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 Nine Months Ended July 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
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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 September 1, 2006 was 15,634,938.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) --
Nine and Three Months Ended July 30, 2006 and July 31, 2005 3
Condensed Consolidated Balance Sheets --
July 30, 2006 (Unaudited) and October 30, 2005 4
Condensed Consolidated Statements of Cash Flows (Unaudited) --
Nine Months Ended July 30, 2006 and July 31, 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 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)
Nine Months Ended Three Months Ended
----------------- ------------------
July 30, July 31, July 30, July 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
NET SALES $1,728,233 $1,587,395 $584,914 $543,515
COST AND EXPENSES:
Cost of sales 1,595,568 1,477,068 535,728 502,572
Selling and administrative 71,061 65,964 23,889 22,941
Depreciation and amortization 26,022 22,627 9,075 7,600
----------- ----------- ----------- -----------
1,692,651 1,565,659 568,692 533,113
----------- ----------- ----------- -----------
OPERATING PROFIT 35,582 21,736 16,222 10,402
OTHER INCOME (EXPENSE):
Interest income 2,383 1,868 724 746
Other expense-net (5,721) (2,911) (1,818) (1,043)
Foreign exchange (loss) gain-net (707) (116) (351) 144
Interest expense (1,402) (1,382) (499) (428)
----------- ----------- ----------- -----------
Income before minority interest and income taxes 30,135 19,195 14,278 9,821
Minority interest (1,021) (4,704) - (1,451)
----------- ----------- ----------- -----------
Income before income taxes 29,114 14,491 14,278 8,370
Income tax provision (12,028) (5,806) (5,925) (3,404)
----------- ----------- ----------- -----------
NET INCOME $17,086 $8,685 $8,353 $4,966
=========== =========== =========== ===========
Per Share Data
Basic:
Net income $1.11 $0.57 $0.54 $0.32
=========== =========== =========== ===========
Weighted average number of shares 15,444 15,314 15,559 15,328
=========== =========== =========== ===========
Diluted:
Net income $1.11 $0.56 $0.53 $0.32
=========== =========== =========== ===========
Weighted average number of shares 15,544 15,427 15,679 15,392
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 30, October 30,
2006 2005
(Unaudited) (Audited)
----------- -----------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $45,258 $61,988
Restricted cash 23,846 26,131
Short-term investments 4,410 4,213
Trade accounts receivable less allowances of $7,318 and $7,527, respectively 360,597 399,677
Inventories 36,360 33,758
Deferred income taxes 8,522 10,246
Prepaid expenses and other assets 25,779 19,788
----------- -----------
TOTAL CURRENT ASSETS 504,772 555,801
Investment in securities 160 141
Property, plant and equipment, net 78,750 83,272
Deposits and other assets 1,741 1,961
Goodwill 50,523 32,623
Intangible assets, net 34,332 14,914
----------- -----------
TOTAL ASSETS $670,278 $688,712
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $10,410 $6,622
Current portion of long-term debt 461 2,404
Accounts payable 172,762 172,788
Accrued wages and commissions 56,776 55,081
Accrued taxes other than income taxes 18,855 17,586
Accrued insurance and other accruals 34,007 35,173
Deferred income and other liabilities 30,101 30,628
Income tax payable 946 1,686
----------- -----------
TOTAL CURRENT LIABILITIES 324,318 321,968
Accrued insurance - 1,630
Long-term debt 12,948 13,297
Deferred income taxes 13,561 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--15,616,358 shares (2006) and 15,339,255 shares (2005) 1,562 1,534
Paid-in capital 50,567 43,694
Retained earnings 266,840 249,754
Accumulated other comprehensive income 482 33
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 319,451 295,015
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $670,278 $688,712
=========== ===========
See accompanying notes to condensed consolidated financial statements (unaudited).
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-----------------
July 30, July 31,
2006 2005
----------- -----------
(Restated)
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net income $17,086 $8,685
Adjustments to reconcile net income to cash provided by (applied to) operating activities:
Depreciation and amortization 26,022 22,627
Accounts receivable provisions 2,557 3,138
Minority interest 1,021 4,704
Loss on disposition of fixed assets 11 122
Loss on foreign currency translation 14 48
Deferred income tax (benefit) (1,511) (2,349)
Share-based compensation expense related to employee stock options 57 -
Excess tax benefits from share-based compensation (88) -
Changes in operating assets and liabilities:
Accounts receivable 36,280 9,926
Securitization of accounts receivable 10,000 25,000
Inventories (2,595) (4,544)
Prepaid expenses and other current assets (5,474) (5,106)
Other assets 219 (954)
Accounts payable 1,936 (10,765)
Accrued expenses (3,544) (3,364)
Deferred income and other liabilities (2,719) (5,317)
Income taxes payable (86) (5,170)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $79,186 $36,681
----------- -----------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) -- Continued
Nine Months Ended
-----------------
July 30, July 31,
2006 2005
----------- -----------
(Restated)
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $975 $969
Purchases of investments (1,090) (652)
Decrease in restricted cash 2,285 19,554
Decrease in payables related to restricted cash (2,285) (19,554)
Acquisitions - business (83,503) -
Acquisition - directory assistance data (1,929) -
Proceeds from disposals of property, plant and equipment 1,366 444
Purchases of property, plant and equipment (18,035) (17,407)
----------- -----------
NET CASH APPLIED TO INVESTING ACTIVITIES (102,216) (16,646)
----------- -----------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (2,321) (296)
Exercise of stock options 5,276 1,228
Excess tax benefits from share-based compensation 88 -
Increase in borrowings 3,654 124
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,697 1,056
----------- -----------
Effect of exchange rate changes on cash (397) (545)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,730) 20,546
Cash and cash equivalents, beginning of period 61,988 44,309
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $45,258 $64,855
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $1,372 $1,422
Income taxes $13,568 $13,140
Non-cash financing activities:
Tendered common stock for stock option exercises $72 -
See accompanying notes to condensed consolidated financial statements (unaudited).
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at July 30, 2006 and consolidated
results of operations for the nine and three months ended July 30, 2006 and July
31, 2005 and consolidated cash flows for the nine months ended July 30, 2006 and
July 31, 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 nine month period ended July 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 statement
of cash flows for the nine months ended July 31, 2005. The condensed
consolidated statement of cash flows 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/A for the year
ended October 30, 2005. Except as described above, 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 amended effective August 31, 2006 to
extend the maturity date to April 2009. Under the Securitization Program,
receivables related to the United States operations of the staffing solutions
business of the Company and its subsidiaries are sold from time-to-time by the
Company to Volt Funding Corp., a wholly-owned special purpose subsidiary of the
Company ("Volt Funding"). Volt Funding, in turn, sells to Three Rivers Funding
Corporation ("TRFCO"), an asset backed commercial paper conduit sponsored by
Mellon Bank, N.A. and unaffiliated with the Company, an undivided percentage
ownership interest in the pool of receivables Volt Funding acquires from the
Company (subject to a maximum purchase by TRFCO in the aggregate of $200.0
million). The Company retains the servicing responsibility for the accounts
receivable. At July 30, 2006, TRFCO had purchased from Volt Funding a
participation interest of $110.0 million out of a pool of approximately $270.8
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 $5.0
million and $1.6 million in the nine and three months ended July 30, 2006,
respectively, compared to $2.2 million and $0.9 million in the nine and three
months ended July 31, 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 4.0% per annum in the
nine-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 July 30, 2006 and October 30, 2005, the Company's carrying retained interest
in a revolving pool of receivables was approximately $159.8 million and $182.5
million, respectively, net of a service fee liability, out of a total pool of
approximately $270.8 million and $283.3 million, respectively. The outstanding
balance of the undivided interest sold to TRFCO was $110.0 million and $100.0
million at July 30, 2006 and October 30, 2005, respectively. Accordingly, the
trade accounts receivable included on the July 30, 2006 and October 30, 2005
balance sheets have been reduced to reflect the participation interest sold of
$110.0 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 July 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:
July 30, October 30,
2006 2005
----------- -----------
(In thousands)
Telephone Directory $13,093 $10,508
Telecommunications Services 18,425 17,734
Computer Systems 4,842 5,516
----------- -----------
Total $36,360 $33,758
=========== ===========
The cumulative amounts billed under service contracts at July 30, 2006 and
October 30, 2005 of $8.9 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 July 30,
2006, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
6.3% 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 July 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 July 30, 2006, four of those guarantors have pledged approximately
$40.6 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 July 30, 2006, the Company had total outstanding foreign currency bank
borrowings of $10.4 million, $6.4 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:
July 30, October 30,
2006 2005
----------- -----------
(In thousands)
8.2% term loan (a) $13,409 $13,730
Payable to Nortel Networks (b) - 1,971
----------- -----------
13,409 15,701
Less amounts due within one year 461 2,404
----------- -----------
Total long-term debt $12,948 $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 $13.4 million at
July 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 July 30, 2006 of $9.9 million. The obligation is
guaranteed by the Company.
(b) Paid to Nortel Networks in February 2006.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued
NOTE F -- Stockholders' Equity
Changes in the major components of stockholders' equity for the nine months
ended July 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 -- 277,103 shares 28 6,873 -
Net income for the nine months - - 17,086
--------- --------- ---------
Balance at July 30, 2006 $1,562 $50,567 $266,840
========= ========= =========
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, a gain of $446,000 and a loss of $28,000 at July 30,
2006 and October 30, 2005, respectively, and an unrealized gain, net of taxes,
of $36,000 and $61,000 in marketable securities at July 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:
Nine Months Ended Three Months Ended
----------------- ------------------
July 30, July 31, July 30, July 31,
2006 2005 2006 2005
-------- -------- -------- --------
(In thousands)
Net income $17,086 $8,685 $8,353 $4,966
Foreign currency translation adjustments, net 474 (263) (210) (32)
Unrealized (loss) gain on marketable securities, net (25) 24 (46) 30
-------- -------- -------- --------
Comprehensive income $17,535 $8,446 $8,097 $4,964
======== ======== ======== ========
NOTE G -- Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Nine Months Ended Three Months Ended
----------------- ------------------
July 30, July 31, July 30, July 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Denominator for basic earnings per share:
Weighted average number of shares 15,444,151 15,314,088 15,558,597 15,327,506
Effect of dilutive securities:
Employee stock options 99,359 112,639 120,562 64,565
----------- ----------- ----------- -----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 15,543,510 15,426,727 15,679,159 15,392,071
=========== =========== =========== ===========
Options to purchase 2,000 and 133,785 shares of the Company's common stock were
outstanding at July 30, 2006 and July 31, 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 nine and three months ended July
30, 2006 and July 31, 2005, starting on page 22 of this Report, is an integral
part of these condensed consolidated financial statements.
During the nine months ended July 30, 2006, consolidated assets decreased by
$18.4 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. At July 30, 2006, the Company had an outstanding
foreign currency option contract in the nominal amount equivalent to $2.8
million, which approximated its net investment in foreign operations and is
accounted for as a hedge under SFAS No. 52, "Foreign Currency Translation."
Restricted cash at July 30, 2006 and October 30, 2005 was approximately $23.8
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
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- Continued
NOTE J -- Acquisition of Businesses -- Continued
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
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 10,896
Intangible assets 15,300
Accrued wages and commissions (1,012)
Other accrued expenses (3,325)
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
-----------------
Nine Months Ended Three Months Ended
----------------- ------------------
July 30, July 31, July 30, July 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
Net sales $1,732,172 $1,603,612 $584,914 $548,414
=========== =========== =========== ===========
Operating profit $36,117 $23,439 $16,247 $10,665
=========== =========== =========== ===========
Net income $17,999 $12,445 $8,367 $5,971
=========== =========== =========== ===========
Earnings per share
Basic $1.17 $0.81 $0.54 $0.39
=========== =========== =========== ===========
Diluted $1.16 $0.81 $0.53 $0.39
=========== =========== =========== ===========
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:
July 30, October 30,
2006 2005
----------- -----------
(In thousands)
Intangible assets $39,094 $16,310
Accumulated amortization 4,762 1,396
----------- -----------
Net Carrying Value $34,332 $14,914
=========== ===========
In fiscal 2006, the total intangible assets acquired were $20.9 million for
acquisition of businesses (see Note J) and $1.9 million for directory assistance
data.
NOTE L -- Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At July 30, 2006, the Company's net prepaid for the outstanding
plan years was $7.9 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 July
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
nine month period ended July 30, 2006 is $57,000 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 nine month
period ended July 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 $1.11. As of July 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 1.8 years.
The intrinsic values of options exercised during the periods ended July 30, 2006
and July 31, 2005 was $3.9 million and $0.6 million, respectively. The total
cash received from the exercise of stock options was $5.3 million and $1.2
million in the nine month periods ended July 30, 2006 and July 31, 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 nine
month period ended July 30, 2006. The actual tax benefit realized on the
exercise of options was $1.6 million for the nine month period ended July 30,
2006.
There were no options granted during the nine months ended July 30, 2006 or July
31, 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 nine month period ended July 31,
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 July 31, 2005, additional
compensation expense of $40,000 would have been recognized in the statement of
operations.
Nine Months Ended Three Months Ended
July 31, 2005 July 31, 2005
------------- -------------
(In thousands, except per share amounts)
Net income as reported $8,685 $4,966
Pro forma compensation expense, net of taxes (80) (24)
------------- -------------
Pro forma net income $8,605 $4,942
============= =============
Pro forma income per share
Basic and Diluted $0.56 $0.32
============= =============
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 nine
months of fiscal 2006, this revenue comprised approximately 77% 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 nine 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 nine 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 nine 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 nine 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 nine months of fiscal 2006, this revenue comprised
approximately 3% 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 nine 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 nine 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 nine 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
nine 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 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 eventual
disposal of the asset or asset group. An impairment loss is recognized when the
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
Critical Accounting Policies -- Continued
----------------------------
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 $110.0
million and $100.0 million at July 30, 2006 and October 30, 2005, respectively.
Accordingly, the trade receivables included on the July 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
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 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.
Nine Months Ended Three Months Ended
----------------- ------------------
July 30, July 31, July 30, July 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
(In thousands)
Net Sales:
Staffing Services
Staffing $1,415,066 $1,297,067 $484,882 $440,151
Managed Services 806,815 888,105 281,948 278,339
----------- ----------- ----------- -----------
Total Gross Sales 2,221,881 2,185,172 766,830 718,490
Less: Non-Recourse Managed Services (762,694) (861,790) (267,591) (268,305)
----------- ----------- ----------- -----------
Net Staffing Services 1,459,187 1,323,382 499,239 450,185
Telephone Directory 54,437 56,972 21,426 23,899
Telecommunications Services 89,959 93,964 22,550 30,825
Computer Systems 139,716 127,920 46,305 43,806
Elimination of intersegment sales (15,066) (14,843) (4,606) (5,200)
----------- ----------- ----------- -----------
Total Net Sales $1,728,233 $1,587,395 $584,914 $543,515
=========== =========== =========== ===========
Segment Operating Profit (Loss):
Staffing Services $35,573 $16,668 $16,248 $6,952
Telephone Directory 10,521 10,211 4,243 5,603
Telecommunications Services 539 (3,219) (189) (983)
Computer Systems 21,632 24,579 6,046 8,050
----------- ----------- ----------- -----------
Total Segment Operating Profit 68,265 48,239 26,348 19,622
General corporate expenses (32,683) (26,503) (10,126) (9,220)
----------- ----------- ----------- -----------
Total Operating Profit 35,582 21,736 16,222 10,402
Interest income and other (expense), net (3,338) (1,043) (1,094) (297)
Foreign exchange (loss) gain, net (707) (116) (351) 144
Interest expense (1,402) (1,382) (499) (428)
----------- ----------- ----------- -----------
Income Before Minority Interest and Income Taxes $30,135 $19,195 $14,278 $9,821
=========== =========== =========== ===========
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 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.
The Company's current nine-month sales and operating profits were the highest in
its history, and the current quarter represented the highest third quarter sales
and operating profits in the Company's history. Numerous non-seasonal factors
impacted sales and profits in the current nine and three month periods.
The Staffing Services segment recorded its highest nine-month sales and
operating profits, and in the current quarter it recorded its highest historical
third quarter sales and operating profits. The sales and profits of the Staffing
Services segment, in addition to the factors noted above, were positively
impacted in the nine and three months periods by a continued increase in
contingent staffing. Operating profits for the nine and three month periods were
higher than in the comparable period of fiscal 2005 due to the sales increase, 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 segment has been
working closely with customers to better manage workers' compensation costs
which are approximately $2.5 million below last year's run rate per quarter.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 2005 -- Continued
EXECUTIVE OVERVIEW -- Continued
-------------------------------
The sales and operating profits of the Telephone Directory segment decreased in
the current quarter primarily due to the timing of directories published and
delivered, as compared to the comparable quarter in the prior year. An increase
in publication and deliveries of telephone directories in the second quarter of
2006 impacted the third quarter results.
The operating results of the Telecommunications Services segment improved in the
nine and three month periods of fiscal 2006 compared to the comparable fiscal
2005 periods due to 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 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 nine and three month
periods, with operating profits decreasing in both periods of fiscal 2006 from
the comparable fiscal 2005 periods, primarily due to decreased gross margins and
increased overhead and amortization of intangible assets.
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. The Company purchased Nortel's minority interest prior
to this contract provision becoming effective. 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. (See Part II Item
1A-Risk Factors in this Report.)
The Company has focused, and will continue to focus on aggressively increasing
its market share while attempting to maintain margins in order to increase
profits. 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. In the first nine months of fiscal 2006, outside
costs of compliance with this Act, including software licenses, equipment,
temporary staff, consultants and professional fees amounted to $5.8 million as
compared to $1.4 million in the comparable fiscal 2005 period.
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the first nine months of fiscal 2006, consolidated net sales increased by
$140.8 million, or 9%, to $1.7 billion, from the comparable period in fiscal
2005. The increase was attributable to the Staffing Services segment, $135.8
million, and the Computer Systems segment, $11.8 million, partially offset by
decreases in the Telecommunications Services segment, $4.0 million, and the
Telephone Directory segment, $2.5 million.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 2005 -- Continued
RESULTS OF OPERATIONS -- SUMMARY -- Continued
---------------------------------------------
Net income for the first nine months of fiscal 2006 was $17.1 million compared
to net income of $8.7 million in the comparable 2005 period. The Company
reported a pre-tax profit before minority interest for the nine months of fiscal
2006 of $30.1 million compared to $19.2 million in the prior year period.
The Company's operating segments reported an operating profit of $68.3 million
in the first nine months of fiscal 2006, an increase of $20.0 million, or 42%,
from the comparable 2005 period. The increase was attributable to the Staffing
Services segment, $18.9 million, the Telecommunications Services segment, $3.8
million, and the Telephone Directory segment, $0.3 million, partially offset by
a decrease in the Computer Systems segment of $2.9 million.
General corporate expenses increased by $6.2 million, or 23%, due to costs
incurred related to compliance with the Sarbanes-Oxley Act, and 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
-----------------
Nine Months Ended
-----------------
July 30, 2006 July 31, 2005
------------- -------------
Staffing Services % of % of Favorable Favorable
----------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $1,415.1 $1,297.1 $118.0 9.1%
----------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $806.8 $888.1 ($81.3) (9.2%)
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $1,459.2 $1,323.4 $135.8 10.3%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $225.8 15.5% $200.4 15.1% $25.4 12.7%
----------------------------------------------------------------------------------------------------------------------------
Overhead $190.2 13.0% $183.7 13.9% ($6.5) (3.6%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $35.6 2.4% $16.7 1.2% $18.9 113.2%
----------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The net sales increase of the Staffing Services segment in the first nine 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, the increase in
gross margin percentage, primarily due to reduced workers' compensation and
payroll tax costs, and the decrease in overhead costs as a percentage of sales.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 2005 -- Continued
STAFFING SERVICES -- Continued
-----------------
Nine Months Ended
-----------------
July 30, 2006 July 31, 2005
Technical Placement ------------- -------------
Division % of % of Favorable Favorable
-------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $1,682.9 $1,667.4 $15.5 0.9%
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $941.3 $823.3 $118.0 14.4%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $150.2 16.0% $136.7 16.6% $13.5 9.9%
----------------------------------------------------------------------------------------------------------------------------
Overhead $118.5 12.6% $113.8 13.8% ($4.7) (4.2%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $31.7 3.4% $22.9 2.8% $8.8 38.3%
----------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in net sales in the first nine
months of fiscal 2006 from the comparable fiscal 2005 period was due to an
$122.5 million, or 17%, increase in traditional alternative staffing and net
managed service associate vendor sales, partially offset by a $4.5 million, or
5%, 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.
Nine Months Ended
-----------------
July 30, 2006 July 31, 2005
Administrative & ------------- -------------
Industrial Division % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $539.0 $517.8 $21.2 4.1%
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $517.9 $500.1 $17.8 3.5%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $75.6 14.6% $63.7 12.7% $11.9 18.7%
----------------------------------------------------------------------------------------------------------------------------
Overhead $71.7 13.8% $69.9 14.0% ($1.8) (2.5%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $3.9 0.8% ($6.2) (1.3%) $10.1 163.0%
----------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in net sales in the first
nine 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
slight 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 tax 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
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 2005 -- Continued
STAFFING SERVICES -- Continued
-----------------
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.
TELEPHONE DIRECTORY
-------------------
Nine Months Ended
-----------------
July 30, 2006 July 31, 2005
------------- -------------
Telephone Directory % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $54.4 $57.0 ($2.6) (4.5%)
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $28.7 52.7% $30.2 53.0% ($1.5) (5.1%)
----------------------------------------------------------------------------------------------------------------------------
Overhead $18.2 33.4% $20.0 35.1% $1.8 9.3%
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $10.5 19.3% $10.2 17.9% $0.3 3.0%
----------------------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's sales decrease for the first
nine months of fiscal 2006 from the comparable 2005 period were decreases of
$1.7 million, or 13%, in the telephone production operations and other sales,
$0.4 million, or 5%, in printing and telephone directory publishing sales in
Uruguay, and $0.5 million, or 1%, in the DataNational community telephone
directory sales. The sales variance in the telephone production operations and
other was primarily due to the sale of the ViewTech division in the third
quarter of fiscal 2005, and the variance in Uruguay and DataNational was due to
the timing of the delivery of their directories. The segment's increased
operating profit was the result of the reduction in overhead, partially offset
by the sales decrease and the slight decrease in gross margins. The overhead
reduction was primarily due to the sale of the ViewTech division.
Other than the DataNational division, which accounted for 68% of the segment's
fiscal 2006 first nine 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
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 2005 -- Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Nine Months Ended
-----------------
July 30, 2006 July 31, 2005
------------- -------------
Telecommunications % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $90.0 $94.0 ($4.0) (4.3%)
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $19.7 21.9% $18.7 19.9% $1.0 5.3%
----------------------------------------------------------------------------------------------------------------------------
Overhead $19.2 21.3% $21.9 23.3% $2.7 12.6%
----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $0.5 0.6% ($3.2) (3.4%) $3.7 116.7%
----------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the first nine
months of fiscal 2006 over the comparable 2005 period was due to decreases of
$2.2 million, or 4%, in the Construction and Engineering division, and $1.8
million, or 5%, in the Network Enterprise Solutions division. The sales decrease
in the Construction and Engineering division was largely due to the customer
acceptance and the recognition in the third quarter of fiscal 2005 of a large
construction job accounted for using the completed-contract method. The decrease
of sales in the Network Enterprise Solutions division was primarily due to the
loss of a few customers resulting from consolidations within the industry. The
improvement in operating results was due to the decrease in overhead costs and
the increase in gross margins due to the mix of jobs completed, partially offset
by the decrease in 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
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 2005 -- Continued
COMPUTER SYSTEMS
----------------
Nine Months Ended
-----------------
July 30, 2006 July 31, 2005
------------- -------------
Computer Systems % of % of Favorable Favorable
---------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $139.7 $127.9 $11.8 9.2%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $71.6 51.3% $67.8 53.0% $3.8 5.7%
----------------------------------------------------------------------------------------------------------------------------
Overhead $50.0 35.8% $43.2 33.8% ($6.8) (15.7%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $21.6 15.5% $24.6 19.2% ($3.0) (12.0%)
----------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the first nine months of fiscal
2006 over the comparable 2005 period was primarily due to increases in the
Maintech division's IT maintenance sales of $8.6 million, or 26%, and $9.8
million of new business as a result of its acquisition of Varetis Solutions in
December 2005, partially offset by decreases in the segment's database access
transaction fee revenue, including ASP directory assistance, of $4.3 million, or
9%, and product and other revenue recognized of $2.3 million, or 5%. The
decrease in the transactions fee revenue was a result of a decreased number of
transactions, partially offset by select transaction price increases. 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 and amortization of intangible assets.
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. The Company purchased Nortel's minority interest prior
to this contract provision becoming effective. 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
NINE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE NINE MONTHS ENDED JULY 31, 2005 -- Continued
RESULTS OF OPERATIONS -- OTHER
------------------------------
Nine Months Ended
-----------------
July 30, 2006 July 31, 2005
------------- -------------
Other % of % of Favorable Favorable
----- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $71.1 4.1% $66.0 4.2% ($5.1) (7.7%)
----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $26.0 1.5% $22.6 1.4% ($3.4) (15.0%)
----------------------------------------------------------------------------------------------------------------------------
Interest Income $2.4 0.1% $1.9 0.1% $0.5 27.6%
----------------------------------------------------------------------------------------------------------------------------
Other Expense ($5.7) (0.3%) ($2.9) (0.2%) ($2.8) (96.5%)
----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.7) - ($0.1) - ($0.6) (509.5%)
----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.4) (0.1%) ($1.4) (0.1%) - (1.5%)
----------------------------------------------------------------------------------------------------------------------------
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 nine 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.
The increase in depreciation and amortization for the first nine 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 increased 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 41.3% in the first nine months of 2006 compared to
40.0% in 2005. The increased effective tax rate in the nine months of fiscal
2006 was due to reduced general business credits, partially offset by the
Company's ability to avail itself of the increased tax benefits of foreign
losses.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
THREE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE THREE MONTHS ENDED JULY 31, 2005 -- Continued
RESULTS OF OPERATIONS -- SUMMARY
--------------------------------
In the third quarter of fiscal 2006, consolidated net sales increased by $41.4
million, or 8%, to $584.9 million, from the comparable period in fiscal 2005.
The increase was primarily attributable to the Staffing Services segment, $49.1
million and the Computer Systems segment, $2.5 million, partially offset by the
Telecommunications Services segment, $8.3 million and the Telephone Directory
segment, $2.5 million.
Net income for the third quarter of fiscal 2006 was $8.4 million compared to
$5.0 million in the comparable 2005 third quarter. The Company reported a
pre-tax income from continuing operations before minority interest for the third
quarter of fiscal 2006 of $14.3 million, compared to $9.8 million in the prior
year's third quarter.
The Company's operating segments reported an operating profit of $26.3 million
in the third fiscal quarter of 2006, an increase of $6.7 million, or 34%, from
the comparable 2005 quarter. The increase was attributable to the Staffing
Services segment, $9.3 million, and the Telecommunications Services segment,
$0.8 million, partially offset by the Computer Systems segment, $2.0 million,
and the Telephone Directory segment, $1.4 million.
General corporate expenses increased by $0.9 million, or 10%, due to costs
related to compliance with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS -- BY SEGMENT
-----------------------------------
STAFFING SERVICES
-----------------
Three Months Ended
------------------
July 30, 2006 July 31, 2005
------------- -------------
Staffing Services % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $484.9 $440.2 $44.7 10.2%
------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales $281.9 $278.3 $3.6 1.3%
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $499.2 $450.2 $49.0 10.9%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $80.9 16.2% $69.0 15.3% $11.9 17.3%
------------------------------------------------------------------------------------------------------------------------------
Overhead $64.7 12.9% $62.0 13.8% ($2.7) (4.2%)
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $16.2 3.3% $7.0 1.5% $9.2 133.7%
------------------------------------------------------------------------------------------------------------------------------
*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 JULY 30, 2006 COMPARED
TO THE THREE MONTHS ENDED JULY 31, 2005 -- Continued
RESULTS OF OPERATIONS -- BY SEGMENT -- Continued
------------------------------------------------
STAFFING SERVICES -- Continued
------------------------------
The net sales increase of the Staffing Services segment in the fiscal 2006 third
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
------------------
July 30, 2006 July 31, 2005
Technical Placement ------------- -------------
Division % of % of Favorable Favorable
-------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $583.8 $544.1 $39.7 7.3%
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $324.2 $282.1 $42.1 14.9%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $53.3 16.4% $47.0 16.7% $6.3 13.4%
----------------------------------------------------------------------------------------------------------------------------
Overhead $40.3 12.4% $38.7 13.7% ($1.6) (4.1%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $13.0 4.0% $8.3 2.9% $4.7 56.9%
----------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in net sales in the third quarter of
fiscal 2006 from the comparable fiscal 2005 quarter was due to a $42.2 million,
or 17% sales increase in traditional alternative staffing and net managed
service associate vendor 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
------------------
July 30, 2006 July 31, 2005
Administrative & ------------- -------------
Industrial Division % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $183.0 $174.4 $8.6 5.0%
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $175.0 $168.1 $6.9 4.1%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $27.6 15.8% $22.0 13.1% $5.6 25.6%
----------------------------------------------------------------------------------------------------------------------------
Overhead $24.4 13.9% $23.3 13.9% ($1.1) (4.5%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $3.2 1.9% ($1.3) (0.8%) $4.5 347.5%
----------------------------------------------------------------------------------------------------------------------------
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
THREE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE THREE MONTHS ENDED JULY 31, 2005 -- Continued
STAFFING SERVICES -- Continued
------------------------------
The Administrative and Industrial division's increase in net sales in the third
quarter of fiscal 2006 compared to the fiscal 2005 third 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.
TELEPHONE DIRECTORY
-------------------
Three Months Ended
------------------
July 30, 2006 July 31, 2005
------------- -------------
Telephone Directory % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $21.4 $23.9 ($2.5) (10.4%)
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $11.0 51.7% $12.7 53.3% ($1.7) (13.0%)
----------------------------------------------------------------------------------------------------------------------------
Overhead $6.8 31.9% $7.1 29.8% $0.3 4.2%
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $4.2 19.8% $5.6 23.4% ($1.4) (24.3%)
----------------------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's slight sales decrease in the
third quarter of fiscal 2006 from the comparable 2005 period were decreases of
$1.6 million, or 9%, in DataNational community telephone directory publishing
sales and $1.4 million, or 34%, in telephone production operation and other
sales, partially offset by an increase of $0.5 million, 27%, in printing and
telephone directory publishing sales in Uruguay. The variance in the telephone
production operation and other sales was primarily from the sale of the ViewTech
division in the third quarter of fiscal 2005, and the variances in the Uruguay
and DataNational operations were due to the timing of the delivery of their
directories. The segment's decreased operating profit was predominantly the
result of the decrease in sales and the decrease in gross margins on the
published directories, partially offset by the reduction in overhead. The
overhead reduction was predominantly due to the sale of the ViewTech division.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
THREE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE THREE MONTHS ENDED JULY 31, 2005 -- Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Three Months Ended
------------------
July 30, 2006 July 31, 2005
------------- -------------
Telecommunications % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $22.5 $30.8 ($8.3) (26.9%)
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $5.1 22.5% $6.3 20.5% ($1.2) (19.4%)
----------------------------------------------------------------------------------------------------------------------------
Overhead $5.3 23.3% $7.3 23.6% $2.0 27.7%
----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) ($0.2) (0.8%) ($1.0) (3.2%) $0.8 80.7%
----------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the third quarter of
fiscal 2006 from the comparable 2005 quarter was due to decreases of $5.4
million, or 31%, in the Construction and Engineering division, and $2.9 million,
or 21%, in the Network Enterprise Solutions division. The sales decrease in the
Construction and Engineering division is due largely due to the customer
acceptance and the recognition in the third quarter of fiscal 2005 of a large
construction job accounted for using the completed-contract method. The decrease
of sales in the Network Enterprise Solutions division is primarily due to the
loss of a few customers, some due to customer consolidations within the
industry. The decrease in operating loss for the quarter from the comparable
quarter in fiscal 2005 was the result of the increase in gross margin percentage
due to the mix of jobs completed, and the slight decrease in overhead as a
percentage of sales, partially offset by the decrease in sales. 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
------------------
July 30, 2006 July 31, 2005
------------- -------------
Computer Systems % of % of Favorable Favorable
---------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $46.3 $43.8 $2.5 5.7%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $23.2 50.1% $23.0 52.5% $0.2 1.0%
----------------------------------------------------------------------------------------------------------------------------
Overhead $17.1 37.0% $14.9 34.1% ($2.2) (14.6%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $6.1 13.1% $8.1 18.4% ($2.0) (24.9%)
----------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the third quarter of fiscal
2006 over the comparable 2005 quarter was primarily due to increases in the
Maintech division's IT maintenance sales of $1.7 million, or 14%, $4.2 million
of new business as a result of its acquisition of Varetis Solutions in December
2005, partially offset by a decrease in the segment's database access
transaction fee revenue, including ASP directory assistance, of $2.3 million, or
14%, and product and other revenue recognized of $1.3 million, or 8%. The
decrease in the transactions fee revenue was a result of a decreased number of
transactions, partially offset by select transaction price increases. The
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
THREE MONTHS ENDED JULY 30, 2006 COMPARED
TO THE THREE MONTHS ENDED JULY 31, 2005 -- Continued
COMPUTER SYSTEMS -- Continued
-----------------------------
decrease in operating profit from the comparable 2005 period was the result of
the decreased gross margins, an increase in overhead costs necessary to support
its increase in sales and increased amortization of intangible assets, partially
offset by the increase in sales. 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
------------------
July 30, 2006 July 31, 2005
------------- -------------
Other % of % of Favorable Favorable
----- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $23.9 4.1% $23.0 4.2% ($0.9) (4.1%)
----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $9.1 1.6% $7.6 1.4% ($1.5) (19.4%)
----------------------------------------------------------------------------------------------------------------------------
Interest Income $0.7 0.1% $0.7 0.1% - (2.9%)
----------------------------------------------------------------------------------------------------------------------------
Other Expense ($1.8) (0.3%) ($1.0) (0.2%) ($0.8) (74.3%)
----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.4) (0.1%) $0.1 - ($0.5) (343.8%)
----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($0.5) (0.1%) ($0.4) (0.1%) ($0.1) (16.6%)
----------------------------------------------------------------------------------------------------------------------------
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 third quarter 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.
The increase in depreciation and amortization for the third 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 increased amortization of intangibles in the Computer Systems segment
due to fiscal 2006 acquisitions.
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 41.5% in the second quarter of 2006 compared to 40.7%
in 2005. The increased effective rate in the third quarter of fiscal 2006 was
due to reduced general business credits, partially offset by the Company's
ability to avail itself of increased tax benefits on foreign losses.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, decreased by $16.7 million to $45.3 million in the
nine months ended July 30, 2006.
Operating activities provided $79.2 million of cash in the first nine months of
fiscal 2006. In the comparable fiscal 2005 period, operating activities provided
$36.7 million in cash.
Operating activities in the first nine months of fiscal 2006, exclusive of
changes in operating assets and liabilities, produced $45.2 million of cash, as
the Company's net income of $17.1 million included non-cash charges primarily
for depreciation and amortization of $26.0 million, accounts receivable
provisions of $2.6 million and minority interest of $1.0 million partially
offset by a deferred tax benefit of $1.5 million. In the first nine months of
fiscal 2005, operating activities, exclusive of changes in operating assets and
liabilities, produced $36.9 million of cash, as the Company's net income of $8.7
million included non-cash charges primarily for depreciation and amortization of
$22.6 million, and accounts receivable provisions of $3.1 million, and minority
interest of $4.7 million, partially offset by a deferred tax benefit of $2.3
million.
Changes in operating assets and liabilities provided $34.0 million of cash, net,
in the first nine months of fiscal 2006 principally due to decrease in the level
of accounts receivable of $36.3 million and an increase in securitization of
receivables of $10.0 million, partially offset by an increase in prepaid
expenses and other current assets of $5.5 million, a decrease in deferred income
and other liabilities of $2.7 million and a decrease in the level of accrued
expenses of $3.5 million. Changes in operating assets and liabilities used $0.2
million of cash, net, in the first nine months of fiscal 2005 principally due to
a decrease in the level of accounts payable and accrued expenses of $14.1
million, a decrease in deferred income and other liabilities of $5.3 million, a
decrease in income taxes payable of $5.2 million and an increase in prepaid and
other assets of $5.1 million, partially offset by an increase in securitization
of receivables of $25.0 million and a decrease in the level of accounts
receivable of $9.9 million.
The $102.2 million of cash applied to investing activities for the first nine
months of fiscal 2006 resulted from the expenditures of $85.4 million for
acquisitions and $16.7 million for net additions to property, plant and
equipment. The $16.6 million of cash applied to investing activities for the
first nine months of fiscal 2005 resulted from the net additions to property,
plant and equipment totaling of $17.0 million, offset by the net reduction in
investments of $0.3 million.
The principal factors in the $6.7 million of cash provided by financing
activities in the first nine months of fiscal 2006 was an increase in the level
of bank loans of $3.7 million and funds received from employees' exercises of
stock options of $5.3 million, partially offset by the repayment of long-term
debt of $2.3 million. The principal factors in the $1.1 million of cash provided
by financing activities in the first nine months of fiscal 2005 were funds
received from employees' exercises of stock options of $1.2 million.
Commitments
-----------
There has been no material change through July 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/A 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. In August 2006, the Company amended the agreement to extend the maturity
date to April 2009. Under the Securitization Program, receivables related to the
United States operations of the staffing solutions business of the Company and
its subsidiaries are sold from time-to-time by the Company to Volt Funding
Corp., a wholly-owned special purpose subsidiary of the Company ("Volt
Funding"). Volt Funding, in turn, sells to Three Rivers Funding Corporation
("TRFCO"), an asset backed commercial paper conduit sponsored by Mellon Bank,
N.A. and unaffiliated with the Company, an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $200.0 million). The
Company retains the servicing responsibility for the accounts receivable. At
July 30, 2006, TRFCO had purchased from Volt Funding a participation interest of
$110.0 million out of a pool of approximately $270.8 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 July 30, 2006, the Company was in compliance
with all requirements of its Securitization Program.
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 July 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
6.3% 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
limitations on, among other things, the incurrence of additional indebtedness,
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
Credit Lines -- Continued
-------------------------
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 July 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 July 30, 2006, four of those guarantors have pledged approximately
$40.6 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 July 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 $51.6
million, including $40.0 million under the Credit Agreement, and the Company had
total outstanding foreign currency bank borrowings of $10.4 million, $6.4
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.
The Company announced that on September 6, 2006 its Board of Directors had
authorized the repurchase of up to one million five hundred thousand (1,500,000)
shares of the Company's Common Stock from time to time in open market or private
transactions at the Company's discretion, subject to market conditions and other
factors, in order to fund awards under the "Volt Information Sciences, Inc. 2006
Incentive Stock Plan". The timing and exact number of shares purchased will be
at the Company's discretion and will depend on market conditions and is subject
to institutional approval for purchases in excess of $8.5 million in fiscal year
2006 under the terms of the Company's credit agreements. This stock buyback
program does not obligate the Company to acquire any specific number of shares
and may be suspended or discontinued at any time.
The Company also announced that on September 6, 2006 its Board of Directors
adopted the "Volt Information Sciences, Inc. 2006 Incentive Stock Plan" subject
to approval by vote of shareholders of the Company. The purpose of the Plan is
to promote the success of the Company and its Subsidiaries by providing
incentives to Employees and Non-Employee Directors that will promote the
long-term financial success of the Company and growth in shareholder value. The
Plan is designed to provide flexibility to the Company and its Subsidiaries, in
its ability to motivate, attract, and retain the services of Employees and
Non-Employee Directors upon whose judgment, interest, and effort the successful
conduct of its operation is largely dependent. The Plan permits the grant of
Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock and
Restricted Stock Units to Employees and Non-Employee Directors of the Company
through September 6, 2016. The maximum aggregate number of shares that may be
issued pursuant to awards made under the Plan shall not exceed one million five
hundred thousand (1,500,000) shares.
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 was 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 Act did not have a material impact on the Company's consolidated financial
position or results of operations.
Related Party Transactions
--------------------------
During the first nine months of fiscal 2006, the Company paid or accrued $0.6
million to the law firm of which Lloyd Frank, a director, is of counsel, 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 the Company's annual net interest expense and securitization costs by
$0.5 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 $13.6 million
at July 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 July 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 July 30, 2006, the total of the Company's net investment in foreign
operations was $5.2 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
July 30, 2006, the total of the Company's foreign exchange contract was $2.8
million, leaving a balance of net foreign assets exposed of $2.4 million. The
amount of risk and the use of foreign exchange instruments described above are
not material to the Company's financial position or results of operations and
the Company does not use these instruments for trading or other speculative
purposes. Based upon the current levels of net foreign assets, a hypothetical
weakening of the U.S. dollar against these currencies at July 30, 2006 by 10%
would result in a pretax gain of $0.5 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at July 30, 2006 by 10% would result in a pretax loss of $0.2 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 July 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 July 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 $69,104 $69,104
Weighted Average Interest Rate 5.1% 5.1%
----------- -----------
Total Cash, Restricted Cash and
Cash Equivalents $69,104 $69,104
=========== ===========
Securitization Program
----------------------
Accounts Receivable Securitization $110,000 $110,000
Finance Rate 5.3% 5.3%
----------- -----------
Securitization Program $110,000 $110,000
=========== ===========
Debt
----
Term Loan $13,409 $461 $1,632 $1,333 $9,983
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $10,410 $10,410
Weighted Average Interest Rate 3.9% 3.9% - - -
----------- ----------- ----------- ----------- -----------
Total Debt $23,819 $10,871 $1,632 $1,333 $9,983
=========== =========== =========== =========== ===========
Foreign Exchange Market Risk Contract Values
---------------------------- ---------------
Fair Value
Contract Less than Option
Exchange Rate Total 1 Year Premium (1)
-------------- --------- ---------- ---------------
(Dollars in thousands of U.S. $)
Option Contracts
----------------
British Pound Sterling (GBP) to U.S. $ 1.87 $2,802 $2,802 $44
(1) Represents the fair value of the foreign contract at July 30, 2006.
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 July 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 July 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. After
discussion with, and agreement by, the Audit Committee and the Company's Board
of Directors, the above corrective actions were put into place. Management
continues to monitor compliance with existing controls and procedures as well as
those put into place to address the material weakness noted at year end.
As of July 30, 2006, the Company's management believed 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.
On September 6, 2006, the Company was first notified of a decision in an action
brought in Germany by several shareholders of GoYellow AG ("GoYellow) (formerly
known as varetis AG). The decision, dated August 24, 2006, by the trial court
held, in substance, that the consent on December 29, 2005 by the shareholders of
GoYellow to the contract relating to the sale of varetis solutions GmbH
("varetis") by GoYellow to a subsidiary of the Company was invalid, because the
shareholders were not given adequate information prior to the meeting. This
decision is against GoYellow and neither the Company nor any of its subsidiaries
nor any of its or their officers or directors was a party. In the first nine
months of fiscal 2006, the revenue of varetis comprised less than 1% of the
Company's net consolidated sales. The Company is evaluating the decision and
believes that its affect, if any, would not have a material adverse effect on
Volt Information Sciences, Inc.
44
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
------- -----------
10.01 Form of indemnification agreement
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent
Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
Date: September 8, 2006
By: /s/Jack Egan
---------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
45
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- -----------
10.01 Form of indemnification agreement
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