UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 1, 2011

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to            

Commission File Number: 1-33981

ANALYSTS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (952) 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 (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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

As of October 31, 2011, 5,017,385 shares of the registrant’s common stock were outstanding.

ANALYSTS INTERNATIONAL CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Analysts International Corporation

Consolidated Balance Sheets

(Unaudited)

See notes to consolidated financial statements.

3

Analysts International Corporation

Consolidated Statements of Operations

(Unaudited)

See notes to consolidated financial statements.

4

Analysts International Corporation

Consolidated Statements of Cash Flows

(Unaudited)

See notes to consolidated financial statements.

5

Analysts International Corporation

Notes to Consolidated Financial Statements

(Unaudited)

1.  Organization and Nature of Business

Analysts International Corporation (“AIC,” “Company,” “we,” “us,” or “our”) is an information technology (“IT”) services company. We employ approximately 970 IT professionals, management and administrative staff and are focused on serving the IT needs of mid-market to Fortune 500 companies and government agencies across North America. AIC was incorporated in Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota. For a more complete description of our Company, please refer to our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.

We operate on a fiscal year ending on the Saturday closest to December 31. Accordingly, fiscal 2011 will end on Saturday, December 31, 2011. The third quarter of fiscal 2011 ended on October 1, 2011 and the third quarter of fiscal 2010 ended on October 2, 2010.

2.  Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying unaudited Consolidated Financial Statements of AIC have been prepared on the accrual basis of accounting and in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under these rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States (“U.S. GAAP”) can be condensed or omitted. The Consolidated Financial Statements included in this document reflect, in the opinion of our management, all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the Notes to Consolidated Financial Statements) necessary for fair presentation of the results of operations for the interim periods presented. The following notes should be read in conjunction with the accounting policies and other disclosures in the Notes to the Consolidated Financial Statements incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011. Revenues, expenses, cash flows, assets and liabilities can and do vary during the year. Therefore, interim results are not necessarily indicative of the results to be expected for the full fiscal year.

Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Changes to Consolidated Statements of Operations

As presented on our third quarter 2011 Form 10-Q, we have changed the format of our Consolidated Statements of Operations for reporting revenues and cost of revenues. The change in format combines Professional services provided directly and Professional services provided through subsuppliers for both revenues and cost of revenues. Professional services provided through subsuppliers is immaterial to our current and historical operations for the periods presented.

3.   Sale of Assets

Sale of Customer Contracts

On March 3, 2010, we sold certain client contracts, property and equipment and sublet a facility. In consideration for the assets sold and the liabilities transferred, we received $0.2 million in cash. We recorded a loss on the sale of approximately $50,000 which is included within Selling, administrative and other operating costs (“SG&A”) in our Consolidated Statement of Operations.

4.   Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets for financial statement purposes and accelerated methods for income tax purposes. The balances of our Property and equipment as of October 1, 2011 and January 2, 2011 and the estimated useful lives used in the financial statements are as follows:

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In the third quarter of fiscal 2011, the Company commenced a project to replace its current financial and human resource information systems with a fully integrated enterprise resource planning (“ERP”) solution. The project to implement the ERP solution resulted in approximately $0.8 million of costs being capitalized in the third quarter of fiscal 2011.

In the second and third quarters of fiscal 2011, the Company disposed of approximately $1.4 million of fully amortized and depreciated property and equipment. The disposed property and equipment primarily relates to decommissioned software, computer hardware and the relocation of our corporate headquarters.

5.  Financing Agreement

Revolving Credit Facility

On February 23, 2011, we entered into the First Amendment to Credit and Security Agreement (“Amended Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), pursuant to which the interest rate on future borrowings and the unused line fee were reduced, the maturity date was extended until September 30, 2014 and certain covenants were made less restrictive. On September 21, 2011, we entered into the Second Amendment to the Amended Credit Facility with Wells Fargo, which increased our annual capital expenditures covenant for fiscal 2011 from $2.0 million to $2.5 million.

Under the Amended Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit. The total amount available for borrowing under the Amended Credit Facility will fluctuate based on our level of eligible accounts receivable.

The Amended Credit Facility carries an interest rate equal to the three-month LIBOR rate plus 1.50% - 2.50% depending on our operating results. The Credit Facility had a one-time origination fee of $150,000, the balance of which is being amortized over the new term of the Amended Credit Facility. The annual unused line fee varies between 0.25% - 0.375%, depending on our operating results, and is based on the daily average unused amount. The Amended Credit Facility may be terminated or reduced by us on 90 days notice in exchange for a termination fee of 1.0% of the maximum line amount through September 30, 2011, 0.50% of such amount thereafter until September 30, 2012, 0.25% of such amount thereafter until September 30, 2013 and no fee in the final year. Borrowings under the Amended Credit Facility are secured by all of our assets.

The Amended Credit Facility requires us to meet certain levels of year-to-date earnings before taxes. The Amended Credit Facility limit on our annual capital expenditures is $2.5 million for fiscal 2011 and $2.0 million for each fiscal year thereafter. The facility contains customary affirmative covenants, including covenants regarding annual, quarterly and projected financial reporting requirements, collateral and insurance maintenance, and compliance with applicable laws and regulations. Further, the facility contains customary negative covenants limiting our ability to grant liens, incur indebtedness, make investments, repurchase our stock, create new subsidiaries, sell assets or engage in any change of control transaction without the consent of Wells Fargo.

Upon an event of default, Wells Fargo may terminate the facility or declare the entire amount outstanding under the facility to be immediately due and payable and exercise other rights under the agreement. The events of default under the facility include, among other things, payment defaults, breaches of covenants, a change in control of the Company and bankruptcy events.

As of October 1, 2011, we were in compliance with all the requirements and had no borrowings under the Amended Credit Facility. Total availability of the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $7.1 million as of October 1, 2011.

6.   Restructuring Costs and Other Severance Related Costs

For the nine month period ended October 1, 2011, we recorded severance and office closure charges of $0.8 million. Of these charges,

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$0.4 million related to severance and severance-related charges for changes in our senior executive officers and $0.4 million related to the relocation of our corporate headquarters.

For the nine month period ended October 2, 2010, we recorded a net reversal of restructuring costs and other severance-related costs of $0.3 million. The net reversal is comprised of a $0.4 million charge relating to severance and severance-related expenses and a reversal of $0.7 million, primarily relating to the modification of lease agreements for office space previously vacated.

A summary of the restructuring charges and subsequent activity in the restructuring accrual for the nine months ended October 1, 2011 is as follows:

7.  Shareholders’ Equity

8. Share Based Compensation

Total share based compensation expense for the three and nine month periods ended October 1, 2011 was approximately $0.1 million and $0.4 million, respectively. This includes compensation expense related to both stock options and stock awards. The tax benefit recorded for these same periods was approximately $16,000 and $48,000. The tax benefit is offset against our valuation allowance for our deferred tax asset.

As a result of changes in our senior leadership personnel, we recorded a reversal of equity-based compensation expense for the three- and nine-month periods ended October 2, 2010 of approximately $0.1 million and $33,000, respectively. This includes compensation expense related to both stock options and stock awards, and the reversal of compensation expense related to the forfeiture of unvested stock options in excess of original estimates. The reduction in tax benefit recorded for third quarter of fiscal 2010 was approximately $5,000 and the tax benefit recorded for the nine-month period ended October 2, 2010 was approximately $10,000. The tax benefit is offset against our valuation allowance for our deferred tax asset.

No stock options were exercised during the periods ended October 1, 2011 and October 2, 2010. As of October 1, 2011, there was approximately $0.3 million of unrecognized share based compensation expense related to unvested stock options and awards that are expected to vest over a weighted-average period of 1.4 years. Options to purchase approximately 448,000 and 348,000 shares of common stock were outstanding at October 1, 2011 and October 2, 2010, respectively.

During the three and nine month periods ended October 1, 2011 and October 2, 2010, we granted equity compensation awards as follows:

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9.  Net Income (Loss) Per Share

Basic and diluted income (loss) per share is presented in accordance with ASC Topic 260, Earnings Per Share. Basic income (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted income per share includes dilutive potential common shares outstanding and is computed by dividing income available to common stockholders by the weighted-average number of common and common equivalent shares outstanding for the period.

There were approximately 373,000 and 335,000 anti-dilutive weighted average shares excluded from the calculation of weighted average number of common equivalent shares outstanding for the three and nine month periods ended October 1, 2011, respectively. For the three-month period ended October 2, 2010, approximately 462,000 anti-dilutive weighted shares were excluded from the calculation of weighted average number of common equivalent shares outstanding. For the nine month period ended October 2, 2010, all potential common shares outstanding were considered anti-dilutive and excluded from the calculation of weighted average number of common and common equivalent shares outstanding because we reported a net loss. The computation of basic and diluted income (loss) per share for the three and nine month periods ended October 1, 2011 and October 2, 2010, is as follows:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q, including the “Risk Factors” described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.

A.          Our Business

Analysts International Corporation (“AIC,” “Company,” “we,” “us,” or “our”) is an information technology (“IT”) services company. We employ approximately 970 IT professionals, management and administrative staff and are focused on serving the IT needs of mid-market to Fortune 500 companies and government agencies across North America. AIC was incorporated in Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota.

B.          Fiscal 2011 Strategic Plan

Our primary goals for fiscal 2011 are to deliver profitability while making the investments required to position us for long-term growth and position AIC as a leading IT services company. Our strategy emphasizes:

·                       Building on our strong brand;

·                       Leveraging our longstanding client relationships; and

·                       Investing in core markets where we believe we can become a market leader in either presence or specialty.

Our fiscal 2011 objectives in support of our strategy are as follows:

·                  Build a platform for growth

During fiscal year 2011, we expect to increase our sales and recruiting capacity by more than 40% from the beginning of fiscal 2011. We have added approximately three-quarters of our targeted increase in sales and recruiting capacity by the end of the third quarter of fiscal 2011. These investments have had a positive effect on fiscal 2011 revenues; however, based on the time we believe it takes an account executive and a recruiter to reach full productivity, we expect a greater impact on future period revenues.

During the balance of fiscal 2011 and as part of our long-term growth strategy, we will consider the possibility of strategic acquisitions if and when the right opportunity arises. Our acquisition strategy is to identify IT staffing firms located in our core markets that complement our existing IT staffing business. We evaluate potential future acquisitions based on the size of the firm, capabilities of their sales force and recruiter personnel and cultural fit as well as other relevant criteria.

·                  Improve gross margin rates

We anticipate additional gross margin rate improvement from the 22.3% we achieved in fiscal 2010 as we continue to change our mix of business and focus on our core markets.

In the third quarter of fiscal 2011, we generated a gross margin rate of 25.0%, a 250 basis point improvement over the prior year third quarter and a 190 basis point improvement over our fiscal 2011 second quarter gross margin rate. For the first nine months of fiscal 2011, we generated a gross margin rate of 24.0%, a 250 basis point improvement over the prior year comparable period. The year-over-year improvement in gross margin rates is primarily due to implementing our strategy of evolving our mix of business and lower benefit costs.

·                  Generate profitability in fiscal 2011

We plan to continue to make investments in our sales and recruiting operations and we believe that improvements in our gross margin rate and continued focus on controlling our administrative and other operating costs will allow us to generate profitability in fiscal 2011.

For the third quarter of fiscal 2011, we generated net income of $1.8 million and on a year-to-date basis we have generated net income of $2.0 million. In the third quarter of fiscal 2011, we incurred charges of approximately $23,000 relating to restructuring costs and other severance related costs. For the first nine months of fiscal 2011, we have incurred charges of approximately $0.8

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million relating to the relocation of our corporate headquarters and for severance charges related to changes in our senior executive officers. We anticipate the relocation of our corporate headquarters will reduce our annualized operating expenses by approximately $0.3 million. We believe we will be profitable for the balance of fiscal 2011.

C.          Business Developments

Leadership

On February 22, 2011, our Board of Directors appointed Brittany B. McKinney as our President and Chief Executive Officer and on May 24, 2011, she was elected as a Director of our Company. Ms. McKinney served as our Interim President and Chief Executive Officer since September 2010. Previously, Ms. McKinney was our Vice President of Corporate Development and the Senior Vice President of the Central Region.

On May 4, 2011, Randy W. Strobel resigned from his employment as the Company’s Senior Vice President, Chief Financial Officer effective on August 31, 2011. On August 3, 2011, Mr. Strobel resigned from his position as the Company’s Senior Vice President, Chief Financial Officer effective as of August 5, 2011; however, Mr. Strobel remained an employee through August 31, 2011.

On August 3, 2011, the Company and William R. Wolff entered into an Employment Agreement with an effective date of August 8, 2011, which provides that Mr. Wolff will be employed as Senior Vice President, Chief Financial Officer of the Company. Prior to this appointment, since December 2009, Mr. Wolff served as Chief Executive for a startup video hosting website for youth sports, TeamKLPZ, LLC of Burnsville, Minnesota.

Lawson Enterprise Resource Planning (“ERP”) Solution

In mid-August, our Board of Directors approved a project to replace our existing financial and human resource information systems with a fully integrated Lawson ERP solution. The Lawson ERP solution should allow us to streamline our business processes and allow for cost efficient scalability as well as improve management reporting and analysis. We believe the implementation of the ERP solution will be complete in early fiscal 2012 and estimate the total capitalized project costs at approximately $1.5 million. Through the third quarter of fiscal 2011, we have incurred capitalized expenditures related to the implementation of the ERP solution of approximately $0.8 million.

Revolving Credit Facility

On February 23, 2011, we entered into the First Amendment to the Credit and Security Agreement (“Amended Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), which amended the terms of the Credit Facility and extended the maturity date to September 30, 2014. On September 21, 2011, we entered into the Second Amendment to the Amended Credit Facility with Wells Fargo, which increased our annual capital expenditures covenant for fiscal 2011 from $2.0 million to $2.5 million. Under the Amended Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit.

Sale of Customer Contracts

On March 3, 2010, AIC sold certain customer contracts, property and equipment and sublet a facility lease. In consideration for the assets sold and the liabilities transferred, the Company received $0.2 million in cash. The Company recorded a loss on the sale of approximately $50,000 which is included within Selling, administrative and other operating costs (“SG&A”) in our Consolidated Statement of Operations. For the preceding 12 months before the sale date, the customer contracts generated revenues of approximately $3.2 million and had an unfavorable contribution margin of approximately $0.7 million.

D.          Overview of Third Quarter Fiscal 2011 Operations

Our revenues increased $2.8 million compared to the third quarter of fiscal 2010. When compared to the prior year quarter, the number of billable hours increased 5.1% and our average billing rates increased 4.2%.

The gross margin rate increased 250 basis points primarily due to our strategy of evolving our mix of business.

SG&A expenses declined $0.4 million, or 6.6%, in the third quarter of fiscal 2011 over the prior year quarter as a result of personnel, benefit and non-personnel cost reductions. Restructuring costs and other severance related costs increased approximately $0.5 million in the third quarter of fiscal 2011 due to a net expense reversal in the prior year quarter primarily as a result of the modification of lease agreements.

We provided cash from operations of $2.4 million during the third quarter of fiscal 2011. As of October 1, 2011, we had a cash balance of $5.8 million and no borrowings under our Amended Credit Facility.

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RESULTS OF OPERATIONS - THREE MONTHS ENDED OCTOBER 1, 2011 VS. OCTOBER 2, 2010

The following table illustrates the relationship between revenue and expense categories along with a count of management and administrative personnel and IT professionals for the three months ended October 1, 2011 and October 2, 2010.

Revenues

Our revenues increased $2.8 million, or 10.9%, from the comparable period a year ago. The increase in our third quarter of fiscal 2011 revenues over the prior year period is primarily due a 5.1% ($1.3 million) increase in the number of hours billed coupled with a 4.2% ($1.1 million) increase in our average billing rates.

Cost of Revenues

Cost of revenues represents our payroll and benefit costs associated with our billable consultants and our cost of using subcontractors. This category of expense as a percentage of revenues decreased 250 basis points from 77.5% to 75.0%, in the third quarter of fiscal 2011 compared to the prior year period primarily due to our strategy of evolving our mix of business.

Selling, Administrative and Other Operating Costs

SG&A costs include management and administrative salaries, salaries and commissions paid to account executives and recruiters, benefits, location costs and other administrative costs.  This category of costs decreased approximately $0.4 million from the comparable period in 2010 and represented 18.7% of revenue for the third quarter of fiscal 2011 compared to 22.2% in fiscal 2010. In the third quarter of

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fiscal 2011, SG&A expenses declined as a result of previously implemented general expense reductions ($0.5 million) and lower employee benefit costs ($0.1 million), which was partially offset by higher sales and recruiting costs ($0.2 million).

Restructuring Costs and Other Severance Related Costs

In the third quarter of fiscal 2011, we recorded severance and office closure charges of $23,000.

In the third quarter of fiscal 2010, we recorded a net expense reversal of $0.5 million. The net reversal is comprised of a $0.2 million charge relating to severance and severance-related expenses and a reversal of $0.7 million for modification of lease agreements.

Non-operating Income

We had no non-operating income in the third quarter of fiscal 2011.

Interest Expense

We had no borrowing outstanding in the third quarter of fiscal 2011 or 2010 under our revolving credit facility.

Income Taxes

Our income tax expense reflects the utilization of net operating loss carryforwards to offset taxable income. We currently have approximately $25.5 million of operating loss carryforwards available to offset federal and state taxes. For both the third quarters of fiscal 2011 and fiscal 2010, we recorded accruals for amounts due for certain state income taxes and changes in our reserves for tax obligations. We recorded no additional income tax expense or benefit associated with our net operating income or loss because any tax expense or benefit that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset.  If, however, we successfully return to profitability to a point where future realization of deferred tax assets, which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowance to realize the benefit of these assets.

Personnel

Our IT professional staff levels, which include subcontractors, finished the third quarter of fiscal 2011 at 852, a 4.0% increase against the comparable period last year and is primarily due to recent increases in our staffing business. The increase in management and administrative personnel is due to our focus on increasing the number of account executives and recruiters that are necessary to increase revenues.

Certain Information Concerning Off-Balance Sheet Arrangements

As of October 1, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

E.          Overview of Year to Date Fiscal 2011 Operations

Our revenues increased $0.7 million, or 0.8%, from the first nine months of fiscal 2010. When compared to the prior year period, our average billing rates increased 2.6%; however, the increase in our average billing rates was partially offset by a 1.3% decline in the number of billable hours.

The gross margin rate increased 250 basis points primarily due our strategy of evolving our mix of business and lower benefit costs.

SG&A expenses declined $2.4 million, or 12.3%, in first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 as a result of personnel, benefit and non-personnel cost reductions. Restructuring costs and other severance related costs increased approximately $1.1 million as a result of changes in senior executives and the relocation of our corporate headquarters in fiscal 2011 compared to a net expense reversal in the prior year primarily as a result of the modification of lease agreements.

We generated cash from operations of $2.6 million during the first nine months of fiscal 2011. As of October 1, 2011, we had a cash balance of $5.8 million and no borrowings under our Amended Credit Facility.

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RESULTS OF OPERATIONS, NINE MONTHS ENDED OCTOBER 1, 2011 VS. OCTOBER 2, 2010

The following table illustrates the relationship between revenue and expense categories along with a count of management and administrative personnel and IT professionals as of October 1, 2011 and October 2, 2010.