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, 1998.
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: October 23, 1998 Number of Common Shares Outstanding: 11,307,510
<PAGE>
TSI INCORPORATED
FORM 10-Q
For the Quarter Ended September 30, 1998
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 7-10
PART II. OTHER INFORMATION 11
EXHIBIT 11 Computation of Per Share Earnings 13
-2-
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
- ----------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $22,945,742 $20,685,942 $41,528,814 $39,976,109
Cost of products sold 10,411,788 9,015,870 18,641,018 17,703,420
- ----------------------------------------- ----------- ----------- ----------- -----------
GROSS PROFIT 12,533,954 11,670,072 22,887,796 22,272,689
Operating expenses
Research and product development 2,635,685 2,928,737 5,441,986 5,713,101
Selling 4,703,280 4,555,205 9,252,373 8,901,981
Administrative 1,779,186 1,652,897 3,261,692 3,139,978
- ----------------------------------------- ----------- ----------- ----------- -----------
9,118,151 9,136,839 17,956,051 17,755,060
- ----------------------------------------- ----------- ----------- ----------- -----------
OPERATING INCOME 3,415,803 2,533,233 4,931,745 4,517,629
Other income 100,254 190,383 259,262 486,241
- ----------------------------------------- ----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 3,516,057 2,723,616 5,191,007 5,003,870
Provision for income taxes 1,160,000 953,000 1,713,000 1,751,000
- ----------------------------------------- ----------- ----------- ----------- -----------
NET EARNINGS $ 2,356,057 $ 1,770,616 $ 3,478,007 $ 3,252,870
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ .21 $ .15 $ .31 $ .28
- ----------------------------------------- =========== =========== =========== ===========
DILUTIVE EARNINGS PER COMMON SHARE $ .20 $ .15 $ .30 $ .28
- ----------------------------------------- =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,385,895 11,529,903 11,398,859 11,512,226
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
AND DILUTIVE SHARES 11,552,975 11,801,018 11,573,952 11,797,713
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30 March 31 September 30
1998 1998 1997
- --------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,530,169 $ 9,385,509 $ 7,329,414
Accounts receivable 18,111,779 16,508,360 13,934,968
Prepaid expenses 335,794 223,713 477,624
Inventories
Finished products 2,980,320 2,883,469 2,535,567
Work-in-process 3,148,620 2,792,730 3,252,865
Materials and supplies 9,638,030 9,840,083 8,879,513
- --------------------------------------------------- ------------ ------------ ------------
15,766,970 15,516,282 14,667,945
- --------------------------------------------------- ------------ ------------ ------------
TOTAL CURRENT ASSETS 41,744,712 41,633,864 36,409,951
INTANGIBLES AND OTHER ASSETS
Goodwill 3,714,339 3,834,903 3,819,011
Note receivable 583,323 632,540 734,255
Deferred income tax benefit 528,180 456,169 668,815
Other assets 2,716289 2,878,348 3,307,758
- --------------------------------------------------- ------------ ------------ ------------
7,542,131 7,801,960 8,529,839
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503 128,503
Buildings 3,713,160 3,713,160 3,586,992
Construction in progress 43,422 51,341 160,354
Machinery and equipment 20,355,763 19,689,035 19,718,473
- --------------------------------------------------- ------------ ------------ ------------
24,240,848 23,582,039 23,594,322
Less allowance for depreciation 16,165,788 15,183,541 14,620,088
- --------------------------------------------------- ------------ ------------ ------------
8,075,060 8,398,498 8,974,234
- --------------------------------------------------- ------------ ------------ ------------
TOTAL ASSETS 57,361,903 57,834,322 $ 53,914,024
============ ============ ============
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,976,859 $ 4,924,480 $ 5,103,051
Employee compensation 3,297,689 3,918,610 3,500,665
Taxes, other than income taxes 467,266 519,285 458,323
Income taxes payable 960,411 1,028,657 216,326
- --------------------------------------------------- ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 9,702,225 10,391,032 9,278,365
- --------------------------------------------------- ------------ ------------ ------------
TOTAL LIABILITIES 9,702,225 10,391,032 9,278,365
SHAREHOLDERS' EQUITY
Common shares, $.10 par value 1,134,931 1,168,138 1,164,490
Additional paid-in capital 11,372,407 11,394,909 10,642,462
Retained earnings 35,223,537 35,164,722 32,970,026
Equity adjustment from translation (71,197) (284,479) (141,319)
- --------------------------------------------------- ------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 47,659,678 47,443,290 44,635,659
- --------------------------------------------------- ============ ============ ============
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,361,903 $ 57,834,322 $ 53,914,024
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30 1998 1997
- ------------------------------------------------------------------ ----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ 3,478,007 $ 3,252,870
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for losses on accounts receivable 29,923 11,066
Depreciation and amortization of property, plant & equipment 935,161 929,055
Amortization of goodwill 120,564 112,567
Loss (gain) on sale of assets 1,514 (16,539)
Provision for deferred income tax (72,011) 0
Changes in operating assets and liabilities:
Accounts receivable (1,633,342) 621,454
Prepaid expenses (112,081) (104,993)
Inventories (250,688) (812,529)
Other assets 211,276 (681,386)
Accounts payable and accrued expenses 52,379 (973,356)
Employee compensation payable (620,921) (468,483)
Taxes, other than income taxes (52,019) 16,076
Current income taxes payable (68,246) (31,028)
Foreign currency translation gain (loss) 225,453 (196,895)
- ------------------------------------------------------------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,244,969 1,657,879
- ------------------------------------------------------------------ ----------- -----------
INVESTING ACTIVITIES
Additions to property, plant and equipment (572,155) (867,343)
Proceeds from disposal of property, plant and equipment 213 17,602
Purchase of companies, net of cash acquired 0 (1,452,208)
- ------------------------------------------------------------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (571,942) (2,301,949)
- ------------------------------------------------------------------ ----------- -----------
FINANCING ACTIVITIES
Proceeds from stock options exercised 96,544 945,417
Dividends paid (684,570) (577,822)
Purchases of common stock (2,886,875) (117,432)
- ------------------------------------------------------------------ ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (3,474,901) 250,163)
- ------------------------------------------------------------------ ----------- -----------
Effect of exchange rate changes on cash and cash equivalents (53,466) 28,323
- ------------------------------------------------------------------ ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,855,340) (365,584)
- ------------------------------------------------------------------ ----------- -----------
Cash and cash equivalents at beginning of year 9,385,509 7,694,998
- ------------------------------------------------------------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF SIX MONTH PERIOD $ 7,530,169 $ 7,329,414
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(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 13
of this document.
Note 3. Comprehensive Income
Effective fiscal 1999, the Company has adopted Statement of
Financial Accounting Standards No. 130 "Reporting
Comprehensive Income". This statement requires companies to
classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance
of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section
of the balance sheet, and is effective for the Company's
fiscal year ending March 31, 1999. The Company's only item of
other comprehensive income is foreign currency translation
adjustments. This item is separately displayed in the equity
section of the balance sheet. For the three months and six
months ended September 30, 1998, comprehensive net income was
$109,300 and $142,900, respectively, higher than net income
due to the effect of foreign currency translation adjustments,
net of income taxes.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements
From time to time, in written and oral statements, TSI Incorporated discusses
expectations regarding its future performance, including such things as sales
and expense trends, global economic issues, future order potentials and Year
2000 risks. These "forward-looking statements" are based on currently available
competitive, financial and economic data and the Company's operating plans. They
are inherently uncertain, and investors must recognize that events could turn
out to be significantly different from expectations.
Results of Operations
Quarterly sales rose $2,260,000 or 11% when compared to the prior year.
Following is a quarterly sales breakdown:
Second Quarter Percent
1998 1997 Change
----------- -----------
Safety Comfort and Health $16,290,000 $13,610,000 20%
Productivity and Quality Improvement 6,656,000 7,076,000 (6)%
----------- ----------- ----
22,946,000 20,686,000 11%
=========== =========== ====
The increase in sales was due to strong demand for our safety, comfort and
health instruments, particularly the PortaCount fit tester which has benefited
from recent changes in OSHA regulations. In addition, we saw strong activity in
our meteorological instrumentation. Within the productivity and quality
improvement area, the Company is seeing continued weakness in the research
products sold into this market. Consequently, in November 1998, we decided to
consolidate our California and Minnesota research operations into our corporate
headquarters.
Year-to-date sales have increased $1,553,000 or 4%. Increases in safety, comfort
and health instruments have been substantially offset by slower sales in
productivity and quality improvement instruments. Besides slower sales of
research instruments sold into this market for the entire six months, we had
slow sales into the wire and cable industry during the first quarter.
Sales to U.S. and state government agencies, including defense, shown as
a percent of total sales, were:
September 30,
1998 1997
---- ----
Quarter 25% 28%
Year-to-date 23% 25%
While the government percentage to total sales is high, the Company sells many
different products to a very diverse range of government agencies. Consequently,
government sales
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<PAGE>
during the past several years have been quite stable as a percentage of total
sales. We consider the current percentages to be within the normal range.
International sales rose $1,062,000 or 19% for the quarter compared with last
year. International sales for the quarter were strong across both product lines.
However, year-to-date international sales are still $1,172,000 below the prior
year. This was due to slow first quarter sales of both our process controls and
research instruments for productivity and quality improvement. Both these areas
showed improvement in the second quarter.
Order bookings were as follows:
Second Quarter Percent
1998 1997 Change
----------- -----------
Quarter $21,651,000 $20,332,000 6.5%
Year-to-date $39,271,000 $37,751,000 4.0%
The increase in order bookings follows a pattern similar to sales. Order backlog
has declined from $23.0 million last year to $20.2 million this year. There are
two primary reasons for the decline in backlog:
1) Shipments were made on some large individual orders that were
previously in backlog.
2) Shipments were made on a $4.8 million military PortaCount
contract that was booked in December 1997, but ships throughout
fiscal 1999. We had a similar $7.1 million contract booked in
November 1996 that shipped over fiscal 1998. Our backlog on these
contracts was $2.1 million lower at September 30, 1998 compared with
September 30, 1997. As indicated in our annual report, we expect to
ship $3.5 million less of military PortaCounts in Fiscal 1999 than
in Fiscal 1998.
Gross profit has ranged between 55.6% and 56.0% over the last three fiscal years
completed. For the quarter it was 54.6%, and 55.1% for the six-months of this
fiscal year. Our gross profit percentage varies slightly depending on the
product mix. While somewhat lower than previous years, it falls within what is
considered to be a normal range for TSI's products. We do not believe the lower
gross margin percentage represents a trend.
Research and development costs dropped to 11.5% of sales for the quarter,
bringing the year-to-date costs to 13.1% of sales. The Company continues its
commitment to growth through development of new technologies and products. For
all of fiscal 1999, research and development expenses are expected to be near
the lower end of the Company's historical range of 13 to15 percent of sales.
For the last three years, selling expenses have ranged between 21.6% and 23.3%
of sales. Selling expenses were 20.5% of net sales for the second quarter
compared to 22.0% last year. For the first six months of both years, selling
expenses were 22.3%. The quarter-to-quarter percentage can vary depending on the
overall sales volume and such things as
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<PAGE>
what channels we sell through, the timing of trade shows, advertising, etc. For
all of fiscal 1999, we would expect selling expenses to be within or near the
historical range.
Administrative expenses were 7.8% of sales for the quarter compared to 8.0% last
year. For the first six months of both fiscal 1999 and 1998, administrative
expenses were 7.9%. The Company expects administrative costs to continue within
our normal operating range between 7 and 8 percent for the rest of the year.
Other income varies depending on foreign currency fluctuations, interest rates
and invested cash balances. The first half of last year included significant
foreign exchange gains that did not reoccur in the first six months of this
fiscal year.
Income taxes represent 33% of pre-tax income this year compared to 35% last
year. We would expect the rate for the rest of the year to be 32% to 34%
depending on our international sales level and the benefit the Company receives
from its foreign tax credit.
Liquidity and Capital Resources
TSI's cash decreased $1,855,000 since March 31, 1998. As shown on the statement
of cash flows, the Company generated $2,245,000 of cash from operating
activities offset primarily by $572,000 in capital expenditures, $685,000 in
dividends, and $2,790,000 used to repurchase stock, net of cash from stock
options exercised. At September 30, 1998 the Company had $7,530,000 cash on hand
and we believe operations will continue to generate sufficient cash to fund
current operating needs. The Company has no long-term debt and a current ratio
over 4. The Company believes it has sufficient borrowing capacity should the
need arise.
Year 2000 Conversion
The Company has reviewed most of its critical information technology ("IT")
business systems and is in the testing phase. It is expected these systems will
be substantially Year 2000 compliant by January 1999. The Company is also
identifying all non-IT systems and will test them by January 1999. Management
does not believe significant changes will be required to non-IT systems to
become Year 2000 compliant. An initial list of key third party providers has
been made and some preliminary discussions have been held in order to determine
their state of Year 2000 readiness. We will complete our assessment of third
party providers during the fiscal year ended March 31, 1999.
Our Year 2000 compliance program is being carried out with internal staff
without significant additional outside expenditures. However, Year 2000 issues
may accelerate approximately 10 to 15 percent of our capital purchases by one to
two years. Management does not believe the focus on Year 2000 compliance has
caused us to ignore other types of upgrades to any critical systems.
Failure to complete upgrades to existing systems, or third party providers being
unable to supply us with inventory, could result in the Company being unable to
ship certain products. However, management believes the remaining system changes
required can be
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<PAGE>
readily implemented well before January 1, 2000 and, therefore, will not subject
the Company to significant business risks. We believe alternative suppliers can
be identified should our current suppliers fail to become Year 2000 compliant.
The Company has not yet established contingency plans, but will continue to
monitor the need for such plans.
NEW EURO CURRENCY
On January 1, 1999, eleven of fifteen members of the European Union are
scheduled to establish fixed conversion rates between existing ("legacy
currencies") and one common currency - the Euro. The Euro will then trade on
currency exchanges and may be used in business transactions. Beginning in
January 2002, new euro-denominated bills and coins will be issued, and legacy
currencies will be withdrawn from circulation.
The Company has a significant number of customers as well as operations located
in European Union countries participating in the Euro conversion and,
consequently, the Euro conversion may impact the results of our operations. The
Euro conversion may have competitive implications for the Company's pricing and
marketing strategies, which could be material in nature, however, any such
impact is not known at this time. The Company has also begun to analyze its
internal systems (such as payroll, accounting and financial reporting) to
determine modifications required to deal with the Euro conversion. The Company
does not expect the cost of making any required modifications to have a material
impact on the Company's results of operations or financial condition. There is
no assurance, however, that all problems related to the Euro conversion will be
foreseen and corrected, or that no material disruptions of the Company's
business will occur.
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<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
(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.
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<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 4, 1998 By: /s/ James E. Doubles
------------------------
James E. Doubles
President & CEO
Date: November 4, 1998 By: /s/ Robert F. Gallagher
------------------------
Robert F. Gallagher
Vice President & CFO
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EXHIBIT 11
TSI Incorporated
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic
Weighted average shares
outstanding 11,385,895 11,529,903 11,398,859 11,512,226
============ =========== =========== ===========
Net Earnings $ 2,356,057 $ 1,770,616 $ 3,478,007 $ 3,252,870
============ =========== =========== ===========
Basic earnings per common share $ .21 $ .15 $ .31 $ .28
============ =========== =========== ===========
Diluted
Weighted average common
shares outstanding 11,385,895 11,529,903 11,398,859 11,512,226
Dilutive effect of stock
options and purchase awards -
based on the treasury stock
method 167,080 271,115 175,093 285,487
------------ ----------- ----------- -----------
Weigthed average common
shares outstanding and
dilutive shares 11,552,975 11,801,018 11,573,952 11,797,713
============ =========== =========== ===========
Net Earnings $ 2,356,057 $ 1,770,616 $ 3,478,007 $ 3,252,870
============ =========== =========== ===========
Fully diluted per share amounts $ .20 $ .15 $ .30 $ .28
============ =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,530,169
<SECURITIES> 0
<RECEIVABLES> 18,111,779
<ALLOWANCES> 279,654
<INVENTORY> 15,766,970
<CURRENT-ASSETS> 41,744,712
<PP&E> 24,240,848
<DEPRECIATION> 16,165,788
<TOTAL-ASSETS> 57,361,903
<CURRENT-LIABILITIES> 9,702,225
<BONDS> 0
0
0
<COMMON> 1,134,931
<OTHER-SE> 47,659,678
<TOTAL-LIABILITY-AND-EQUITY> 57,361,903
<SALES> 22,945,742
<TOTAL-REVENUES> 22,945,742
<CGS> 10,411,788
<TOTAL-COSTS> 9,118,151
<OTHER-EXPENSES> (100,254)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,516,057
<INCOME-TAX> 1,160,000
<INCOME-CONTINUING> 2,356,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,356,057
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
