and $1,285,000,
respectively. During the three months ended October 31, 2001 and 2000
total comprehensive income (loss) was $(130,000) and $404,000,
respectively. The reported amount for total comprehensive income differs
from net income for the three months and nine months ended October 31,
2001 and 2000 due to foreign currency translation adjustments. The tax
effect related to foreign currency translation adjustments is immaterial
and has not been recognized as part of comprehensive income or in
accumulated other comprehensive income.
4. Inventories
Inventories consist of accumulated costs applicable to uncompleted
contracts and are stated at actual cost which is not in excess of
estimated net realizable value.
5. Interest and Taxes
Cash paid for interest and taxes for the nine months ended October 31,
2001 was $1,383,000 and $114,000, respectively. Cash paid for interest and
taxes for the nine months ended October 31, 2000 was $1,554,000 and
$580,000, respectively.
7
6. Minority Interest
Minority interest in the Company's NQA, Inc. subsidiary is a result of 50%
of the stock of NQA, Inc. being issued to National Quality Assurance, Ltd.
Effective with fiscal 2002, profits and losses are allocated 51% to NTS,
and 49% to National Quality Assurance, Ltd. In fiscal 2001, profits and
losses were allocated 61% to NTS, and 39% to National Quality Assurance,
Ltd.
7. Dividends
On February 6, 2001, the Company's Board of Directors announced the
discontinuance of the Company's policy of paying ordinary and special
dividends.
8. Stock Repurchase
On February 6, 2001, the Company's Board of Directors authorized the
repurchase of common stock in open market purchases subject to the
Company's covenants with its banks, which permit the use of a maximum
amount equal to 40% of the Company's net profit for the prior fiscal year
for such purposes. As of October 31, 2001, the Company had purchased
88,700 shares at an average price of $1.94.
9. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 ("FAS 141"), Business
Combinations, and No. 142 ("FAS 142"), Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with these two Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2003. The
Company has not yet determined what the effect of the new rules will be on
its earnings and financial position.
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 services organization that supplies technical
services and solutions to a variety of industries including aerospace, defense,
automotive, nuclear, electronics, computers and telecommunications. Through its
wide range of testing facilities, staffing solutions and certification services,
the Company helps its customers reduce their time to market and enhance their
overall competitiveness.
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, as well as England and Japan,
serving a large variety of high technology industries, including aerospace,
defense, automotive, nuclear, electronics, computers and telecommunications.
This segment provides highly trained technical personnel for product
certification, product safety testing and product evaluation to allow clients to
sell their products in world markets. In addition, it performs management
registration and certification services to ISO related standards. The Company is
accredited by numerous national and international technical organizations, which
allows the Company to have its test data accepted in the European Union, Taiwan,
Japan, Australia, the United States and Canada.
The Technical Staffing segment provides a variety of staffing and
workforce management services and solutions, including contract services,
temporary and full time placements to meet its clients' information technology
("IT"), information systems ("IS") and software engineering needs. This
segment's objective is to build long-term relationships with companies and
employees and to maximize talent processes and technology for client
organizations.
9
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 nine months ended October
31.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Nine months ended October 31, 2001 % Change 2000
(Dollars in thousands) -----------------------------------
Engineering & Evaluation $ 40,751 (7.4)% $ 44,004
Technical Staffing 15,745 (20.9)% 19,895
----------- ----------
Total revenues $ 56,496 (11.6)% $ 63,899
=========== ==========
For the nine months ended October 31, 2001, consolidated revenues decreased by
$7,403,000 or 11.6% when compared to the same period in fiscal 2001.
Engineering & Evaluation:
- -------------------------
For the nine months ended October 31, 2001, Engineering & Evaluation revenues
decreased by $3,253,000 or 7.4% when compared to the same period in fiscal 2001,
primarily due to the continuing recession in the U.S. economy which has severely
affected the automotive, telecommunications and computer software and hardware
testing business. The impact of the slowdown in the computer testing business
was so severe in the U.K that the Company decided to shut down its U.K.
operations. The Company also shut down its Largo, Florida location and is in the
process of allocating their assets to the Company's other testing locations.
Because of the September 11, 2001 tragedy, revenues for the month of September
plummeted more than $ 840,000 from the Company's average revenues year to date
through August 2001. Revenues were also affected by the shut down of the Rye
Canyon facility during the second half of fiscal 2001.
Technical Staffing:
- -------------------
For the nine months ended October 31, 2001, revenues in Technical Staffing
decreased by $4,150,000 or 20.9% when compared to the same period in fiscal
2001, primarily due to the closure of several non-performing staffing offices
and the general slowdown in the economy. The continuing recession has negatively
impacted the growth in the staffing industry, as companies are not looking to
increase their work force. During the fourth quarter of fiscal 2001, in an
attempt to reduce costs and further diversify its business model, the Company
consolidated some of its locations by moving to virtual offices with regional
"Hubs" providing the necessary administrative support.
GROSS PROFIT
Nine months ended October 31, 2001 % Change 2000
(Dollars in thousands) ------------------------------
Engineering & Evaluation $ 9,645 (24.1)% $ 12,700
% to segment revenue 23.7% 28.9%
Technical Staffing 3,666 (21.6)% 4,677
% to segment revenue 23.3% 23.5%
--------- ---------
Total $ 13,311 (23.4)% $ 17,377
========= =========
% to segment revenue 23.6% 27.2%
Total gross profit for the nine months ended October 31, 2001 decreased by
$4,066,000 or 23.4% when compared to the same period in fiscal 2001.
10
Engineering & Evaluation:
- ------------------------
For the nine months ended October 31, 2001, gross profit for the Engineering &
Evaluation Group decreased by $3,055,000 or 24.1% when compared to the same
period in fiscal 2001, primarily as a result of the decreased revenues discussed
above and the competitive pricing pressures in all segments of the business.
Gross profit as a percentage of sales decreased by 5.2% due to increases in
depreciation, utility costs, insurance, workers compensation and other employee
benefits.
Technical Staffing:
- -------------------
For the nine months ended October 31, 2001, gross profit decreased by $1,011,000
or 21.6% in the Technical Staffing Group when compared to the same period in
fiscal 2001. This decrease was primarily due to the decrease in revenues
discussed above.
SELLING, GENERAL & ADMINISTRATIVE
Nine months ended October 31, 2001 % Change 2000
(Dollars in thousands) ------------------------------
Engineering & Evaluation $ 8,441 7.9% $ 7,820
% to segment revenue 20.7% 17.8%
Technical Staffing 3,509 (39.2)% 5,774
% to segment revenue 22.3% 29.0%
--------- ---------
Total $ 11,950 (12.1)% $ 13,594
========= =========
% to segment revenue 21.2% 21.3%
Total selling, general and administrative expenses decreased $1,644,000 or 12.1%
for the nine months ended October 31, 2001 when compared to the same period in
fiscal 2001.
Engineering & Evaluation:
- ------------------------
For the nine months ended October 31, 2001, selling, general and administrative
expenses increased by $621,000 or 7.9% when compared to the same period in
fiscal 2001, primarily due to increased marketing efforts by the Company to
generate new business.
Technical Staffing:
- ------------------
For the nine months ended October 31, 2001, selling, general and administrative
expenses decreased by $2,265,000 or 39.2% when compared to the same period in
fiscal 2001, primarily due to the closure of several non-performing staffing
offices and the consolidation of the staffing operations in an effort to
streamline this business. In addition, for the nine months ended October 31,
2000, selling, general and administrative expenses included $880,000 in bad debt
expense as a result of costs incurred in servicing one customer, which were
deemed to be un-reimbursable due to fraud perpetrated against the Company.
11
OPERATING INCOME
Nine months ended October 31, 2001 % Change 2000
(Dollars in thousands)
-------------------------------
Engineering & Evaluation $ 1,204 (75.3)% $ 4,880
% to segment revenue 3.0% 11.1%
Technical Staffing 157 114.3% (1,097)
% to segment revenue 1.0% (5.5)%
--------- ----------
Total $ 1,361 (64.0)% $ 3,783
========= ==========
% to segment revenue 2.4% 5.9%
Operating income for the nine months ended October 31, 2001 decreased by
$2,422,000 or 64.0% when compared to fiscal 2001.
For the nine months ended October 31, 2001, operating income in the Engineering
& Evaluation Group decreased by $3,676,000 or 75.3% when compared to the same
period in fiscal 2001, as a result of the decrease in gross profit and the
increase in selling, general and administrative expenses discussed above.
For the nine months ended October 31, 2001, operating income in the Technical
Staffing Group increased by $1,254,000 or 114.3% when compared to the same
period in fiscal 2001, as a result of the decrease in selling, general and
administrative expenses discussed above.
INTEREST EXPENSE
Net interest expense decreased by $76,000 in the nine months ended October 31,
2001 when compared to the same period in fiscal 2001. This decrease was
principally due to slightly lower average debt balances for the nine months
ended October 31, 2001 and lower weighted average interest rates when compared
to the same period last year.
INCOME TAXES
The income tax provision rate of 41.9% for the nine months ended October 31,
2001 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, 2002. 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 decrease in net income for the nine months ended October 31, 2001, compared
to the same period in fiscal 2001, was primarily due to the lower gross profit
in both segments of the business and the increase in selling, general and
administrative expenses in the Engineering & Evaluation segment.
12
The following information is based upon results for the Company for the three
months ended October 31.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
Three months ended October 31, 2001 % Change 2000
(Dollars in thousands) -----------------------------------
Engineering & Evaluation $ 13,045 (11.8)% $ 14,790
Technical Staffing 4,958 (32.2)% 7,313
----------- ----------
Total revenues $ 18,003 (18.5)% $ 22,103
=========== ==========
For the three months ended October 31, 2001, consolidated revenues decreased by
$4,100,000 or 18.5% when compared to the same period in fiscal 2001.
Engineering & Evaluation:
- -------------------------
For the three months ended October 31, 2001, Engineering & Evaluation revenues
decreased by $1,745,000 or 11.8% when compared to the same period in fiscal
2001, primarily due to the continuing recession in the U.S. economy which has
severely affected the automotive, telecommunications and computer software and
hardware testing business. The impact of the slowdown in the computer testing
business was so severe in the U.K that the Company decided to shut down its U.K.
operations. The Company also shut down its Largo, Florida location and is in the
process of allocating their assets to the Company's other testing locations.
Because of the September 11, 2001 tragedy, revenues for the month of September
plummeted more than $ 840,000 from the Company's average revenues year to date
through August 2001.
Technical Staffing:
- -------------------
For the three months ended October 31, 2001, revenues in Technical Staffing
decreased by $2,355,000 or 32.2% when compared to the same period in fiscal
2001, primarily due to the closure of several non-performing staffing offices
and the general slowdown in the economy. The continuing recession has negatively
impacted the growth in the staffing industry, as companies are not looking to
increase their work force. During the fourth quarter of fiscal 2001, in an
attempt to reduce costs and further diversify its business model, the Company
consolidated some of its locations by moving to virtual offices with regional
"Hubs" providing the necessary administrative support.
GROSS PROFIT
Three months ended October 31, 2001 % Change 2000
(Dollars in thousands) ------------------------------
Engineering & Evaluation $ 2,791 (31.7)% $ 4,085
% to segment revenue 21.4% 27.6%
Technical Staffing 1,110 (32.9)% 1,655
% to segment revenue 22.4% 22.6%
--------- ---------
Total $ 3,901 (32.0)% $ 5,740
========= =========
% to segment revenue 21.7% 26.0%
Total gross profit for the three months ended October 31, 2001 decreased by
$1,839,000 or 32.0% when compared to the same period in fiscal 2001.
13
Engineering & Evaluation:
- ------------------------
For the three months ended October 31, 2001, gross profit for the Engineering &
Evaluation Group decreased by $1,294,000 or 31.7% when compared to the same
period in fiscal 2001, primarily as a result of the decreased revenues discussed
above and the competitive pricing pressures in all segments of the business.
Gross profit as a percentage of sales decreased by 6.2% due to increases in
depreciation, utility costs, insurance, workers compensation and other employee
benefits.
Technical Staffing:
- -------------------
For the three months ended October 31, 2001, gross profit decreased by $545,000
or 32.9% in the Technical Staffing Group when compared to the same period in
fiscal 2001. This decrease was primarily due to the decrease in revenues
discussed above.
SELLING, GENERAL & ADMINISTRATIVE
Three months ended October 31, 2001 % Change 2000
(Dollars in thousands) ------------------------------
Engineering & Evaluation $ 2,698 (6.2)% $ 2,877
% to segment revenue 20.7% 19.5%
Technical Staffing 1,068 (34.1)% 1,621
% to segment revenue 21.5% 22.2%
--------- ---------
Total $ 3,766 (16.3)% $ 4,498
========= =========
% to segment revenue 20.9% 20.4%
Total selling, general and administrative expenses decreased $732,000 or 16.3%
for the three months ended October 31, 2001 when compared to the same period in
fiscal 2001.
Engineering & Evaluation:
- ------------------------
For the three months ended October 31, 2001, selling, general and administrative
expenses decreased by $179,000 or 6.2% when compared to the same period in
fiscal 2001, as a result of the cost reduction programs including reductions in
staff implemented during the current year.
Technical Staffing:
- ------------------
For the three months ended October 31, 2001, selling, general and administrative
expenses decreased by $553,000 or 34.1% when compared to the same period in
fiscal 2001, primarily due to the closure of several non-performing staffing
offices and the consolidation of the staffing operations in an effort to
streamline this business.
14
OPERATING INCOME
Three months ended October 31, 2001 % Change 2000
(Dollars in thousands)
-------------------------------
Engineering & Evaluation $ 93 (92.3)% $ 1,208
% to segment revenue 0.7% 8.2%
Technical Staffing 42 23.5% 34
% to segment revenue 0.8% 0.5%
--------- ----------
Total $ 135 (89.1)% $ 1,242
========= ==========
% to segment revenue 0.7% 5.6%
Operating income for the three months ended October 31, 2001 decreased by
$1,107,000 or 89.1% when compared to fiscal 2001.
For the three months ended October 31, 2001, operating income in the Engineering
& Evaluation Group decreased by $1,115,000 or 92.3% when compared to the same
period in fiscal 2001, primarily as a result of the decrease in gross profit.
For the three months ended October 31, 2001, operating income in the Technical
Staffing Group increased by $8,000 or 23.5% when compared to the same period in
fiscal 2001, primarily as a result of the decrease in selling, general and
administrative expenses, offset by the decrease in gross profit.
INTEREST EXPENSE
Net interest expense decreased by $50,000 in the three months ended October 31,
2001 when compared to the same period in fiscal 2001. This decrease was
principally due to lower average debt balances for the three months ended
October 31, 2001 and lower weighted average interest rates when compared to the
same period last year.
INCOME TAXES
The income tax provision rate of 39.5% for the three months ended October 31,
2001 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, 2002. 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 decrease in net income for the three months ended October 31, 2001, compared
to the same period in fiscal 2001, was primarily due to the lower gross profit
in both segments of the business.
BUSINESS ENVIRONMENT
Engineering & Evaluation:
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The Company's basic service is to provide conformity assessment services. The
Company is well positioned to service the needs of each of these markets with
its current locations, extensive equipment capability, world wide recognized
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accreditations, and technical staff and national sales staff. Market needs do
change, and the Company is well positioned to reallocate resources which include
test equipment and personnel to meet the market demands. Growth and
profitability will be dependent on general economic conditions and an increase
in research and development spending in the telecommunication, aerospace, and
defense industries as well as business expansion in the broadband and wireless
markets.
Technical Staffing:
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The Company provides a variety of staffing and workforce management services and
solutions, including contract, contract-to-hire and full time placements to meet
its clients' needs. The strategy for growth is to aggressively pursue new
business and leverage off the Engineering & Evaluation clients and provide on
site technical and engineering personnel for product compliance departments as a
complete package to augment the physical and functional compliance activity the
company currently provides at each of its test locations. The goal is to align
the Company as a complete solution to support the clients' product development
needs and product compliance requirements. These needs and requirements include
consultants and technical experts provided by the staffing division.
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.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended October 31, 2001, cash provided by operations
increased by $2,091,000 when compared to the same period in fiscal 2001. This
increase was primarily due to the reductions in accounts receivable and
inventories.
Net cash used in investing activities in the nine-month period ended October 31,
2001 decreased by $2,436,000 over the same period in fiscal 2001, primarily due
to the decrease in capital purchases during the nine-month period ended October
31, 2001.
In the nine-month period ended October 31, 2001, net cash used by financing
activities increased by $3,170,000 over the same period in fiscal 2001. Net cash
used by financing activities consisted of debt reduction on lines of credit and
short term and long term debt of $5,179,000 and repurchase of common stock of
$172,000, partially offset by increases in proceeds from lines of credit and
term loans of $2,568,000.
The Company had a credit agreement with United California Bank (formerly Sanwa
Bank California), as agent, and Mellon Bank, which included (1) a $10,000,000
revolving line of credit at an interest rate equal to the agent bank's reference
rate expiring November 1, 2002 and (2) a $6,500,000 term loan at an interest
rate of 8.31% expiring in January 2003. In September 2001, the line of Credit
was reduced to $9,700,000. The outstanding balance on the line of credit as of
October 31, 2001, was $8,167,000 and the outstanding balance on the term loan as
of October 31, 2001, was $4,308,000. 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 July 30, 2003. Comerica, as the agent Bank, is sharing
60% of the line with First Bank as the participant Bank sharing 40% of the line.
The revolving line of credit will be reduced by $1,500,000 on July 30, 2002 and
by $1,750,000 each year thereafter. If during any fiscal year, the Company's net
income equals or exceeds $2,000,000, there will be no reduction in the revolving
line of credit. The interest rate is at the agent bank's prime rate, with an
option for the Company to convert to loans at the Libor rate plus 250 basis
points for 30, 60, 90, 180 or 365 days, with minimum advances of $1,000,000. The
Company paid a 0.5% commitment fee of the total line amount and will pay an
additional 0.25% of the commitment amount annually. The Company will also pay a
0.25% fee for any unused line of credit. 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 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 October 31, 2001
was $3,899,000.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.14 - Revolving credit agreement between Comerica Bank and NTS
effective November 21, 2001
(b) Form 8-K
During the quarter ended October 31, 2001 the registrant did not file a
current report on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL TECHNICAL SYSTEMS, INC.
Date: December 11, 2001 By: /s/ Lloyd Blonder
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Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer)
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