UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For The Three Months Ended January 27, 2008.
Or
---
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from ____________________to_____________________
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 13-5658129
-------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 704-2400
Not Applicable
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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___
Indicate by check mark whether 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.
Large Accelerated Filer ___ Accelerated Filer _X_
Non-Accelerated Filer ___ Smaller Reporting Company ___
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __ No _X_
The number of shares of the registrant's common stock, $.10 par value,
outstanding as of March 1, 2008 was 21,983,541.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended January 27, 2008 and January 28, 2007 3
Condensed Consolidated Balance Sheets -
January 27, 2008 (Unaudited) and October 28, 2007 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended January 27, 2008 and January 28, 2007 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
Item 4. Controls and Procedures 44
PART II - OTHER INFORMATION
Item 1A. Risk Factors 44
Item 6. Exhibits 45
SIGNATURE 45
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------------
January 27, January 28,
2008 2007
----------- -----------
(In thousands, except
per share amounts)
NET SALES $590,493 $548,799
COST AND EXPENSES:
Cost of sales 572,739 513,082
Selling and administrative 25,080 23,882
Restructuring costs 1,504 -
Depreciation and amortization 9,856 9,601
----------- -----------
609,179 546,565
----------- -----------
OPERATING (LOSS) INCOME (18,686) 2,234
OTHER INCOME (EXPENSE):
Interest income 1,302 1,213
Other expense, net (1,707) (1,532)
Foreign exchange loss, net (309) (87)
Interest expense (1,622) (628)
----------- -----------
(Loss) income before minority interest and income taxes (21,022) 1,200
Minority interest 33 -
----------- -----------
(Loss) income before income taxes (20,989) 1,200
Income tax benefit (provision) 7,781 (473)
----------- -----------
NET (LOSS) INCOME ($13,208) $727
=========== ===========
Per Share Data
--------------
Net (loss) income per share -basic and diluted ($0.59) $0.03
=========== ===========
Weighted average number of shares
Basic 22,301 23,161
=========== ===========
Diluted 22,301 23,211
=========== ===========
See accompanying notes to condensed consolidated financial statements
(unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 27, October 28,
2008 2007
(Unaudited) (Audited)
----------- -----------
ASSETS (In thousands, except
share amounts)
CURRENT ASSETS
Cash and cash equivalents $44,089 $40,398
Restricted cash 22,546 25,482
Short-term investments 5,097 5,624
Trade accounts receivable, net of allowances of
$5,714 (2008) and $5,236 (2007) 392,791 417,115
Inventories, net of allowances of $21,325 (2008)
and $4,445 (2007) 40,494 59,950
Recoverable income taxes 5,479 -
Deferred income taxes 16,481 9,629
Prepaid insurance and other assets 31,003 39,927
----------- -----------
TOTAL CURRENT ASSETS 557,980 598,125
Property, plant and equipment, net 73,937 74,709
Insurance and other assets 7,191 6,648
Deferred income taxes 7,998 8,125
Goodwill 99,705 98,715
Other intangible assets, net 51,779 53,829
----------- -----------
TOTAL ASSETS $798,590 $840,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $86,037 $84,111
Current portion of long-term debt 521 510
Accounts payable 194,653 214,799
Accrued wages and commissions 58,393 64,049
Accrued taxes other than income taxes 26,920 22,440
Accrued insurance and other accruals 31,046 32,715
Deferred income and other liabilities 39,399 33,785
Income taxes payable - 4,822
----------- -----------
TOTAL CURRENT LIABILITIES 436,969 457,231
Long-term debt 12,182 12,316
Income taxes payable 937 -
Deferred income taxes 17,523 18,025
Minority interest 60 43
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000
shares; issued--none
Common stock, par value $.10; Authorized--120,000,000
shares; issued--23,480,103 shares (2008) and (2007) 2,348 2,348
Paid-in capital 50,777 50,740
Retained earnings 306,430 319,688
Accumulated other comprehensive income 2,345 2,660
----------- -----------
361,900 375,436
Less treasury stock--1,496,562 shares (2008) and
1,048,966 shares (2007), at cost (30,981) (22,900)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 330,919 352,536
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $798,590 $840,151
=========== ===========
See accompanying notes to condensed consolidated financial statements
(unaudited).
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
------------------
January 27, January 28,
2008 2007
----------- -----------
(In thousands)
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
Net (loss) income ($13,208) $727
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization 9,856 9,601
Accounts receivable provisions 5,714 1,119
Minority interest (33) -
Gain on dispositions of property, plant and
equipment - (36)
Loss (gain) on foreign currency translation 91 (111)
Deferred income tax benefit (8,095) (619)
Share-based compensation expense related to employee
stock options 37 14
Excess tax benefits from share-based compensation - (110)
Changes in operating assets and liabilities, net of
assets acquired :
Accounts receivable 38,213 30,965
Reduction in securitization program (20,000) (50,000)
Inventories 19,456 3,123
Prepaid insurance and other current assets 8,355 3,121
Insurance and other long-term assets (629) 207
Accounts payable (17,544) (3,962)
Accrued expenses (2,018) 2,519
Deferred income and other liabilities 5,124 16,985
Income taxes (9,334) (4,366)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,985 9,177
----------- -----------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Three Months Ended
------------------
January 27, January 28,
2008 2007
----------- -----------
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments $696 $469
Purchases of investments (727) (459)
Decrease in restricted cash 2,936 1,755
(Decrease) in payables related to restricted cash (2,936) (1,755)
Acquisition, business - (225)
Proceeds from disposals of property, plant and
equipment, net 2 48
Purchases of property, plant and equipment (7,211) (6,836)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (7,240) (7,003)
----------- -----------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (123) (114)
Cash in lieu of fractional shares - (18)
Exercises of stock options - 345
Excess tax benefits from share-based compensation - 110
Purchase of treasury shares (8,081) (7,950)
Increase in notes payable to banks 1,768 38,823
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (6,436) 31,196
----------- -----------
Effect of exchange rate changes on cash 1,382 (37)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,691 33,333
Cash and cash equivalents, beginning of period 40,398 38,481
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $44,089 $71,814
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $1,724 $471
Income taxes $9,831 $6,235
See accompanying notes to condensed consolidated financial statements
(unaudited).
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at January 27, 2008 and consolidated
results of operations and consolidated cash flows for the three months ended
January 27, 2008 and January 28, 2007.
Effective October 29, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
There was no material impact on the Company's consolidated financial position
and results of operations as a result of the adoption of the provisions of FIN
48.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the fiscal
year ended October 28, 2007. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
NOTE B--Securitization Program
The Company has a $200.0 million accounts receivable securitization program
("Securitization Program"), which expires in April 2009. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $200.0 million). The Company retains the servicing responsibility
for the accounts receivable. At January 27, 2008, TRFCO had purchased from Volt
Funding a participation interest of $100.0 million out of a pool of
approximately $239.9 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company beyond its interest in the pool of receivables owned by Volt
Funding.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE B--Securitization Program--Continued
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 156, "Accounting for Transfers and Servicing of Financial Assets,
an amendment of SFAS No. 140." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges in connection with the sale of receivables under
the Securitization Program, of $1.5 million in the three months ended January
27, 2008 compared to $1.3 million in the prior year's first quarter, which are
included in Other Expense on the consolidated statement of operations. The
equivalent cost of funds in the Securitization Program was at the rate of 5.6%
per annum in both of the three-month 2008 and 2007 fiscal periods. The Company's
carrying retained interest in the receivables approximated fair value due to the
relatively short-term nature of the receivable collection period. In addition,
the Company performed a sensitivity analysis, changing various key assumptions,
which also indicated the retained interest in receivables approximated fair
value.
At January 27, 2008 and October 28, 2007, the Company's carrying retained
interest in a revolving pool of receivables was approximately $139.1 million and
$143.8 million, respectively, net of a service fee liability, out of a total
pool of approximately $239.9 million and $264.9 million, respectively. The
outstanding balance of the undivided interest sold to TRFCO was $100.0 million
and $120.0 million at January 27, 2008 and October 28, 2007, respectively.
Accordingly, the trade accounts receivable included on the January 27, 2008 and
October 28, 2007 balance sheets were reduced to reflect the participation
interest sold of $100.0 million and $120.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At January 27, 2008, the Company was in
compliance with all requirements of the Securitization Program.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves, by segment are as follows:
January 27, October 28,
2008 2007
------------ ------------
(In thousands)
Telephone Directory $10,306 $9,650
Telecommunications Services 23,091 43,162
Computer Systems 7,097 7,138
------------ ------------
Total $40,494 $59,950
============ ============
The cumulative amounts billed under service contracts at January 27, 2008 and
October 28, 2007 of $19.8 million and $13.9 million, respectively, are credited
against the related costs in inventory. In addition, inventory reserves at
January 27, 2008 and October 28, 2007 of $21.3 million and $4.4 million,
respectively, are credited against the related costs in inventory. The increase
in reserves is the result of a $19.3 million reserve established for certain
costs included in inventory related to work performed and for additional costs
expected to be incurred to complete that work under an installation contract in
the Telecommunications Services segment.
NOTE D--Short-Term Borrowings
At January 27, 2008, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit of up to an aggregate
of $148.9 million, including the Company's $40.0 million secured, syndicated
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $100.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility"). The Company had
total outstanding bank borrowings of $86.0 million, the majority of which was
used to finance the acquisition of LSSi Corp. Included in these borrowings were
$16.4 million of foreign currency borrowings of which $13.6 million provide
economic hedges against foreign denominated net assets.
Credit Agreement
----------------
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. At January 27, 2008, the Company had
no borrowings against this facility. The administrative agent for the Credit
Facility is JPMorgan Chase Bank, N.A. The other banks participating in the
Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB Bank
PLC and Bank of America, N.A.
Borrowings under the Credit Agreement are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided by a
nationally recognized rating agency. The Credit Agreement requires the
maintenance of specified accounts receivable collateral in excess of any
outstanding borrowings. Based upon the Company's leverage ratio and debt rating
at January 27, 2008, if a three-month U.S. Dollar LIBO rate were the interest
rate option selected by the Company, borrowings would have borne interest at the
rate of 4.1% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. The Company was not in compliance with one covenant at January 27,
2008. A waiver of this covenant was not required as the Credit Agreement, which
was due to expire in April 2008, was cancelled and replaced with a new $42.0
million five-year unsecured revolving facility on February 28, 2008.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made under the
Credit Agreement to subsidiary borrowers. However, unless also a guarantor of
loans, a subsidiary borrower is not liable with respect to loans made to the
Company or letters of credit issued at the request of the Company, or with
regard to loans made to any other subsidiary borrower. Five subsidiaries of the
Company are guarantors of all loans made to the Company or to subsidiary
borrowers under the Credit Facility. At January 27, 2008, four of those
guarantors had pledged approximately $42.0 million of accounts receivable, other
than those in the Securitization Program, as collateral for the guarantee
obligations. Under certain circumstances, other subsidiaries of the Company also
may be required to become guarantors under the Credit Facility.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the Delta Credit Facility, which
expires in December 2009, with Wells Fargo, N.A. as the administrative agent and
arranger, and as a lender thereunder. Wells Fargo and the other three lenders
under the Delta Credit Facility, Lloyds TSB Bank Plc., Bank of America, N.A. and
JPMorgan Chase, also participate in the Company's $40.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At January 27, 2008, $79.5 million was drawn
on this facility. Certain rate options, as well as the commitment fee, are based
on a leverage ratio, as defined, which resets quarterly. Based upon Volt Delta's
leverage ratio at January 27, 2008, if a three-month U.S. Dollar LIBO rate were
the interest rate option selected by the Company, borrowings would have borne
interest at the rate of 5.0% per annum. Volt Delta also pays a commitment fee on
the unused portion of the Delta Credit Facility which varies based on Volt
Delta's leverage ratio. At January 27, 2008, the commitment fee was 0.3% per
annum.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.5 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At January 27, 2008, Volt Delta was in compliance with all covenants in the
Delta Credit Facility.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Long-Term Debt and Financing Arrangements
In September 2001, a subsidiary of the Company entered into a $15.1 million loan
agreement with General Electric Capital Business Asset Funding Corporation.
Principal payments have reduced the loan to $12.7 million at January 27, 2008.
The fair value of the loan was approximately $14.0 million at January 27, 2008.
The 20-year loan, which bears interest at 8.2% per annum and requires principal
and interest payments of $0.4 million per quarter, is secured by a deed of trust
on certain land and buildings that had a carrying amount at January 27, 2008 of
$10.0 million. The obligation is guaranteed by the Company.
NOTE F--Stockholders' Equity
Changes in the major components of stockholders' equity for the three months
ended January 27, 2008 are as follows:
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
------ ------- --------- ---------
(In thousands)
Balance at October 28, 2007 $2,348 $50,740 $319,688 ($22,900)
Amortization of restricted stock and stock
units 21
Compensation expense - stock options 16
Change in fair value of minority interest (50)
Purchase of treasury shares (8,081)
Net loss for the three months (13,208)
------ ------- --------- ---------
Balance at January 27, 2008 $2,348 $50,777 $306,430 ($30,981)
====== ======= ========= =========
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, a gain of $2.3 million and $2.6 million at January
27, 2008 and October 28, 2007, respectively, and an unrealized gain, net of
taxes, of $46,000 and $89,000 in marketable securities at January 27, 2008 and
October 28, 2007, respectively. Changes in these items, net of income taxes, are
included in the calculation of comprehensive (loss) income as follows:
Three Months Ended
------------------
January 27, January 28,
2008 2007
----------- -----------
(In thousands)
Net (loss) income $(13,208) $727
Change in fair value of minority interest (50) -
Foreign currency translation adjustments, net (272) (234)
Unrealized (loss) gain on marketable securities, net (43) 23
----------- -----------
Comprehensive (loss) income $(13,573) $516
=========== ===========
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Three Months Ended
------------------
January 27, January 28,
2008 2007
----------- -----------
Denominator for basic earnings per share:
Weighted average number of shares 22,301,204 23,161,023
Effect of dilutive securities:
Employee stock options - 49,923
----------- -----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 22,301,204 23,210,946
========== ==========
Options to purchase 251,111 shares of the Company's common stock were
outstanding at January 27, 2008, but were not included in the computation of
diluted earnings per share because the effect of inclusion would have been
antidilutive. All stock options outstanding at January 28, 2007 were included in
the computation.
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the three months ended January 27,
2008 and January 28, 2007 are as follows:
Operating (loss) profit, a non-GAAP measure, is comprised of total net sales
less cost of sales (direct costs and overhead). In computing operating (loss)
profit, none of the following items have been added or deducted: general
corporate expense; interest expense; fees related to sales of accounts
receivable; interest income and income taxes.
General corporate expenses, a non-GAAP measure, consist of the Company's shared
service centers, and include, among other items, enterprise resource planning,
human resources, corporate accounting and finance, treasury, legal and executive
functions. In order to leverage the Company's infrastructure, these functions
are operated under a centralized management platform, providing support services
throughout the organization. The costs of these functions are included within
general corporate expenses as they are not directly allocable to a specific
category.
Identifiable assets are those assets that are used in the Company's operations
in each industry segment. Corporate assets consist principally of cash and cash
equivalents, investments and investments in joint ventures. During the three
months ended January 27, 2008, consolidated assets decreased by $41.6 million
primarily due to a decrease in accounts receivables of the Staffing Services
segment, partially offset by a decrease in the use of the Company's
Securitization Program, as well as lower inventory primarily in the
Telecommunications Services segment.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures--Continued
Three Months Ended
------------------
January 27, January 28,
2008 2007
----------- -----------
Net Sales:
----------
Staffing Services
Staffing $468,571 $455,095
Managed Services 296,545 294,499
----------- -----------
Total Gross Sales 765,116 749,594
Less: Non-Recourse Managed Services (283,312) (282,645)
----------- -----------
Net Staffing Services 481,804 466,949
Telephone Directory 14,668 17,643
Telecommunications Services 47,203 21,381
Computer Systems 50,783 46,532
Elimination of intersegment sales (3,965) (3,706)
----------- -----------
Total Net Sales $590,493 $548,799
========== ===========
Gross Profit (Loss):
--------------------
Staffing Services $73,915 $71,435
Telephone Directory 6,436 8,031
Telecommunications Services (4,166) 4,771
Computer Systems 26,118 24,744
----------- -----------
Total Gross Profit 102,303 108,981
----------- -----------
Overhead:
---------
Staffing Services 68,446 66,087
Telephone Directory 5,774 5,879
Telecommunications Services 14,999 5,448
Computer Systems 22,866 19,050
----------- -----------
Total Overhead 112,085 96,464
----------- -----------
Segment Operating Profit (Loss):
--------------------------------
Staffing Services 5,469 5,348
Telephone Directory 662 2,152
Telecommunications Services (19,165) (677)
Computer Systems 3,252 5,694
----------- -----------
Total Segment Operating (Loss) Profit (9,782) 12,517
General corporate expenses (8,904) (10,283)
----------- -----------
Total Operating (Loss) Profit (18,686) 2,234
Interest income and other (expense), net (405) (319)
Foreign exchange loss, net (309) (87)
Interest expense (1,622) (628)
----------- -----------
(Loss) Income Before Minority Interest and Income
Taxes ($21,022) $1,200
=========== ===========
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE I--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge.
Generally, changes in fair values of derivatives accounted for as fair value
hedges are recorded in income along with the portions of the changes in the fair
values of the hedged items that relate to the hedged risks. Changes in fair
values of derivatives accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in other comprehensive income, net of deferred
taxes. Changes in fair values of derivatives not qualifying as hedges are
reported in the results of operations. As of January 27, 2008, the Company had
an outstanding foreign currency option contract in the nominal amount equivalent
to $9.5 million, which approximated its net investment in foreign operations and
is accounted for as a hedge under SFAS No. 52, "Foreign Currency Translation".
Restricted cash at January 27, 2008 and October 28, 2007 included $22.5 million
and $25.5 million, respectively, to cover obligations that were reflected in
accounts payable at that date. These amounts primarily related to certain
contracts with customers, for whom the Company manages the customers'
alternative staffing requirements, including the payments to associate vendors.
NOTE J--Acquisition of Businesses
In September 2007, Volt Delta, the principal business unit of the Computer
Systems segment, acquired LSSi Corp. ("LSSi") by merger for $70.8 million and
combined it and its DataServ division into LSSiData. The combination of Volt
Delta's application development, integration and hosting expertise and LSSi's
highly efficient data processing will allow Volt Delta to serve a broader base
of customers by aggregating the most current and accurate business and consumer
information possible. Substantially all of the merger consideration was
attributable to goodwill and other intangible assets.
The Company is presently valuing the transaction to determine the final
allocation of the purchase price, which is subject to finalization of certain
adjustments, and is expected to be completed before the end of the fourth
quarter of fiscal 2008.
The assets and liabilities of LSSi are accounted for under the purchase method
of accounting at the date of acquisition at their fair values. The results of
operations have been included in the consolidated statement of operations since
the acquisition date.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses--Continued
The preliminary purchase price allocation of the fair value of assets acquired
and liabilities assumed of LSSi Corp. is as follows:
(In thousands)
Cash $679
Accounts receivable 5,836
Prepaid expenses and other assets 469
Property, plant and equipment 1,800
Goodwill 47,963
Intangible assets 25,860
---------
Total Assets 82,607
---------
Accounts payable (1,119)
Other accrued expenses (3,919)
Other liabilities (1,126)
Deferred income tax (5,651)
---------
Total Liabilities (11,815)
---------
Purchase price $70,792
=========
In September 2007, the Company purchased for $1.5 million an 80% interest in an
outsourcing and services provider that will complement existing services in the
Staffing Services segment. The Company and the 20%-owner have call and put
rights related to ownership commencing in fiscal 2010. The Company estimated the
fair value of the call/put and recorded a liability of $60,000 as of January 27,
2008.
The following unaudited pro forma information reflects the purchase of LSSi as
if the transaction had occurred in November 2006. This pro forma financial
information is presented for comparative purposes only and is not necessarily
indicative of the operating results that actually would have occurred had the
acquisition been consummated at the beginning of fiscal 2007. In addition, these
results are not intended to be a projection of future results.
Pro Forma Results
-----------------
Three Months Ended
------------------
January 28,
2007
--------
(In thousands, except per share amounts)
Net sales $555,947
=========
Operating income $3,131
=========
Net income $3,390
=========
Earnings per share
Basic and Diluted $0.15
=========
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE K--Goodwill and Intangibles
Goodwill and intangibles with indefinite lives are subject to annual testing
using fair value methodology. An impairment charge is recognized for the amount,
if any, by which the carrying value of goodwill or an indefinite-lived
intangible asset exceeds its estimated fair value. The test for goodwill, which
is performed in the Company's second fiscal quarter, primarily uses comparable
multiples of sales and EBITDA and other valuation methods to assist the Company
in the determination of the fair value of the goodwill and the reporting units
measured.
Intangible assets, other than goodwill and indefinite-lived intangible assets,
are tested for recoverability whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. An impairment loss
is recognized when the carrying amount exceeds the estimated fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value.
The following table represents the balance of intangible assets:
January 27, 2008 October 28, 2007
---------------- ----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
(In thousands)
Customer relationships $44,398 $6,531 $44,398 $5,138
Existing technology 13,164 3,496 13,164 3,090
Contract backlog 3,200 1,667 3,200 1,467
Trade name (a) 2,016 - 2,016 -
Reseller network 816 213 816 187
Non-compete agreements
and trademarks 325 233 325 208
-------------- ------------ -------------- ------------
Total $63,919 $12,140 $63,919 $10,090
============== ============ ============== ============
(a) Trade names have an indefinite life and are not amortized.
NOTE L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At January 27, 2008, the Company's net prepaid for the
outstanding plan years was $16.0 million compared to $26.0 million at October
28, 2007.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Incentive Stock Plans
The Non-Qualified Option Plan adopted by the Company in fiscal 1995 terminated
on May 16, 2005 except for options previously granted under the plan.
Unexercised options expire ten years after grant. Outstanding options at January
27, 2008 were granted at 100% of the market price on the date of grant and
become fully vested within one to five years after the grant date.
As a result of adopting SFAS No. 123R, the Company recorded compensation expense
of $7,000 and $14,000 for the three-month period ended January 27, 2008 and
January 28, 2007, respectively. Compensation expense is recognized in the
selling and administrative expenses in the Company's statement of operations on
a straight-line basis over the vesting periods. Basic and dilutive net income
per share for the three-month ended January 27, 2008 and January 28, 2007 would
not have been different if the Company had not adopted SFAS No. 123R, compared
to the reported basic and dilutive net (loss) income per share of ($0.59) and
$0.03, respectively. As of January 27, 2008, there was $24,000 of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements to be recognized over a weighted average period of 0.6 years.
There were no options exercised under the 1995 Plan during the three-month
period ended January 27, 2008. The intrinsic value of options exercised during
the three-month period ended January 28, 2007 was $0.6 million. The total cash
received from the exercise of stock options was $0.3 million in the three-month
period ended January 28, 2007 and is classified as financing cash flows in the
statement of cash flows. The actual tax benefit realized from the exercise of
stock options for the three-month period ended January 28, 2007 was $0.2
million.
In April 2007, the shareholders of the Company approved the Volt Information
Sciences, Inc. 2006 Incentive Stock Plan ("2006 Plan"). The 2006 Plan permits
the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock and Restricted Stock Units to employees and non-employee directors of the
Company through September 6, 2016. The maximum aggregate number of shares that
may be issued pursuant to awards made under the 2006 Plan shall not exceed one
million five hundred thousand (1,500,000) shares.
On December 18, 2007, the Company granted to employees (i) 233,000 restricted
stock units and (ii) non-qualified stock options to purchase 152,996 shares of
the Company's common stock at $13.32 per share under the 2006 Plan. If certain
net income targets are met in fiscal years 2007 through 2011, the restricted
stock units begin to vest over a five-year period through 2016. Similarly, if
net income targets are met in fiscal years 2008 through 2012, substantially all
the stock options will vest over a four-year period and expire on December 17,
2017. Compensation expense of $29,000 is recognized in the selling and
administrative expenses in the Company's condensed consolidated statement of
operations for the three-month period ended January 27, 2008 on a straight-line
basis over the vesting period. As of January 27, 2008, there was $ 4.4 million
of total unrecognized compensation cost related to non-vested share-based
compensation arrangements to be recognized over a weighted average period of
seven years.
The fair value of each option grant is estimated using the Multiple
Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants in three-month period ended January 27, 2008:
risk-free interest rates of 4.1%; expected volatility of 0.47; an expected life
of the options of ten years; and no dividends. The weighted average fair value
of stock options granted during this period was $8.38.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE N--Income Taxes
Effective October 29, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. The
adoption of the provisions of FIN 48 did not have a material impact on the
Company's consolidated financial position and results of operations.
At October 29, 2007, the Company had a liability for unrecognized tax benefits
of $0.9 million which includes an accrual of $0.1 million of related interest.
The Company's policy is that interest and penalties are recorded as a component
of income tax expense.
The Company is subject to taxation in the US, various states and various foreign
jurisdictions. With few exceptions, the Company is generally no longer subject
to examination by the United States federal, state, local or non-U.S. income tax
examination by tax authorities for years before fiscal 2002. The following
describes the open tax years, by major tax jurisdiction, as of October 29, 2007:
United States-Federal 2004-present
United States-State 2003-present
Canada 2002-present
Germany 2005-present
United Kingdom 2006-present
The Company's policy is to accrue interest in the period during which it is
deemed to have been incurred, based on the difference between the tax position
recognized in the financial statements and the amount previously claimed (or
expected to be claimed) on the tax return. In addition, if the Company is
subject to penalties because of this, a liability for the penalties is
recognized in the period in which the penalties are deemed to have been
incurred.
NOTE O--Restructuring
During the first quarter of fiscal 2008, the Company recorded a pre-tax
restructuring charge of approximately $1.5 million ($0.9 million net of taxes,
or $0.04 per share) related to the elimination of employee positions in Europe
and North America. The workforce reduction at Volt Delta resulted from the
integration of LSSiData into the segment's database access line of business. The
restructuring charge consists solely of severance and termination benefits for
the effected employees and is presented on a separate line item in the Company's
condensed consolidated statement of operations. The accrual for the
restructuring charge is expected to be paid by the end of the second quarter of
fiscal 2008, is included in accrued wages and commissions on the Company's
condensed consolidated balance sheets and amounted to approximately $1.4 million
at January 27, 2008.
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
--------
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to our consolidated financial
statements and notes thereto included in Part I of this Form 10-Q and to provide
an understanding of our consolidated results of operations, financial condition
and changes in financial condition. Our MD&A is organized as follows:
o Forward-Looking Statements - This section describes some of the
language and assumptions used in this document that may have an impact
on the readers' interpretation of the financial statements.
o Critical Accounting Policies - This section discusses those accounting
policies that are considered to be both important to our financial
condition and results of operations and require us to exercise
subjective or complex judgments in their application.
o Summary of Operating Results by Segment - This section provides a
summary of operating results by segment in a tabular format.
o Executive Overview - This section provides a general description of
our business segments and provides a brief overview of the results of
operations during the accounting period.
o Results of Operations - This section provides our analysis of the line
items on our summary of operating results by segment for the current
and comparative accounting periods on both a company-wide and segment
basis. The analysis is in both a tabular and narrative format.
o Liquidity and Capital Resources - This section provides an analysis of
our liquidity and cash flows, as well as our discussion of our
commitments, securitization program and credit lines.
o New Accounting Pronouncements - This section includes a discussion of
recently published accounting authoritative literature that may have
an impact on our historical or prospective results of operations or
financial condition.
o Related Person Transactions - This section describes any business
relationships, or transaction or series of similar transactions
between the Company and its directors, executive officers,
shareholders (with a 5% or greater interest in the Company), or any
entity in which an executive officer has more than a 10% equity
ownership interest, as well as members of the immediate families of
any of the foregoing persons during the first quarter of fiscal year
2007 and 2008. Excluded from the transactions are employment
compensation and directors' fees.
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth in the Company's Annual Report on Form 10-K, in this Form 10-Q and in the
Company's press releases and other public filings. Such risks and uncertainties
could cause the Company's actual results, performance and achievements to differ
materially from those described in or implied by the forward-looking statements.
Accordingly, readers should not place undue reliance on any forward-looking
statements made by or on behalf of the Company. The Company does not assume any
obligation to update any forward-looking statements after the date they are
made.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments. Revenue is generally recognized when
persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed and determinable and collectibility is
probable. The determination of whether and when some of the criteria below have
been satisfied sometimes involves assumptions and judgments that can have a
significant impact on the timing and amount of revenue we report.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered. In the first three
months of fiscal 2008, this revenue comprised approximately 74% of the
Company's net consolidated sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, for which the Company receives an
administrative fee for arranging for, billing for and collecting the
billings related to staffing companies ("associate vendors") who have
supplied personnel to the Company's customers. The administrative fee is
either charged to the customer or subtracted from the Company payment to
the associate vendor. The customer is typically responsible for assessing
the work of the associate vendor, and has responsibility for the
acceptability of its personnel, and in most instances the customer and
associate vendor have agreed that the Company does not pay the associate
vendor until the customer pays the Company. Based upon the revenue
recognition principles prescribed in Emerging Issues Task Force ("EITF")
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent,"
revenue for these services, where the customer and the associate vendor
have agreed that the Company is not at risk for payment, is recognized net
of associated costs in the period the services are rendered. In addition,
sales for certain contracts generated by the Company's Staffing Solutions
Group's managed services operations have similar attributes. In the first
three months of fiscal 2008, this revenue comprised approximately 2% of the
Company's net consolidated sales.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 81-1, "Accounting for
Performance of Construction-Type Contracts" The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
services are rendered when on a time and material basis, and when the
Company is responsible for project completion, revenue is recognized when
the project is complete and the customer has approved the work. In the
first three months of fiscal 2008, this revenue comprised approximately 6%
of the Company's net consolidated sales.
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and delivered. In the first three months of fiscal 2008,
this revenue comprised approximately 1% of the Company's net consolidated
sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
the first three months of fiscal 2008, this revenue comprised approximately
1% of the Company's net consolidated sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in SOP
81-1, using the completed-contract method, to recognize revenue on a gross
basis upon customer acceptance of the project or by the
percentage-of-completion method, when applicable. In the first three months
of fiscal 2008, this revenue comprised approximately 6% of the Company's
net consolidated sales.
Non-Construction: Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and, if applicable, any completed
units are delivered and accepted by the customer. In the first three months
of fiscal 2008, this revenue comprised approximately 2% of the Company's
net consolidated sales.
Computer Systems:
Database Access: Sales are derived from the Company granting access to its
proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases. In the first three months of
fiscal 2008, this revenue comprised approximately 3% of the Company's net
consolidated sales.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems, on a time and material basis or a contract basis. The
Company uses its own employees and inventory in the performance of the
services, and has credit risk for collecting its billings. Revenue for
these services is recognized on a gross basis in the period in which the
services are performed, contingent upon customer acceptance when on a time
and material basis, or over the life of the contract, as applicable. In the
first three months of fiscal 2008, this revenue comprised approximately 2%
of the Company's net consolidated sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in SOP 97-2 "Software Revenue Recognition" and EITF 00-21,
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value or by the use of the percentage-of-completion method, when
applicable. In the first three months of fiscal 2008, this revenue
comprised approximately 3% of the Company's net consolidated sales.
For those contracts accounted for under SOP 81-1, the Company records provisions
for estimated losses on contracts when losses become evident.
Accumulated unbilled costs on contracts are carried in inventory at the lower of
actual cost or estimated realizable value.
Allowance for Uncollectible Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for accounts receivable are maintained based
upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company also makes judgments about the creditworthiness
of significant customers based upon ongoing credit evaluation, and might assess
current economic trends that might impact the level of credit losses in the
future. However, since a reliable prediction of future changes in the financial
stability of customers is not possible, the Company cannot guarantee that
allowances will continue to be adequate. If actual credit losses are
significantly higher or lower than the allowance established, it would require a
related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill and indefinite-lived intangible
assets are subject to annual impairment testing using fair value methodologies.
The Company performs its annual impairment testing during its second fiscal
quarter, or more frequently if indicators of impairment arise. The timing of the
impairment test may result in charges to earnings in the second fiscal quarter
that could not have been reasonably foreseen in prior periods. The testing
process includes the comparison of the Company's business units' multiples of
sales and EBITDA to those multiples of its business units' competitors. If these
estimates or their related assumptions change in the future as a result of
changes in strategy and/or market conditions, the Company may be required to
record an impairment charge in the future.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. Intangible assets, other than goodwill and indefinite-lived intangible
assets, and property, plant and equipment are reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Under SFAS No. 144, these assets are tested for
recoverability whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Circumstances which could trigger a
review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or legal
factors; the accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of the asset; current
period cash flow or operating losses combined with a history of losses or a
forecast of continuing losses associated with the use of the asset; and a
current expectation that the asset will more likely than not be sold or disposed
of significantly before the end of its estimated useful life. Recoverability is
assessed based on the carrying amount of the asset and the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset or asset group. An impairment loss is recognized when the
carrying amount exceeds the estimated fair value of the asset or asset group.
The impairment loss is measured as the amount by which the carrying amount
exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with SOP No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Subsequent
to the preliminary project planning and approval stage, all appropriate costs
are capitalized until the point at which the software is ready for its intended
use. Subsequent to the software being used in operations, the capitalized costs
are transferred from costs-in-process to completed property, plant and
equipment, and are accounted for as such. All post-implementation costs, such as
maintenance, training and minor upgrades that do not result in additional
functionality, are expensed as incurred. The capitalization process involves
judgment as to what types of projects and tasks are capitalizable. Although the
Company believes the decisions made in the past concerning the accounting
treatment of these software costs have been reasonable and appropriate,
different decisions could materially impact financial results.
Income Taxes - Estimates of Effective Tax Rates, Deferred Taxes and Valuation
Allowance - When the financial statements are prepared, the Company estimates
its income taxes based on the various jurisdictions in which business is
conducted. Significant judgment is required in determining the Company's
worldwide income tax provision. Liabilities for anticipated tax audit issues in
the United States and other tax jurisdictions are based on estimates of whether,
and the extent to which, additional taxes will be due. The recognition of these
provisions for income taxes is recorded in the period in which it is determined
that such taxes are due. If in a later period it is determined that payment of
this additional amount is unnecessary, a reversal of the liability is
recognized. As a result, the ongoing assessments of the probable outcomes of the
audit issues and related tax positions require judgment and can materially
increase or decrease the effective tax rate and materially affect the Company's
operating results. This also requires the Company to estimate its current tax
exposure and to assess temporary differences that result from differing
treatments of certain items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are reflected on the
balance sheet. The Company must then assess the likelihood that its deferred tax
assets will be realized. To the extent it is believed that realization is not
likely, a valuation allowance is established. When a valuation allowance is
increased or decreased, a corresponding tax expense or benefit is recorded in
the statement of operations.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 156, "Accounting for Transfers and
Servicing of Financial Assets, an amendment of SFAS No. 140." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $100.0 million and
$120.0 million at January 27, 2008 and October 28, 2007, respectively.
Accordingly, the trade receivables included on the January 27, 2008 and October
28, 2007 balance sheets have been reduced to reflect the participation interest
sold. TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding Corp., a wholly-owned special purpose
subsidiary of the Company) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds, and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For each policy year, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of services in the period in which such
determination is made.
Medical Insurance Program -The Company is self-insured for the majority of its
medical benefit programs. The Company remains insured for a portion of its
medical program (primarily HMOs) as well as the entire dental program. The
Company provides the self-insured medical benefits through an arrangement with a
third party administrator. However, the liability for the self-insured benefits
is limited by the purchase of stop loss insurance. The contributed and withheld
funds and related liabilities for the self-insured program together with unpaid
premiums for the insured programs are held in a 501(c)9 employee welfare benefit
trust. These amounts, other than the current provisions, do not appear on the
balance sheet of the Company. In order to establish the self-insurance reserves,
the Company utilized actuarial estimates of expected losses based on statistical
analyses of historical data. The provision for future payments is initially
adjusted by the enrollment levels in the various plans. Periodically, the
resulting liabilities are monitored and will be adjusted as warranted by
changing circumstances. Should the amount of claims occurring exceed what was
estimated or medical costs increase beyond what was expected, liabilities might
not be sufficient, and additional expense may be recorded by the Company.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Three Months Ended
------------------
January 27, January 28,
2008 2007
----------- -----------
Net Sales:
----------
Staffing Services
Staffing $468,571 $455,095
Managed Services 296,545 294,499
----------- -----------
Total Gross Sales 765,116 749,594
Less: Non-Recourse Managed Services (283,312) (282,645)
----------- -----------
Net Staffing Services 481,804 466,949
Telephone Directory 14,668 17,643
Telecommunications Services 47,203 21,381
Computer Systems 50,783 46,532
Elimination of intersegment sales (3,965) (3,706)
----------- -----------
Total Net Sales $590,493 $548,799
=========== ===========
Gross Profit (Loss):
--------------------
Staffing Services $73,915 $71,435
Telephone Directory 6,436 8,031
Telecommunications Services (4,166) 4,771
Computer Systems 26,118 24,744
----------- -----------
Total Gross Profit 102,303 108,981
----------- -----------
Overhead:
---------
Staffing Services 68,446 66,087
Telephone Directory 5,774 5,879
Telecommunications Services 14,999 5,448
Computer Systems 22,866 19,050
----------- -----------
Total Overhead 112,085 96,464
----------- -----------
Segment Operating Profit (Loss):
--------------------------------
Staffing Services 5,469 5,348
Telephone Directory 662 2,152
Telecommunications Services (19,165) (677)
Computer Systems 3,252 5,694
----------- -----------
Total Segment Operating (Loss) Profit (9,782) 12,517
General corporate expenses (8,904) (10,283)
----------- -----------
Total Operating (Loss) Profit (18,686) 2,234
Interest income and other (expense), net (405) (319)
Foreign exchange loss, net (309) (87)
Interest expense (1,622) (628)
----------- -----------
(Loss) Income Before Minority Interest and Income Taxes ($21,022) $1,200
=========== ===========
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
EXECUTIVE OVERVIEW
------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions provides a full spectrum of managed staffing,
temporary/contract personnel employment, and workforce solutions.
This functional area is comprised of the Technical Placement
("Technical") division and the Administrative and Industrial
("A&I") division. The employees and contractors on assignment are
usually on the payroll of the Company for the length of their
assignment, but this functional area also uses employees and
subcontractors from other staffing providers ("associate
vendors") when necessary. This functional area also provides
direct placement services and, upon requests from customers, will
allow the customer to convert the temporary employees to
permanent customer positions. In addition, the Company's
Recruitment Process Outsourcing ("RPO") services deliver
end-to-end hiring solutions to customers. The Technical division
provides skilled employees, such as computer and other IT
specialties, engineering, design, scientific and technical
support. The A&I division provides administrative, clerical,
office automation, accounting and financial, call center and
light industrial personnel. Employee assignments in the Technical
division assignments usually last from weeks to months, while in
the A&I division the assignments are generally shorter.
o E-Procurement Solutions provides global vendor neutral human
capital acquisition and management solutions by combining
web-based tools and business process outsourcing services. The
employees and contractors on assignment are usually from
associate vendor firms, although at times, Volt recruited
contractors may be selected to fill some assignments, but in
those cases Volt competes on an equal basis with other
unaffiliated firms. The skill sets utilized in this functional
area closely match those of the Technical assignments within the
Staffing Solutions area. The Company receives a fee for managing
the process, and the revenue for such services is recognized net
of its associated costs. This functional area, which is part of
the Technical division, is comprised of the ProcureStaff
operation.
o Information Technology Solutions provides a wide range of
services including consulting, outsourcing and turnkey project
management in the product development lifecycle, IT and customer
contact markets. Offerings include electronic game testing,
hardware and software testing, technical communications,
technical call center support, data center management, enterprise
technology implementation and integration and corporate help desk
services. This functional area offers higher margin
project-oriented services to its customers and assumes greater
responsibility for the finished product in contrast to the other
areas within the segment. This functional area, which is part of
the Technical division, is comprised of the VMC Consulting
operation.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
EXECUTIVE OVERVIEW--Continued
------------------
Telephone Directory: This segment publishes independent telephone
directories and provides telephone directory production services, database
management and printing. Most of the revenues of this segment are derived
from the sales of telephone directory advertising for the books it
publishes. This segment is comprised of the DataNational directory
publishing operation, the Uruguay directory publishing and printing
operations, and other domestic directory production locations.
Telecommunications Services: This segment provides a full spectrum of
voice, data and video turnkey solutions for government and private sectors,
encompassing engineering, construction, installation and maintenance
services. These services include outside plant engineering and
construction, central office network solutions, integrated technologies,
global solutions (structured cabling, field dispatch, installation and
repair, security access control and maintenance), government solutions and
wireless solutions. This segment is comprised of the Construction and
Engineering division and the Network Enterprise Solutions division.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry and provides IT
maintenance services. The segment also sells information service systems to
its customers and, in addition, provides an Application Service Provider
("ASP") model which also provides information services, including
infrastructure and database content, on a transactional fee basis. It also
provides third-party IT and data services to others. This segment is
comprised of Volt Delta Resources, Volt Delta International, LSSiData and
the Maintech computer maintenance division.
The Company's operating segments have been determined in accordance with the
Company's internal management structure, which is based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment operating profit. The Company defines
operating (loss) profit, a non-GAAP measure, as total net sales less cost of
sales (direct costs and overhead). In computing operating (loss) profit, none of
the following items have been added or deducted: general corporate expense;
interest expense; fees related to sales of accounts receivable; interest income
and income taxes. Operating profit provides management, investors and equity
analysts a measure to analyze operating performance of each business segment
against historical and competitors' data, although historical results, including
operating profit, may not be indicative of future results, as operating profit
is highly contingent on many factors, including the state of the economy and
customer preferences.
General corporate expenses, a non-GAAP measure, consist of the Company's shared
service centers, and include, among other items, enterprise resource planning,
human resources, corporate accounting and finance, treasury, legal and executive
functions. In order to leverage the Company's infrastructure, these functions
are operated under a centralized management platform, providing support services
throughout the organization. The costs of these functions are included within
general corporate expenses as they are not directly allocable to a specific
category.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales and operating profit are always
lowest in the Company's first fiscal quarter due to the Thanksgiving, Christmas
and New Year holidays, as well as certain customer facilities closing for one to
two weeks. During the third and fourth quarters of the fiscal year, this segment
benefits from a reduction of payroll taxes when the annual tax contributions for
higher salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
EXECUTIVE OVERVIEW--Continued
------------------
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
In the first quarter of fiscal 2008, the Company's consolidated net sales
totaled $590.5 million and it sustained a consolidated segment operating loss
totaling $9.8 million. The explanations by segment are detailed below.
The sales of the Staffing Services segment, in addition to the factors noted
above, were positively impacted by a continued increase in the use of contingent
staffing in the Technical Placement division, as net sales increased by $14.9
million. Despite the sales increase, operating profit of the segment for the
current quarter was only $0.1 million higher than in the comparable quarter of
fiscal 2007 as gross margins and overhead costs as a percentage of sales
remained the same.
The Telephone Directory segment's sales decreased by $2.9 million and the
operating profit decreased by $1.5 million in the current fiscal quarter from
the comparable quarter of fiscal 2007. The decrease in operating profit was
predominantly due to the sales decrease and a decrease in gross margin
percentages due to the mix of telephone directories delivered in the quarter.
The Telecommunications Services segment sales increased by $25.8 million,
however, operating loss increased by $18.5 million from the comparable quarter
in fiscal 2007. In late January 2008, the Company learned that it may not be
reimbursed for certain costs under an installation contract and the Company has
revalued its reserves to include this uncertainty. The increase in operating
loss was due to the establishment of a $19.3 million reserve for certain costs
included in inventory related to work performed and for additional costs
expected to be incurred to complete that work under that installation contract.
The Computer Systems segment's sales increased by $4.3 million while its
operating profits decreased by $2.4 million from the comparable quarter of
fiscal 2007. The decrease in operating profit was due to the increased overhead
cost as a result of the acquisition of LSSi, which included $1.5 million of
severance costs and increased amortization of intangible costs related to the
acquisition.
The Company has focused, and will continue to focus, on aggressively increasing
its market share while attempting to maintain margins in order to increase
profits. Despite an increase in costs to solidify and expand their presence in
their respective markets, the segments have emphasized cost containment
measures, along with improved credit and collections procedures designed to
improve the Company's cash flow.
RESULTS OF OPERATIONS
---------------------
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results which
may be expected for any subsequent period. The following discussion should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
which appear in Item 1 of this Report.
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the first fiscal quarter of fiscal 2008, consolidated net sales increased by
$41.7 million, or 8%, to $590.5 million, from the comparable quarter of fiscal
2007. The increase in the current quarter's net sales resulted from increases in
Staffing Services of $14.9 million, Telecommunications Services of $25.8 million
and Computer Systems of $4.3 million, partially offset by a decrease in
Telephone Directory of $2.9 million.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
RESULTS OF OPERATIONS - SUMMARY--Continued
-------------------------------
Cost of sales increased to $572.7 million, or 97% of sales, in the first quarter
of fiscal 2008 from $513.1 million, or 93%, of sales in the comparable quarter
of fiscal 2007. In late January 2008, the Company learned that it may not be
reimbursed for certain costs under an installation contract in the
Telecommunications Services segment and the Company has revalued its reserves to
include this uncertainty. The increase in cost of sales as a percentage of sales
is primarily due to the $19.3 million loss reserve established in the first
quarter of fiscal 2008 for certain costs included in inventory related to work
performed and for additional costs expected to be incurred to complete that work
under that contract. Excluding this reserve, cost of sales would have been
$553.4 million, or 94% of sales, which is comparable to the prior period.
The Company reported an operating loss of $18.7 million in the current quarter,
as compared to an operating profit of $2.2 million in the comparable quarter of
fiscal 2007 due to a decrease in segment operating profit of $22.3 million, or
178%, partially offset by a decrease in general corporate expenses of $1.4
million, or 13%. The segment operating loss of $9.8 million was attributable to
the decreased operating profits of the Telecommunications Services segment of
$18.5 million, the Computer Systems segment of $2.4 million, the Telephone
Directory segment of $1.5 million, partially offset by an increase in the
Staffing Services segment of $0.1 million.
The Company's pre-tax loss before minority interest for the current quarter was
$21.0 million compared to an income of $1.2 million in the comparable quarter of
fiscal 2007.
The net loss in the current quarter of fiscal 2008 was $13.2 million compared to
a net income of $0.7 million in the comparable quarter of fiscal 2007.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Three Months Ended
------------------
January 27, 2008 January 28, 2007
----------------------- ------------------------
Staffing Services % of % of Favorable Favorable
----------------- Net Net (Unfavorable) (Unfavorable
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------ ---------- ------------ ----------- --------------- --------------
----------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $468.6 $455.1 $13.5 3.0%
----------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $296.5 $294.5 $2.0 0.7%
----------------------------------------------------------------------------------------------------------------
Sales (Net) * $481.8 $466.9 $14.9 3.2%
----------------------------------------------------------------------------------------------------------------
Gross Profit $73.9 15.3% $71.4 15.3% $2.5 3.5%
----------------------------------------------------------------------------------------------------------------
Overhead $68.5 14.2% $66.1 14.2% ($2.4) (3.6%)
----------------------------------------------------------------------------------------------------------------
Operating Profit $5.4 1.1% $5.3 1.1% $0.1 1.9%
----------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The increase in net sales of the Staffing Services segment in the first quarter
of fiscal 2008 from the comparable quarter in fiscal 2007 was comprised of a
$15.9 million, or 5%, increase in net Technical sales, partially offset by a
decrease of $1.0 million, or 1%, in net A&I sales. Foreign generated net sales
for the current quarter
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
STAFFING SERVICES--Continued
-----------------
increased by 47% from the comparable 2007 fiscal quarter, and accounted for 7%
of total net Staffing Services sales for the current quarter. On a constant
currency basis, foreign sales increased by 40% from the comparable 2007 fiscal
quarter.
The slight increase in operating profit was comprised of an increase of $2.7
million in the A&I division, with a decrease of $2.6 million in the Technical
division. The gross margin percentage and overhead percentage approximated the
comparable 2007 fiscal quarter's percentages. In the current quarter, permanent
placement and RPO sales represented 2% of the segment's net sales compared to 1%
in the comparable quarter of fiscal 2007.
Three Months Ended
------------------
January 27, 2008 January 28, 2007
---------------- ----------------
Technical Placement
Division % of % of Favorable Favorable
-------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
----------------------------------------------------------------------------------------------
Sales (Gross) $604.5 $587.9 $16.6 2.8%
----------------------------------------------------------------------------------------------
Sales (Net) $328.0 $312.1 $15.9 5.1%
----------------------------------------------------------------------------------------------
Gross Profit $49.6 15.1% $47.9 15.4% $1.7 3.6%
----------------------------------------------------------------------------------------------
Overhead $44.9 13.7% $40.6 13.1% ($4.3) (10.6%)
----------------------------------------------------------------------------------------------
Operating Profit $4.7 1.4% $7.3 2.3% ($2.6) (35.3%)
----------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The Technical division's increase in gross sales in the current quarter of
fiscal 2008 from the comparable prior year quarter included increases of
approximately $12 million of sales to new customers, or customers with
substantial increased business, as well as $14 million attributable to net
increases in sales to continuing customers. This was partially offset by sales
decreases of approximately $9 million from customers whose business with the
Company either ceased or was substantially lower than in the comparable quarter
of fiscal 2007. The Technical Placement division's increase in net sales in the
first quarter of fiscal 2008 from the comparable quarter in fiscal 2007 was
comprised of increases of $11.3 million, or 4%, in traditional alternative
staffing, $2.7 million, or 9%, in VMC Consulting project management and
consulting sales, and $1.9 million, or 19%, in net managed service associate
vendor sales.
The decrease in the operating profit was the result of the decrease in gross
margin percentage and the increase in overhead in dollars and as a percentage of
net sales, partially offset by the increase in sales. The decrease in gross
margin was primarily due to the decrease in the gross margins in VMC Consulting
due to losses on two projects. The increase in overhead in the current fiscal
quarter was a result of increased indirect labor at VMC and the European
operation, startup costs in the current quarter at VMC for a few new projects,
and a gain on the settlement of a vendor dispute in the comparable 2007 quarter,
partially offset by a reduction in the current quarter of $0.8 million in health
insurance costs due to improved claims experience. The increase in indirect
labor costs of 11% from the comparable fiscal quarter, was primarily related to
new projects within VMC and the sales growth in Europe.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
STAFFING SERVICES--Continued
-----------------
Three Months Ended
------------------
January 27, 2008 January 28, 2007
------------------ ------------------
Administrative &
Industrial Division % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-------------------------------------------------------------------------------------------
Sales (Gross) $160.6 $161.7 ($1.1) (0.7%)
-------------------------------------------------------------------------------------------
Sales (Net) $153.8 $154.8 ($1.0) (0.7%)
-------------------------------------------------------------------------------------------
Gross Profit $24.3 15.8% $23.5 15.2% $0.8 3.3%
-------------------------------------------------------------------------------------------
Overhead $23.6 15.3% $25.5 16.5% $1.9 7.6%
-------------------------------------------------------------------------------------------
Operating Profit (Loss) $0.7 0.5% ($2.0) (1.3%) $2.7 138.2%
-------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The A&I division's decrease in gross sales in the current quarter of fiscal 2008
from the comparable quarter of fiscal 2007 included a decline of approximately
$5 million of sales to customers which the Company either ceased or
substantially reduced servicing in the current year, as well as $7 million
attributable to net decreases in sales to continuing customers. This was
partially offset by growth of $11 million from new customers, or customers whose
business with the Company in the comparable fiscal quarter was substantially
below the current quarter's volume.
The improved operating results were the result of the increased gross margin
percentage and the decrease in overhead in dollars and as a percentage of sales,
partially offset by the decrease in sales. The increase in gross margin
percentage was primarily due to a 0.4 percentage point reduction in payroll
taxes. This reduction in two of A&I's more significant states is expected to
continue throughout the remainder of the fiscal year. The decrease in overhead
costs from the comparable quarter in fiscal 2007 primarily resulted from the
closure of eight underperforming branches, and the related reduction in indirect
labor headcount by 8%. The division is focused on reducing overhead costs to
compensate for lower sales. In each of the past three quarters, the overhead
costs have been lower than the comparable prior fiscal year quarters.
Although the markets for the segment's services include a broad range of
industries throughout the United States, Europe and Asia, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could in the future affect the profitability of the segment. Much of the
segment's business is obtained through submission of competitive proposals for
staffing services and other contracts which are frequently re-bid after
expiration. Many of this segment's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the segment
is not in default under the contract, and generally do not provide for a minimum
amount of work to be awarded to the segment. While the Company has historically
secured new contracts and believes it can secure renewals and/or extensions of
most of these contracts, some of which are material to this segment, and obtain
new business, there can be no assurance that contracts will be renewed or
extended, or that additional or replacement contracts will be awarded to the
Company on satisfactory terms.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
TELEPHONE DIRECTORY
-------------------
Three Months Ended
------------------
January 27, 2008 January 28, 2007
---------------- ----------------
Telephone Directory % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------
Sales (Net) $14.7 $17.6 ($2.9) (16.9%)
------------------------------------------------------------------------------------------------
Gross Profit $6.4 43.9% $8.0 45.5% ($1.6) (19.9%)
------------------------------------------------------------------------------------------------
Overhead $5.7 39.4% $5.8 33.3% $0.1 1.8%
------------------------------------------------------------------------------------------------
Operating Profit $0.7 4.5% $2.2 12.2% ($1.5) (69.2%)
------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's sales decrease for the first
quarter of fiscal 2008 from the comparable quarter of fiscal 2007 were decreases
of $1.2 million in the printing and telephone directory publishing operation in
Uruguay, $1.3 million in the DataNational community telephone directory
publishing sales, and $0.4 million in telephone production and other sales. The
sales decrease in Uruguay was comprised of $1.7 million in publishing sales,
partially offset by an increase of $0.5 million in printing sales. The sales
decrease in the telephone directory publishing operation in Uruguay was due to
the timing of the delivery of their directories. The increase in printing sales
in Uruguay was primarily related to a new customer for the operation. The
DataNational sales decrease was comprised of a $0.8 million reduction related to
the timing of the delivery of their directories, $0.3 million from a 4% decrease
in same book sales and $0.2 million from net discontinued books. The current
quarter included the addition of 4 small directories and the discontinuance of 3
small directories as compared to the comparable 2007 quarter. The sales decrease
in production and other sales was related to volume decreases at continuing
customers.
The decrease in the segment's operating profit from the comparable fiscal
quarter of 2007 was the result of the sales decrease and a reduction in the
gross margin percentage. The decreased gross margin is primarily related to the
reduction in Uruguay of higher margin directory revenue and an increase in the
less profitable printing sales, as compared to the comparable 2007 quarter,
partially offset by higher margin jobs in the first fiscal quarter of 2008
within the telephone directory production operation.
Other than the DataNational division and the telephone directory publishing
operation in Uruguay, which accounted for 45% of the segment's sales in the
first quarter of fiscal 2008, the segment's business is obtained through
submission of competitive proposals for production and other contracts. These
short and long-term contracts are re-bid after expiration. Many of this
segment's long-term contracts contain cancellation provisions under which the
customer can cancel the contract, even if the segment is not in default under
the contract and generally do not provide for a minimum amount of work to be
awarded to the segment. While the Company has historically secured new contracts
and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue from DataNational's directories, which
could be affected by general economic conditions.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Three Months Ended
------------------
January 27, 2008 January 28, 2007
---------------- ----------------
Telecommunications
Services % of % of Favorable Favorable
-------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-------------------------------------------------------------------------------------------
Sales (Net) $47.2 $21.4 $25.8 120.8%
-------------------------------------------------------------------------------------------
Gross Profit ($4.2) (8.8%) $4.8 22.3% ($9.0) (187.3%)
-------------------------------------------------------------------------------------------
Overhead $15.0 31.8% $5.5 25.5% ($9.5) (175.3%)
-------------------------------------------------------------------------------------------
Operating Loss ($19.2) (40.6%) ($0.7) (3.2%) ($18.5) (2,730.9%)
-------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the first quarter of
fiscal 2008 from the comparable quarter of fiscal 2007 was comprised of an
increase of $26.7 million, or 236%, in the Construction and Engineering
division, partially offset by a decrease of $0.9 million, or 9%, in the Network
Enterprise Solutions division. The sales increase in the Construction and
Engineering division in the current quarter was largely due to a large fiber
optic contract which ramped up in the latter half of fiscal 2007 and the
recognition of revenue for two large government contracts accounted for using
the percentage-of-completion method of accounting. The segment's sales backlog
at the end of the first quarter of fiscal 2008 was $69 million, as compared to a
backlog of approximately $76 million at the end of the comparable 2007 quarter.
In late January 2008, the Company learned that it may not be reimbursed for
certain costs under an installation contract and the Company has revalued its
reserves to include this uncertainty. The increase in the operating loss was
primarily the result of the establishment of a $19.3 million loss reserve
established in the first quarter of fiscal 2008 for certain costs included in
inventory related to work performed and for additional costs expected to be
incurred to complete that work under that contract. In addition, the gross
margins of other jobs completed this year were lower than projects completed in
the comparable 2007 fiscal quarter.
The results of the segment continue to be affected by the decline in capital
spending by telephone companies caused by the consolidation within the segment's
telecommunications industry fixed-line customer base and an increasing shift by
consumers to wireless communications and alternatives. This factor has also
increased competition for available work, pressuring pricing and gross margins
throughout the segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurances that contracts will be renewed or extended or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
COMPUTER SYSTEMS
----------------
Three Months Ended
------------------
January 27, 2008 January 28, 2007
---------------- ----------------
Computer Systems % of % of Favorable Favorable
---------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------
Sales (Net) $50.8 $46.5 $4.3 9.1%
---------------------------------------------------------------------------------------
Gross Profit $27.2 53.3% $24.7 53.2% $2.5 9.7%
---------------------------------------------------------------------------------------
Overhead $22.4 44.3% $19.0 41.0% ($3.4) (18.4%)
---------------------------------------------------------------------------------------
Restructuring $1.5 2.6% - - ($1.5) -
---------------------------------------------------------------------------------------
Operating Profit $3.3 6.4% $5.7 12.2% ($2.4) (42.9%)
---------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the first quarter of fiscal
2008 from the comparable quarter of fiscal 2007 was comprised of increases of
$5.3 million, or 39%, in database access transaction fee revenue, including ASP
directory assistance, $2.6 million, or 19%, in the Maintech division's IT
maintenance, partially offset by a decrease of $3.6 million, or 19%, in projects
and other income. The increase in transaction fee revenue for the current
quarter included $6.2 million from the new LSSi operations (enterprise data
transactions) acquired in September 2007. The remaining telco transaction fee
revenue which decreased from new and existing customers by $0.9 million, or 6%,
from the comparable quarter was due to a transaction volume decrease of 2%, and
selected unit price decreases. The increase in Maintech sales included new
customers with $1.0 million in sales for the current quarter. The decrease in
project and other revenue was due to the completion of a few large projects in
Europe in the first quarter of fiscal 2007.
The decreased operating profit was due to the increase in overhead in dollars
and as a percentage of sales and the restructuring charge, partially offset by
the increase in sales and the slight increase in gross margin percentage. The
increased gross profit percentage was a result of the increased database access
fees from newly acquired LSSi, partially offset by the reduction in project
margins in Europe. The increased overhead cost is primarily due to the inclusion
of the LSSi operation (including the related intangible amortization costs) and
the restructuring charge is a result of the foreign and domestic personnel
downsizing as a result of the acquisition.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services, its continued ability to sell products and
services to new and existing customers and consumer demands for its customers'
services.
GENERAL CORPORATE EXPENSES
--------------------------
General corporate expenses decreased by $1.4 million, or 13%, to $8.9 million in
the first quarter of fiscal 2008. This decrease was primarily due to a reduction
in amortization of the Corporate enterprise resource planning system software
and decreased communication costs.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JANUARY 28, 2007--Continued
RESULTS OF OPERATIONS--OTHER
----------------------------
Three Months Ended
------------------
January 27, 2008 January 28, 2007
---------------- ----------------
Other % of % of Favorable Favorable
----- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
----------------------------------------------------------------------------------------------
Selling & Administrative $25.1 4.2% $23.9 4.4% ($1.2) (5.0%)
----------------------------------------------------------------------------------------------
Depreciation & Amortization $9.9 1.7% $9.6 1.7% ($0.3) (2.7%)
----------------------------------------------------------------------------------------------
Restructuring $1.5 0.3% - - ($1.5) -
----------------------------------------------------------------------------------------------
Interest Income $1.3 0.2% $1.2 0.2% $0.1 7.3%
----------------------------------------------------------------------------------------------
Other Expense ($1.7) (0.3%) ($1.5) (0.3%) ($0.2) (11.4%)
----------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.3) (0.1%) ($0.1) - ($0.2) (255.2%)
----------------------------------------------------------------------------------------------
Interest Expense ($1.6) (0.3%) ($0.6) (0.1%) ($1.0) (158.3%)
----------------------------------------------------------------------------------------------
The changes in other items affecting the results of operations for the first
quarter of fiscal 2008 as compared to the comparable 2007 quarter, discussed on
a consolidated basis, were:
The increase in selling and administrative expenses in the current quarter from
the comparable 2007 fiscal quarter was primarily the result of increased
salaries, professional fees and provision for bad debts, partially offset by
reduced communication costs.
The increase in depreciation and amortization in the current quarter from the
comparable 2007 fiscal quarter was attributable to increases in amortization of
intangibles in the Computer Systems segment due to acquisitions in fiscal 2007,
partially offset by a reduction in amortization of the Corporate enterprise
resource planning system software.
Interest income increased due to interest earned on premium deposits held by
insurance companies, partially offset by reduced cash equivalents invested.
The increase in other expense was primarily due to an increase in securitization
fees from an additional amount of accounts receivable sold under the Company's
Securitization Program.
Interest expense increased due to additional borrowings used to fund
acquisitions.
The Company's effective tax benefit rate on its financial reporting pre-tax loss
was 37.1% in the first quarter of fiscal 2008 compared to an effective tax
provision rate of 39.4% on its financial reporting pre-tax income in the
comparable quarter in fiscal 2007. The decrease in the effective rate was
principally due to the limitation on the use of foreign tax credits.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, increased by $3.7 million to $44.1 million in the
three months ended January 27, 2008.
Operating activities provided $16.0 million of cash in the first three months of
fiscal 2008. In the comparable fiscal 2007 period, operating activities provided
$9.2 million in cash.
Operating activities in the first three months of fiscal 2008, exclusive of
changes in operating assets and liabilities, used $5.6 million of cash, as the
Company's net loss of $13.2 million included non-cash charges primarily for
depreciation and amortization of $9.9 million, accounts receivable provisions of
$5.7 million and a deferred tax benefit of $8.1 million. Operating activities in
the first three months of fiscal 2007, exclusive of changes in operating assets
and liabilities, produced $10.6 million of cash, as the Company's net income of
$0.7 million included non-cash charges primarily for depreciation and
amortization of $9.6 million, accounts receivable provisions of $1.1 million and
a deferred tax benefit of $0.6 million.
Changes in operating assets and liabilities produced $21.6 million of cash, net,
in the first three months of fiscal 2008 principally due to a decrease in the
level of accounts receivable of $38.2 million and a decrease in the level of
inventory, primarily in the Telecommunications Services segment, of $19.5
million offset by a reduction in securitization of receivables of $20.0 million
and a decrease in accounts payable of $17.5 million. Changes in operating assets
and liabilities used $1.4 million of cash, net, in the first three months of
fiscal 2007 principally due to a reduction in securitization of receivables of
$50.0 million substantially offset by a decrease in the level of accounts
receivable of $31.0 million and an increase in deferred income and other
liabilities of $17.0 million.
The $7.2 million of cash applied to investing activities for the first three
months of fiscal 2008 resulted primarily from the expenditures of $7.2 million
for net additions to property, plant and equipment. The $7.0 million of cash
applied to investing activities for the first three months of fiscal 2007
resulted from the expenditures of $6.8 million for net additions to property,
plant and equipment and $0.2 million for acquisitions.
The principal factors in the $6.4 million of cash used by financing activities
in the first three months of fiscal 2008 were a payment of $8.1 million for the
purchase of treasury shares partially offset by an increase in notes payable of
$1.8 million. The principal factors in the $31.2 million of cash provided by
financing activities in the first three months of fiscal 2007 were an increase
in notes payable of $38.8 million and cash provided from exercises of stock
options totaling $0.3 million partially offset by a payment of $8.0 million for
the purchase of treasury shares.
Commitments
-----------
There has been no material change through January 27, 2008 in the Company's
contractual obligations and other commercial commitments from that reported in
the Company's Annual Report on Form 10-K for the fiscal year ended October 28,
2007.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Off-Balance Sheet Financing
---------------------------
The Company has no off-balance sheet financing arrangements, as that term has
meaning in Item 303(a) (4) of Regulation S-K.
Securitization Program
----------------------
The Company has a $200.0 million accounts receivable securitization program
("Securitization Program"), which expires in April 2009. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $200.0 million). The
Company retains the servicing responsibility for the accounts receivable. At
January 27, 2008, TRFCO had purchased from Volt Funding a participation interest
of $100.0 million out of a pool of approximately $239.9 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100%-owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company beyond its interest in the pool of receivables owned by Volt
Funding.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 156, "Accounting for Transfers and Servicing of Financial Assets
and an amendment of SFAS No. 140." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At
January 27, 2008, the Company was in compliance with all requirements of its
Securitization Program.
Credit Lines
------------
At January 27, 2008, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit of up to an aggregate
of $148.9 million, including the Company's $40.0 million secured, syndicated
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $100.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility") The Company had
total outstanding bank borrowings of $86.0 million. Included in these borrowings
were $16.4 million of foreign currency borrowings of which $13.6 million provide
economic hedges against devaluation in foreign denominated assets.
Credit Agreement
----------------
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. At January 27, 2008, the Company had
no outstanding borrowings against this facility. The administrative agent for
the Credit Facility is JPMorgan Chase Bank, N.A. The other banks participating
in the Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB
Bank PLC and Bank of America, N.A.
Borrowings under the Credit Agreement are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided by a
nationally recognized rating agency. The Credit Agreement requires the
maintenance of specified accounts receivable collateral in excess of any
outstanding borrowings. Based upon the Company's leverage ratio and debt rating
at January 27, 2008, if a three-month U.S. Dollar LIBO rate were the interest
rate option selected by the Company, borrowings would have borne interest at the
rate of 4.1% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. The Company was not in compliance with one covenant at January 27,
2008. A waiver of this covenant was not required as the Credit Agreement, which
was due to expire in April 2008, was cancelled and replaced with a new $42.0
million five-year unsecured revolving facility on February 28, 2008.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made under
the Credit Agreement to any other subsidiary borrower. Five subsidiaries of the
Company are guarantors of all loans made to the Company or to subsidiary
borrowers under the Credit Facility. At January 27, 2008, four of those
guarantors had pledged approximately $42.0 million of accounts receivable, other
than those in the Securitization Program, as collateral for the guarantee
obligations. Under certain circumstances, other subsidiaries of the Company also
may be required to become guarantors under the Credit Facility.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the Delta Credit Facility, which
expires in December 2009, with Wells Fargo, N.A. as the administrative agent and
arranger, and as a lender thereunder. Wells Fargo and the other three lenders
under the Delta Credit Facility, Lloyds TSB Bank Plc., Bank of America, N.A. and
JPMorgan Chase also participate in the Company's $40.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At January 27, 2008, $79.5 million was drawn
on this facility, the majority of which was used to finance the acquisition of
LSSi. Certain rate options, as well as the commitment fee, are based on a
leverage ratio, as defined, which resets on a quarterly basis. Based upon Volt
Delta's leverage ratio at January 27, 2008, if a three-month U.S. Dollar LIBO
rate were the interest rate option selected by the Company, borrowings would
have borne interest at the rate of 5.0% per annum. Volt Delta also pays a
commitment fee on the unused portion of the Delta Credit Facility which varies
based on Volt Delta's leverage ratio. At January 27, 2008, the commitment fee
was 0.3% per annum.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.5 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At January 27, 2008, Volt Delta was in compliance with all covenants in the
Delta Credit Facility.
Summary
-------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through, at least, the next twelve
months.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2008
------------------------------------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within that fiscal year. The Company is
currently evaluating the impact of adopting this statement.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FAS 115".
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, including
interim periods within that fiscal year. The Company is currently evaluating the
impact of adopting this statement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB NO. 51" This statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This statement is
effective for financial statements issued for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2008. The Company is
currently evaluating the impact of adopting this statement.
Related Party Transactions
--------------------------
During the first three months of fiscal 2008, the Company paid or accrued $0.2
million to the law firm of which Lloyd Frank, a director, is of counsel, for
services rendered to the Company and expenses reimbursed.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $200 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest expense and securitization costs by $1.2
million, respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $14.0 million
at January 27, 2008. This fair value was calculated by applying the appropriate
fiscal year-end interest rate to the Company's present stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At January 27, 2008, the total market value of these
investments was $5.1 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuates against the dollar, which may impact reported earnings. As
of January 27, 2008, the total of the Company's net investment in foreign
operations was $12.3 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
January 27, 2008, the Company had an outstanding foreign currency option
contract in the nominal amount equivalent to $9.5 million, which approximated
its net investment in foreign operations and is accounted for as a hedge under
SFAS No. 52, "Foreign Currency Translation". The amount of risk and the use of
foreign exchange instruments described above are not material to the Company's
financial position or results of operations and the Company does not use these
instruments for trading or other speculative purposes. Based upon the current
levels of net foreign assets, a hypothetical weakening of the U.S. dollar
against these currencies at January 27, 2008 by 10% would result in a pretax
gain of $1.2 million related to these positions. Similarly, a hypothetical
strengthening of the U.S. dollar against these currencies at January 27, 2008 by
10% would result in a pretax loss of $0.7 million related to these positions.
41
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at January 27,
2008. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The
information is presented in U.S. dollar equivalents, which is the Company's
reporting currency.
Interest Rate Market Risk Payments Due By Period as of January 27, 2008
------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 Year Years Years Years
---------- --------- --------- ------- --------
(Dollars in thousands of US$)
Cash and Cash Equivalents and
-----------------------------
Restricted Cash
---------------
Money Market and Cash Accounts $66,635 $66,635
Weighted Average Interest Rate 3.49% 3.49%
---------- ---------
Total Cash, Cash Equivalents and
Restricted Cash $66,635 $66,635
========== =========
Securitization Program
----------------------
Accounts Receivable Securitization $100,000 $100,000
Finance Rate 6.07% 6.07%
---------- ---------
Securitization Program $100,000 $100,000
========== =========
Debt
----
Term Loan $12,703 $521 $1,179 $1,388 $9,615
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $86,037 $86,037
Weighted Average Interest Rate 5.56% 5.56% - - -
---------- --------- --------- ------- --------
Total Debt $98,740 $86,558 $1,179 $1,388 $9,615
========== ========= ========= ======= ========
42
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Foreign Exchange Market Risk
----------------------------
Contract Values
---------------
Contract Fair Value
Exchange Less than Option
Rate Total 1 Year Premium (1)
--------- -------- --------- ------------
(Dollars in thousands of U.S. $)
Option Contracts
----------------
Canadian $ to U.S.$ 1.05 $9,524 $9,524 $227
-------- --------- ------------
Total Option Contracts $9,524 $9,524 $227
======== ========= ============
(1) Represents the fair value of the foreign contracts at January 27, 2008.
43
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company's management is responsible for maintaining adequate internal
controls over financial reporting and for its assessment of the effectiveness of
internal controls over financial reporting.
The Company carried out an evaluation of the effectiveness of the design and
operation of its "disclosure controls and procedures," as defined in, and
pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of January
27, 2008 under the supervision and with the participation of the Company's
management, including the Company's President and Principal Executive Officer
and its Senior Vice President and Principal Financial Officer. Based on that
evaluation, management concluded that the Company's disclosure controls and
procedures are effective in ensuring that material information relating to the
Company and its subsidiaries is made known to them on a timely basis.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
Legal Contingencies - The Company is subject to certain legal proceedings, as
well as demands, claims and threatened litigation that arise in the normal
course of our business. A quarterly review is performed of each significant
matter to assess any potential financial exposure. If the potential loss from
any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, a liability and an expense are recorded for the estimated
loss. Significant judgment is required in both the determination of probability
and the determination of whether an exposure is reasonably estimable. Any
accruals are based on the best information available at the time. As additional
information becomes available, a reassessment is performed of the potential
liability related to any pending claims and litigation and may revise the
Company's estimates. Potential legal liabilities and the revision of estimates
of potential legal liabilities could have a material impact on the results of
operations and financial position.
44
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
--------------------------------------------------------------------------------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent
Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURE
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.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
Date: March 12, 2008
By: /s/ Jack Egan
---------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
45
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent
Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002