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| ANLY > SEC Filings for ANLY > Form 10-Q on 12-Aug-2008 | All Recent SEC Filings |
12-Aug-2008
Quarterly Report
Company Overview
Headquartered in Minneapolis, Minnesota, Analysts International Corporation (AIC) is a diversified IT services company. In business since 1966, we have sales and customer support offices in the United States and Canada.
We offer our clients a broad range of IT consulting services, including:
º Staffing: Serving large, high-volume accounts, our
staffing services are focused on providing reasonably
priced resources to volume buyers on demand.
º Professional Services: Serving mid-market clients in
targeted geographic regions, our professional services
are designed to provide professional resources such as
developers, project managers, business analysts and
other highly-skilled resources that can assist our
clients in achieving their business objectives; and
º Solutions: Providing network services,
infrastructure, application integration, IP telephony
and hardware solutions to mid-market clients.
Overview of Results of Second Quarter 2008 Operations
· Total revenue for the three- and six-month periods ended June 28, 2008, was $82.0 million and $164.8 million, compared to $89.2 million and $178.4 million during the comparable periods ended June 28, 2007.
††† Year-over-year comparable quarter revenue declined 3.7%, 4.0%, and 31.7% for direct services revenue, services provided through subsuppliers, and product sales, respectively. The decrease in revenue is largely the result of lower headcount in our staffing business and a decrease in our product sales as we transition to providing clients with higher-value services.
††† As we have reduced the placement of third parties to fulfill our largest clients' staffing needs, we have begun to see a corresponding decline in our subsupplier revenue. For the three- and six-month periods ended June 28, 2008, 70.9% and 72.1% of our revenue, respectively, was derived from services provided directly, compared to 67.7% and 69.2% in the comparable year-ago period.
· Our net loss for the three- and six-month periods ended June 28, 2008, which included $0.7 million or $0.03 per diluted share and $2.4 million or $0.10 per diluted share of restructuring, severance and other related expenses, was $1.0 million and $2.0 million, respectively, compared with a net loss of $0.7 million and $2.8 million for the comparable periods of 2007, which included $0.4 million or $0.02 per diluted share and $1.4 million or $0.06 per diluted share of severance and other related charges.
††† On a diluted per share basis, the net loss for the three- and six-month periods ended June 28, 2008 was $0.04 and $0.08 per share compared with a net loss of $0.03 and $0.11 per share in the comparable periods of 2007.
· Selling, administrative and other expenses declined by $1.2 million and $2.7 million for the three- and six-month periods ended June 28, 2008, respectively, when compared to the comparable periods of 2007, reflecting the Company's success in implementing its new strategy and reducing costs in certain areas.
· Sold Symmetry Workforce Solutions, our managed services business, to COMSYS IT Partners, Inc., a leading provider in the managed services space, after determining it was not core to our strategy and business, . The transaction closed on July 1, 2008. On an annual basis, the Symmetry revenue was approximately $40 million.
· Discontinued our staffing relationship with one of our largest staffing accounts. Effective July 6, 2008, we transferred our existing contracts and approximately 350 billable consultants to three other staffing suppliers serving this company. On an annual basis, this client accounted for approximately $20 million in revenue for AIC. With the cost of supporting that business also at approximately $20 million, the net impact to our business as a result of this transition is expected to be negligible.
· Completed additional reductions in our corporate and back office support staff and made a number of changes in other areas of the business where there were opportunities to further reduce costs without impacting service to our clients. These reductions were made in order to keep our costs in line with the requirements of the business moving forward.
These initiatives are consistent with the plans we outlined in January 2008 designed to restore the Company to profitability and increase shareholder value, and they mark important steps in the continued transformation of our business.
The focus for the remainder of 2008 will be on marketing our services, hiring best-in-class people and delivering on the needs and expectations of our clients. AIC's new business activity remains steady, and we expect the number of opportunities to provide premium staffing, high value-add solutions, project-oriented services and managed teams to our clients to continue to increase.
Our Strategy
In January 2008, we announced a new strategic plan designed to restore the Company to profitability and increase shareholder value. Moving forward, AIC will be focused on providing value-driven IT services in markets where we believe we have a competitive advantage and an opportunity to strengthen our presence. This includes maintaining our best client relationships, investing in growing our higher-margin businesses and exiting businesses that are not core to our strategy. By reducing the volume of low-margin business, we can turn our attention to providing more value for our clients and building a better, more balanced business.
Our primary focus for the first half of 2008 was on changing the way we run the business and create efficiencies across the organization in order to return the Company to sustained profitability. We have already taken significant steps to reduce our corporate overhead costs, consolidate our back-office functions and reduce our facilities expenses by closing or downsizing more than a dozen administrative offices not essential to serving our clients or meeting the needs and expectations of our employees. And, perhaps most importantly, we've imposed strict operating policies and controls throughout the organization to keep our costs in line with our future business objectives.
Over the past six months, we have also made the investments required to increase our mix of higher-margin services and exited some of our lowest-margin and non-core lines of business.
· Application development and support, including Microsoft technologies, project management services, business analysts, quality assurance and testing services.
· IP communications which includes wireless, IP telecommunications, contact center and security services.
· Infrastructure and storage solutions which includes VMware services.
· Lawson services which includes integration, customization and administration of Lawson Software applications.
· IT outsourcing which includes application outsourcing, help desk, hosting and field engineering services.
In addition, we seek to expand our presence in state and local government where we currently provide a broad array of services to this market, including criminal justice information systems and mobile and wireless solutions.
Ultimately, our goal is to shift Analysts International Corporation from being a business primarily focused on high-volume transactions to being a business that delivers higher value and offers its clients a more complete set of offerings.
Market Conditions and Economics of Our Business
Competitive conditions in the IT services industry continue to present challenges for our business. We continue to experience intense competition in hiring billable technical personnel and significant pricing pressures from our largest clients. During the second quarter of 2008, as a result of these pressures and our decision to focus on selling higher- value, better-margin services, our revenue declined approximately 8% from the comparable quarter in 2007. By focusing our sales efforts on higher value services, we have increased the average bill rate at our existing clients. We expect that demand for our services will increase in coming years, enabling us to increase our headcount. Our continued strategy is to develop more intimate client relationships based on the value we bring to their business. We believe that doing so will allow us to become less dependent on large national accounts. As we accomplish this, we expect that our bill rates and margins will continue to improve.
Our ability to quickly identify, attract and retain qualified technical personnel at competitive pay rates will affect the results of our operations and our ability to grow in the future. Competition for the technical personnel needed to deliver the services we provide our clients has intensified in recent years, and is expected to continue to increase. If we are unable to hire the talent required by our clients in a timely, cost-effective manner, our ability to grow our business could be adversely affected.
Employee benefits and other employee-related costs are significant factors bearing on our ability to hire qualified personnel and control overall labor costs. In an effort to manage our benefits costs, we have regularly implemented changes to our benefits plans. While we believe these changes will be effective in reducing the costs of those plans, the effectiveness of these changes may vary due to factors such as rising medical costs, the amount of medical services consumed by our employees and other similar factors. Also, as we make changes to benefit plans to control costs, the risk that it will be more difficult to attract and retain talented resources will increase.
Our ability to continue to respond to our client needs in a cost-controlled environment will be key to our future success. We have made significant progress over the past six months towards streamlining our operations, consolidating offices, reducing administrative and management personnel, and will continue to look for opportunities to more efficiently operate our business and deliver services to our clients.
Other Factors Affecting Our Business
Terms and conditions standard to IT services contracts present a risk to our business. In general, our clients can cancel or reduce their contracts on short notice. Loss of a significant client relationship or a significant portion thereof or a significant number of smaller contracts could have a material adverse effect on our business.
Compliance with Section 404 of the Sarbanes-Oxley Act has created substantial cost to us and strained our internal resources. We expect to continue to incur such costs in future years for maintaining compliance. An inability to control these costs, a failure to comply with the Sarbanes-Oxley Act, or a failure to adequately remediate control deficiencies as they are identified could have a material adverse effect on our business.
We believe our working capital will be sufficient for the foreseeable needs of our business. Significant rapid growth in our business, a major acquisition, a significant lengthening of payment terms with major clients, or significant costs associated with non-operating activities, including a need to address matters such as, by way of example, unsolicited proposals, 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.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. We believe the estimates described below are the most sensitive estimates made by management in the preparation of the financial statements.
Estimates of Future Operating Results
The realization of certain assets recorded in our balance sheet is dependent upon our ability to achieve and maintain profitability. In evaluating the recorded value of our goodwill for indication of impairment and, when business conditions warrant, to evaluate our long-lived intangible assets and deferred tax asset, we are required to make critical accounting estimates regarding our future operating results. These estimates are based on management's current expectations but involve risks, uncertainties and other factors that could cause actual results to differ materially from these estimates.
To evaluate goodwill for impairment, we rely heavily on the discounted cash flow method to assess the value of the associated reporting units. The discounted cash flow valuation technique requires us to project operating results and the related cash flows over a ten-year period. These projections involve risks, uncertainties and other factors and are, by their nature, subjective. If actual results were substantially below projected results, an impairment of the recorded value of our goodwill could result.
We have placed a full valuation allowance against our deferred tax assets of $18.4 million. The federal net operating loss (NOL) carry forward benefits of approximately $0.9 million, $62,000, $3.6 million, $1.1 million, $1.7 million, and $1.9 million expire in 2023, 2024, 2025, 2026, 2027, and 2028, respectively.
Allowance for Doubtful Accounts
In each accounting period, we determine an amount to set aside to cover potentially uncollectible accounts. We base our determination on an evaluation of accounts receivable for risk associated with a client's ability to make contractually required payments. These determinations require considerable judgment in assessing the ultimate potential for collection of these receivables and include reviewing the financial stability of the client, the client's willingness to pay and current market conditions. If our evaluation of a client's ability to pay is incorrect, we may incur future charges.
Restructuring and other severance-related costs
During the second quarter of 2008, we recorded workforce reduction and office closure/consolidation charges totaling $0.6 million. Of these charges, $0.5 million related to severance and severance-related charges and approximately $18,000 related to future rent obligations for a location we closed prior to June 28, 2008.
Total charges related to these actions during the second quarter of 2008, including the $0.5 million of workforce reduction and office closure/consolidation charges, were $0.7 million and have been included in the Restructuring and Other Severance-Related Costs line on the Condensed Consolidated Statement of Operations.
During the first quarter of 2008, we recorded workforce reduction and office closure/consolidation charges totaling $1.2 million. Of these charges, $1.0 million related to severance and severance-related charges, and $0.2 million related to future rent obligations for locations we closed or downsized prior to March 29, 2008.
Total charges related to these actions during the first quarter of 2008, including the $1.2 million of workforce and office closure/consolidation charges, were $1.6 million and have been included in the Restructuring and Other Severance-Related Costs line on the Condensed Consolidated Statement of Operations. All of these charges are related to the implementation of a new business plan initiated during the fourth quarter of 2007.
The reductions in our workforce and office closures/consolidation were a continuation of the restructuring efforts commenced in December of 2007 as part of our implementation of a new business plan.
During 2007, we recorded restructuring- and severance-related charges of $2.0 million. Of these charges, $1.7 million related to workforce reduction and $0.3 million related to future rent obligations on locations we closed prior to December 29, 2007.
We believe the reserve for office closure and consolidating remaining at June 28, 2008 is adequate; however, negative sublease activities in the future, including any defaults of existing subleases, could create the need for future adjustments to this reserve.
Accrual of Unreported Medical Claims
In each accounting period, we estimate an amount to accrue for medical costs incurred but not yet reported under our self-funded employee medical insurance plans. We base our determination on an evaluation of past rates of claim payouts and trends in the amount of payouts. This determination requires significant judgment and assumes past patterns are representative of future payment patterns and that we have identified any trends in our claim experience. A significant shift in claim and payment patterns within our medical plans could necessitate significant adjustments to these accruals in future accounting periods.
Critical Accounting Policies
Critical accounting policies are defined as those that involve significant judgments and uncertainties or affect significant line items within our financial statements and potentially result in materially different outcomes under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. We believe the accounting policies described below meet these characteristics.
Revenue Recognition
We recognize revenue for our staffing, professional services and the majority of our solutions business as services are performed. This includes staffing services, technology integration services, outsourcing services and advisory services that are billed on an hourly basis. For product sales, except in rare circumstances, we act as the primary obligor in the transaction. Accordingly, except for those rare situations where net revenue reporting is appropriate because we are acting as an agent in the sale of product, product revenue is recorded for the gross amount of the transaction when the products are delivered. Certain of our outsourcing and help desk engagements provide for a specific level of service each month. We generally bill for these services at a standard monthly rate. Revenue for these engagements is recognized in monthly installments over the period of the contract. In some monthly service contracts, we invoice in advance for two or more months of service. When we do this, the revenue is deferred and recognized ratably over the term of the contractual agreement.
In certain situations, we will contract to sell both product (including third-party software and/or hardware) and services in a single client arrangement with multiple deliverables. These arrangements are generally to resell certain products and to provide the service necessary to install such products and optimize functionality of such products. We account for multiple deliverable arrangements involving third-party software products under the provision of SOP 97-2, "Software Revenue Recognition" when we are able to establish vendor-specific objective evidence as to the fair value of each deliverable. Other multiple deliverable arrangements not involving software are accounted for utilizing the guidelines of ETIF 00-21, "Revenue Arrangements with Multiple Deliverables." We account for each of the components of multiple deliverable arrangements separately by using the identified fair value of each component to allocate the total consideration of the arrangement to the separate components.
In certain client situations, where the nature of the engagement requires it, we utilize the services of other companies in our industry. If these services are provided under an arrangement whereby we agree to retain only a fixed portion of the amount billed to the client to cover our management and administrative costs, we classify the amount billed to the client as subsupplier revenue. These revenues, however, are recorded on a gross versus net basis because we retain credit risk and are the primary obligor for rendering services to our client. All revenue derived from services provided by our employees or other independent contractors who work directly for us are recorded as direct revenue.
We periodically enter into fixed-price engagements. When we enter into such engagements, revenue is recognized over the life of the contract based on time and materials input to date and estimated time and materials to complete the project. This method of revenue recognition relies on accurate estimates of the cost, scope and duration of the engagement. If we do not accurately estimate the resources required or the scope of the work to be performed, future revenues may be negatively affected or losses on contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are required to evaluate goodwill and indefinite-lived intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the assets might be impaired. We currently perform the annual test as of the last day of our monthly accounting period for August. This evaluation relies on assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or related assumptions change, we may be required to recognize impairment charges.
We performed our annual goodwill impairment evaluation on September 1, 2007, and determined the fair value of our reporting units was sufficient to support the recorded goodwill. We utilize professionally appropriate income and market comparable methodologies to determine the fair values of the reporting units. The valuation methodology we use relies heavily on a discounted cash flow analysis prepared using long-term operating projections prepared by management. These projections involve risks and uncertainties and are, by their nature, subject to change in the economic realities of the markets in which we operate.
In December 2007, we adopted a new business plan that significantly changed the key business strategies assumed in the September 1, 2007 goodwill evaluation described above. Also, during the fourth quarter of 2007, we experienced a significant drop in the price of our publicly traded shares. We concluded that these events, taken together, represented an indication that our intangible assets may be impaired. Accordingly, we performed another impairment evaluation at December 29, 2007, to reflect these changes in circumstance. As a result of this new evaluation, on December 29, 2007, we recorded goodwill impairment charges in our solutions and staffing reporting units totaling $5.5 million, leaving a carrying amount of $6.3 million.
In December of 2007, when we adopted our new business plan, we determined the Sequoia tradename was no longer going to be used and, therefore, determined the tradename to have finite life. Use of the tradename ceased entirely during the second quarter of 2008 and, therefore, the carrying value has been fully amortized. As of December 29, 2007, we no longer have any other indefinite-lived intangible assets.
Deferred Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between reported income and income considered taxable by the taxing authorities. SFAS No. 109 also requires the resulting deferred tax assets to be reduced by a valuation allowance if some portion or all of the deferred tax assets are not expected to be realized. In accordance with SFAS No. 109, we have recorded a full valuation allowance against our deferred tax assets.
During the three- and six-month periods ended June 28, 2008, we recorded $5,000 and $9,000 of income tax expense, respectively, related to subsidiaries where profitability was achieved and state taxes are owed. We recorded no income tax benefit associated with our net loss because the benefit created by our operating loss has been negated by the establishment of additional reserves against our deferred assets. 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 allowances to realize the benefit of these assets.
Sales Taxes
We account for our sales tax and any other taxes that are collected from our customers and remitted to governmental authorities on a net basis. The assessment, collection and payment of these taxes are not reflected on our Statement of Operations.
Income Taxes
We and our subsidiaries file a consolidated income tax return in the U.S. federal jurisdiction. We also file consolidated or separate company income tax returns in most U.S. states, Canada (federal), the Ontario province, and the United Kingdom. As of June 28, 2008, there are no federal, state, or foreign income tax audits in progress. We are no longer subject to U.S. federal audits for years before 2004 and, with a few exceptions, the same applies to our status relative to state and local audits.
We adopted the provisions of FASB Interpretation No. 48 ("FIN48"), Accounting for Uncertainty in Income Taxes, on December 31, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was effective . . .
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