SECURITIES AND EXCHANGE COMMISSION
Washington, DC 10549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 1997.
Commission File Number 0-2958
TSI INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 41-0843524
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
500 Cardigan Road, Shoreview, Minnesota 55126
(Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 20 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date.
Date: November 5, 1997 Number of Common Shares Outstanding: 11,645,437
<PAGE>
TSI INCORPORATED
FORM 10-Q
For the Quarter Ended September 30, 1997
Page
PART I. FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7-9
PART II. OTHER INFORMATION 10
EXHIBIT 11 Computation of Per Share Earnings
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $20,685,942 $19,314,726 $39,976,109 $38,811,844
Cost of products sold 9,015,870 8,474,322 17,703,420 16,987,911
- ----------------------------------------------------------------- ----------- ----------- ----------- -----------
GROSS PROFIT 11,670,072 10,840,404 22,272,689 21,823,933
Operating expenses
Research and product development 2,928,737 2,787,799 5,713,101 5,277,786
Selling 4,555,205 4,197,664 8,901,981 8,461,051
Administrative 1,652,897 1,486,520 3,139,978 2,900,937
- ----------------------------------------------------------------- ----------- ----------- ----------- -----------
9,136,839 8,471,983 17,755,060 16,639,774
- ----------------------------------------------------------------- ----------- ----------- ----------- -----------
OPERATING INCOME 2,533,233 2,368,421 4,517,629 5,184,159
Other income 190,383 107,879 486,241 173,087
- ----------------------------------------------------------------- ----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 2,723,616 2,476,300 5,003,870 5,357,246
Provision for income taxes 953,000 867,000 1,751,000 1,875,000
- ----------------------------------------------------------------- ----------- ----------- ----------- -----------
NET EARNINGS $ 1,770,616 $ 1,609,300 $ 3,252,870 $ 3,482,246
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE $.15 $.14 $.28 $.30
- ----------------------------------------------------------------- =========== =========== =========== ===========
Weighted average number of shares for
computation of earnings per common share 11,803,907 11,806,557 11,797,325 11,673,955
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPT. 30 March 31 Sept. 30
1997 1997 1996
(UNAUDITED) (unaudited)
- ---------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,329,414 $ 7,694,998 $ 4,761,585
Accounts receivable 13,934,968 14,256,692 12,181,593
Prepaid expenses 477,624 310,276 559,830
Inventories
Finished products 2,535,567 2,908,537 2,817,891
Work-in-process 3,252,865 2,486,856 2,500,940
Materials and supplies 8,879,513 7,906,912 7,067,545
- ---------------------------------------------------------------------- ----------- ----------- -----------
14,667,945 13,302,305 12,386,376
- ---------------------------------------------------------------------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 36,409,951 35,564,271 29,889,384
INTANGIBLES AND OTHER ASSETS
Goodwill 3,819,011 3,001,796 2,801,257
Note receivable 734,255 595,577 610,000
Deferred income tax benefit 668,815 498,020 721,020
Other assets 3,307,758 2,420,050 2,231,990
- ---------------------------------------------------------------------- ----------- ----------- -----------
8,529,839 6,515,443 6,364,267
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503 128,503
Buildings 3,586,992 3,586,992 3,564,863
Construction in progress 160,354 183,229 567,325
Machinery and equipment 19,718,473 18,244,708 17,301,013
- ---------------------------------------------------------------------- ----------- ----------- -----------
23,594,322 22,143,432 21,561,704
Less allowance for depreciation 14,620,088 13,344,806 12,696,454
- ---------------------------------------------------------------------- ----------- ----------- -----------
8,974,234 8,798,626 8,865,250
- ---------------------------------------------------------------------- ----------- ----------- -----------
TOTAL ASSETS $53,914,024 $50,878,340 $45,118,901
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,103,051 $ 4,963,795 $4,297,368
Employee compensation 3,500,665 3,904,546 3,285,967
Taxes, other than income taxes 458,323 442,247 309,420
Income taxes payable 216,326 247,354 349,698
- ---------------------------------------------------------------------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 9,278,365 9,557,942 8,242,453
- ---------------------------------------------------------------------- ----------- ----------- -----------
TOTAL LIABILITIES 9,278,365 9,557,942 8,242,453
SHAREHOLDERS' EQUITY
Common shares, $.10 par value 1,164,490 1,149,573 1,125,287
Additional paid-in capital 10,642,462 9,724,365 8,454,374
Retained earnings 32,970,026 30,400,007 27,235,049
Equity adjustment from translation (141,319) 46,453 61,738
- ---------------------------------------------------------------------- ----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 44,635,659 41,320,398 36,876,448
- ---------------------------------------------------------------------- ----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $53,914,024 $50,878,340 $45,118,901
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30 1997 1996
- -------------------------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 3,252,870 $ 3,482,246
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Provision for losses on accounts receivable 11,066 994
Depreciation and amortization of property, plant and equipment 929,055 903,903
Amortization of goodwill 112,567 189,965
Gain on sale of assets (16,539) --
Changes in operating assets and liabilities:
Accounts receivable 621,454 3,350,954
Prepaid expenses (104,993) (249,347)
Inventories (812,529) (1,505,962)
Other assets (681,386) 145,568
Accounts payable and accrued expenses (973,356) (566,035)
Employee compensation payable (468,483) 167,550
Taxes, other than income taxes 16,076 3,193
Current income taxes payable (31,028) (276,441)
Foreign currency translation (gain) loss (196,895) 5,200
- -------------------------------------------------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,657,879 5,651,788
- -------------------------------------------------------------------------------------------------------- ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (867,343) (1,375,819)
Proceeds from disposal of property, plant and equipment 17,602 --
Purchase of companies, net of cash acquired (1,452,208) --
- -------------------------------------------------------------------------------------------------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,301,949) (1,375,819)
- -------------------------------------------------------------------------------------------------------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from stock options exercised 945,417 219,732
Dividends paid (577,822) (449,233)
Purchases of common stock (117,432) --
- -------------------------------------------------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 250,163 (229,501)
- -------------------------------------------------------------------------------------------------------- ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 28,323 27,062
- -------------------------------------------------------------------------------------------------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (365,584) 4,073,530
- -------------------------------------------------------------------------------------------------------- ------------ ------------
Cash and cash equivalents at beginning of year 7,694,998 688,055
- -------------------------------------------------------------------------------------------------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF SIX MONTH PERIOD $ 7,329,414 $ 4,761,585
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 1. Basis of Presentation
The information included in the accompanying interim financial
statements is unaudited. In the opinion of management, all adjustments,
consisting of normal recurring accruals necessary for a fair
presentation of the results of operations, financial position and cash
flows for the interim periods presented have been reflected herein. The
results of operations for the interim periods are not necessarily
indicative of the results to be expected for the entire year.
Note 2. Earnings Per Share
See Exhibit 11, Computation of Per Share Earnings, on page 12 of this
document.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the three-month period ended September 30, 1997, were $20,686,000
which represents an increase of 7 percent from $19,315,000 for the same period
last year.
For the first six months of fiscal 1998, the Company's net sales were
$39,976,000, up 3 percent from $38,812,000, for the same six-month period a year
ago.
Sales of products for the Safety, Comfort, and Health of People decreased 1.5
percent and accounted for 66 percent of the Company's total business during the
second quarter, compared to 72 percent for the same quarter a year ago. For the
six months ended September 30, 1997, sales of Safety, Comfort, and Health
products decreased 3.5 percent and represented 65 percent of total sales
compared with 69 percent for last year's first half. This area accounted for 67
percent of the Company's business in fiscal 1997, ended March 31, 1997. While
sales of commercial product lines in this market area have continued to increase
during the second quarter and six-month periods of fiscal 1998, a decrease in
sales of military sales of the Company's PORTACOUNT(R) respirator fit testers
caused the year-to-year comparison to show a small decrease. The major
difference is due to a contract for these devices from the German Army which was
shipped during the first three quarters of fiscal 1997. During the first six
months of fiscal 1998, a total of $4.2 million of military PORTACOUNT fit
testers were shipped compared with $6.8 million for the prior year. Without the
military PORTACOUNT fit tester sales, the Safety, Comfort, and Health market
area had about a 14 percent sales increase for the second quarter and about 9
percent for the six months of fiscal 1998 compared with the prior year.
Sales of products for Productivity and Quality Improvement increased 29 percent
and were at 34 percent of total sales for the fiscal 1998 second quarter
compared with 28 percent a year ago. For the six months ended September 30,
1997, sales of Productivity and Quality Improvement products increased 18
percent, making up 35 percent of total sales compared with 31 percent for last
year's first half. For fiscal 1997, ended March 31, 1997, this category
accounted for 33 percent of the Company's business. A portion of the sales
increase in this area came from two small acquisitions--Zimmer GmbH in Germany
made October 30, 1996, and Target Systems, Incorporated, made July 15, 1997.
Without these acquisitions, sales of products for Productivity and Quality
Improvement increased 18 percent for the second quarter and 10 percent for the
six-month period of fiscal 1998 compared with fiscal 1997. The remainder of the
sales increases are mainly attributable to the Company's line of LaserSpeed(R)
noncontact, industrial process instrumentation.
Sales to U.S. and state government agencies including defense, comprised about
28 percent of the Company's net sales for the quarter as compared to 26 percent
for the same quarter last year. For the six months ended September 30, 1997 and
1996, sales to the U.S. and state government agencies were at 25 percent and 23
percent, respectively. These changes in the percentage of governmental sales is
within the range of normal fluctuations that can occur from quarter-to-quarter.
The second half of fiscal 1998 should show governmental sales to be at a
similar, or slightly lower, percentage compared with the first six months. Since
sales to government agencies represent a significant portion of the Company's
sales, it is important to consider the potential effects of changes in
government spending. Due to the Company's
<PAGE>
diverse line of products, sales usually occur in a wide range of U.S. and state
government agencies, so total government sales during the past several years
have been quite stable as a percentage of total sales. However, shifts have
occurred because of changes from quarter-to-quarter and year-to-year in
shipments under contracts with the U.S. military agencies for the Company's
PORTACOUNT(R) respirator fit testers.
During the second quarter, backlog of orders stayed almost even at $23.0 million
at September 30, 1997, compared with $23.1 million at June 30, 1997, but below
the backlog of $25.9 million at September 30, 1996. Order bookings were stronger
across most of the Company's product lines at $20.4 million in the second
quarter ended September 30, 1997 compared to the $17.4 million in the first
quarter ended June 30, 1997. The lower backlog compared to a year ago is mainly
due to shipments on a major contract for PORTACOUNT fit testers with the German
Army which was still in backlog a year ago.
Gross profit for the second quarter ended September 30, 1997, was 56.4 percent
of net sales compared with the 56.1 percent gross profit margin in the second
quarter last year. Six-month gross profit margin was 55.7 percent this year
compared to 56.2 percent a year ago. These gross profit margin percentages for
the second quarter and first six months fell within what is considered to be a
normal range for TSI's business.
Research and product development expenses as a percentage of net sales were 14.2
percent for the second quarter and 14.3 percent for the six-month period ended
September 30, 1997, compared to 14.4 percent and 13.6 percent of net sales,
respectively, for the same periods last year. Actual research and product
development spending was up about 5 percent in the second quarter and 8 percent
in the first six months. The Company continues its commitment to growth through
development of new technologies and products. For all of fiscal 1998, research
and development expenses are expected to continue near the Company's historical
range of 12 to 14 percent of sales.
Selling expenses were 22.0 percent of net sales for the second quarter compared
to 21.7 percent for the year earlier period. For the first six months of fiscal
1998, selling expenses were 22.3 percent compared with 21.8 percent for the same
period a year ago. The differences between periods as a percentage of sales are
considered to be within the range of normal fluctuation.
Administrative expenses were 8.0 percent and 7.9 percent of net sales for the
three and six-month periods ended September 30, 1997, respectively. For the same
periods ended September 30, 1996, administrative expenses were 7.7 and 7.5
percent of net sales. The Company expects administrative costs to continue in a
normal operating range of 7 to 9 percent of net sales through the remainder of
fiscal 1998.
Other income was $190,000 in the second quarter and $486,000 in the first six
months of fiscal 1998 compared with $108,000 and $173,000, respectively, for the
same periods in fiscal 1997. The increase for the second quarter of the current
fiscal year is due to higher interest income due to higher cash balances, along
with fluctuations due to foreign currency transactions.
The provision for income taxes was at the rate of 35 percent of pre-tax earnings
for the second quarter and six month periods of both fiscal 1998 and 1997.
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents remained at about the same level, being at $7,329,000
on September 30, 1997, compared with $7,695,000 at March 31, 1997. The increase
attributable to increased net earnings was more than offset by increases in
inventory, property, plant, and equipment and other assets, decreases in
accruals, and cash required for the acquisition of another company.
The ratio of current assets to current liabilities was 3.9 as of September 30,
1997, compared to 3.7 as of March 31, 1997. Working capital increased $5,485,000
to $27,132,000 at the end of the second quarter of fiscal 1998, compared to
$21,647,000 at the end of fiscal 1997.
Management believes internally generated funds and short-term borrowings on
existing credit lines will provide adequate resources for supporting operations
during the remainder of fiscal 1998.
Forward-Looking Statements
The Company believes that this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are subject
to certain risks and uncertainties.
Forward-looking statements represent the Company's expectations or beliefs
concerning future events, including the following: any statements regarding
future sales and gross profit percentages, any statements regarding the
continuation of historical trends, any statements regarding the sufficiency of
the Company's cash balances and cash generated from operating and financing
activities for the Company's future liquidity and capital resource needs, any
statements regarding the effect of regulatory changes, the success of
development and enhancement of the Company's products, the adequacy of the
Company's facilities, potential acquisitions, and any statements regarding the
future of the instrumentation industry and the various parts of the
instrumentation markets in which the Company conducts its business. The Company
cautions that any forward-looking statements made by the Company in this report
or in other announcements made by the Company are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitations, the factors set
forth on Exhibit 99 to the Company's report on Form 10K for the fiscal year
ended March 31, 1997.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant
during the quarter for which this report is being filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
Registrant: TSI Incorporated
Date: November 12, 1997 By:
---------------------------------
James E. Doubles
President & CEO
Date: November 12, 1997 By:
---------------------------------
Lowell D. Nystrom
Vice President &CFO
EXHIBIT 11
TSI Incorporated
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 September 30, 1997
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary
- -------
Average shares outstanding 11,529,903 11,372,186 11,512,226 11,229,319
Net effect of dilutive stock
options, based on the treasury
stock method using average
market price 274,004 434,371 285,099 444,637
----------- ----------- ----------- -----------
Total 11,803,907 11,806,557 11,797,325 11,673,956
Net Earnings $ 1,770,616 $ 1,609,300 $ 3,252,870 $ 3,482,246
Primary per share amounts $ .15 $ .14 $ .28 $ .30
Fully Diluted
- -------------
Average shares 11,529,903 11,372,186 11,512,226 11,229,319
Net effect of dilutive stock
options, based on the treasury
stock method using the
period-end market price, if
higher than the average market
price 271,115 438,053 285,487 446,748
----------- ----------- ----------- -----------
Total 11,801,018 11,810,239 11,797,713 11,676,067
Net Earnings $ 1,770,616 $ 1,609,300 $ 3,252,870 $ 3,482,246
Fully diluted per share amounts $ .15 $ .14 $ .28 $ .30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,329,414
<SECURITIES> 0
<RECEIVABLES> 13,934,968
<ALLOWANCES> 477,624
<INVENTORY> 14,667,945
<CURRENT-ASSETS> 36,409,951
<PP&E> 23,594,322
<DEPRECIATION> 14,620,088
<TOTAL-ASSETS> 53,914,024
<CURRENT-LIABILITIES> 9,278,365
<BONDS> 0
0
0
<COMMON> 1,164,490
<OTHER-SE> 43,471,169
<TOTAL-LIABILITY-AND-EQUITY> 53,914,024
<SALES> 20,685,942
<TOTAL-REVENUES> 20,685,942
<CGS> 9,015,870
<TOTAL-COSTS> 9,136,839
<OTHER-EXPENSES> (190,383)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,723,616
<INCOME-TAX> 953,000
<INCOME-CONTINUING> 1,770,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,770,616
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
