FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-4090
ANALYSTS INTERNATIONAL CORPORATION
Minnesota 41-0905408
7615 Metro Boulevard
Minneapolis, MN 55439
(612) 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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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As of October 30, 1998, 22,518,625 shares of the Registrant's Common Stock were
outstanding.
ANALYSTS INTERNATIONAL CORPORATION
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets
September 30, 1998 (Unaudited) and June 30, 1998 1
Condensed Consolidated Statements of Income
Three months ended September 30, 1998 and 1997
(Unaudited) 2
Condensed Consolidated Statements of Cash Flows
Three months ended September 30, 1998 and 1997
(Unaudited) 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-6
ANALYSTS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
(In thousands) 1998 1998
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(Unaudited)
Current assets:
Cash and cash equivalents $ 13,583 $ 11,868
Accounts receivable, less allowance
for doubtful accounts 95,477 94,294
Other current assets 3,971 3,808
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Total current assets 113,031 109,970
Property and equipment, net 14,916 10,360
Other assets 12,518 12,331
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$140,465 $132,661
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $21,288 $21,236
Dividend payable 2,249 1,795
Salaries and vacations 14,763 15,669
Other, primarily self-insured health care reserves 2,056 2,161
Income taxes payable 5,362 1,635
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Total current liabilities 45,718 42,496
Long-term liabilities 7,381 7,171
Shareholders' equity 87,366 82,994
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$140,465 $132,661
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Note: The balance sheet at June 30, 1998 has been taken from the audited
financial statements at that date, and condensed.
See notes to condensed consolidated financial statements.
1
ANALYSTS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
(In thousands except per share amounts) September 30
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1998 1997
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Professional services revenues:
Provided directly $123,373 $104,671
Provided through sub-suppliers 35,091 30,487
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Total revenues 158,464 135,158
Expenses:
Salaries, contracted
services and direct charges 123,621 104,571
Selling, administrative and other
operating costs 24,959 21,951
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Total expenses 148,580 126,522
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Operating income 9,884 8,636
Non-operating income 309 331
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Income before income taxes 10,193 8,967
Income taxes 4,067 3,587
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Net income $ 6,126 $ 5,380
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PER COMMON SHARE:*
Net income (basic) $ .27 $ .24
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Net income (diluted) $ .27 $ .24
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Dividends paid $ .08 $ .06
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Average common shares
outstanding* 22,481 22,310
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Average common and common
equivalent shares outstanding* 22,875 22,757
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*1997 amounts have been adjusted to reflect the 3 for 2 common stock split in
the form of a stock dividend distributed December 3, 1997.
See notes to condensed consolidated financial statements.
2
ANALYSTS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30
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(In thousands) 1998 1997
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Net cash provided by operating activities $ 8,419 $ 4,991
Cash flows from investing activities:
Property and equipment additions (5,404) (1,050)
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Net cash used in investing activities (5,404) (1,050)
Cash flows from financing activities:
Cash dividends (1,798) (1,337)
Proceeds from exercise of stock options 498 539
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Net cash used in financing activities (1,300) (798)
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Net change in cash and equivalents 1,715 3,143
Cash and equivalents at beginning of period 11,868 17,888
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Cash and equivalents at end of period $13,583 $21,031
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See notes to condensed consolidated financial statements.
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ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Financial Statements - The condensed consolidated
balance sheet as of September 30, 1998, the condensed consolidated
statements of income for the three month periods ended September 30, 1998
and 1997 and the condensed consolidated statements of cash flows for the
three month periods then ended have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and the cash flows at September 30, 1998
and for the periods then ended have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1998 annual
report to shareholders.
2. SHAREHOLDERS' EQUITY
Three Months Ended
September 30, 1998
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(In thousands)
Balance at beginning of period $82,994
Cash dividends declared:
August 20, 1998 at $.10 per share (2,252)
Proceeds upon exercise of stock options 443
Stock-based compensation 55
Net income 6,126
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Balance at end of period $ 87,366
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3. NET INCOME PER COMMON SHARE
Basic and diluted earnings per share (EPS) are presented in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". The difference between average common shares and average common and
common equivalent shares is the result of outstanding stock options.
4
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
CHANGES IN FINANCIAL CONDITION
Working capital at September 30, 1998 was $67.3 million, down 0.3% from the
$67.5 million at June 30, 1998. This includes cash and cash equivalents of
$13.6 million compared to $11.9 million at June 30, 1998 and accounts receivable
of $95.5 million compared to $94.3 million at June 30, 1998. Ratios of current
assets to current liabilities and total assets to total liabilities have
decreased slightly since June 30, 1998.
The Company's primary need for working capital is to support accounts receivable
resulting from the growth in its business and to fund the time lag between
payroll disbursement and receipt of fees billed to clients. Over the past
years, the Company has been able to support the growth in its business with
internally generated funds. The Company's sub-supplier contracts are not
expected to burden working capital.
On August 20, 1998 the Board of Directors increased the regular quarterly
dividend to $.10 per share payable November 13, 1998 to shareholders of record
on October 30, 1998. The previous dividend rate was $.08 per share.
In January 1998 the Company entered into an agreement to build a facility for
use as its corporate headquarters and its Minneapolis branch operations. The
Company expects construction and related costs will be approximately $22,000,000
and these costs will be financed through a combination of unsecured debt and use
of cash reserves.
The Company believes funds generated from its business, current cash balances
and the above mentioned financing are adequate to meet demands placed upon its
resources by its operations, capital investments and the payment of quarterly
dividends.
The Company intends to achieve Year 2000 compliance by replacing its computer
systems with new, Y2K compliant hardware and software which is currently being
subjected to compliance testing. It is expected the new hardware/software
system will be ready for use in production by February 1, 1999. The cost of the
new system is expected to be approximately $2,500,000, of which $2,000,000 has
already been incurred. The Company depends on its computer system for critical
business functions, including time record keeping, billing, payroll, and
accounts payable and receivable. The loss of these capabilities would have a
material adverse impact on the Company. The Company believes, however, its new
computer systems will be ready in time for the millennium date change, and
accordingly no contingency plan has been developed at this time. If Y2K
compliance testing currently being performed exposes weaknesses (Y2K or
otherwise) in the new system, or if implementation into production is deferred
beyond February 1, 1999, the Company intends to develop a contingency plan,
which will likely take into account the fact it has a staff of over 4,500
computer programmers as well as a national Y2K practice which can assist in
achieving Y2K compliance. The Company's business does not depend on raw
materials, parts or other goods supplied by third parties and therefore, the
Company believes the inability of its vendors to achieve Y2K compliance would
not have a material adverse impact on the Company. The Company does use utility
services (electricity, telecommunication, natural gas and the like) for its
offices, and interruption of these services could have a material adverse impact
on the Company's operations. The inability of the Company's clients to achieve
Y2K compliance could have an impact on their ability to pay the Company for the
services it renders to them, with consequent adverse impact on the Company's
cash flow. Nearly all of the Company's revenue is derived from services
rendered to Fortune 1000 companies, and the Company considers it unlikely a
material number of its customers would encounter Y2K compliance issues which
would prevent them from paying the Company's invoices in a timely manner.
5
The Company's services addressing the Year 2000 problem involve key aspects of
its clients' computer systems. A failure in a client's system could result in a
claim for substantial damages against the Company, regardless of the Company's
responsibility for such failure. Litigation, regardless of its outcome, could
result in substantial cost to the Company. Accordingly, any contract liability
claim or litigation against the Company could have an adverse effect on the
Company's business, operations and financial results.
RESULTS OF OPERATIONS
Revenues provided directly for the three months ended September 30, 1998 were
$123.4 million, an increase of 17.9 % over the same period a year ago.
Approximately 50% of this increase is the result of an increase in billed hours
and 50% from increases in hourly rates. While the Company has been able to
increase rates over the prior year, there can be no assurance the Company will
be able to continue this as competitive conditions in the industry make it
difficult for the Company to continually increase the hourly rates it charges
for services. Revenues provided through sub-suppliers for the three months
ended September 30, 1998 were $35.1 million, an increase of 15.1% over the same
period a year ago. This increase in sub-supplier revenues resulted almost
exclusively from an increase in billable hours of service rendered to clients.
Personnel totalled 5,200 at September 30, 1998, compared to 4,900 at September
30, 1997, an increase of 6.1%. Substantially all of the increase consists of
billable technical staff.
Salaries, contracted services and direct charges, which represent primarily the
Company's direct labor cost, were 78.0% of revenues for the three months ended
September 30, 1998 compared to 77.4% for the same period a year ago. By
comparison, these costs were 77.8% of revenues for the fourth quarter of fiscal
1998 and 77.9% of revenues for the fourth quarter of fiscal 1997. The increase
in this expense category as a percentage of revenues is mostly a consequence of
the increase in business done through sub-suppliers. The fees which the Company
pays to the sub-suppliers are higher per hour than the labor costs for its own
employees. The Company's efforts to control these costs involve controlling
labor costs, passing on labor cost increases through increased billing rates
where possible, and maintaining productivity levels of its billable technical
staff. Labor costs, however, are difficult to control because the highly
skilled technical personnel the Company seeks to hire and retain are in great
demand and intense competition in the industry makes it difficult to pass cost
increases on to customers, while unfavorable economic conditions could adversely
affect productivity. Although the Company has taken steps to control this
category of expense, there can be no assurance the Company will be able to
maintain or improve this level.
Selling, administrative and other operating costs, which include commissions,
employee fringe benefits and location costs, represented 15.8% of revenues for
the three months ended September 30, 1998 compared to 16.2% for the same period
a year ago. While the Company is committed to careful management of these
costs, there can be no assurance the Company will be able to maintain these
costs at their current relationship to revenues.
Net income for the three months ended September 30, 1998 increased 13.9% over
the same period a year ago. As a percentage of revenue, net income has
decreased from 4.0% for the three months ended September 30, 1997 to 3.9% for
the three months ended September 30, 1998. The Company's net income as a
percentage of revenues provided directly for the three months ended September
30, 1998 and 1997 was 5.0% and 5.1%, respectively.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) There were no reports on Form 8-K filed for the three months ended
September 30, 1998.
CAUTIONARY STATEMENT UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements included in this document may be "forward-looking statements" within
the meaning of the term in Section 27A of the Securities Act of 1933 as amended,
and of Section 21F of the Securities Exchange Act of 1934, as amended.
Additional oral or written forward-looking statements may be made by the Company
from time to time, and such statements may be included in documents that are
filed with the Securities and Exchange Commission. Words such as "believes,"
"intends," "possible," "expects," "estimates" "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are based on expectations and assumptions, and they
involve risks and uncertainties which could cause results or outcomes to differ
materially from expectations. Among the risks and uncertainties important to
the Company's business are (i) the continued need of current and prospective
customers for the Company's services, (ii) the revewal of contracts with
customers, especially major customers, (iii) the cancellation of contracts by
customers, especially major customers, (iv), competition, (v) the availability
of qualified professional staff, (vi) the Company's ability to increase hourly
billing rates as labor and operating costs increase and (vii) the Company's
ability to continue to operate its business and support growth with internally
generated funds. There may be other factors, such as general economic
conditions which affect businesses generally, which may cause results to vary
from expectations.
7
SIGNATURES
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
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(Registrant)
Date November 12, 1998 By /s/ Gerald M. McGrath
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Gerald M. McGrath
Treasurer and Chief Financial Officer
Date November 12, 1998 By /s/ Marti R. Charpentier
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Marti R. Charpentier
Controller and Assistant
Treasurer (Chief Accounting Officer)
8
EXHIBIT INDEX
Exhibit Number Exhibit Page No.*
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27 Financial Data Schedule 13
* Page numbers in the sequential numbering system of the manually signed
original report.