<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-4090
ANALYSTS INTERNATIONAL CORPORATION
Minnesota 41-0905408
3601 West 76th Street
Minneapolis, MN 55435
(612) 835-5900
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 preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
As of April 30, 1999, 22,550,461 shares of the Registrant's Common Stock were
outstanding.
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ANALYSTS INTERNATIONAL CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets
March 31, 1999 (Unaudited) and June 30, 1998 1
Condensed Consolidated Statements of Income
Three months and nine months ended March 31, 1999 and 1998
(Unaudited) 2
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 1999 and 1998 (Unaudited) 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-8
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ANALYSTS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
(In thousands) 1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,542 $ 11,868
Accounts receivable, less allowance
for doubtful accounts 99,920 94,294
Other current assets 4,343 3,808
-------- --------
Total current assets 133,805 109,970
Property and equipment, net 25,223 10,360
Other assets 16,705 12,331
-------- --------
$175,733 $132,661
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,178 $ 21,236
Dividend payable 2,255 1,795
Salaries and vacations 17,499 15,669
Other, primarily self-insured
health care reserves 2,525 2,161
Income taxes payable 1,257 1,635
-------- --------
Total current liabilities 53,714 42,496
Long-term debt 20,000 --
Other long-term liabilities 7,555 7,171
Shareholders' equity 94,464 82,994
--------- --------
$175,733 $132,661
========= =========
</TABLE>
Note: The balance sheet at June 30, 1998 has been taken from the audited
financial statements at that date, and condensed.
See notes to condensed consolidated financial statements.
1
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ANALYSTS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands except per share amounts) March 31 March 31
---------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Professional services revenues:
Provided directly $119,847 $116,261 $361,611 $329,276
Provided through sub-suppliers 34,281 33,750 103,967 97,158
-------- -------- -------- --------
Total revenues 154,128 150,011 465,578 426,434
Expenses:
Salaries, contracted
services and direct charges 121,138 117,261 365,193 332,023
Selling, administrative and other
operating costs 24,025 23,848 73,665 68,842
-------- -------- -------- --------
Total expenses 145,163 141,109 438,858 400,865
-------- -------- -------- --------
Operating income 8,965 8,902 26,720 25,569
Non-operating income 392 313 966 997
-------- -------- -------- --------
Income before income taxes 9,357 9,215 27,686 26,566
--------
Income taxes 3,652 3,687 10,894 10,627
-------- -------- -------- --------
Net income $ 5,705 $ 5,528 $ 16,792 $ 15,939
======== ======== ========= ========
PER COMMON SHARE:
Net income (basic) $ .26 $ .24 $ .75 $ .71
======== ======== ========= ========
Net income (diluted) $ .25 $ .24 $ .74 $ .70
======== ======== ======== ========
Dividends paid $ .10 $ .08 $ .28 $ .21
======== ======== ======== ========
Average common shares
outstanding 22,543 22,409 22,516 22,357
======== ======== ======== ========
Average common and common
equivalent shares outstanding 22,651 22,868 22,730 22,841
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
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ANALYSTS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31
-----------------
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 24,130 $ 4,560
Cash flows from investing activities:
Property and equipment additions (17,584) (3,884)
Payments for acquisitions (3,847) --
-------- --------
Net cash used in investing activities (21,431) (3,884)
Cash flows from financing activities:
Cash dividends (6,473) (4,769)
Proceeds from borrowings 20,000 --
Proceeds from exercise of stock options 1,448 1,163
-------- --------
Net cash used in financing activities 14,975 (3,606)
Net change in cash and equivalents 17,674 (2,930)
Cash and equivalents at beginning of period 11,868 17,888
-------- --------
Cash and equivalents at end of period $ 29,542 $14,958
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Financial Statements - The condensed consolidated
balance sheet as of March 31, 1999, the condensed consolidated
statements of income for the three month and nine month periods ended
March 31, 1999 and 1998 and the condensed consolidated statements of
cash flows for the nine month periods then ended have been prepared by
the Company, without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and the
cash flows at March 31, 1999 and for the periods then ended have been
made.
The Company did not have any items of other comprehensive income in any
of the periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
these condensed consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the
Company's June 30, 1998 annual report to shareholders.
2. LONG-TERM DEBT
On December 30, 1998 the Company entered into a Notes Purchase Agreement
whereby it sold $20,000,000 of 7% Senior Notes due December 30, 2006.
Minimum future maturities on these Notes is as follows: 1999, $0; 2000,
$0; 2001, $5,250,000; 2002, $4,000,000; 2003, $3,000,000; thereafter,
$7,750,000. The agreement contains, among other things, provisions
regarding maintenance of working capital and net worth and restrictions
on payments of dividends on common stock. The Company's working capital
and net worth are substantially in excess of the minimum net
requirements and current dividend payments would not be restricted.
3. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Nine Months Ended
March 31, 1999
--------------
(In thousands)
<S> <C>
Balance at beginning of period $ 82,994
Cash dividends declared:
August 20, 1998 at $.10 per share (2,252)
December 17, 1998 at $.10 per share (2,256)
February 18, 1999 at $.10 per share (2,256)
Proceeds upon exercise of stock options 1,279
Stock-based compensation 163
Net income 16,792
------
Balance at end of period $ 94,464
======
</TABLE>
4. NET INCOME PER COMMON SHARE
Basic and diluted earnings per share are presented in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share." The difference between average common shares and average
common and common equivalent shares is the result of outstanding stock
options.
4
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5. BUSINESS ACQUISITION
On February 26, 1999, the Company acquired all of the assets of Real
World Training Systems LLC, a Phoenix, Arizona based provider of
software services. The acquisition was accounted for by the purchase
method of accounting. Accordingly, the assets acquired, primarily
accounts receivable and property and equipment, were recorded at their
estimated fair values as of the date of the acquisition. The excess of
the purchase price over the estimated fair value of the assets acquired
was recorded as goodwill and is being amortized on a straight-line
basis over a 12-year period.
5
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended March 31, 1999 and 1998
CHANGES IN FINANCIAL CONDITION
Working capital at March 31, 1999 was $80.1 million, up 18.7% from the $67.5
million at June 30, 1998. This includes cash and cash equivalents of $29.5
million compared to $11.9 million at June 30, 1998 and accounts receivable of
$99.9 million compared to $94.3 million at June 30, 1998. Ratios of current
assets to current liabilities and total assets to total liabilities have
decreased since June 30, 1998. On December 30, 1998, the Company entered into
a Notes Purchase Agreement whereby it sold $20,000,000 of 7% Senior Notes due
December 30, 2006. The increase in working capital and long-term debt and the
changes in the ratios are due to cash provided by operating activities and
the proceeds from the $20 million Notes Purchase Agreement which is being
used to finance construction costs of the new corporate headquarters building.
The Company's primary need for working capital is to support accounts
receivable resulting from the growth in its business and to fund the time lag
between payroll disbursement and receipt of fees billed to clients. Over the
past years, the Company has been able to support the growth in its business
with internally generated funds. The Company's sub-supplier contracts are not
expected to burden working capital.
In January 1998 the Company entered into an agreement to build a facility for
use as its corporate headquarters and its Minneapolis branch operations. The
Company expects construction and related costs will be approximately
$21,300,000. These costs will be financed through the use of cash reserves
and the proceeds of the Notes Purchase Agreement described above.
On December 17, 1998 the Board of Directors declared the regular quarterly
dividend of $.10 per share payable February 12, 1999 to shareholders of
record as of January 29, 1999.
On February 18, 1999 the Board of Directors declared the regular quarterly
dividend of $.10 per share payable May 14, 1999 to shareholders of record as
of April 30, 1999.
On February 26, 1999, the Company acquired all of the assets of Real World
Training Systems LLC, a Phoenix, Arizona based provider of software services.
The amount paid in connection with the purchase was paid entirely with
internal funds.
The Company believes funds generated from its business, current cash balances
and the above mentioned financing are adequate to meet demands placed upon
its resources by its operations, capital investments and the payment of
quarterly dividends.
The Company believes it has achieved Year 2000 compliance by replacing its
computer systems with new, Y2K compliant hardware and software. The new
hardware/software system was put into production February 1, 1999. The cost
of the new system was approximately $3,000,000. The Company depends on its
computer system for critical business functions, including time record
keeping, billing, payroll, and accounts payable and receivable. The loss of
these capabilities would have a material adverse impact on the Company. The
Company believes, however, its new computer systems has remedied the
millennium date change, however, if weaknesses (Y2K or otherwise) in the new
system are discovered, the Company intends to develop a contingency plan,
which will likely take into account the fact it has a staff of over 4,500
computer programmers as well as a national Y2K practice which can assist in
achieving Y2K compliance. The Company's business does not depend on raw
materials, parts or other goods supplied by third parties and therefore, the
6
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Company believes the inability of its vendors to achieve Y2K compliance would
not have a material adverse impact on the Company. The Company does use
utility services (electricity, telecommunication, natural gas and the like)
for its offices, and interruption of these services could have a material
adverse impact on the Company's operations. The inability of the Company's
clients to achieve Y2K compliance could have an impact on their ability to
pay the Company for the services it renders to them, with consequent adverse
impact on the Company's cash flow. Nearly all of the Company's revenue is
derived from services rendered to Fortune 1000 companies, and the Company
considers it unlikely a material number of its customers would encounter Y2K
compliance issues which would prevent them from paying the Company's invoices
in a timely manner.
The Company's services addressing the Year 2000 problem involve key aspects
of its clients' computer systems. A failure in a client's system could result
in a claim for substantial damages against the Company, regardless of the
Company's responsibility for such failure. Litigation, regardless of its
outcome, could result in substantial cost to the Company. Accordingly, any
contract liability claim or litigation against the Company could have an
adverse effect on the Company's business, operations and financial results.
RESULTS OF OPERATIONS
The Company operates in one business segment.
Revenues provided directly for the nine months ended March 31, 1999 were
$361.6 million, an increase of 9.8% over the same period a year ago. For the
three months ended March 31, 1999 revenues provided directly were $119.8
million, an increase of 3.1% over the same period a year ago. Nearly all of
these increases are the result of increases in hourly rates. While the
Company has been able to increase rates over the prior year, there can be no
assurance the Company will be able to continue this as competitive conditions
in the industry make it difficult for the Company to continually increase the
hourly rates it charges for services. Revenues provided through sub-suppliers
for the nine month period and quarter ended March 31, 1999 were $104.0 and
$34.3 million, respectively. This represents increases of 7.0% and 1.6% over
the same periods a year ago. These increases in sub-supplier revenues
resulted almost exclusively from an increase in billable hours of service
rendered to clients.
Personnel totaled 4,950 at March 31, 1999, compared to 5,250 at March 31,
1998, a decrease of 5.7%.
Salaries, contracted services and direct charges, which represent primarily
the Company's direct labor cost, were 78.4% of revenues for the nine months
ended March 31, 1999 compared to 77.9% for the same period a year ago. These
costs were 78.6% of revenues for the three months ended March 31, 1999 and
78.2% of revenues for the three months ended March 31, 1998. By comparison,
these costs were 78.7% of revenues for the second quarter of fiscal 1999 and
78.0% of revenues for the first quarter of fiscal 1999. The increase in this
expense category as a percentage of revenues is mostly a consequence of
increased idle time and increases in labor costs. The Company's efforts to
control these costs involve controlling labor costs, passing on labor cost
increases through increased billing rates where possible, and maintaining
productivity levels of its billable technical staff. Labor costs, however,
are difficult to control because the highly skilled technical personnel the
Company seeks to hire and retain are in great demand and intense competition
in the industry makes it difficult to pass cost increases on to customers,
while unfavorable economic conditions could adversely affect productivity.
Productivity is being affected by the Y2K issue, as many clients are
concentrating on compliance and testing for Y2K and postponing new
applications to avoid testing complications as well as budget considerations.
The Company believes demand for the services it provides should increase as
clients address a backlog of projects, but there can be no assurance as to
when or if this will occur. Although the Company has taken steps to control
this category of expense, there can be no assurance the Company will be able
to maintain or improve its gross margin.
Selling, administrative and other operating costs, which include commissions,
employee fringe benefits and location costs, represented 15.8% of revenues
for the nine months ended March 31, 1999 compared to 16.1% for the same
period a year ago. These costs were 15.6% of revenues for the three months
ended March 31, 1999 and 15.9% of revenues for the three months ended March
31, 1998. While the Company is committed to careful management of these
costs, there can be no assurance the Company will be able to maintain these
costs at their current relationship to revenues.
7
<PAGE>
Net income for the nine months ended March 31, 1999 increased 5.4% over the
same period a year ago. As a percentage of revenue, net income has decreased
from 3.7% for the nine months ended March 31, 1998 to 3.6% for the nine
months ended March 31, 1999. Net income for the quarter, as a percentage of
revenues, was 3.7% for both the three months ended March 31, 1999 and 1998.
The Company's net income as a percentage of revenues provided directly was
4.6% for the nine months ended March 31, 1999 compared to 4.8% for the same
period a year ago. The Company's net income as a percentage of revenues
provided directly for the three months ended March 31, 1999 and 1998 was the
same at 4.8%.
8
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) There were no reports on Form 8-K filed for the nine months ended
March 31, 1999.
9
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CAUTIONARY STATEMENT UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements included in this document may be "forward-looking statements"
within the meaning of the term in Section 27A of the Securities Act of 1933
as amended, and of Section 21F of the Securities Exchange Act of 1934, as
amended. Additional oral or written forward-looking statements may be made by
the Company from time to time, and such statements may be included in
documents that are filed with the Securities and Exchange Commission. Words
such as "believes," "intends," "possible," "expects," "estimates"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements, although forward-looking statements may exist
without such expressions.
Forward-looking statements are based on expectations and assumptions, and
they involve risks and uncertainties which could cause results or outcomes to
differ materially from expectations. Among the risks and uncertainties
important to the Company's business are (i) the continued need of current and
prospective customers for the Company's services, (ii) the renewal of
contracts with customers, especially major customers, (iii) the cancellation
of contracts by customers, especially major customers, (iv), competition, (v)
the availability of qualified professional staff, (vi) the Company's ability
to increase hourly billing rates as labor and operating costs increase, (vii)
the Company's ability to continue to operate its business and support growth
with internally generated funds and (viii) the impact of Y2K. There may be
other factors, such as general economic conditions which affect businesses
generally, which may cause results to vary from expectations.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANALYSTS INTERNATIONAL CORPORATION
(Registrant)
Date May 14, 1999 By /s/ Gerald M. McGrath
---------------------------------------
Gerald M. McGrath
Treasurer and Chief Financial Officer
Date May 14, 1999 By /s/ Marti R. Charpentier
---------------------------------------
Marti R. Charpentier
Controller and Assistant
Treasurer (Chief Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 29,542
<SECURITIES> 0
<RECEIVABLES> 100,495
<ALLOWANCES> 575
<INVENTORY> 0
<CURRENT-ASSETS> 133,805
<PP&E> 39,972
<DEPRECIATION> 14,749
<TOTAL-ASSETS> 175,733
<CURRENT-LIABILITIES> 53,714
<BONDS> 27,555
0
0
<COMMON> 2,479
<OTHER-SE> 91,985
<TOTAL-LIABILITY-AND-EQUITY> 175,733
<SALES> 465,578
<TOTAL-REVENUES> 465,578
<CGS> 365,193
<TOTAL-COSTS> 365,193
<OTHER-EXPENSES> 73,130
<LOSS-PROVISION> 535
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,686
<INCOME-TAX> 10,894
<INCOME-CONTINUING> 16,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,792
<EPS-PRIMARY> .75
<EPS-DILUTED> .74
</TABLE>
