UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For The Six Months Ended April 30, 2006.
Or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
---------------------- -----------------------
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-5658129
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(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
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(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 or a non-accelerated filer.
Large Accelerated Filer Accelerated Filer X Non-Accelerated Filer
--- --- ---
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of the registrant's common stock, $.10 par value,
outstanding as of June 2, 2006 was 15,520,268.
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 -
Six and Three Months Ended April 30, 2006 and May 1, 2005 3
Condensed Consolidated Balance Sheets -
April 30, 2006 and October 30, 2005 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended April 30, 2006 and May 1, 2005 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
Item 4. Controls and Procedures 43
PART II - OTHER INFORMATION
Item 1A. Risk Factors 44
Item 4. Submission of Matters to a Vote of Security Holders 44
Item 6. Exhibits 45
SIGNATURE 45
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
---------------------------- -----------------------------
April 30, May 1, April 30, May 1,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
NET SALES $1,143,319 $ 1,043,880 $ 593,811 $ 546,045
COST AND EXPENSES:
Cost of sales 1,059,840 974,496 544,373 506,323
Selling and administrative 47,172 43,023 22,712 22,199
Depreciation and amortization 16,947 15,027 9,085 7,527
------------ ------------ ------------ ------------
1,123,959 1,032,546 576,170 536,049
------------ ------------ ------------ ------------
OPERATING PROFIT 19,360 11,334 17,641 9,996
OTHER INCOME (EXPENSE):
Interest income 1,659 1,122 621 562
Other expense-net (3,903) (1,868) (2,292) (852)
Foreign exchange loss-net (356) (260) (103) (98)
Interest expense (903) (954) (447) (442)
------------ ------------ ------------ ------------
Income before minority interest and income taxes 15,857 9,374 15,420 9,166
Minority interest (1,021) (3,253) - (1,759)
------------ ------------ ------------ ------------
Income before income taxes 14,836 6,121 15,420 7,407
Income tax provision (6,103) (2,402) (6,310) (2,880)
------------ ------------ ------------ ------------
NET INCOME $ 8,733 $ 3,719 $ 9,110 $ 4,527
============ ============ ============ ============
Per Share Data
----------------------------
Basic:
Net income $ 0.57 $ 0.24 $ 0.59 $ 0.30
============ ============ ============ ============
Weighted average number of shares 15,387 15,307 15,431 15,324
============ ============ ============ ============
Diluted:
Net income $ 0.56 $ 0.24 $ 0.59 $ 0.29
============ ============ ============ ============
Weighted average number of shares 15,476 15,444 15,516 15,446
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, October 30,
2006 2005
(Unaudited) (Audited)
---------------- ----------------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $ 44,785 61,988
Restricted cash 20,478 26,131
Short-term investments 4,371 4,213
Trade accounts receivable less allowances of $7,577
(2006) and $7,527 (2005) 355,647 399,677
Inventories 37,397 33,758
Recoverable income taxes 1,424 -
Deferred income taxes 7,384 10,246
Prepaid expenses and other assets 24,333 19,788
---------------- ----------------
TOTAL CURRENT ASSETS 495,819 555,801
Investment in securities 176 141
Property, plant and equipment-net 81,919 83,272
Deposits and other assets 1,628 1,961
Goodwill 50,484 32,623
Intangible assets-net 34,085 14,914
---------------- ----------------
TOTAL ASSETS $664,111 $688,712
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 11,547 $ 6,622
Current portion of long-term debt 452 2,404
Accounts payable 166,015 172,788
Accrued wages and commissions 55,341 55,081
Accrued taxes other than income taxes 22,473 17,586
Accrued insurance and other accruals 33,414 35,173
Deferred income and other liabilities 37,207 30,628
Income tax payable - 1,686
---------------- ----------------
TOTAL CURRENT LIABILITIES 326,449 321,968
Accrued insurance 748 1,630
Long-term debt 13,067 13,297
Deferred income taxes 15,410 13,358
Minority interest - 43,444
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares;
issued--none
Common stock, par value $.10; Authorized--30,000,000 shares;
issued and outstanding--15,519,988 shares (2006) and
15,339,255 shares (2005) 1,552 1,534
Paid-in capital 47,660 43,694
Retained earnings 258,487 249,754
Accumulated other comprehensive income 738 33
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 308,437 295,015
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $664,111 $688,712
================ ================
See accompanying notes to condensed consolidated financial statements.
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
------------------------
April 30, May 1,
2006 2005
----------- -----------
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net income $ 8,733 $ 3,719
Adjustments to reconcile net income to cash provided by
(applied to) operating activities:
Depreciation and amortization 16,947 15,027
Accounts receivable provisions 2,061 1,902
Minority interest 1,021 3,253
(Gain) loss on disposition of fixed assets (2) 85
(Gain) loss on foreign currency translation (9) 40
Deferred income tax provision (benefit) 1,484 (1,215)
Changes in operating assets and liabilities:
Accounts receivable 11,180 5,903
Securitization of accounts receivable 40,000 10,000
Inventories (3,632) 16
Prepaid expenses and other current assets (4,109) (4,117)
Other assets 331 (631)
Accounts payable (1,250) 5,305
Accrued expenses (1,128) (949)
Deferred income and other liabilities 4,963 601
Income taxes payable (4,152) (6,953)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 72,438 31,986
----------- -----------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Six Months Ended
------------------------
April 30, May 1,
2006 2005
----------- -----------
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $ 690 $ 814
Purchases of investments (578) (413)
Decrease in restricted cash 5,653 17,301
Decrease in payables related to restricted cash (5,653) (17,301)
Acquisitions (83,503) -
Proceeds from disposals of property, plant and equipment 908 673
Purchases of property, plant and equipment (13,629) (11,559)
----------- -----------
NET CASH APPLIED TO INVESTING ACTIVITIES (96,112) (10,485)
----------- -----------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (2,212) (195)
Exercise of stock options 3,984 933
Increase (decrease) in notes payable to bank 4,896 (4,135)
----------- -----------
NET CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 6,668 (3,397)
----------- -----------
Effect of exchange rate changes on cash (197) (220)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (17,203) 17,884
Cash and cash equivalents, beginning of period 61,988 44,309
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 44,785 $ 62,193
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $ 866 $ 1,108
Income taxes $ 8,238 $ 10,417
The Company purchased certain assets and assumed certain specified
liabilities. In conjunction with the acquisition of Varetis Solutions
GmbH, liabilities were assumed as follows:
Fair value of assets acquired $ 39,994
Cash paid 24,813
-----------
Liabilities assumed $ 15,181
===========
See accompanying notes to condensed consolidated financial statements.
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 April 30, 2006 and consolidated
results of operations for the six and three months ended April 30, 2006 and May
1, 2005 and consolidated cash flows for the six months ended April 30, 2006 and
May 1, 2005.
Prior to October 31, 2005, the Company elected to follow Accounting Principles
Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," to account
for its Non-Qualified Stock Option Plan under which no compensation cost is
recognized because the option exercise price is equal to at least the market
price of the underlying stock on the date of grant. Effective October 31, 2005,
the Company adopted the fair-value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123R "Share Based Payment" and the
Securities and Exchange Commission Staff Accounting Bulletin No. 107 using the
modified-prospective transition method; therefore, prior periods have not been
restated. Compensation cost recognized in the six month period ended April 30,
2006 includes compensation cost for all share-based payments granted prior to,
but not yet vested as of, October 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123.
The Company has reclassified restricted cash as a separate line on the condensed
consolidated balance sheet at October 30, 2005 and the statement of cash flows
for the six months ended May 1, 2005. The condensed consolidated statement of
cash flows now present the changes in restricted cash and payables related to
restricted cash as changes in investing activities, as compared to its previous
inclusion in the net change in cash and cash equivalents and accounts payable
(See Note I).
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 year
ended October 30, 2005. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
NOTE B--Securitization Program
The Company has an accounts receivable securitization program ("Securitization
Program"), which was amended effective January 31, 2006 to increase the level
from $150.0 million to $200.0 million and extend the maturity date to April
2008. Under the Securitization Program, receivables related to the United States
operations of the staffing solutions business of the Company and its
subsidiaries are sold from time-to-time by the Company to Volt Funding Corp., a
wholly-owned special purpose subsidiary of the Company ("Volt Funding"). Volt
Funding, in turn, sells to Three Rivers Funding Corporation ("TRFCO"), an asset
backed commercial paper conduit sponsored by Mellon Bank, N.A. and unaffiliated
with the Company, an undivided percentage ownership interest in the pool of
receivables Volt Funding acquires from the Company (subject to a maximum
purchase by TRFCO in the aggregate of $200.0 million). The Company retains the
servicing responsibility for the accounts receivable. At April 30, 2006, TRFCO
had purchased from Volt Funding a participation interest of $140.0 million out
of a pool of approximately $281.6 million of receivables.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE B--Securitization Program--Continued
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company (beyond its interest in the pool of receivables owned by Volt
Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges, related to the Securitization Program, of $3.4
million and $2.1 million in the six and three months ended April 30, 2006,
respectively, compared to $1.3 million and $0.8 million in the six and three
months ended May 1, 2005, respectively, which are included in Other Expense on
the condensed consolidated statement of operations. The equivalent cost of funds
in the Securitization Program was 5.5% per annum and 4.1% per annum in the
six-month 2006 and 2005 fiscal periods, respectively. The Company's carrying
retained interest in the receivables approximated fair value due to the
relatively short-term nature of the receivable collection period. In addition,
the Company performed a sensitivity analysis, changing various key assumptions,
which also indicated that the retained interest in receivables approximated fair
values.
At April 30, 2006 and October 30, 2005, the Company's carrying retained interest
in a revolving pool of receivables was approximately $140.4 million and $182.5
million, respectively, net of a service fee liability, out of a total pool of
approximately $281.6 million and $283.3 million, respectively. The outstanding
balance of the undivided interest sold to TRFCO was $140.0 million and $100.0
million at April 30, 2006 and October 30, 2005, respectively. Accordingly, the
trade accounts receivable included on the April 30, 2006 and October 30, 2005
balance sheets have been reduced to reflect the participation interest sold of
$140.0 million and $100.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At April 30, 2006, the Company was in compliance
with all requirements of the Securitization Program.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials by segment are as follows:
April 30, October 30,
2006 2005
----------- -----------
(In thousands)
Telephone Directory $12,349 $10,508
Telecommunications Services 15,754 17,734
Computer Systems 9,294 5,516
----------- -----------
Total $37,397 $33,758
=========== ===========
The cumulative amounts billed under service contracts at April 30, 2006 and
October 30, 2005 of $5.2 million and $9.6 million, respectively, are credited
against the related costs in inventory.
NOTE D--Short-Term Borrowings
In the first quarter of fiscal 2006, the Company's $40.0 million secured,
syndicated revolving credit agreement ("Credit Agreement") was amended to (i)
permit the consummation of the acquisition by the Company of Varetis Solutions
GmbH ("Varetis Solutions") and the twenty-four percent interest in Volt Delta
Resources LLC ("Volt Delta") owned by Nortel Networks Inc. ("Nortel Networks"),
(ii) modify certain of the financial covenants contained in the Credit Agreement
and (iii) increase the amount of financing permitted under the securitization
program. The Credit Agreement expires in April 2008.
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. The administrative agent for the
Credit Facility is JPMorgan Chase Bank, N.A. The other banks participating in
the Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB
Bank PLC and Bank of America, N.A.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at April 30,
2006, if a three-month U.S. Dollar LIBO rate was the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
5.8% per annum, including a facility fee of 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At April 30, 2006, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At April 30, 2006, four of those guarantors have pledged approximately
$56.6 million of accounts receivable, other than those in the Securitization
Program, as collateral for the guarantee obligations. Under certain
circumstances, other subsidiaries of the Company also may be required to become
guarantors under the Credit Facility.
At April 30, 2006, the Company had total outstanding foreign currency bank
borrowings of $11.5 million, $7.6 million of which were under the Credit
Agreement. These bank borrowings provide a hedge against devaluation in foreign
currency denominated assets.
NOTE E--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
April 30, October 30,
2006 2005
----------- -----------
(In thousands)
8.2% term loan (a) $13,519 $13,730
Payable to Nortel Networks (b) - 1,971
----------- -----------
13,519 15,701
Less amounts due within one year 452 2,404
----------- -----------
Total long-term debt $13,067 $13,297
=========== ===========
(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 $13.5 million at
April 30, 2006. 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 April 30, 2006 of $10.0 million. The obligation is
guaranteed by the Company.
(b) Represented the present value of $2.0 million which was paid to Nortel
Networks in February 2006, discounted at 6% per annum.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Stockholders' Equity
Changes in the major components of stockholders' equity for the six months ended
April 30, 2006 are as follows:
Common Paid-In Retained
Stock Capital Earnings
-------- -------- --------
(In thousands)
Balance at October 30, 2005 $1,534 $43,694 $249,754
Stock options exercised--183,083 shares 18 3,966 -
Net income for the six months - - 8,733
-------- -------- --------
Balance at April 30, 2006 $1,552 $47,660 $258,487
======== ======== ========
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, a gain of $656,000 and a loss of $28,000 at April 30,
2006 and October 30, 2005, respectively, and an unrealized gain, net of taxes,
of $82,000 and $61,000 in marketable securities at April 30, 2006 and October
30, 2005, respectively. Changes in these items, net of income taxes, are
included in the calculation of comprehensive loss as follows:
Six Months Ended Three Months Ended
------------------- --------------------
April 30, May 1, April 30, May 1,
2006 2005 2006 2005
--------- --------- --------- ---------
(In thousands)
Net income $8,733 $3,719 $9,110 $4,527
Foreign currency translation adjustments-net 684 (231) 297 (117)
Unrealized gain (loss) on marketable securities-net 21 (6) 7 (25)
--------- --------- --------- ---------
Comprehensive income $9,438 $3,482 $9,414 $4,385
========= ========= ========= =========
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.
Six Months Ended Three Months Ended
---------------------- ----------------------
April 30, May 1, April 30, May 1,
2006 2005 2006 2005
---------- ---------- ---------- ----------
Denominator for basic earnings per share:
Weighted average number of shares 15,387,071 15,307,380 15,431,103 15,323,593
Effect of dilutive securities:
Employee stock options 88,756 136,676 85,391 122,704
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 15,475,827 15,444,056 15,516,494 15,446,297
========== ========== ========== ==========
Options to purchase 44,200 and 45,250 shares of the Company's common stock were
outstanding at April 30, 2006 and May 1, 2005, respectively, but were not
included in the computation of diluted earnings per share because the effect of
inclusion would have been antidilutive.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the six and three months ended April
30, 2006 and May 1, 2005, included on page 27 of this Report, is an integral
part of these condensed consolidated financial statements.
During the six months ended April 30, 2006, consolidated assets decreased by
$24.6 million primarily due to an increase in the use of the Company's
Securitization Program resulting in a decrease of accounts receivable as well as
a decrease in cash and cash equivalents, partially offset by increases in
goodwill and intangible assets due to acquisitions (see Note J).
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.
Restricted cash at April 30, 2006 and October 30, 2005 was approximately $20.5
million and $26.1 million, respectively, restricted to cover obligations that
were reflected in accounts payable at such dates. These amounts primarily relate
to contracts with customers in which the Company manages the customers'
alternative staffing requirements, including the payment of associate vendors.
NOTE J--Acquisition of Businesses
On December 29, 2005, Volt Delta purchased from Nortel Networks its 24% minority
interest in Volt Delta. Under the terms of the agreement, Volt Delta was
required to pay Nortel Networks approximately $56.4 million for its minority
interest in Volt Delta, and an excess cash distribution of approximately $5.4
million. Under the terms of the agreement, Volt Delta paid $25.0 million on
December 29, 2005 and paid the remaining $36.8 million on February 15, 2006. The
transaction resulted in an increase in goodwill and intangible assets of
approximately $7.0 million and $5.6 million, respectively.
On December 30, 2005, Volt Delta acquired varetis AG's Varetis Solutions
subsidiary for $24.8 million. The acquisition of Varetis Solutions provides Volt
Delta with the resources to focus on the evolving global market for directory
information systems and services. Varetis Solutions adds technology in the area
of wireless and wireline database management, directory assistance/enquiry
automation, and wireless handset information delivery to Volt Delta's
significant technology portfolio.
The Company is presently valuing both transactions to determine the final
allocation of the purchase price to various types of potential intangible
assets. The types of intangible assets being reviewed which might exist as of
consummation of the transactions are: the existing technology of the businesses,
the value of their customer relationships, the value of trade names, the value
of contract backlogs, the value of non-compete agreements and the value of their
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses--Continued
reseller network. The value of each of the intangible assets identified will be
determined with the use of a discounted cash flow methodology. This methodology
involves discounting forecasted revenues and earnings attributable to each of
the potential intangible assets. The allocation, which is subject to
finalization of certain adjustments, is expected to be completed before the end
of fiscal 2006.
The assets and liabilities of Varetis Solutions 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 Statements of
Operations since the acquisition date.
The preliminary purchase price allocation of the fair value of assets acquired
and liabilities assumed and established is as follows:
(In thousands)
Cash $ 3,310
Accounts receivable 8,878
Inventories 7
Prepaid expenses and other assets 324
Property, plant and equipment 1,318
Goodwill 10,857
Intangible assets 15,300
Accrued wages and commissions (1,012)
Other accrued expenses (3,286)
Other liabilities (1,741)
Income taxes (1,266)
Deferred income tax (7,876)
---------
Purchase price $24,813
=========
The following unaudited pro forma information reflects the purchase from Nortel
Networks of its 24% minority interest in Volt Delta and combines the
consolidated results of operations of the Company with those of the Varetis
Solutions business as if the transactions had occurred in November 2004. 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 this acquisition been consummated at the start of fiscal 2005. In
addition, these results are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from the combined
operations.
Pro Forma Results
----------------------------------------------------
Six Months Ended Three Months Ended
----------------------------------------------------
April 30, May 1, April 30, May 1,
2006 2005 2006 2005
---------- ---------- -------- --------
(In thousands, except per share amounts)
Net sales $1,147,257 $1,055,198 $593,811 $551,496
========== ========== ======== ========
Operating profit $ 19,870 $ 12,774 $ 17,641 $ 9,851
========== ========== ======== ========
Net income $ 9,632 $ 6,474 $ 9,110 $ 5,472
========== ========== ======== ========
Earnings per share
Basic $ 0.63 $ 0.42 $ 0.59 $ 0.36
========== ========== ======== ========
Diluted $ 0.62 $ 0.42 $ 0.59 $ 0.36
========== ========== ======== ========
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE K--Goodwill and Intangibles
Goodwill and intangibles with indefinite lives are no longer amortized, but 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 an
indefinite-life intangible asset exceeds its fair value. The test for goodwill,
which is performed in the Company's second fiscal quarter, primarily uses
comparable multiples of sales and EBITDA to assist the Company in the
determination of the fair value of the goodwill and the reporting units
measured. The fiscal 2006 second quarter testing did not result in any
impairment.
The following table represents the balance of intangible assets subject to
amortization:
April 30, October 30,
2006 2005
------------ ------------
(In thousands)
Intangible assets $37,166 $16,310
Accumulated amortization 3,081 1,396
------------ ------------
Net Carrying Value $34,085 $14,914
============ ============
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 April 30, 2006, the Company's net prepaid for the outstanding
plan years was $6.0 million compared to $1.6 million at October 30, 2005.
NOTE M--Stock Options
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 April
30, 2006 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.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Stock Options--Continued
As a result of adopting SFAS No. 123R, the Company's income before taxes for the
six month period ended April 30, 2006 is $36,000 lower than it would have been
if the Company had continued to account for stock-based compensation under APB
No. 25. Compensation expense is recognized in the selling and administrative
expenses in the Company's statement of operations on a straight-line basis over
the vesting periods. Basic and dilutive net income per share for the six month
period ended April 30, 2006 would not have been different if the Company had not
adopted SFAS No. 123R, compared to the reported basic and dilutive net income
per share of $0.57 and $0.56, respectively. As of April 30, 2006, there was $0.1
million of total unrecognized compensation cost related to non-vested
share-based compensation arrangements to be recognized over a weighted average
period of 1.7 years.
The intrinsic values of options exercised during the periods ended April 30,
2006 and May 1, 2005 were not significant. The total cash received from the
exercise of stock options was $3.9 million and $0.9 million in the six month
periods ended April 30, 2006 and May 1, 2005, respectively, and is classified as
financing cash flows in the statement of cash flows. Prior to the adoption of
SFAS 123R, the Company presented all tax benefit deductions resulting from the
exercise of stock options as operating cash flows. SFAS 123R requires that cash
flows from tax benefits attributable to tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) be
classified as financing cash flows. The Company did not have significant tax
benefits from the expense of stock options for the six month period ended April
30, 2006.
There were no options granted during the six months ended April 30, 2006 or May
1, 2005.
The table below presents the pro forma effect on net loss and loss per share if
the Company had applied the fair value recognition provision to options granted
under the Company's stock option plan for the six month period ended May 1,
2005. For purposes of this pro forma disclosure, the value of the options
granted is estimated using the Black-Scholes option-pricing model and amortized
to expense over the options' vesting periods. If the Company had adopted the
fair value based method for the quarter ended May 1, 2005, additional
compensation expense of $41,000 would have been recognized in the statement of
operations.
Six Months Ended Three Months Ended
May 1, 2005 May 1, 2005
------------------- -------------------
(In thousands, except per share amounts)
Net income as reported $3,719 $4,527
Pro forma compensation expense,
net of taxes (56) (25)
------------------- -------------------
Pro forma net income $3,663 $4,502
=================== ===================
Pro forma income per share
Basic and Diluted $0.24 $0.29
=================== ===================
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
--------
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to our consolidated financial
statements and notes thereto included in Part I of this Form 10-Q and to provide
an understanding of our consolidated results of operations, financial condition
and changes in financial condition. Our MD&A is organized as follows:
o Forward-Looking Statements - This section describes some of the
language and assumptions used in this document that may have an impact
on the readers' interpretation of the financial statements.
o Critical Accounting Policies - This section discusses those accounting
policies that are considered to be both important to our financial
condition and results of operations and require us to exercise
subjective or complex judgments in their application.
o Summary of Operating Results by Segment - This section provides a
summary of operating results by segment in a tabular format.
o Executive Overview - This section provides a general description of
our business segments and provides a brief overview of the results of
operations during the accounting period.
o Results of Operations - This section provides our analysis of the line
items on our summary of operating results by segment for the current
and comparative accounting periods on both a company-wide and segment
basis. The analysis is in both a tabular and narrative format.
o Liquidity and Capital Resources - This section provides an analysis of
our liquidity and cash flows, as well as our discussion of our
commitments, securitization program and credit lines.
o New Accounting Pronouncements - This section includes a discussion of
recently published accounting authoritative literature that may have
an impact on our historical or prospective results of operations or
financial condition.
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.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
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 six
months of fiscal 2006, this revenue comprised approximately 76% of net
consolidated sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, and for certain contracts, sales are
generated by the Company's Staffing Solutions Group's managed services
operations. The Company receives an administrative fee for arranging for,
billing for and collecting the billings related to other staffing companies
("associate vendors") who have supplied personnel to the Company's
customers. The administrative fee is either charged to the customer or
subtracted from the Company payment to the associate vendor. The customer
is typically responsible for assessing the work of the associate vendor,
and has responsibility for the acceptability of its personnel, and in most
instances the customer and associate vendor have agreed that the Company
does not pay the associate vendor until the customer pays the Company.
Based upon the revenue recognition principles prescribed in Emerging Issues
Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal versus
Net as an Agent," revenue for these services, where the customer and the
associate vendor have agreed that the Company is not at risk for payment,
is recognized net of associated costs in the period the services are
rendered. In the first six months of fiscal 2006, this revenue comprised
approximately 2% of 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. 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 revenue is recognized when the project is
complete and the customer has approved the work when the Company is
responsible for project completion. In the first six months of fiscal 2006,
this revenue comprised approximately 5% of net consolidated sales.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and delivered. In the first six months of fiscal 2006,
this revenue comprised approximately 2% of net consolidated sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
the first six months of fiscal 2006, this revenue comprised approximately
1% of 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
AICPA Statement of Position ("SOP") No. 81-1, "Accounting for Performance
of Construction-Type Contracts," using the completed-contract method, to
recognize revenue on a gross basis upon customer acceptance of the project.
In the first six months of fiscal 2006, this revenue comprised
approximately 4% of 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 six months
of fiscal 2006, this revenue comprised approximately 2% of 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 six months of fiscal
2006, this revenue comprised approximately 5% of net consolidated sales.
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 six months of fiscal 2006, this revenue comprised approximately 2% of
net consolidated sales.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
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 AICPA Statement of Position 97-2 ("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
six months of fiscal 2006, this revenue comprised approximately 1% of net
consolidated sales.
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 believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Goodwill and Intangible Assets - Under Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer amortized, but is subject to annual impairment testing using fair
value methodologies. The impairment test for goodwill is a two-step process.
Step one consists of a comparison of a reporting unit with its carrying amount,
including the goodwill allocated to the reporting unit. Measurement of the fair
value of a reporting unit is based on one or more fair value measures including
present value techniques of estimated future cash flows and estimated amounts at
which the unit as a whole could be bought or sold in a current transaction
between willing parties. If the carrying amount of the reporting unit exceeds
the fair value, step two requires the fair value of the reporting unit to be
allocated to the underlying assets and liabilities of that reporting unit,
resulting in an implied fair value of goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss equal to the excess is recorded in net earnings (loss). The
Company performs its impairment testing using comparable multiples of sales and
EBITDA and other valuation methods to assist the Company in the determination of
the fair value of the reporting units measured. Intangible assets not subject to
amortization are tested annually. The impairment test consists of a comparison
of the fair value of the intangible asset with its carrying amount.
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated useful lives. Intangible assets subject to amortization 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
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds the 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 AICPA 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.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $140.0 million and
$100.0 million at April 30, 2006 and October 30, 2005, respectively.
Accordingly, the trade receivables included on the April 30, 2006 and October
30, 2005 balance sheets have been reduced to reflect the participation interest
sold. TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding Corp., a wholly-owned special purpose
subsidiary of the Company) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds, and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For each policy year, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of services in the period in which such
determination is made.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Medical Insurance Program - Beginning in April 2004, the Company became
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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005
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.
Six Months Ended Three Months Ended
--------------------- --------------------
April 30, May 1, April 30, May 1,
2006 2005 2006 2005
---------- --------- --------- ---------
(In thousands)
Net Sales:
----------
Staffing Services
Staffing $930,184 $ 856,916 $484,557 $442,822
Managed Services 524,867 609,766 273,791 312,334
---------- ---------- --------- ---------
Total Gross Sales 1,455,051 1,466,682 758,348 755,156
Less: Non-Recourse Managed Services (495,103) (593,485) (256,042) (302,292)
---------- ---------- --------- ---------
Net Staffing Services 959,948 873,197 502,306 452,864
Telephone Directory 33,011 33,073 17,226 17,369
Telecommunications Services 67,409 63,139 27,295 37,935
Computer Systems 93,411 84,114 52,137 42,920
Elimination of intersegment sales (10,460) (9,643) (5,153) (5,043)
---------- ---------- --------- ---------
Total Net Sales $1,143,319 $1,043,880 $593,811 $546,045
========== ========== ========= =========
Segment Operating Profit (Loss):
--------------------------------
Staffing Services $ 19,325 $ 9,716 $ 14,496 $ 7,263
Telephone Directory 6,278 4,608 4,017 2,501
Telecommunications Services 728 (2,236) (40) 193
Computer Systems 15,586 16,529 9,837 9,015
---------- ---------- --------- ---------
Total Segment Operating Profit 41,917 28,617 28,310 18,972
General corporate expenses (22,557) (17,283) (10,669) (8,976)
---------- ---------- --------- ---------
Total Operating Profit 19,360 11,334 17,641 9,996
Interest income and other (expense)-net (2,244) (746) (1,671) (290)
Foreign exchange loss-net (356) (260) (103) (98)
Interest expense (903) (954) (447) (442)
---------- ---------- --------- ---------
Income Before Minority Interest and Income Taxes $ 15,857 $ 9,374 $ 15,420 $ 9,166
========== ========== ========= =========
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
EXECUTIVE OVERVIEW
------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions fulfills IT and other technical, commercial
and industrial placement requirements of its customers, on both a
temporary and permanent basis together with managed staffing.
o E-Procurement Solutions provides global vendor neutral
procurement and management solutions for supplemental staffing
using web-based tools through the Company's ProcureStaff
subsidiary.
o Information Technology Solutions provides a wide range of
information technology consulting and project management services
through the Company's VMC Consulting subsidiary.
Telephone Directory: This segment publishes independent telephone
directories, provides telephone directory production services, database
management and printing.
Telecommunications Services: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services in
the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry and provides IT
maintenance services.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales 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 addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the current six and
three month periods. The sales and profits of the Staffing Services segment, in
addition to the factors noted above, were positively impacted in the six and
three months periods by a continued increase in contingent staffing. Operating
profits for the six and three month periods were higher than in the comparable
period of fiscal 2005 due to the sales increase and a reduction in overhead
costs as a percentage of sales and lower workers' compensation and payroll tax
costs, partially offset by continued pressure on the operating margins in the
VMC Consulting division.
The sales and operating results of the Telecommunications Services segment
improved in the six months of fiscal 2006 compared to the comparable fiscal 2005
period due to the sales growth, improvement in gross margins and reductions in
overhead. As explained in the Company's year-end financial statements, this
segment restructured its operations in the fourth fiscal quarter of 2005, and
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
EXECUTIVE OVERVIEW--Continued
-----------------------------
now operates in two divisions, Construction and Engineering and Network
Enterprise Solutions. The restructuring reduced overhead headcount, consolidated
two divisions and closed several leased locations.
The Computer Systems segment's sales increased in the six and three month
periods, with operating profits increasing in the three month period of fiscal
2006 from the comparable fiscal 2005 period primarily from the sales increase.
During the first quarter, Volt Delta, the principal business unit of the
Computer Systems segment, purchased from Nortel Networks its 24% minority
interest in Volt Delta for $62.0 million. Nortel Networks had originally
purchased its 24% interest in August 2004, and under the terms of the original
purchase agreement, each party had a one year option to cause Nortel Networks to
sell and Volt Delta to buy the minority interest for an amount ranging from $25
million to $70 million, starting in August 2006. During the first quarter, Volt
Delta also purchased Varetis Solutions GmbH from varetis AG for $24.8 million.
The acquisition provides Volt Delta with the resources to focus on the evolving
global market for directory information systems and services. Varetis Solutions
adds technology in the area of wireless and wireline database management,
directory assistance/inquiry automation, and wireless handset information
delivery to Volt Delta's significant technology portfolio.
The Company has, and will continue to focus on aggressively increasing its
market share while attempting to maintain margins in order to increase profits.
All segments have emphasized cost containment measures, along with improved
credit and collections procedures designed to improve the Company's cash flow.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its compliance
with the Sarbanes-Oxley Act, and the standardization and upgrading of IT
redundancy and business continuity for corporate systems and communications
networks. In the first six months of fiscal 2006, outside costs of compliance
with this Act, including software licenses, equipment, temporary staff,
consultants and professional fees amounted to $3.8 million as compared to $0.6
million in the comparable fiscal 2005 period.
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the first six months of fiscal 2006, consolidated net sales increased by
$99.4 million, or 10%, to $1.1 billion, from the comparable period in fiscal
2005. The increase was attributable to the Staffing Services segment, $86.8
million, the Computer Systems segment, $9.3 million, and the Telecommunications
Services segment, $4.3 million.
Net income for the first six months of fiscal 2006 was $8.7 million compared to
net income of $3.7 million in the comparable 2005 period. The Company reported a
pre-tax profit before minority interest for the six months of fiscal 2006 of
$15.9 million, compared to $9.4 million in the prior year period.
The Company's operating segments reported an operating profit of $41.9 million
in the first six months of fiscal 2006, an increase of $13.3 million, or 47%,
from the comparable 2005 period. The increase was attributable to the Staffing
Services segment, $9.6 million, the Telecommunications Services segment, $3.0
million, and the Telephone Directory segment, $1.7 million, partially offset by
a decrease in the Computer Systems segment of $0.9 million.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
RESULTS OF OPERATIONS - SUMMARY--Continued
------------------------------------------
General corporate expenses increased by $5.3 million, or 31%, due to costs
incurred related to compliance with the Sarbanes-Oxley Act, and to meet the
disaster recovery requirements of redundancy and business continuity for
corporate systems and communication networks, a one-time accrual of $1.2 million
related to death benefits for two senior corporate officers, as well as salary
and professional fee increases.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Six Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Staffing Services
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $930.2 $856.9 $ 73.3 8.6%
---------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $524.9 $609.8 ($84.9) (13.9%)
---------------------------------------------------------------------------------------------------------------
Sales (Net) * $959.9 $873.2 $ 86.7 9.9%
---------------------------------------------------------------------------------------------------------------
Gross Profit $144.9 15.1% $131.3 15.0% $ 13.6 10.3%
---------------------------------------------------------------------------------------------------------------
Overhead $125.6 13.1% $121.6 13.9% ($4.0) (3.2%)
---------------------------------------------------------------------------------------------------------------
Operating Profit $ 19.3 2.0% $ 9.7 1.1% $ 9.6 99.0%
---------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The net sales increase of the Staffing Services segment in the first six months
of fiscal 2006 from the comparable fiscal 2005 period was due to increased
staffing business in both the Technical Placement and the Administrative and
Industrial divisions, including higher-margin permanent placement fees. The
increase in operating profit was due to the increase in sales, reduced workers'
compensation costs, and the decrease in overhead costs as a percentage of sales.
Six Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Technical Placement
Division
--------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Gross) $1,099.1 $1,123.3 ($24.2) (2.1%)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $ 617.1 $ 541.2 $ 75.9 14.0%
---------------------------------------------------------------------------------------------------------------
Gross Profit $ 97.0 15.7% $ 89.7 16.6% $7.3 8.1%
---------------------------------------------------------------------------------------------------------------
Overhead $ 78.3 12.7% $ 75.1 13.9% ($3.2) (4.3%)
---------------------------------------------------------------------------------------------------------------
Operating Profit $ 18.7 3.0% $ 14.6 2.7% $4.1 27.7%
---------------------------------------------------------------------------------------------------------------
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
STAFFING SERVICES--Continued
----------------------------
The Technical Placement division's increase in net sales in the first six months
of fiscal 2006 from the comparable fiscal 2005 period was due to an $80.4
million, or 17%, increase in traditional alternative staffing and net managed
service associate vendor sales, partially offset by a $4.5 million, or 8%,
decrease in higher margin VMC Consulting project management and consulting
sales. The sales increase resulted from both new accounts and increased business
from existing accounts. The increase in the operating profit was the result of
the increase in sales and the reduction in overhead as a percentage of net
sales, partially offset by the decrease in gross margin percentage.
Six Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Administrative &
Industrial Division
-------------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Gross) $356.0 $343.4 $ 12.6 3.6%
---------------------------------------------------------------------------------------------------------------
Sales (Net) $342.8 $332.0 $ 10.8 3.3%
---------------------------------------------------------------------------------------------------------------
Gross Profit $ 47.9 14.0% $ 41.6 12.5% $ 6.3 15.0%
---------------------------------------------------------------------------------------------------------------
Overhead $ 47.3 13.8% $ 46.5 14.0% ($ 0.8) (1.5%)
---------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ 0.6 0.2% ($ 4.9) (1.5%) $ 5.5 113.3%
---------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in net sales in the first
six months of fiscal 2006 resulted from revenue from both new accounts and
increased business from existing accounts. The improvement in operating results
was due to the sales increase, the increase in gross margin percentage, and the
decrease in overhead as a percentage of sales. The increase in gross margin
percentage was due to lower workers' compensation costs resulting from
improvements in claims experience, together with an increase in higher margin
permanent placement sales, and decreases in payroll taxes and benefit costs.
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, 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. In addition,
the segment's business is obtained through submission of competitive proposals
for production and other contracts. These short and long-term contracts are
re-bid after expiration. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract and generally do not provide
for a minimum amount of work to be awarded to the segment. While the Company has
historically secured new contracts and believes it can secure renewals and/or
extensions of most of these contracts, some of which are material to this
segment, and obtain new business, there can be no assurance that contracts will
be renewed or extended, or that additional or replacement contracts will be
awarded to the Company on satisfactory terms.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
TELEPHONE DIRECTORY
-------------------
Six Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Telephone Directory
-------------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $33.0 $33.1 ($0.1) (0.2%)
---------------------------------------------------------------------------------------------------------------
Gross Profit $17.6 53.3% $17.5 52.9% $0.1 0.7%
---------------------------------------------------------------------------------------------------------------
Overhead $11.3 34.3% $12.9 39.0% $1.6 12.1%
---------------------------------------------------------------------------------------------------------------
Operating Profit $ 6.3 19.0% $ 4.6 13.9% $1.7 36.3%
---------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's slight sales decrease for
the first six months of fiscal 2006 from the comparable 2005 period were
decreases of $0.9 million, or 18%, in printing and telephone directory
publishing sales in Uruguay and $0.2 million, or 3%, in telephone production
operation and other sales, partially offset by increases of $1.0 million, or 5%,
in printing sales in DataNational community telephone directory sales. The sales
variance in Uruguay and Datanational was due to the timing of the delivery of
their directories. The segment's increased operating profit was predominantly
the result of the reduction in overhead, along with the slight increase in gross
margins. The overhead reduction was primarily due to the sale of the ViewTech
division in the third quarter of fiscal 2005.
Other than the DataNational division, which accounted for 63% of the segment's
fiscal 2006 first six months' sales, the segment's business is obtained through
submission of competitive proposals for production and other contracts. These
short and long-term contracts are re-bid after expiration. Many of this
segment's long-term contracts contain cancellation provisions under which the
customer can cancel the contract, even if the segment is not in default under
the contract and generally do not provide for a minimum amount of work to be
awarded to the segment. While the Company has historically secured new contracts
and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue for DataNational's directories, which
could be affected by general economic conditions.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Six Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Telecommunications
Services
--------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $67.4 $63.1 $4.3 6.8%
---------------------------------------------------------------------------------------------------------------
Gross Profit $14.6 21.7% $12.4 19.7% $2.2 17.9%
---------------------------------------------------------------------------------------------------------------
Overhead $13.9 20.6% $14.6 23.2% $0.7 5.1%
---------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ 0.7 1.1% ($2.2) (3.5%) $2.9 132.6%
---------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the first six months
of fiscal 2006 over the comparable 2005 period was due to increases of $3.2
million, or 8%, in the Construction and Engineering division, and $1.1 million,
or 4%, in the Network Enterprise Solutions division. The sales increase was
primarily due to the customer acceptance and the recognition of construction
work in the first quarter accounted for using the completed-contract method. The
improvement in operating results was due to the sales increase, the increase in
gross margins due to the mix of jobs completed, and the decrease in overhead as
a percentage of sales. The reduction in overhead is a result of the
restructuring within the division initiated in the fourth quarter of fiscal
2005. The restructuring resulted in the segment reducing its overhead headcount
and the closing and consolidation of several leased locations. Despite an
emphasis on cost controls, the results of the segment continue to be affected by
the decline in capital spending by telephone companies caused by the
consolidation within the segment's telecommunications industry fixed-line
customer base and an increasing shift by consumers to wireless and other
alternatives. This factor has also increased competition for available work,
pressuring pricing and gross margins throughout the segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically are completed
within one to three years. Many of this segment's master 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 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.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
COMPUTER SYSTEMS
----------------
Six Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Computer Systems
----------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $93.4 $84.1 $9.3 11.1%
---------------------------------------------------------------------------------------------------------------
Gross Profit $48.5 51.9% $44.8 53.3% $3.7 8.1%
---------------------------------------------------------------------------------------------------------------
Overhead $32.9 35.2% $28.3 33.6% ($4.6) (16.2%)
---------------------------------------------------------------------------------------------------------------
Operating Profit $15.6 16.7% $16.5 19.7% ($0.9) (5.7%)
---------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the first six months of fiscal
2006 over the comparable 2005 period was primarily due to increases in the
Maintech division's IT maintenance sales of $6.9 million, or 33%, $5.6 million
of new business as a result of its acquisition of Varetis Solutions in December
2005 and increased product and other revenue recognized of $1.8 million, or 22%,
partially offset by a decrease in the segment's database access transaction fee
revenue, including ASP directory assistance, which reflected a $4.9 million, or
9% due to reduced volume and pricing. The decrease in operating profit from the
comparable 2005 period was the result of the decreased gross margins and an
increase in overhead costs necessary to support its increase in sales.
During the first quarter of fiscal 2006, Volt Delta, the principal business unit
of the Computer Systems segment, purchased from Nortel Networks its 24% minority
interest in Volt Delta for $62.0 million. Nortel Networks had originally
purchased its 24% interest in August 2004, and under the terms of the original
purchase agreement, each party had a one year option to cause Nortel Networks to
sell and Volt Delta to buy the minority interest for an amount ranging from $25
million to $70 million, starting in August 2006. During the first quarter, Volt
Delta also purchased Varetis Solutions GmbH from varetis AG for $24.8 million.
The acquisition provides Volt Delta with the resources to focus on the evolving
global market for directory information systems and services. Varetis Solutions
adds technology in the area of wireless and wireline database management,
directory assistance/inquiry automation, and wireless handset information
delivery to Volt Delta's significant technology portfolio.
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.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE SIX MONTHS ENDED MAY 1, 2005--Continued
RESULTS OF OPERATIONS--OTHER
----------------------------
Six Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Other
-----
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Selling & Administrative $47.2 4.1% $43.0 4.1% ($4.2) (9.6%)
---------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $16.9 1.5% $15.0 1.4% ($1.9) (12.8%)
---------------------------------------------------------------------------------------------------------------
Interest Income $1.7 0.1% $ 1.1 0.1% $0.6 47.9%
---------------------------------------------------------------------------------------------------------------
Other Expense ($3.9) 0.3% ($1.9) 0.2% ($2.0) (108.9%)
---------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.4) - ($0.3) - ($0.1) (36.9%)
---------------------------------------------------------------------------------------------------------------
Interest Expense ($0.9) 0.1% ($1.0) 0.1% $0.1 (5.3%)
---------------------------------------------------------------------------------------------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal periods were:
The increase in selling and administrative expenses in the first six months of
fiscal 2006 from the comparable 2005 quarter was a result of increased salaries,
professional fees and costs related to compliance with the Sarbanes-Oxley Act, a
one-time accrual of $1.2 million for death benefits related to two senior
corporate executives, and increased costs to meet the disaster recovery
requirements of redundancy and business continuity for corporate systems and
communications networks.
The increase in depreciation and amortization for the first six months of fiscal
2006 from the comparable 2005 quarter was attributable to increases in fixed
assets, primarily in the Computer Systems and Staffing Services segments, as
well as increase amortization of intangibles in the Computer Systems segment due
to fiscal 2006 acquisitions.
Interest income increased due to higher interest rates together with additional
funds available for investment.
The increase in other expense was primarily due to an increase in the amount of
accounts receivable sold under the Company's Securitization Program and an
increased average cost of funds rate.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 41.1% in the first six months of 2006 compared to
39.2% in 2005. The effective rate was higher in 2006 due to higher foreign
losses for which no tax benefit was provided.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE THREE MONTHS ENDED MAY 1, 2005--Continued
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the second quarter of fiscal 2006, consolidated net sales increased by $47.8
million, or 9%, to $593.8 million, from the comparable period in fiscal 2005.
The increase was primarily attributable to the Staffing Services segment, $49.4
million and the Computer Systems segment, $9.2 million, partially offset by the
Telecommunications Services segment, $10.6 million.
Net income for the second quarter of fiscal 2006 was $9.1 million compared to
$4.5 million in the comparable 2005 second quarter. The Company reported a
pre-tax income from continuing operations before minority interest for the
second quarter of fiscal 2006 of $15.4 million, compared to $9.2 million in the
prior year's second quarter.
The Company's operating segments reported an operating profit of $28.3 million
in the second fiscal 2006 quarter, an increase of $9.3 million, or 49%, from the
comparable 2005 quarter. The increase was attributable to the Staffing Services
segment, $7.2 million, the Telephone Directory segment, $1.5 million and the
Computer Systems segment, $0.8 million, partially offset by a decrease in the
Telecommunications Services segment, $0.2 million.
General corporate expenses increased by $1.7 million, or 19%, due to a one-time
accrual of $1.2 million for death benefits for two senior executives, along with
costs related to compliance with the Sarbanes-Oxley Act and to meet the disaster
recovery requirements of redundancy and business continuity for corporate
systems and communication networks, as well as salary and professional fee
increases.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Three Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Staffing Services
-----------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $484.6 $442.8 $41.8 9.4%
---------------------------------------------------------------------------------------------------------------
Managed Service Sales $273.8 $312.3 ($38.5) (12.3%)
---------------------------------------------------------------------------------------------------------------
Sales (Net) * $502.3 $452.9 $49.4 10.9%
---------------------------------------------------------------------------------------------------------------
Gross Profit $ 78.6 15.7% $ 69.7 15.4% $ 8.9 12.9%
---------------------------------------------------------------------------------------------------------------
Overhead $ 64.1 12.8% $ 62.4 13.8% ($1.7) (2.8%)
---------------------------------------------------------------------------------------------------------------
Operating Profit $ 14.5 2.9% $ 7.3 1.6% $ 7.2 99.6%
---------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE THREE MONTHS ENDED MAY 1, 2005--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
---------------------------------------------
STAFFING SERVICES--Continued
----------------------------
The net sales increase of the Staffing Services segment in the fiscal 2006
second quarter from the comparable fiscal 2005 quarter was due to increased
staffing business in both the Technical Placement and the Administrative and
Industrial divisions, including permanent placement fees. The increase in
operating profit in the segment resulted from the increase in sales, decreased
workers' compensation costs and the decrease in overhead costs as a percentage
of sales.
Three Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Technical Placement
Division
--------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Gross) $576.6 $580.0 ($3.4) (0.6%)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $327.7 $283.3 $44.4 15.7%
---------------------------------------------------------------------------------------------------------------
Gross Profit $ 53.3 16.3% $48.2 17.0% $5.1 10.7%
---------------------------------------------------------------------------------------------------------------
Overhead $ 39.9 12.2% $39.0 13.8% ($0.9) (2.5%)
---------------------------------------------------------------------------------------------------------------
Operating Profit $ 13.4 4.1% $ 9.2 3.2% $4.2 45.6%
---------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in net sales in the second quarter
of fiscal 2006 from the comparable fiscal 2005 quarter was due to a $47.7
million, or 19% sales increase in traditional alternative staffing and net
managed service associate vendor sales, partially offset by a $3.3 million, or
10%, decrease in higher margin VMC Consulting project management and consulting
sales. The sales increase resulted from both new accounts and increased business
from existing accounts. The increase in the operating profit was the result of
the increase in sales and the reduction in overhead as a percentage of net
sales, partially offset by the decrease in gross margin percentage.
Three Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Administrative &
Industrial Division
-------------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Gross) $181.8 $175.1 $6.7 3.8%
---------------------------------------------------------------------------------------------------------------
Sales (Net) $174.6 $169.6 $5.0 2.9%
---------------------------------------------------------------------------------------------------------------
Gross Profit $ 25.3 14.5% $21.5 12.7% $3.8 17.8%
---------------------------------------------------------------------------------------------------------------
Overhead $ 24.2 13.9% $23.4 13.8% ($0.8) (3.3%)
---------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ 1.1 0.6% ($1.9) (1.1%) $3.0 (158.6%)
---------------------------------------------------------------------------------------------------------------
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE THREE MONTHS ENDED MAY 1, 2005--Continued
STAFFING SERVICES--Continued
----------------------------
The Administrative and Industrial division's increase in net sales in the second
quarter of fiscal 2006 compared to the fiscal 2005 second quarter resulted from
both new accounts and increased business from existing accounts. The improvement
in operating results was due to the sales increase and the increase in gross
margin percentage, partially offset by the slight increase in overhead as a
percentage of sales. The increase in gross margin percentage was due to lower
workers' compensation costs resulting from improvements in claims experience
together with increased higher margin permanent placement sales and decreases in
payroll taxes and benefit costs.
TELEPHONE DIRECTORY
-------------------
Three Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Telephone Directory
-------------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $17.2 $17.4 ($0.2) (0.8%)
---------------------------------------------------------------------------------------------------------------
Gross Profit $ 9.8 57.1% $ 9.2 52.8% $0.6 7.1%
---------------------------------------------------------------------------------------------------------------
Overhead $ 5.8 33.8% $ 6.7 38.4% $0.9 12.9%
---------------------------------------------------------------------------------------------------------------
Operating Profit $ 4.0 23.3% $ 2.5 14.4% $1.5 60.6%
---------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's slight sales decrease in the
second quarter of fiscal 2006 from the comparable 2005 period were decreases of
$2.3 million, or 81%, in printing and telephone directory publishing sales in
Uruguay and $0.1 million, or 3%, in telephone production operation and other
sales, partially offset by increases of $2.3 million, or 22%, in DataNational
community telephone directory publishing sales. The variances in Uruguay and
DataNational were due to the timing of the delivery of their directories. The
segment's increased operating profit was predominantly the result of the
reduction in overhead, along with the increase in gross margins on the published
directories. The overhead reduction was predominantly due to the sale of the
ViewTech division in the third quarter of fiscal 2005.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE THREE MONTHS ENDED MAY 1, 2005--Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Three Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Telecommunications
------------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $27.3 $37.9 ($10.6) (28.1%)
---------------------------------------------------------------------------------------------------------------
Gross Profit $ 4.8 17.6% $ 7.9 20.9% ($3.1) (39.5%)
---------------------------------------------------------------------------------------------------------------
Overhead $ 4.8 17.9% $ 7.7 20.4% $2.9 37.1%
---------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) - - $ 0.2 0.5% ($0.2) -
---------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the second quarter
of fiscal 2006 from the comparable 2005 quarter was due to a $11.5 million, or
44%, decrease in the Construction and Engineering division, partially offset by
an increase of $0.8 million, or 7%, in the Network Enterprise Solutions
division. The sales decrease in the Construction and Engineering division is due
to the customer acceptance and the recognition in the 2005 second quarter of two
large construction jobs accounted for using the completed-contract method. The
decrease in operating profit for the quarter from the comparable quarter in
fiscal 2005 was the result of the decrease in sales and the reduction in gross
margin percentage due to the mix of jobs completed, partially offset by the
decrease in overhead as a percentage of sales. The reduction in overhead is a
result of the restructuring within the division initiated in the fourth quarter
of fiscal 2005. Despite an emphasis on cost controls, the results of the segment
continue to be affected by the decline in capital spending by telephone
companies caused by the consolidation within the segment's telecommunications
industry customer base. This factor has also increased competition for available
work, pressuring pricing and gross margins throughout the segment.
COMPUTER SYSTEMS
----------------
Three Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Computer Systems
----------------
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Sales (Net) $52.1 $42.9 $9.2 21.5%
---------------------------------------------------------------------------------------------------------------
Gross Profit $26.6 51.0% $23.0 53.5% $3.6 15.8%
---------------------------------------------------------------------------------------------------------------
Overhead $16.7 32.1% $14.0 32.5% ($2.7) (20.1%)
---------------------------------------------------------------------------------------------------------------
Operating Profit $ 9.8 18.9% $ 9.0 21.0% $0.8 9.1%
---------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the second quarter of fiscal
2006 over the comparable 2005 quarter was primarily due to increases in the
Maintech division's IT maintenance sales of $4.4 million, or 42%, $4.9 million
of new business as a result of its acqusition of Varetis Solutions in December
2005 and increased product and other revenue recognized of $1.7 million, or 38%,
partially offset by a decrease in the segment's database access transaction fee
revenue, including ASP directory assistance, which reflected a $1.8 million, or
6%, sales decrease due to reduced volume and pricing. The increase in operating
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
THREE MONTHS ENDED APRIL 30, 2006 COMPARED
TO THE THREE MONTHS ENDED MAY 1, 2005--Continued
COMPUTER SYSTEMS--Continued
---------------------------
profit from the comparable 2005 period was the result of the increase in sales
and the decrease in overhead as a percentage of sales, partially offset by the
reduction in gross margin. Total overhead increased due to the addition of
Varetis Solutions and increased overhead within Maintech to support its
expansion.
RESULTS OF OPERATIONS--OTHER
----------------------------
Three Months Ended
-----------------------------------
April 30, 2006 May 1, 2005
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------
Other
-----
(Dollars in Millions)
---------------------------------------------------------------------------------------------------------------
Selling & Administrative $22.7 3.8% $22.2 4.1% ($0.5) (2.3%)
---------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $ 9.1 1.5% $ 7.5 1.4% ($1.6) (20.7%)
---------------------------------------------------------------------------------------------------------------
Interest Income $ 0.6 0.1% $ 0.5 0.1% $0.1 10.5%
---------------------------------------------------------------------------------------------------------------
Other Expense ($2.3) (0.4%) ($0.8) (0.2%) ($1.5) 169.0%
---------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.1) - ($0.1) - - -
---------------------------------------------------------------------------------------------------------------
Interest Expense ($0.4) (0.1%) ($0.4) (0.1%) - -
---------------------------------------------------------------------------------------------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal periods were:
The increase in selling and administrative expenses in the second quarter of
fiscal 2006 from the comparable 2005 quarter was a result of a one-time accrual
of $1.2 million for death benefits related to two senior corporate executives,
increased salaries, professional fees and costs related to compliance with the
Sarbanes-Oxley Act, and increased corporate general and administrative expenses
related to costs to meet the disaster recovery requirements of redundancy and
business continuity for corporate systems and communications networks.
The increase in depreciation and amortization for the second quarter of fiscal
2006 from the comparable 2005 quarter was attributable to increases in fixed
assets, primarily in the Computer Systems and Staffing Services segments, as
well as increase amortization of intangibles in the Computer Systems segment due
to fiscal 2006 acquisitions.
Interest income increased due to higher interest rates together with additional
funds available for investment.
The increase in other expense was primarily due to an increase in the amount of
accounts receivable sold under the Company's Securitization Program and an
increased average cost of funds rate.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 40.9% in the second quarter of 2006 compared to 38.9%
in 2005. The effective rate was higher in 2006 due to foreign losses for which
no tax benefit was provided.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, decreased by $17.2 million to $44.8 million in the
six months ended April 30, 2006.
Operating activities provided $72.4 million of cash in the first six months of
fiscal 2006. In the comparable fiscal 2005 period, operating activities used
$32.0 million in cash.
Operating activities in the first six months of fiscal 2006, exclusive of
changes in operating assets and liabilities, produced $30.2 million of cash, as
the Company's net income of $8.7 million included non-cash charges primarily for
depreciation and amortization of $16.9 million, accounts receivable provisions
of $2.1 million, minority interest of $1.0 million, and a deferred tax provision
of $1.5 million. In the first six months of fiscal 2005, operating activities,
exclusive of changes in operating assets and liabilities, produced $22.8 million
of cash, as the Company's net income of $3.7 million included non-cash charges
primarily for depreciation of $15.0 million, and accounts receivable provisions
of $1.9 million, and minority interest of $3.3 million, partially offset by a
deferred tax benefit of $1.2 million.
Changes in operating assets and liabilities provided $42.2 million of cash, net,
in the first six months of fiscal 2006 principally due to proceeds from the
Securitization Program of $40.0 million, a decrease in the level of accounts
receivable of $11.2 million and an increase in deferred income and other
liabilities of $5.0 million, partially offset by an increase in prepaid and
other assets of $4.1 million, an increase in inventory of $3.6 million, a
decrease in income taxes payable of $4.2 million and a decrease in the level of
accounts payable and accrued expenses of $2.4 million. In the first six months
of fiscal 2005 changes in operating assets and liabilities provided $9.2 million
of cash, net, principally due to proceeds from the Securitization Program of
$10.0 million, a decrease of accounts receivable of $5.9 million and an increase
in the level of accounts payable and accrued expenses of $4.4 million, partially
offset by a decrease in income tax payable of $7.0 million and an increase in
prepaid and other assets of $4.1 million.
The $96.1 million of cash applied to investing activities for the first six
months of fiscal 2006 resulted from the expenditures of $83.5 million for
acquisitions and $12.7 million for net additions to property, plant and
equipment. The $10.5 million of cash applied to investing activities for the
first six months of fiscal 2005 resulted from the net additions to property,
plant and equipment totaling of $10.9 million, offset by the net reduction in
investments of $0.4 million.
The principal factors in the $6.7 million of cash provided by financing
activities in the first six months of fiscal 2006 was an increase in the level
of bank loans of $4.9 million and funds received from employees' exercises of
stock options of $3.9 million, partially offset by the repayment of long-term
debt of $2.2 million. The principal factors in the $3.4 million of cash applied
to financing activities in the first six months of fiscal 2005 was a decrease in
the level of bank loans of $4.1 million, partially offset by the funds received
from employees' exercises of stock options of $0.9 million.
Commitments
-----------
There has been no material change through April 30, 2006 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended October
30, 2005.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Off-Balance Sheet Financing
---------------------------
The Company has no off-balance sheet financing arrangements, as that term has
meaning in Item 303(a) (4) of Regulation S-K.
Securitization Program
----------------------
The Company has an accounts receivable securitization program ("Securitization
Program"), which was amended effective January 31, 2006 to increase the level
from $150.0 million to $200.0 million and extend the maturity date to April
2008. Under the Securitization Program, receivables related to the United States
operations of the staffing solutions business of the Company and its
subsidiaries are sold from time-to-time by the Company to Volt Funding Corp., a
wholly-owned special purpose subsidiary of the Company ("Volt Funding"). Volt
Funding, in turn, sells to Three Rivers Funding Corporation ("TRFCO"), an asset
backed commercial paper conduit sponsored by Mellon Bank, N.A. and unaffiliated
with the Company, an undivided percentage ownership interest in the pool of
receivables Volt Funding acquires from the Company (subject to a maximum
purchase by TRFCO in the aggregate of $200.0 million). The Company retains the
servicing responsibility for the accounts receivable. At April 30, 2006, TRFCO
had purchased from Volt Funding a participation interest of $140.0 million out
of a pool of approximately $281.6 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company (beyond its interest in the pool of receivables owned by Volt
Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better or the equivalent thereof from a nationally
recognized rating organization. At April 30, 2006, the Company was in compliance
with all requirements of its Securitization Program.
In May 2006, the Company decreased the amount of participation interest sold to
$130.0 million from $140.0 million.
Credit Lines
------------
In the first quarter of fiscal 2006, the Company's $40.0 million secured,
syndicated revolving credit agreement ("Credit Agreement") was amended to (i)
permit the consummation of the acquisition by the Company of Varetis Solutions
and the twenty-four percent interest in Volt Delta owned by Nortel Networks,
(ii) modify certain of the financial covenants contained in the Credit Agreement
and (iii) increase the amount of financing permitted under the securitization
program. The Credit Agreement expires in April 2008.
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. The administrative agent for the
Credit Facility is JPMorgan Chase Bank, N.A. The other banks participating in
the Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB
Bank PLC and Bank of America, N.A.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided, by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at April 30,
2006, if a three-month U.S. Dollar LIBO rate was the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
5.8% per annum, including a facility fee of 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At April 30, 2006, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At April 30, 2006, four of those guarantors have pledged approximately
$56.6 million of accounts receivable, other than those in the Securitization
Program, as collateral for the guarantee obligations. Under certain
circumstances, other subsidiaries of the Company also may be required to become
guarantors under the Credit Facility.
At April 30, 2006, the Company had credit lines with domestic and foreign banks
which provided for borrowings and letters of credit up to an aggregate of $51.4
million, including $40.0 million under the Credit Agreement, and the Company had
total outstanding foreign currency bank borrowings of $11.5 million, $7.6
million of which were under the Credit Agreement. These bank borrowings provide
a hedge against devaluation in foreign currency denominated assets.
Summary
-------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through, at least, the next twelve
months.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2006
------------------------------------------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement establishes, unless impracticable, retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. The provisions of this Statement are effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not believe that the adoption of this
Statement in fiscal 2006 will have a material impact on the Company's
consolidated financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140". This
Statement, among other things, allows a preparer to elect fair value measurement
of instruments in cases in which a derivative would otherwise have to be
bifurcated. The provisions of this Statement are effective for all financial
instruments acquired or issued in fiscal years beginning after September 15,
2006. Early adoption is permitted for instruments that an entity holds at the
date of adoption on an instrument-by-instrument basis. The Company does not
believe that the adoption of this Statement in fiscal 2007 will have a material
impact on the Company's consolidated financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140." This Statement amends
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", with respect to the accounting for separately
recognized servicing assets and servicing liabilities. The provisions of this
Statement are effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006. Early adoption is permitted for
instruments that an entity holds at the date of adoption on an
instrument-by-instrument basis. The Company does not believe that the adoption
of this Statement in fiscal 2007 will have a material impact on the Company's
consolidated financial position or results of operations.
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company does not believe the Act will have a material impact on the
Company's consolidated financial position or results of operations.
Related Party Transactions
--------------------------
During the first six months of fiscal 2006, the Company paid or accrued $0.4
million to the law firm of which Lloyd Frank, a director, is of counsel,
primarily for services rendered.
The Company rents approximately 2,600 square feet of office space to a
corporation owned by Steven A. Shaw, President, Principal Executive Officer and
a director, in the Company's El Segundo, California facility, which the Company
does not require for its own use, on a month-to-month basis at a rental of
$1,750 per month. Based on the nature of the premises and a recent market survey
conducted for the Company, the Company believes the rent is the fair market
rental for such space.
40
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $200 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest expense and securitization costs by $0.9
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 $13.7 million
at April 30, 2006. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender 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 April 30, 2006, the total market value of these
investments was $4.4 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 April 30, 2006, the total of the Company's net investment in foreign
operations was $5.7 million which was reduced to $3.8 million on May 9, 2006,
when the Company purchased a foreign currency option. 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. 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 April
30, 2006 by 10% would result in a pretax gain of $0.6 million related to these
positions. Similarly, a hypothetical strengthening of the U.S. dollar against
these currencies at April 30, 2006 by 10% would result in a pretax loss of $0.6
million related to these positions.
41
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at April 30, 2006.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of April 30, 2006
------------------------- -------------------------------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
---------- ---------- --------- ---------- -------------
(Dollars in thousands of US$)
Cash and Cash Equivalents and Restricted Cash
------------------------------------------------
Money Market and Cash Accounts $ 65,263 $ 65,263
Weighted Average Interest Rate 4.6% 4.6%
---------- ----------
Total Cash, Restricted Cash and Cash Equivalents $ 65,263 $ 65,263
========== ==========
Securitization Program
----------------------
Accounts Receivable Securitization $140,000 $140,000
Finance Rate 4.9% 4.9%
---------- ----------
Securitization Program $140,000 $140,000
========== ==========
Debt
----
Term Loan $ 13,519 $ 452 $ 1,599 $ 1,306 $ 10,162
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $ 11,547 $ 11,547
Weighted Average Interest Rate 3.9% 3.9% - - -
---------- ---------- --------- ---------- -------------
Total Debt $ 25,066 $ 11,999 $ 1,599 $ 1,306 $ 10,162
========== ========== ========= ========== =============
42
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 April 30,
2006 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 and the events described below, management concluded that, as of the
date of their evaluation, the Company's disclosure controls and procedures were
effective as of April 30, 2006 to ensure that material information relating to
the Company and its subsidiaries is made known to them on a timely basis.
As of October 30, 2005, the Company's management concluded that the Company did
not maintain effective internal controls over financial reporting at a single
subsidiary because of the effect of a material weakness in the Company's system
of internal controls, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The subsidiary did
not appropriately calculate and reconcile its fixed assets and related
depreciation detail records to the amounts recorded in its financial statements
and did not properly reconcile the deferred tax liability recorded in its
financial statements relating to depreciation timing differences to the
supporting documentation. These findings resulted in material adjustments to the
preliminary consolidated financial statements.
Remediation Efforts Related to the Material Weakness in Internal Controls
The Company's management reviewed and evaluated the design of the control
procedure relating to depreciation of assets and reconciliation of the deferred
tax liability, and has taken the following actions to remediate the reported
material weakness in internal controls over financial reporting by:
o The creation of additional positions within the affected subsidiary,
including an accounting and finance compliance officer to review and
coordinate with the subsidiary controller, the implementation and
maintenance of its internal controls over financial reporting.
o Requiring certain changes to the fixed asset sub-ledgers be reviewed
and approved in writing by the subsidiary controller.
o Adhering to the Company's financial statement closing process
monitoring controls and documentation procedures related to the
Company's fixed asset and income tax provision policies.
After the completion of the evaluation, the Company began its remediation
program to correct the material weakness in its processes reported above. The
Company's management has discussed this material weakness and initial corrective
actions and future plans with the Audit Committee and the Company's Board of
Directors who concurred with management's plans.
As of April 30, 2006, the Company's management believes that the material
weakness reported above has been corrected and that the control procedures
relating to the depreciation of assets and reconciliation of the deferred tax
liability are operating effectively.
43
CONTROLS AND PROCEDURES--Continued
Changes in Internal Control over Financial Reporting
Except as set forth above, 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
Set forth below is a new risk factor not included in the risk factors contained
in the registrant's Annual Report on Form 10-K for the fiscal year ended October
30,2005:
There has been an increase in litigation in the United States by temporary
workers against users and providers of temporary services claiming that
temporary workers are entitled to various rights given to traditional employees
or for violations of applicable labor codes. The Company does not know the
effect, if any, the resolution of these cases will have on the industry or upon
the Staffing Solutions Group's business, but adverse decisions may adversely
affect the business of the staffing services segment.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2006 Annual Meeting of shareholders held on April 6, 2006,
shareholders:
(a) elected the following to serve as Class I directors of the Company
until the 2008 Annual Meeting of the shareholders by the following
votes:
For Vote Withheld
--- -------------
Steven A. Shaw 14,399,242 393,110
Lloyd Frank 14,184,856 607,496
Bruce Goodman 14,251,011 541,341
Mark N. Kaplan 14,446,374 345,978
(b) ratified the action of the Board of Directors in appointing Ernst &
Young LLP as the Company's independent registered public accounting
firm for the fiscal year ending October 29, 2006 by the following
vote:
For Against Abstain
--- ------- -------
14,730,799 46,884 14,669
44
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
--------------------------------------------------------------------------------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
Date: June 8, 2006
By: /s/Jack Egan
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Jack Egan
Senior Vice President and
Principal Financial Officer
45
EXHIBIT INDEX
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Exhibit Description
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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