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 DECEMBER 31, 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: February 9, 1998 Number of Common Shares Outstanding: 11,693,003
<PAGE>
TSI INCORPORATED
FORM 10-Q
For the Quarter Ended December 31, 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 NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
- ----------------------------------------- ---------------------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 19,739,440 $ 22,329,666 $ 59,715,549 $ 61,141,510
Cost of products sold 8,365,549 9,926,126 26,068,969 26,914,037
- ----------------------------------------- ---------------- ----------------- ----------------- ----------------
GROSS PROFIT 11,373,891 12,403,540 33,646,580 34,227,473
Operating expenses
Research and product development 2,971,105 2,789,140 8,684,206 8,066,926
Selling 4,643,389 4,833,647 13,545,370 13,294,698
Administrative 1,497,508 1,520,823 4,637,485 4,421,760
- ----------------------------------------- ---------------- ----------------- ----------------- ----------------
9,112,002 9,143,610 26,867,061 25,783,384
- ----------------------------------------- ---------------- ----------------- ----------------- ----------------
OPERATING INCOME 2,261,889 3,259,930 6,779,519 8,444,089
Other income 242,126 114,168 728,367 287,255
- ----------------------------------------- ---------------- ----------------- ----------------- ----------------
EARNINGS BEFORE INCOME TAXES 2,504,015 3,374,098 7,507,886 8,731,344
Provision for income taxes 826,000 1,181,000 2,577,000 3,056,000
- ---------------------------------------------------------- ----------------------------------------------------
NET EARNINGS $ 1,678,015 $ 2,193,098 $ 4,930,886 $ 5,675,344
================ ================= ================= ================
EARNINGS PER COMMON SHARE $.14 $.19 $.42 $.49
- ----------------------------------------- ================ ================= ================= ================
Weighted average number of shares
for computation of
earnings per common share 11,925,809 11,713,802 11,868,506 11,690,791
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31 March 31 December 31
1997 1997 1996
(UNAUDITED) (unaudited)
- ----------------------------------------------------- ----------------- ----------------- -----------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,071,872 $ 7,694,998 $ 3,205,382
Accounts receivable 12,316,089 14,256,692 17,436,596
Prepaid expenses 453,598 310,276 431,638
Inventories
Finished products 2,954,924 2,908,537 2,455,016
Work-in-process 3,571,554 2,486,856 2,886,050
Materials and supplies 9,360,250 7,906,912 7,490,468
- ----------------------------------------------------- ----------------- ----------------- -----------------
15,886,728 13,302,305 12,831,534
- ----------------------------------------------------- ----------------- ----------------- -----------------
TOTAL CURRENT ASSETS 38,728,287 35,564,271 33,905,150
INTANGIBLES AND OTHER ASSETS
Goodwill 3,799,300 3,001,796 2,856,179
Note receivable 666,387 595,577 595,577
Deferred income tax benefit 668,815 498,020 721,020
Other assets 3,131,380 2,420,050 2,392,392
- ----------------------------------------------------- ----------------- ----------------- -----------------
8,265,882 6,515,443 6,565,168
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503 128,503
Buildings 3,706,152 3,586,992 3,568,981
Construction in progress 84,690 183,229 439,124
Machinery and equipment 19,900,265 18,244,708 17,912,736
- ----------------------------------------------------- ----------------- ----------------- -----------------
23,819,610 22,143,432 22,049,344
Less allowance for depreciation 15,034,499 13,344,806 13,105,193
- ----------------------------------------------------- ----------------- ----------------- -----------------
8,785,111 8,798,626 8,944,151
- ----------------------------------------------------- ----------------- ----------------- -----------------
TOTAL ASSETS $ 55,779,280 $ 50,878,340 $ 49,414,469
================= ================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,799,275 $ 4,963,795 $ 5,294,937
Employee compensation 3,652,035 3,904,546 4,020,752
Taxes, other than income taxes 434,934 442,247 634,693
Income taxes payable 831,361 247,354 402,812
- ----------------------------------------------------- ----------------- ----------------- -----------------
TOTAL CURRENT LIABILITIES 9,717,605 9,557,942 10,353,194
- ----------------------------------------------------- ----------------- ----------------- -----------------
TOTAL LIABILITIES 9,717,605 9,557,942 10,353,194
SHAREHOLDERS' EQUITY
Common shares, $.10 par value 1,168,437 1,149,573 1,129,767
Additional paid-in capital 10,805,191 9,724,365 8,573,413
Retained earnings 34,298,613 30,400,007 29,146,109
Equity adjustment from translation (210,566) 46,453 211,986
- ----------------------------------------------------- ----------------- ----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 46,061,675 41,320,398 39,061,275
--------------------------------------------- ----------------- ----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 55,779,280 $ 50,878,340 $ 49,414,469
================= ================= =================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31 1997 1996
- ------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 4,930,887 $ 5,675,344
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Provision for losses on accounts receivable 33,185 6,994
Depreciation and amortization of property, plant and equipment 1,421,722 1,414,525
Amortization of goodwill 176,359 137,899
Gain on sale of assets (21,039) 4,337
Changes in operating assets and liabilities:
Accounts receivable 2,218,214 (1,565,906)
Prepaid expenses (80,967) (121,155)
Inventories (1,889,404) (1,422,492)
Other assets (437,137) 272,361
Accounts payable and accrued expenses (1,277,132) 360,506
Employee compensation payable (317,113) 831,037
Taxes, other than income taxes (7,313) 304,273
Current income taxes payable 584,007 (223,327)
Foreign currency translation gain (loss) (284,063) 162,749
- ------------------------------------------------------------------- ------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,050,206 5,837,145
- ------------------------------------------------------------------- ------------------ ------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,368,892) (1,881,813)
Proceeds from disposal of property, plant and equipment 22,858 4,526
Purchase of companies, net of cash acquired (1,452,208) (1,081,764)
- ------------------------------------------------------------------- ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (2,798,242) (2,959,051)
- ------------------------------------------------------------------- ------------------ ------------------
FINANCING ACTIVITIES
Proceeds from stock options exercised 1,112,093 343,249
Dividends paid (927,252) (731,269)
Purchases of common stock (117,432) ---
- ------------------------------------------------------------------- ------------------ ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 67,409 (388,020)
- ------------------------------------------------------------------- ------------------ ------------------
Effect of exchange rate changes on cash and cash equivalents 57,501 27,253
- ------------------------------------------------------------------- ------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,376,874 2,517,327
- ------------------------------------------------------------------- ------------------ ------------------
Cash and cash equivalents at beginning of year 7,694,998 688,055
- ------------------------------------------------------------------- ------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF NINE MONTH PERIOD $ 10,071,872 $ 3,205,382
================== ==================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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. In the fourth quarter of the fiscal year ended March 31, 1998
the Company will implement FAS No. 128, "Earnings Per Share". The
Company does not anticipate the impact of this to be material.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the three-month period ended December 31, 1997, were $19,739,000
which represents a decrease of 12 percent from $22,330,000 for the same period
last year.
For the first nine months of fiscal 1998, the Company's net sales were
$59,716,000, down 2 percent from $61,142,000 for the same nine-month period a
year ago.
Sales of products for the Safety, Comfort, and Health of People decreased 12
percent and accounted for 66 percent of the Company's total business for the
third quarter of both the current and prior fiscal year. For the nine months
ended December 31, 1997, sales of Safety, Comfort, and Health of People products
decreased 6.7 percent and represented 65 percent of total sales compared with 68
percent for last year's first nine months. 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 first nine month of fiscal 1998, a decrease in military sales of the
Company's PORTACOUNT(R) respirator fit testers caused the year-to-year
comparison to show a 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 nine months of fiscal 1998, a total of
$6.8 million of military PORTACOUNT fit testers were shipped compared with $11.0
million for the prior year. Without the military PORTACOUNT fit tester sales,
the Safety, Comfort, and Health market area had about a 3 percent sales decrease
for the third quarter and about a 4 percent increase for the nine months of
fiscal 1998 compared with the prior year. The fiscal 1998 third quarter sales
decline was primarily due to delays in the release of a product. This product
will ship in the fourth quarter of fiscal 1998.
Sales of products for Productivity and Quality Improvement decreased 11 percent
and were at 34 percent of total sales for the third quarter of both the current
and prior fiscal year. For the nine months ended December 31, 1997, sales of
Productivity and Quality Improvement products increased 7 percent, making up 35
percent of total sales compared with 32 percent for last year's first nine
months. For fiscal 1997, ended March 31, 1997, this category accounted for 33
percent of the Company's business. A portion of the sales in this area came from
two small acquisitions--Zimmer GmbH in Germany made in October 1996, and Target
Systems, Incorporated, made in July 1997. Without these acquisitions, sales of
products for Productivity and Quality Improvement would have decreased about 20
percent for the third quarter and about 1 percent for the nine-month period of
fiscal 1998 compared with fiscal 1997. The declines were due primarily to:
* A slowdown in business in the Pacific Rim region. The Company is
uncertain when this business will return to its previous level, but
believes it to be six-months or longer. Over the past 5 years, this
business has represented between 12 to 14 percent of overall sales. For
the third quarter of fiscal 1998 it was about 10 percent of sales.
<PAGE>
* Turnover at a subsidiary in both the technical and manufacturing areas.
This caused a significant decline in our shipment levels. The Company
is in the process of replacing key positions and training those
replacements that have been hired.
Sales to U.S. and state government agencies including defense, comprised about
17 percent of the Company's net sales for the quarter as compared to 20 percent
for the same quarter last year. For the nine months ended December 31, 1997 and
1996, sales to the U.S. and state government agencies were at 22 percent for
both periods. These changes in the percentage of governmental sales are within
the range of normal fluctuations that can occur from quarter-to-quarter. The
fourth quarter of fiscal 1998 should show governmental sales to be at a similar
percentage compared with the first nine 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 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.
Order bookings were reasonable across most of the Company's product lines at
$21.5 million in the third quarter ended December 31, 1997 compared to the $20.4
million in the second quarter ended September 30, 1997. During the third
quarter, backlog of orders increased to $24.8 million at December 31, 1997,
compared with $23.0 million at September 30, 1997, but below the backlog of
$26.6 million at December 31, 1996. The lower backlog compared to a year ago is
mainly due to shipments on a major contract for PORTACOUNT fit testers with the
U.S. Army which had a higher backlog level a year ago.
Gross profit for the third quarter ended December 31, 1997, was 57.6 percent of
net sales compared with the 55.5 percent gross profit margin in the third
quarter last year. Nine-month gross profit margin was 56.3 percent this year
compared to 56.0 percent a year ago. These gross profit margin percentages for
the third quarter and first nine 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 15.1
percent for the third quarter and 14.5 percent for the nine-month period ended
December 31, 1997, compared to 12.5 percent and 13.2 percent of net sales,
respectively, for the same periods last year. Actual research and product
development spending was up about 6.5 percent in the third quarter and 7.7
percent in the first nine 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 be in a similar range as the
nine-month period ended December 31, 1997.
Selling expenses were 23.5 percent of net sales for the third quarter compared
to 21.6 percent for the year earlier period. For the first nine months of fiscal
1998, selling expenses were 22.7 percent compared with 21.7 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.
<PAGE>
Administrative expenses were 7.6 percent and 7.8 percent of net sales for the
three and nine-month periods ended December 31, 1997, respectively. For the same
periods ended December 31, 1996, administrative expenses were 6.8 and 7.2
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 $242,000 in the third quarter and $728,000 in the first nine
months of fiscal 1998 compared with $114,000 and $287,000, respectively, for the
same periods in fiscal 1997. The increase for the third quarter of the current
fiscal year is primarily due to higher interest income due to higher cash
balances.
The provision for income taxes was at the rate of 33 percent and 34 of pre-tax
earnings for the three and nine-month periods ended December 31, 1997,
respectively. For the same periods ended December 31, 1996, the income tax rate
was 35 percent for both the three and nine-month periods. The Company expects
the income tax rate to continue in the 33 to 35 percent range for the remainder
of fiscal 1998.
Liquidity and Capital Resources
Cash and cash equivalents increased to $10,072,000 on December 31, 1997,
compared with $7,329,000 at September 30, 1997. The increase was attributable to
cash generated from operations partially offset by additions to property, plant
and equipment and payment of dividends.
The ratio of current assets to current liabilities was 4.0 as of December 31,
1997, compared to 3.7 as of March 31, 1997. Working capital increased $3,005,000
to $29,011,000 at the end of the third quarter of fiscal 1998, compared to
$26,006,000 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
<PAGE>
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
(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: February 13, 1998 By: /s/ James E. Doubles
-------------------------
James E. Doubles
President & CEO
Date: February 13, 1998 By: /s/ Robert F. Gallagher
-------------------------
Robert F. Gallagher
Vice President & CFO
EXHIBIT 11
TSI Incorporated
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
----------- -----------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 11,659,613 11,276,305 11,587,909 11,245,038
Net effect of dilutive stock
options, based on the treasury
stock method using average
market price 266,196 437,497 280,597 445,753
----------- ----------- ----------- -----------
Total 11,925,809 11,713,802 11,868,506 11,690,791
=========== =========== =========== ===========
Net earnings $ 1,678,015 $ 2,193,098 $ 4,930,886 $ 5,675,344
=========== =========== =========== ===========
Primary per share amounts $ .14 $ .19 $ .42 $ .49
=========== =========== =========== ===========
FULLY DILUTED
Average shares 11,659,613 11,276,305 11,587,909 11,245,038
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 267,595 491,403 293,858 516,387
----------- ----------- ----------- -----------
Total 11,927,208 11,767,708 11,881,767 11,761,425
=========== =========== =========== ===========
Net earnings $ 1,678,015 $ 2,193,098 $ 4,930,886 $ 5,675,344
=========== =========== =========== ===========
Fully diluted per share amounts $ .14 $ .19 $ .41 $ .49
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,071,872
<SECURITIES> 0
<RECEIVABLES> 12,624,594
<ALLOWANCES> 308,505
<INVENTORY> 15,886,728
<CURRENT-ASSETS> 38,728,287
<PP&E> 23,819,610
<DEPRECIATION> 15,034,499
<TOTAL-ASSETS> 55,779,280
<CURRENT-LIABILITIES> 9,717,605
<BONDS> 0
0
0
<COMMON> 1,168,437
<OTHER-SE> 44,893,238
<TOTAL-LIABILITY-AND-EQUITY> 55,779,280
<SALES> 59,715,549
<TOTAL-REVENUES> 59,715,549
<CGS> 26,068,969
<TOTAL-COSTS> 26,867,061
<OTHER-EXPENSES> (728,367)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,507,886
<INCOME-TAX> 2,577,000
<INCOME-CONTINUING> 4,930,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,930,886
<EPS-PRIMARY> .42
<EPS-DILUTED> .41
</TABLE>
