UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 2, 2010
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 0-4090
ANALYSTS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota |
| 41-0905408 |
(State of Incorporation) |
| (IRS Employer Identification No.) |
|
|
|
3601 West 76th Street |
|
|
Minneapolis, MN |
| 55435 |
(Address of Principal Executive Offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (952) 835-5900
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated Filer o |
|
|
|
Non-accelerated Filer o |
| Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 1, 2010, 4,985,874 shares of the registrant’s common stock were outstanding.
ANALYSTS INTERNATIONAL CORPORATION
Analysts International Corporation
(Unaudited)
|
| October 2, |
| January 2, |
| ||
(In thousands) |
| 2010 |
| 2010 |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 4,730 |
| $ | 3,818 |
|
Accounts receivable, less allowance for doubtful accounts of $750 and $958, respectively |
| 18,457 |
| 23,028 |
| ||
Prepaid expenses and other current assets |
| 693 |
| 1,442 |
| ||
Total current assets |
| 23,880 |
| 28,288 |
| ||
|
|
|
|
|
| ||
Property and equipment, net of accumulated depreciation of $8,261 and $10,774, respectively |
| 954 |
| 1,846 |
| ||
Other assets |
| 441 |
| 543 |
| ||
Total assets |
| $ | 25,275 |
| $ | 30,677 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 4,419 |
| $ | 6,958 |
|
Line of credit |
| — |
| — |
| ||
Salaries and benefits |
| 3,890 |
| 2,498 |
| ||
Deferred revenue |
| 299 |
| 310 |
| ||
Deferred compensation |
| 205 |
| 522 |
| ||
Restructuring accrual |
| 776 |
| 2,038 |
| ||
Other current liabilities |
| 785 |
| 960 |
| ||
Total current liabilities |
| 10,374 |
| 13,286 |
| ||
|
|
|
|
|
| ||
Non-current liabilities: |
|
|
|
|
| ||
Deferred compensation |
| 977 |
| 1,037 |
| ||
Restructuring accrual |
| 243 |
| 1,045 |
| ||
Other long-term liabilities |
| 178 |
| 361 |
| ||
Total non-current liabilities |
| 1,398 |
| 2,443 |
| ||
|
|
|
|
|
| ||
Shareholders’ equity: |
|
|
|
|
| ||
Common stock, par value $.10 a share; authorized 24,000,000 shares; issued and outstanding 4,985,874 and 4,985,015, respectively |
| 498 |
| 498 |
| ||
Additional capital |
| 25,565 |
| 25,598 |
| ||
Accumulated deficit |
| (12,560 | ) | (11,148 | ) | ||
Total shareholders’ equity |
| 13,503 |
| 14,948 |
| ||
Total liabilities and shareholders’ equity |
| $ | 25,275 |
| $ | 30,677 |
|
See notes to consolidated financial statements.
Analysts International Corporation
Consolidated Statements of Operations
(Unaudited)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| October 2, |
| October 3, |
| October 2, |
| October 3, |
| ||||
(In thousands except per share amounts) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenue: |
|
|
|
|
|
|
|
|
| ||||
Professional services provided directly |
| $ | 26,032 |
| $ | 29,335 |
| $ | 80,731 |
| $ | 105,211 |
|
Professional services provided through subsuppliers |
| 17 |
| 460 |
| 616 |
| 2,011 |
| ||||
Product sales |
| — |
| 1,106 |
| — |
| 9,339 |
| ||||
Total revenue |
| 26,049 |
| 30,901 |
| 81,347 |
| 116,561 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Expenses: |
|
|
|
|
|
|
|
|
| ||||
Cost of services provided directly |
| 20,170 |
| 23,595 |
| 63,274 |
| 83,704 |
| ||||
Cost of services provided through subsuppliers |
| 17 |
| 441 |
| 582 |
| 1,915 |
| ||||
Cost of product sales |
| — |
| 965 |
| — |
| 7,973 |
| ||||
Selling, administrative and other operating costs |
| 5,772 |
| 8,886 |
| 19,209 |
| 30,233 |
| ||||
Restructuring costs and other severance related costs |
| (482 | ) | 917 |
| (300 | ) | 2,708 |
| ||||
Impairment of intangible assets |
| — |
| — |
| — |
| 2,268 |
| ||||
Amortization of intangible assets |
| — |
| 44 |
| — |
| 491 |
| ||||
Total expenses |
| 25,477 |
| 34,848 |
| 82,765 |
| 129,292 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
| 572 |
| (3,947 | ) | (1,418 | ) | (12,731 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-operating income |
| 4 |
| 8 |
| 14 |
| 35 |
| ||||
Interest expense |
| (3 | ) | (9 | ) | (11 | ) | (20 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) before income taxes |
| 573 |
| (3,948 | ) | (1,415 | ) | (12,716 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax (benefit) expense |
| (14 | ) | 13 |
| 5 |
| 31 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 587 |
| $ | (3,961 | ) | $ | (1,420 | ) | $ | (12,747 | ) |
|
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|
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| ||||
Per common share (basic): |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 0.12 |
| $ | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |
|
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Per common share (diluted): |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 0.12 |
| $ | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |
|
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|
|
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| ||||
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 4,986 |
| 4,985 |
| 4,986 |
| 4,985 |
| ||||
Diluted |
| 4,988 |
| 4,985 |
| 4,986 |
| 4,985 |
|
See notes to consolidated financial statements.
Analysts International Corporation
Consolidated Statements of Cash Flows
(Unaudited)
|
| Nine Months Ended |
| ||||
|
| October 2, |
| October 3, |
| ||
(In thousands) |
| 2010 |
| 2009 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net loss |
| $ | (1,420 | ) | $ | (12,747 | ) |
|
|
|
|
|
| ||
Adjustments to net loss: |
|
|
|
|
| ||
Depreciation |
| 677 |
| 1,086 |
| ||
Amortization of intangible assets |
| — |
| 491 |
| ||
Impairment of intangible assets |
| — |
| 2,268 |
| ||
Stock based compensation |
| (33 | ) | 298 |
| ||
Loss (gain) on sale on assets and disposals |
| 157 |
| (394 | ) | ||
|
|
|
|
|
| ||
Changes in: |
|
|
|
|
| ||
Accounts receivable |
| 4,571 |
| 15,933 |
| ||
Accounts payable |
| (2,576 | ) | (7,158 | ) | ||
Salaries and benefits |
| 1,392 |
| 1,517 |
| ||
Restructuring accrual |
| (2,064 | ) | 2,238 |
| ||
Deferred compensation |
| (377 | ) | (214 | ) | ||
Prepaid expenses and other assets |
| 851 |
| 404 |
| ||
Deferred revenue |
| (11 | ) | (381 | ) | ||
Other accrued liabilities |
| (215 | ) | (55 | ) | ||
Net cash provided by operating activities |
| 952 |
| 3,286 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Expended for property and equipment additions |
| (91 | ) | (1,082 | ) | ||
Proceeds from asset sale, net |
| 186 |
| 3,263 |
| ||
Change in restricted cash |
| — |
| (396 | ) | ||
Net cash provided by investing activities |
| 95 |
| 1,785 |
| ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net change in line of credit |
| — |
| — |
| ||
Payment of capital lease obligation |
| (135 | ) | (98 | ) | ||
Net cash used in financing activities |
| (135 | ) | (98 | ) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
| 912 |
| 4,973 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 3,818 |
| 2,288 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 4,730 |
| $ | 7,261 |
|
See notes to consolidated financial statements.
Analysts International Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Nature of Business
Analysts International Corporation (“AIC,” “Company,” “we,” “us” or “our”) is an information technology (“IT”) services company. We employ approximately 800 professionals and are focused on serving the information technology needs of mid-market to Fortune 500 companies and government agencies across North America. AIC was incorporated in Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota. For a more complete description of our Company, please refer to our Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
We operate on a fiscal year ending on the Saturday closest to December 31. Accordingly, fiscal 2010 will end on January 1, 2011. The third quarter of fiscal 2010 ended on October 2, 2010 and the third quarter of fiscal 2009 ended on October 3, 2009.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying unaudited Consolidated Financial Statements of AIC have been prepared on the accrual basis of accounting and in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under these rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States (“U.S. GAAP”) can be condensed or omitted. The Consolidated Financial Statements included in this document reflect, in the opinion of our management, all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the Notes to Consolidated Financial Statements) necessary for fair presentation of the results of operations for the interim periods presented. The following notes should be read in conjunction with the accounting policies and other disclosures in the Notes to the Consolidated Financial Statements incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended January 2, 2010. Revenues, expenses, cash flows, assets and liabilities can and do vary during the year. Therefore, interim results are not necessarily indicative of the results to be expected for the full fiscal year.
Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
3. Fair Value Measurement
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, provides a fair value hierarchy which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The levels of the fair value hierarchy are defined as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted market prices.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The type of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using observable inputs.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. The type of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation.
Short-term cash investments in money market accounts are considered to be cash equivalents. The estimated fair values for cash equivalents approximate their carrying values due to the short-term maturities of these instruments. Cash equivalents are classified as Level 1 and are recorded in our cash and cash equivalents line on our Consolidated Balance Sheets.
4. Sale of Assets
Sale of Customer Contracts
On March 3, 2010, AIC sold certain customer contracts, property and equipment and sublet a facility. In consideration for the assets sold and the liabilities transferred, the Company received $0.2 million in cash. The Company recorded a loss on the sale of approximately $50,000 which is included within Selling, administrative and other operating costs (“SG&A”) in our Consolidated Statement of Operations.
5. Intangible Assets
In the third quarter of fiscal 2009, we incurred amortization expense related to intangible assets of $44,000 and disposed of the remaining balance of our customer lists of approximately $3.3 million. Our customer lists were sold as part of the Value Added Reseller (“VAR”) asset sale on August 4, 2009.
For the nine month period ended October 3, 2009, we incurred amortization expense of $0.5 million, recorded an impairment of our customer lists of approximately $2.3 million, as described below, and disposed of the remaining balance of our customer lists of approximately $3.3 million.
During the second quarter of fiscal 2009, we reviewed our customer lists in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 360, Property, Plant, and Equipment, based on the expectation that the business with which the customer lists were associated would be sold significantly before the end of their previously estimated useful life. Based on this measurement, we recorded a $2.3 million impairment loss, which is the amount by which the carrying value of the customer lists exceeded the fair value of the expected consideration to be received from the sale of assets. The impairment loss is included within Impairment of intangible assets in the Consolidated Statement of Operations.
6. Financing Agreement
Revolving Credit Facility
On September 30, 2009, AIC entered into a revolving line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”) pursuant to which Wells Fargo will advance up to $15.0 million to AIC for working capital purposes and to facilitate the issuance of letters of credit. The total amount available for borrowing under the Credit Facility fluctuates based on the Company’s level of eligible accounts receivable.
The Credit Facility carries an interest rate equal to the three month LIBOR rate plus 3.5%. The Credit Facility has an unused line fee of 0.50% annually on the daily average unused amount. The maturity date of the Credit Facility is September 30, 2012. Borrowings under the Credit Facility are secured by all of the Company’s assets.
The Credit Facility requires the Company to meet certain levels of year-to-date earnings/loss before taxes. The Credit Facility limits the Company’s annual capital expenditures to $2.0 million and requires the Company to maintain an excess borrowing base of at least $5.0 million. The Credit Facility contains customary affirmative and negative covenants and upon an event of default Wells Fargo may terminate the facility or declare the entire amount outstanding under the Credit Facility to be immediately due and payable and exercise other rights under the agreement.
As of October 2, 2010, we were in compliance with all the requirements of, and had no borrowing under, the Credit Facility. Total availability of the Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $8.3 million as of October 2, 2010. See “Sources and Uses of Cash/Credit Facility,” below, for further information.
7. Restructuring Costs and Other Severance Related Costs
In the third quarter of fiscal 2010, AIC recorded a net reversal of restructuring costs and other severance related costs of $0.5 million. The net reversal is comprised of a $0.2 million charge relating to severance and severance-related expenses and a reversal of $0.7 million, primarily relating to the modification of lease agreements for office space previously vacated.
For the nine month period ended October 2, 2010, AIC recorded a net reversal of restructuring costs and other severance-related costs of $0.3 million. The net reversal is comprised of a $0.4 million charge relating to severance and severance-related expenses and a reversal of $0.7 million primarily relating to the modification of lease agreements for office space previously vacated.
In the third quarter of fiscal 2009, we recorded workforce reduction and office closure charges totaling $0.9 million. Of these charges, $0.8 million related to severance and severance-related charges and $0.1 million related to future rent obligations (net of anticipated sub-lease income).
For the nine month period ended October 3, 2009, we recorded workforce reduction charges and office closure/consolidation charges totaling $2.7 million. Of these charges, $0.9 million related to severance and severance-related charges and $1.8 million related to future rent obligations.
A summary of the activity in the restructuring accrual for the nine months ended October 2, 2010 is as follows:
(In thousands) |
| Workforce |
| Office Closure/ |
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 2, 2010 |
| $ | 1,215 |
| $ | 1,868 |
| $ | 3,083 |
|
Restructuring charges (reversals) |
| 413 |
| (713 | ) | (300 | ) | |||
Cash expenditures |
| (1,225 | ) | (539 | ) | (1,764 | ) | |||
Balance as of October 2, 2010 |
| $ | 403 |
| $ | 616 |
| $ | 1,019 |
|
8. Reverse Stock Split and Amendment to Rights Plan
On February 26, 2010, the Company amended its Articles of Incorporation to effect a one-for-five reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.10 per share (the “Common Stock”). As a result of the Reverse Stock Split, every five shares of the Company’s Common Stock were automatically converted into one share of the Company’s Common Stock immediately prior to the opening of trading on March 1, 2010. All fractional shares were rounded down and any shareholder that would be entitled to receive a fractional share would be paid the fair market value of the fractional share in cash.
To reflect the effect of the Reverse Stock Split, the Company has retroactively adjusted all share and per share data to reflect the Common stock and Additional capital line in its Consolidated Balance Sheets as of January 2, 2010 and the weighted-average shares outstanding in its Consolidated Statements of Operations and related disclosures for the periods presented.
The Reverse Stock Split also resulted in proportionate adjustments under the Company’s then-existing Amended and Restated Rights Agreement having an effective date of February 27, 2008 (the “Amended Rights Plan”) in (a) the number of shares issuable under the Amended Rights Plan and (b) the Purchase Price.
On May 25, 2010, the Company amended the Amended Rights Plan by entering into Amendment No. 1 to the Amended Rights Plan with Wells Fargo Bank, N.A. as rights agent (“Amendment No. 1”). The principal purposes of Amendment No. 1 were to reflect the Reverse Stock Split (by decreasing the Purchase Price for Common Share Purchase Rights to $30.00 per share), and to make certain other technical and conforming changes.
9. Shareholders’ Equity
|
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|
| Total |
| ||||
|
| Common |
| Additional |
| Accumulated |
| Shareholders’ |
| ||||
(In thousands) |
| Stock |
| Capital |
| (Deficit) |
| Equity |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balances as of January 2, 2010 |
| $ | 498 |
| $ | 25,598 |
| $ | (11,148 | ) | $ | 14,948 |
|
Common stock issued - 1,200 shares |
| — |
| 4 |
| — |
| 4 |
| ||||
Stock Compensation |
| — |
| (37 | ) | — |
| (37 | ) | ||||
Other Comprehensive Income |
| — |
| — |
| 8 |
| 8 |
| ||||
Net loss |
| — |
| — |
| (1,420 | ) | (1,420 | ) | ||||
Balance as of October 2, 2010 |
| $ | 498 |
| $ | 25,565 |
| $ | (12,560 | ) | $ | 13,503 |
|
10. Equity Compensation Plans
As a result of recent changes in our senior leadership personnel, AIC recorded a reversal of equity-based compensation expense for the three- and nine-month periods ended October 2, 2010 of approximately $0.1 million and $33,000, respectively. This includes compensation expense related to both stock options and stock awards, and the reversal of compensation expense related to the forfeiture of unvested stock options in excess of original estimates. The reduction in tax benefit recorded for third quarter of fiscal 2010 was approximately $5,000 and the tax benefit recorded for the nine-month period ended October 2, 2010 was approximately $10,000. The tax benefit is offset against our valuation allowance for our deferred tax asset.
Total equity-based compensation expense for the three and nine-month periods ended October 3, 2009 was approximately $0.1 million and $0.3 million, respectively. This includes compensation expense related to both stock options and stock awards. The tax benefit recorded for these same periods was approximately $6,000 and $28,000 respectively. The tax benefit is offset against our valuation allowance for our deferred tax asset.
No stock options were exercised during the three and nine month periods ended October 2, 2010 or October 3, 2009. As of October 2, 2010, there was approximately $0.2 million of unrecognized compensation expense related to unvested option awards that are expected to vest over a weighted-average period of 1.3 years. Options to purchase approximately 348,000 and 551,000 shares of common stock were outstanding at October 2, 2010 and October 3, 2009, respectively.
During the three and nine month periods ended October 2, 2010, and October 3, 2009, we granted equity compensation awards as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||
|
| October 2, |
| October 3, |
| October 2, |
| October 3, |
| ||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||||||||
|
| Grants |
| Weighted- |
| Grants |
| Weighted- |
| Grants |
| Weighted- |
| Grants |
| Weighted- |
| ||
|
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|
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| ||
Stock Options |
| — |
| — |
| 118,000 |
| $ | 2.13 |
| 86,800 |
| 1.73 |
| 178,800 |
| $ | 1.93 |
|
Stock Awards |
| — |
| — |
| — |
| $ | — |
| 1,200 |
| 3.36 |
| 2,400 |
| $ | 2.21 |
|
11. Earnings (Loss) Per Share
Basic and diluted earnings and loss per share are presented in accordance with ASC Topic 260, Earnings Per Share. Basic income (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share includes dilutive options and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common equivalent shares outstanding for the period. For the three-month period ended October 2, 2010, approximately 462,000 anti-dilutive weighted shares were excluded from the calculation of weighted average number of common equivalent shares outstanding. For the nine-month period ended October 2, 2010 and for the three and nine-month periods ended October 3, 2009, all options were considered anti-dilutive and excluded from the computation of common equivalent shares because we reported a net loss. The computation of basic and diluted income (loss) per share for the three and nine months ended October 2, 2010 and October 3, 2009, is as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| October 2, |
| October 3, |
| October 2, |
| October 3, |
| ||||
(In thousands except per share amounts) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 587 |
| $ | (3,961 | ) | $ | (1,420 | ) | $ | (12,747 | ) |
Weighted-average number of common shares outstanding |
| 4,986 |
| 4,985 |
| 4,986 |
| 4,985 |
| ||||
Dilutive effect of equity compensation awards |
| 2 |
| — |
| — |
| — |
| ||||
Weighted-average number of common and common equivalent shares outstanding |
| 4,988 |
| 4,985 |
| 4,986 |
| 4,985 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.12 |
| $ | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |
Diluted |
| $ | 0.12 |
| $ | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q, including the “Risk Factors” described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
A. Our Business
Analysts International Corporation (“AIC,” “Company,” “we,” “us” or “our”) is an information technology (“IT”) services company. We employ approximately 800 professionals and are focused on serving the information technology needs of mid-market to Fortune 500 companies and government agencies across North America. AIC was incorporated in Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota.
B. Business Environment
Our business plan includes specific actions to be implemented during the balance of fiscal year 2010 and in fiscal year 2011. Although we believe these actions will lead to improvements in our operating results, whether or not any improvements in our operating results will materialize in such a way as to improve our financial performance depends on a number of factors. We operate in a highly competitive industry. Our ability to achieve our goals (including our primary goal of attaining profitability) is dependent, among other things, on customer demand for our services, our continuing ability to staff that customer demand with qualified IT professionals, our ability to reduce and manage our expenses, our ability to successfully implement and execute on our strategic plan and continued demand in general for IT services and staffing. If we do not satisfy the minimum earning requirements set forth in our revolving line of credit (“Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), we risk non-compliance with the financial covenant requirement of the Credit Facility. The financial covenant set forth in our Credit Facility for fiscal 2010 is a maximum year-to-date loss before taxes of $2.0 million. During fiscal 2011 the Credit Facility requires that the Company attain cumulative quarterly and annual profitability targets. If we are unable to satisfy the financial covenant requirement, an “Event of Default” would exist under the Credit Facility which would enable Wells Fargo, in its discretion, to exercise certain rights including the right to terminate the Credit Facility and declare all amounts outstanding under the Credit Facility to be immediately due and payable.
C. Fiscal 2010 Strategic Plan
Our primary goal for fiscal 2010 was to achieve profitability in the third quarter and the second half of fiscal 2010. We continue to focus our strategy on initiatives aimed at growing our IT staffing business, improving the productivity of our sales and recruiting personnel and controlling costs.
Our main objectives for fiscal 2010 continue to be:
· Become a profitable company
During the third quarter of fiscal 2010, we generated net income of $0.6 million, which is an improvement of $1.4 million and $4.5 million over the second quarter of fiscal 2010 and the third quarter of fiscal 2009, respectively.
For the nine month period ended October 2, 2010, we incurred a net loss of $1.4 million compared to a net loss of $12.7 million for the nine month period ended October 3, 2009.
· Increase revenue
Our third quarter of fiscal 2010 revenues decreased $0.8 million, or 3.0%, from the second quarter of fiscal 2010 and our average revenue per day decreased 1.4% from approximately $419,000 in the second quarter of fiscal 2010 to approximately $413,000 in the third quarter of fiscal 2010. There were 64 billing days in the second quarter of fiscal 2010 and 63 billing days in the third quarter of fiscal 2010.
· End fiscal 2010 with 1,000 billable consultants
We ended the third quarter of fiscal 2010 with 818 billable consultants and do not expect to have 1,000 billable consultants by the end of fiscal 2010.
· Achieve industry standard gross margin rates
Our third quarter of fiscal 2010 gross margin percentage was 22.5%, which was 150 basis points greater than our 2010 second quarter gross margin percentage and 340 basis points greater than our 2009 third quarter gross margin percentage.
· Build cash to invest in our strategy
We ended the third quarter of fiscal 2010 with approximately $4.7 million in cash and cash equivalents, an increase of $0.9 million since the beginning of fiscal 2010.
D. Business Developments
Reverse Stock Split and Amendment to Rights Plan
On February 26, 2010, the Company amended its Articles of Incorporation to effect a one-for-five reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.10 per share (the “Common Stock”). As a result of the Reverse Stock Split, every five shares of the Company’s Common Stock were automatically converted into one share of the Company’s Common Stock immediately prior to the opening of trading on March 1, 2010. All fractional shares were rounded down and any shareholder that would be entitled to receive a fractional share would be paid the fair market value of the fractional share in cash.
To reflect the effect of the Reverse Stock Split, the Company has retroactively adjusted all share and per share data to reflect the Common stock and Additional capital line in its Consolidated Balance Sheets as of January 2, 2010 and the weighted-average shares outstanding in its Consolidated Statements of Operations and related disclosures for the periods presented.
The Reverse Stock Split also resulted in proportionate adjustments under the Company’s then-existing Amended and Restated Rights Agreement having an effective date of February 27, 2008 (the “Amended Rights Plan”) in (a) the number of shares issuable under the Amended Rights Plan and (b) the Purchase Price.
On May 25, 2010, the Company amended the Amended Rights Plan by entering into Amendment No. 1 to the Amended Rights Plan with Wells Fargo Bank, N.A. as rights agent (“Amendment No. 1”). The principal purposes of Amendment No. 1 were to reflect the Reverse Stock Split (by decreasing the Purchase Price for Common Share Purchase Rights to $30.00 per share), and to make certain other technical and conforming changes.
Sale of Customer Contracts
On March 3, 2010, AIC sold certain customer contracts, property and equipment and sublet a facility. In consideration for the assets sold and the liabilities transferred, the Company received $0.2 million in cash. The Company recorded a loss on the sale of approximately $50,000 which is included within Selling, administrative and other operating costs (“SG&A”) in our Consolidated Statement of Operations. For the preceding 12 months before the sale date, the customer contracts generated revenues of approximately $3.2 million and had an unfavorable contribution margin of approximately $0.7 million.
Change in Leadership
On September 28, 2010, Andrew K. Borgstrom resigned as President, Chief Executive Officer and a Director of our Company. Under a transitional services agreement, Mr. Borgstrom will be available to assist AIC with ongoing business initiatives through January 31, 2011. On September 29, 2010, our Board of Directors appointed Brittany B. McKinney as our Interim President and Chief Executive Officer.
E. Overview of Third Quarter Fiscal 2010 Operations
Our revenues decreased $4.9 million, or 15.7%, from the third quarter of fiscal 2009 primarily due to our planned exit from non-core and low-margin lines of business (13.2%) and from less demand for our IT professional services (2.5%).
Gross margins as a percent of revenue increased 340 basis points from 19.1% in the third quarter of fiscal 2009 to 22.5% in the third quarter of fiscal 2010 due to our focus on higher margin business and the impact of exiting lower margin lines of business.
Selling, administrative and other operating cost (“SG&A”) expenses declined $3.1 million in third quarter of fiscal 2010 over the prior year quarter due largely to the exit from the value added reseller (“VAR”) operations, the impact of personnel and facility reductions and the overall reduction in business volume.
We generated cash from operating activities of $1.3 million during the third quarter of fiscal 2010. As of October 2, 2010, we had a cash balance of $4.7 million and no borrowing under our revolving line of credit.
RESULTS OF OPERATIONS, THREE MONTHS ENDED OCTOBER 2, 2010 VS. OCTOBER 3, 2009
The following table illustrates the relationship between revenue and expense categories along with a count of employees and technical consultants for the three months ended October 2, 2010 and October 3, 2009.
|
| Three Months Ended |
| Three Months Ended |
|
|
| |||||||||
|
| October 2, 2010 |
| October 3, 2009 |
| Increase (Decrease) |
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
(Dollars in thousands) |
| Amount |
| Revenue |
| Amount |
| Revenue |
| Amount |
| % |
| |||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Professional services provided directly |
| $ | 26,032 |
| 99.9 | % | $ | 29,335 |
| 94.9 | % | $ | (3,303 | ) | (11.3 | )% |
Professional services provided through subsuppliers |
| 17 |
| 0.1 |
| 460 |
| 1.5 |
| (443 | ) | (96.3 | ) | |||
Product sales |
| — |
| — |
| 1,106 |
| 3.6 |
| (1,106 | ) | (100.0 | ) | |||
Total revenue |
| 26,049 |
| 100.0 |
| 30,901 |
| 100.0 |
| (4,852 | ) | (15.7 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cost of services provided directly |
| 20,170 |
| 77.4 |
| 23,595 |
| 76.4 |
| (3,425 | ) | (14.5 | ) | |||
Cost of services provided through subsuppliers |
| 17 |
| 0.1 |
| 441 |
| 1.4 |
| (424 | ) | (96.1 | ) | |||
Cost of product sales |
| — |
| — |
| 965 |
| 3.1 |
| (965 | ) | (100.0 | ) | |||
Selling, administrative and other operating costs |
| 5,772 |
| 22.2 |
| 8,886 |
| 28.8 |
| (3,114 | ) | (35.0 | ) | |||
Restructuring costs and other severance related costs |
| (482 | ) | (1.9 | ) | 917 |
| 3.0 |
| (1,399 | ) | (152.6 | ) | |||
Amortization of intangible assets |
| — |
| — |
| 44 |
| 0.1 |
| (44 | ) | (100.0 | ) | |||
Total expenses |
| 25,477 |
| 97.8 |
| 34,848 |
| 112.8 |
| (9,371 | ) | (26.9 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating income (loss) |
| 572 |
| 2.2 |
| (3,947 | ) | (12.8 | ) | 4,519 |
| 114.5 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Non-operating income |
| 4 |
| — |
| 8 |
| — |
| (4 | ) | (50.0 | ) | |||
Interest expense |
| (3 | ) | — |
| (9 | ) | — |
| (6 | ) | (66.7 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income (loss) before income taxes |
| 573 |
| 2.2 |
| (3,948 | ) | (12.8 | ) | 4,521 |
| 114.5 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income tax (benefit) expense |
| (14 | ) | (0.1 | ) | 13 |
| — |
| (27 | ) | (207.7 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 587 |
| 2.3 | % | $ | (3,961 | ) | (12.8 | )% | $ | 4,548 |
| 114.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Personnel: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Management and Administrative |
| 111 |
|
|
| 153 |
|
|
| (42 | ) | (27.5 | )% | |||
Technical Consultants |
| 818 |
|
|
| 877 |
|
|
| (59 | ) | (6.7 | )% |
Revenue
Revenue from services provided directly for the three months ended October 2, 2010 declined 11.3% from the comparable period a year ago. The decline in revenue was primarily due to our planned exit from non-core and low-margin lines of business (10.2%) and from less demand for our project-based solutions (1.1%). The overall decline in revenue from services provided directly resulted in a reduction in the number of billable hours and technical consultants which was partially offset by a 6.3% increase in overall billing rates over the prior year period.
Our subsupplier revenue, which is mainly pass-through revenue with associated fees, declined by 96.3% over the prior year period as a result of focusing on higher margin business. We had no product sales in the third quarter of fiscal 2010 as a result of the sale of our VAR operations in the third quarter of fiscal 2009.
Cost of Services Provided Directly
Cost of services provided directly represents our payroll and benefit costs associated with our billable consultants. This category of expense as a percentage of direct services revenue decreased to 77.5% in the third quarter of fiscal 2010 compared to 80.4% in the prior comparable period. The decrease in expense as a percentage of direct services revenue is primarily due to the reduction in volume at lower margin staffing accounts.
Cost of Services Provided Through Subsuppliers
Cost of services provided through subsuppliers represents our cost when we utilize third parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services provided through subsuppliers was 100% for third quarter in fiscal 2010 compared to 95.9 % for the prior year comparable period.
Cost of Product Sales
Cost of product sales represents our cost when we resold hardware and software products. This category of expense, as a percentage of product sales, was 87.3% in the third quarter of fiscal 2009. With the sale of our VAR operations in the third quarter of fiscal 2009, hardware and software product sales are no longer a material part of our operations.
Selling, Administrative and Other Operating Costs
SG&A costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs and other administrative costs. This category of costs decreased approximately $3.1 million from the comparable period in 2009 and represented 22.2% of total revenue for the third quarter of fiscal 2010 compared to 28.8% in the third quarter of fiscal 2009. SG&A expenses decreased primarily due to the impact of personnel reductions that occurred in the prior year as a result of the asset sales and implementation of non-personnel cost reductions.
Restructuring Costs and Other Severance Related Costs
In the third quarter of fiscal 2010, we recorded a net expense reversal of $0.5 million. The net reversal is comprised of a $0.2 million charge relating to severance and severance-related expenses and a reversal of $0.7 million for modification of lease agreements.
In the third quarter of fiscal 2009, we recorded workforce reduction and office closure charges totaling $0.9 million. Of these charges, $0.8 million related to severance and severance-related charges and $0.1 million related to future rent obligations (net of anticipated sub-lease income).
Amortization of Intangible Assets
This category of expense decreased during the third quarter of fiscal 2010 from the prior year due to the sale of all our remaining customer lists in third quarter of fiscal 2009. In the third quarter of fiscal 2009, we disposed of a customer list and a trade name that were fully amortized.
Non-operating Income
Non-operating income decreased slightly in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009, as a result of less interest income earned on our cash balances and lower interest income related to customer financed equipment.
Interest Expense
We had no borrowing outstanding in the third quarter of fiscal 2010 and 2009.
Income Taxes
For both the third quarters of fiscal 2010 and fiscal 2009, we recorded accruals for amounts due for certain state income taxes and changes in our reserves for tax obligations. We recorded no additional income tax expense associated with our net operating losses because any tax expense that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we successfully return to profitability to a point where future realization of deferred tax
assets, which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowance to realize the benefit of these assets.
Personnel
Our technical consulting staff levels finished the third quarter of fiscal 2010 at 818, a 6.7% decline against the comparable period last year. The decline in technical consulting staff levels is primarily due to an overall decline in business volume and sale of assets. The decline in management and administrative personnel is due to our focus on reducing the number of management and administrative personnel that are necessary to support the existing business operations.
Certain Information Concerning Off-Balance Sheet Arrangements
As of October 2, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
F. Overview of Year to Date Fiscal 2010 Operations
Our revenues decreased $35.2 million, or 30.2%, from the first nine months of fiscal 2009 primarily due to our planned exit from non-core and low-margin lines of business (21.5%) and from less demand for our IT professional services (8.7%).
Gross margins as a percent of revenue increased 180 basis points from 19.7% in the first nine months of fiscal 2009 to 21.5% in the first nine months of fiscal 2010 due to our focus on higher margin business and the impact of exiting lower margin lines of business and accounts.
SG&A expenses declined $11.0 million, or 36.5%, in the first nine months of fiscal 2010 over the first nine months of fiscal 2009 due largely to the exit from the VAR operations, the impact of the personnel and facility reductions and the overall reduction in business volume.
We generated cash from operating activities of $1.0 million during the first nine months of fiscal 2010. As of October 2, 2010, we had a cash balance of $4.7 million and no borrowing under our revolving line of credit.
RESULTS OF OPERATIONS, NINE MONTHS ENDED OCTOBER 2, 2010 VS. OCTOBER 3, 2009
The following table illustrates the relationship between revenue and expense categories along with a count of employees and technical consultants for the nine months ended October 2, 2010 and October 3, 2009.
|
| Nine Months Ended |
| Nine Months Ended |
|
|
| |||||||||
|
| October 2, 2010 |
| October 3, 2009 |
| Increase (Decrease) |
| |||||||||
|
|
|
| % of |
|
|
| % of |
|
|
|
|
| |||
(Dollars in thousands) |
| Amount |
| Revenue |
| Amount |
| Revenue |
| Amount |
| % |
| |||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Professional services provided directly |
| $ | 80,731 |
| 99.2 | % | $ | 105,211 |
| 90.3 | % | $ | (24,480 | ) | (23.3 | )% |
Professional services provided through subsuppliers |
| 616 |
| 0.8 |
| 2,011 |
| 1.7 |
| (1,395 | ) | (69.4 | ) | |||
Product sales |
| — |
| — |
| 9,339 |
| 8.0 |
| (9,339 | ) | (100.0 | ) | |||
Total revenue |
| 81,347 |
| 100.0 |
| 116,561 |
| 100.0 |
| (35,214 | ) | (30.2 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cost of services provided directly |
| 63,274 |
| 77.8 |
| 83,704 |
| 71.8 |
| (20,430 | ) | (24.4 | ) | |||
Cost of services provided through subsuppliers |
| 582 |
| 0.7 |
| 1,915 |
| 1.6 |
| (1,333 | ) | (69.6 | ) | |||
Cost of product sales |
| — |
| — |
| 7,973 |
| 6.8 |
| (7,973 | ) | (100.0 | ) | |||
Selling, administrative and other operating costs |
| 19,209 |
| 23.6 |
| 30,233 |
| 25.9 |
| (11,024 | ) | (36.5 | ) | |||
Restructuring costs and other severance related costs |
| (300 | ) | (0.4 | ) | 2,708 |
| 2.3 |
| (3,008 | ) | (111.1 | ) | |||
Impairment of intangible assets |
| — |
| — |
| 2,268 |
| 1.9 |
| (2,268 | ) | (100.0 | ) | |||
Amortization of intangible assets |
| — |
| — |
| 491 |
| 0.4 |
| (491 | ) | (100.0 | ) | |||
Total expenses |
| 82,765 |
| 101.7 |
| 129,292 |
| 110.9 |
| (46,527 | ) | (36.0 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating loss |
| (1,418 | ) | (1.7 | ) | (12,731 | ) | (10.9 | ) | (11,313 | ) | (88.9 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Non-operating income |
| 14 |
| — |
| 35 |
| — |
| (21 | ) | (60.0 | ) | |||
Interest expense |
| (11 | ) | — |
| (20 | ) | — |
| (9 | ) | (45.0 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Loss before income taxes |
| (1,415 | ) | (1.7 | ) | (12,716 | ) | (10.9 | ) | (11,301 | ) | (88.9 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income tax expense |
| 5 |
| — |
| 31 |
| — |
| (26 | ) | (83.9 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net loss |
| $ | (1,420 | ) | (1.7 | )% | $ | (12,747 | ) | (10.9 | )% | $ | (11,327 | ) | (88.9 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Personnel: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Management and Administrative |
| 111 |
|
|
| 153 |
|
|
| (42 | ) | (27.5 | )% | |||
Technical Consultants |
| 818 |
|
|
| 877 |
|
|
| (59 | ) | (6.7 | )% |
Revenue
Revenue from services provided directly for the nine months ended October 2, 2010 declined 23.3% from the comparable period a year ago. The decline in revenue was primarily due to our planned exit from non-core and low-margin lines of business (14.9%) and from less demand for our IT staffing (5.8%) and project-based solutions (2.5%). The decline in revenue from services provided directly resulted in a reduction in the number of billable hours and technical consultants as a result of lower business volumes which was partially offset by a 4.7% increase in overall billing rates over the prior year period.
Our subsupplier revenue, which is mainly pass-through revenue with associated fees, declined by 69.4% over the prior year period as a result of focusing on higher margin business. We had no product sales in the first nine months of fiscal 2010 as a result of the sale of our VAR operations in the third quarter of fiscal 2009.
Cost of Services Provided Directly
Cost of services provided directly represents our payroll and benefit costs associated with our billable consultants. This category of expense as a percentage of direct services revenue decreased to 78.4% for the nine months ended October 2, 2010 compared to 79.6% in the prior comparable period. The decrease in expense as a percentage of direct services revenue is primarily due to the reduction in volume at lower margin staffing accounts.
Cost of Services Provided Through Subsuppliers
Cost of services provided through subsuppliers represents our cost when we utilize third parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services provided through subsuppliers was 94.5% for the nine months ended October 2, 2010 compared to 95.2% for the prior year comparable period.
Cost of Product Sales
Cost of product sales represents our cost when we resold hardware and software products. This category of expense, as a percentage of product sales, was 85.4% for the nine months ended October 3, 2009. With the sale of our VAR operations in the third quarter of fiscal 2009, hardware and software product sales are no longer a material part of our operations.
Selling, Administrative and Other Operating Costs
SG&A costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs, and other administrative costs. This category of costs decreased approximately $11.0 million from $30.2 million for the nine months ended October 3, 2009 to $19.2 million for the nine months ended October 2, 2010. These amounts represented 25.9% and 23.6% of total revenue for 2009 and 2010, respectively. SG&A expenses decreased primarily due to the impact of personnel reductions that occurred in the prior year as a result of the asset sales and implementation of non-personnel cost reductions.
Restructuring Costs and Other Severance Related Costs
For the nine month period ended October 2, 2010, we recorded a net expense reversal of $0.3 million. The net reversal is comprised of a $0.4 million charge relating to severance and severance-related expenses and a reversal of $0.7 million for modification of lease agreements.
For the nine month period ended October 3, 2009, we recorded workforce reduction charges and office closure/consolidation charges totaling $2.7 million. Of these charges, $0.9 million related to severance and severance-related charges and $1.8 million related to future rent obligations.
Amortization of Intangible Assets
During the nine months ended October 2, 2010, this category of expense decreased from the prior year due to the sale of all our remaining customer lists in third quarter of fiscal 2009.
Non-operating Income
Non-operating income decreased for the nine months ended October 2, 2010, compared to the nine months ended July 3, 2009, as a result of less interest income earned from our cash balances due to lower interest rates and higher interest income related to a customer equipment lease in the prior year.
Interest Expense
We had no borrowing outstanding for the nine months ended October 2, 2010. For the nine months ended October 3, 2009, the average interest rate was 3.78% and we incurred interest expense of $20,000.
Income Taxes
For the nine months ended October 2, 2010 and October 3, 2009, we recorded accruals for amounts due for certain state income taxes and changes in our reserves for tax obligations. We recorded no additional income tax expense associated with our net operating losses because any tax expense that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we successfully return to profitability to a point where future realization of deferred tax assets, which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowance to realize the benefit of these assets.
Liquidity and Capital Resources
The following table provides information relative to the liquidity of our business.
|
|
|
|
|
|
|
| Percentage |
| |||
|
| October 2, |
| January 2, |
| Increase |
| Increase |
| |||
(In thousands) |
| 2010 |
| 2010 |
| (Decrease) |
| (Decrease) |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
| $ | 4,730 |
| $ | 3,818 |
| $ | 912 |
| 23.9 | % |
Accounts receivable |
| 18,457 |
| 23,028 |
| (4,571 | ) | (19.8 | ) | |||
Other current assets |
| 693 |
| 1,442 |
| (749 | ) | (51.9 | ) | |||
Total current assets |
| $ | 23,880 |
| $ | 28,288 |
| $ | (4,408 | ) | (15.6 | )% |
|
|
|
|
|
|
|
|
|
| |||
Accounts payable |
| $ | 4,419 |
| $ | 6,958 |
| $ | (2,539 | ) | (36.5 | )% |
Line of credit |
| — |
| — |
| — |
| — |
| |||
Salaries and benefits |
| 3,890 |
| 2,498 |
| 1,392 |
| 55.7 |
| |||
Deferred revenue |
| 299 |
| 310 |
| (11 | ) | (3.5 | ) | |||
Deferred compensation |
| 205 |
| 522 |
| (317 | ) | (60.7 | ) | |||
Restructuring accrual |
| 776 |
| 2,038 |
| (1,262 | ) | (61.9 | ) | |||
Other current liabilities |
| 785 |
| 960 |
| (175 | ) | (18.2 | ) | |||
Total current liabilities |
| $ | 10,374 |
| $ | 13,286 |
| $ | (2,912 | ) | (21.9 | )% |
|
|
|
|
|
|
|
|
|
| |||
Working capital |
| $ | 13,506 |
| $ | 15,002 |
| $ | (1,496 | ) | (10.0 | )% |
Current ratio |
| 2.30 |
| 2.13 |
| 0.17 |
| 8.1 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Total shareholders’ equity |
| $ | 13,503 |
| $ | 14,948 |
| $ | (1,445 | ) | (9.7 | )% |
Change in Working Capital
Working capital was $13.5 million at October 2, 2010, down approximately $1.5 million from January 2, 2010. The ratio of current assets to current liabilities increased by 8.1% to 2.30 at October 2, 2010 compared to 2.13 at January 2, 2010.
Our total current assets decreased approximately $4.4 million at October 2, 2010, compared to the end of fiscal 2009, primarily from lower accounts receivable. Our accounts receivable decreased 19.8% primarily due to improved collection experience which lowered our days sales outstanding from 78 at the end of fiscal 2009 to 63 at October 2, 2010.
Our total current liabilities decreased by approximately $2.9 million at October 2, 2010, compared to the end of fiscal 2009 as a result of lower accounts payable balances due to reduced business volumes and restructuring accrual payments.
We believe our existing working capital and availability under our Credit Facility with Wells Fargo will be sufficient to support the cash flow needs of our business in fiscal 2010. Additional operating losses, unfavorable bad debt experience, a lengthening of payment terms from our clients, or significant costs associated with additional restructuring activities could create a need for additional working capital. An inability to obtain additional working capital, should it be required, could have a material adverse effect on our business. We expect to be able to comply with the requirements of our credit agreement; however, failure to do so could affect our ability to obtain necessary working capital and could have a material adverse effect on our business.
Sources and Uses of Cash/Credit Facility
Cash and cash equivalents increased by $0.9 million from January 2, 2010 to October 2, 2010. Our primary need for working capital is to support accounts receivable and to fund the time lag between payroll and vendor disbursements and receipt of fees billed to clients. Historically, we have been able to support internal growth in our business with internally generated funds and through the use of our credit facility.
The Credit Facility will advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit. The total amount available for borrowing under the Credit Facility will fluctuate based on our level of eligible accounts receivable.
The Credit Facility carries an interest rate equal to the three month LIBOR rate plus 3.5%. The Credit Facility has an unused line fee of 0.50% annually on the daily average unused amount. The maturity date of the Credit Facility is September 30, 2012 and may be terminated or reduced by us on 90 days notice in exchange for a termination fee of 2% of the maximum line amount or reduction of the maximum line amount in the second year or 1% of such amounts in the second year and no fee in the third year. Borrowings under the Credit Facility are secured by all of our assets.
The Credit Facility contains a set of covenants with which we are required to comply. These covenants include reporting requirements and financial requirements. The financial requirements allow us, among other things, to generate a loss of $2.0 million or less to satisfy the minimum level of earnings before taxes for fiscal 2010. If we are not able to generate sufficient earnings before taxes to satisfy the covenant, an “Event of Default” would exist under the Credit Facility which would enable Wells Fargo, in its discretion, to exercise certain rights including the right to terminate the Credit Facility and declare all amounts outstanding under the Credit Facility to be immediately due and payable.
Additionally, the Credit Facility limits our annual capital expenditures to $2.0 million and requires us to maintain an excess borrowing base of at least $5.0 million. The Credit Facility contains customary affirmative and negative covenants and upon an event of default Wells Fargo may terminate the facility or declare the entire amount outstanding under the Credit Facility to be immediately due and payable and exercise other rights under the agreement.
As of October 2, 2010, we were in compliance with all the requirements and had no borrowing under the Credit Facility. Total availability under the Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $8.3 million as of October 2, 2010.
On March 3, 2010, we closed on an asset sale agreement for certain customer contracts. In consideration for the assets sold and the liabilities transferred, we received $0.2 million in cash.
During each of the third quarters of fiscal 2010 and 2009, we made capital expenditures of approximately $13,000 and $0.3 million, respectively. For the nine month periods ended October 2, 2010 and October 3, 2009, we made capital expenditures of approximately $0.1 million and $1.1 million, respectively.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) about: (i) our expectations and beliefs with respect to the current condition of the United States economy (including the economic recession and the volatility of the capital markets), (ii) assumptions with respect to the effect these economic conditions will have on our business, (iii) our strategic plans, the objectives of those strategic plans and our ability to successfully implement our strategic plans, including our plan to attain profitability at some point during the second half of fiscal year 2010, (iv) our expectations with respect to the demand for our services and continuing pressure from customers to request lower cost offerings for IT staffing services, (v) our expectations with respect to competition in our industry and our ability to compete, (vi) our beliefs regarding the adequacy of our working capital, (vii) our ability to satisfy the requirements of our Credit Facility, and (viii) our expectations with respect to our financial results and operating performance. These statements could affect our plans, anticipated operating results and/or financial condition. You can identify these statements by the use of words such as “anticipate,” “estimate,” “expect,” “should,” “project,” “forecast,” “intend,” “plan,” “believe,” “will,” and other words and terms of similar meaning or import, or variations thereof, in connection with any discussion of future operating or financial performance.
Among the factors that could cause our estimates and assumptions as to future performance, and our actual results to differ materially, are: (i) our inability, in whole or in part, to implement or execute our strategic plans, (ii) our inability to successfully recruit and hire qualified technical personnel, (iii) our inability to successfully compete on a national basis with other companies in our industry or with new competitors who face limited barriers to entry in the markets we serve, (iv) our inability to maintain key customer relationships or to attract new customers, (v) our inability to attract, retain or motivate key personnel, (vi) our inability to continue to reduce operating costs, (vii) the possibility that we may incur liability for the errors or omissions of our consultants providing IT services for customers or the risk that we may be subject to claims for indemnification under contracts with our customers, (viii) our inability to comply with the covenants in our credit facilities or to obtain a replacement credit facility on commercially reasonable terms, (ix) a continued or worsened downturn in the national or global economy, and (x) our inability to effectively manage accounts receivable; as well as other economic, business, competitive and/or regulatory factors affecting our business generally, including those set forth in this Quarterly Report on Form 10-Q for fiscal year 2010, especially in the
Management’s Discussion and Analysis section, our most recent Annual Report on Form 10-K (including the Risk Factors section thereof) and our Current Reports on Form 8-K. All forward-looking statements included in this Form 10-Q are based on information available to us as of the date hereof and largely reflect estimates and assumptions made by our management, which may be difficult to predict and beyond our control. We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management, including the Interim President and Chief Executive Officer, Brittany B. McKinney, and Chief Financial Officer, Randy W. Strobel, regarding the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that is required to be disclosed by us in reports that are filed under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules of the Securities Exchange Commission.
(b) Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There are no pending legal proceedings to which we are a party or to which any of our property is subject, other than routine litigation incidental to the business.
There were no material changes in the Company’s risk factors from those previously disclosed in the Company’s Form 10-K for the period ended January 2, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
None.
Exhibit No. |
| Description |
|
|
|
^ 3.1 |
| Articles of Incorporation, as amended (Exhibit 3-a to Annual Report on Form 10-K for fiscal year 1988, Commission File No. 0-4090, incorporated by reference). |
^ 3.2 |
| Restated Bylaws (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000, Commission File No. 0-4090, incorporated by reference). |
^ 3.3 |
| Amendment to Articles of Incorporation to increase authorized shares to 40 million (Exhibit A to Definitive Proxy Statement dated September 5, 1996, Commission File No. 0-4090, incorporated by reference). |
^ 3.4 |
| Amendment to Articles of Incorporation to increase authorized shares to 60 million (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998, Commission File No. 0-4090, incorporated by reference). |
^ 3.5 |
| Amendment to Articles of Incorporation to increase authorized shares to 120 million (Exhibit A to Definitive Proxy Statement dated September 8, 1998, Commission File No. 0-4090, incorporated by reference). |
^3.6 |
| Amendment to Articles of Incorporation to reduce authorized shares to 24 million (Exhibit 3.6 to Quarterly Report on Form 10-Q dated May 5, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 3.7 |
| Amendment No. 1 to Restated Bylaws of Analysts International Corporation (Exhibit 3.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 4.1 |
| Specimen Common Stock Certificate (Exhibit 4(a) to Annual Report on Form 10-K for fiscal year 1989, Commission File No. 0-4090, incorporated by reference). |
^ 4.2 |
| Amended and Restated Rights Agreement dated as of February 27, 2008 between the Company and Wells Fargo Bank N.A. and Form of Right Certificate (Exhibit 4.1 to the Registrant’s Form 8-A12B dated February 27, 2008, Commission File No. 0-4090, incorporated by reference). |
^ 4.3 |
| Amendment No. 1 to Amended and Restated Rights Agreement dated as of May 25, 2010 by and between Analysts International Corporation and Wells Fargo Bank, N.A. (Exhibit 4.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 10.60 |
| Agreement for Legal Services between the Company and Robert E. Woods Professional Association dated March 5, 2010. |
+ 10.61 |
| Separation Agreement and Release of Claims dated July 28, 2010, between the Company and James D. Anderson. |
^ 10.62 |
| Separation Agreement and Release of Claims dated September 29, 2010, between the Company and Andrew K. Borgstrom (Exhibit 10.1 to the Registrant’s Form 8-K filed September 30, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 10.63 |
| Transitional Services Agreement dated September 29, 2010, between the Company and Andrew K. Borgstrom (Exhibit 10.2 to the Registrant’s Form 8-K filed September 30, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 10.64 |
| Letter Agreement dated September 29, 2010, between the Company and Brittany B. McKinney (Exhibit 10.3 to the Registrant’s Form 8-K filed September 30, 2010, Commission File No. 0-4090, incorporated by reference). |
+ 31.1 |
| Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
+ 31.2 |
| Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
++ 32 |
| Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
^ |
| Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. |
+ |
| Filed herewith. |
++ |
| Furnished herewith. |
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 there unto duly authorized.
| ANALYSTS INTERNATIONAL CORPORATION |
| |
| (Registrant) |
| |
|
|
|
|
|
|
|
|
Date: November 4, 2010 | By: | /s/ Brittany B. McKinney |
|
|
| Brittany B. McKinney |
|
|
| Interim President and Chief Executive Officer |
|
|
| (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Date: November 4, 2010 | By: | /s/ Randy W. Strobel |
|
|
| Randy W. Strobel |
|
|
| Chief Financial Officer |
|
|
| (Principal Financial and Accounting Officer) |
|
Exhibit No. |
| Description |
|
|
|
^ 3.1 |
| Articles of Incorporation, as amended (Exhibit 3-a to Annual Report on Form 10-K for fiscal year 1988, Commission File No. 0-4090, incorporated by reference). |
^ 3.2 |
| Restated Bylaws (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000, Commission File No. 0-4090, incorporated by reference). |
^ 3.3 |
| Amendment to Articles of Incorporation to increase authorized shares to 40 million (Exhibit A to Definitive Proxy Statement dated September 5, 1996, Commission File No. 0-4090, incorporated by reference). |
^ 3.4 |
| Amendment to Articles of Incorporation to increase authorized shares to 60 million (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998, Commission File No. 0-4090, incorporated by reference). |
^ 3.5 |
| Amendment to Articles of Incorporation to increase authorized shares to 120 million (Exhibit A to Definitive Proxy Statement dated September 8, 1998, Commission File No. 0-4090, incorporated by reference). |
^3.6 |
| Amendment to Articles of Incorporation to reduce authorized shares to 24 million (Exhibit 3.6 to Quarterly Report on Form 10-Q dated May 5, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 3.7 |
| Amendment No. 1 to Restated Bylaws of Analysts International Corporation (Exhibit 3.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 4.1 |
| Specimen Common Stock Certificate (Exhibit 4(a) to Annual Report on Form 10-K for fiscal year 1989, Commission File No. 0-4090, incorporated by reference). |
^ 4.2 |
| Amended and Restated Rights Agreement dated as of February 27, 2008 between the Company and Wells Fargo Bank N.A. and Form of Right Certificate (Exhibit 4.1 to the Registrant’s Form 8-A12B dated February 27, 2008, Commission File No. 0-4090, incorporated by reference). |
^ 4.3 |
| Amendment No. 1 to Amended and Restated Rights Agreement dated as of May 25, 2010 by and between Analysts International Corporation and Wells Fargo Bank, N.A. (Exhibit 4.1 to the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 10.60 |
| Agreement for Legal Services between the Company and Robert E. Woods Professional Association dated March 5, 2010. |
+ 10.61 |
| Separation Agreement and Release of Claims dated July 28, 2010, between the Company and James D. Anderson. |
^ 10.62 |
| Separation Agreement and Release of Claims dated September 29, 2010, between the Company and Andrew K. Borgstrom (Exhibit 10.1 to the Registrant’s Form 8-K filed September 30, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 10.63 |
| Transitional Services Agreement dated September 29, 2010, between the Company and Andrew K. Borgstrom (Exhibit 10.2 to the Registrant’s Form 8-K filed September 30, 2010, Commission File No. 0-4090, incorporated by reference). |
^ 10.64 |
| Letter Agreement dated September 29, 2010, between the Company and Brittany B. McKinney (Exhibit 10.3 to the Registrant’s Form 8-K filed September 30, 2010, Commission File No. 0-4090, incorporated by reference). |
+ 31.1 |
| Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
+ 31.2 |
| Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
++ 32 |
| Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
^ |
| Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. |
+ |
| Filed herewith. |
++ |
| Furnished herewith. |