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| TSRI > SEC Filings for TSRI > Form 10-Q on 9-Jan-2009 | All Recent SEC Filings |
9-Jan-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements.
Forward-Looking Statements
Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company's future prospects and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: the impact of current adverse conditions in the credit markets and current adverse economic conditions on the Company's business; risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company's contract computer consulting services will continue to adversely affect the Company's business; the concentration of the Company's business with certain customers; uncertainty as to the Company's ability to maintain its relations with existing customers and expand its contract computer consulting services business; the impact of changes in the industry, such as the use of vendor management companies in connection with the consulting procurement process, the increase in customers moving IT operations offshore and other risks and uncertainties set forth in the Company's filings with the Securities and Exchange Commission. The Company is under no obligation to publicly update or revise forward looking statements.
Results of Operations
The following table sets forth, for the periods indicated, certain financial information derived from the Company's condensed consolidated statements of income. There can be no assurance that trends in operating results will continue in the future:
Three months ended November 30, 2008 compared with three months ended November
------------------------------------------------------------------------------
30, 2007
--------
Three Months Ended
November 30,
(Dollar amounts in thousands)
2008 2007
---- ----
% of % of
Amount Revenue Amount Revenue
------- ------- ------- -------
Revenue, net.......................... $11,536 100.0% $13,241 100.0%
Cost of sales......................... 9,467 82.1% 10,752 81.2%
------- ------- ------- -------
Gross profit.......................... 2,069 17.9% 2,489 18.8%
Selling, general and administrative
expenses.............................. 1,696 14.7% 1,922 14.5%
------- ------- ------- -------
Income from operations................ 373 3.2% 567 4.3%
Other income, net..................... 12 0.1% 76 0.6%
------- ------- ------- -------
Income before income taxes............ 385 3.3% 643 4.9%
Provision for income taxes............ 165 1.4% 265 2.0%
------- ------- ------- -------
Net income............................ $ 220 1.9% $ 378 2.9%
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Revenue
Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended November 30, 2008 decreased $1,705,000 or 12.9% from the quarter ended November 30, 2007. The average number of consultants on billing with customers decreased from approximately 348 for the quarter ended November 30, 2007 to 281 for the quarter ended November 30, 2008. The decrease in revenue resulted primarily from the continued reduction in consultants placed with AT&T, additional reductions in consultants on billing with customers which the Company attributes to current economic conditions and decreases in revenue due to lower billing rates caused by discounts and other rate reductions instituted by customers.
As a result of the merger of AT&T with SBC Communications, Inc., Procurestaff, which had been the sole vendor management company for AT&T, is currently one of the many vendors to the new AT&T and no longer serves as the primary vendor manager. Due to these changes, the Company experienced a decrease in new placements with AT&T beginning in the second quarter of fiscal 2007. This has reduced the number of consultants on billing with AT&T from 88 at November 30, 2006 to 53 at November 30, 2007 and 25 at November 30, 2008. The Company expects this change in relationship will continue to impact the Company's business relationship with AT&T, resulting in fewer opportunities to place new consultants at AT&T.
As a result of the current economic downturn and, specifically, the impact of the adverse conditions in the credit markets on the financial services industry, the Company expects that IT spending will continue to decrease in the short term and that the impact is likely to be greater in the financial services industry. These economic conditions have reduced the opportunities to place new consultants on billing with clients and have caused early termination of some existing assignments. The Company derived approximately 20% of its revenue from banking and brokerage clients in fiscal 2008. The Company expects that these conditions will continue to affect the number of consultants on billing with customers and the Company's revenue.
The Company has provided services to Lehman Brothers Holdings, Inc. ("LBHI") through its contract with Beeline.com, Inc. ("Beeline"), a vendor management company. LBHI filed a petition under Chapter 11 of the U.S. Bankruptcy Code on September 15, 2008. As part of the bankruptcy proceedings, the Bankruptcy Court has approved a sale of Lehman Brothers, Inc. ("LBI"), a subsidiary of LBHI to Barclays Capital Inc. ("Barclays"). The Beeline contract has been assumed by LBI as part of the purchase agreement. The Company has received payment in full for amounts due for services rendered through the date of the bankruptcy filing and will not incur a charge against earnings as the result of the bankruptcy. LBHI and its subsidiaries constituted approximately 6% of the Company's revenue in fiscal 2008. There were 13 consultants on billing with LBHI as of August 31, 2008 and 5 as of November 30, 2008. The Company cannot determine the impact that the bankruptcy filing and purchase of LBI by Barclays will have on the remaining consultants on billing with LBI and its affiliates.
Cost of Sales
Cost of sales for the quarter ended November 30, 2008, decreased $1,285,000 or 12.0% to $9,467,000 from $10,752,000 in the prior year period. The decrease in cost of sales resulted primarily from the decrease in the number of consultants on billing with clients. Cost of sales as a percentage of revenue increased from 81.2% in the quarter ended November 30, 2007 to 82.1% in the quarter ended November 30, 2008. The increase in cost of sales percentage of revenue was primarily attributable to discount programs instituted or expanded by customers and other customer required rate reductions. These discount programs and other billing rate reduction initiatives decrease revenue without allowing the Company to reduce costs sufficiently to completely offset the decrease in revenue. These required rate reductions have accelerated as a result of the current economic conditions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses decreased $226,000 or 11.8% from $1,922,000 in the quarter ended November 30, 2007 to $1,696,000 in the quarter ended November 30, 2008. This decrease was primarily attributable to a reduction in the number of sales and recruiting personnel and lower commissions paid to the remaining sales and recruiting personnel due to lower revenue. However, while selling, general and administrative expenses decreased, these expenses as a percentage of revenue increased from 14.5% in the quarter ended November 30, 2007 to 14.7% in the quarter ended November 30, 2008.
Income from Operations
Income from operations decreased $194,000 or 34.2% from $567,000 in the quarter ended November 30, 2007 to $373,000 in the quarter ended November 30, 2008. The combination of reduced revenue and reduced gross margins had a significant negative impact on income from operations.
Other Income
Other income for the quarter ended November 30, 2008 resulted primarily from interest and dividend income of $35,000, which decreased by $64,000 from the level realized in the quarter ended November 30, 2007 due to lower interest rates earned on the Company's US Treasury securities and money market accounts as well as lower average investable assets.
Six months ended November 30, 2008 compared with six months ended November 30,
------------------------------------------------------------------------------
2007
----
Six Months Ended
November 30,
(Dollar amounts in Thousands)
2008 2007
---- ----
% of % of
Amount Revenue Amount Revenue
------- ------- ------- -------
Revenue, net.......................... $23,686 100.0% $26,767 100.0%
Cost of sales......................... 19,495 82.3% 21,769 81.3%
------- ------- ------- -------
Gross profit.......................... 4,191 17.7% 4,998 18.7%
Selling, general and administrative
expenses.............................. 3,496 14.8% 3,720 13.9%
------- ------- ------- -------
Income from operations................ 695 2.9% 1,278 4.8%
Other income, net..................... 70 0.3% 161 0.6%
------- ------- ------- -------
Income before income taxes............ 765 3.2% 1,439 5.4%
Provision for income taxes............ 330 1.4% 613 2.3%
------- ------- ------- -------
Net income............................ $ 435 1.8% $ 826 3.1%
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Revenue
Revenue consists primarily of revenue from computer programming consulting services. Revenue for the six months ended November 30, 2008 decreased $3,081,000 or 11.5% from the six months ended November 30, 2007. The average number of consultants on billing with customers decreased from approximately 342 for the six months ended November 30, 2007 to 290 for the six months ended November 30, 2008. The decrease in revenue resulted primarily from the continued reduction in consultants placed with AT&T, additional reductions in consultants on billing with customers which the Company attributes to current economic conditions and decreases in revenue due to lower billing rates caused by discounts and other rate reductions instituted by customers.
As a result of the merger of AT&T with SBC Communications, Inc., Procurestaff, which had been the sole vendor management company for AT&T, is currently one of the many vendors to the new AT&T and no longer serves as the primary vendor manager. Due to these changes, the Company experienced a decrease in new placements with AT&T beginning in the second quarter of fiscal 2007. This has reduced the number of consultants on billing with AT&T from 88 at November 30, 2006 to 53 at November 30, 2007 and 25 at November 30, 2008. The Company expects this change in relationship will continue to impact the Company's business relationship with AT&T, resulting in fewer opportunities to place new consultants at AT&T.
As a result of the current economic downturn and, specifically, the impact of the adverse conditions in the credit markets on the financial services industry, the Company expects that IT spending will continue to decrease in the short term and that the impact is likely to be greater in the financial services industry. These economic conditions have reduced the opportunities to place new consultants on billing with clients and have caused early termination of some existing assignments. The Company derived approximately 20% of its revenue from banking and brokerage clients in fiscal 2008. The Company expects that these conditions will continue to affect the number of consultants on billing with customers and the Company's revenue.
The Company has provided services to Lehman Brothers Holdings, Inc. ("LBHI") through its contract with Beeline.com, Inc. ("Beeline"), a vendor management company. LBHI filed a petition under Chapter 11 of the U.S. Bankruptcy Code on September 15, 2008. As part of the bankruptcy proceedings, the Bankruptcy Court has approved a sale of Lehman Brothers, Inc. ("LBI"), a subsidiary of LBHI to Barclays Capital Inc. ("Barclays"). The Beeline contract has been assumed by LBI as part of the purchase agreement. The Company has received payment in full for amounts due for services rendered through the date of the bankruptcy filing and will not incur a charge against earnings as the result of the bankruptcy. LBHI and its subsidiaries constituted approximately 6% of the Company's revenue in fiscal 2008. There were 13 consultants on billing with LBHI as of August 31, 2008 and 5 as of November 30, 2008. The Company cannot determine the impact that the bankruptcy filing and purchase of LBI by Barclays will have on the remaining consultants on billing with LBI and its affiliates.
Cost of Sales
Cost of sales for the six months ended November 30, 2008, decreased $2,274,000 or 10.4% to $19,495,000 from $21,769,000 in the prior year period. The decrease in cost of sales resulted primarily from the decrease in the number of consultants on billing with clients. Cost of sales as a percentage of revenue increased from 81.3% in the six months ended November 30, 2007 to 82.3% in the six months ended November 30, 2008. The increase in cost of sales percentage of revenue was primarily attributable to discount programs instituted or expanded by customers and other customer required rate reductions. These discount programs and other billing rate reduction initiatives decrease revenue without allowing the Company to reduce costs sufficiently to completely offset the decrease in revenue. These required rate reductions have accelerated as a result of the current economic conditions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses decreased $224,000 or 6.0% from $3,720,000 in the six months ended November 30, 2007 to $3,496,000 in the six ended November 30, 2008. This decrease was primarily attributable to a reduction in the number of sales and recruiting personnel and lower commissions paid to the remaining sales and recruiting personnel due to lower revenue. However, while selling, general and administrative expenses decreased , these expenses as a percentage of revenue increased from 13.9% in the six months ended November 30, 2007 to 14.8% in the six months ended November 30, 2008.
Income from Operations
Income from operations decreased $583,000 or 45.6% from $1,278,000 in the six months ended November 30, 2007 to $695,000 in the six months ended November 30, 2008. The combination of reduced revenue and reduced gross margins had a significant negative impact on income from operations.
Other Income
Other income for the six months ended November 30, 2008 resulted primarily from interest and dividend income of $102,000, which decreased by $109,000 from the level realized in the six months ended November 30, 2007 due to lower interest rates earned on the Company's US Treasury securities and money market accounts as well as lower average investable assets.
Liquidity and Capital Resources
The Company expects that cash flow generated from operations together with its cash and marketable securities will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for at least the next 12 months.
At November 30, 2008, the Company had working capital of $11,855,000 including cash and cash equivalents of $1,837,000 as compared to working capital of $12,693,000 including cash and cash equivalents of $1,588,000 at May 31, 2008. The Company's working capital also included $4,972,000 and $6,460,000 of marketable securities with maturities of less than one year at November 30, 2008 and May 31, 2008, respectively.
For the six months ended November 30, 2008, net cash provided by operating activities was $78,000 compared to cash used of $212,000 for the six months ended November 30, 2007, or an increase of $290,000. The cash provided by operating activities primarily resulted from net income and a decrease in accounts receivable of $223,000 offset by a decrease in accounts payable and accrued expenses of $543,000. The cash used by operating activities in the six months ended November 30, 2007, resulted primarily from an increase in accounts receivable.
Net cash provided by investing activities of $1,970,000 for the six months ended November 30, 2008 primarily resulted from not reinvesting all of the proceeds of maturing US Treasury Securities and the purchase of fixed assets.
Net cash used in financing activities resulted from the purchases of treasury stock amounting to $1,220,000, cash dividends paid of $565,000 and distributions to the minority interest of $14,000. The purchases of treasury stock consisted of $1,050,000 in a private transaction and $170,000 in open market transactions. The Board of Directors of the Company approved a plan in December 2007 authorizing the repurchase of shares of Common Stock and approximately 239,000 shares remain available for purchase under this previously announced plan. The Company has not made any purchases under this plan since September 2008. The Company does not intend to make further purchases under this plan unless there is a change in the market for the Company's common stock. Additionally, the Board of Directors of the Company has declared a cash dividend of $0.05 per share for the quarter ended November 30, 2008. As part of its prior determination to decrease the Company's dividend to $0.05 per share, the Board had determined to reevaluate the dividend if there were a continued decline in the Company's earnings due to the current economic environment. In view of the continued impact of the current economic environment, the Board of Directors has determined to suspend the payment of further dividends. The Board of Directors may reevaluate the Company's dividend policy once the economic conditions stabilize.
The Company's capital resource commitments at November 30, 2008 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities.
The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the six months ended November 30, 2008. The Company has available a revolving line of credit of $5,000,000 with a major money center bank through October 31, 2009. As of November 30, 2008, no amounts were outstanding under this line of credit.
Tabular Disclosure of Contractual Obligations
---------------------------------------------
<CAPTION>
Payments Due By Period
Contractual Obligations Less than More than
----------------------- Total 1 Year 1-3 Years 3-5 Years 5 Years
---------- ---------- ---------- ---------- ----------
Operating Leases......... $1,393,000 $ 361,000 $ 663,000 $ 369,000 $ --
Employment Agreements.... 1,162,000 624,000 488,000 50,000 --
---------- ---------- ---------- ---------- ----------
Total.................... $2,555,000 $ 985,000 $1,151,000 $ 419,000 $ --
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Recent Account Pronouncements
On September 15, 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 provides guidance related to estimating fair value and requires expanded disclosures. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value in any new circumstances. The adoption of SFAS No. 157 did not have a material impact on the Company's condensed consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on the Company's condensed consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), "Business Combinations" ("SFAS 141(R)"), and SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS 141 (R) and SFAS 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of SFAS 141 (R) and SFAS 160 to have a material impact on its condensed consolidated financial statements.
Critical Accounting Policies
The SEC defines "critical accounting policies" as those that require the application of management's most difficult subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to the Company's consolidated financial statements, contained in its May 31, 2008 Annual Report on Form10-K, as filed with the SEC. The Company believes that those accounting policies require the application of management's most difficult, subjective or complex judgments. There have been no changes in the Company's significant accounting policies as of November 30, 2008.
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