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, 1998
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, 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 June 8,
1998 was 6,980,284.
Exhibit Index on Page 12
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page No.
Financial Statements:
Condensed Consolidated Balance Sheets as of
April 30, 1998 (unaudited) and January 31, 1998 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended April 30, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 1998 and 1997 5
Notes to the Unaudited Condensed Consolidated Financial Statments 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION & SIGNATURE 11
Item 6. Exhibits and Reports on Form 8-K
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PART I -- FINANCIAL INFORMATION
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
April 30, January 31,
1998 1998
--------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 2,108,000 $ 2,101,000
Receivables, less allowance for doubtful
accounts of $596,000 at April 30, 1998
and $666,000 at January 31,1998 14,597,000 14,880,000
Income taxes receivable 104,000 104,000
Inventories 2,154,000 1,860,000
Deferred tax assets 523,000 523,000
Prepaid expenses 1,113,000 762,000
----------- -----------
Total current assets 20,599,000 20,230,000
Property, plant and equipment, at cost 49,250,000 48,509,000
Less: accumulated depreciation 30,161,000 29,527,000
----------- -----------
Net property, plant and equipment 19,089,000 18,982,000
Property held for sale 544,000 544,000
Intangible assets, net 609,000 637,000
Other assets 371,000 326,000
----------- -----------
TOTAL ASSETS $41,212,000 $40,719,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,410,000 $ 2,974,000
Accrued expenses 3,391,000 1,976,000
Income taxes payable 534,000 69,000
Current installments of long-term debt 1,555,000 1,535,000
----------- -----------
Total current liabilities 7,890,000 6,554,000
Long-term debt, excluding current installments 10,512,000 12,144,000
Deferred tax liabilities 2,321,000 2,303,000
Minority interest 34,000 27,000
STOCKHOLDERS' EQUITY:
Common stock, no par value. Authorized,
20,000,000; issued and outstanding 6,971,000
as of April 30, 1998 and as of January 31, 1998 11,071,000 11,069,000
Retained earnings 9,384,000 8,622,000
----------- -----------
Total stockholders' equity 20,455,000 19,691,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $41,212,000 $40,719,000
=========== ===========
See accompanying notes
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended April 30, 1998 and 1997
1998 1997
----------- -----------
Revenues $ 14,929,000 $ 13,153,000
Cost of sales 10,826,000 9,589,000
------------ ------------
Gross profit 4,103,000 3,564,000
Selling, general and administrative expense 2,552,000 2,125,000
------------ ------------
Operating income 1,551,000 1,439,000
Other income (expense):
Interest expense, net (268,000) (262,000)
Other (1,000) (1,000)
------------ ------------
Total other expense (269,000) (263,000)
------------ ------------
Income before income taxes, and minority
interest 1,282,000 1,176,000
Income taxes 513,000 529,000
------------ ------------
Income before minority interest 769,000 647,000
Minority interest (7,000) 1,000
------------ ------------
Net income $ 762,000 $ 648,000
============ ============
Basic earnings per common share: $ 0.11 $ 0.10
============ ============
Diluted earnings per common share: $ 0.11 $ 0.10
============ ============
Weighted average common shares outstanding 6,971,000 6,742,000
Dilutive effect of stock options 276,000 --
------------ ------------
Weighted average common shares outstanding,
assuming dilution 7,247,000 6,742,000
============ ============
See accompanying notes.
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ending April 30, 1998 and 1997
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income from continuing operations $ 762,000 $ 648,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 662,000 539,000
Provision for losses on receivables (recoveries) (70,000) 52,000
Deferred income taxes 18,000 270,000
Net changes in assets and liabilities, net:
Accounts receivable 353,000 304,000
Inventories (294,000) (133,000)
Prepaid expenses (351,000) 17,000
Other assets (45,000) (78,000)
Accounts payable (564,000) (1,159,000)
Accrued expenses 1,415,000 753,000
Undistributed loss of affiliate 7,000 (1,000)
Income taxes 465,000 171,000
----------- -----------
Net cash provided by operating activities 2,358,000 1,383,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (741,000) (710,000)
----------- -----------
Net cash used for investing activities (741,000) (710,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 288,000 860,000
Repayments of current and long-term debt (1,900,000) (468,000)
Proceeds from stock options exercised 2,000 11,000
----------- -----------
Net cash provided by (used for)
financing activities (1,610,000) 403,000
----------- -----------
Net increase (decrease) in cash 7,000 1,076,000
Beginning cash balance 2,101,000 1,204,000
----------- -----------
ENDING CASH BALANCE $ 2,108,000 $ 2,280,000
=========== ===========
See accompanying notes
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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements April 30, 1998
1. In accordance with instructions to Form 10-Q the accompanying consolidated
financial statements and footnotes have been condensed and, therefore, do
not contain all disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the
financial statements and notes thereto included in the Registrant's Form
10-K for the year ended January 31, 1998.
2. The statements presented as of and for the three-month periods ended April
30, 1998 and 1997 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.
3. While the Registrant's business is not materially seasonal, the quarterly
results of operations should not be construed as representing pro rata
results of the Registrant's fiscal year.
4. Income taxes for the interim periods are computed using the effective tax
rates estimated to be applicable for the full fiscal year based on the
provision accrued for the Registrant's year ended January 31, 1998.
5. In 1997, the Financial Accounting Standards Board issued Statement No.128,
"Earnings Per Share". The statement replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been presented, and where appropriate, restated to
conform to the statement's requirements.
6. The consolidated financial statements include the accounts of the
Registrant and its wholly owned and financially controlled subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
7. 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.
8. Cash paid for interest and taxes for the three months ended April 30, 1998
was $281,000 and $31,000 respectively. Cash paid for interest and taxes
for the three months ended April 30, 1997 was $240,000 and $67,000
respectively.
9. Minority interest in the Registrant's NQA-USA, Inc. subsidiary is a result
of 50% of the stock of NQA-USA, Inc. being issued to National Quality
Assurance, Ltd. Profits and losses are allocated 63% to NQA-USA, Inc. and
37% to National Quality Assurance, Ltd for the fiscal year ending January
31, 1999.
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10. As of February 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income
or shareholders' equity. Statement 130 requires display of unrealized
gains or losses on available-for-sale securities and foreign currency
translation adjustments. The Company does not have these accounting
transactions. Prior year financial statements have not been reclassified
to conform to the requirements of statement 130 since there is no impact.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
quarterly financial statements and notes thereto. All information is based upon
operating results of National Technical Systems, Inc. for the first quarter
ended April 30.
RESULTS OF OPERATIONS
REVENUES
Quarter ended April 30
(Dollars in thousands) 1998 % Change 1997
--------- ---------- ----------
Technical Services $11,004 7.5% $10,237
Technical Staffing 2,959 35.7% 2,180
Registration Services 966 31.3% 736
--------- ----------
Total Revenues $14,929 13.5% $13,153
========= ==========
For the three months ended April 30, 1998, consolidated revenues increased by
$1,776,000 or 13.5% when compared to the same period in 1997.
Revenues in the Technical Services segment increased $767,000 or 7.5% primarily
due to the addition of two new testing facilities in April and November of 1997
and an increase in outsourcing of engineering and evaluation services by
commercial customers.
Revenues in the Technical Staffing segment increased $779,000 due to increases
in the expanding Information Technology (IT) portion of its business, the
continuing success of its strategic alliances with Fortune 500 companies and
major technical staffing companies, the opening of three new staffing offices
during the first six months of 1997 and the acquisition of the staffing division
of Texas-based Johnson Engineering Corporation in the third quarter of 1997. The
Company considers this to be a continuing growth industry.
Revenues in the Registration Services segment increased $230,000 or 31.3% as a
result of continuing marketing efforts and an increase in demand by U.S.
companies for ISO 9000 certification.
It is anticipated by the Registrant that revenues in the Technical Services and
Technical Staffing segments will continue to increase through fiscal 1999. The
Registrant also anticipates that revenues in the Registration Services segment
will continue to grow moderately through 1999.
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GROSS PROFIT
Quarter ended April 30
(Dollars in thousands) 1998 % Change 1997
--------- ---------- ---------
Technical Services $3,038 6.8% $2,845
% to segment revenue 27.6% 27.8%
Technical Staffing 753 52.4% 494
% to segment revenue 25.4% 22.7%
Registration Services 312 38.7% 225
% to segment revenue 32.3% 30.6%
------------------------------
Total Gross Proft $4,103 15.1% $3,564
==============================
% to total revenues 27.5% 27.1%
Total gross profit for the period ended April 30, 1998 increased by $539,000 or
15.1% as a result of increased revenues in 1998 compared to 1997. Gross profit
as a percentage of net revenues in 1998 increased slightly when compared to the
same period in 1997. This increase was due primarily to the success of the
Registrant in obtaining more profitable fixed price contracts in its Technical
Staffing and Registration Services segments and the success of its continuing
cost containment programs in these segments.
SELLING, GENERAL & ADMINISTRATIVE
Quarter ended April 30
(Dollars in thousands) 1998 % Change 1997
--------- ---------- ---------
Technical Services $1,669 12.2% $1,487
% to segment revenue 15.2% 14.5%
Technical Staffing 633 60.3% 395
% to segment revenue 21.4% 18.1%
Registration Services 216 3.3% 209
% to segment revenue 22.4% 28.4%
Corporate 34 0.0% 34
------------------------------
Total S G & A $2,552 20.1% $2,125
==============================
% to total revenues 17.1% 16.2%
Total selling, general and administrative expenses increased by $427,000 or
20.1% for the quarter ended April 30, 1998 when compared to the same period in
1997. This increase was due primarily to the increase in revenues as well as an
increase in marketing costs related to new marketing programs in its Technical
Staffing segment in addition to the opening of an additional staffing office and
the acquisition of Texas-based Johnson Engineering Corporation in Boulder,
Colorado. Selling, general and administrative expenses decreased slightly as a
percentage of net revenue in the Registration Services segment due to the
success of the Registrant's continuing cost containment activities. The
Registrant continues to look for new ways to reduce costs yet remain effective
in all segments of its business.
INTEREST EXPENSE
Net interest expense increased $6,000 in the first quarter ended April 30, 1998
when compared to the same period in 1997. This increase was principally due to
slightly higher average debt balances offset to some extent by lower interest
rates.
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INCOME TAXES
The income tax provisional rate for the first quarters of 1998 and 1997 reflects
a rate in excess of the U.S. federal statutory rate primarily due to the
inclusion of state income taxes. The Registrant's provision for the first
quarter ending April 30, 1998 was lower than the same period in 1997 due to a
lower estimate for fiscal year ending January 31, 1999 as compared to the same
period the prior year. The estimate for fiscal year ending January 31, 1999 is
based on the actual provision accrued for fiscal year ending January 31, 1998.
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 Registrant's intention to evaluate the realizability of
the deferred tax asset quarterly by assessing the need for a valuation account
based upon future net income of the Registrant.
NET INCOME
The increase in net income in the first quarter ended April 30, 1998 compared to
the same period in 1997 was due to increased revenues and higher gross profit
margins offset partially by higher Selling, General and Administrative expenses.
BUSINESS ENVIRONMENT
During the course of the last fiscal year, the business climate in the aerospace
and defense industry, which in the past had shown signs of uncertainty, seems to
have stabilized and, in several areas, shows signs of strengthening. Various
major prime government contractors have won significant development contracts
which increases the market for the Registrant's Technical Services segment.
During the period of uncertainty the Registrant developed a strategy of growth
through diversification and taking advantage of opportunities created by the
aerospace and defense industry's merger activities and ultimate downsizing. In
addition, increased activity in commercial satellite and launch vehicles has
increased demand for component and systems testing. As the demand for nuclear
staff augmentation has decreased, the Registrant has aggressively pursued
additional business in the growing IT portion of its Technical Staffing
segment's business. The Registrant supplies IT professionals in support of
customers who need help-desk analysts and managers; relational database
administrators and developers; application and systems programmers;
configuration and project managers; and multiple levels of system operations
personnel. Also, the Registrant continues to pursue ISO registration business
through its Registration Services segment as demand for these services continues
to increase as more companies must compete for business in the global market
place. Notwithstanding the foregoing, and because of factors affecting the
Registrant's operating results, past financial performance should not be
considered to be a reliable indicator of future performance
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter ended April 30, 1998, cash provided by operations increased
by $975,000 when compared to the same period in 1997. Major items contributing
to this increase were increases in net income and accrued expenses offset by
increases in inventories, prepaid expenses and a decrease in accounts payable
uses.
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Net cash used in investing activities in the three-month period ended April 30,
1998 increased $43,000 over the same period in 1997. The Registrant anticipates
that its capital spending level in fiscal 1999 will be less than fiscal 1998.
The actual level of spending will be dependent on a variety of factors,
including general economic conditions, bank covenants and the Registrant's
operating requirements.
In the three-month period ended April 30, 1998, net cash used for financing
activities consisted of debt reduction on lines of credit and short term and
long term debt of $1,900,000 offset by increases in lines of credit and term
loans of $288,000 and proceeds from the exercise of stock options of $2,000. In
September 1997, the Registrant negotiated with Sanwa Bank California as agent
and Mellon Bank for a new credit agreement which includes a $6,000,000 revolving
line of credit at an interest rate equal to the bank's reference rate plus 0.25%
which expires in September 1999. Also included in the new agreements is a
$6,500,000 term loan at an interest rate of 8.31% which expires in January 2003.
Management is not aware of any significant demands for capital funds that may
materially affect the short or long-term liquidity in the form of large fixed
asset acquisitions, unusual working capital commitments or contingent
liabilities. In addition, the Registrant has made no material commitments for
capital expenditures. The Registrant's future working capital will be provided
from operations and the current bank revolving line of credit which had
$3,000,000 available at April 30, 1998.
FORWARD-LOOKING INFORMATION
Certain statements or assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the Private
Securities Litigation and Reform Act of 1995) that involve risk and
uncertainties inherent in the Registrant's business. Actual outcomes are
dependent upon the Registrant's successful performance of internal plans,
customer changes in short range and long range plans, competition in the
Registrant's service areas and pricing, continued acceptance of new services,
performance issues with key customers and general economic risks and
uncertainties.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Form 8-K
During the quarter ended April 30, 1998, 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: June 8, 1998 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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EXHIBIT INDEX
Exhibit No. Description Page
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27 Financial Data Schedule 13
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