Rocked by Tech Fallout, Firm Refocuses on Testing, Staffing

CORPORATE FOCUS

By RiSHAWN BIDDLE, Staff Reporter

After being caught on the wrong end of the computer industry bust, National Technical Systems Inc. is finally reaping the benefits of a two-year restructuring and expansion in two of its other markets.

Shares in the Calabasas company have more than doubled in the past year. At a closing price of $4.30 on July 30, the stock is up 45 percent so far this year.

The gains have resulted from the decision two years ago to move away from testing and certifying computer components, such as disk drives, and instead return to its roots as a military contractor.

The company, founded in 1961, began by testing building materials and defense products in the mid-1960s. By the 1990s, the business was stagnant and National Technical Systems looked elsewhere for growth.

Testing military equipment, such as missile systems used in the recent war in Iraq, has been a growth driver. From its 216-acre laboratory complex in Camden, Ark., the company will put a rocket through a series of simulators to determine whether it can withstand temperature drops that come with high-altitude flight, as well as the shocks from a plane’s take-off and landing.

Also showing strength is the temporary staffing business, which supplies engineers and technicians to companies that don’t want to fully outsource their own testing departments. In October, National doubled the size of its business when it paid $1.6 million for the staffing unit of Aliso Viejo-based engineering firm Fluor Corp.

First quarter revenues for the staffing division rose 129 percent over the year-earlier period to $12.6 million.

William McGinnis, the company’s president, said staffing is expected to account for half of all revenues for the year ending Jan. 31, 2004; it accounted for just 29 percent of revenues two years ago.

Overall, net income for the first quarter ended April 30 was $327,000, a 17 percent increase over the like year-earlier period; first quarter revenues rose 39 percent, to $27 million.

New markets

From here, there are plans for expansion in the testing and certifying of telecom equipment, such as routers or telephone switches. The telecom equipment market is a challenging one; spending fell 50 percent in 2002, although it is expected to rise 5 percent in 2003.

In December, National was certified by telecom giant Verizon Communications as a test lab that can be used by suppliers of its fiber optic components.

Internationally, National Technical Systems allied itself with Germany’s Siemens AG to form a European testing center in March. The center will be based out of Siemens’ Munich laboratory. The company also teamed up recently with Germany’s TUV Rheinland to test and certify medical equipment sold by Asian manufacturers.

But it faces larger European competitors, including Societe Generale de Surveillance Holding SA and Britain’s Intertek Testing Service, both of which are also sizeable players in the United States.

McGinnis says the company can thrive by playing in international niches, like telecom, where it already has a foothold. “European and Asian equipment firms want to do business with American companies. That means complying with American standards, and we’re already in that field,” said McGinnis.

Diversification efforts haven’t always worked out. An expansion into the environmental remediation business was abandoned in 1997, for example.

Likewise, a mid-1990s foray into certifying computer peripherals and conducting “stress and load” tests on Web sites and Linux-based networks paid short-lived dividends.

Quarterly revenues jumped from the low-teens (in millions) to the high teens starting around 1997, but then stopped growing. By 2001, the company fell out of compliance with its loan covenants and began retrenching.

To get back on track, National shifted personnel to its defense and aerospace testing businesses. It also shut down a British technical staffing unit that targeted the videogame industry.

“Most diversification works for the time they took place, but not for long” conceded McGinnis. “We think we’ve got the right plans in place right now.”