UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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/X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the Nine Months Ended July 27, 2008.
Or
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/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
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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
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(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
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Non-Accelerated Filer Smaller Reporting Company
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Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
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The number of shares of the registrant's common stock, $.10 par value,
outstanding as of September 1, 2008 was 22,001,541.
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) -
Nine Months and Three Months Ended July 27, 2008 and July 29, 2007 3
Condensed Consolidated Balance Sheets -
July 27, 2008 (Unaudited) and October 28, 2007 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended July 27, 2008 and July 29, 2007 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 55
Item 4. Controls and Procedures 58
PART II - OTHER INFORMATION
Item 1A. Risk Factors 58
Item 6. Exhibits 59
SIGNATURE 59
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) Nine Months Ended Three Months Ended
------------------------------------ -----------------------------------
July 27, July 29, July 27, July 29,
2008 2007 2008 2007
---------------- ---------------- ---------------- ---------------
(In thousands, except per share amounts)
NET SALES $ 1,776,694 $ 1,680,193 $ 590,553 $ 590,218
COST AND EXPENSES:
Cost of sales 1,689,719 1,567,350 554,400 548,374
Selling and administrative 66,426 64,522 21,496 21,712
Restructuring costs 1,504 - - -
Depreciation and amortization 29,532 27,838 10,090 9,311
---------------- --------------- --------------- --------------
1,787,181 1,659,710 585,986 579,397
---------------- --------------- --------------- --------------
OPERATING (LOSS) INCOME (10,487) 20,483 4,567 10,821
OTHER INCOME (EXPENSE):
Interest income 3,416 4,410 860 1,822
Other expense, net (3,319) (4,667) (258) (1,707)
Foreign exchange loss, net (806) (758) (452) (305)
Interest expense (5,636) (2,320) (2,453) (831)
---------------- --------------- --------------- --------------
(Loss) income from continuing operations
before minority interest and income taxes (16,832) 17,148 2,264 9,800
Minority interest 2 - (75) -
---------------- --------------- --------------- --------------
(Loss) income from continuing operations
before income taxes (16,830) 17,148 2,189 9,800
Income tax benefit (provision) 6,115 (6,446) (786) (3,543)
---------------- --------------- --------------- --------------
(Loss) income from continuing operations
before items shown below (10,715) 10,702 1,403 6,257
Discontinued operations, net of taxes 4,832 5,535 2,552 2,860
---------------- --------------- --------------- --------------
NET (LOSS) INCOME ($5,883) $ 16,237 $ 3,955 $ 9,117
================ =============== =============== ==============
Per Share Data
--------------
(Loss) income from continuing operations
before items shown below - basic and diluted ($0.49) $ 0.46 $ 0.06 $ 0.27
Discontinued operations - basic and diluted 0.22 0.24 0.12 0.13
---------------- --------------- --------------- --------------
Net (loss) income per share - basic and
diluted ($0.27) $ 0.70 $ 0.18 $ 0.40
================ =============== =============== ==============
Weighted average number of shares - basic 22,098 23,103 22,002 22,968
================ =============== =============== ==============
Weighted average number of shares - diluted 22,098 23,153 22,017 23,018
================ =============== =============== ==============
See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 27, 2008 October 28, 2007
(Unaudited) (Audited)
-------------------- --------------------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $ 43,821 $ 40,343
Restricted cash 28,593 25,482
Short-term investments 4,965 5,624
Trade accounts receivable, net of allowances of $5,575 (2008)
and $3,749 (2007) 500,000 392,970
Inventories, net of allowances of $5,433 (2008) and $4,249
(2007) 40,264 54,414
Assets held for sale 35,065 35,263
Recoverable income taxes 13,096 -
Deferred income taxes 9,597 9,629
Prepaid insurance and other assets 32,133 37,205
-------------------- --------------------
TOTAL CURRENT ASSETS 707,534 600,930
Property, plant and equipment, net 70,560 72,250
Insurance and other assets 4,325 6,604
Deferred income taxes 7,980 8,125
Goodwill 102,670 98,715
Other intangible assets, net 48,404 53,527
-------------------- --------------------
TOTAL ASSETS $ 941,473 $ 840,151
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings, including current portion of long-term
debt $ 217,360 $ 84,621
Accounts payable 206,456 212,355
Liabilities related to assets held for sale 21,862 20,769
Accrued wages and commissions 58,417 62,777
Accrued taxes other than income taxes 22,396 22,276
Accrued insurance and other accruals 30,492 32,582
Deferred income and other liabilities 12,496 17,029
Income taxes payable - 4,822
-------------------- --------------------
TOTAL CURRENT LIABILITIES 569,479 457,231
Long-term debt, excluding current portion 12,250 12,316
Deferred income 2,505 -
Income taxes payable 937 -
Deferred income taxes 17,157 18,025
Minority interest 994 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--23,498,103 shares (2008) and 23,480,103 (2007) 2,350 2,348
Paid-in capital 51,000 50,740
Retained earnings 312,852 319,688
Accumulated other comprehensive income 2,930 2,660
-------------------- --------------------
369,132 375,436
Less treasury stock--1,496,562 shares (2008) and 1,048,966
shares (2007), at cost (30,981) (22,900)
-------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 338,151 352,536
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 941,473 $ 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)
Nine Months Ended
--------------------------------------------
July 27, July 29,
2008 2007
-------------------- --------------------
(In thousands)
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
Net (loss) income ($5,883) $ 16,237
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Discontinued operations (4,832) (5,535)
Depreciation and amortization 29,532 27,838
Accounts receivable provisions 3,087 96
Minority interest (2) -
Loss on dispositions of property, plant and equipment 16 37
Loss on foreign currency translation 78 30
Deferred income tax benefit (3,611) (4,196)
Share-based compensation expense related to employee stock
options 45 44
Excess tax benefits from share-based compensation (12) (110)
Changes in operating assets and liabilities, net of assets
acquired :
Accounts receivable 9,754 (6,392)
Reduction in securitization of accounts receivable (120,000) (20,000)
Inventories 14,151 (16,001)
Prepaid insurance and other current assets 6,920 (2,615)
Insurance and other long-term assets 116 572
Accounts payable (9,371) 7,723
Accrued expenses (6,658) (1,070)
Deferred income and other liabilities (718) 12,638
Income taxes (15,896) (7,156)
------------------- --------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (103,284) 2,140
------------------- --------------------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Nine Months Ended
--------------------------------------------
July 27, July 29,
2008 2007
-------------------- --------------------
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments $ 1,341 $ 6,057
Purchases of investments (1,601) (6,440)
Increase in restricted cash (3,111) (3,436)
Increase in payables related to restricted cash 3,111 3,436
Acquisitions (1,348) (225)
Proceeds from disposals of property, plant and equipment, net 343 236
Purchases of property, plant and equipment (21,541) (20,914)
-------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (22,806) (21,286)
-------------------- --------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Increase in short-term borrowings 132,262 19,606
Payment of long-term debt (410) (349)
Cash in lieu of fractional shares - (18)
Exercises of stock options 166 345
Excess tax benefits from share-based compensation 12 110
Purchase of treasury shares (8,081) (22,979)
-------------------- --------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 123,949 (3,285)
-------------------- --------------------
Effect of exchange rate changes on cash (547) 376
-------------------- --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS (2,688) (22,055)
Change in cash from discontinued operations 6,166 7,839
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,478 (14,216)
Cash and cash equivalents, beginning of period 40,343 38,481
-------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 43,821 $ 24,265
==================== ====================
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $ 5,929 $ 2,199
Income taxes $ 18,031 $ 22,045
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 July 27, 2008 and consolidated
results of operations for the nine and three months ended and consolidated cash
flows for the nine months ended July 27, 2008 and July 29, 2007.
Effective October 29, 2007, the Company adopted the provisions of Financial
Accounting Standards Board ("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.
On July 29, 2008, the Company signed an Asset Purchase Agreement to sell the net
assets of its directory systems and services and North American publishing
operations to Yellow Page Group. The transaction includes the net assets of Volt
Directory Systems and Services and DataNational but excludes the Uruguayan
operations, which combined were historically reported as the Company's Telephone
Directory segment. The transaction closed on September 5, 2008. The net purchase
price of approximately $179 million was paid in cash at closing. In accordance
with Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the results
of operations of Volt Directory Systems and DataNational have been classified as
discontinued, the prior period results have been reclassified and their assets
and liabilities included as separate line items on the Company's July 27, 2008
condensed consolidated balance sheet.
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.
Certain amounts in the third quarter of fiscal 2007 have been reclassified to
conform to the fiscal 2008 presentation.
NOTE B--Securitization Program
On June 3, 2008, the Company's $200.0 million accounts receivable securitization
program (the "Expiring Securitization Program"), which was due to expire within
the next year, was transferred to a multi-buyer program administered by PNC Bank
(see Note D). Prior to that date, under the Expiring Securitization Program,
receivables related to the United States operations of the staffing solutions
business of the Company and its subsidiaries were 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, sold 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 acquired from the
Company (subject to a maximum purchase by TRFCO in the aggregate of $200.0
million). The Company retained the servicing responsibility for the accounts
receivable.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE B--Securitization Program--Continued
The Expiring Securitization Program was not an off-balance sheet arrangement as
Volt Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable were 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 Expiring Securitization Program was designed to enable receivables sold by
the Company to Volt Funding to constitute true sales of those receivables. As a
result, the receivables were 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 had
no recourse to the Company beyond its interest in the pool of receivables owned
by Volt Funding.
The Company accounted 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 was sold, the receivable representing that interest
was removed from the condensed consolidated balance sheet (no debt was recorded)
and the proceeds from the sale were 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,
were charged to the consolidated statement of operations.
The Company incurred charges in connection with the sale of receivables under
the Expiring Securitization Program, of $2.8 million in the nine months ended
July 27, 2008 compared to $3.5 million and $1.3 million in the nine and three
months ended July 29, 2007, which are included in Other Expense in the
consolidated statement of operations. The equivalent cost of funds in the
Expiring Securitization Program was at the rate of 6.2% per annum in the
nine-month 2007 fiscal period.
At October 28, 2007, the Company's carrying retained interest in a revolving
pool of receivables was approximately $143.8 million, net of a service fee
liability, out of a total pool of approximately $264.9 million, respectively.
The outstanding balance of the undivided interest sold to TRFCO was $120.0
million at October 28, 2007. Accordingly, the trade accounts receivable included
on the October 28, 2007 balance sheet were reduced to reflect the participation
interest sold of $120.0 million.
NOTE C--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves, by segment are as follows:
July 27, October 28,
2008 2007
-------------------- --------------------
(In thousands)
Telecommunications Services $ 28,789 $ 43,162
Computer Systems 7,440 7,138
Printing and Other 4,035 4,114
-------------------- -------------------
Total $ 40,264 $ 54,414
==================== ====================
The cumulative amounts billed under service contracts at July 27, 2008 and
October 28, 2007 of $22.1 million and $13.9 million, respectively, are credited
against the related costs in inventory. In addition, inventory reserves at July
27, 2008 and October 28, 2007 of $5.4 million and $4.2 million, respectively,
are credited against the related costs in inventory.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings
At July 27, 2008, the Company had credit facilities with various banks and
financial conduits which provided for borrowings and letters of credit of up to
an aggregate of $357.8 million, including the Company's $200.0 million five-year
accounts receivable securitization program (the "Amended Securitization
Program"), a $42.0 million five-year unsecured 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
short-term borrowings of $216.7 million as of July 27, 2008. Included in these
borrowings were $18.7 million of foreign currency borrowings which provide
economic hedges against foreign denominated net assets.
Amended Securitization Program
On June 3, 2008, the Company's $200.0 million accounts receivable securitization
program (see Note B), which was due to expire within the next year, was
transferred to a multi-buyer program administered by PNC Bank. The Amended
Securitization Program has a five-year term (subject to 364 day liquidity).
Under the Amended 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, borrows from two commercial paper conduits (Market Street
Funding LLC, a PNC Bank affiliate, and Relationship Funding LLC), secured by an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company. The Company retains the servicing responsibility for
the accounts receivable.
The Amended Securitization Program is not an off-balance sheet arrangement as
Volt Funding is a 100% owned consolidated subsidiary of the Company. The
receivables and related borrowings remain on the balance sheet since Volt
Funding effectively retains control over the receivables, which are no longer
treated as sold assets. Accordingly, pledged receivables are included as trade
accounts receivable, net, while the corresponding borrowings are included as
short-term borrowings on the condensed consolidated balance sheet. At July 27,
2008, Volt Funding had borrowed $81.3 million and $48.7 million from Market
Street Funding and Relationship Funding, respectively. At July 27, 2008,
borrowings bear a weighted-average interest rate of 2.94% per annum, excluding a
facility fee of 0.25% per annum paid on the entire facility and a program fee of
0.35% paid on the outstanding borrowings.
The Amended Securitization Program is subject to termination by PNC Bank (with
the consent of the majority purchasers) under certain circumstances, including,
among other things, the default rate, as defined, on receivables exceeding a
specified threshold, or the rate of collections on receivables failing to meet a
specified threshold.
At July 27, 2008, the Company was in compliance with all requirements of the
Amended Securitization Program.
Credit Agreement
On February 28, 2008, the Company entered into the Credit Agreement to replace
the Company's then expiring $40.0 million secured credit agreement with an
unsecured 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 and $25.0 million for borrowing in alternative currencies. At July 27,
2008, the Company had no borrowings against this facility. The administrative
agent for the Credit Facility is Bank of America, N.A. The other banks
participating in the Credit Facility are JP Morgan Chase Bank, N.A. as
syndicated agent, Wells Fargo Bank, N.A.and HSBC Bank USA, N.A.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
Borrowings under the Credit Agreement 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. Based
upon the Company's leverage ratio at July 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 3.8% per annum, excluding a fee of
0.35% 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 total
funded debt to EBITDA of 3.0 to 1.0; and a requirement that the Company maintain
a minimum ratio of EBITDA, as defined, to interest expense, as defined, of 4.0
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 level of annual capital expenditures,
and the amount of investments, including business acquisitions and mergers, and
loans that may be made by the Company to its subsidiaries.
Delta Credit Facility
In December 2006, Volt Delta entered into the secured 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 two of the other
three lenders under the Delta Credit Facility, Bank of America, N.A. and
JPMorgan Chase, also participate in the Company's $42.0 million unsecured
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 July 27, 2008, $77.9 million was drawn on
this facility. Certain interest 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 July 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 3.0% 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 July 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 for the twelve months ended as of the last day of each fiscal quarter
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.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
July 27, October 28,
2008 2007
-------------------- --------------------
(Dollars in thousands)
8.2% term loan (a) $ 12,448 $ 12,826
Note payable for an acquisition (b) 475 -
-------------------- --------------------
12,923 12,826
Less amounts due within one year 673 510
-------------------- --------------------
Total long-term debt $ 12,250 $ 12,316
==================== ====================
(a) 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 $12.4 million at
July 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 July 27, 2008 of $9.9 million. The obligation is
guaranteed by the Company.
(b) Represents the present value of a $0.6 million payment due in sixty monthly
installments, discounted at 5% per annum.
NOTE F--Stockholders' Equity
Changes in the major components of stockholders' equity for the nine months
ended July 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)
Options exercised - 18,000 shares 2 215
Amortization of restricted stock and stock units 21
Compensation expense - stock options 24
Change in fair value of minority interest (953)
Purchase of treasury shares (8,081)
Net loss for the nine months (5,883)
---------- ---------- ---------- ----------
Balance at July 27, 2008 $ 2,350 $ 51,000 $ 312,852 ($30,981)
========== ========== ========== ==========
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Stockholders' Equity - Continued
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, gains of $2.9 million and $2.6 million at July 27,
2008 and October 28, 2007, respectively, and unrealized gains, net of taxes, of
$9,000 and $89,000 in marketable securities at July 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:
Nine Months Ended Three Months Ended
------------------------ ------------------------
July 27, July 29, July 27, July 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(In thousands)
Net (loss) income ($5,883) $ 16,237 $ 3,955 $ 9,117
Change in fair value of minority interest (953) - (120) -
Foreign currency translation adjustments, net 350 979 674 353
Unrealized (loss) gain on marketable
securities, net (80) 13 (10) 7
---------- ---------- ---------- ----------
Comprehensive (loss) income ($6,566) $ 17,229 $ 4,499 $ 9,477
========== ========== ========== ==========
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.
Nine Months Ended Three Months Ended
------------------------ ------------------------
July 27, July 29, July 27, July 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
Denominator for basic earnings per share:
Weighted average number of shares 22,097,901 23,103,167 22,001,541 22,967,583
Effect of dilutive securities:
Employee stock options - 50,312 15,185 50,092
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 22,097,901 23,153,479 22,016,726 23,017,675
========== ========== ========== ==========
Options to purchase 179,886 and 21,300 shares of the Company's common stock were
outstanding at July 27, 2008 and July 29, 2007, respectively, but were not
included in the computation of diluted earnings per share because the effect of
inclusion would have been antidilutive.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures
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. 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.
On September 5, 2008, the Company sold the net assets of its DataNational and
Directory Systems and Services divisions, whose operations for the current and
comparable nine-month periods have been reclassified to Discontinued Operations,
with the remainder of the segment being renamed Printing and Other. The
operations of this segment were part of the Telephone Directory segment until
the current quarter.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value.
Segment operating profit is comprised of segment sales less its overhead,
selling and administrative costs and depreciation, and excludes general
corporate expenses, interest income earned by the Company on excess cash
generated by its segments, interest expended on corporate debt necessary to
finance the segments' operations and capital expenditures, fees related to sales
of interests in accounts receivable, foreign exchange gains and losses and
income taxes.
General corporate expenses 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 segment.
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the nine and three months ended July
27, 2008 and July 29, 2007 are summarized in the table below.
During the nine months ended July 27, 2008, consolidated assets increased by
$101.3 million primarily due to a $120.0 million reduction in a participation
interest in trade accounts receivable sold at October 28, 2007 related to the
Expiring Securitization Program. Borrowings under the Amended Securitization
Program are included in short-term borrowings in the July 27, 2008 balance
sheet. This increase in trade accounts receivable was offset by a $14.4 million
reduction in the Telecommunications Services segment's inventory.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures--Continued
Nine Months Ended Three Months Ended
------------------------ ------------------------
July 27, July 29, July 27, July 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(In thousands)
Net Sales:
Staffing Services
Staffing $1,446,867 $1,433,008 $ 486,525 $ 509,003
Managed Services 947,934 904,644 312,216 275,819
---------- ---------- ---------- ----------
Total Gross Sales 2,394,801 2,337,652 798,741 784,822
Less: Non-Recourse Managed Services (908,273) (868,261) (299,731) (265,729)
---------- ---------- ---------- ----------
Net Staffing Services 1,486,528 1,469,391 499,010 519,093
Telecommunications Services 133,031 76,897 36,588 28,347
Computer Systems 160,710 139,131 57,787 47,413
Printing and Other 9,251 8,256 1,623 557
Elimination of intersegment sales (12,826) (13,482) (4,455) (5,192)
---------- ---------- ---------- ----------
Total Net Sales $1,776,694 $1,680,193 $ 590,553 $ 590,218
========== ========== ========== ==========
Segment Operating Profit (Loss):
Staffing Services $ 23,666 $ 32,515 $ 11,972 $ 13,300
Telecommunications Services (22,335) 649 (5,066) 943
Computer Systems 15,627 17,639 7,017 6,932
Printing and Other (1,793) (1,042) (885) (866)
---------- ---------- ---------- ----------
Total Segment Operating Profit 15,165 49,761 13,038 20,309
General corporate expenses (25,652) (29,278) (8,471) (9,488)
---------- ---------- ---------- ----------
Total Operating (Loss) Profit (10,487) 20,483 4,567 10,821
Interest income and other (expense), net 97 (257) 602 115
Foreign exchange loss, net (806) (758) (452) (305)
Interest expense (5,636) (2,320) (2,453) (831)
---------- ---------- ---------- ----------
(Loss) income from continuing operations before
minority interest and income taxes ($16,832) $ 17,148 $ 2,264 $ 9,800
========== ========== ========== ==========
14
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 July 27, 2008, the Company had an
outstanding foreign currency option contracts 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 July 27, 2008 and October 28, 2007 was $28.6 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 which the Company manages the customers'
alternative staffing requirements, including the payments to associate vendors.
NOTE J--Sale and Acquisitions of Businesses
On July 29, 2008, the Company signed an Asset Purchase Agreement to sell the net
assets of its directory systems and services and North American publishing
operations to Yellow Page Group. The transaction includes the net assets of Volt
Directory Systems and Services and DataNational but excludes the Uruguayan
operations, which combined were historically reported as the Company's Telephone
Directory segment. The transaction closed on September 5, 2008. The net purchase
price of approximately $179 million was paid in cash at closing. In accordance
with SFAS No. 144, the results of operations of Volt Directory Systems and
DataNational, have been classified as discontinued, the prior period results
have been reclassified and their assets and liabilities included as separate
line items on the Company's July 27, 2008 condensed consolidated balance sheet.
The following summarizes the discontinued operations:
Nine Months Ended Three Months Ended
------------------------ ------------------------
July 27, July 29, July 27, July 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(In thousands)
Revenue $ 47,295 $ 51,039 $ 19,786 $ 21,510
========== ========== ========== ==========
Income before taxes $ 8,135 $ 9,316 $ 4,297 $ 4,812
Income tax provision 3,303 3,781 1,745 1,952
---------- ---------- ---------- ----------
Income from operations $ 4,832 $ 5,535 $ 2,552 $ 2,860
========== ========== ========== ==========
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Sale and Acquisitions of Businesses - Continued
Volt Directory Systems and Services and DataNational's assets and liabilities
reclassified in the July 27, 2008 balance sheet include:
July 27, October 28,
2008 2007
----------- ------------
(In thousands)
Cash $ 44 $ 55
Accounts receivable 22,295 24,145
Inventory 7,499 5,536
Deferred taxes and other current assets 2,768 2,722
Property, plant and equipment, net 2,208 2,459
Intangible assets 210 302
Other non-current assets 41 44
----------- ------------
Assets held for sale $ 35,065 $ 35,263
=========== ============
Accounts payable $ 2,677 $ 2,444
Accrued expenses 1,594 1,569
Customer advances and other liabilities 17,591 16,756
----------- ------------
Liabilities related to assets held for sale $ 21,862 $ 20,769
=========== ============
In March 2008, the Company acquired a staffing and consulting services provider
in South America for $1.6 million, which is expected to complement existing
services in the Staffing Services segment.
In September 2007, Volt Delta, the principal business unit of the Computer
Systems segment, acquired LSSi Corp. ("LSSi") for $71.8 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 allows 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 transactions 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 above-mentioned acquisitions 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 respective acquisition dates.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Sale and Acquisitions of Businesses - Continued
The preliminary purchase price allocation of the fair value of assets acquired
and liabilities assumed of LSSi is as follows:
(In thousands)
Cash $ 679
Accounts receivable 5,836
Prepaid expenses and other assets 469
Property, plant and equipment 1,800
Goodwill 49,959
Intangible assets 25,860
-----------
Total Assets 84,603
-----------
Accounts payable (1,119)
Other accrued expenses (3,912)
Other liabilities (144)
Deferred income tax (7,595)
-----------
Total Liabilities (12,770)
-----------
Purchase price $ 71,833
===========
In September 2007, the Company purchased for $1.5 million an 80% interest in an
outsourcing and services provider that complements 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 $1.0 million as of July
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
Nine Months Ended Three Months Ended
July 29, 2007 July 29, 2007
----------- ------------
(In thousands, except per share amounts)
Net Sales $1,701,713 $ 597,367
=========== ============
Operating profit $ 24,120 $ 11,853
=========== ============
Income from continuing operations $ 15,163 $ 6,593
Discontinued operations, net of taxes 5,535 2,860
----------- ------------
Net income $ 20,698 $ 9,453
=========== ============
Earnings per share - Basic and Diluted
Income from continuing operations $ 0.66 $ 0.29
Discontinued operations, net of taxes 0.24 0.12
----------- ------------
Net income $ 0.90 $ 0.41
=========== ============
17
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. The fiscal 2008 second quarter testing did not result in any
impairment. The Company performed a sensitivity analysis on its annual goodwill
impairment test by changing the sales and EBITDA factors used in its impairment
analysis by 10% and noted no indicators of impairment.
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:
July 27, 2008 October 28, 2007
---------------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- --------------- --------------- ---------------
(In thousands)
Customer relationships $ 43,788 $ 8,921 $ 43,788 $ 4,830
Existing technology 13,164 4,308 13,164 3,090
Contract backlog 3,200 2,066 3,200 1,467
Trade names (a) 2,016 - 2,016 -
Non-compete agreements and trademarks 975 327 325 208
Reseller network 816 263 816 187
Patents 444 114 - -
--------------- --------------- --------------- ---------------
Total $ 64,403 $ 15,999 $ 63,309 $ 9,782
=============== =============== =============== ===============
(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 July 27, 2008, the Company's net prepaid for the outstanding
plan years was $18.8 million compared to $26.0 million at October 28, 2007.
18
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 July
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.
The Company recorded compensation expense of $21,000 and $36,000 for the
nine-month periods ended July 27, 2008 and July 29, 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. As of July 27, 2008, there was $11,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
under the 1995 plan to be recognized over a weighted average period of 0.4
years.
The intrinsic value of options exercised during the nine-month period ended July
27, 2008 and July 29, 2007 was $0.1 and $0.6 million, respectively. The total
cash received from the exercise of stock options was $0.2 million and $0.3
million in the nine-month period ended July 27, 2008 and July 29, 2007,
respectively 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 nine-month period ended July 27, 2008 and July 29, 2007 was $0.1 million and
$0.2 million, respectively.
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.
Compensation expense of $20,000 was recognized in selling and administrative
expenses in the Company's condensed consolidated statement of operations for the
nine-month period ended July 27, 2008 on a straight-line basis over the vesting
period for grants issued in fiscal 2007. As of July 27, 2008, there was $46,000
of total unrecognized compensation cost related to non-vested share-based
compensation arrangements for these options to be recognized over a weighted
average period of 1.7 years.
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
certain 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. There was no compensation expense recognized on the grants
with certain targets. Compensation expense of $4,000 was recognized in cost of
sales in the Company's condensed consolidated statement of operations for the
nine-month period ended July 27, 2008 for options without targets. As of July
27, 2008, there was $20,000 of unrecognized compensation costs related to
non-vested share-based compensation arrangements to be recognized over a
weighted average period of 2.9 years.
There were no options granted during the three months ended July 27, 2008.
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE N--Income Taxes
Effective October 29, 2007, the Company adopted the provisions of 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
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 of severance and termination benefits for the
affected employees and is presented on a separate line item in the Company's
condensed consolidated statement of operations. The restructuring charge was
paid during the first nine months of fiscal 2008.
NOTE P--Subsequent Event
The transaction between the Company and Yellow Page Group, referred to in Notes
A, H, and J, closed on September 5, 2008.
20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Organization of Information
- ---------------------------
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 Non-GAAP Financial Measures - This section describes some of the
information extracted from the consolidated financial statements that
are not required by generally accepted accounting principles ("GAAP")
to be presented in the financial statements.
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 Consolidated Results of Operations - This section provides an analysis
of the line items on the Statements of Operations for the current and
comparative accounting periods.
o Results of Operations by Segment - This section provides a summary of
the results of operations by segment in tabular format and an analysis
of the line items by segment for the current and comparative
accounting periods.
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 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 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 nine months of fiscal
year 2007 and 2008. Excluded from the transactions are employment
compensation and directors' fees.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
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.
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.
Non-GAAP Financial Measures
- ---------------------------
This report includes information extracted from consolidated financial
information that is not required by GAAP to be presented in the financial
statements. Certain of this information is considered "non-GAAP financial
measures" as defined by SEC rules. Some of these measures are as follows:
Gross profit for a segment is comprised of its total net sales less direct
costs.
Segment or division operating profit is comprised of segment or division gross
profit less its overhead, selling and administrative costs and depreciation, and
has limitations as an analytical tool. It should not be considered in isolation
or as a substitute for analysis of the Company's results as reported under GAAP.
Some of these limitations are due to the omission of: (a) general corporate
expenses; (b) interest income earned by the Company on excess cash generated by
its segments; (c) interest expended on corporate debt necessary to finance the
segments' operations and capital expenditures; and (d) interest and fees related
to sales of interests in accounts receivable. Because of these limitations,
segment or division operating profit (loss) should only be used on a
supplemental basis combined with GAAP results when evaluating the Company's
performance.
Overhead is comprised of indirect costs required to support each segment's
operations, and is included in cost of sales in the statements of operations,
along with selling and administrative and depreciation expenses, which are
reflected separately in the statements of operations.
General corporate expenses are comprised of the Company's shared service
centers, and include, among other items, enterprise resource planning, human
resource, 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
segment.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--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 follows:
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 and are then eligible
to be re-assigned to another customer. 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 request from customers, subject to
contractual conditions, will allow the customer to convert the
temporary employees to permanent customer positions under negotiated
terms. 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 usually last
from weeks to months, while in the A&I division the assignments are
generally shorter and in both divisions the employee is eligible to be
re-assigned and the Company attempts to re-assign the employee as soon
as possible.
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.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Executive Overview--Continued
- ------------------
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.
Printing and Other: This segment provides printing services and publishes
telephone directories in Uruguay. The telephone directory revenues of this
segment are derived from the sales of telephone directory advertising for
the books it publishes. The operations of this segment were part of the
Telephone Directory segment until the current quarter. In July 2008, the
Company announced that it had agreed to sell the net assets of its
DataNational and Directory Systems and Services divisions, whose operations
for the current and comparable nine-month periods have been reclassified to
Discontinued Operations, with the remainder of the segment being renamed
Printing and Other.
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. 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.
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.
In the nine and three-month periods of fiscal 2008, the Company's consolidated
net sales totaled $1.8 billion and $590.6 million and consolidated segment
operating profit totaled $15.2 million and $13.0 million, respectively. The
explanations by segment for the nine and three-month periods are detailed below.
Staffing Services: The Staffing Services segment net sales for the nine-month
fiscal period increased by $17.1 million from the comparable 2007 period, but
decreased by $20.1 million in the current three months from the comparable 2007
fiscal period. The operating profits for the nine and three-month periods
decreased by
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Executive Overview--Continued
- ------------------
$8.8 million and $1.3 million from the comparable periods in fiscal 2007. The
decrease in operating profit for the nine months from the comparable 2007 period
was due to a decrease in gross margins and an increase in overhead, partially
offset by an increase in net sales. The decrease in operating profit for the
three months was due to the decrease in net sales and increase in overhead,
partially offset by an increase in gross margins.
Telecommunications Services: The Telecommunications segment sales increased by
$56.1 million and $8.3 million, respectively, from the comparable nine and
three-month periods in fiscal 2007; however, the operating results decreased by
$22.9 million and $6.0 million for the nine months and the current quarter,
respectively. The decrease in operating results for the nine months was due to
decreased gross margins and increased overhead costs. In late January 2008, the
Company learned that it may not be reimbursed for certain costs incurred under
an installation contract and the increase in operating loss for the nine months
was primarily due to the losses incurred on this contract. The increase in
overhead was predominantly due to increased indirect labor related to this
contract. The Company continues to negotiate with the customer in order for it
to be reimbursed for disputed billings under this contract. The installation
work on this contract is substantially complete.
Computer Systems: The Computer Systems segment's sales increased by $21.6
million and $10.4 million, respectively, from the comparable nine and
three-month periods in fiscal 2007, while its operating profit decreased by $2.0
million for the nine months, but increased $0.1 million for the current quarter.
The decrease in operating profit for the current nine months 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.
Printing and Other: On July 29, 2008, the Company announced it had agreed to
sell the net assets of its directory systems and services and North American
telephone directory publishing operations to Yellow Page Group ("YPG"). The
companies have signed an asset purchase agreement and the transaction closed on
September 5, 2008. The net purchase price of approximately $179 million was paid
in cash at closing.
The transaction includes the operations of Volt Directory Systems and Services
and DataNational, formerly part of the Telephone Directory segment, but excludes
the Uruguayan printing and telephone directory operations, which now comprises
this new segment. The results of operations of Volt Directory Systems and
DataNational have been classified as discontinued and the prior period results
have been reclassified.
The Printing and Other segment's sales increased by $1.0 million from both the
comparable nine and three-month periods in fiscal 2007, however, its operating
losses increased by $0.8 million for the nine months, while remaining the same
for the three-month period of fiscal 2008. The decrease in operating profit for
the nine months of fiscal 2008 was predominantly due to the reduction in gross
margin, partially offset by the sales increase.
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.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007
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.
Consolidated Results of Operations
- ----------------------------------
In the first nine months of fiscal 2008, consolidated net sales increased by
$96.5 million, or 6%, to approximately $1.8 billion, from the comparable period
of fiscal 2007. The increase in the nine months' net sales resulted from
increases in Telecommunications Services of $56.1 million, Staffing Services of
$17.1 million, Computer Systems of $21.6 million, and Printing and Other of $1.0
million.
Cost of sales increased by $122.3 million, or 8%, to $1.7 billion, and was 95%
of sales, in the nine months of fiscal 2008 as compared to 93% of sales in the
comparable period of fiscal 2007. The increase in the cost of sales percentage
was primarily due to the losses sustained in the Telecommunications segment in
fiscal 2008.
Selling and administrative costs increased by $2.0 million, or 3%, in the
current nine-month period from the comparable period in fiscal 2007, and was
3.7% of sales, as compared to 3.8% in the comparable period of fiscal 2007.
Depreciation and amortization increased by $1.7 million, or 6%, in the current
nine-month period from the comparable period in fiscal 2007, and remained at
1.7% of sales. The increase in depreciation and amortization in the current nine
months from the comparable 2007 fiscal period was attributable to increases in
amortization of intangibles in the Computer Systems segment due to acquisitions
in fiscal 2007, along with additions of fixed assets in Staffing Services and
the Telecommunications Services segment, partially offset by a reduction in
amortization of the corporate enterprise resource planning system.
The Company reported an operating loss of $10.5 million in the current nine
months, as compared to an operating profit of $20.5 million in the comparable
period of fiscal 2007 due to a decrease in segment operating profit of $34.5
million, or 70%, partially offset by a decrease of $3.5 million, or 12%, in
general corporate expenses. The decrease in segment operating results was
attributable to the decreased operating profits of the Telecommunications
Services segment of $22.9 million, the Staffing Services segment of $8.8
million, the Computer Systems segment of $2.0 million and the Printing and Other
segment of $0.8 million.
Interest income decreased by $1.0 million, or 23%, in the current nine months
from the comparable period in fiscal 2007 due to lower interest rates and a
reduction in premium deposits held by insurance companies.
Other expense decreased by $1.4 million, or 29%, in the current nine months from
the comparable period in fiscal 2007 due to an amended securitization program
which resulted in a reduction in securitization fees and an increase in interest
expense.
Interest expense increased by $3.3 million, or 143%, in the current nine months
over the comparable period in fiscal 2007 due to additional borrowings used to
fund the 2007 acquisitions and the aforementioned amended securitization
program.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
The loss from continuing operations before income taxes for the nine months of
fiscal 2008 totaled $16.8 million compared to income from continuing operations
of $17.1 million in the comparable nine months of fiscal 2007.
The Company's effective tax benefit rate on its financial reporting pre-tax loss
was 36.3% in the nine months of fiscal 2008 compared to an effective tax
provision rate of 37.6% on its financial reporting pre-tax income in the
comparable period in fiscal 2007.
Discontinued operations for the nine months totaled $4.8 million (net of income
taxes of $3.3 million) compared to $5.5 million (net of income taxes of $3.8
million) in the comparable nine months of fiscal 2007.
The net loss in the nine months of fiscal 2008 was $5.9 million compared to a
net income of $16.2 million in the comparable period of fiscal 2007.
Results of Operations by Segment
- --------------------------------
The following two tables reconcile the operating profit by segment to the
consolidated statements of operations for the nine months ended July 27, 2008
and July 29, 2007:
Nine Months Ended July 27, 2008
------------------------------------------------------------------------------------------
(Dollars in Millions)
Staffing
Total Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
------------------------------------------------------------------------------------------
Net Sales $ 1,776.7 $ 1,486.5 $ 133.0 $ 160.7 $9.3 ($12.8)
Direct Costs 1,425.4 1,249.4 108.9 72.3 7.6 (12.8)
Overhead 264.3 170.1 44.0 50.2 - -
------------------------------------------------------------------------------------------
Cost of Sales 1,689.7 1,419.5 152.9 122.5 7.6 (12.8)
Selling & Administrative 66.5 32.9 0.4 6.5 2.9 23.8
Restructuring 1.5 - - 1.5 - -
Depreciation 29.5 10.4 2.0 14.6 0.6 1.9
------------------------------------------------------------------------------------------
Operating (loss) profit (10.5) 23.7 (22.3) 15.6 (1.8) (25.7)
Interest income 3.4 - - - - 3.4
Other expense, net (3.3) - - - - (3.3)
Foreign exchange (0.8) - - - - (0.8)
Interest expense (5.6) - - - - (5.6)
------------------------------------------------------------------------------------------
(Loss) income from continuing
operations before minority
interest and income taxes ($16.8) $ 23.7 ($22.3) $ 15.6 ($1.8) ($32.0)
==========================================================================================
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
Nine Months Ended July 29, 2007
------------------------------------------------------------------------------------------
(Dollars in Millions)
Staffing
Total Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
------------------------------------------------------------------------------------------
Net Sales $ 1,680.2 $ 1,469.4 $ 76.9 $ 139.1 $8.3 ($13.5)
Direct Costs 1,346.7 1,230.6 57.5 66.0 6.1 (13.5)
Overhead 220.7 165.0 17.1 38.6 - -
------------------------------------------------------------------------------------------
Cost of Sales 1,567.4 1,395.6 74.6 104.6 6.1 (13.5)
Selling & Administrative 64.5 31.8 0.3 5.1 2.7 24.6
Depreciation 27.8 9.5 1.4 11.8 0.5 4.6
------------------------------------------------------------------------------------------
Operating profit (loss) 20.5 32.5 0.6 17.6 (1.0) (29.2)
Interest income 4.4 - - - - 4.4
Other expense, net (4.7) - - - - (4.7)
Foreign exchange (0.8) - - - - (0.8)
Interest expense (2.3) - - - - (2.3)
------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before minority
interest and income taxes $ 17.1 $ 32.5 $ 0.6 $ 17.6 ($1.0) ($32.6)
==========================================================================================
Staffing Services
- -----------------
Nine Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Gross Staffing Sales $1,446.9 $1,433.0 $13.9 1.0%
- ----------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $947.9 $904.6 $43.3 4.8%
- ----------------------------------------------------------------------------------------------------
Net Sales * $1,486.5 $1,469.4 $17.1 1.2%
- ----------------------------------------------------------------------------------------------------
Direct Costs $1,249.4 84.0% $1,230.6 83.7% ($18.8) (1.5%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $237.1 16.0% $238.8 16.3% ($1.7) (0.7%)
- ----------------------------------------------------------------------------------------------------
Overhead $170.1 11.5% $165.0 11.2% ($5.1) (3.1%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $32.9 2.2% $31.8 2.2% ($1.1) (3.2%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $10.4 0.7% $9.5 0.7% ($0.9) (10.4%)
- ----------------------------------------------------------------------------------------------------
Segment Operating Profit $23.7 1.6% $32.5 2.2% ($8.8) (27.1%)
- ----------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
The increase in net sales of the Staffing Services segment for the nine months
of fiscal 2008 from the comparable period in fiscal 2007 was comprised of a
$27.0 million, or 3%, increase in net Technical sales, partially offset by a
decrease of $9.9 million, or 2%, in net A&I sales. Foreign generated net sales
for the nine months increased by 29% from the comparable nine months of fiscal
2007, and accounted for 7% of total net Staffing Services sales for the current
nine months. On a constant currency basis, foreign sales increased by 24% from
the comparable 2007 nine months. In the current nine months, the segment's
permanent placement sales increased by 11% and RPO sales decreased by 13% from
the comparable nine months fiscal 2007.
The decrease in the segment's operating profit was comprised of a decrease of
$12.2 million in the Technical division, partially offset by an increase of $3.4
million in the A&I division. The segment's gross margin percentage decreased by
0.3 percentage points, primarily due to a decrease of 0.5 percentage points in
the Technical division. Overhead increased by 0.3 percentage points from the
comparable 2007 period percentages, with an increase in the Technical division
substantially offset by a decrease in the A&I division.
Nine Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
====================================================================================================
Gross Sales $1,917.8 $1,849.9 $67.9 3.6%
- ----------------------------------------------------------------------------------------------------
Net Sales * $1,030.0 $1,003.0 $27.0 2.7%
- ----------------------------------------------------------------------------------------------------
Direct Costs $868.3 84.3% $840.1 83.8% ($28.2) (3.4%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $161.7 15.7% $162.9 16.2% ($1.2) (0.7%)
- ----------------------------------------------------------------------------------------------------
Overhead $110.5 10.8% $102.7 10.1% ($7.8) (7.7%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $23.7 2.3% $21.8 2.2% ($1.9) (8.3%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $8.5 0.8% $7.2 0.8% ($1.3) (16.8%)
- ----------------------------------------------------------------------------------------------------
Division Operating Profit $19.0 1.8% $31.2 3.1% ($12.2) (39.1%)
- ----------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The Technical division's increase in gross sales in the current nine months of
fiscal 2008 from the comparable prior year period included increases of
approximately $17 million of sales to new customers or customers with
substantial increased business, as well as $59 million attributable to net
increases in sales to continuing customers. This was partially offset by sales
decreases of approximately $8 million from customers whose business with the
Company either ceased or was substantially lower than in the comparable nine
months of fiscal 2007. The Technical division's increase in net sales in the
nine months of fiscal 2008 from the comparable period in fiscal 2007 was
comprised of increases of $27.4 million, or 3%, in traditional alternative
staffing and $3.6 million, or 11%, in net managed service associate vendor
sales, partially offset by a decrease of $4.0 million, or 4%, in VMC Consulting
project management and consulting sales.
The decrease in the division's operating profit was the result of the decrease
in gross margin percentage and the increase in overhead, partially offset by the
increase in net sales. The decrease in gross margin was primarily due to the
decrease in the gross margins in VMC Consulting due to current year losses on
one large project and the completion of one project early in fiscal 2008 that
was highly profitable in fiscal 2007, partially offset by an increase in higher
margin permanent placement sales. The increase in overhead in the current nine
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
Staffing Services--Continued
months was a result of VMC startup costs for new projects, and costs related to
new foreign operations, partially offset by a reduction in the current nine
months of $2.0 million in health insurance costs due to improved claims
experience. The increase in selling and administrative costs was due to
increased indirect labor in the European operation related to its sales growth,
and a gain on the settlement of a vendor dispute in the comparable 2007 period.
Indirect labor costs, which are included in overhead and selling and
administrative costs, increased by 8% from the comparable 2007 nine months. The
increase in depreciation was due to fixed assets purchased for VMC to
accommodate the growth of new projects.
Nine Months Ended
--------------------------------------------
July 27, 2008 July 29, 2007
--------------------------------------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- -----------------------------------------------------------------------------------------------------
Gross Sales $477.0 $487.7 ($10.7) (2.2%)
- -----------------------------------------------------------------------------------------------------
Net Sales * $456.5 $466.4 ($9.9) (2.1%)
- -----------------------------------------------------------------------------------------------------
Direct Costs $381.1 83.5% $390.5 83.7% $9.4 2.4%
- -----------------------------------------------------------------------------------------------------
Gross Profit $75.4 16.5% $75.9 16.3% ($0.5) (0.6%)
- -----------------------------------------------------------------------------------------------------
Overhead $59.6 13.1% $62.3 13.4% $2.7 4.1%
- -----------------------------------------------------------------------------------------------------
Selling & Administrative $9.2 2.0% $10.0 2.1% $0.8 8.1%
- -----------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.9 0.4% $2.3 0.5% $0.4 11.0%
- -----------------------------------------------------------------------------------------------------
Division Operating Profit $4.7 1.0% $1.3 0.3% $3.4 246.4%
- -----------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The A&I division's decrease in gross sales in the current nine months of fiscal
2008 as compared to the comparable period of fiscal 2007 included a decline of
approximately $15 million of sales to customers which the Company either ceased
or substantially reduced servicing in the current year, as well as $27 million
attributable to net decreases in sales to continuing customers. This was
partially offset by a growth of approximately $31 million from new customers, or
customers whose business with the Company in the comparable fiscal period was
substantially below the current nine-month period volume.
The increased operating results were primarily due to the decrease in overhead,
selling and administrative costs and depreciation in dollars and as a percentage
of sales, along with a slight improvement in gross margin percentage. The
increase in gross margin percentage was primarily due to a 0.7 percentage point
reduction in workers' compensation costs as a percentage of direct labor
resulting from improvements in claims experience and the regulatory environment
in several states, a 0.4 percentage point reduction in payroll taxes as a
percentage of direct labor, substantially offset by a decrease in permanent
placement and RPO sales. This payroll tax reduction is expected to continue
throughout the remainder of the fiscal year. The decrease in overhead costs from
the comparable period in fiscal 2007 primarily resulted from a reduction of
indirect headcount of approximately 3%. The division is focused on reducing
overhead costs to compensate for lower sales.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
Staffing Services--Continued
- -----------------
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.
Telecommunications Services
- ---------------------------
Nine Months Ended
-------------------------------------------------------
July 27, 2008 July 29, 2007
-------------------------------------------------------
% of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Net Sales $133.0 $76.9 $56.1 73.0%
- ----------------------------------------------------------------------------------------------------
Direct Costs $108.9 81.9% $57.5 74.8% ($51.4) (89.4%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $24.1 18.1% $19.4 25.2% $4.7 24.3%
- ----------------------------------------------------------------------------------------------------
Overhead $44.0 33.1% $17.1 22.2% ($26.9) (158.2%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $0.4 0.3% $0.3 0.4% ($0.1) (45.6%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $2.0 1.5% $1.4 1.8% ($0.6) (41.1%)
- ----------------------------------------------------------------------------------------------------
Segment Operating (Loss)
Profit ($22.3) (16.8%) $0.6 0.8% ($22.9) (3,541.5%)
- ----------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the nine months of
fiscal 2008 from the comparable period of fiscal 2007 was due to a $57.2
million, or 133% increase in the Construction and Engineering division,
partially offset by a decrease of $1.1 million, or 3%, in the Network Enterprise
Solutions division. The sales increase in the Construction and Engineering
division in the current nine months was largely due to a large installation
contract which ramped up in the latter half of fiscal 2007 and the recognition
of revenue in fiscal 2008 for several large utility and government contracts
accounted for using the percentage-of-completion method of accounting. The
segment's sales backlog at the end of the third quarter of fiscal 2008 was $32
million, as compared to a backlog of approximately $68 million at the end of the
comparable 2007 quarter.
The decreased operating results for the nine months were due to the decreased
gross margin percentage and the increase in overhead in dollars and as a
percentage of sales. In late January 2008, the Company learned that it may not
be reimbursed for certain costs incurred under an installation contract and the
reduction in gross margin in the nine months of fiscal 2008 is primarily due to
the losses on this contract. The installation work on this contract is
substantially complete. The Company continues to negotiate with the customer to
be reimbursed for disputed billings under the contract. The increased overhead
for the nine months was incurred to support the increased sales volume and the
additional costs required to be expended on the aforementioned contract to
substantially complete the work and resolve open issues with the customer.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
Telecommunications Services--Continued
- ---------------------------
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.
Computer Systems
- ----------------
Nine Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Net Sales $160.7 $139.1 $21.6 15.5%
- ----------------------------------------------------------------------------------------------------
Direct Costs $72.3 45.2% $66.0 47.4% ($6.3) (9.5%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $88.4 54.8% $73.1 52.6% $15.3 20.9%
- ----------------------------------------------------------------------------------------------------
Overhead $50.2 31.1% $38.6 27.7% ($11.6) (30.1%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $6.5 4.1% $5.1 3.7% ($1.4) (29.4%)
- ----------------------------------------------------------------------------------------------------
Restructuring $1.5 0.9% - - ($1.5) -
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $14.6 9.0% $11.8 8.5% ($2.8) (23.7%)
- ----------------------------------------------------------------------------------------------------
Segment Operating Profit $15.6 9.7% $17.6 12.7% ($2.0) (11.4%)
- ----------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the nine months of fiscal 2008
from the comparable period of fiscal 2007 was comprised of increases of $11.4
million, or 28%, in database access transaction fee revenue, including ASP
directory assistance, $8.3 million, or 20%, in the Maintech division's IT
maintenance and $1.9 million, or 3%, in projects and other income. The increase
in transaction fee revenue for the nine months included $18.8 million from the
LSSi operations (enterprise data transactions) acquired in September 2007. The
remaining transaction fee revenue from telco and non-telco customers reflected a
decrease from existing customers of $7.4 million, or 18%, from the comparable
period in fiscal 2007. This decrease was primarily due to a reduction of such
services to a major customer as the customer agreement transitions to a fixed
monthly fee model from a variable transaction-based pricing model.
The segment's decreased operating profit was due to the increase in overhead,
selling and administrative expenses, restructuring charge and depreciation and
amortization in dollars and as a percentage of sales, partially offset by the
increase in sales and the increase in gross margin percentage. The increased
gross profit percentage was a result of the increased revenue from database
access fees generated by LSSi. The increased overhead and selling and
administrative expenses were primarily due to the inclusion in the current
period of the LSSi operations and increased bad debt expenses. The restructuring
charge was a result of foreign and domestic personnel downsizing as a result of
the acquisition. The increased depreciation and amortization was due to the
intangible amortization related to the LSSi acquisition.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
Computer Systems--Continued
- ----------------
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.
Printing and Other
- ------------------
Nine Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Net Sales $9.3 $8.3 $1.0 12.1%
- ----------------------------------------------------------------------------------------------------
Direct Costs $7.6 81.6% $6.1 73.2% ($1.5) (20.0%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $1.7 18.4% $2.2 26.8% ($0.5) (23.2%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $2.9 31.5% $2.7 32.5% ($0.2) (7.8%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.6 6.3% $0.5 6.9% ($0.1) (20.0%)
- ----------------------------------------------------------------------------------------------------
Segment Operating Loss ($1.8) (19.4%) ($1.0) (12.6%) ($0.8) (72.1%)
- ----------------------------------------------------------------------------------------------------
On July 29, 2008, the Company announced it had agreed to sell the net assets of
its directory systems and services and North American telephone directory
publishing operations to Yellow Page Group. The companies have signed an asset
purchase agreement and the transaction closed on September 5, 2008. The net
purchase price of approximately $179 million was paid in cash at closing.
The transaction includes the operations of Volt Directory Systems and Services
and DataNational, formerly part of the Telephone Directory segment, but excludes
the Uruguayan printing and telephone directory operations, which now comprise
this new segment. The results of operations of Volt Directory Systems and
DataNational have been classified as discontinued operations, and the prior
period results have been reclassified.
The Printing and Other segment's sales increased by $1.0 million from the
comparable nine-month period in fiscal 2007. The sales increase was comprised of
an increase of $2.6 million, or 41%, in printing sales, partially offset by a
decrease of $1.6 million, or 84%, in telephone directory publishing sales. The
increase in printing sales included $1.1 million of sales to new customers. The
decrease in telephone directory publishing sales was due to the timing of the
delivery of the directories.
The operating losses increased by $0.8 million as compared to the comparable
period in fiscal 2007. The decrease in operating profit for the nine months of
fiscal 2008 was predominantly due to the decreased gross margin percentage,
partially offset by the increase in sales. The decrease in gross margin
percentage was due to a reduction in the higher margin directory revenue and an
increase in the less profitable printing sales as compared to the comparable
period in fiscal 2007.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
Discontinued Operations
- -----------------------
Nine Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Net Sales $47.3 $51.0 ($3.7) (7.3%)
- ----------------------------------------------------------------------------------------------------
Direct Costs $22.0 46.5% $24.4 47.8% $2.4 9.8%
- ----------------------------------------------------------------------------------------------------
Gross Profit $25.3 53.5% $26.6 52.2% ($1.3) (4.9%)
- ----------------------------------------------------------------------------------------------------
Overhead $5.0 10.6% $5.6 11.0% $0.6 12.3%
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $11.0 23.3% $10.5 20.6% ($0.5) (4.8%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.9 1.9% $0.9 1.8% - -
- ----------------------------------------------------------------------------------------------------
Operating Profit $8.4 17.7% $9.6 18.8% ($1.2) (9.7%)
- ----------------------------------------------------------------------------------------------------
As described above, with the announced sale of the Volt Directory Systems and
Services and DataNational operations in July, 2008, the results of their
operations for the current and comparable fiscal periods have been reclassified
out of their previously reported Telephone Directory segment into to
Discontinued Operations. Their sales and costs for the two periods have been
eliminated from the Company's Statement of Operations and are reflected net in
Discontinued Operations. The gross components of their operations are reflected
in the table above.
The components of the sales decrease for the nine months of fiscal 2008 from the
comparable period of fiscal 2007 were decreases of $3.6 million in the
DataNational community telephone directory publishing sales and $0.1 million in
telephone production and other sales. The sales decrease was comprised of a $3.3
million, or 11%, reduction in same book sales, and $0.3 million of the sales
decrease was related to the timing of the delivery of the published directories,
partially offset by a net of 8 additional directories published, as compared to
the comparable period in fiscal 2007. 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 nine months
of fiscal 2007 was the result of the sales decrease and an increase in selling
and administrative costs, partially offset by an increase in gross margin
percentage and a reduction of overhead costs. Administrative costs increased
primarily due to increased bad debts. The increased gross margin is primarily
related to a reduction in production costs in both operations. The overhead
reduction was primarily due to decreased health care and communication costs.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
NINE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE NINE MONTHS ENDED JULY 29, 2007--Continued
General Corporate Expenses and Other Income (Expense)
- -----------------------------------------------------
Nine Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $23.8 1.3% $24.6 1.5% $0.8 3.9%
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.9 0.1% $4.6 0.3% $2.7 58.7%
- ----------------------------------------------------------------------------------------------------
Interest Income $3.4 0.2% $4.4 0.3% ($1.0) (22.5%)
- ----------------------------------------------------------------------------------------------------
Other Expense ($3.3) (0.2%) ($4.7) (0.3%) $1.4 28.9%
- ----------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.8) - ($0.8) - - -
- ----------------------------------------------------------------------------------------------------
Interest Expense ($5.6) (0.3%) ($2.3) (0.1%) ($3.3) (142.9%)
- ----------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the
nine months of fiscal 2008 as compared to the comparable 2007 period, were:
The decrease in selling and administrative expenses in the current nine months
from the comparable 2007 fiscal period was primarily the result of decreased
equipment rental and communication costs.
The decrease in depreciation and amortization in the nine months of fiscal 2008
from the comparable 2007 fiscal period was due to portions of the corporate
enterprise resource planning system becoming fully amortized.
The decrease in interest income from the comparable period in fiscal 2007 was
due to lower interest rates and a reduction in premium deposits held by
insurance companies.
The decrease in other expense from the comparable period in fiscal 2007 was due
to an amended securitization program which resulted in a reduction in
securitization fees and an increase in interest expense.
Interest expense increased from the comparable period in fiscal 2007 due to
additional borrowings used to fund the 2007 acquisitions and the aforementioned
amended securitization program.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Consolidated Results of Operations
- ----------------------------------
In the third quarter of fiscal 2008, consolidated net sales increased by $0.3
million, to $590.6 million, from the comparable quarter of fiscal 2007. The
increase in the current quarter's net sales resulted from increases in Computer
Systems of $10.4 million, Telecommunications Services of $8.3 million, and
Printing and Other of $1.0 million, partially offset by a decrease in Staffing
Services of $20.1 million.
Cost of sales increased by $6.0 million, or 1%, to $554.4 million, and was 94%
of sales, in the third quarter of fiscal 2008 as compared to 93% of sales in the
comparable quarter of fiscal 2007. The increase in the cost of sales percentage
was primarily due to the losses sustained in the Telecommunications segment in
the third quarter of fiscal 2008.
Selling and administrative costs decreased by $0.2 million, or 1%, in the third
quarter of fiscal 2008 over the comparable period in fiscal 2007, but was 3.6%
of sales, as compared to 3.7% in the comparable period.
Depreciation and amortization increased by $0.8 million, or 8%, in the third
quarter over the comparable quarter in fiscal 2007, and was 1.7% of sales, as
compared to 1.6% in the comparable period. The increase in depreciation and
amortization in the current quarter from the comparable 2007 fiscal period was
primarily attributable to the Computer Systems segment related to increases in
amortization of intangibles due to the LSSi acquisition, and increases in
Staffing Systems due to asset acquisitions at VMC, partially offset by a
reduction in amortization of the corporate enterprise resource planning system.
The Company reported an operating profit of $4.6 million in the current quarter,
as compared to $10.8 million in the comparable period of fiscal 2007 due to a
decrease in segment operating profit of $7.2 million, or 36%, partially offset
by a decrease of $1.0 million, or 11%, in general corporate expenses. The
decrease in segment operating profit was attributable to decreases of $6.0
million in the Telecommunications segment, $1.3 million in the Staffing Services
segment, partially offset by an increase in the Computer Systems segment of $0.1
million.
Interest income decreased by $0.9 million, or 53%, in the current quarter from
the comparable quarter in fiscal 2007 due to lower interest rates and a
reduction in premium deposits held by insurance companies.
Other expense decreased by $1.4 million, or 85%, in the current quarter as
compared to the comparable quarter in fiscal 2007 due to an amended
securitization program which resulted in a reduction in securitization fees and
an in increase in interest expense.
Interest expense increased by $1.7 million, or 195%, in the current quarter over
the comparable quarter in fiscal 2007 due to additional borrowings used to fund
the 2007 acquisitions and the aforementioned amended securitization program.
The income from continuing operations before income taxes for the third quarter
of fiscal 2008 totaled $2.3 million compared to income from continuing
operations of $9.8 million in the comparable quarter of fiscal 2007.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Consolidated Results of Operations--Continued
- ----------------------------------
The Company's effective tax provision rate on its financial reporting pre-tax
income was 35.9% in the third quarter of fiscal 2008 compared to an effective
tax provision rate of 36.2% on its financial reporting pre-tax income in the
comparable quarter in fiscal 2007.
Discontinued operations for the third quarter of fiscal 2008 totaled $2.6
million (net of income taxes of $1.7 million) compared to $2.9 million (net of
income taxes of $2.0 million) in the comparable quarter of fiscal 2007.
The net income in the third quarter of fiscal 2008 was $4.0 million compared to
a net income of $9.1 million in the comparable quarter of fiscal 2007.
Results of Operations by Segment
- --------------------------------
The following two tables reconcile the operating profit by segment to the
consolidated statements of operations for the three months ended July 27, 2008
and July 29, 2007:
Three Months Ended July 27, 2008
---------------------------------------------------------------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
----------- ----------- ---------------- --------- ----------- ---------------
Net Sales $ 590.6 $ 499.0 $ 36.6 $ 57.8 $ 1.6 ($4.4)
Direct Costs 460.5 414.6 23.4 25.5 1.4 (4.4)
Overhead 93.9 58.1 17.5 18.3 - -
----------- ----------- ---------------- -------- ----------- ---------------
Cost of Sales 554.4 472.7 40.9 43.8 1.4 (4.4)
Selling & Administrative 21.5 10.6 0.1 2.1 0.9 7.8
Depreciation 10.1 3.7 0.7 4.9 0.2 0.6
----------- ----------- ---------------- -------- ----------- ---------------
Operating profit (loss) 4.6 12.0 (5.1) 7.0 (0.9) (8.4)
Interest income 0.9 - - - - 0.9
Other expense, net (0.3) - - - - (0.3)
Foreign exchange (0.4) (0.4)
Interest expense (2.5) - - - - (2.5)
------------ ---------- ---------------- -------- ------------ --------------
Income (loss) from
continuing operations
before minority
interest and income
taxes $ 2.3 $ 12.0 ($5.1) $ 7.0 ($0.9) ($10.7)
=========== =========== ================= ========= =========== ==============
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Consolidated Results of Operations
- ----------------------------------
Three Months Ended July 29, 2007
-------------------------------------------------------------------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
----------- ---------- ---------------- ---------- ----------- ---------------
Net Sales $ 590.2 $ 519.1 $ 28.3 $ 47.4 $ 0.6 ($5.2)
Direct Costs 473.3 436.4 20.0 21.6 0.5 (5.2)
Overhead 75.1 55.3 6.8 13.0 - -
----------- ---------- ---------------- ---------- ----------- ---------------
Cost of Sales 548.4 491.7 26.8 34.6 0.5 (5.2)
Selling & Administrative 21.7 10.9 0.1 1.9 0.8 8.0
Depreciation 9.3 3.2 0.5 4.0 0.2 1.4
----------- ---------- ---------------- ---------- ----------- ---------------
Operating profit (loss) 10.8 13.3 0.9 6.9 (0.9) (9.4)
Interest income 1.8 - - - - 1.8
Other expense, net (1.7) - - - - (1.7)
Foreign exchange (0.3) - - - - (0.3)
Interest expense (0.8) - - - - (0.8)
----------- ---------- ---------------- ---------- ----------- ---------------
Income (loss) from
continuing operations
before minority
interest and income
taxes $ 9.8 $ 13.3 $ 0.9 $ 6.9 ($0.9) ($10.4)
=========== ========== ================ ========== =========== ===============
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Staffing Services
- -----------------
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Gross Staffing Sales $486.5 $509.0 ($22.5) (4.4%)
- ----------------------------------------------------------------------------------------------------
Gross Managed Service Sales $312.2 $275.8 $36.4 13.2%
- ----------------------------------------------------------------------------------------------------
Net Sales* $499.0 $519.1 ($20.1) (3.9%)
- ----------------------------------------------------------------------------------------------------
Direct Costs $414.6 83.1% $436.4 84.1% $21.8 5.0%
- ----------------------------------------------------------------------------------------------------
Gross Profit $84.4 16.9% $82.7 15.9% $1.7 2.1%
- ----------------------------------------------------------------------------------------------------
Overhead $58.1 11.6% $55.3 10.6% ($2.8) (5.3%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $10.6 2.1% $10.9 2.1% $0.3 3.6%
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $3.7 0.8% $3.2 0.6% ($0.5) (15.5%)
- ----------------------------------------------------------------------------------------------------
Segment Operating Profit $12.0 2.4% $13.3 2.6% ($1.3) (10.0%)
- ----------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The decrease in net sales of the Staffing Services segment in the third quarter
of fiscal 2008 from the comparable quarter in fiscal 2007 was comprised of a
$11.5 million, or 3%, increase in net Technical sales, and a $8.6 million, or 6%
decrease in net A&I sales. Foreign generated net sales for the current quarter
increased by 15% 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 13% from the comparable 2007 fiscal
quarter. In the current three months, the segment's permanent placement sales
decreased by 2% and RPO sales decreased by 46% from the comparable period in
fiscal 2007.
The segment's decrease in operating profit was comprised of a decrease of $1.8
million in the Technical division, partially offset by an increase of $0.5
million in the A&I division. The segment's gross margin percentage increased due
to an increase of 1.1 percentage points in the Technical division and 0.7
percentage points in the A&I division. The overhead percentage increased due to
increases in both the Technical and A&I divisions. Selling and administrative
and depreciation costs increased in the Technical division.
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
====================================================================================================
Gross Sales $645.3 $621.8 $23.5 3.8%
- ----------------------------------------------------------------------------------------------------
Net Sales * $351.8 $363.3 ($11.5) (3.2%)
- ----------------------------------------------------------------------------------------------------
Direct Costs $293.6 83.5% $307.3 84.6% $13.7 4.5%
- ----------------------------------------------------------------------------------------------------
Gross Profit $58.2 16.5% $56.0 15.4% $2.2 3.9%
- ----------------------------------------------------------------------------------------------------
Overhead $38.5 10.9% $35.3 9.7% ($3.2) (9.1%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $7.9 2.2% $7.7 2.1% ($0.2) (2.7%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $3.1 0.9% $2.5 0.7% ($0.6) (21.9%)
- ----------------------------------------------------------------------------------------------------
Division Operating Profit $8.7 2.5% $10.5 2.9% ($1.8) (17.3%)
- ----------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Staffing Services--Continued
- -----------------
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 $8 million of sales to new customers, or customers with
substantial increased business, as well as $16 million attributable to net
increases in sales to continuing customers. This was partially offset by sales
decreases of approximately $1 million from customers whose business with the
Company either ceased or was substantially lower than in the comparable quarter
of fiscal 2007. The Technical division's decrease in net sales in the third
quarter of fiscal 2008 from the comparable quarter in fiscal 2007 was comprised
of decreases of $13.2 million, or 4%, in traditional alternative staffing, and
$1.6 million, or 4% in VMC Consulting project management and consulting sales,
partially offset by an increase of $3.3 million, or 40%, in net managed service
associate vendor sales.
The division's decrease in the operating profit was the result of the decrease
in sales, and the increase in overhead and depreciation in dollars and as a
percentage of sales, partially offset by the increase in gross margin
percentage. The increase in overhead and depreciation in the current fiscal
quarter was a result of VMC startup costs for new projects, costs related to new
foreign operations, partially offset by a reduction in the current quarter of
$0.5 million in health insurance costs due to improved claims experience. The
increase in gross margin was primarily due to an increase in the gross margins
in Volt Europe as well as the new foreign operation. Indirect labor costs which
are included in overhead and selling and administrative costs increased by 6%
from the comparable 2007 three months.
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Gross Sales $153.4 $163.0 ($9.6) (5.9%)
- ----------------------------------------------------------------------------------------------------
Net Sales * $147.2 $155.8 ($8.6) (5.5%)
- ----------------------------------------------------------------------------------------------------
Direct Costs $121.0 82.2% $129.1 82.9% $8.1 6.3%
- ----------------------------------------------------------------------------------------------------
Gross Profit $26.2 17.8% $26.7 17.1% ($0.5) (1.8%)
- ----------------------------------------------------------------------------------------------------
Overhead $19.6 13.4% $20.0 12.8% $0.4 1.5%
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $2.7 1.8% $3.2 2.1% $0.5 18.9%
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.6 0.4% $0.7 0.4% $0.1 10.7%
- ----------------------------------------------------------------------------------------------------
Division Operating Profit $3.3 2.2% $2.8 1.8% $0.5 17.9%
- ----------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The A&I division's gross sales decreased in the current quarter as compared to
the comparable quarter of fiscal 2007. The current quarter's sales decline
included approximately $8 million of sales to customers which the Company either
ceased or substantially reduced servicing in the current year, as well as $11
million attributable to net decreases in sales to continuing customers,
partially offset by sales of approximately $9 million from new customers, or
customers whose business with the Company in the comparable fiscal period was
substantially below the current quarter's volume.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Staffing Services--Continued
- -----------------
The division's increased operating profit in the current quarter was the result
of the increased gross margin percentage, along with reductions in overhead and
selling and administrative costs in dollars, partially offset by the decrease in
net sales. The increase in gross margin percentage was primarily due to a 1.9
percentage point reduction in workers' compensation costs as a percentage of
direct labor resulting from improvements in claims experience and the regulatory
environment in several states, a 0.2 percentage point reduction in payroll taxes
as a percentage of direct labor, partially offset by a 26% decrease in permanent
placement sales.
Although overhead costs were lower than the comparable quarter in fiscal 2007,
they increased as a percentage of sales for the first time in the past five
quarters due to a greater than expected sales decline. The division continues to
focus on reducing overhead costs to compensate for lower sales. In each of the
past five quarters, the overhead dollars have declined from the comparable prior
year quarter.
Telecommunications Services
- ---------------------------
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change %Change
- ----------------------------------------------------------------------------------------------------
Net Sales $36.6 $28.3 $8.3 29.1%
- ----------------------------------------------------------------------------------------------------
Direct Costs $23.4 63.9% $20.0 70.7% ($3.4) (16.7%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $13.2 36.1% $8.3 29.3% $4.9 59.0%
- ----------------------------------------------------------------------------------------------------
Overhead $17.5 47.7% $6.8 23.8% ($10.7) (157.4%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $0.1 0.3% $0.1 0.4% - -
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.7 1.9% $0.5 1.8% ($0.2) (44.1%)
- ----------------------------------------------------------------------------------------------------
Segment Operating (Loss)
Profit ($5.1) (13.8%) $0.9 3.3% ($6.0) (637.2%)
- ----------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the third quarter of
fiscal 2008 from the comparable quarter of fiscal 2007 was comprised of an
increase of $9.1 million, or 58%, in the Construction and Engineering division,
partially offset by a decrease of $0.8 million, or 7%, 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 installation contract
which ramped up in the latter half of fiscal 2007 and the recognition of several
large utility projects and government contracts accounted for using the
percentage-of-completion method of accounting.
The segment's increased operating loss for the current quarter as compared to
the comparable quarter in fiscal 2007 was due to the increased overhead costs,
partially offset by the increased sales and the increase in gross margin
percentage. In January 2008, the Company learned that it may not be reimbursed
for certain costs incurred under an installation contract and the operating loss
for the quarter is primarily due to the losses on this contract. The
installation work on this contract is substantially complete. The Company
continues to negotiate with the customer to be reimbursed for disputed billings
under the contract. The increased overhead for the quarter was incurred to
support the increased sales volume and the additional costs required to be
expended on the aforementioned contract to substantially complete the work and
resolve open issues with the customer.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Computer Systems
- ----------------
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Net Sales $57.8 $47.4 $10.4 21.9%
- ----------------------------------------------------------------------------------------------------
Direct Costs $25.5 44.4% $21.6 45.5% ($3.9) (17.9%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $32.3 55.6% $25.8 54.5% $6.5 25.2%
- ----------------------------------------------------------------------------------------------------
Overhead $18.3 31.5% $13.0 27.5% ($5.3) (41.6%)
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $2.1 3.6% $1.9 4.0% ($0.2) (11.2%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $4.9 8.4% $4.0 8.4% ($0.9) (21.3%)
- ----------------------------------------------------------------------------------------------------
Segment Operating Profit $7.0 12.1% $6.9 14.6% $0.1 1.2%
- ----------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the third quarter of fiscal
2008 from the comparable quarter of fiscal 2007 was comprised of increases of
$4.3 million, or 33%, in database access transaction fee revenue, including ASP
directory assistance, $2.3 million, or 15%, in the Maintech division's IT
maintenance and $3.8 million, or 20%, in projects and other income. The increase
in transaction fee revenue for the current quarter included $6.3 million from
the LSSi operations (enterprise data transactions) acquired in September 2007.
The remaining transaction fee revenue decreased by $2.0 million primarily due to
a reduction of such services to a major customer as it transitions to a fixed
monthly fee model from a variable transaction-based pricing model.
The segment's increased operating profit was due to the increase in sales and
gross margin percentage, partially offset by the increase in overhead as a
percentage of sales. The increased gross profit percentage was a result of the
increased database access fees from LSSi. The increased overhead and general
administrative expenses were primarily due to the inclusion of the LSSi
operations. The increased depreciation and amortization was due to the
intangible amortization related to the LSSi acquisition.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Printing and Other
- ------------------
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Net Sales $1.6 $0.6 $1.0 191.4%
- ----------------------------------------------------------------------------------------------------
Direct Costs $1.4 83.7% $0.5 85.5% ($0.9) (185.3%)
- ----------------------------------------------------------------------------------------------------
Gross Profit $0.2 16.3% $0.1 14.5% $0.1 241.0%
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $0.9 59.0% $0.8 136.4% ($0.1) (26.1%)
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.2 11.8% $0.2 33.6% - -
- ----------------------------------------------------------------------------------------------------
Segment Operating Loss ($0.9) (54.5%) ($0.9) (155.5%) - -
- ----------------------------------------------------------------------------------------------------
The Printing and Other segment's sales increased by $1.0 million from the
comparable three-month period in fiscal 2007. The sales increase was comprised
of an increase of $0.9 million, or 170%, in printing sales, and $0.1 million in
telephone directory publishing sales. The increase in printing sales included
$0.2 million of sales to new customers.
The operating loss was the same as in the comparable period of fiscal 2007 due
to the increase in sales offset by the reduced gross margins and increased
selling and administrative costs.
Discontinued Operations
- -----------------------
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Net Sales $19.8 $21.5 ($1.7) (7.9%)
- ----------------------------------------------------------------------------------------------------
Direct Costs $9.2 46.5% $10.1 47.0% $0.9 8.9%
- ----------------------------------------------------------------------------------------------------
Gross Profit $10.6 53.5% $11.4 53.0% ($0.8) (7.0%)
- ----------------------------------------------------------------------------------------------------
Overhead $1.5 7.6% $1.9 8.8% $0.4 21.1%
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $4.1 20.7% $4.1 19.1% - -
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.4 2.0% $0.3 1.4% ($0.1) (33.3%)
- ----------------------------------------------------------------------------------------------------
Operating Profit $4.6 23.2% $5.1 23.7% ($0.5) (10.6%)
- ----------------------------------------------------------------------------------------------------
As described above, with the announced sale of the Volt Directory Systems and
Services and DataNational operations in July 2008, the results of their
operations for the current and comparable fiscal periods have been reclassified
out of their previously reported Telephone Directory segment into Discontinued
Operations. Their sales and costs for the two periods have been eliminated from
the Company's Statement of Operations and are reflected net in Discontinued
Operations. The gross components of their operations are reflected in the table
above.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED JULY 27, 2008 COMPARED
TO THE THREE MONTHS ENDED JULY 29, 2007--Continued
Discontinued Operations--Continued
- -----------------------
The components of the sales decrease for the third quarter of fiscal 2008 from
the comparable period of fiscal 2007 were decreases of $2.1 million in the
DataNational community telephone directory publishing sales, partially offset by
an increase of $0.4 million in telephone production and other sales. The sales
decrease was comprised of a $1.7 million, or 12%, reduction in same book sales,
and $0.4 million related to the timing of the delivery of the published
directories, partially offset by a net of 1 additional directory published, as
compared to the comparable period in fiscal 2007. The sales increase in
production and other sales was related to volume increases at continuing
customers.
The decrease in the segment's operating profit from the comparable quarter in
fiscal 2007 was the result of the sales decrease, partially offset by a decrease
in overhead and an increase in gross margin percentage. The overhead reduction
was primarily due to decreased indirect labor and communication costs.
General Corporate Expenses and Other Income (Expense)
- -----------------------------------------------------
Three Months Ended
----------------------------------------
July 27, 2008 July 29, 2007
----------------------------------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ----------------------------------------------------------------------------------------------------
Selling & Administrative $7.8 1.4% $8.0 1.4% $0.2 2.2%
- ----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.6 0.1% $1.4 0.2% $0.8 59.8%
- ----------------------------------------------------------------------------------------------------
Interest Income $0.9 0.1% $1.8 0.3% ($0.9) (52.8%)
- ----------------------------------------------------------------------------------------------------
Other Expense ($0.3) - ($1.7) (0.3%) $1.4 84.9%
- ----------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.4) - ($0.3) (0.1%) ($0.1) (48.2%)
- ----------------------------------------------------------------------------------------------------
Interest Expense ($2.5) (0.1%) ($0.8) (0.1%) ($1.7) (195.2%)
- ----------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the
third quarter of fiscal 2008 as compared to the comparable 2007 quarter were:
The decrease in selling and administrative expenses in the current quarter of
fiscal 2008 from the comparable 2007 fiscal quarter was primarily the result of
decreased equipment rental and communication costs.
The decrease in depreciation and amortization in the current quarter of fiscal
2008 from the comparable 2007 fiscal quarter was due to portions of the
corporate enterprise resource planning system becoming fully amortized.
Interest income decreased in the current quarter from the comparable quarter in
fiscal 2007 due to lower interest rates and a reduction in premium deposits held
by insurance companies.
Other expense decreased in the current quarter from the comparable quarter in
fiscal 2007 due to an amended securitization program which resulted in a
reduction in securitization fees and an increase in interest expense.
Interest expense increased in the current quarter over the comparable quarter in
fiscal 2007 due to additional borrowings used to fund the 2007 acquisitions and
the aforementioned amended securitization program.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents, increased by $3.5 million to $43.8 million in the
nine months ended July 27, 2008.
Operating activities used $103.3 million of cash in the first nine months of
fiscal 2008. Operating activities provided $2.1 million of cash in the first
nine months of fiscal 2007.
Operating activities in the first nine months of fiscal 2008, exclusive of
changes in operating assets and liabilities, produced $18.4 million of cash, as
the Company's net loss of $5.9 million included non-cash charges primarily for
depreciation and amortization of $29.5 million and accounts receivable
provisions of $3.1 million partially offset by income from discontinued
operations of $4.8 million and a deferred tax benefit of $3.6 million. Operating
activities in the first nine months of fiscal 2007, exclusive of changes in
operating assets and liabilities, produced $34.4 million of cash, as the
Company's net income of $16.2 million included non-cash charges primarily for
depreciation and amortization of $27.8 million partially offset by income from
discontinued operations of $5.5 million and a deferred tax benefit of $4.2
million.
Changes in operating assets and liabilities used $121.7 million of cash, net, in
the first nine months of fiscal 2008 principally due to the change in the
expiring securitization program of $120.0 million, a decrease in accounts
payable and accrued expenses of $16.0 million and a decrease in income tax
liability of $15.9 million partially offset by a decrease in the level of
inventory, primarily in the Telecommunications Services segment, of $14.2
million, a decrease in trade accounts receivable of $9.8 million and a decrease
in prepaid insurance and other current assets of $6.9 million. Changes in
operating assets and liabilities used $32.3 million of cash, net, in the first
nine months of fiscal 2007 principally due to a reduction in the expiring
securitization program of $20.0 million, an increase in the levels of inventory,
principally by the Telecommunication Services segment, and trade accounts
receivable of $16.0 million and $6.4 million, respectively, and a decrease in
income taxes of $7.2 million partially offset by an increase in deferred income
and other liabilities of $12.6 million, principally due to customer advances,
and an increase in the level of accounts payable of $7.7 million.
The $22.8 million of cash used in investing activities for the first nine months
of fiscal 2008 resulted primarily from expenditures of $21.5 million for net
additions to property, plant and equipment and $1.3 million for an acquisition
of a staffing and consulting services provider in South America and patents in
the Computer Systems segment. The $21.3 million of cash used in investing
activities for the first nine months of fiscal 2007 primarily resulted from the
$20.9 million for net additions to property, plant and equipment and
expenditures of $0.2 million for acquisitions.
The principal factors in the $123.9 million of cash provided by financing
activities in the first nine months of fiscal 2008 were borrowings of $130.0
million under the amended securitization program and an increase in notes
payable of $2.3 million partially offset by a payment of $8.1 million for the
purchase of treasury shares. The principal factors in the $3.3 million of cash
used in financing activities in the first nine months of fiscal 2007 were a
payment of $23.0 million for the purchase of treasury shares partially offset by
an increase in the level of bank loans of $19.6 million primarily due to
borrowing under the Delta Credit Facility.
Commitments
- -----------
There has been no material change through July 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.
45
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.
Credit Lines
- ------------
At July 27, 2008, the Company had credit facilities with various banks and
financial conduits which provided for borrowings and letters of credit of up to
an aggregate of $357.8 million, including the Company's $200.0 million five-year
accounts receivable securitization program (the "Amended Securitization
Program"), $42.0 million five-year unsecured 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 short-term
borrowings of $216.7 million as of July 27, 2008. Included in these borrowings
were $18.7 million of foreign currency borrowings which provide economic hedges
against foreign denominated net assets.
Amended Securitization Program
- ------------------------------
On June 3, 2008, the Company's $200.0 million accounts receivable securitization
program (see Note B), which was due to expire within the next year, was
transferred to a multi-buyer program administered by PNC Bank. The Amended
Securitization Program has a five-year term (subject to 364 day liquidity).
Under the Amended 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, borrows from two commercial paper conduits (Market Street
Funding LLC, a PNC Bank affiliate, and Relationship Funding LLC), secured by an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company. The Company retains the servicing responsibility for
the accounts receivable.
The Amended Securitization Program is not an off-balance sheet arrangement as
Volt Funding is a 100% owned consolidated subsidiary of the Company. The
receivables and related borrowings remain on the balance sheet since Volt
Funding effectively retains control over the receivables, which are no longer
treated as sold assets. Accordingly, pledged receivables are included as trade
accounts receivable, net while the corresponding borrowings are included as
short-term borrrowings on the condensed consolidated balance sheet. At July 27,
2008, Volt Funding had borrowed from $81.3 million and $48.7 million from Market
Street Funding and Relationship Funding, respectively. At July 27, 2008,
borrowings bear a weighted average interest rate of 2.94% per annum, excluding a
facility fee of 0.25% per annum paid on the entire facility and a program fee of
0.35% paid on the outstanding borrowings.
The Amended Securitization Program is subject to termination by PNC Bank (with
the consent of the majority purchasers) under certain circumstances, including,
among other things, the default rate, as defined, on receivables exceeding a
specified threshold, or the rate of collections on receivables failing to meet a
specified threshold.
At July 27, 2008, the Company was in compliance with all requirements of the
Amended Securitization Program.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Credit Lines--Continued
- ------------
Credit Agreement
- ----------------
On February 28, 2008, the Company entered into the Credit Agreement to replace
the Company's then expiring $40.0 million secured credit agreement with an
unsecured 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 and $25.0 million for borrowing in alternative currencies. At July 27,
2008, the Company had no borrowings against this facility. The administrative
agent for the Credit Facility is Bank of America, N.A. The other banks
participating in the Credit Facility are JP Morgan Chase Bank, N.A. as
syndicated agent, Wells Fargo Bank, N.A.and HSBC Bank USA, N.A.
Borrowings under the Credit Agreement 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. Based
upon the Company's leverage ratio at July 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 3.8% per annum, excluding a fee of
0.35% 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 total
funded debt to EBITDA of 3.0 to 1.0; and a requirement that the Company maintain
a minimum ratio of EBITDA, as defined, to interest expense, as defined, of 4.0
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 level of annual capital expenditures,
and the amount of investments, including business acquisitions and mergers, and
loans that may be made by the Company to its subsidiaries. The Company was in
compliance with all covenants at July 27, 2008.
Delta Credit Facility
- ---------------------
In December 2006, Volt Delta entered into the secured 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 two of the other
three lenders under the Delta Credit Facility, Bank of America, N.A. and
JPMorgan Chase, also participate in the Company's $42.0 million unsecured
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 July 27, 2008, $77.9 million was drawn on
this facility. Certain interest 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 July 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 3.0% 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 July 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 for the twelve months ended as of the last day of each fiscal quarter
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Credit Lines--Continued
- ------------
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 July 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.
On June 2, 2008, the Company's Board of Directors authorized the repurchase of
up to one million five hundred thousand (1,500,000) shares of the Company's
common stock from time to time in open market or private transactions at the
Company's discretion, subject to market conditions and other factors. The timing
and exact number of shares purchased will be at the Company's discretion and
will depend on market conditions and is subject to institutional approval for
purchases in excess of $11.6 million in fiscal year 2008 under the terms of the
Company's credit agreements. This stock buyback program does not obligate the
Company to acquire any specific number of shares and may be suspended or
discontinued at any time.
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 nine
months of fiscal 2008, this revenue comprised approximately 76% of the
Company's net consolidated sales.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
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's 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
nine months of fiscal 2008, this revenue comprised approximately 2% of the
Company's net consolidated sales.
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 nine months of fiscal 2008, this revenue comprised approximately 5%
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 nine 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 nine 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 nine months of
fiscal 2008, this revenue comprised approximately 3% of the Company's net
consolidated sales.
49
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 nine 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 nine months of fiscal 2008, this revenue comprised
approximately 3% of the Company's net consolidated sales.
Printing and Other:
Printing: Sales are derived from the Company's sales of printing services
in 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 printed documents have been
delivered. In the first nine months of fiscal 2008, this revenue comprised
approximately 1% of the Company's net consolidated sales.
Other: Sales are derived from the Company's sales of telephone directory
advertising for books it publishes as an independent publisher in 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 nine months of fiscal 2008, this revenue comprised less than 1% 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.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
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 third fiscal
quarter, or more frequently if indicators of impairment arise. The timing of the
impairment test may result in charges to earnings in the third 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.
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.
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
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.
Securitization Program - On June 3, 2008, the Company's $200.0 million accounts
receivable securitization program (the "Expiring Securitization Program") was
transferred to a multi-buyer program administered by PNC Bank. Prior to that
date, under the Expiring Securitization Program, receivables were 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, sold
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
acquired from the Company. The Company accounted for the securitization of
accounts receivable in accordance with Statement of Financial Accounting
Standards ("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 was sold, the receivable representing that interest was removed
from the condensed consolidated balance sheet (no debt was recorded) and the
proceeds from the sale were reflected as cash provided by operating activities.
The outstanding balance of the undivided interest sold to TRFCO was $120.0
million at October 28, 2007.
Under the amended Program, the receivables and related borrowings remain on the
balance sheet since Volt Funding effectively retains control over the
receivables, which are no longer treated as sold assets. Accordingly, pledged
receivables are included as trade accounts receivable, net, while the
corresponding borrowings are included as short-term borrowings on the condensed
consolidated balance sheet. At July 27, 2008, Volt Funding had borrowed $81.3
million and $48.7 million from Market Street Funding and Relationship Funding ,
respectively.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
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.
53
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, and
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.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133."
This statement requires enhanced disclosures about an entity's derivative and
hedging activities by explaining how and why derivatives are used by the entity,
how they are accounted for under Statement 133, and how derivatives affect the
entity's various financial statements. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early adoption encouraged. The Company is currently evaluating
the impact of adopting this statement.
Related Party Transactions
- --------------------------
During the first nine months of fiscal 2008, the Company paid or accrued $0.8
million to the law firm of which Lloyd Frank, a director, is of counsel, for
services rendered to the Company and expenses reimbursed. In addition, the
Company paid $19,000 to Michael Shaw, Ph. D., a brother of Steven Shaw, an
executive officer and director, for services rendered to the Company.
54
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 the Company's annual net interest expense and securitization costs by
$1.4 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 $12.7 million
at July 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 July 27, 2008, the total market value of these
investments was $5.0 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 July 27, 2008, the total of the Company's net investment in foreign
operations was $20.4 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
July 27, 2008, the Company had an outstanding foreign currency option contract
in the nominal amount equivalent to $9.5 million, which 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 July 27, 2008 by 10% would result in a pretax
gain of $2.0 million related to these positions. Similarly, a hypothetical
strengthening of the U.S. dollar against these currencies at July 27, 2008 by
10% would result in a pretax loss of $1.4 million related to these positions.
55
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at July 27, 2008.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The
information is presented in U.S. dollar equivalents, which is the Company's
reporting currency.
Interest Rate Market Risk Payments Due By Period as of July 27, 2008
- ------------------------- ------------------------------------------
Less than 1-3 3-5 After 5
Total 1 Year Years Years Years
-------------------------------------------------------------------------------------------
(Dollars in thousands of US$)
Cash and Cash Equivalents and
Restricted Cash
- -----------------------------
Money Market and Cash Accounts $ 72,414 $ 72,414
Weighted Average Interest Rate 2.12% 2.12%
--------------- --------------
Total Cash, Cash Equivalents and
Restricted Cash $ 72,414 $ 72,414
=============== ==============
Debt
- ----
Term Loan $ 12,448 $ 543 $ 1,228 $ 1,446 $ 9,231
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Note Payable $ 475 $ 130 $ 188 $ 157 -
Interest Rate 5.0% 5.0% 5.0% 5.0%
--------------- -------------- --------------- --------------- -----------------
Total Long Term Debt $ 12,923 $ 673 $ 1,416 $ 1,603 $ 9,231
=============== ============== =============== =============== ================
Short-term Borrowings $ 216,687 $ 216,687 - - -
Weighted Average Interest Rate 3.59% 3.59% - - -
--------------- -------------- --------------- --------------- ----------------
Total Debt $ 229,610 $ 217,360 $ 1,416 $ 1,603 $ 9,231
=============== ============== =============== =============== ================
56
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Foreign Exchange Market Risk Contract Values
- ------------------------------ -----------------------------------------
Fair Value
Contract Less than Option
Exchange Rate Total 1 Year Premium (1)
--------------------------------------- ---------------
(Dollars in thousands of U.S. $)
Option Contracts
- ------------------------------
Canadian $ to U.S.$ 1.05 $9,524 $9,524 $131
----------- ----------- ------------
Total Option Contracts $9,524 $9,524 $131
=========== =========== ============
(1) Represents the fair value of the foreign contracts at July 27, 2008.
57
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 July 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.
58
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
- --------------------------------------------------------------------------------
10.01 Amended and Restated Receivables Purchase Agreement dated as of June
3, 2008 among Volt Funding Corp., the various buyers and buyer agents,
Volt Information Sciences, Inc. and PNC Bank as administrator for each
buyer group.
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: September 5, 2008
By: /s/Jack Egan
--------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
59
EXHIBIT INDEX
- -------------
Exhibit
Number Description
- ------- -----------
10.01 Amended and Restated Receivables Purchase Agreement dated as of June
3, 2008 among Volt Funding Corp., the various buyers and buyer agents,
Volt Information Sciences, Inc. and PNC Bank as administrator for each
buyer group.
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