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| TSRI > SEC Filings for TSRI > Form 10-Q on 7-Apr-2009 | All Recent SEC Filings |
7-Apr-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 February 28, 2009 compared with three months ended February
------------------------------------------------------------------------------
29, 2008
--------
<CAPTION>
(Dollar amounts in thousands)
Three Months Ended
February 28, February 29,
2009 2008
---- ----
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- --------
Revenue, net $ 9,751 100.0% $ 12,412 100.0%
Cost of sales 7,958 81.6% 10,228 82.4%
-------- -------- -------- --------
Gross profit 1,793 18.4% 2,184 17.6%
Selling, general and administrative expenses 1,636 16.8% 1,867 15.0%
-------- -------- -------- --------
Income from operations 157 1.6% 317 2.6%
Other income, net 16 0.2% 68 0.5%
-------- -------- -------- --------
Income before income taxes 173 1.8% 385 3.1%
Provision for income taxes 80 0.8% 171 1.4%
-------- -------- -------- --------
Net income $ 93 1.0% $ 214 1.7%
======== ======== ======== ========
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Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the quarter ended February 28, 2009 decreased $2,661,000
or 21.4% from the quarter ended February 29, 2008. The average number of
consultants on billing with customers decreased from 329 for the quarter ended
February 29, 2008 to 250 for the quarter ended February 28, 2009. The decrease
in revenue resulted primarily from the continued reduction in consultants placed
with AT&T, additional reductions in consultants on billing with other 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 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 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.
As a result of the merger of AT&T with SBC Communications, Inc., 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 79 at February 28, 2007 to 50 at February 29, 2008 and 20 at February 28, 2009. The Company expects this change in relationship will continue to impact the Company's business relationship with AT&T, resulting in significantly fewer opportunities to place new consultants with AT&T.
The Company 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. The Company has received payment in full for amounts due for services rendered through the date of the bankruptcy filing. Following the bankruptcy filing, the consultants on billing with LBHI decreased from 13 as of August 31, 2008 to 5 as of February 28, 2009. The Company cannot determine the impact that the bankruptcy filing and purchase of Lehman Brothers, Inc. ("LBI") by Barclays Capital, Inc. will have on the remaining consultants on billing with LBI and its affiliates. LBHI and its subsidiaries constituted approximately 6% of the Company's revenue in fiscal 2008 and 2% of the Company's revenue for the quarter ended February 28, 2009.
Cost of Sales
Cost of sales for the quarter ended February 28, 2009, decreased $2,270,000 or
22.2% to $7,958,000 from $10,228,000 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 decreased from
82.4% in the quarter ended February 29, 2008 to 81.6% in the quarter ended
February 28, 2009. The decrease in cost of sales as a percentage of revenue was
primarily attributable to the significant reduction of consultants on billing
with AT&T, which has historically been the Company's lowest margin (highest cost
of sales as a percentage of revenue) business.
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 $231,000 or 12.4%
from $1,867,000 in the quarter ended February 29, 2008 to $1,636,000 in the
quarter ended February 28, 2009. 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 15.0% in the quarter ended
February 29, 2008 to 16.8% in the quarter ended February 28, 2009 as a result of
lower sales.
Income from Operations
Income from operations decreased $160,000 or 50.5% from $317,000 in the quarter
ended February 29, 2008 to $157,000 in the quarter ended February 28, 2009. The
decrease was primarily attributable to the reduced revenue from the decrease in
the number of consultants on billing with customers.
Other Income
Other income for the quarter ended February 28, 2009 resulted primarily from
interest and dividend income of $30,000, which decreased by $60,000 from the
level realized in the quarter ended February 29, 2008 due to lower interest
rates earned on the Company's US Treasury securities, certificates of deposit
and money market accounts as well as lower average investable assets.
Nine months ended February 28, 2009 compared with nine months ended February 29,
--------------------------------------------------------------------------------
2008
----
<CAPTION>
(Dollar amounts in thousands)
Nine Months Ended
February 28, February 29,
2009 2008
---- ----
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- --------
Revenue, net $ 33,437 100.0% $ 39,179 100.0%
Cost of sales 27,453 82.1% 31,997 81.7%
-------- -------- -------- --------
Gross profit 5,984 17.9% 7,182 18.3%
Selling, general and administrative expenses 5,132 15.3% 5,587 14.2%
-------- -------- -------- --------
Income from operations 852 2.6% 1,595 4.1%
Other income, net 86 0.2% 229 0.6%
-------- -------- -------- --------
Income before income taxes 938 2.8% 1,824 4.7%
Provision for income taxes 410 1.2% 784 2.0%
-------- -------- -------- --------
Net income $ 528 1.6% $ 1,040 2.7%
======== ======== ======== ========
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Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the nine months ended February 28, 2009 decreased
$5,742,000 or 14.7% from the nine months ended February 29, 2008. The average
number of consultants on billing with customers decreased from 338 for the nine
months ended February 29, 2008 to 276 for the nine months ended February 28,
2009. The decrease in revenue resulted primarily from the continued reduction in
consultants placed with AT&T, additional reductions in consultants on billing
with other 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. The decline was also impacted by
the decrease in consultants on billing with LBHI.
Cost of Sales
Cost of sales for the nine months ended February 28, 2009, decreased $4,544,000
or 14.2% to $27,453,000 from $31,997,000 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 81.7% in the nine months ended February 29, 2008 to 82.1% in the
nine months ended February 28, 2009. The increase in cost of sales as a
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 $455,000 or 8.1%
from $5,587,000 in the nine months ended February 29, 2008 to $5,132,000 in the
nine ended February 28, 2009. 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 14.2% in the nine months
ended February 29, 2008 to 15.3% in the nine months ended February 28, 2009 as a
result of lower sales.
Income from Operations
Income from operations decreased $743,000 or 46.6% from $1,595,000 in the nine
months ended February 29, 2008 to $852,000 in the nine months ended February 28,
2009. The combination of reduced revenue and reduced gross margins had a
significant negative impact on income from operations.
Other Income
Other income for the nine months ended February 28, 2009 resulted primarily from
interest and dividend income of $132,000, which decreased by $169,000 from the
level realized in the nine months ended February 29, 2008 due to lower interest
rates earned on the Company's US Treasury securities, certificates of deposit
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 February 28, 2009, the Company had working capital of $12,201,000 including cash and cash equivalents of $4,561,000 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 $3,748,000 and $6,460,000 of marketable securities with maturities of less than one year at February 28, 2009 and May 31, 2008, respectively.
For the nine months ended February 28, 2009, net cash provided by operating activities was $1,344,000 compared to cash used of $763,000 for the nine months ended February 29, 2008, or an increase of $2,107,000. The cash provided by operating activities primarily resulted from net income and a decrease in accounts receivable of $1,525,000 offset by a decrease in accounts payable and accrued expenses of $667,000. The cash used by operating activities in the nine months ended February 29, 2008, resulted primarily from an increase in accounts receivable.
Net cash provided by investing activities of $3,694,000 for the nine months ended February 28, 2009 primarily resulted from not reinvesting all of the proceeds of maturing US Treasury Securities and offset by 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 $768,000 and distributions to the minority interest of $77,000. 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. The Board of Directors determined to suspend the payment of further dividends effective after the dividend paid on February 9, 2009 for the second quarter of fiscal 2009. The Board of Directors may reevaluate the Company's dividend policy once the economic conditions stabilize.
The Company's capital resource commitments at February 28, 2009 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 nine months ended February 28, 2009. 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 February 28, 2009, 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 $1,303,000 $ 363,000 $ 646,000 $ 294,000 $ --
Employment Agreements 943,000 499,000 444,000 -- --
---------- ---------- ---------- ---------- ----------
Total. $2,246,000 $ 862,000 $1,090,000 $ 294,000 $ --
========== ========== ========== ========== ==========
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Recent Accounting 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.
The Company adopted the methods of fair value measurement as described in SFAS No. 157 to value its financial assets and liabilities. As described in SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as counterparty credit risks in its assessment of fair value.
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 No. 141(R)"), and SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 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 No. 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 No. 141 (R) and SFAS No. 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 No. 141 (R) and SFAS No. 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 February 28, 2009.
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