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TSRI > SEC Filings for TSRI > Form 10-Q on 8-Apr-2013All Recent SEC Filings

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Form 10-Q for TSR INC


8-Apr-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I. Financial Information
Item 2.

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 success of the Company's plan for internal growth, the impact of 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 consultant 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
operations. There can be no assurance that trends in operating results will
continue in the future:

Three months ended February 28, 2013 compared with three months ended February
29, 2012

                                                           (Dollar amounts in thousands)
                                                                 Three Months Ended
                                                     February 28,                  February 29,
                                                         2013                          2012
                                                                % of                          % of
                                                 Amount       Revenue          Amount       Revenue
Revenue, net                                   $  10,515          100.0 %    $  11,093          100.0 %
Cost of sales                                      8,874           84.4 %        9,372           84.5 %
Gross profit                                       1,641           15.6 %        1,721           15.5 %

Selling, general and administrative expenses       2,018           19.2 %        1,861           16.8 %
Loss from operations                                (377 )         (3.6 )%        (140 )         (1.3 )%
Other income, net                                      7            0.1 %            5            0.1 %
Loss before income taxes                            (370 )         (3.5 )%        (135 )         (1.2 )%
Benefit for income taxes                            (116 )         (1.1 )%         (53 )         (0.5 )%
Consolidated net loss                          $    (254 )         (2.4 )%   $     (82 )         (0.7 )%


TSR, INC. AND SUBSIDIARIES

Revenue

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended February 28, 2013 decreased $578,000 or 5.2% from the prior year quarter. The average number of consultants on billing with customers increased slightly from approximately 270 for the quarter ended February 29, 2012 to 275 for the quarter ended February 28, 2013.

During the current quarter, although consultants on billing with customers increased, the Company experienced a decrease in revenue due to reduced average billing rates for the consultants on billing with customers compared with the prior year period. This resulted from a shift in the business mix as a higher percentage of new placements have been with customers where there is stronger competition due to managed vendor services programs. During the current quarter, the Company also experienced a decrease in revenue due to a lower number of billable work days in the current period compared with the prior year quarter.

Cost of Sales

Cost of sales for the quarter ended February 28, 2013 decreased $498,000 or 5.3% to $8,874,000 from $9,372,000 in the prior year period. The decrease in cost of sales resulted primarily from a combination of a decrease in the average pay rates and a lower number of work days for the consultants on billing with customers in the current quarter compared with the prior year quarter. Cost of sales as a percentage of revenue decreased from 84.5% in the quarter ended February 29, 2012 to 84.4% in the quarter ended February 28, 2013.

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 increased $157,000 or 8.4% from $1,861,000 in the quarter ended February 29, 2012 to $2,018,000 in the quarter ended February 28, 2013. This increase was primarily attributable to an increase in the number of recruiting and sales executives and expenses associated with the recruiting training program. The Company's plan for internal growth involves the hiring of additional recruiters and sales executives. The Company has established a program to hire and train recent college graduates to become recruiters. The initial costs associated with the hiring and training of such personnel have increased selling, general and administrative expenses. Technical recruiters have been hired in order to address increased requests by clients for submissions of technical personnel for potential positions. Such increased submissions have not yet led to the expected increases in placements. In addition, hiring new sales executives requires a significant investment to cover their costs while their non-compete agreements, which typically last a year, expire. The Company expects these expenses to continue to increase as more recruiting trainees and sales executives are hired to stimulate growth. Selling, general and administrative expenses, as a percentage of revenue, increased from 16.8% in the quarter ended February 29, 2012 to 19.2% in the quarter ended February 28, 2013 as a result of the increase in the number of technical recruiters and sales executives not yet generating sufficient additional revenue.

Other Income

Other income for the quarter ended February 28, 2013 resulted primarily from interest income of $6,000.

Income Taxes

The income tax benefit included in the Company's results of operations for the quarters ended February 28, 2013 and February 29, 2012 reflect the Company's estimated effective tax rate for the years ending May 31, 2013 and 2012, respectively. These rates were 39.2 % for the quarter ended February 29, 2012 and 31.3 % for the quarter ended February 28, 2013.

Consolidated Net Loss

Consolidated net loss increased $172,000 from a loss of $82,000 in the quarter ended February 29, 2012 to a loss of $254,000 in the quarter ended February 28, 2013. This increase in the loss was primarily attributable to the increase in selling, general and administrative expenses as a result of hiring additional recruiters and sales executives. Losses are expected to continue until such time as the Company's plan for internal growth generates a sufficient increase in revenue.


                           TSR, INC. AND SUBSIDIARIES

Nine months ended February 28, 2013 compared with nine months ended February 29,
2012

                                                           (Dollar amounts in thousands)
                                                                 Nine Months Ended
                                                     February 28,                  February 29,
                                                         2013                          2012
                                                                % of                          % of
                                                 Amount       Revenue          Amount       Revenue
Revenue, net                                   $  32,364          100.0 %    $  33,581          100.0 %
Cost of sales                                     27,118           83.8 %       28,059           83.5 %
Gross profit                                       5,246           16.2 %        5,522           16.5 %

Selling, general and administrative expenses       5,995           18.5 %        5,477           16.3 %
Income (loss) from operations                       (749 )         (2.3 )%          45            0.2 %
Other income, net                                      8            0.0 %           13            0.0 %
Income (loss) before income taxes                   (741 )         (2.3 )%          58            0.2 %
Provision (benefit) for income taxes                (232 )         (0.7 )%          38            0.1 %
Consolidated net income (loss)                 $    (509 )         (1.6 )%   $      20            0.1 %

Revenue

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the nine months ended February 28, 2013 decreased $1,217,000 or 3.6% from the prior year period. The average number of consultants on billing with customers remained at approximately 263 for the nine months ended February 29, 2012 and February 28, 2013.

During the current period, although consultants on billing with customers was flat, the Company experienced a decrease in revenue due to reduced average billing rates for the consultants on billing with customers compared with the prior year period. This resulted from a shift in the business mix as a higher percentage of new placements have been with customers where there is stronger competition due to managed vendor services programs. During the current period, the Company also experienced a decrease in revenue due to a lower number of billable work days in the current period compared with the prior year period, primarily due to tropical storm Sandy.

Cost of Sales

Cost of sales for the nine months ended February 28, 2013 decreased $941,000 or 3.4% to $27,118,000 from $28,059,000 in the prior year period. The decrease in cost of sales resulted primarily from reduced average pay rates for the consultants on billing with customers as compared with the prior year period. Cost of sales as a percentage of revenue increased from 83.5% in the nine months ended February 29, 2012 to 83.8% in the nine months ended February 28, 2013. The increase in cost of sales as a percentage of revenue was primarily attributable to revenue being reduced by discount programs and rate reductions at a few of the Company's major financial services customers.


TSR, INC. AND SUBSIDIARIES

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 increased $518,000 or 9.5% from $5,477,000 in the nine months ended February 29, 2012 to $5,995,000 in the nine months ended February 28, 2013. This increase was primarily attributable to an increase in the number of recruiting and sales personnel and expenses associated with the recruiting training program. The Company's plan for internal growth involves the hiring of additional recruiters and sales executives. The Company has established a program to hire and train recent college graduates to become recruiters. The initial costs associated with the hiring and training of such personnel have increased selling, general and administrative expenses. Technical recruiters have been hired in order to address increased requests by clients for submissions of technical personnel for potential positions. Such increased submissions have not yet led to the expected increases in placements. In addition, hiring new sales executives requires a significant investment to cover their costs while their non-compete agreements, which typically last a year, expire. The Company expects these expenses to continue to increase as more recruiting trainees and sales executives are hired to stimulate growth. Selling, general and administrative expenses, as a percentage of revenue, increased from 16.3% in the nine months ended February 29, 2012 to 18.5% in the nine months ended February 28, 2013 as a result of the increase in the number of technical recruiters and sales executives not yet generating sufficient additional revenue.

Other Income

Other income for the nine months ended February 28, 2013 resulted primarily from interest and dividend income of $11,000, offset by an unrealized loss on marketable securities of $4,000.

Income Taxes

The income tax provision (benefit) included in the Company's results of operations for the nine months ended February 28, 2013 and February 29, 2012 reflect the Company's estimated effective tax rate for the years ending May 31, 2013 and 2012, respectively. These rates were 65.8% for the nine months ended February 29, 2012 and (31.3) % for the nine months ended February 28, 2013. The effective tax rate for the nine months ended February 29, 2012 was impacted by the increased effects of state minimum taxes and non-deductible expenses on lower taxable income.

Consolidated Net Income (Loss)

Consolidated net income decreased $529,000 from income of $20,000 in the nine months ended February 29, 2012 to a loss of $509,000 in the nine months ended February 28, 2013. This decrease was primarily attributable to the increase in selling, general and administrative expenses as a result of hiring additional recruiters and sales executives and a reduction in gross profit due to lower billing rates. Losses are expected to continue until such time as the Company's plan for internal growth generates a sufficient increase in revenue.


TSR, INC. AND SUBSIDIARIES

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, 2013, the Company had working capital (total current assets in excess of total current liabilities) of $8,800,000 including cash and cash equivalents and certificates of deposit and marketable securities of $4,489,000 as compared to working capital of $12,402,000 including cash and cash equivalents and certificates of deposit and marketable securities of $8,035,000 at May 31, 2012.

For the nine months ended February 28, 2013, net cash used in operating activities was $438,000 compared to net cash used in operating activities of $17,000 for the nine months ended February 29, 2012, or an increase in cash used in operating activities of $421,000. The cash used in operating activities in the nine months ended February 28, 2013 primarily resulted from the consolidated net loss of $510,000, an increase of prepaid and recoverable income taxes of $234,000 and a decrease in accounts and other payables and accrued expenses and other current liabilities of $377,000, offset by a decrease in accounts receivable of $686,000. The cash used in operating activities in the nine months ended February 29, 2012, resulted primarily from increases in prepaid expenses of $58,000 and prepaid and recoverable income taxes of $50,000 which were offset by increases in accounts and other payables and accrued expenses and other current liabilities of $40,000 and advances from customers of $20,000.

Net cash used in investing activities of $1,495,000 for the nine months ended February 28, 2013 primarily resulted from new investments in US Treasury securities and certificates of deposit. Net cash provided by investing activities of $1,487,000 for the nine months ended February 29, 2012 primarily resulted from the maturities of US Treasury securities and certificates of deposit.

Net cash used in financing activities resulted primarily from a cash dividend of $1.50 per share paid on November 30, 2012, which amounted to $2,970,000, distributions to the noncontrolling interest of $46,000 and the purchases of 21,600 shares of common stock for $82,000 in the nine months ended February 28, 2013. In the nine months ended February 29, 2012, net cash used in financing activities resulted from a distribution to the noncontrolling interest of $67,000 and the purchases of 34,325 shares of common stock for $147,000.

The Company's capital resource commitments at February 28, 2013 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, 2013.


TSR, INC. AND SUBSIDIARIES

Recent Accounting Pronouncements

The Company is not aware of any new accounting pronouncements that would have a material impact on its 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, 2012 Annual Report on Form 10-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, 2013.

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