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TSRI > SEC Filings for TSRI > Form 10-K on 8-Aug-2013All Recent SEC Filings

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Form 10-K for TSR INC


8-Aug-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto presented elsewhere in this report.

Results of Operations

The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of operations. There can be no assurance that historical trends in operating results will continue in the future:

                                                                   Year Ended May 31,
                                                             (Dollar Amounts in Thousands)
                                                          2013                            2012
                                                                  % of          Amount            % of
                                                Amount          Revenue                         Revenue
Revenue, Net                                   $  44,914            100.0 %    $  45,215            100.0 %
Cost of Sales                                     37,549             83.6         37,751             83.5
Gross Profit                                       7,365             16.4          7,464             16.5

Selling, General and Administrative Expenses       8,081             18.0          7,466             16.5
Loss from Operations                                (716 )           (1.6 )           (2 )            0.0
Other Income, Net                                     13              0.0             15              0.0
Income (Loss) Before Income Taxes                   (703 )           (1.6 )           13              0.0
Provision (Benefit) for IncomeTaxes                 (214 )            0.5             25              0.0
Consolidated Net Loss                          $    (489 )           (1.1 )%   $     (12 )            0.0 %

Revenue

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the fiscal year ended May 31, 2013 decreased $302,000 or 0.7% from fiscal 2012. The average number of consultants on billing with customers increased from approximately 264 for the fiscal year ended May 31, 2012 to 273 for the fiscal year ended May 31, 2013.

During the current period, 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 fiscal year. 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. Although customers' IT spending may be increasing and the number of consultants on billing with customers has increased, the Company is still experiencing the impact of the economic downturn, specifically in the gross profit generated from the placements of consultants on billing with customers, particularly with customers in the financial services industry. The Company believes that the economic outlook remains uncertain.

Page 13

Cost of Sales

Cost of sales decreased by $202,000 or 0.5%, in fiscal 2013 from fiscal 2012. Cost of sales as a percentage of revenue increased to 83.6% in fiscal 2013 from 83.5% in fiscal 2012. 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 fiscal year. The increase in cost of sales as a percentage of revenue was primarily attributable to discount programs and rate reductions at a few of the Company's major financial services customers.

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 $615,000, or 8.2%, to $8,081,000 in fiscal 2013 from $7,466,000 in fiscal 2012. 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. Additionally, these expenses increased, as a percentage of revenue, from 16.5% in the fiscal year ended May 31, 2012 to 18.0% in the fiscal year ended May 31, 2013.

Other Income

Fiscal 2013 other income resulted primarily from interest and dividend income of $14,000, which increased by $2,000 from the level realized in 2012 due to increased amounts invested in certificates of deposit, which earned slightly higher rates of interest than the rates earned by US Treasury securities and money market accounts.

Income Taxes

The effective income tax benefit rate was 30.4% in fiscal 2013. The expected federal tax benefit rate of 34% was reduced due to state minimum or alternative taxes being payable despite the Company's net loss for fiscal 2013. The effective income tax rate for 2012 is not meaningful due to state minimum or alternative taxes exceeding taxable income.

Consolidated Net Loss

Consolidated net loss increased from $12,000 in fiscal 2012 to a loss of $489,000 in fiscal 2013. Consolidated net loss increased primarily due to higher selling and recruiting expenses. Also, although the number of 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. This also reduced gross profit generated per consultant on billing with customers.

Page 14

Liquidity, Capital Resources and Changes in Financial Condition

The Company expects that its available cash and marketable securities will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for the next 12 months.

At May 31, 2013, the Company had working capital (total current assets in excess of total current liabilities) of $8,717,000 including cash and cash equivalents and certificates of deposit and marketable securities of $3,890,000 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. The decrease in working capital was primarily due to the payment of the one-time special cash dividend of $2,970,000, or $1.50 per share, with respect to the Company's common stock on November 30, 2012.

Net cash flow of $1,036,000 was used in operations during fiscal 2013 as compared to $359,000 of net cash flow provided by operations in fiscal 2012. The cash used in operations for fiscal 2013 primarily resulted from the consolidated net loss of $489,000, an increase in accounts receivable of $418,000 and an increase in prepaid and recoverable income taxes of $112,000. The cash provided by operations for fiscal 2012 primarily resulted from a decrease in accounts receivable of $193,000 in addition to an increase in accounts and other payables and accrued expenses and other liabilities of $284,000.

Net cash used in investing activities amounted to $1,497,000 for fiscal 2013, compared to $2,734,000 in net cash provided by investing activities in fiscal 2012. The change in net cash from investing activities between fiscal 2013 and 2012 primarily resulted from investing in additional certificates of deposit.

Net cash used in financing activities of $3,101,000 during the fiscal year ended May 31, 2013 resulted from a special cash dividend paid of $2,970,000, purchases of treasury stock of $82,000 and distributions of $49,000 to the holder of the noncontrolling interest in the Company's subsidiary, Logixtech Solutions LLC. Net cash used in financing activities of $224,000 during the fiscal year ended May 31, 2012 resulted from purchases of treasury stock of $153,000 and distributions of $71,000 to the holder of the noncontrolling interest.

The Company's capital resource commitments at May 31, 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 liquidity requirements during fiscal 2013.

Page 15

Impact of New Accounting Standards

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 its consolidated financial statements, contained elsewhere in this report. The Company believes that the following accounting policies require the application of management's most difficult, subjective or complex judgments:

Estimating Allowances for Doubtful Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience, customer types, credit worthiness, economic trends and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers, or in their willingness to pay, could have a material adverse effect on the collectibility of our accounts receivable and our future operating results.

Valuation of Marketable Securities
The Company classifies its marketable securities at acquisition as either (i) held-to-maturity, (ii) trading or (iii) available-for-sale. Based upon the Company's intent and ability to hold its certificates of deposit to maturity (which maturities range up to 24 months), such securities have been classified as held-to-maturity and are carried at amortized cost, which approximates fair value. The Company's equity securities are classified as trading securities, which are carried at fair value, as determined by quoted market price, which is Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings.

Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred income tax assets considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. Presently, the Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets based primarily on the Company's history of and projections for taxable income in the future. In the event that actual results differ from our estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance against a portion or all of our deferred tax assets, which could materially impact our financial position or results of operations.

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