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 July 31, 2000
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 September
7, 2000 was 8,509,875.
Exhibit Index on Page 18
1
<PAGE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
July 31, 2000 (unaudited) and January 31, 2000 3
Unaudited Condensed Consolidated Statements of Income
For the Six Months Ended July 31, 2000 and 1999 4
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended July 31, 2000 and 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended July 31, 2000 and 1999 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 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<CAPTION>
July 31, January 31,
2000 2000
(unaudited)
------------ -----------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 2,959,000 $ 3,133,000
Accounts receivable, less allowance for doubtful accounts
of $700,000 at July 31, 2000 and $803,000 at January 31, 2000 20,607,000 20,114,000
Income taxes receivable 328,000 1,387,000
Inventories 2,779,000 1,804,000
Deferred tax assets 838,000 847,000
Prepaid expenses 1,211,000 719,000
------------ ------------
Total current assets 28,722,000 28,004,000
Property, plant and equipment, at cost 66,479,000 63,347,000
Less: accumulated depreciation 38,237,000 36,310,000
------------ ------------
Net property, plant and equipment 28,242,000 27,037,000
Property held for sale 544,000 544,000
Intangible assets, net 1,019,000 1,077,000
Other assets 2,116,000 1,969,000
------------ ------------
TOTAL ASSETS $ 60,643,000 $ 58,631,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,490,000 $ 5,249,000
Accrued expenses 3,524,000 2,913,000
Deferred income 1,149,000 309,000
Income taxes payable - 106,000
Current installments of long-term debt 3,299,000 3,195,000
------------ ------------
Total current liabilities 12,462,000 11,772,000
Long-term debt, excluding current installments 18,944,000 18,639,000
Deferred income taxes, net 3,067,000 3,075,000
Deferred compensation 775,000 615,000
Minority interest 71,000 67,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized, 20,000,000; issued and outstanding
8,509,000 as of July 31, 2000 and 8,404,000 as of January 31, 2000 11,912,000 11,764,000
Retained earnings 13,450,000 12,706,000
Accumulated other comprehensive income (38,000) (7,000)
------------ ------------
Total shareholders' equity 25,324,000 24,463,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,643,000 $ 58,631,000
============ ============
See accompanying notes.
</TABLE>
3
<PAGE>
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Six Months Ended July 31, 2000 and 1999
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 41,796,000 $ 43,359,000
Cost of sales 30,159,000 30,258,000
------------ ------------
Gross profit 11,637,000 13,101,000
Selling, general and administrative expense 9,096,000 9,937,000
------------ ------------
Operating income 2,541,000 3,164,000
Other income (expense):
Interest expense, net (987,000) (651,000)
Other (56,000) 26,000
------------ ------------
Total other income (expense) (1,043,000) (625,000)
------------ ------------
Income from continuing operations before income taxes and minority interest 1,498,000 2,539,000
Income taxes 582,000 1,023,000
------------ ------------
Income from continuing operations before minority interest 916,000 1,516,000
Minority interest (4,000) -
------------ ------------
Income from continuing operations 912,000 1,516,000
Loss from discontinued operations, net of taxes - (83,000)
------------ ------------
Net income $ 912,000 $ 1,433,000
============ ============
Basic earnings (loss) per common share:
Continuing operations $ 0.11 $ 0.18
Discontinued operations - (0.01)
------------ ------------
Net income $ 0.11 $ 0.17
============ ============
Diluted earnings (loss) per common share:
Continuing operations $ 0.11 $ 0.18
Discontinued operations - (0.01)
------------ ------------
Net income $ 0.11 $ 0.17
============ ============
Weighted average common shares outstanding 8,484,000 8,329,000
Dilutive effect of stock options 77,000 235,000
------------ ------------
Weighted average common shares outstanding, assuming dilution 8,561,000 8,564,000
============ ============
</TABLE>
4
<PAGE>
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended July 31, 2000 and 1999
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 20,606,000 $ 21,794,000
Cost of sales 14,969,000 15,353,000
------------ ------------
Gross profit 5,637,000 6,441,000
Selling, general and administrative expense 4,926,000 4,974,000
------------ ------------
Operating income 711,000 1,467,000
Other income (expense):
Interest expense, net (497,000) (325,000)
Other 21,000 32,000
------------ ------------
Total other income (expense) (476,000) (293,000)
------------ ------------
Income from continuing operations before income taxes and minority interest 235,000 1,174,000
Income taxes 77,000 471,000
------------ ------------
Income from continuing operations before minority interest 158,000 703,000
Minority interest (8,000) 4,000
------------ ------------
Income from continuing operations 150,000 707,000
Loss from discontinued operations, net of taxes - (22,000)
------------ ------------
Net income $ 150,000 $ 685,000
============ ============
Basic earnings (loss) per common share:
Continuing operations $ 0.02 $ 0.08
Discontinued operations - 0.00
------------ ------------
Net income $ 0.02 $ 0.08
============ ============
Diluted earnings (loss) per common share:
Continuing operations $ 0.02 $ 0.08
Discontinued operations - 0.00
------------ ------------
Net income $ 0.02 $ 0.08
============ ============
Weighted average common shares outstanding 8,509,000 8,337,000
Dilutive effect of stock options 69,000 261,000
------------ ------------
Weighted average common shares outstanding, assuming dilution 8,578,000 8,598,000
============ ============
See accompanying notes.
</TABLE>
5
<PAGE>
<TABLE>
NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended July 31, 2000 and 1999
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 912,000 $ 1,516,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,985,000 1,579,000
Provision for losses on receivables (103,000) 12,000
Undistributed earnings of affiliate 4,000 -
Deferred income taxes 1,000 7,000
Changes in assets and liabilities:
Accounts receivable (390,000) (682,000)
Inventories (975,000) (552,000)
Prepaid expenses (492,000) (196,000)
Other assets and Intangibles (147,000) (77,000)
Accounts payable (759,000) (394,000)
Accrued expenses 611,000 989,000
Deferred income 840,000 -
Deferred compensation 160,000 30,000
Income taxes 953,000 125,000
----------- -----------
Cash provided by continuing operations 2,600,000 2,357,000
Loss from discontinued operations - (83,000)
----------- -----------
Cash provided by operating activities 2,600,000 2,274,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,132,000) (2,936,000)
Investment in new business - (375,000)
----------- -----------
Net cash used for investing activities (3,132,000) (3,311,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt 2,972,000 2,546,000
Repayments of current and long-term debt (2,563,000) (1,548,000)
Cash dividends paid (168,000) (166,000)
Distributions paid - (120,000)
Proceeds from stock options exercised 148,000 66,000
----------- -----------
Net cash used for financing activities 389,000 778,000
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (31,000) 4,000
----------- -----------
Net decrease in cash (174,000) (255,000)
Beginning cash balance 3,133,000 2,599,000
----------- -----------
ENDING CASH BALANCE $ 2,959,000 $ 2,344,000
=========== ===========
See accompanying notes
</TABLE>
6
<PAGE>
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, 2000.
The statements presented as of and for the six month and three month
periods ended July 31, 2000 and 1999 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 six months ended July 31, 2000
and 1999 total comprehensive income was $881,000 and $1,448,000
respectively. During the three months ended July 31, 2000 and 1999 total
comprehensive income was $132,000 and $689,000 respectively. The reported
amount for total comprehensive income differs from net income for the
three months and six months ended July 31, 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. Recently Issued Accounting Standards
SAB No. 101 -- In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB No. 101). SAB No. 101 provides the Commission's
views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company has reviewed the requirements of
SAB No. 101 and has determined that it is in compliance with SAB No. 101.
SFAS No. 138, 137 and 133 -- In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
7
<PAGE>
(SFAS) No. 133--"Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives in the statement of financial position and
measure those instruments at fair value. In 1999, the FASB issued SFAS No.
137--"Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 for one year. In June 2000, the FASB issued SFAS No. 138 --
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of SFAS No. 133," which amends the accounting
and reporting standards of SFAS No. 133 for certain derivative instruments
and hedging activities. The Company must implement SFAS No. 133 by the
third quarter of fiscal 2001 and has not yet made a final determination of
its impact on the financial statements.
5. 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.
6. Interest and Taxes
Cash paid for interest and taxes for the six months ended July 31, 2000
was $1,033,000 and $562,000 respectively. Cash paid for interest and taxes
for the six months ended July 31, 1999 was $626,000 and $852,000
respectively.
7. Minority Interest
Minority interest in the Company'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 61% to NTS, Inc. and 39%
to National Quality Assurance, Ltd for the fiscal year ending January 31,
2001.
8. Dividends
On February 4, 2000, pursuant to the Company's current dividend policy,
the Company's Board of Directors authorized the regular semiannual cash
dividend of $0.02 per share, that was paid on March 15, 2000 to
shareholders of record at the close of business on February 28, 2000. The
second semi-annual dividend of $0.02 per share was paid on August 2, 2000
to shareholders of record at the close of business on July 14, 2000.
In the prior year, the Company paid a total cash dividend of $.07 per
share through August 4, 1999, which included a special dividend of $.03
per share that was paid on August 4, 1999.
8
<PAGE>
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
-------
NTS is a diversified services company which 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 performs technical services for a
wide range of industries (telecommunications, medical, computer, automotive,
aerospace, defense, among others) including analysis, engineering and mechanical
and electronic testing to ascertain performance and reliability, computer-based
structural dynamics and finite element analysis. In addition, this segment
performs quality management registration services.
The Technical Staffing segment is a provider of information technology,
managed services and staffing. Utilizing full-time salaried and hourly
consultants, the Company offers a wide range of staffing solutions to meet its
clients' information technology "IT", information systems ("IS") and software
engineering needs.
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 six
months ended July 31.
RESULTS OF OPERATIONS
---------------------
REVENUES
Six months ended July 31, 2000 % Change 1999
(Dollars in thousands)
-----------------------------------
Engineering & Evaluation $29,214 17.6% $24,835
Technical Staffing 12,582 (32.1)% 18,524
----------- ------------
Total revenues $41,796 (3.6)% $43,359
=========== ============
For the six months ended July 31,2000, consolidated revenues decreased by
$1,563,000 or 3.6% when compared to the same period in 1999 due to the decrease
in revenues at the Technical Staffing segment.
Engineering & Evaluation:
-------------------------
In 2000, the Engineering & Evaluation segment revenues increased by $4,379,000
or 17.6% primarily due to strong growth in new sales orders relative to the
telecommunications, aerospace, defense and automotive markets and the benefit
the Company is receiving from the increased investment in equipment at some of
its facilities during the past two years.
9
<PAGE>
Technical Staffing
------------------
Revenues in the Technical Staffing segment decreased by $5,942,000 or 32.1% due
to the closure of several non-performing staffing offices and the consolidation
of its operations to control costs and focus on profitability. Revenues were
also affected by the cessation of Year 2000 related projects and competitive
pricing pressures in the staffing industry which forced the Company to lower its
prices to maintain existing relationships with several valued clients.
This segment is currently in the process of moving from the traditional "bricks
and mortar" model of a business to a "virtual office" model in anticipation of
movement in technology towards the new Internet era of "E-Cruiting". The Company
anticipates that this new business model will reduce the costs of doing business
and at the same time increase productivity of the staff.
GROSS PROFIT
Six months ended July 31, 2000 % Change 1999
(Dollars in thousands)
------------------------------
Engineering & Evaluation $8,615 9.6% $7,861
% to segment revenue 29.5% 31.7%
Technical Staffing 3,022 (42.3)% 5,240
% to segment revenue 24.0% 28.3%
--------- ---------
Total gross profit $11,637 (11.2)% $13,101
========= =========
% to total revenue 27.8% 30.2%
Total gross profit for the six months ended July 31, 2000 decreased by
$1,464,000 or 11.2% when compared to the same period in 1999.
Engineering & Evaluation:
------------------------
Gross profit for the Engineering & Evaluation Group increased by $754,000 or
9.6% for the six months ended July 31, 2000 when compared to the same period in
1999, as a result of the increased revenues.
Technical Staffing
------------------
Gross profit in 2000 decreased by $2,218,000 or 42.3% in the Technical Staffing
group when compared to the same period in 1999. This was due to the decrease in
revenues and increased competitive pricing pressures. Gross profit was also
affected by costs incurred in servicing one customer which were deemed to be
un-reimbursable as a result of possible fraud that may have been perpetrated
against the Company (see operating income below).
SELLING, GENERAL & ADMINISTRATIVE
Six months ended July 31, 2000 % Change 1999
(Dollars in thousands)
--------------------------------
Engineering & Evaluation $4,943 (4.0)% $5,151
% to segment revenue 16.9% 20.7%
Technical Staffing 4,153 (13.2)% 4,786
% to segment revenue 33.0% 25.8%
--------- ---------
Total S G & A $9,096 (8.5)% $9,937
========= =========
% to total revenue 21.8% 22.9%
10
<PAGE>
Total selling, general and administrative expenses decreased $841,000 or 8.5%
for the six months ended July 31, 2000 when compared to the same period in 1999.
Engineering & Evaluation:
------------------------
Selling, general and administrative expenses decreased by $208,000 in the
Engineering & Evaluation segment as the programs established by the Company in
the prior year to hire specialists to expand the base of business into new
technology areas are starting to take effect by improving sales while containing
costs. This decrease in selling costs was partially offset by an increase in
depreciation expense.
Technical Staffing:
-------------------
Selling, general and administrative expenses in the Technical Staffing segment
decreased by $633,000 or 13.2% when compared to the same period in 1999 as a
result of the closure of several non-performing staffing offices and the
consolidation of its operations in an effort to streamline this business. This
decrease was offset by an increase in bad debt expense as a result of possible
fraud that may have been perpetrated against the Company (see operating income
below).
OPERATING INCOME (LOSS)
Six months ended July 31, 2000 % Change 1999
(Dollars in thousands)
---------------------------------
Engineering & Evaluation $3,672 35.5% $2,710
% to segment revenue 12.6% 10.9%
Technical Staffing (1,131) (349.1)% 454
% to segment revenue (9.0)% 2.5%
--------- ----------
Total operating income $2,541 (19.7)% $3,164
========= ==========
% to total revenue 6.1% 7.3%
Operating income for the six months ended July 31, 2000 decreased by $623,000
when compared to the same period in1999.
Engineering & Evaluation:
------------------------
Operating income for the six months ended July 31, 2000 for the Engineering &
Evaluation Group increased by $962,000 when compared to the same period in 1999
primarily as a result of the increase in gross profit and the decrease in
selling and general and administrative expenses discussed above.
Technical Staffing:
-------------------
Operating income (loss) for the six months ended July 31, 2000 decreased by
$1,585,000 in the Technical Staffing segment when compared to the same period in
1999 primarily as a result of the decrease in gross profit partially offset by a
decrease in selling and general and administrative expenses discussed above.
Operating income (loss) was also affected by costs incurred in servicing one
customer which were deemed to be un-reimbursable as a result of possible fraud
that may have been perpetrated against the Company. The Company is currently in
the process of an investigation to determine the facts and circumstances and the
persons involved in the possible fraud. The Company has placed its insurance
carriers on notice and is vigorously pursuing recovery from them and other
responsible parties. The effect on operating loss was approximately $880,000.
The Company has provided for the balance of this customer's accounts receivable
and does not anticipate any additional bad debt expense related to this
customer.
INTEREST EXPENSE
Net interest expense increased $336,000 in the six months ended July 31, 2000
when compared to the same period in 1999. This increase was principally due to
higher average debt balances for the six months ended July 31, 2000, and
slightly higher interest rates, when compared to the same period last year.
11
<PAGE>
INCOME TAXES
The income tax provisional rate of 38.9% for the six months ended July 31, 2000
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 tax
provision accrual for fiscal year ending January 31, 2001. The income tax rate
for the six months ended July 31, 1999 was 40.3%. 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 evaluate the realizability of the deferred tax asset quarterly by
assessing the need for a valuation account based upon future net income of the
Company.
NET INCOME
The decrease in net income for the six months ended July 31, 2000, compared to
the same period in 1999, was primarily due to the decrease in revenues in
Technical Staffing and increase in interest expense, partially offset by a
decrease in selling, general and administrative expenses.
The following information is based upon results for National Technical Systems,
Inc. for the three months ended July 31.
RESULTS OF OPERATIONS
---------------------
REVENUES
Three months ended July 31, 2000 % Change 1999
(Dollars in thousands)
-----------------------------------
Engineering & Evaluation $14,723 15.4% $12,756
Technical Staffing 5,883 (34.9)% 9,038
----------- ------------
Total net revenues $20,606 (5.5)% $21,794
=========== ============
For the three months ended July 31, 2000, consolidated revenues decreased by
$1,188,000 or 5.5% when compared to the same period in 1999 due to the decrease
in revenues at the Technical Staffing segment.
Engineering & Evaluation:
-------------------------
For the three months ended July 31, 2000, Engineering & Evaluation revenues
increased by $1,967,000 or 15.4% when compared to the same period in 1999,
primarily due to strong growth in new sales orders relative to the
telecommunications, aerospace, defense and automotive markets and the benefit
the Company is receiving from the increased investment in equipment at some of
its facilities during the past two years.
Technical Staffing:
-------------------
Revenues in Technical Staffing decreased by $3,155,000 or 34.9% when compared to
the same period in 1999, due to the closure of several non-performing staffing
offices and the consolidation of its operations to control costs and focus on
profitability. Revenues were also affected by the cessation of Year 2000 related
projects and competitive pricing pressures in the staffing industry which forced
the Company to lower its prices to maintain existing relationships with several
valued clients.
This segment is currently in the process of moving from the traditional "bricks
and mortar" model of a business to a "virtual office" model in anticipation of
movement in technology towards the new Internet era of "E-Cruiting".
12
<PAGE>
The Company anticipates that this new business model will reduce the costs of
doing business and at the same time increase productivity of the staff.
GROSS PROFIT
Three months ended July 31, 2000 % Change 1999
(Dollars in thousands)
------------------------------
Engineering & Evaluation $4,387 4.4% $4,202
% to segment revenue 29.8% 32.9%
Technical Staffing 1,250 (44.2)% 2,239
% to segment revenue 21.2% 24.8%
--------- ---------
Total $5,637 (12.5)% $6,441
========= =========
% to total net revenue 27.4% 29.6%
Total gross profit for the three months ended July 31, 2000 decreased by
$804,000 or 12.5% when compared to 1999.
Engineering & Evaluation:
------------------------
For the three months ended July 31, 2000, gross profit for the Engineering &
Evaluation Group increased by $185,000 or 4.4% when compared to the same period
in 1999, as a result of the increased revenues.
Technical Staffing:
-------------------
For the three months ended July 31, 2000, gross profit decreased by $989,000 or
44.2% in the Technical Staffing Group when compared to the same period in 1999.
This was due to the decrease in revenues and increased competitive pricing
pressures. Gross profit was also affected by costs incurred in servicing one
customer which were deemed to be un-reimbursable as a result of possible fraud
that may have been perpetrated against the Company (see operating income below).
SELLING, GENERAL & ADMINISTRATIVE
Three months ended July 31, 2000 % Change 1999
(Dollars in thousands)
--------------------------------
Engineering & Evaluation $2,679 (1.4)% $2,718
% to segment revenue 18.2% 21.3%
Technical Staffing 2,247 (0.4)% 2,256
% to segment revenue 38.2% 25.0%
--------- ---------
Total S G & A $4,926 (1.0)% $4,974
========= =========
% to total net revenue 23.9% 22.8%
Total selling, general and administrative expenses decreased $48,000 for the
three months ended July 31, 2000 when compared to the same period in 1999.
Engineering & Evaluation:
------------------------
For the three months ended July 31, 2000, selling, general and administrative
expenses decreased by $39,000 when compared to the same period in 1999, as the
programs established by the Company in the prior year to hire specialists to
expand the base of business into new technology areas are starting to take
effect by improving sales while containing costs. This decrease in selling costs
was partially offset by an increase in depreciation expense.
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Technical Staffing:
------------------
For the three months ended July 31, 2000, selling, general and administrative
expenses decreased slightly when compared to the same period in 1999 due to the
closure of several non-performing staffing offices and the consolidation of its
operations in an effort to streamline this business. This decrease was offset by
an increase in bad debt expense as a result of possible fraud that may have been
perpetrated against the Company (see operating income below).
OPERATING INCOME (LOSS)
Three months ended July 31, 2000 % Change 1999
(Dollars in thousands)
--------------------------------
Engineering & Evaluation $1,708 15.1% $1,484
% to segment revenue 11.6% 11.6%
Technical Staffing (997) (5,764.7)% (17)
% to segment revenue (16.9)% (0.2)%
--------- ---------
Total operating income $711 (51.5)% $1,467
========= =========
% to total net revenue 3.5% 6.7%
Operating income for the three months ended July 31, 2000 decreased by $756,000
or 51.5% when compared to 1999.
Engineering & Evaluation
------------------------
Operating income for the three months ended July 31, 2000 increased by $224,000
in the Engineering & Evaluation Group when compared to the same period in 1999,
as a result of the increase in gross profit and the decrease in selling and
general and administrative expenses discussed above.
Technical Staffing:
------------------
Operating income for the three months ended July 31, 2000 decreased by $980,000
in the Technical Staffing Group when compared to the same period in 1999, as a
result of the decrease in gross profit partially offset by a decrease in selling
and general and administrative expenses discussed above. It was also affected by
costs incurred in servicing one customer which were deemed to be un-reimbursable
as a result of possible fraud that may have been perpetrated against the
Company. The Company is currently in the process of an investigation to
determine the facts and circumstances of the persons involved in the possible
fraud. The Company has placed its insurance carriers on notice and is vigorously
pursuing recovery from them and other responsible parties. The effect on
operating loss was approximately $880,000. The Company has provided for the
balance of this customer's accounts receivable and does not anticipate any
additional bad debt expense related to this customer.
INTEREST EXPENSE
Net interest expense increased by $172,000 in the three months ended July 31,
2000 when compared to the same period in 1999. This increase was principally due
to higher average debt balances for the three months ended July 31, 2000, and
slightly higher interest rates when compared to the same period last year.
INCOME TAXES
The income tax rate of 32.8% for the three months ended July 31, 2000 is based
on the estimated tax provision accrual for fiscal year ending January 31, 2001.
The Company recorded a rate in the first quarter considered too high. As a
result, the current rate has been adjusted to account for the estimated fiscal
year tax rate through the first six months. 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
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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 Company.
DISCONTINUED OPERATIONS
The discontinued operations represents the results of operations of the
Company's McClellan Air Force base facility in Sacramento, California. During
fiscal 1998, the Company took over the operations and employees of the Science
and Engineering Test Laboratories at McClellan. This facility allowed the
Company to enter a new segment of business which provided chemical, materials
and electronic analysis for the government, including failure analysis of fuels
and lubricants, electronic components, materials and processes, metal fatigue
simulation and corrosion analysis. This was the only facility in the Company
that had the necessary equipment and knowledge to perform these types of testing
services. During the fourth quarter of fiscal 2000, the Company decided to
discontinue this line of business and close its operations in Sacramento as it
experienced a significant loss of business due to the government decision to
transfer work, planned for that operation, to another Air Force base.
NET INCOME
The decrease in net income for the three months ended July 31, 2000, compared to
the same period in 1999, was primarily due to lower revenues and gross profit in
Technical Staffing and higher interest expense in the current quarter when
compared to the same period last year.
YEAR 2000
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
BUSINESS ENVIRONMENT
Engineering & Evaluation:
-------------------------
The Company's basic service to industry is to support the development of new
products. Much of that effort in basic industries such as automotive, aerospace
and defense was not evident in fiscal 2000 except for research and development
on new spacecraft such as X-33, DeltaIV and Atlas V. For these programs, the
Company anticipates increased workload in cryogenics evaluation.
The information technology market, on the other hand, continues its
technological growth cycle due to the use of computers, wireless systems, cell
phones, e-mail and faxes. The Company is serving this growing market in four of
its locations and anticipates significant growth for the next 18 to 24 months.
Competition is more limited in these markets for two reasons. First, when
international standards and approval are required, only third party laboratories
such as National Technical Systems can perform this service. Second, information
technology companies need all their scientists and engineers working on the
design and manufacturing of their evolving products, and will make more "make or
buy" decisions to use independent, qualified test labs to evaluate and test
their products.
Technical Staffing:
-------------------
The Company 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, and
multiple levels of system operations personnel. Because of the technology
advancements made in the Internet, the number of methods of obtaining staffing
are expanding. Presently, with low price connectivity for home use as well as
for businesses available through cable modems and "DSL", tele-commuting is a
reality for the new "E-Cruiting" segment of the staffing industry. In
anticipation of these rapid changes in the industry, the Company is moving from
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the traditional "bricks and mortar" model of a business to a "virtual office"
model with regional "Hubs"providing the necessary administrative support to the
virtual offices. The Company believes that this new business model will reduce
the costs of doing business and at the same time increase productivity of the
staff. However, the shortage of qualified temporary and permanent candidates is
still an obstacle to a healthy growth in this highly competitive business.
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 six months ended July 31, 2000, cash provided by operations increased by
$326,000 when compared to the same period in 1999. This increase was primarily
due to the effect of changes in depreciation and amortization, accounts
receivable, deferred income and income taxes partially offset by decreases in
net income and the effect of changes in inventories, prepaid expenses, accounts
payable and accrued expenses.
Net cash used in investing activities in the six-month period ended July 31,
2000 decreased by $179,000 over the same period in 1999, primarily due to the
acquisition of two quality-registration and certification services companies
during the six-month period ended July 31, 1999 offset by an increase in capital
purchases during the same period in 2000.
In the six-month period ended July 31, 2000 net cash used for financing
activities decreased by $389,000 over the same period in 1999. Net cash used for
financing activities consisted of debt reduction on lines of credit and short
term and long term debt of $2,563,000 and cash dividends paid of $168,000,
offset by increases in proceeds from lines of credit and term loans of
$2,972,000 and proceeds from issuance of common stock of $148,000.
In September 1997, the Company negotiated with Sanwa Bank California, as agent,
and Mellon Bank, for a credit agreement which included a $6,000,000 revolving
line of credit at an interest equal to the bank's reference rate plus 0.25%. On
October 30, 1998, the credit agreement was amended to extend the term of the
revolving line to September 8, 2000 and to increase the revolving line amount
from $6,000,000 to $8,000,000 at an interest rate equal to the bank's reference
rate. A flat fee of $18,750 was charged to set up the new revolving line and a
facility fee of 0.5% of the total line is charged on a quarterly basis. On
October 29, 1999, the credit agreement was amended again to extend the term of
the revolving line to September 8, 2001 and to increase the revolving line
amount from $8,000,000 to $10,000,000 at an interest rate equal to the bank's
reference rate.
In November 1997, the Company entered into an equipment line of credit agreement
with Mellon US Leasing (interest rates of 7.60 % to 10.25%) to finance various
test equipment with terms of 60 months for each equipment schedule. In April
1999, Mellon US Leasing extended an additional $2,000,000 of credit under the
same terms as the original agreement. The outstanding balance at July 31, 2000
is $3,628,000.
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 Company has made no material commitments for
capital expenditures. The Company's future working capital will be provided from
operations and the current bank revolving line of credit which had $1,393,000
available at July 31, 2000.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of shareholders held on June 23, 2000,
the shareholders of the Company voted to approve an amendment to the
Company's 1994 Employee Incentive Stock Option Plan (the "1994 Plan")
to increase the number of shares reserved for issuance under the 1994
Plan from 1,500,000 to 2,000,000. The results of the vote of the
shareholders were as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker non-
votes
-------------------------------------------------------
<S> <C> <C> <C> <C>
Amendment to the Company's 1994
Employee Stock Option Plan 4,342,973 807,556 23,114 2,587,383
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Form 8-K
During the quarter ended July 31, 2000 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: September 13, 2000 By /s/ Lloyd Blonder
----------------------------------- --------------------------
Lloyd Blonder
Senior Vice President
Chief Financial Officer
(Signing on behalf of the
registrant and as principal
financial officer]
17
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Exhibit Index
Exhibit No. Description Page No.
--------------------------------------------------------------------------------
27 Financial Data Schedule 19
18
