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 29, 2007.
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.
--------------------------------
(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 (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
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The number of shares of the registrant's common stock, $.10 par value,
outstanding as of September 1, 2007 was 22,431,137.
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 29, 2007 and July 30, 2006 3
Condensed Consolidated Balance Sheets -
July 29, 2007 (Unaudited) and October 29, 2006 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended July 29, 2007 and July 30, 2006 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 48
Item 4. Controls and Procedures 50
PART II - OTHER INFORMATION
Item 6. Exhibits 51
SIGNATURE 51
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 29, July 30, July 29, July 30,
2007 2006 2007 2006
--------- --------- ------- -------
(In thousands, except per share amounts)
NET SALES $1,727,466 $1,728,233 $610,465 $584,914
COST AND EXPENSES:
Cost of sales 1,593,639 1,595,568 559,056 535,728
Selling and administrative 75,003 71,061 26,069 23,889
Depreciation and amortization 28,711 26,022 9,600 9,075
--------- --------- ------- -------
1,697,353 1,692,651 594,725 568,692
--------- --------- ------- -------
OPERATING PROFIT 30,113 35,582 15,740 16,222
OTHER INCOME (EXPENSE):
Interest income 4,410 2,383 1,822 724
Other expense, net (4,979) (5,721) (1,812) (1,818)
Foreign exchange loss, net (758) (707) (305) (351)
Interest expense (2,320) (1,402) (831) (499)
--------- --------- ------- -------
Income before minority interest and income
taxes 26,466 30,135 14,614 14,278
Minority interest - (1,021) - -
--------- --------- ------- -------
Income before income taxes 26,466 29,114 14,614 14,278
Income tax provision (10,229) (12,028) (5,497) (5,925)
--------- --------- ------- -------
NET INCOME $16,237 $17,086 $9,117 $8,353
========= ========= ======= =======
Per Share Data
--------------
Net income per share - basic $0.70 $0.74 $0.40 $0.36
========= ========= ======= =======
Weighted average number of shares - basic 23,103 23,166 22,968 23,338
========= ========= ======= =======
Net income per share - diluted $0.70 $0.73 $0.40 $0.36
========= ========= ======= =======
Weighted average number of shares - diluted 23,153 23,315 23,018 23,519
========= ========= ======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 29, October 29,
2007 2006
(Unaudited) (Audited)
------------------ ----------------
ASSETS (In thousands, except share
amounts)
CURRENT ASSETS
Cash and cash equivalents $ 24,265 $ 38,481
Restricted cash 34,149 30,713
Short-term investments 5,152 4,709
Trade accounts receivable less allowances of $5,766 (2007) and $7,491
(2006) 419,097 390,799
Inventories 45,262 28,735
Recoverable income taxes 3,876 -
Deferred income taxes 8,314 9,167
Prepaid insurance and other assets 32,663 37,280
------------------ ----------------
TOTAL CURRENT ASSETS 572,778 539,884
Property, plant and equipment-net 69,884 74,135
Insurance and other assets 9,461 2,247
Goodwill 50,354 50,896
Other intangible assets-net 29,043 31,959
------------------ ----------------
TOTAL ASSETS $ 731,520 $ 699,121
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 24,405 $ 4,639
Current portion of long-term debt 500 470
Accounts payable 203,055 190,431
Accrued wages and commissions 59,475 59,387
Accrued taxes other than income taxes 22,664 20,186
Accrued insurance and other accruals 27,906 29,241
Deferred income and other liabilities 45,486 37,519
Income tax payable - 3,626
------------------ ----------------
TOTAL CURRENT LIABILITIES 383,491 345,499
Accrued insurance 1,248 4,760
Long-term debt 12,448 12,827
Deferred income taxes 6,284 10,787
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none - -
Common stock, par value $.10; Authorized 120,000,000 shares (2007) and
30,000,000 shares (2006); issued --23,480,103 shares
(2007) and 23,456,974 shares (2006) 2,348 2,346
Paid-in capital 50,723 50,203
Retained earnings 296,641 280,404
Accumulated other comprehensive income 1,237 245
------------------ ----------------
350,949 333,198
Less treasury stock -1,048,966 shares (2007) and 300,000 shares (2006),
at cost (22,900) (7,950)
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TOTAL STOCKHOLDERS' EQUITY 328,049 325,248
------------------ ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 731,520 $ 699,121
================== ================
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 29, July 30,
2007 2006
----------------- ------------------
(In thousands)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 16,237 $ 17,086
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization 28,711 26,022
Accounts receivable provisions 1,229 2,557
Minority interest - 1,021
Loss on disposition of fixed assets 37 11
Loss on foreign currency translation 30 14
Deferred income tax benefit (4,196) (1,511)
Share-based compensation expense related to employee stock options 44 57
Excess tax benefit from share-based compensation (110) (88)
Changes in operating assets and liabilities, net of assets acquired:
Trade accounts receivable (7,622) 36,280
(Reduction in) increase in securitization of accounts receivable (20,000) 10,000
Inventories (16,527) (2,595)
Prepaid insurance and other current assets (2,825) (7,403)
Insurance and other long-term assets 590 219
Accounts payable 8,326 1,936
Accrued expenses (947) (3,544)
Deferred income and other liabilities 14,554 (2,719)
Income taxes (7,156) (86)
----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,375 77,257
----------------- ------------------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Nine Months Ended
--------------------------------
July 29, July 30,
2007 2006
--------------- ----------------
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments $ 6,057 $ 975
Purchases of investments (6,440) (1,090)
(Increase) decrease in restricted cash (3,436) 2,285
Increase (decrease) in payables related to restricted cash 3,436 (2,285)
Acquisitions (225) (83,503)
Proceeds from disposals of property, plant and equipment, net 236 1,366
Purchases of property, plant and equipment (21,310) (18,035)
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (21,682) (100,287)
--------------- ----------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (349) (2,321)
Cash paid in lieu of fractional shares (18)
Exercises of stock options 345 5,276
Excess tax benefit from share-based compensation 110 88
Purchase of treasury shares (22,979)
Increase in notes payable to bank 19,606 3,654
--------------- ----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,285) 6,697
--------------- ----------------
Effect of exchange rate changes on cash 376 (397)
--------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (14,216) (16,730)
Cash and cash equivalents, beginning of period 38,481 61,988
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,265 $ 45,258
=============== ================
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $ 2,199 $ 1,372
Income taxes $ 22,045 $ 13,568
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 29, 2007 and consolidated
results of operations for the nine and three months ended July 29, 2007 and July
30, 2006 and consolidated cash flows for the nine months ended July 29, 2007 and
July 30, 2006.
These statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended October 29, 2006. The accounting policies used in preparing
these financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
Certain amounts in the third quarter of fiscal 2006 have been reclassified to
conform to the fiscal 2007 presentation.
NOTE B--Securitization Program
The Company has a $200.0 million accounts receivable securitization program
("Securitization Program"), which expires in April 2009. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $200.0 million). The Company retains the servicing responsibility
for the accounts receivable. At July 29, 2007, TRFCO had purchased from Volt
Funding a participation interest of $90.0 million out of a pool of approximately
$269.2 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company beyond its interest in the pool of receivables owned by Volt
Funding.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE B--Securitization Program--Continued
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 156, "Accounting for Transfers and Servicing of Financial Assets,
an amendment of SFAS No. 140." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges in connection with the sale of receivables under
the Securitization Program of $3.5 million and $1.3 million in the nine and
three months ended July 29, 2007, respectively, compared to $5.0 million and
$1.6 million in the nine and three months ended July 30, 2006, respectively,
which are included in Other Expense on the condensed consolidated statement of
operations. The equivalent cost of funds in the Securitization Program was 6.2%
per annum and 5.5% per annum in the nine-month 2007 and 2006 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 29, 2007 and October 29, 2006, the Company's carrying retained interest
in a revolving pool of receivables was approximately $178.3 million and $164.2
million, respectively, net of a service fee liability, out of a total pool of
approximately $269.2 million and $275.2 million, respectively. The outstanding
balance of the undivided interest sold to TRFCO was $90.0 million and $110.0
million at July 29, 2007 and October 29, 2006, respectively. Accordingly, the
trade accounts receivable included on the July 29, 2007 and October 29, 2006
balance sheets were reduced to reflect the participation interest sold of $90.0
million and $110.0 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 29, 2007, the Company was in compliance
with all requirements of the Securitization Program.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves by segment are as follows:
July 29, October 29,
2007 2006
---------- ---------------
(In thousands)
Telephone Directory $9,063 $11,527
Telecommunications Services 28,847 12,606
Computer Systems 7,352 4,602
-------- ---------
Total $45,262 $28,735
======= =======
The cumulative amounts billed under service contracts at July 29, 2007 and
October 29, 2006 of $19.0 million and $10.9 million, respectively, are credited
against the related costs in inventory. In addition, reserves at July 29, 2007
and October 29, 2006 of $3.3 million and $4.5 million, respectively, are
credited against the related costs in inventory.
NOTE D--Short-Term Borrowings
At July 29, 2007, the Company had credit lines with domestic and foreign banks
which provided for borrowings and letters of credit of up to an aggregate of
$119.1 million, including the Company's $40.0 million secured, syndicated
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $70.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility"). The Company had
total outstanding bank borrowings of $24.4 million. Included in these borrowings
were $9.4 million of foreign currency borrowings which provide a hedge against
foreign denominated net assets.
Credit Agreement
----------------
The Credit Agreement, which expires in April 2008, established a secured credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit.
Borrowings by subsidiaries are limited to $25.0 million in the aggregate. At
July 29, 2007, the Company had no borrowings against this facility. The
administrative agent for the Credit Facility is JPMorgan Chase Bank, N.A. The
other banks participating in the Credit Facility are Mellon Bank, N.A., Wells
Fargo Bank, N.A., Lloyds TSB Bank PLC and Bank of America, N.A.
Borrowings under the Credit Agreement are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided by a
nationally recognized rating agency. The Credit Agreement requires the
maintenance of specified accounts receivable collateral in excess of any
outstanding borrowings. Based upon the Company's leverage ratio and debt rating
at July 29, 2007, 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 6.2% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
50% of consolidated net income, as defined, for the prior fiscal year; and a
requirement that the Company maintain a ratio of EBIT, as defined, to interest
expense, as defined, of 1.25 to 1.0 for the twelve months ended as of the last
day of each fiscal quarter. The Credit Agreement also imposes limitations on,
among other things, the incurrence of additional indebtedness, the incurrence of
additional liens, sales of assets, the level of annual capital expenditures, and
the amount of investments, including business acquisitions and investments in
joint ventures, and loans that may be made by the Company and its subsidiaries.
At July 29, 2007, 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 29, 2007, four of those guarantors have pledged approximately
$46.0 million of accounts receivable, other than those in the Securitization
Program, as collateral for the guarantee obligations. Under certain
circumstances, other subsidiaries of the Company also may be required to become
guarantors under the Credit Facility.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the Delta Credit Facility, which
expires in December 2009, with Wells Fargo, N.A. as the administrative agent and
arranger, and as a lender thereunder. Wells Fargo and the other three lenders
under the Delta Credit Facility, Lloyds TSB Bank Plc., Bank of America, N.A. and
JPMorgan Chase also participate in the Company's $40.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $70.0 million (increased to $100.0 million - see
Note N - Subsequent Events) with a sublimit of $10.0 million on the issuance of
letters of credit. At July 29, 2007, $20.6 million was drawn on this facility.
Certain rate options, as well as the commitment fee, are based on a leverage
ratio, as defined. Based upon Volt Delta's leverage ratio at July 29, 2007, 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 6.2% per annum.
Volt Delta also pays a commitment fee of 0.2% on the unused portion of the Delta
Credit Facility.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.0 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At July 29, 2007, Volt Delta was in compliance with all covenants in the Delta
Credit Facility.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Long-Term Debt and Financing Arrangements
In September 2001, a subsidiary of the Company entered into a $15.1 million loan
agreement with General Electric Capital Business Asset Funding Corporation.
Principal payments have reduced the loan to $12.9 million, of which $0.5 million
is current, at July 29, 2007. 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 29, 2007 of $9.6 million. The obligation is guaranteed by the
Company.
NOTE F--Stockholders' Equity
On December 19, 2006, the Company's Board of Directors authorized and approved a
three-for-two stock split in the form of a dividend on the Company's common
stock. Shares of common stock were distributed on January 26, 2007, to all
stockholders of record as of January 15, 2007. Any fractional shares resulting
from the dividend were paid in cash. Information pertaining to shares, earnings
per share, common stock and paid-in capital has been adjusted in the
accompanying financial statements and footnotes, except for the table below, to
reflect the stock split.
Changes in the major components of stockholders' equity for the nine months
ended July 29, 2007 are as follows:
Common Paid-In Treasury Retained
Stock Capital Stock Earnings
--------------- ----------------- --------------- ---------------
(In thousands)
Balance at October 29, 2006 $ 2,346 $ 50,203 ($7,950) $ 280,404
Stock options exercised--23,625 shares 2 608 -
Cash paid in lieu of fractional shares (18)
Issuance of restricted stock (79) 79
Amortization of restricted stock 9
Purchase of treasury stock (15,029)
Net income for the nine months - - - 16,237
--------------- ----------------- --------------- ---------------
Balance at July 29, 2007 $ 2,348 $ 50,723 ($22,900) $ 296,641
=============== ================= =============== ===============
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, a gain of $1.2 million and a gain of $192,000 at July
29, 2007 and October 29, 2006, respectively, and an unrealized gain, net of
taxes, of $66,000 and $53,000 in marketable securities at July 29, 2007 and
October 29, 2006, respectively. Changes in these items, net of income taxes, are
included in the calculation of comprehensive income as follows:
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Stockholders' Equity--Continued
Nine Months Ended Three Months Ended
---------------------------- ------------------------------
July 29, July 30, July 29, July 30,
2007 2006 2007 2006
----------- ---------------- --------------- --------------
(In thousands)
Net income $ 16,237 $ 17,086 $ 9,117 $ 8,353
Foreign currency translation adjustments, net 979 474 353 (210)
Unrealized gain (loss) on marketable securities, net 13 (25) 7 (46)
----------- ---------------- --------------- --------------
Comprehensive income $ 17,229 $ 17,535 $ 9,477 $ 8,097
=========== ================ =============== ==============
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 29, July 30, July 29, July 30,
2007 2006 2007 2006
--------------- ---------------- --------------- ----------------
Denominator for basic earnings per share:
Weighted average number of shares 23,103,167 23,166,227 22,967,583 23,337,895
Effect of dilutive securities:
Employee stock options 50,312 149,038 50,092 180,844
--------------- ---------------- --------------- ----------------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 23,153,479 23,315,265 23,017,675 23,518,739
=============== ================ =============== ================
Options to purchase 21,300 and 3,000 shares of the Company's common stock were
outstanding at July 29, 2007 and July 30, 2006, respectively, but were not
included in the computation of diluted earnings per share because the effect of
inclusion would have been antidilutive.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the nine and three months ended July
29, 2007 and July 30, 2006:
Nine Months Ended Three Months Ended
--------------------------------------------------------------
July 29, July 30, July 29, July 30,
2007 2006 2007 2006
--------------------------------------------------------------
Net Sales: (In thousands)
----------------------------------------------
Staffing Services
Staffing $ 1,433,008 $ 1,415,066 $ 509,003 $ 484,882
Managed Services 904,644 806,815 275,819 281,948
--------------------------------------------------------------
Total Gross Sales 2,337,652 2,221,881 784,822 766,830
Less: Non-Recourse Managed Services (868,261) (762,694) (265,729) (267,591)
--------------------------------------------------------------
Net Staffing Services 1,469,391 1,459,187 519,093 499,239
Telephone Directory 55,527 54,437 20,802 21,426
Telecommunications Services 76,897 89,959 28,347 22,550
Computer Systems 139,131 139,716 47,413 46,305
Elimination of intersegment sales (13,480) (15,066) (5,190) (4,606)
--------------------------------------------------------------
Total Net Sales $ 1,727,466 $ 1,728,233 $ 610,465 $ 584,914
==============================================================
Segment Operating Profit (Loss):
----------------------------------------------
Staffing Services $ 32,515 $ 35,573 $ 13,300 $ 16,248
Telephone Directory 9,162 10,521 4,243 4,243
Telecommunications Services 649 539 943 (189)
Computer Systems 17,639 21,632 6,932 6,046
--------------------------------------------------------------
Total Segment Operating Profit 59,965 68,265 25,418 26,348
General corporate expenses (29,852) (32,683) (9,678) (10,126)
--------------------------------------------------------------
Total Operating Profit 30,113 35,582 15,740 16,222
Interest income and other (expense), net (569) (3,338) 10 (1,094)
Foreign exchange loss, net (758) (707) (305) (351)
Interest expense (2,320) (1,402) (831) (499)
--------------------------------------------------------------
Income Before Minority Interest and Income
Taxes $ 26,466 $ 30,135 $ 14,614 $ 14,278
==============================================================
During the nine months ended July 29, 2007, consolidated assets increased by
$32.4 million primarily due to a decrease in the use of the Company's
Securitization Program, an increase in inventory in the Telecommunications
Services segment and an increase in the level of accounts receivable in the
Staffing Services segment partially offset by a decrease in cash, cash
equivalents and restricted cash.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE I--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge.
Generally, changes in fair values of derivatives accounted for as fair value
hedges are recorded in income along with the portions of the changes in the fair
values of the hedged items that relate to the hedged risks. Changes in fair
values of derivatives accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in other comprehensive income, net of deferred
taxes. Changes in fair values of derivatives not qualifying as hedges are
reported in the results of operations. At July 29, 2007, the Company had no
outstanding derivative financial instruments.
Restricted cash at July 29, 2007 and October 29, 2006 was approximately $34.1
million and $30.7 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 $6.8 million and $5.7 million, respectively.
On December 30, 2005, Volt Delta acquired varetis AG's Varetis Solutions
subsidiary for $24.8 million. The acquisition of Varetis Solutions provided Volt
Delta with the resources to focus on the evolving global market for directory
information systems and services. Varetis Solutions added 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 has valued both transactions to determine the final allocation of
the purchase price to various types of potential intangible assets. The types of
intangible assets which exist as of consummation of the transactions are: the
existing technology of the businesses, the value of their customer
relationships, the value of trade names, the value of contract backlogs, the
value of non-compete agreements and the value of their reseller network. The
value of each of the intangible assets identified was determined with the use of
a discounted cash flow methodology. This methodology involved discounting
forecasted revenues and earnings attributable to each of the intangible assets.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses--Continued
The assets and liabilities of Varetis Solutions were accounted for using the
purchase method of accounting at the date of acquisition at their fair values.
The results of operations of Varetis Solutions have been included in the
condensed consolidated statements of operations since the acquisition date.
The purchase price allocation of the fair value of assets acquired and
liabilities assumed of Varetis Solutions 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
------
Total Assets 40,033
------
Accrued wages and commissions (1,012)
Other accrued expenses (3,325)
Other liabilities (1,741)
Income taxes payable (1,266)
Deferred income tax (7,876)
--------
Total Liabilities (15,220)
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 2005. This
pro forma financial information is presented for comparative purposes only and
is not necessarily indicative of the operating results that actually would have
occurred had the acquisitions been consummated at the beginning of fiscal 2006.
In addition, these results are not intended to be a projection of future
results.
Pro Forma Results
-----------------
Nine Months Ended
-----------------
July 30,
2006
----------
(In thousands, except per share amounts)
Net sales $1,732,172
==========
Operating profit $36,117
==========
Net income $17,999
==========
Earnings per share
Basic $0.78
==========
Diluted $0.77
==========
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses--Continued
As previously announced, on June 18, 2007, Volt Delta signed a definitive merger
agreement with LLSi Corp. and certain shareholders of LSSI. As a result of the
merger, LSSI will become a wholly-owned subsidiary of Volt Delta. The total
merger consideration will be approximately $70 million in cash subject to
adjustment after the closing based upon the amount of LSSi's working capital on
the closing date.
The combination of Volt Delta's application development, integration and hosting
expertise and LSSi's highly efficient data processing will allow Volt Delta to
serve a broader base of customers by aggregating the most current and accurate
business and consumer information possible. The transaction is subject to
antitrust and regulatory approvals as well as other customary closing conditions
and is expected to close in the Company's fourth quarter of 2007.
Volt Delta will utilize the Delta Credit Facility to finance approximately $55
million of the merger consideration with the remainder being contributed by the
Company (see Note N - Subsequent Event). Substantially all of the merger
consideration will be attributable to goodwill and intangible assets.
NOTE K--Goodwill and Intangibles
Goodwill and intangibles with indefinite lives are subject to annual impairment
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 each year, primarily uses comparable multiples
of sales and EBITDA and other valuation methods to assist the Company in the
determination of the fair value of the goodwill and the reporting units
measured. The fiscal 2007 second quarter testing did not result in any
impairment.
The following table represents the balance of intangible assets:
July 29, 2007 October 29, 2006
------------------------------------------ ---------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------- ---------------------- ---------------- ----------------
(In thousands)
Customer relationships $ 18,038 $ 4,223 $ 17,645 $ 2,890
Existing technology 13,164 2,684 13,164 1,466
Contract backlog 3,200 1,267 3,200 667
Trade name (a) 2,016 - 2,016 -
Reseller network 816 161 816 85
Non-compete agreements and trademarks 325 181 325 99
------------------- ---------------------- ---------------- ----------------
Total $ 37,559 $ 8,516 $ 37,166 $ 5,207
=================== ====================== ================ ================
(a) Trade names have an indefinite life and are not amortized.
In fiscal 2007, the total intangible assets acquired were $0.2 million for
acquisition of two directories by the Telephone Directory Segment.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
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 29, 2007, the Company's net prepaid for the outstanding
plan years was $21.5 million compared to $18.9 million at October 29, 2006.
NOTE M--Incentive Stock Plans
The Non-Qualified Option Plan ("1995 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 29, 2007 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.
Under the 1995 Plan, compensation expense of $36,000 and $57,000 for the nine
months ended July 29, 2007 and July 30, 2006, respectively, is recognized in the
selling and administrative expenses in the Company's condensed consolidated
statement of operations on a straight-line basis over the vesting periods. As of
July 29, 2007, there was $41,700 of total unrecognized compensation cost related
to non-vested share-based compensation arrangements to be recognized over a
weighted average period of 0.8 years.
The intrinsic values of options exercised during the nine-month periods ended
July 29, 2007 and July 30, 2006 were $0.6 million and $3.9 million,
respectively. The total cash received from the exercise of stock options was
$0.3 million and $5.3 million in the nine month periods ended July 29, 2007 and
July 30, 2006, respectively, and is classified as financing cash flows in the
condensed consolidated statement of cash flows. The actual tax benefit realized
on the exercise of options was $0.2 million and $1.6 million for the nine-month
periods ended July 29, 2007 and July 30, 2006, respectively.
In April 2007, the shareholders of the Company approved the Volt Information
Sciences, Inc. 2006 Incentive Stock Plan ("2006 Plan"). The 2006 Plan permits
the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock and Restricted Stock Units to employees and non-employee directors of the
Company through September 6, 2016. The maximum aggregate number of shares that
may be issued pursuant to awards made under the 2006 Plan shall not exceed one
million five hundred thousand (1,500,000) shares.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Incentive Stock Plans--Continued
There were 3,000 shares of restricted stock granted under the 2006 Plan (500
shares of restricted stock to each non-employee member of the Board of
Directors) on April 5, 2007. Compensation expense of $8,500 is recognized in the
selling and administrative expenses in the Company's condensed consolidated
statement of operations for the nine month period ended July 29, 2007 on a
straight-line basis over the vesting period. As of July 29, 2007, there was
$72,500 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements to be recognized over a weighted average
period of three years.
NOTE N--Subsequent Event
In August 2007, Volt Delta amended the Delta Credit Facility to, among other
things, increase the facility to $100.0 million. Volt Delta plans to use part of
the increase in liquidity to finance the previously announced merger of its
wholly owned subsidiary, LSSI Resources Corp., with LSSi Corp.
On September 4, 2007, Volt Delta received the necessary regulatory clearances to
proceed with its previously announced definitive merger agreement with LSSi
Corp. The transaction is expected to close within the next two weeks and as a
result of the merger, LSSI Data Corp. will become a wholly owned subsidiary of
Volt Delta. (See Note J - Acquisition of Businesses).
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
--------
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to our consolidated financial
statements and notes thereto included in Part I of this Form 10-Q and to provide
an understanding of our consolidated results of operations, financial condition
and changes in financial condition. Our MD&A is organized as follows:
o Forward-Looking Statements - This section describes some of the language
and assumptions used in this document that may have an impact on the
readers' interpretation of the financial statements.
o Critical Accounting Policies - This section discusses those accounting
policies that are considered to be both important to our financial
condition and results of operations and require us to exercise subjective
or complex judgments in their application.
o Summary of Operating Results by Segment - This section provides a summary
of operating results by segment in a tabular format.
o Executive Overview - This section provides a general description of our
business segments and provides a brief overview of the results of
operations during the accounting period.
o Results of Operations - This section provides our analysis of the line
items on our summary of operating results by segment for the current and
comparative accounting periods on both a company-wide and segment basis.
The analysis is in both a tabular and narrative format.
o Liquidity and Capital Resources - This section provides an analysis of our
liquidity and cash flows, as well as our discussion of our commitments,
securitization program and credit lines.
o New Accounting Pronouncements - This section includes a discussion of
recently published accounting authoritative literature that may have an
impact on our historical or prospective results of operations or financial
condition.
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth in the Company's Annual Report on Form 10-K, in this Form 10-Q and in the
Company's press releases and other public filings. Such risks and uncertainties
could cause the Company's actual results, performance and achievements to differ
materially from those described in or implied by the forward-looking statements.
Accordingly, readers should not place undue reliance on any forward-looking
statements made by or on behalf of the Company. The Company does not assume any
obligation to update any forward-looking statements after the date they are
made.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments. We generally recognize revenue when
persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed and determinable and collectibility is
probable. The determination of whether and when some of the criteria below have
been satisfied sometimes involves assumptions and judgments that can have a
significant impact on the timing and amount of revenue we report.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered. In the first nine
months of fiscal 2007, this revenue comprised approximately 77% of net
consolidated sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, for which the Company receives an
administrative fee for arranging for, billing for and collecting the
billings related to staffing companies ("associate vendors") who have
supplied personnel to the Company's customers. The administrative fee is
either charged to the customer or subtracted from the Company's payment to
the associate vendor. The customer is typically responsible for assessing
the work of the associate vendor, and has responsibility for the
acceptability of its personnel, and in most instances the customer and
associate vendor have agreed that the Company does not pay the associate
vendor until the customer pays the Company. Based upon the revenue
recognition principles prescribed in Emerging Issues Task Force ("EITF")
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent,"
revenue for these services, where the customer and the associate vendor
have agreed that the Company is not at risk for payment, is recognized net
of associated costs in the period the services are rendered. In addition,
sales for certain contracts generated by the Company's Staffing Solutions
Group's managed services operations have similar attributes. In the first
nine months of fiscal 2007, this revenue comprised approximately 2% of net
consolidated sales.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
---------------------------------------
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with the AICPA Statement of Position ("SOP")
81-1, "Accounting for Performance of Construction-Type Contracts." The
Company's employees perform the services and the Company has credit risk
for collecting its billings. Revenue for these services is recognized on a
gross basis in the period the services are rendered when on a time and
material basis; when the Company is responsible for project completion,
revenue is recognized when the project is complete and the customer has
approved the work. In the first nine months of fiscal 2007, this revenue
comprised approximately 6% of net consolidated sales.
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and delivered. In the first nine months of fiscal 2007,
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 2007, 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 SOP
No. 81-1, 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 2007, 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 2007, 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 2007, this revenue comprised approximately 2% of net consolidated
sales.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems, on a time and material basis or a contract basis. The
Company uses its own employees and inventory in the performance of the
services, and has credit risk for collecting its billings. Revenue for
these services is recognized on a gross basis in the period in which the
services are performed, contingent upon customer acceptance when on a time
and material basis, or over the life of the contract, as applicable. In the
first nine months of fiscal 2007, this revenue comprised approximately 2%
of net consolidated sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in SOP 97-2, "Software Revenue Recognition" and EITF 00-21,
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value or by the use of the percentage of completion method when
applicable. In the first nine months of fiscal 2007, this revenue comprised
approximately 3% 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 also makes judgments about the creditworthiness
of significant customers based upon ongoing credit evaluations, and might assess
current economic trends that might impact the level of credit losses in the
future. However, since a reliable prediction of future changes in the financial
stability of customers is not possible, the Company cannot guarantee that
allowances will continue to be adequate. If actual credit losses are
significantly higher or lower than the allowance established, it would require a
related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill and indefinite-lived intangible
assets are subject to annual impairment testing using fair value methodologies.
The Company performs its annual impairment testing during its second fiscal
quarter, or more frequently if indicators of impairment arise. The timing of the
impairment test may result in charges to earnings in the second fiscal quarter
that could not have been reasonably foreseen in prior periods. The testing
process includes the comparison of the Company's business units' multiples of
sales and EBITDA to those multiples of its business units' competitors. Although
it is believed the assumptions and estimates made in the past have been
reasonable and appropriate, different assumptions and estimates could materially
impact financial results.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount exceeds the estimated fair value of the asset or asset
group. The impairment loss is measured as the amount by which the carrying
amount exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with SOP No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Subsequent
to the preliminary project planning and approval stage, all appropriate costs
are capitalized until the point at which the software is ready for its intended
use. Subsequent to the software being used in operations, the capitalized costs
are transferred from costs-in-process to completed property, plant and
equipment, and are accounted for as such. All post-implementation costs, such as
maintenance, training and minor upgrades that do not result in additional
functionality, are expensed as incurred. The capitalization process involves
judgment as to what types of projects and tasks are capitalizable. Although the
Company believes the accounting decisions made in the past concerning the
accounting treatment of these software costs have been reasonable and
appropriate, different decisions could materially impact financial results.
Income Taxes - Estimates of Effective Tax Rates, Deferred Taxes and Valuation
Allowance - When the financial statements are prepared, the Company estimates
its income taxes based on the various jurisdictions in which business is
conducted. Significant judgment is required in determining the Company's
worldwide income tax provision. Liabilities for anticipated tax audit issues in
the United States and other tax jurisdictions are based on estimates of whether,
and the extent to which, additional taxes will be due. The recognition of these
provisions for income taxes is recognized in the period in which it is
determined that such taxes are due. If in a later period it is determined that
payment of this additional amount is unnecessary, a reversal of the liability is
recognized. As a result, the ongoing assessments of the probable outcomes of the
audit issues and related tax positions require judgment and can materially
increase or decrease the effective tax rate and materially affect the Company's
operating results. This also requires the Company to estimate its current tax
exposure and to assess temporary differences that result from differing
treatments of certain items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are reflected on the
balance sheet. The Company must then assess the likelihood that its deferred tax
assets will be realized. To the extent it is believed that realization is not
likely, a valuation allowance is established. When a valuation allowance is
established or increased, a corresponding tax expense is recorded in the
statement of operations.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
The net deferred tax asset at July 29, 2007 was $2.0 million, net of the
valuation allowance of $2.7 million. The valuation allowance was recorded to
reflect uncertainties about whether the Company will be able to utilize some of
its deferred tax assets (consisting primarily of foreign net operating loss
carryforwards) before they expire. The valuation allowance is based on estimates
of taxable income for the applicable jurisdictions and the period over which the
deferred tax assets will be realizable.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 156, "Accounting for Transfers and
Servicing of Financial Assets an amendment of SFAS No. 140." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $90.0 million and
$110.0 million at July 29, 2007 and October 29, 2006, respectively. Accordingly,
the trade receivables included on the July 29, 2007 and October 29, 2006 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.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Medical Insurance Program -The Company is self-insured for the majority of its
medical benefit programs. The Company remains insured for a portion of its
medical program (primarily HMOs) as well as the entire dental program. The
Company provides the self-insured medical benefits through an arrangement with a
third party administrator. However, the liability for the self-insured benefits
is limited by the purchase of stop loss insurance. The contributed and withheld
funds and related liabilities for the self-insured program together with unpaid
premiums for the insured programs are held in an IRS Code Section 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.
Legal Contingencies - The Company is subject to certain legal proceedings, as
well as demands, claims and threatened litigation that arise in the normal
course of our business. A quarterly review is performed of each significant
matter to assess any potential financial exposure. If the potential loss from
any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, a liability and an expense are recorded for the estimated
loss. Significant judgment is required in both the determination of probability
and the determination of whether an exposure is reasonably estimable. Any
accruals are based on the best information available at the time. As additional
information becomes available, a reassessment is performed of the potential
liability related to any pending claims and litigation and may revise the
Company's estimates. Potential legal liabilities and the revision of estimates
of potential legal liabilities could have a material impact on the results of
operations and financial position but there are no claims or legal proceedings
pending against the Company or its subsidiaries which, in the opinion of
management, would have a material adverse effect on the Company's consolidated
financial position or results of operations.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006
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 29, July 30, July 29, July 30,
2007 2006 2007 2006
-------------- -------------- --------------- ---------------
Net Sales: (In thousands)
------------------------------------------------
Staffing Services
Staffing $ 1,433,008 $ 1,415,066 $ 509,003 $ 484,882
Managed Services 904,644 806,815 275,819 281,948
-------------- -------------- --------------- ---------------
Total Gross Sales 2,337,652 2,221,881 784,822 766,830
Less: Non-Recourse Managed Services (868,261) (762,694) (265,729) (267,591)
-------------- -------------- --------------- ---------------
Net Staffing Services 1,469,391 1,459,187 519,093 499,239
Telephone Directory 55,527 54,437 20,802 21,426
Telecommunications Services 76,897 89,959 28,347 22,550
Computer Systems 139,131 139,716 47,413 46,305
Elimination of intersegment sales (13,480) (15,066) (5,190) (4,606)
-------------- -------------- --------------- ---------------
Total Net Sales $ 1,727,466 $ 1,728,233 $ 610,465 $ 584,914
============== ============== =============== ===============
Segment Operating Profit (Loss):
------------------------------------------------
Staffing Services $ 32,515 $ 35,573 $ 13,300 $ 16,248
Telephone Directory 9,162 10,521 4,243 4,243
Telecommunications Services 649 539 943 (189)
Computer Systems 17,639 21,632 6,932 6,046
-------------- -------------- --------------- ---------------
Total Segment Operating Profit 59,965 68,265 25,418 26,348
General corporate expenses (29,852) (32,683) (9,678) (10,126)
-------------- -------------- --------------- ---------------
Total Operating Profit 30,113 35,582 15,740 16,222
Interest income and other (expense), net (569) (3,338) 10 (1,094)
Foreign exchange loss, net (758) (707) (305) (351)
Interest expense (2,320) (1,402) (831) (499)
-------------- -------------- --------------- ---------------
Income Before Minority Interest and Income Taxes $ 26,466 $ 30,135 $ 14,614 $ 14,278
============== ============== =============== ===============
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--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 domestic and foreign
branch offices.
o Staffing Solutions provides a full spectrum of managed staffing,
temporary/contract personnel employment, and workforce solutions. This
functional area is comprised of the Technical Placement ("Technical")
division and the Administrative and Industrial ("A&I") division. The
contractors on assignment are usually on the payroll of the Company
for the length of their assignment, but this functional area also uses
subcontractors from other staffing providers ("associate vendors")
when necessary. This functional area also provides direct placement
services, and upon requests from customers, will convert Company
contract personnel to permanent customer positions ("permanent
placement"). In addition, the Company's Recruitment Process
Outsourcing ("RPO") services deliver end-to-end hiring solutions and
technology to customers. The Technical division provides skilled
employees, such as computer and other IT specialties, engineering,
design, scientific and technical support in the Technical division.
The A&I division provides administrative, clerical, office automation,
accounting and financial personnel, call center and light industrial
personnel. The Technical division assignments usually last from weeks
to months, whereas the A&I division assignments usually last from days
to weeks.
o E-Procurement Solutions provides global vendor neutral human capital
acquisition and management solutions by combining web-based tools and
business process outsourcing services. The contractors on assignment
are usually from associate vendor firms, although at times, Volt
recruited contractors may be selected to fill some assignments. The
skill sets utilized in this functional area closely match those of the
Technical assignments within the Staffing Solutions area. The Company
receives a fee for managing the associate vendor process, and the
revenue for such services is recognized net of its associated costs.
This functional area, which is part of the Technical division, is
comprised of the ProcureStaff operation.
o Information Technology Solutions provides a wide range of services
including consulting, outsourcing and turnkey project management in
the product development lifecycle, IT and customer contact markets.
Offerings include electronic game testing, hardware and software
testing, technical communications, technical call center support, data
center management, enterprise technology implementation and
integration and corporate help desk services. This functional area
offers higher margin project-oriented services to its customers and
assumes greater responsibility for the finished product in contrast to
the other areas within the segment. This functional area, which is
part of the Technical division, is comprised of the VMC Consulting
operation.
Telephone Directory: This segment publishes independent telephone directories
and provides telephone directory production services, database management and
printing. Most of the revenues of this segment are derived from the sales of
telephone directory advertising for the books it publishes. This segment is
comprised of the DataNational directory publishing operation, the Uruguay
directory publishing and printing operations, and other domestic directory
production locations.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
EXECUTIVE OVERVIEW--Continued
-----------------------------
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. This
segment is comprised of the Construction and Engineering division and the
Network Enterprise Solutions division.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry and provides IT
maintenance services. The segment sells information service systems to its
customers and, in addition, provides an Application Service Provider
("ASP") model which also provides information services, including
infrastructure and database content, on a transactional fee basis. It also
provides third-party IT and data services to others. This segment is
comprised of Volt Delta Resources, Volt Delta International, DataServ and
the Maintech computer maintenance division.
The Company's operating segments have been determined in accordance with the
Company's internal management structure, which is based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment operating profit. The Company defines
operating profit as pre-tax income, before general corporate expenses, interest
income and expense, and other non-operating income and expense items. Operating
profit provides management, investors and equity analysts a measure to analyze
operating performance of each business segment against historical and
competitors' data, although historical results, including operating profit, may
not be indicative of future results, as operating profit is highly contingent on
many factors, including the state of the economy and customer preferences.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales and operating profit are always
lowest in the Company's first fiscal quarter due to the Thanksgiving, Christmas
and New Year holidays, as well as certain customer facilities closing for one to
two weeks. During the third and fourth quarters of the fiscal year, this segment
benefits from a reduction of payroll taxes when the annual tax contributions for
higher salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the nine and three
months of fiscal 2007. In the current nine and three month periods, the sales
and operating profits of the Staffing Services segment, in addition to the
factors noted above, were negatively impacted by a decrease in the use of
contingent staffing in the A&I division. Operating profits of the segment for
the nine months were lower than in the comparable period of fiscal 2006 due to
the A&I sales decrease and an increase in overhead costs in dollars and as a
percentage of sales, partially offset by an improvement in gross margin
percentages due to lower payroll tax costs and workers' compensation costs. The
workers' compensation cost run rate for the current nine-month period is lower
than the comparable period by approximately $1.0 million per quarter due to the
segment working closely with customers to better manage workers' compensation
costs and the improved regulatory environment within several states. The Company
anticipates this reduced level of workers' compensation costs will continue for
the remainder of fiscal 2007. In the current quarter, operating profits were
lower than in the comparable quarter in fiscal 2006 due to the A&I sales
decrease, lower gross margins in the Technical division and an increase in
overhead costs as a percentage of sales. The gross margins in the A&I division
increased due to reductions in payroll tax costs.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
EXECUTIVE OVERVIEW--Continued
-----------------------------
The Telephone Directory segment's sales increased in the nine months of fiscal
2007 from the comparable fiscal 2006 period, but operating profits decreased,
and in the current fiscal quarter, sales decreased slightly and operating
profits remained constant from the comparable 2006 fiscal period. The decreased
operating profit in the nine-month period was primarily due to a decrease in
gross margin percentage attributable to the mix of telephone directories
delivered, along with an increase in overhead costs in dollars and as a
percentage of sales.
In the Telecommunications Services segment, sales decreased in the nine months
of fiscal 2007 from the comparable fiscal 2006 period, with operating profits
increasing, and in the current quarter, sales and operating results improved
from the comparable 2006 quarter. The gross margin percentages improved in the
nine and three-month periods due to the mix of jobs completed during the period;
however, overhead costs increased as a percentage of sales.
The Computer Systems segment's sales and operating profits decreased in the nine
months of fiscal 2007 from the comparable 2006 fiscal period, although in the
current quarter, sales and operating profits increased from the comparable 2006
quarter. Gross margin percentages increased for the nine and three-month periods
due to the mix of the various revenue components, and overhead costs increased
in dollars and as a percentage of sales in the nine and three-month periods.
The Company has focused, and will continue to focus, on aggressively increasing
its market share while attempting to maintain margins in order to increase
profits. Despite an increase in costs to solidify and expand their presence in
their respective markets, the segments have emphasized cost containment
measures, along with improved credit and collections procedures designed to
improve the Company's cash flow.
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results which
may be expected for any subsequent period. The following discussion should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
which appear in Item 1 of this Report.
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the first nine months of fiscal 2007, consolidated net sales decreased by
$0.8 million, remaining at $1.7 billion, from the comparable period in fiscal
2006. The decrease was primarily attributable to the Telecommunications Services
segment, $13.1 million and the Computer Systems segment, $0.6 million, partially
offset by increases in the Staffing Services segment, $10.2 million and the
Telephone Directory segment, $1.1 million.
Net income for the first nine months of fiscal 2007 was $16.2 million compared
to net income of $17.1 million in the comparable 2006 period. The Company
reported a pre-tax profit before minority interest for the nine months of fiscal
2007 of $26.5 million, compared to $30.1 million in the comparable prior year
period.
The Company reported an operating profit of $30.1 million, a decrease of $5.5
million, or 15%, from the comparable period in fiscal 2006, due to a decrease in
segment operating profit of $8.3 million, partially offset by a decrease in
general corporate expenses of $2.8 million, or 9%. The decrease in segment
operating profit
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
RESULTS OF OPERATIONS - SUMMARY -Continued
------------------------------------------
was attributable to the Computer Systems segment, $4.0 million, the Staffing
Services segment, $3.1 million and the Telephone Directory segment, $1.3
million, partially offset by an increase of $0.1 in the Telecommunications
Services segment. The decrease in general corporate expenses was primarily due
to a one-time accrual of $1.2 million in the second quarter of fiscal 2006 for
death benefits related to two senior corporate executives together with a
reduction in professional fees.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Nine Months Ended
-----------------
July 29, 2007 July 30, 2006
------------- -------------
Staffing Services % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $1,433.0 $1,415.1 $17.9 1.3%
Managed Service Sales (Gross) $904.6 $806.8 $97.8 12.1%
Sales (Net) * $1,469.4 $1,459.2 $10.2 0.7%
Gross Profit $236.4 16.1% $225.8 15.5% $10.6 4.7%
Overhead $203.9 13.9% $190.2 13.0% ($13.7) (7.2%)
Operating Profit $32.5 2.2% $35.6 2.4% ($3.1) (8.7%)
*Sales (Net) only includes the gross margin on managed service sales.
The increase in net sales of the Staffing Services segment in the first nine
months of fiscal 2007 from the comparable fiscal 2006 period was due to a $61.7
million increase in net Technical sales, partially offset by a $51.5 million
decrease in net A&I sales. Foreign generated sales for the current nine months
increased by 33% from the comparable nine-month period, and accounted for 6% of
total Staffing Services net sales for the fiscal 2007 period. On a constant
currency basis, foreign sales increased 24%.
The decrease in operating profit was due to the increase in overhead in dollars
and as a percentage of sales, partially offset by the net sales increase, and
the increase in gross margin percentage. The increased gross margin percentage
was due to a 0.3 percentage point reduction in workers' compensation costs as a
percentage of direct labor resulting from improvements in claims experience and
the regulatory environment in several states, a 0.6 percentage point reduction
in payroll taxes as a percentage of direct labor, and an increase in higher
margin permanent placement and RPO business. In the current nine months,
permanent placement and RPO sales represented 2% of the segment's net sales
compared to 1% in the comparable nine months. The increase in overhead
percentage was due to a sales growth that was less than expected, along with the
costs associated with the higher margin permanent placement and RPO sales. The
segment is focused on reducing overhead costs to compensate for lower sales.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
STAFFING SERVICES--Continued
----------------------------
Nine Months Ended
-----------------
July 29, 2007 July 30, 2006
------------- -------------
Technical Placement
Division % of % of Favorable Favorable
-------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Gross) $1,849.9 $1,682.9 $167.0 9.9%
Sales (Net) * $1,003.0 $941.3 $61.7 6.6%
Gross Profit $160.5 16.0% $150.2 16.0% $10.3 6.9%
Overhead $129.3 12.9% $118.5 12.6% ($10.8) (9.1%)
Operating Profit $31.2 3.1% $31.7 3.4% ($0.5) (1.6%)
*Sales (Net) only includes the gross margin on managed service sales.
The Technical division's increase in gross sales in the nine months of fiscal
2007 from the comparable fiscal 2006 period included increases of approximately
$51 million of sales to new customers, or customers with substantial increased
business, as well as $134 million attributable to net increases in sales to
continuing customers. This was partially offset by sales decreases of
approximately $18 million from customers whose business with the Company either
ceased or was substantially lower than in the comparable period of fiscal 2006.
The Technical division's increase in net sales in the nine months of fiscal 2007
as compared to the comparable period in fiscal 2006 was comprised of a $54.9
million, or 7%, increase in traditional alternative staffing, a $14.9 million,
or 18%, increase in higher margin VMC Consulting project management and
consulting sales, partially offset by a decrease of $8.1 million, or 20%, in net
managed service associate vendor sales.
The decrease in the operating profit was the result of the increase in overhead
in dollars and as a percentage of net sales partially offset by the increase in
net sales and gross margin. The increase in gross margin was due to the increase
in the higher margin project sales of VMC Consulting, a 0.4 percentage reduction
in payroll taxes as a percentage of direct labor, together with an increase in
higher margin permanent placement and RPO business. The increase in overhead
percentage for the nine months was a result of sales growth that was less than
expected along with the costs associated with the higher margin permanent
placement and RPO sales.
Nine Months Ended
-----------------
July 29, 2007 July 30, 2006
------------- -------------
Administrative &
Inudstrial Division
-------------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Gross) $487.7 $539.0 ($51.3) (9.5%)
Sales (Net)* $466.4 $517.9 ($51.5) (9.9%)
Gross Profit $75.9 16.3% $75.6 14.6% $0.3 0.3%
Overhead $74.6 16.0% $71.7 13.8% ($2.9) (4.0%)
Operating Profit $1.3 0.3% $3.9 0.8% ($2.6) (65.4%)
*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
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
STAFFING SERVICES--Continued
----------------------------
The A&I division's decrease in gross sales in the first nine months of fiscal
2007 from the comparable fiscal 2006 period included a decline of approximately
$37 million of sales to customers which the Company either ceased or
substantially reduced servicing in the nine months, as well as $26 million
attributable to decreases in sales to continuing customers. This was partially
offset by growth of $12 million from new customers, or customers whose business
with the Company in the comparable 2006 period was substantially below the
current period's volume.
The decrease in operating profit was the result of the decrease in net sales,
the increase in overhead in dollars and as a percentage of sales, partially
offset by the increased gross margin percentage. The increase in gross margin
percentage was primarily due to a 0.6 percentage point reduction in workers'
compensation costs as a percentage of direct labor resulting from improvements
in claims experience and the regulatory environment in several states, a 0.5
percentage point reduction in payroll taxes as a percentage of direct labor,
together with an increase in higher margin permanent placement and RPO business.
The increase in overhead percentage for the current nine months was due to the
sales decrease without a corresponding reduction in overhead costs, along with
increases in overhead costs related to high-margin permanent placement and RPO
sales . The division is focused on reducing overhead costs to compensate for
lower sales. In the nine months of fiscal 2007, the division closed eight
underperforming branches, and in the third quarter, the overhead costs were
lower than the comparable 2006 quarter and the second quarter of fiscal 2007.
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could, in the future, affect the profitability of the segment. In addition,
the segment's business is obtained through submission of competitive proposals
for production and other contracts. These short and long-term contracts are
re-bid after expiration. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract and generally do not provide
for a minimum amount of work to be awarded to the segment. While the Company has
historically secured new contracts and believes it can secure renewals and/or
extensions of most of these contracts, some of which are material to this
segment, and obtain new business, there can be no assurance that contracts will
be renewed or extended, or that additional or replacement contracts will be
awarded to the Company on satisfactory terms.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
TELEPHONE DIRECTORY
-------------------
Nine Months Ended
-----------------
July 29, 2007 July 30, 2006
------------- -------------
Telephone Directory
------------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Net) $55.5 $54.4 $1.1 2.0%
Gross Profit $28.3 51.0% $28.7 52.7% ($0.4) (1.3%)
Overhead $19.1 34.5% $18.2 33.4% ($0.9) (5.4%)
Operating Profit $9.2 16.5% $10.5 19.3% ($1.3) (12.9%)
The components of the Telephone Directory segment's sales increase for the first
nine months of fiscal 2007 from the comparable 2006 period were increases of
$1.7 million, or 27%, in printing and telephone directory publishing sales in
Uruguay, and $0.1 million in the DataNational community telephone directory
publishing sales, partially offset by a decrease of $0.7 million, or 7%, in
telephone production operation and other sales. The sales increase in Uruguay
was comprised of $1.5 million in publishing sales and $0.2 million in printing
sales. The publishing sales increases by DataNational and in Uruguay are due to
the timing of the deliveries of their directories. DataNational published 97
directories in the current nine months and the comparable nine months, with the
total sales for those books being 1% greater than those same books published in
the prior publishing year. The sales decline for telephone production and other
is due to decreased volumes with existing customers.
The segment's decreased operating profit was primarily due to the mix of
telephone directories delivered in the current nine-month period by DataNational
and in Uruguay, as compared to the prior year's comparable period and the
increase in overhead in dollars and as a percentage of sales, partially offset
by the sales increase.
Other than the DataNational division and the telephone directory publishing
operation in Uruguay, which accounted for 70% of the segment's sales in the
nine-month period of fiscal 2007, 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.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
TELECOMMUNICATIONS SERVICES
Nine Months Ended
-----------------
July 29, 2007 July 30, 2006
------------- -------------
Telecommunication
Services
-------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Sales (Net) $76.9 $90.0 ($13.1) (14.5%)
Gross Profit $19.4 25.2% $19.7 21.9% ($0.3) (1.6%)
Overhead $18.8 24.4% $19.2 21.3% $0.4 2.2%
Operating Profit $0.6 0.8% $0.5 0.6% $0.1 20.4%
The Telecommunications Services segment's sales decrease in the first nine
months of fiscal 2007 from the comparable 2006 period was due to decreases of
$10.9 million, or 20%, in the Construction and Engineering division, and $2.2
million, or 6%, in the Network Enterprise Solutions division. The sales decrease
in the Construction and Engineering division in the current nine-month period
was largely due to completion of a large construction job in fiscal 2006
accounted for using the completed-contract method. The sales decrease in the
Network Enterprise Solutions division was primarily due to reduced volumes with
existing customers.
The increase in operating profit was due to the increase in gross margins,
partially offset by the decrease in sales and the increase in overhead costs as
a percentage of sales. The improved gross margin is due to a reduction in
workers' compensation costs of approximately 3.3 percentage points as a
percentage of direct labor, and to a change in the mix of jobs completed during
the current period as compared to the comparable fiscal 2006 period. The results
of the segment continue to be affected by the decline in capital spending by
telephone companies caused by the consolidation within the segment's
telecommunications industry fixed-line customer base and an increasing shift by
consumers to wireless communications and alternatives. This factor has also
increased competition for available work, pressuring pricing and gross margins
throughout the segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically 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.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
COMPUTER SYSTEMS
----------------
Nine Months Ended
-----------------
July 29, 2007 July 30, 2006
------------- -------------
Computer Systems
---------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Sales (Net) $139.1 $139.7 ($0.6) (0.4%)
Gross Profit $73.1 52.6% $71.6 51.3% $1.5 2.0%
Overhead $55.5 39.9% $50.0 35.8% ($5.5) (10.9%)
Operating Profit $17.6 12.7% $21.6 15.5% ($4.0) (18.5%)
The Computer Systems segment's slight sales decrease in the first nine months of
fiscal 2007 from the comparable 2006 period was due to a decrease in the
database access transaction fee revenue, including ASP directory assistance, of
$3.8 million, or 9%, partially offset by increases in the Maintech division's IT
maintenance sales of $1.2 million, or 3%, and product and other revenue
recognized of $2.0 million, or 4%. The nine months' sales increase included a
$4.2 million increase in sales from the Varetis Solutions operation acquired in
December 2005. Although the number of database transactions from new and
existing customers increased by approximately 16% for the nine months from the
comparable period, selected unit price decreases caused the transaction revenue
to decline. The revenue increase in Maintech from new and existing customers was
net of a reduction at one large customer. The $2.0 million product and other
sales increase included the $4.2 million increase generated from the Varetis
Solutions operation acquired in fiscal 2006.
The decrease in operating profit from the comparable 2006 period was due to the
increase in overhead in dollars and as a percentage of sales, partially offset
by an increase in gross margins The increase in gross margins was due to the
completion of more profitable projects in the current nine months, and the
overhead variance was primarily due to increased indirect labor, as well as
depreciation and amortization.
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. During the first fiscal quarter of
2006, Volt Delta also purchased Varetis Solutions GmbH from varetis AG for $24.8
million. The acquisition provided Volt Delta with the resources to focus on the
evolving global market for directory information systems and services. Varetis
Solutions added 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.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE NINE MONTHS ENDED JULY 30, 2006--Continued
RESULTS OF OPERATIONS--OTHER
----------------------------
Nine Months Ended
-----------------
July 29, 2007 July 30, 2006
------------- -------------
Other
----- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Selling & Administrative $75.0 4.3% $71.1 4.1% ($3.9) (5.6%)
Depreciation & Amortization $28.7 1.7% $26.0 1.5% ($2.7) (10.3%)
Interest Income $4.4 0.3% $2.4 0.1% $2.0 85.0%
Other Expense ($5.0) (0.3%) ($5.7) (0.3%) $0.7 13.0%
Foreign Exchange Loss ($0.8) - ($0.7) - ($0.1) (7.2%)
Interest Expense ($2.3) (0.1%) ($1.4) (0.1%) ($0.9) (65.5%)
The changes in other items affecting the results of operations for the nine
months of fiscal 2007 as compared to the comparable period in fiscal 2006,
discussed on a consolidated basis, were:
The increase in selling and administrative expenses was a result of increased
salaries, partially offset by a one-time accrual of $1.2 million in the second
quarter of fiscal 2006 for death benefits related to two senior corporate
executives together with a reduction in professional fees.
The increase in depreciation and amortization 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 interest income was due to higher interest rates, as well as
interest earned on premium deposits by insurance companies.
The decrease in other expense was primarily due to a decrease in the amount of
accounts receivable sold under the Company's Securitization Program.
The increase in interest expense was due to increased borrowings under the Delta
Credit Facility.
The Company's effective tax rate on its pre-tax income from continuing
operations was 38.7% in the nine months of 2007 compared to 41.3% in the
comparable period of 2006. The effective rate was lower in 2007 due to the
effect of foreign losses in fiscal 2006 for which no benefit was provided and
increased general business credits, partially offset by increased state and
local taxes.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE THREE MONTHS ENDED JULY 30, 2006
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the third quarter of fiscal 2007, consolidated net sales increased by $25.6
million, or 4%, to $610.5 million, from the comparable period in fiscal 2006.
The increase was primarily attributable to the Staffing Services segment, $19.9
million, the Telecommunications Services segment, $5.8 million, and the Computer
Systems segment, $1.1 million, partially offset by a decrease in the Telephone
Directory segment, $0.6 million.
Net income for the third quarter of fiscal 2007 was $9.1 million compared to
$8.4 million in the comparable 2006 quarter. The Company reported a pre-tax
income from continuing operations before minority interest for the third quarter
of fiscal 2007 of $14.6 million, compared to $14.3 million in the prior year's
third quarter.
The Company reported an operating profit of $15.7 million, a decrease of $0.5
million, or 3%, from the comparable quarter in fiscal 2006, due to a decrease in
segment operating profit of $0.9 million, partially offset by a decrease in
general corporate expenses of $0.4 million, or 4%. The decrease in segment
operating profit was attributable to the Staffing Services segment, $2.9
million, partially offset by increases in the Telecommunications Services
segment, $1.1 million, and Computer Systems segment, $0.8 million. The decrease
in general corporate expenses was primarily due to a reduction in professional
fees.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Three Months Ended
------------------
July 29, 2007 July 30, 2006
------------- -------------
Staffing Services
----------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $509.0 $484.9 $24.1 5.0%
Managed Service Sales $275.8 $281.9 ($6.1) (2.2%)
Sales (Net) * $519.1 $499.2 $19.9 4.0%
Gross Profit $81.8 15.8% $80.9 16.2% $0.9 1.1%
Overhead $68.5 13.2% $64.7 12.9% ($3.8) (6.0%)
Operating Profit $13.3 2.6% $16.2 3.3% ($2.9) (18.1%)
*Sales (Net) only includes the gross margin on managed service sales.
The net sales increase of the Staffing Services segment in the third quarter of
fiscal 2007 from the comparable fiscal 2006 quarter was due to a $39.1 million
increase in net Technical sales, partially offset by a $19.2 million decrease in
net A&I sales.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE THREE MONTHS ENDED JULY 30, 2006--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
---------------------------------------------
STAFFING SERVICES--Continued
----------------------------
The decrease in operating profit in the segment resulted from the decrease in
gross margin percentage, the increase in overhead in dollars and as a percentage
of sales, partially offset by the increase in net sales. The decrease in gross
margin percentage was due to margin reductions within ProcureStaff operation and
the VMC Consulting projects, partially offset by a net 0.7 percentage point
decrease in payroll tax costs as a percentage of direct labor, together with an
increase in higher margin permanent placement and RPO business. The increase in
overhead percentage was due to a sales growth that was less than expected, along
with the costs associated with the higher margin permanent placement and RPO
sales.
Three Months Ended
------------------
July 29, 2007 July 30, 2006
------------- -------------
Technical Placement
Division
-------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Sales (Gross) $621.8 $583.8 $38.0 6.5%
Sales (Net) * $363.3 $324.2 $39.1 12.0%
Gross Profit $55.2 15.2% $53.3 16.4% $1.9 3.6%
Overhead $44.7 12.3% $40.3 12.4% ($4.4) (10.8%)
Operating Profit $10.5 2.9% $13.0 4.0% ($2.5) (18.8%)
*Sales (Net) only includes the gross margin on managed service sales.
The Technical division's increase in gross sales in the current quarter of
fiscal 2007 from the comparable fiscal 2006 quarter included increases of
approximately $20 million of sales to new customers, or customers with
substantial increased business, as well as $20 million attributable to net
increases in sales to continuing customers. This was partially offset by sales
decreases of approximately $2 million from customers whose business with the
Company either ceased or was substantially lower than in the comparable quarter
of fiscal 2006. The Technical division's increase in net sales in the current
quarter of fiscal 2007 as compared to the comparable quarter in fiscal 2006 was
comprised of a $35.6 million, or 13%, increase in traditional alternative
staffing and a $8.0 million, or 29%, increase in higher margin VMC Consulting
project management and consulting sales, partially offset by a decrease of $4.5
million, or 35%, in net managed service associate vendor sales.
The decrease in the operating profit was the result of the decreased gross
margin percentage and the increase in overhead in dollars partially offset by
the increase in net sales. The decrease in gross margin percentage was due to
margin reductions in ProcureStaff operation and the VMC Consulting projects,
partially offset by a net 0.2 percentage reduction in payroll taxes and workers'
compensation costs as a percentage of direct labor, together with an increase in
higher margin permanent placement and RPO business. The increase in overhead
percentage for the quarter was a result of sales growth that was less than
expected, along with the costs associated with the higher margin permanent
placement and RPO sales.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE THREE MONTHS ENDED JULY 30, 2006--Continued
STAFFING SERVICES--Continued
----------------------------
Three Months Ended
------------------
July 29, 2007 July 30, 2006
------------- -------------
Administrative &
Industrial Division
------------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Sales (Gross) $163.0 $183.0 ($20.0) (10.9%)
Sales (Net) * $155.8 $175.0 ($19.2) (11.0%)
Gross Profit $26.6 17.1% $27.6 15.8% ($1.0) (3.6%)
Overhead $23.8 15.3% $24.4 13.9% $0.6 2.0%
Operating Profit $2.8 1.8% $3.2 1.9% ($0.4) (15.5%)
*Sales (Net) only includes the gross margin on managed service sales.
The A&I division's decrease in gross sales in the current quarter of fiscal 2007
from the comparable fiscal 2006 period included a decline of approximately $12
million of sales to customers which the Company either ceased or substantially
reduced servicing in the current quarter, as well as $12 million attributable to
net decreases in sales to continuing customers. This was partially offset by
growth of $4 million from new customers, or customers whose business with the
Company in the comparable quarter was substantially below the current quarter's
volume.
The decrease in operating profits was the result of the decrease in net sales,
the increase in overhead as a percentage of sales, partially offset by the
increased gross margin percentage. The increase in gross margin percentage was
primarily due to a 0.9 percentage point reduction in payroll taxes as a
percentage of direct labor, together with an increase in higher margin permanent
placement revenue and RPO business, partially offset by 0.3 percentage point
increase in workers' compensation costs as a percentage of direct labor.
Although overhead costs decreased in dollars from the preceding quarter and the
comparable 2006 quarter, the rate of decrease was not as great as the rate of
sales decline from the comparable quarter. The division is focused on reducing
overhead costs to compensate for lower sales. Two underperforming branches were
closed in the current quarter.
TELEPHONE DIRECTORY
-------------------
Three Months Ended
------------------
July 29, 2007 July 30, 2006
------------- -------------
Telephone Directory
------------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Sales (Net) $20.8 $21.4 ($0.6) (2.9%)
Gross Profit $11.3 54.5% $11.0 51.7% $0.3 2.4%
Overhead $7.1 34.1% $6.8 31.9% ($0.3) (3.9%)
Operating Profit $4.2 20.4% $4.2 19.8% - -
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE THREE MONTHS ENDED JULY 30, 2006--Continued
TELEPHONE DIRECTORY--Continued
-------------------
The components of the Telephone Directory segment's slight sales decrease in the
third quarter of fiscal 2007 from the comparable 2006 period were a decrease of
$1.8 million, or 77%, in the printing operation in Uruguay, partially offset by
increases of $0.7 million, or 5%, in DataNational community telephone directory
sales, and $0.5 million, or 19%, in telephone production and other sales. The
sales decrease in Uruguay was due to reduced printing volumes with existing
customers. The publishing sales increase by DataNational was due to the timing
of the deliveries of their directories. DataNational published 39 directories in
the current three months and the comparable three months. The sales increase in
telephone production and other is due to increased volumes with existing
customers.
The increase in gross margin was due to the increase in the higher profit margin
telephone production sales, offset by the increase in overhead in dollars and as
a percentage of sales.
TELECOMMUNICATIONS SERVICES
---------------------------
Three Months Ended
------------------
July 29, 2007 July 30, 2006
------------- -------------
Telecommunications
------------------ % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Sales $28.3 $22.5 $5.8 25.7%
Gross Profit $8.3 29.3% $5.1 22.5% $3.2 63.5%
Overhead $7.4 26.0% $5.3 23.3% ($2.1) (39.7%)
Operating Profit
(Loss) $0.9 3.3% ($0.2) (0.8%) $1.1 599.0%
The Telecommunications Services segment's sales increase in the third quarter of
fiscal 2007 from the comparable 2006 period was due to an increase of $4.0
million, or 34%, in the Construction and Engineering division, and a $1.8
million, or 17%, increase in the Network Enterprise Solutions division. The
sales increase in the Construction and Engineering division was due to a new
large on-going fiber optic contract which ramped up this quarter and other
projects. The sales increase in the Network Enterprise Solutions division was
primarily due to increased volumes with existing customers and the completion in
the quarter of a job accounted for using the completed-contract method.
The improved operating results were due to the sales increase and improved gross
margins, partially offset by the increase in overhead costs in dollars and as a
percentage of sales. The increased gross margin percentage was due to the higher
margins recognized from the Construction and Engineering's new large fiber optic
job, along with new higher margin work in the Network Enterprise Solutions
division. The increased overhead resulted from the increase in business during
the quarter. The results of the segment continue to be affected by the decline
in capital spending by telephone companies caused by the consolidation within
the segment's telecommunications industry fixed-line customer base and an
increasing shift by consumers to wireless communications and alternatives. This
factor has also increased competition for available work, pressuring pricing and
gross margins throughout the segment.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE THREE MONTHS ENDED JULY 30, 2006--Continued
COMPUTER SYSTEMS
----------------
Three Months Ended
------------------
July 29, 2007 July 30, 2006
------------- -------------
Computer Systems
---------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Sales (Net) $47.4 $46.3 $1.1 2.4%
Gross Profit $25.4 53.6% $23.2 50.1% $2.2 10.0%
Overhead $18.5 39.0% $17.1 37.0% ($1.4) (8.3%)
Operating Profit $6.9 14.6% $6.1 13.1% $0.8 14.7%
The Computer Systems segment's sales increase in the third quarter of fiscal
2007 from the comparable 2006 quarter was due to increases in the Maintech
division's IT maintenance sales of $1.6 million, or 12%, product and other
revenue recognized of $0.6 million, or 3%, partially offset by a decrease in the
database access transaction fee revenue, including ASP directory assistance, of
$1.1 million, or 8%. The revenue increase in Maintech was from new and existing
customers. Although the number of database transactions from new and existing
customers increased by approximately 18% for the quarter from the comparable
fiscal 2006 quarter, selected unit price decreases caused the transaction
revenue to decline.
The increase in operating profit from the comparable 2006 quarter was the result
of the increased sales and the increase in gross margin, partially offset by
increased overhead in dollars and as a percentage of sales. The increase in
gross margins was a result of more profitable projects being completed in the
current quarter, and the overhead variance is primarily due to increases in
indirect labor, as well as depreciation and amortization.
RESULTS OF OPERATIONS--OTHER
----------------------------
Three Months Ended
------------------
July 29, 2007 July 30, 2006
------------- -------------
Other
----- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
-------------------------------------------------------------------------------------------------------
Selling & Administrative $26.1 4.3% $23.9 4.1% $2.2 9.1%
Depreciation & Amortization $9.6 1.6% $9.1 1.6% ($0.5) (5.8%)
Interest Income $1.8 0.3% $0.7 0.1% $1.1 151.5%
Other Expense ($1.8) (0.3%) ($1.8) (0.3%) - -
Foreign Exchange Loss ($0.3) (0.1%) ($0.4) (0.1%) $0.1 13.1%
Interest Expense ($0.8) (0.1%) ($0.5) (0.1%) ($0.3) (66.5%)
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JULY 29, 2007 COMPARED
TO THE THREE MONTHS ENDED JULY 30, 2006--Continued
RESULTS OF OPERATIONS--OTHER--Continued
----------------------------
The changes in other items affecting the results of operations for the third
quarter of fiscal 2007 as compared to the comparable period in fiscal 2006,
discussed on a consolidated basis, were:
The increase in selling and administrative expenses was a result of increased
salaries and other expenses, partially offset by a reduction in professional
fees.
The increase in depreciation and amortization was attributable to increases in
fixed assets, primarily in the Computer Systems and Staffing Services segments.
The increase in interest income was due to interest earned on premium deposits
held by insurance companies, as well as higher interest rates.
The increase in interest expense was due to increased borrowings under the Delta
Credit Facility.
The Company's effective tax rate on its pre-tax income from continuing
operations was 37.6% in the third quarter of fiscal 2007 compared to 41.5% in
the comparable quarter of fiscal 2006. The effective rate was lower in 2007 due
to the effect of foreign losses in fiscal 2006 for which no benefit was provided
and increased general business credits, partially offset by increased state and
local taxes.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, decreased by $14.2 million to $24.3 million in the
nine months ended July 29, 2007.
Operating activities provided $10.4 million of cash in the first nine months of
fiscal 2007. In the comparable fiscal 2006 period, operating activities provided
$77.3 million of cash.
Operating activities in the first nine months of fiscal 2007, exclusive of
changes in operating assets and liabilities, produced $42.0 million of cash, as
the Company's net income of $16.2 million included non-cash charges primarily
for depreciation and amortization of $28.7 million and accounts receivable
provisions of $1.2 million, partially offset by a deferred tax benefit of $4.2
million. In the first nine months of fiscal 2006, operating activities,
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, and 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.
Changes in operating assets and liabilities used $31.6 million of cash, net, in
the first nine months of fiscal 2007 principally due to a reduction in the
Securitization Program of $20.0 million, an increase in the levels of inventory,
principally by the Telecommunication Services segment, and trade accounts
receivable of $16.5 million and $7.6 million, respectively, and a decrease in
income taxes of $7.2 million partially offset by an increase in deferred income
and other liabilities of $14.6 million, principally due to customer advances,
and an increase in the level of accounts payable of $8.3 million. In the first
nine months of fiscal 2006, changes in operating assets and liabilities provided
$32.1 million of cash, net, principally due to the 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
insurance and other current assets of $7.4 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.
The $21.7 million of cash applied to investing activities for the first nine
months of fiscal 2007 primarily resulted from the $21.1 million for net
additions to property, plant and equipment and expenditures of $0.2 million for
acquisitions. The $100.3 million of cash applied to investing activities for the
first nine months of fiscal 2006 resulted from the expenditures of $83.5 million
for acquisitions by the Computer Systems segment and $16.7 million for net
additions to property, plant and equipment.
The principal factors in the $3.3 million of cash used in by financing
activities in the first nine months of fiscal 2007 were a payment of $23.0
million for the purchase of treasury shares partially offset by an increase in
the level of bank loans of $19.6 million primarily due to borrowing under the
Delta Credit Facility. The principal factors in the $6.7 million of cash
provided by financing activities in the first nine months of fiscal 2006 were 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.
Commitments
-----------
In the third quarter of fiscal 2007, Volt Delta signed an agreement with LSSi
Corp. The total merger consideration will be approximately $70 million in cash
subject to adjustment based upon the amount of LSSi's working capital on the
closing date. The transaction is expected to close in the Company's fourth
quarter of 2007.
There have been no other material changes through July 29, 2007 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended October
29, 2006.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Off-Balance Sheet Financing
---------------------------
The Company has no off-balance sheet financing arrangements, as that term has
meaning in Item 303(a) (4) of Regulation S-K.
Securitization Program
----------------------
The Company has a $200.0 million accounts receivable securitization program
("Securitization Program"), which expires in April 2009. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $200.0 million). The
Company retains the servicing responsibility for the accounts receivable. At
July 29, 2007, TRFCO had purchased from Volt Funding a participation interest of
$90.0 million out of a pool of approximately $269.2 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 (subject also, as described
above, to the security interest that the Company granted in the common stock of
Volt Funding in favor of the lenders under the Company's Credit Facility). TRFCO
has no recourse to the Company beyond its interest in the pool of receivables
owned by Volt Funding.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 156, "Accounting for Transfers and Servicing of Financial Assets
an amendment of SFAS No. 140." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
condensed consolidated statement of operations.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold 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 or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At July
29, 2007, the Company was in compliance with all requirements of its
Securitization Program.
Credit Lines
------------
At July 29, 2007, the Company had credit lines with domestic and foreign banks
which provided for borrowings and letters of credit of up to an aggregate of
$119.1 million, including the Company's $40.0 million secured, syndicated
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $70.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility") The Company had
total outstanding bank borrowings of $24.4million. Included in these borrowings
were $9.4 million of foreign currency borrowings which provide a hedge against
devaluation in foreign denominated assets.
Credit Agreement
----------------
The Credit Agreement, which expires in April 2008, established a secured credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit.
Borrowings by subsidiaries are limited to $25.0 million in the aggregate. At
July 29, 2007, the Company had no borrowings against this facility. The
administrative agent for the Credit Facility is JPMorgan Chase Bank, N.A. The
other banks participating in the Credit Facility are Mellon Bank, N.A., Wells
Fargo Bank, N.A., Lloyds TSB Bank PLC and Bank of America, N.A.
Borrowings under the Credit Agreement are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided by a
nationally recognized rating agency. The Credit Agreement requires the
maintenance of specified accounts receivable collateral in excess of any
outstanding borrowings. Based upon the Company's leverage ratio and debt rating
at July 29, 2007, 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 6.2% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At July 29, 2007, the Company was in compliance with all covenants
in the Credit Agreement.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made 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 29, 2007, four of those guarantors have pledged approximately
$46.0 million of accounts receivable, other than those in the Securitization
Program, as collateral for the guarantee obligations. Under certain
circumstances, other subsidiaries of the Company also may be required to become
guarantors under the Credit Facility.
On July 31, 2007, the Company, Gatton Volt Consulting Group Limited, the
Guarantors party thereto, the Lenders party thereto and JPMorgan Chase Bank,
N.A., as a Lender, Issuing Bank and Administrative Agent, entered into a Consent
(the "Consent") to its Credit Agreement. Pursuant to the Consent, the Lenders
consented to the merger and the consummation of the Volt Delta LSSi transaction
and waived the application of certain provisions of the Credit Agreement to the
extent inconsistent with such Consent.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the Delta Credit Facility, which
expires in December 2009, with Wells Fargo, N.A. as the administrative agent and
arranger, and as a lender thereunder. Wells Fargo and the other three lenders
under the Delta Credit Facility, Lloyds TSB Bank Plc., Bank of America, N.A. and
JPMorgan Chase also participate in the Company's $40.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $70.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At July 29, 2007, $20.6 million was drawn on
this facility. Certain rate options, as well as the commitment fee, are based on
a leverage ratio, as defined. Based upon Volt Delta's leverage ratio at July 29,
2007, 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
6.2% per annum. Volt Delta also pays a commitment fee of 0.2% on the unused
portion of the Delta Credit Facility.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.0 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At July 29, 2007, Volt Delta was in compliance with all covenants outlined in
the Delta Credit Facility.
In August 2007, Volt Delta amended the Delta Credit Facility to, among other
things, increase the facility to $100.0 million. Volt Delta plans to use part of
the increase in liquidity to finance the previously announced merger of its
wholly owned subsidiary, LSSI Resources Corp., with LSSi Corp.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
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.
New Accounting Pronouncements to be Effective in Fiscal 2007
------------------------------------------------------------
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48") which prescribes a
recognition threshold and measurement attribute, as well as criteria for
subsequently recognizing, derecognizing and measuring uncertain tax position for
financial statement purposes. FIN 48 also requires expanded disclosure with
respect to the uncertainty in income taxes assets and liabilities. FIN 48 is
effective for the Company on October 29, 2007 and is required to be recognized
as a change in accounting principle through a cumulative-effect adjustment to
retained earnings as of the beginning of the year of adoption. The Company is
currently evaluating the impact of adopting the provisions of FIN 48 in fiscal
2008.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within that fiscal year. The Company is
currently evaluating the impact of adopting this statement.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FAS 115".
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, including
interim periods within that fiscal year. The Company is currently evaluating the
impact of adopting this statement.
Related Party Transactions
--------------------------
During the first nine months of fiscal 2007, the Company paid or accrued $1.5
million to the law firm of which Lloyd Frank, a director, is of counsel, for
services rendered to the Company and expenses reimbursed.
47
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
$0.6 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 $13.2 million
at July 29, 2007. 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 29, 2007, the total market value of these
investments was $5.2 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 29, 2007, the total of the Company's net investment in foreign
operations was $15.8 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 29, 2007, the Company had no outstanding exchange contracts. 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 29, 2007 by 10%
would result in a pretax gain of $1.6 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at July 29, 2007 by 10% would result in a pretax loss of $1.6 million
related to these positions.
48
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at July 29, 2007.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of July 29, 2007
----------------------------------------------------------------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
-----------------------------------------------------------------
(Dollars in thousands of US$)
Cash and Cash Equivalents and
Restricted Cash
-----------------------------------
Money Market and Cash Accounts $ 58,414 $ 58,414
Weighted Average Interest Rate 5.08% 5.08%
---------------------------
Total Cash, Cash Equivalents, and
Restricted Cash $ 58,414 $ 58,414
===========================
Securitization Program
-----------------------------------
Accounts Receivable Securitization $ 90,000 $ 90,000
Finance Rate 5.31% 5.31%
---------------------------
Securitization Program $ 90,000 $ 90,000
===========================
Debt
-----------------------------------
Term Loan $ 12,948 $ 500 $ 1,132 $ 1,333 $ 9,983
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $ 24,405 $ 24,405
Weighted Average Interest Rate 6.14% 6.14% - - -
-----------------------------------------------------------------
Total Debt $ 37,353 $ 24,905 $ 1,132 $ 1,333 $ 9,983
=================================================================
49
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 the 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 29,
2007 under the supervision and with the participation of the Company's
management, including the Company's President and Principal Executive Officer
and its Senior Vice President and Principal Financial Officer. Based on that
evaluation, management concluded that the Company's disclosure controls and
procedures are effective in ensuring that material information relating to the
Company and its subsidiaries is made known to them on a timely basis.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
50
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
--------------------------------------------------------------------------------
10.01 Agreement and Plan of Merger by and among Volt Delta Resources LLC, as parent,
LSSI Resources Corp., as merger sub, and LSSi Corp. as the Company dated as of
June 18, 2007
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 7, 2007
By: /s/Jack Egan
------------
Jack Egan
Senior Vice President and
Principal Financial Officer
51
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.01 Agreement and Plan of Merger by and among Volt Delta Resources LLC, as parent,
LSSI Resources Corp., as merger sub, and LSSi Corp. as the Company dated as of
June 18, 2007
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