UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
--
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934
For the Six Months Ended April 27, 2008.
Or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from to
-------------------- -------------------------
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 13-5658129
------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 704-2400
Not Applicable
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes _X_ No ___
Indicate by check mark whether registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer _____ Accelerated Filer __X__
Non-Accelerated Filer _____ Smaller Reporting Company _____
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ___ No _X_
The number of shares of the registrant's common stock, $.10 par value,
outstanding as of June 2, 2008 was 22,001,541.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Six Months and Three Months Ended April 27, 2008 and April 29, 2007 3
Condensed Consolidated Balance Sheets -
April 27, 2008 (Unaudited) and October 28, 2007 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended April 27, 2008 and April 29, 2007 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 50
Item 4. Controls and Procedures 53
PART II - OTHER INFORMATION
Item 1A. Risk Factors 53
Item 4. Submissions of Matters to a Vote of Security Holders 54
Item 6. Exhibits 55
SIGNATURE 55
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
---------------- ------------------
April 27, April 29, April 27, April 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
NET SALES $1,211,473 $1,117,001 $620,980 $568,202
COST AND EXPENSES:
Cost of sales 1,149,380 1,034,583 576,641 521,501
Selling and administrative 51,690 48,934 26,610 25,052
Restructuring costs 1,504 - - -
Depreciation and amortization 19,962 19,111 10,106 9,510
---------- ---------- ---------- ----------
1,222,536 1,102,628 613,357 556,063
---------- ---------- ---------- ----------
OPERATING (LOSS) INCOME (11,063) 14,373 7,623 12,139
OTHER INCOME (EXPENSE):
Interest income 2,556 2,588 1,254 1,375
Other expense, net (3,214) (3,167) (1,507) (1,635)
Foreign exchange loss, net (354) (453) (45) (366)
Interest expense (3,183) (1,489) (1,561) (861)
---------- ---------- ---------- ----------
(Loss) income before minority interest and income taxes (15,258) 11,852 5,764 10,652
Minority interest 77 - 44 -
---------- ---------- ---------- ----------
(Loss) income before income taxes (15,181) 11,852 5,808 10,652
Income tax benefit (provision) 5,343 (4,732) (2,438) (4,259)
---------- ---------- ---------- ----------
NET (LOSS) INCOME ($9,838) $7,120 $3,370 $6,393
========== ========== ========== ==========
Per Share Data
--------------
Net (loss) income per share - basic and diluted ($0.44) $0.31 $0.15 $0.28
====== ====== ====== ======
Weighted average number of shares - basic 22,146 23,171 21,991 23,181
====== ====== ====== ======
Weighted average number of shares - diluted 22,146 23,221 22,016 23,232
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 27, 2008 October 28, 2007
(Unaudited) (Audited)
----------- ---------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $47,417 $40,398
Restricted cash 33,746 25,482
Short-term investments 5,189 5,624
Trade accounts receivable, net of allowances of $6,269 (2008) and
$5,236 (2007) 399,615 417,115
Inventories, net of allowances of $14,050 (2008) and $4,445 (2007) 48,268 59,950
Recoverable income taxes 10,518 -
Deferred income taxes 12,130 9,629
Prepaid insurance and other assets 33,485 39,927
----------- -----------
TOTAL CURRENT ASSETS 590,368 598,125
Property, plant and equipment, net 75,010 74,709
Insurance and other assets 3,352 6,648
Deferred income taxes 8,776 8,125
Goodwill 102,404 98,715
Other intangible assets, net 50,367 53,829
----------- -----------
TOTAL ASSETS $830,277 $840,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $78,117 $84,111
Current portion of long-term debt 656 510
Accounts payable 223,741 214,799
Accrued wages and commissions 59,433 64,049
Accrued taxes other than income taxes 25,805 22,440
Accrued insurance and other accruals 31,843 32,715
Deferred income and other liabilities 43,041 33,785
Income taxes payable - 4,822
----------- -----------
TOTAL CURRENT LIABILITIES 462,636 457,231
Long-term debt 12,416 12,316
Deferred income 2,505 -
Income taxes payable 937 -
Deferred income taxes 17,359 18,025
Minority interest 799 43
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none
Common stock, par value $.10; Authorized--120,000,000 shares; issued - -
--23,498,103 shares (2008) and 23,480,103 (2007) 2,350 2,348
Paid-in capital 50,973 50,740
Retained earnings 309,017 319,688
Accumulated other comprehensive income 2,266 2,660
----------- -----------
364,606 375,436
Less treasury stock--1,496,562 shares (2008) and 1,048,966 shares (2007),
at cost (30,981) (22,900)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 333,625 352,536
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $830,277 $840,151
=========== ===========
See accompanying notes to condensed consolidated financial statements (unaudited).
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
----------------
April 27, April 29,
2008 2007
---------- ----------
(In thousands)
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
Net (loss) income ($9,838) $7,120
Adjustments to reconcile net (loss) income to cash provided by operating
activities:
Depreciation and amortization 19,962 19,111
Accounts receivable provisions 2,943 1,343
Minority interest (77) -
Loss on dispositions of property, plant and equipment 30 27
Loss on foreign currency translation 105 23
Deferred income tax benefit (7,126) (2,090)
Share-based compensation expense related to employee stock options 29 31
Excess tax benefits from share-based compensation (12) (110)
Changes in operating assets and liabilities, net of assets acquired :
Accounts receivable (5,093) 3,449
Increase (reduction) in securitization of accounts receivable 20,000 (50,000)
Inventories 11,682 (6,031)
Prepaid insurance and other current assets 9,410 (518)
Insurance and other long-term assets 106 516
Accounts payable 466 15,838
Accrued expenses (3,012) 3,342
Deferred income and other liabilities 11,096 16,434
Income taxes (12,622) (7,489)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,049 996
---------- ----------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Six Months Ended
----------------
April 27, April 29,
2008 2007
---------- ----------
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments $997 $697
Purchases of investments (1,100) (812)
Increase in restricted cash (8,264) (1,594)
Increase in payables related to restricted cash 8,264 1,594
Acquisition (873) (225)
Proceeds from disposals of property, plant and equipment, net 60 206
Purchases of property, plant and equipment (15,853) (12,682)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (16,769) (12,816)
---------- ----------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (249) (230)
Cash in lieu of fractional shares - (18)
Exercises of stock options 166 345
Excess tax benefits from share-based compensation 12 110
Purchase of treasury shares (8,081) (7,950)
(Decrease) increase in notes payable to banks (6,189) 28,137
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (14,341) 20,394
---------- ----------
Effect of exchange rate changes on cash 80 (1,097)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,019 7,477
Cash and cash equivalents, beginning of period 40,398 38,481
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $47,417 $45,958
========== ==========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $3,336 $1,305
Income taxes $15,541 $14,978
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 April 27, 2008 and consolidated
results of operations for the six and three months ended and consolidated cash
flows for the six months ended April 27, 2008 and April 29, 2007.
Effective October 29, 2007, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a recognition threshold and a measurement attribute for
the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing
authorities. There was no material impact on the Company's consolidated
financial position and results of operations as a result of the adoption of the
provisions of FIN 48.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the fiscal
year ended October 28, 2007. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
NOTE B--Securitization Program
The Company has a $200.0 million accounts receivable securitization program
("Securitization Program"), which expires in April 2009. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $200.0 million). The Company retains the servicing responsibility
for the accounts receivable. At April 27, 2008, TRFCO had purchased from Volt
Funding a participation interest of $140.0 million out of a pool of
approximately $263.6 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. 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 Statement of Financial Accounting Standards ("SFAS") No. 156, "Accounting
for Transfers and Servicing of Financial Assets, an amendment of SFAS No. 140."
At the time a participation interest in the receivables 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 $2.8 million and $1.3 million in the six and
three months ended April 27, 2008, respectively, compared to $2.2 million and
$0.9 million in the six and three months ended April 29, 2007, which are
included in Other Expense in the consolidated statement of operations. The
equivalent cost of funds in the Securitization Program was at the rate of 4.5%
per annum and 6.0% per annum in the six-month 2008 and 2007 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 the retained
interest in receivables approximated fair value.
At April 27, 2008 and October 28, 2007, the Company's carrying retained interest
in a revolving pool of receivables was approximately $122.8 million and $143.8
million, respectively, net of a service fee liability, out of a total pool of
approximately $263.6 million and $264.9 million, respectively. The outstanding
balance of the undivided interest sold to TRFCO was $140.0 million and $120.0
million at April 27, 2008 and October 28, 2007, respectively. Accordingly, the
trade accounts receivable included on the April 27, 2008 and October 28, 2007
balance sheets were reduced to reflect the participation interest sold of $140.0
million and $120.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At April 27, 2008, the Company was in compliance
with all requirements of the Securitization Program.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves, by segment are as follows:
April 27, October 28,
2008 2007
----------- -----------
(In thousands)
Telephone Directory $11,772 $9,650
Telecommunications Services 28,311 43,162
Computer Systems 8,185 7,138
----------- -----------
Total $48,268 $59,950
=========== ===========
The cumulative amounts billed under service contracts at April 27, 2008 and
October 28, 2007 of $24.6 million and $13.9 million, respectively, are credited
against the related costs in inventory. In addition, inventory reserves at April
27, 2008 and October 28, 2007 of $14.1 million and $4.4 million, respectively,
are credited against the related costs in inventory. The increase in reserves is
the result of a reserve established during the first quarter for certain costs
included in inventory related to work performed and for additional costs
expected to be incurred to complete that work under an installation contract in
the Telecommunications Services segment.
NOTE D--Short-Term Borrowings
At April 27, 2008, the Company had credit lines with domestic and foreign banks
which provided for borrowings and letters of credit of up to an aggregate of
$153.9 million, including the Company's $42.0 million five-year unsecured
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $100.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility"). The Company had
total outstanding bank borrowings of $78.1 million as of April 27, 2008.
Included in these borrowings were $16.1 million of foreign currency borrowings
which provide economic hedges against foreign denominated net assets.
Credit Agreement
----------------
On February 28, 2008, the Company entered into the Credit Agreement to replace
the Company's then expiring $40.0 million secured credit agreement with a credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit and
$25.0 million for borrowing in alternative currencies. At April 27, 2008, the
Company had no borrowings against this facility. The administrative agent for
the Credit Facility is Bank of America, N.A. The other banks participating in
the Credit Facility are JP Morgan Chase Bank, N.A. as syndicated agent, Wells
Fargo Bank, N.A.and HSBC Bank USA, N.A.
Borrowings under the Credit Agreement bear interest at various rate options
selected by the Company at the time of each borrowing. Certain rate options,
together with a facility fee, are based on a leverage ratio, as defined. Based
upon the Company's leverage ratio at April 27, 2008, if a three-month U.S.
Dollar LIBO rate were the interest rate option selected by the Company,
borrowings would have borne interest at the rate of 3.8% per annum, excluding a
fee of 0.3% per annum paid on the entire facility.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on total
funded debt to EBITDA of 3.0 to 1.0; and a requirement that the Company maintain
a minimum ratio of EBITDA, as defined, to interest expense, as defined, of 4.0
to 1.0 for the twelve months ended as of the last day of each fiscal quarter.
The Credit Agreement also imposes limitations on, among other things, the
incurrence of additional indebtedness, the level of annual capital expenditures,
and the amount of investments, including business acquisitions and mergers, and
loans that may be made by the Company to its subsidiaries.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the Delta Credit Facility, which
expires in December 2009, with Wells Fargo, N.A. as the administrative agent and
arranger, and as a lender thereunder. Wells Fargo and two of the other three
lenders under the Delta Credit Facility, Bank of America, N.A. and JPMorgan
Chase, also participate in the Company's $42.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At April 27, 2008, $71.4 million was drawn on
this facility. Certain interest rate options, as well as the commitment fee, are
based on a leverage ratio, as defined, which resets quarterly. Based upon Volt
Delta's leverage ratio at April 27, 2008, if a three-month U.S. Dollar LIBO rate
were the interest rate option selected by the Company, borrowings would have
borne interest at the rate of 4.3% per annum. Volt Delta also pays a commitment
fee on the unused portion of the Delta Credit Facility which varies based on
Volt Delta's leverage ratio. At April 27, 2008, the commitment fee was 0.3% per
annum.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.5 to 1.0 for the twelve months ended as of the last day of each fiscal quarter
and the maintenance of a consolidated net worth, as defined. The Delta Credit
Facility also imposes limitations on, among other things, incurrence of
additional indebtedness or liens, the amount of investments including business
acquisitions, creation of contingent obligations, sales of assets (including
sale leaseback transactions) and annual capital expenditures.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
April 27, October 28,
2008 2007
----------- -----------
(Dollars in thousands)
8.2% term loan (a) $12,577 $12,826
Note payable for an acquisition (b) 495 -
----------- -----------
13,072 12,826
Less amounts due within one year 656 510
----------- -----------
Total long-term debt $12,416 $12,316
=========== ===========
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $12.6 million at
April 27, 2008. The 20-year loan, which bears interest at 8.2% per annum
and requires principal and interest payments of $0.4 million per quarter,
is secured by a deed of trust on certain land and buildings that had a
carrying amount at April 27, 2008 of $10.0 million. The obligation is
guaranteed by the Company.
(b) Represents the present value of a $0.6 million payment due in sixty monthly
installments, discounted at 5% per annum.
NOTE F--Stockholders' Equity
Changes in the major components of stockholders' equity for the six months ended
April 27, 2008 are as follows:
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
----- ------- -------- -----
(In thousands)
Balance at October 28, 2007 $2,348 $50,740 $319,688 ($22,900)
Options exercised - 18,000 shares 2 204
Amortization of restricted stock and stock units 13
Compensation expense - stock options 16
Change in fair value of minority interest (833)
Purchase of treasury shares (8,081)
Net loss for the six months (9,838)
--------- --------- --------- ---------
Balance at April 27, 2008 $2,350 $50,973 $309,017 ($30,981)
========= ========= ========= =========
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Stockholders' Equity
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, gains of $2.3 million and $2.6 million at April 27,
2008 and October 28, 2007, respectively, and unrealized gains, net of taxes, of
$19,000 and $89,000 in marketable securities at April 27, 2008 and October 28,
2007, respectively. Changes in these items, net of income taxes, are included in
the calculation of comprehensive (loss) income as follows:
Six Months Ended Three Months Ended
---------------- ------------------
April 27, April 29, April 27, April 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(In thousands)
Net (loss) income ($9,838) $7,120 $3,370 $6,393
Change in fair value of minority interest (833) - (783) -
Foreign currency translation adjustments, net (324) 626 (52) 860
Unrealized (loss) gain on marketable securities, net (70) 6 (27) (17)
---------- ---------- ---------- ----------
Comprehensive (loss) income ($11,065) $7,752 $2,508 $7,236
========== ========== ========== ==========
NOTE G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Six Months Ended Three Months Ended
---------------- ------------------
April 27, April 29, April 27, April 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
Denominator for basic earnings per share:
Weighted average number of shares 22,146,081 23,170,959 21,990,959 23,180,894
Effect of dilutive securities:
Employee stock options - 50,422 24,654 50,921
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 22,146,081 23,221,381 22,015,613 23,231,815
========== ========== ========== ==========
Options to purchase 157,746 and 3,000 shares of the Company's common stock were
outstanding at April 27, 2008 and April 29, 2007 respectively, but were not
included in the computation of diluted earnings per share because the effect of
inclusion would have been antidilutive.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures
The Company's operating segments have been determined in accordance with the
Company's internal management structure, which is based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment operating profit. Operating profit provides
management, investors and equity analysts a measure to analyze operating
performance of each business segment against historical and competitors' data,
although historical results, including operating profit, may not be indicative
of future results, as operating profit is highly contingent on many factors,
including the state of the economy and customer preferences.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value.
Segment operating profit is comprised of segment sales less its overhead,
selling and administrative costs and depreciation, and excludes general
corporate expenses, interest income earned by the Company on excess cash
generated by its segments, interest expended on corporate debt necessary to
finance the segments' operations and capital expenditures, fees related to sales
of interests in accounts receivable, foreign exchange gains and losses and
income taxes.
General corporate expenses consist of the Company's shared service centers, and
include, among other items, enterprise resource planning, human resources,
corporate accounting and finance, treasury, legal and executive functions. In
order to leverage the Company's infrastructure, these functions are operated
under a centralized management platform, providing support services throughout
the organization. The costs of these functions are included within general
corporate expenses as they are not directly allocable to a specific segment.
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the six and three months ended April
27, 2008 and April 29, 2007 are summarized in the table below.
During the six months ended April 27, 2008, consolidated assets decreased by
$9.9 million primarily due to an increase in the use of the Company's
Securitization Program, as well as lower inventory, primarily in the
Telecommunications Services segment, partially offset by recoverable income
taxes and increases in cash and restricted cash.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures--Continued
Six Months Ended Three Months Ended
---------------- ------------------
April 27, April 29, April 27, April 29,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(In thousands)
Net Sales:
----------
Staffing Services
Staffing $960,342 $924,005 $491,771 $468,910
Managed Services 635,718 628,825 339,173 334,326
---------- ---------- ---------- ----------
Total Gross Sales 1,596,060 1,552,830 830,944 803,236
Less: Non-Recourse Managed Services (608,542) (602,532) (325,230) (319,887)
---------- ---------- ---------- ----------
Net Staffing Services 987,518 950,298 505,714 483,349
Telephone Directory 32,960 34,725 18,292 17,082
Telecommunications Services 96,443 48,550 49,240 27,169
Computer Systems 102,923 91,718 52,140 45,186
Elimination of intersegment sales (8,371) (8,290) (4,406) (4,584)
---------- ---------- ---------- ----------
Total Net Sales $1,211,473 $1,117,001 $620,980 $568,202
========== ========== ========== ==========
Segment Operating Profit (Loss):
--------------------------------
Staffing Services $11,694 $19,215 $6,225 $13,867
Telephone Directory 3,414 4,919 2,752 2,767
Telecommunications Services (17,269) (294) 1,896 383
Computer Systems 8,610 10,707 5,358 5,013
---------- ---------- ---------- ----------
Total Segment Operating Profit 6,449 34,547 16,231 22,030
General corporate expenses (17,512) (20,174) (8,608) (9,891)
---------- ---------- ---------- ----------
Total Operating (Loss) Profit (11,063) 14,373 7,623 12,139
Interest income and other (expense), net (658) (579) (253) (260)
Foreign exchange loss, net (354) (453) (45) (366)
Interest expense (3,183) (1,489) (1,561) (861)
---------- ---------- ---------- ----------
(Loss) Income Before Minority Interest and Income Taxes ($15,258) $11,852 $5,764 $10,652
========== ========== ========== ==========
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE I--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge.
Generally, changes in fair values of derivatives accounted for as fair value
hedges are recorded in income along with the portions of the changes in the fair
values of the hedged items that relate to the hedged risks. Changes in fair
values of derivatives accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in other comprehensive income, net of deferred
taxes. Changes in fair values of derivatives not qualifying as hedges are
reported in the results of operations. As of April 27, 2008, the Company had an
outstanding foreign currency option contracts in the nominal amount equivalent
to $9.5 million, which approximated its net investment in foreign operations and
is accounted for as a hedge under SFAS No. 52, "Foreign Currency Translation".
Restricted cash at April 27, 2008 and October 28, 2007 was $33.7 million and
$25.5 million, respectively, to cover obligations that were reflected in
accounts payable at that date. These amounts primarily related to certain
contracts with customers, for which the Company manages the customers'
alternative staffing requirements, including the payments to associate vendors.
NOTE J--Acquisition of Businesses
In March 2008, the Company acquired a staffing and consulting services provider
in South America for $1.6 million, which is expected to complement existing
services in the Staffing Services segment.
In September 2007, Volt Delta, the principal business unit of the Computer
Systems segment, acquired LSSi Corp. ("LSSi") for $71.7 million and combined it
and its DataServ division into LSSiData. The combination of Volt Delta's
application development, integration and hosting expertise and LSSi's highly
efficient data processing allows Volt Delta to serve a broader base of customers
by aggregating the most current and accurate business and consumer information
possible. Substantially all of the merger consideration was attributable to
goodwill and other intangible assets.
The Company is presently valuing the transactions to determine the final
allocation of the purchase price, which is subject to finalization of certain
adjustments, and is expected to be completed before the end of the fourth
quarter of fiscal 2008.
The above-mentioned acquisitions are accounted for under the purchase method of
accounting at the date of acquisition at their fair values. The results of
operations have been included in the consolidated statement of operations since
the respective acquisition dates.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses--Continued
The preliminary purchase price allocation of the fair value of assets acquired
and liabilities assumed of LSSi is as follows:
(In thousands)
Cash $679
Accounts receivable 5,836
Prepaid expenses and other assets 469
Property, plant and equipment 1,800
Goodwill 49,782
Intangible assets 25,860
---------
Total Assets 84,426
---------
Accounts payable (1,119)
Other accrued expenses (3,912)
Other liabilities (144)
Deferred income tax (7,595)
---------
Total Liabilities (12,770)
---------
Purchase price $71,656
=========
In September 2007, the Company purchased for $1.5 million an 80% interest in an
outsourcing and services provider that complements existing services in the
Staffing Services segment. The Company and the 20%-owner have call and put
rights related to ownership commencing in fiscal 2010. The Company estimated the
fair value of the call/put and recorded a liability of $0.8 million as of April
27, 2008.
The following unaudited pro forma information reflects the purchase of LSSi as
if the transaction had occurred in November 2006. This pro forma financial
information is presented for comparative purposes only and is not necessarily
indicative of the operating results that actually would have occurred had the
acquisition been consummated at the beginning of fiscal 2007. In addition, these
results are not intended to be a projection of future results.
Pro Forma Results
Six Months Ended Three Months Ended
April 29, April 29,
2007 2007
---------- ----------
(In thousands, except per share amounts)
Net Sales $1,131,372 $575,425
========== ==========
Operating income $16,978 $13,847
========== ==========
Net income $11,245 $7,855
========== ==========
Earnings per share
Basic $0.49 $0.34
========== ==========
Diluted $0.48 $0.34
========== ==========
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE K--Goodwill and Intangibles
Goodwill and intangibles with indefinite lives are subject to annual testing
using fair value methodology. An impairment charge is recognized for the amount,
if any, by which the carrying value of goodwill or an indefinite-lived
intangible asset exceeds its estimated fair value. The test for goodwill, which
is performed in the Company's second fiscal quarter, primarily uses comparable
multiples of sales and EBITDA and other valuation methods to assist the Company
in the determination of the fair value of the goodwill and the reporting units
measured. The fiscal 2008 second quarter testing did not result in any
impairment. The Company performed a sensitivity analysis on its annual goodwill
impairment test by changing the sales and EBITDA factors used in its impairment
analysis by 10% and noted no indicators of impairment.
Intangible assets, other than goodwill and indefinite-lived intangible assets,
are tested for recoverability whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. An impairment loss
is recognized when the carrying amount exceeds the estimated fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value.
The following table represents the balance of intangible assets:
April 27, 2008 October 28, 2007
-------------- ----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(In thousands)
Customer relationships $44,398 $7,926 $44,398 $5,138
Existing technology 13,164 3,902 13,164 3,090
Contract backlog 3,200 1,867 3,200 1,467
Trade name (a) 2,016 - 2,016 -
Reseller network 816 238 816 187
Non-compete agreements and trademarks 975 269 325 208
---------- ---------- ---------- ----------
Total $64,569 $14,202 $63,919 $10,090
========== ========== ========== ==========
(a) Trade names have an indefinite life and are not amortized.
NOTE L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At April 27, 2008, the Company's net prepaid for the outstanding
plan years was $16.5 million compared to $26.0 million at October 28, 2007.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Incentive Stock Plans
The Non-Qualified Option Plan adopted by the Company in fiscal 1995 terminated
on May 16, 2005 except for options previously granted under the plan.
Unexercised options expire ten years after grant. Outstanding options at April
27, 2008 were granted at 100% of the market price on the date of grant and
become fully vested within one to five years after the grant date.
As a result of adopting SFAS No. 123R, the Company recorded compensation expense
of $9,000 and $29,000 for the six-month periods ended April 27, 2008 and April
29, 2007, respectively. Compensation expense is recognized in the selling and
administrative expenses in the Company's statement of operations on a
straight-line basis over the vesting periods. As of April 27, 2008, there was
$17,000 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements to be recognized over a weighted average
period of 0.7 years.
The intrinsic value of options exercised during the six-month period ended April
27, 2008 and April 29, 2007 was $0.1 and $0.6 million, respectively. The total
cash received from the exercise of stock options was $0.2 million and $0.3
million in the six-month period ended April 27, 2008 and April 29, 2007,
respectively and is classified as financing cash flows in the statement of cash
flows. The actual tax benefit realized from the exercise of stock options for
the six-month period ended April 27, 2008 and April 29, 2007 was $0.1 million
and $0.2 million, respectively.
In April 2007, the shareholders of the Company approved the Volt Information
Sciences, Inc. 2006 Incentive Stock Plan ("2006 Plan"). The 2006 Plan permits
the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock and Restricted Stock Units to employees and non-employee directors of the
Company through September 6, 2016. The maximum aggregate number of shares that
may be issued pursuant to awards made under the 2006 Plan shall not exceed one
million five hundred thousand (1,500,000) shares.
Compensation expense of $14,000 was recognized in selling and administrative
expenses in the Company's condensed consolidated statement of operations for the
six-month period ended April 27, 2008 on a straight-line basis over the vesting
period for grants issued in fiscal 2007. As of April 27, 2008, there was $52,000
of total unrecognized compensation cost related to non-vested share-based
compensation arrangements to be recognized over a weighted average period of two
years.
On December 18, 2007, the Company granted to employees (i) 233,000 restricted
stock units and (ii) non-qualified stock options to purchase 152,996 shares of
the Company's common stock at $13.32 per share under the 2006 Plan. If certain
net income targets are met in fiscal years 2007 through 2011, the restricted
stock units begin to vest over a five-year period through 2016. Similarly, if
certain net income targets are met in fiscal years 2008 through 2012,
substantially all the stock options will vest over a four-year period and expire
on December 17, 2017. For the six months ended April 27, 2008, no compensation
expense was recognized on these grants.
There were no options granted during the three months ended April 27, 2008.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE N--Income Taxes
Effective October 29, 2007, the Company adopted the provisions of FIN 48. FIN 48
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
The adoption of the provisions of FIN 48 did not have a material impact on the
Company's consolidated financial position and results of operations.
At October 29, 2007, the Company had a liability for unrecognized tax benefits
of $0.9 million which includes an accrual of $0.1 million of related interest.
The Company's policy is that interest and penalties are recorded as a component
of income tax expense.
The Company is subject to taxation in the US, various states and various foreign
jurisdictions. With few exceptions, the Company is generally no longer subject
to examination by the United States federal, state, local or non-U.S. income tax
authorities for years before fiscal 2002. The following describes the open tax
years, by major tax jurisdiction, as of October 29, 2007:
United States-Federal 2004-present
United States-State 2003-present
Canada 2002-present
Germany 2005-present
United Kingdom 2006-present
The Company's policy is to accrue interest in the period during which it is
deemed to have been incurred, based on the difference between the tax position
recognized in the financial statements and the amount previously claimed (or
expected to be claimed) on the tax return. In addition, if the Company is
subject to penalties because of this, a liability for the penalties is
recognized in the period in which the penalties are deemed to have been
incurred.
NOTE O--Restructuring
During the first quarter of fiscal 2008, the Company recorded a pre-tax
restructuring charge of approximately $1.5 million ($0.9 million net of taxes,
or $0.04 per share) related to the elimination of employee positions in Europe
and North America. The workforce reduction at Volt Delta resulted from the
integration of LSSiData into the segment's database access line of business. The
restructuring charge consists of severance and termination benefits for the
affected employees and is presented on a separate line item in the Company's
condensed consolidated statement of operations. The restructuring charge was
paid during the first six months of fiscal 2008.
19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Organization of Information
---------------------------
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to our consolidated financial
statements and notes thereto included in Part I of this Form 10-Q and to provide
an understanding of our consolidated results of operations, financial condition
and changes in financial condition. Our MD&A is organized as follows:
o Forward-Looking Statements - This section describes some of the
language and assumptions used in this document that may have an impact
on the readers' interpretation of the financial statements.
o Non-GAAP Financial Measures - This section describes some of the
information extracted from the consolidated financial statements that
are not required by generally accepted accounting principles ("GAAP")
to be presented in the financial statements.
o Executive Overview - This section provides a general description of
our business segments and provides a brief overview of the results of
operations during the accounting period.
o Consolidated Results of Operations - This section provides an analysis
of the line items on the Statements of Operations for the current and
comparative accounting periods.
o Results of Operations by Segment - This section provides a summary of
the results of operations by segment in tabular format and an analysis
of the line items by segment for the current and comparative
accounting periods.
o Liquidity and Capital Resources - This section provides an analysis of
our liquidity and cash flows, as well as our discussion of our
commitments, securitization program and credit lines.
o Critical Accounting Policies - This section discusses those accounting
policies that are considered to be both important to our financial
condition and results of operations and require us to exercise
subjective or complex judgments in their application.
o New Accounting Pronouncements - This section includes a discussion of
recently published accounting authoritative literature that may have
an impact on our historical or prospective results of operations or
financial condition.
o Related Person Transactions - This section describes any business
relationships, or transaction or series of similar transactions,
between the Company and its directors, executive officers,
shareholders (with a 5% or greater interest in the Company), or any
entity in which an executive officer has more than a 10% equity
ownership interest, as well as members of the immediate families of
any of the foregoing persons during the first six months of fiscal
year 2007 and 2008. Excluded from the transactions are employment
compensation and directors' fees.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth in the Company's Annual Report on Form 10-K, in this Form 10-Q and in the
Company's press releases and other public filings. Such risks and uncertainties
could cause the Company's actual results, performance and achievements to differ
materially from those described in or implied by the forward-looking statements.
Accordingly, readers should not place undue reliance on any forward-looking
statements made by or on behalf of the Company. The Company does not assume any
obligation to update any forward-looking statements after the date they are
made.
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Non-GAAP Financial Measures
---------------------------
This report includes information extracted from consolidated financial
information that is not required by generally accepted accounting principles
("GAAP") to be presented in the financial statements. Certain of this
information is considered "non-GAAP financial measures" as defined by SEC rules.
Some of these measures are as follows:
Gross profit for a segment is comprised of its total net sales less direct
costs.
Segment or division operating profit is comprised of segment or division gross
profit less its overhead, selling and administrative costs and depreciation, and
has limitations as an analytical tool. It should not be considered in isolation
or as a substitute for analysis of the Company's results as reported under GAAP.
Some of these limitations are due to the omission of: (a) general corporate
expenses; (b) interest income earned by the Company on excess cash generated by
its segments; (c) interest expended on corporate debt necessary to finance the
segments' operations and capital expenditures; and (d) fees related to sales of
interests in accounts receivable. Because of these limitations, segment or
division operating profit (loss) should only be used on a supplemental basis
combined with GAAP results when evaluating the Company's performance.
Overhead is comprised of indirect costs required to support each segment's
operations, and is included in cost of sales in the statements of operations,
along with selling and administrative and depreciation expenses, which are
reflected separately in the statements of operations.
General corporate expenses are comprised of the Company's shared service
centers, and include, among other items, enterprise resource planning, human
resource, corporate accounting and finance, treasury, legal and executive
functions. In order to leverage the Company's infrastructure, these functions
are operated under a centralized management platform, providing support services
throughout the organization. The costs of these functions are included within
general corporate expenses as they are not directly allocable to a specific
segment.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Executive Overview
------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions provides a full spectrum of managed staffing,
temporary/contract personnel employment, and workforce solutions.
This functional area is comprised of the Technical Placement
("Technical") division and the Administrative and Industrial
("A&I") division. The employees and contractors on assignment are
usually on the payroll of the Company for the length of their
assignment and are then eligible to be re-assigned to another
customer. This functional area also uses employees and
subcontractors from other staffing providers ("associate
vendors") when necessary. This functional area also provides
direct placement services and, upon requests from customers, will
allow the customer to convert the temporary employees to
permanent customer positions. In addition, the Company's
Recruitment Process Outsourcing ("RPO") services deliver
end-to-end hiring solutions to customers. The Technical division
provides skilled employees, such as computer and other IT
specialties, engineering, design, scientific and technical
support. The A&I division provides administrative, clerical,
office automation, accounting and financial, call center and
light industrial personnel. Employee assignments in the Technical
division usually last from weeks to months, while in the A&I
division the assignments are generally shorter and in both
divisions the employee is eligible to be re-assigned and the
Company attempts to re-assign the employee as soon as possible.
o E-Procurement Solutions provides global vendor neutral human
capital acquisition and management solutions by combining
web-based tools and business process outsourcing services. The
employees and contractors on assignment are usually from
associate vendor firms, although at times, Volt recruited
contractors may be selected to fill some assignments, but in
those cases Volt competes on an equal basis with other
unaffiliated firms. The skill sets utilized in this functional
area closely match those of the Technical assignments within the
Staffing Solutions area. The Company receives a fee for managing
the process, and the revenue for such services is recognized net
of its associated costs. This functional area, which is part of
the Technical division, is comprised of the ProcureStaff
operation.
o Information Technology Solutions provides a wide range of
services including consulting, outsourcing and turnkey project
management in the product development lifecycle, IT and customer
contact markets. Offerings include electronic game testing,
hardware and software testing, technical communications,
technical call center support, data center management, enterprise
technology implementation and integration and corporate help desk
services. This functional area offers higher margin
project-oriented services to its customers and assumes greater
responsibility for the finished product in contrast to the other
areas within the segment. This functional area, which is part of
the Technical division, is comprised of the VMC Consulting
operation.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Executive Overview--Continued
------------------
Telephone Directory: This segment publishes independent telephone
directories and provides telephone directory production services, database
management and printing. Most of the revenues of this segment are derived
from the sales of telephone directory advertising for the books it
publishes. This segment is comprised of the DataNational directory
publishing operation, the Uruguay directory publishing and printing
operations, and other domestic directory production locations.
Telecommunications Services: This segment provides a full spectrum of
voice, data and video turnkey solutions for government and private sectors,
encompassing engineering, construction, installation and maintenance
services. These services include outside plant engineering and
construction, central office network solutions, integrated technologies,
global solutions (structured cabling, field dispatch, installation and
repair, security access control and maintenance), government solutions and
wireless solutions. This segment is comprised of the Construction and
Engineering division and the Network Enterprise Solutions division.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry and provides IT
maintenance services. The segment also sells information service systems to
its customers and, in addition, provides an Application Service Provider
("ASP") model which also provides information services, including
infrastructure and database content, on a transactional fee basis. It also
provides third-party IT and data services to others. This segment is
comprised of Volt Delta Resources, Volt Delta International, LSSiData and
the Maintech computer maintenance division.
The Company's operating segments have been determined in accordance with the
Company's internal management structure, which is based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment operating profit. 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.
In the six and three-month periods of fiscal 2008, the Company's consolidated
net sales totaled $1.2 billion and $621.0 million and it had consolidated
segment operating profits totaling $6.4 million and $16.2 million, respectively.
The explanations by segment for the six and three-month periods are detailed
below.
The Staffing Services segment, in addition to the factors noted above, was
positively impacted by a continued increase in the use of contingent staffing in
the Technical Placement division, as net sales increased by $37.2 million and
$22.4 million, respectively, from the comparable 2007 fiscal periods. Despite
the sales increases,
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Executive Overview--Continued
------------------
operating profit of the segment for the six and three-month periods decreased by
$7.5 million and $7.6 million from the comparable period in fiscal 2007 as gross
margins decreased by 1.0 and 2.0 percentage points, respectively, with other
costs remaining stable.
The Telephone Directory segment's sales decreased by $1.7 million for the six
months, but increased $1.2 million for the current quarter, and its operating
profit decreased by $1.5 million for the six months, while remaining flat for
the current fiscal quarter from the comparable period of fiscal 2007. The
decrease in operating profit for the six months of fiscal 2008 was predominantly
due to the sales decreases and an increase in selling and administrative
expense.
The Telecommunications Services segment sales increased by $47.8 million and
$22.1 million, respectively, from the comparable periods in fiscal 2007;
however, the operating loss increased by $17.0 million for the six months and
the operating profit increased by $1.5 million for the current quarter. In late
January 2008, the Company learned that it may not be reimbursed for certain
costs under an installation contract and the Company has revalued its reserves
to include this uncertainty. The increase in operating loss for the six months
was due to the establishment of a $19.3 million reserve for certain costs
included in inventory related to work performed and for additional costs
expected to be incurred to complete that work under that contract.
The Computer Systems segment's sales increased by $11.2 million and $6.9
million, respectively, from the comparable periods in fiscal 2007, while its
operating profit decreased by $2.1 million for the six months, but increased
$0.3 million for the current quarter. The decrease in operating profit for the
current six months was due to the increased overhead cost as a result of the
acquisition of LSSi, which included $1.5 million of severance costs and
increased amortization of intangible costs related to the acquisition.
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.
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007
Results of Operations
---------------------
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results which
may be expected for any subsequent period. The following discussion should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
which appear in Item 1 of this Report.
Consolidated Results of Operations
----------------------------------
In the first six months of fiscal 2008, consolidated net sales increased by
$94.5 million, or 9%, to approximately $1.2 billion, from the comparable period
of fiscal 2007. The increase in the current period's net sales resulted from
increases in Staffing Services of $37.2 million, Telecommunications Services of
$47.8 million and Computer Systems of $11.2 million, partially offset by a
decrease in Telephone Directory of $1.7 million.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Consolidated Results of Operations--Continued
----------------------------------
Cost of sales increased by $114.8 million, or 11%, to $1.1 billion, and was 95%
of sales, in the six months of fiscal 2008 as compared to 93% of sales in the
comparable period of fiscal 2007. In the first quarter of fiscal 2008, the
Company learned that it may not be reimbursed for certain costs under an
installation contract in the Telecommunications Services segment and the Company
revalued its reserves to include this uncertainty. The increase in cost of sales
as a percentage of sales is primarily due to the $19.3 million loss reserve
established in the first quarter of fiscal 2008 for certain costs included in
inventory related to work performed and for additional costs expected to be
incurred to complete that work under that contract. The acquisition of LSSi
within the Computer Systems segment in September 2007 increased cost of sales by
$6.2 million, but it did not increase the cost of sales percentage. Excluding
the reserve established in the Telecommunications Services segment, cost of
sales in the current six months would have been 93% of sales, as it was in the
comparable period of fiscal 2007.
Selling and administrative costs increased by $2.8 million, or 6%, in the
current six-month period from the comparable period in fiscal 2007, but
decreased as a percentage of sales to 4.3% from 4.4% in the comparable period.
Depreciation and amortization increased by $0.9 million, or 4%, in the current
six-month period from the comparable period in fiscal 2007, and was 2% of sales,
as it was in the comparable period. The increase in depreciation and
amortization in the current six months from the comparable 2007 fiscal period
was attributable to increases in amortization of intangibles in the Computer
Systems segment due to acquisitions in fiscal 2007, partially offset by a
reduction in amortization of the corporate enterprise resource planning system.
The Company reported an operating loss of $11.1 million in the current six
months, as compared to an operating profit of $14.3 million in the comparable
period of fiscal 2007 due to a decrease in segment operating profit of $28.1
million, or 81%, partially offset by a decrease of $2.7 million, or 13%, in
general corporate expenses. The decrease in segment operating results was
attributable to the decreased operating profits of the Telecommunications
Services segment of $17.0 million, the Staffing Services segment of $7.5
million, the Computer Systems segment of $2.1 million and the Telephone
Directory segment of $1.5 million.
Interest expense increased by $1.7 million, or 114%, in the current six months
over the comparable period in fiscal 2007. The increase was due to additional
borrowings used to fund the 2007 acquisitions and for working capital
requirements.
The Company's effective tax benefit rate on its financial reporting pre-tax loss
was 35.2% in the six months of fiscal 2008 compared to an effective tax
provision rate of 39.9% on its financial reporting pre-tax income in the
comparable period in fiscal 2007.
The net loss in the six months of fiscal 2008 was $9.8 million compared to a net
income of $7.1 million in the comparable period of fiscal 2007.
Results of Operations by Segment
--------------------------------
The following two tables reconcile the operating profit by segment to the
consolidated statements of operations for the six months ended April 27, 2008
and April 29, 2007:
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Six Months Ended April 27, 2008
-------------------------------
(Dollars in Millions)
Staffing Telephone Telecommunications Computer Corporate &
Total Services Directory Services Systems Eliminations
----- -------- --------- -------- ------- ------------
Net Sales $1,211.4 $987.5 $33.0 $96.4 $102.9 ($8.4)
Direct Costs 978.0 836.8 17.2 85.6 46.8 (8.4)
Overhead 171.3 109.8 3.1 26.6 31.8 -
-------- -------- -------- -------- -------- --------
Cost of Sales 1,149.3 946.6 20.3 112.2 78.6 (8.4)
Selling & Administrative 51.7 22.3 8.4 0.2 4.6 16.2
Restructuring 1.5 - - - 1.5 -
Depreciation 20.0 6.9 0.9 1.3 9.6 1.3
-------- -------- -------- -------- -------- --------
Operating (loss) profit (11.1) 11.7 3.4 (17.3) 8.6 (17.5)
Interest income 2.6 - - - - 2.6
Other expense, net (3.2) - - - - (3.2)
Foreign exchange (0.4) - - - - (0.4)
Interest expense (3.2) - - - - (3.2)
-------- -------- -------- -------- -------- --------
(Loss) income before
minority interest and
income taxes ($15.3) $11.7 $3.4 ($17.3) $8.6 ($21.7)
======== ======== ======== ======== ======== ========
Six Months Ended April 29, 2007
-------------------------------
(Dollars in Millions)
Staffing Telephone Telecommunications Computer Corporate &
Total Services Directory Services Systems Eliminations
----- -------- --------- -------- ------- ------------
Net Sales $1,117.0 $950.3 $34.7 $48.6 $91.7 ($8.3)
Direct Costs 887.0 795.7 17.7 37.5 44.4 (8.3)
Overhead 147.6 108.2 3.4 10.3 25.7 -
-------- -------- -------- -------- -------- --------
Cost of Sales 1,034.6 903.9 21.1 47.8 70.1 (8.3)
Selling & Administrative 49.0 20.9 7.7 0.2 3.2 17.0
Depreciation 19.1 6.3 1.0 0.9 7.7 3.2
-------- -------- -------- -------- -------- --------
Operating profit (loss) 14.3 19.2 4.9 (0.3) 10.7 (20.2)
Interest income 2.6 - - - - 2.6
Other expense, net (3.1) - - - - (3.1)
Foreign exchange (0.5) - - - - (0.5)
Interest expense (1.5) - - - - (1.5)
-------- -------- -------- -------- -------- --------
Income (loss) income before
minority interest and
income taxes $11.8 $19.2 $4.9 ($0.3) $10.7 ($22.7)
======== ======== ======== ======== ======== ========
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Staffing Services
-----------------
Six Months Ended
----------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-----------------------------------------------------------------------------------------------------------------------------------
Gross Staffing Sales $960.3 $924.0 $36.3 3.9%
-----------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $635.7 $628.8 $6.9 1.1%
-----------------------------------------------------------------------------------------------------------------------------------
Net Sales * $987.5 $950.3 $37.2 3.9%
-----------------------------------------------------------------------------------------------------------------------------------
Direct Costs $836.8 84.7% $795.7 83.7% ($41.1) (5.2%)
-----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $150.7 15.3% $154.6 16.3% ($3.9) (2.5%)
-----------------------------------------------------------------------------------------------------------------------------------
Overhead $109.8 11.1% $108.2 11.4% ($1.6) (1.6%)
-----------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $22.3 2.3% $20.9 2.2% ($1.4) (6.7%)
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $6.9 0.7% $6.3 0.7% ($0.6) (8.0%)
-----------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $11.7 1.2% $19.2 2.0% ($7.5) (39.1%)
-----------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The increase in net sales of the Staffing Services segment for the six months of
fiscal 2008 from the comparable period in fiscal 2007 was comprised of a $38.5
million, or 6%, increase in net Technical sales, partially offset by a decrease
of $1.3 million, or 0.4%, in net A&I sales. Foreign generated net sales for the
six months increased by 38% from the comparable 2007 fiscal period, and
accounted for 7% of total net Staffing Services sales for the current period. On
a constant currency basis, foreign sales increased by 31% from the comparable
2007 fiscal period. In the current six months, the segment's permanent placement
sales increased by 18% and RPO sales increased by 8% from the comparable period
in fiscal 2007.
The decrease in the segment's operating results was comprised of a decrease of
$10.3 million in the Technical division, partially offset by an increase of $2.8
million in the A&I division. The segment's gross margin percentage decreased by
1.0%, primarily due to a decrease of 1.5 percentage points in the Technical
division. The total of overhead, selling and administrative and depreciation
percentages approximated the comparable 2007 period percentages, with a decrease
in the A&I division substantially offset by an increase in the Technical
division.
Six Months Ended
----------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Technical Placement Net Net (Unfavorable) (Unfavorable)
Division Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
-----------------------------------------------------------------------------------------------------------------------------------
Gross Sales $1,272.4 $1,228.1 $44.3 3.6%
-----------------------------------------------------------------------------------------------------------------------------------
Net Sales * $678.2 $639.7 $38.5 6.0%
-----------------------------------------------------------------------------------------------------------------------------------
Direct Costs $576.7 85.0% $534.3 83.5% ($42.4) (7.9%)
-----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $101.5 15.0% $105.4 16.5% ($3.9) (3.7%)
-----------------------------------------------------------------------------------------------------------------------------------
Overhead $70.0 10.4% $65.9 10.3% ($4.1) (6.4%)
-----------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $15.7 2.3% $14.1 2.2% ($1.6) (11.4%)
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $5.5 0.8% $4.8 0.8% ($0.7) (13.9%)
-----------------------------------------------------------------------------------------------------------------------------------
Division Operating Profit $10.3 1.5% $20.6 3.2% ($10.3) (50.3%)
-----------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Staffing Services--Continued
-----------------
The Technical division's increase in gross sales in the current six months of
fiscal 2008 from the comparable prior year period included increases of
approximately $12 million of sales to new customers or customers with
substantial increased business, as well as $38 million attributable to net
increases in sales to continuing customers. This was partially offset by sales
decreases of approximately $6 million from customers whose business with the
Company either ceased or was substantially lower than in the comparable six
months of fiscal 2007. The Technical division's increase in net sales in the six
months of fiscal 2008 from the comparable period in fiscal 2007 was comprised of
increases of $40.6 million, or 7%, in traditional alternative staffing and $0.3
million, or 1%, in net managed service associate vendor sales, partially offset
by a decrease of $2.4 million, or 4%, in VMC Consulting project management and
consulting sales.
The decrease in the division's operating profit was the result of the decrease
in gross margin percentage and the increase in overhead, partially offset by the
increase in sales. The decrease in gross margin was primarily due to the
decrease in the gross margins in VMC Consulting due to losses on four projects.
The increase in overhead in the current six months was a result of VMC startup
costs for new projects, and costs related to the new Momentum RPO operation,
partially offset by a reduction in the current six months of $1.7 million in
health insurance costs due to improved claims experience. The increase in
selling and administrative costs was due to increased indirect labor in the
European operation related to its sales growth, and a gain on the settlement of
a vendor dispute in the comparable 2007 period. Indirect labor costs, which are
included in overhead and selling and administrative costs, increased by 9% from
the comparable 2007 six months.
Six Months Ended
----------------
April 27, 2008 April 29, 2007
-------------- --------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-------------------------------------------------------------------------------------------------------------------------------
Gross Sales $323.6 $324.7 ($1.1) (0.3%)
-------------------------------------------------------------------------------------------------------------------------------
Net Sales * $309.3 $310.6 ($1.3) (0.4%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $260.1 84.1% $261.4 84.2% $1.3 0.5%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $49.2 15.9% $49.2 15.8% - -
-------------------------------------------------------------------------------------------------------------------------------
Overhead $39.8 12.9% $42.3 13.6% $2.5 5.9%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $6.6 2.1% $6.8 2.2% $0.2 3.0%
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.4 0.4% $1.5 0.5% $0.1 12.4%
-------------------------------------------------------------------------------------------------------------------------------
Division Operating Profit (Loss) $1.4 0.5% ($1.4) (0.5%) $2.8 202.7%
-------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The A&I division's decrease in gross sales in the current six months of fiscal
2008 as compared to the comparable period of fiscal 2007 included a decline of
approximately $16 million of sales to customers which the Company either ceased
or substantially reduced servicing in the current year, as well as $5 million
attributable to net decreases in sales to continuing customers. This was
substantially offset by a growth of approximately $20 million from new
customers, or customers whose business with the Company in the comparable fiscal
period was substantially below the current six-month period volume.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Staffing Services--Continued
-----------------
The division's improved operating results were primarily due to the decrease in
overhead in dollars and as a percentage of sales, along with a slight
improvement in gross margin percentage and other indirect costs. The increase in
gross margin percentage was primarily due to a 0.5 percentage point reduction in
payroll taxes as a percentage of direct labor, substantially offset by a
decrease in permanent placement and RPO sales and direct labor markups. This
payroll tax reduction in two of A&I's more significant states is expected to
continue throughout the remainder of the fiscal year. The decrease in overhead
costs from the comparable period in fiscal 2007 primarily resulted from a
reduction of indirect headcount of approximately 6%. The division is focused on
reducing overhead costs to compensate for lower sales. In each of the past four
quarters, the overhead costs have been lower than the comparable prior fiscal
year quarters.
Although the markets for the segment's services include a broad range of
industries throughout the United States, Europe and Asia, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could in the future affect the profitability of the segment. Much of the
segment's business is obtained through submission of competitive proposals for
staffing services and other contracts which are frequently re-bid after
expiration. Many of this segment's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the segment
is not in default under the contract, and generally do not provide for a minimum
amount of work to be awarded to the segment. While the Company has historically
secured new contracts and believes it can secure renewals and/or extensions of
most of these contracts, some of which are material to this segment, and obtain
new business, there can be no assurance that contracts will be renewed or
extended, or that additional or replacement contracts will be awarded to the
Company on satisfactory terms.
Telephone Directory
-------------------
Six Months Ended
----------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------------------------------------------------
Net Sales $33.0 $34.7 ($1.7) (5.1%)
---------------------------------------------------------------------------------------------------------------------------------
Direct Costs $17.2 52.0% $17.7 51.1% $0.5 3.6%
---------------------------------------------------------------------------------------------------------------------------------
Gross Profit $15.8 48.0% $17.0 48.9% ($1.2) (6.7%)
---------------------------------------------------------------------------------------------------------------------------------
Overhead $3.1 9.5% $3.4 9.8% $0.3 8.7%
---------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $8.4 25.4% $7.7 22.1% ($0.7) (9.3%)
---------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.9 2.7% $1.0 2.8% $0.1 5.9%
---------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $3.4 10.4% $4.9 14.2% ($1.5) (30.6%)
---------------------------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's sales decrease for the six
months of fiscal 2008 from the comparable period of fiscal 2007 were decreases
of $1.7 million in publishing sales in Uruguay, $1.4 million in the DataNational
community telephone directory publishing sales and $0.3 million in telephone
production and other sales, partially offset by a $1.7 million increase in
printing sales in Uruguay. The sales decrease in the telephone directory
publishing operation in Uruguay was due to the timing of the delivery of their
directories. The increase in printing sales in Uruguay included $0.8 million of
sales to new customers. The DataNational
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Telephone Directory--Continued
-------------------
sales decrease was comprised of a $1.5 million, or 7%, reduction in same book
sales, and $0.5 million from the discontinuance of four directories, partially
offset by the addition of seven directories, with sales of $0.4 million and a
$0.2 million increase related to the timing of the delivery of the directories.
The sales decrease in production and other sales was related to volume decreases
at continuing customers.
The decrease in the segment's operating profit from the comparable six months of
fiscal 2007 was the result of the sales decrease, a reduction in the gross
margin percentage and an increase in selling and administrative costs. The
decreased gross margin is primarily related to the reduction in Uruguay of
higher margin directory revenue and an increase in the less profitable printing
sales, as compared to the comparable 2007 quarter, partially offset by higher
margin jobs in fiscal 2008 within the telephone directory production operation,
along with a reduction of production costs in DataNational. Selling and
administrative costs increased primarily due to increased bad debts.
Other than the DataNational division and the telephone directory publishing
operation in Uruguay, which accounted for 58% of the segment's sales in the six
months of fiscal 2008, the segment's business is obtained through submission of
competitive proposals for production and other contracts. These short and
long-term contracts are re-bid after expiration. Many of this segment's
long-term contracts contain cancellation provisions under which the customer can
cancel the contract, even if the segment is not in default under the contract
and generally do not provide for a minimum amount of work to be awarded to the
segment. While the Company has historically secured new contracts and believes
it can secure renewals and/or extensions of most of these contracts, some of
which are material to this segment, and obtain new business, there can be no
assurance that contracts will be renewed or extended, or that additional or
replacement contracts will be awarded to the Company on satisfactory terms. In
addition, this segment's sales and profitability are highly dependent on
advertising revenue from DataNational's directories, which could be affected by
general economic conditions.
Telecommunications Services
---------------------------
Six Months Ended
----------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------------
Net Sales $96.4 $48.6 $47.8 98.7%
--------------------------------------------------------------------------------------------------------------------------------
Direct Costs $85.6 88.7% $37.5 77.2% ($48.1) (128.3%)
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit $10.8 11.3% $11.1 22.8% ($0.3) (1.7%)
--------------------------------------------------------------------------------------------------------------------------------
Overhead $26.6 27.6% $10.3 21.2% ($16.3) (158.3%)
--------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $0.2 0.3% $0.2 0.4% - -
--------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.3 1.3% $0.9 1.8% ($0.4) (39.3%)
--------------------------------------------------------------------------------------------------------------------------------
Segment Operating Loss ($17.3) (17.9%) ($0.3) (0.6%) ($17.0) (5,774.8%)
--------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the six months of
fiscal 2008 from the comparable period of fiscal 2007 was due to a $48.1
million, or 176% increase in the Construction and Engineering division,
partially offset by a decrease of $0.3 million, or 1%, in the Network Enterprise
Solutions division. The sales increase in the Construction and Engineering
division in the current six months was largely
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Telecommunication Services--Continued
--------------------------
due to a large fiber optic contract which ramped up in the latter half of fiscal
2007 and the recognition of revenue in fiscal 2008 for several large utility and
government contracts accounted for using the percentage-of-completion method of
accounting. The segment's sales backlog at the end of the second quarter of
fiscal 2008 was $51 million, as compared to a backlog of approximately $66
million at the end of the comparable 2007 quarter.
The increased segment operating loss for the six months was due to the decreased
gross margin percentage and the increase in overhead in dollars and as a
percentage of sales. In late January 2008, the Company learned that it may not
be reimbursed for certain costs under an installation contract and the Company
has revalued its reserves to include this uncertainty. The increase in the
segment's operating loss was primarily the result of the establishment of a loss
reserve for certain costs included in inventory related to work performed and
for additional costs expected to be incurred to complete that work under that
contract. The reserve is reflected in direct costs and overhead for the period.
Overhead also increased due to additional costs incurred to support the sales
increase.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurances that contracts will be renewed or extended or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms.
Computer Systems
----------------
Six Months Ended
----------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------------
Net Sales $102.9 $91.7 $11.2 12.2%
---------------------------------------------------------------------------------------------------------------------------------
Direct Costs $46.8 45.5% $44.4 48.5% ($2.4) (5.4%)
---------------------------------------------------------------------------------------------------------------------------------
Gross Profit $56.1 54.5% $47.3 51.5% $8.8 18.7%
---------------------------------------------------------------------------------------------------------------------------------
Overhead $31.8 30.9% $25.7 28.0% ($6.1) (24.1%)
---------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $4.6 4.5% $3.2 3.4% ($1.4) (41.4%)
---------------------------------------------------------------------------------------------------------------------------------
Restructuring $1.5 1.5% - - ($1.5) -
---------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $9.6 9.3% $7.7 8.4% ($1.9) (24.7%)
---------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $8.6 8.3% $10.7 11.7% ($2.1) (19.6%)
---------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the six months of fiscal 2008
from the comparable period of fiscal 2007 was comprised of increases of $7.1
million, or 26%, in database access transaction fee revenue, including ASP
directory assistance and $6.1 million, or 22%, in the Maintech division's IT
maintenance, partially offset by a decrease of $2.0 million, or 6%, in projects
and other income. The increase in transaction fee revenue for the six months
included $12.6 million from the LSSi operations (enterprise data transactions)
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE SIX MONTHS ENDED APRIL 29, 2007--Continued
Computer Systems--Continued
----------------
acquired in September 2007. The remaining transaction fee revenue from telco and
non-telco customers reflected a decrease from new and existing customers by $5.5
million, or 20%, from the comparable period in fiscal 2007. This decrease was
primarily due to a reduction of such services to a major customer as it
transitions to a fixed monthly fee model from a variable transaction-based
pricing model.
The segment's decreased operating profit was due to the increase in overhead,
selling and administrative expenses, restructuring charge and depreciation and
amortization in dollars and as a percentage of sales, partially offset by the
increase in sales and the increase in gross margin percentage. The increased
gross profit percentage was a result of the increased revenue from database
access fees generated by LSSi, partially offset by the reduction in project
margins in Europe. The increased overhead and selling and administrative
expenses were primarily due to the inclusion of the LSSi operations and the
restructuring charge was a result of foreign and domestic personnel downsizing
as a result of the acquisition. The increased depreciation and amortization was
due to the intangible amortization related to the LSSi acquisition.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services, its continued ability to sell products and
services to new and existing customers and consumer demands for its customers'
services.
General Corporate Expenses and Other Income (Expense)
----------------------------------------------------
Six Months Ended
----------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $16.2 1.3% $17.0 1.5% $0.8 4.7%
-----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.3 0.1% $3.2 0.3% $1.9 58.3%
-----------------------------------------------------------------------------------------------------------------------------
Interest Income $2.6 0.2% $2.6 0.2% - -
-----------------------------------------------------------------------------------------------------------------------------
Other Expense ($3.2) (0.3%) ($3.1) (0.3%) ($0.1) (1.5%)
-----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.4) - ($0.5) - $0.1 21.9%
-----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($3.2) (0.3%) ($1.5) (0.1%) ($1.7) (113.8%)
-----------------------------------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the six
months of fiscal 2008 as compared to the comparable 2007 period, were:
The decrease in selling and administrative expenses in the current six months
from the comparable 2007 fiscal period was primarily the result of decreased
salaries and communication costs.
The decrease in depreciation and amortization in the six months of fiscal 2008
from the comparable 2007 fiscal period was due to portions of the corporate
enterprise resource planning system becoming fully amortized.
Interest expense increased due to additional borrowings used to fund 2007
acquisitions and for working capital requirements.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE THREE MONTHS ENDED APRIL 29, 2007--Continued
Consolidated Results of Operations
----------------------------------
In the second quarter of fiscal 2008, consolidated net sales increased by $52.8
million, or 9%, to $621.0 million, from the comparable quarter of fiscal 2007.
The increase in the current quarter's net sales resulted from increases in
Staffing Services of $22.4 million, Telecommunications Services of $22.1
million, Computer Systems of $6.9 million and Telephone Directory of $1.2
million.
Cost of sales increased by $55.1 million, or 11%, to $576.6 million, and was 93%
of sales, in the second quarter of fiscal 2008 as compared to 92% of sales in
the comparable quarter of fiscal 2007. The acquisition of LSSi within the
Computer Systems segment in September 2007 increased cost of sales by $2.9
million, but it did not increase the cost of sales percentage.
Selling and administrative costs increased by $1.6 million, or 6%, in the second
quarter of fiscal 2008 over the comparable period in fiscal 2007, but was 4.3%
of sales, as compared to 4.4% in the comparable period.
Depreciation and amortization increased by $0.6 million, or 0.6%, in the second
quarter over the comparable quarter in fiscal 2007, and was 2% of sales, as it
was in the comparable period. The increase in depreciation and amortization in
the current quarter from the comparable 2007 fiscal period was attributable to
increases in amortization of intangibles in the Computer Systems segment due to
acquisitions in fiscal 2007, partially offset by a reduction in amortization of
the corporate enterprise resource planning system.
The Company reported an operating profit of $7.6 million in the current quarter,
as compared to $12.1 million in the comparable period of fiscal 2007 due to a
decrease in segment operating profit of $5.8 million, or 26%, partially offset
by a decrease of $1.3 million, or 13%, in general corporate expenses. The
decrease in segment operating profit was attributable to the decreases of $7.7
million in the Staffing Services segment, partially offset by an increase in the
Telecommunications Services segment of $1.5 million and the Computer Systems
segment of $0.3 million.
Interest expense increased by $0.8 million, or 81%, in the current quarter over
the comparable quarter in fiscal 2007. The increase was due to additional
borrowings used to fund the 2007 acquisitions.
The Company's effective tax rate on its financial reporting pre-tax income was
42.0% in the second quarter of fiscal 2008 compared to an effective tax
provision rate of 40.0% on its financial reporting pre-tax income in the
comparable period in fiscal 2007.
The net income in the second quarter of fiscal 2008 was $3.4 million compared to
a net income of $6.4 million in the comparable quarter of fiscal 2007.
Results of Operations by Segment
--------------------------------
The following two tables reconcile the operating profit by segment to the
consolidated statements of operations for the three months ended April 27, 2008
and April 29, 2007:
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE THREE MONTHS ENDED APRIL 29, 2007--Continued
Three Months Ended April 27, 2008
---------------------------------
(Dollars in Millions)
Staffing Telephone Telecommunications Computer Corporate &
Total Services Directory Services Systems Eliminations
------- -------- --------- -------- ------- ------------
Net Sales $621.0 $505.7 $18.3 $49.3 $52.1 ($4.4)
Direct Costs 490.9 429.0 8.9 34.2 23.2 (4.4)
Overhead 85.8 55.6 1.5 12.4 16.3 -
------- -------- --------- -------- ------- ------------
Cost of Sales 576.7 484.6 10.4 46.6 39.5 (4.4)
Selling & Administrative 26.6 11.3 4.7 0.1 2.5 8.0
Depreciation 10.1 3.6 0.4 0.7 4.8 0.6
------- -------- --------- -------- ------- ------------
Operating profit (loss) 7.6 6.2 2.8 1.9 5.3 (8.6)
Interest income 1.3 - - - - 1.3
Other expense, net (1.5) - - - - (1.5)
Interest expense (1.6) - - - - (1.6)
------- -------- --------- -------- ------- ------------
Income (loss) before minority
interest and income taxes $5.8 $6.2 $2.8 $1.9 $5.3 ($10.4)
======= ======== ========= ======== ======= ============
Three Months Ended April 29, 2007
---------------------------------
(Dollars in Millions)
Staffing Telephone Telecommunications Computer Corporate &
Total Services Directory Services Systems Eliminations
------- -------- --------- -------- ------- ------------
Net Sales $568.2 $483.3 $17.1 $27.2 $45.2 ($4.6)
Direct Costs 447.4 $400.1 8.2 20.9 22.8 (4.6)
Overhead 74.1 $55.3 1.6 5.4 11.8 -
------ -------- --------- -------- ------- ------------
Cost of Sales 521.5 455.4 9.8 26.3 34.6 (4.6)
Selling & Administrative 25.1 10.8 4.1 0.1 1.8 8.3
Depreciation 9.5 3.2 0.5 0.4 3.8 1.6
------ -------- --------- -------- ------- ------------
Operating profit (loss) 12.1 13.9 2.7 0.4 5.0 (9.9)
Interest income 1.4 - - - - 1.4
Other expense, net (1.6) - - - - (1.6)
Foreign exchange (0.4) - - - - (0.4)
Interest expense (0.8) - - - - (0.8)
------ -------- --------- -------- ------- ------------
Income (loss) before minority
interest and income
taxes $10.7 $13.9 $2.7 $0.4 $5.0 ($11.3)
====== ======== ========= ======== ======= ============
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE THREE MONTHS ENDED APRIL 29, 2007--Continued
Staffing Services
-----------------
Three months Ended
------------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
-----------------------------------------------------------------------------------------------------------------------------------
Gross Staffing Sales $491.8 $468.9 $22.9 4.9%
-----------------------------------------------------------------------------------------------------------------------------------
Gross Managed Service Sales $339.2 $334.3 $4.9 1.5%
-----------------------------------------------------------------------------------------------------------------------------------
Net Sales* $505.7 $483.3 $22.4 4.6%
-----------------------------------------------------------------------------------------------------------------------------------
Direct Costs $429.0 84.8% $400.1 82.8% ($28.9) (7.2%)
-----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $76.7 15.2% $83.2 17.2% ($6.5) (7.6%)
-----------------------------------------------------------------------------------------------------------------------------------
Overhead $55.6 11.0% $55.3 11.4% ($0.3) (0.7%)
-----------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $11.3 2.3% $10.8 2.2% ($0.5) (11.8%)
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $3.6 0.7% $3.2 0.7% ($0.4) (41.4%)
-----------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $6.2 1.2% $13.9 2.9% ($7.7) (55.1%)
-----------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The increase in net sales of the Staffing Services segment in the second quarter
of fiscal 2008 from the comparable quarter in fiscal 2007 was comprised of a
$22.6 million, or 7%, increase in net Technical sales, partially offset by a
slight decrease in net A&I sales. Foreign generated net sales for the current
quarter increased by 29% from the comparable 2007 fiscal quarter, and accounted
for 7% of total net Staffing Services sales for the current quarter. On a
constant currency basis, foreign sales increased by 24% from the comparable 2007
fiscal quarter. In the current three months, the segment's permanent placement
sales increased by 19% and RPO sales increased by 30% from the comparable period
in fiscal 2007.
The segment's decrease in operating profit was comprised of a decrease of $7.8
million in the Technical division, partially offset by a slight increase in the
A&I division. The segment's gross margin percentage decreased due to a decrease
of 2.7 percentage points in the Technical division and 0.5 percentage points in
the A&I division. The overhead percentage decreased due to an overhead decline
in the A&I division. Selling and administrative and depreciation percentages
approximated the comparable 2007 period percentages.
Three months Ended
------------------
April 27, 2008 April 29, 2007
-------------- --------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
-----------------------------------------------------------------------------------------------------------------------------------
Gross Sales $667.9 $640.2 $27.7 4.3%
-----------------------------------------------------------------------------------------------------------------------------------
Net Sales * $350.2 $327.6 $22.6 6.9%
-----------------------------------------------------------------------------------------------------------------------------------
Direct Costs $298.4 85.2% $270.1 82.5% ($28.3) (10.4%)
-----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $51.8 14.8% $57.5 17.5% ($5.7) (9.7%)
-----------------------------------------------------------------------------------------------------------------------------------
Overhead $35.5 10.1% $34.2 10.4% ($1.3) (3.7%)
-----------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $7.9 2.3% $7.5 2.3% ($0.4) (6.3%)
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $2.9 0.8% $2.5 0.7% ($0.4) (18.6%)
-----------------------------------------------------------------------------------------------------------------------------------
Division Operating Profit $5.5 1.6% $13.3 4.1% ($7.8) (58.5%)
-----------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE THREE MONTHS ENDED APRIL 29, 2007--Continued
Staffing Services--Continued
-----------------
The Technical division's increase in gross sales in the current quarter of
fiscal 2008 from the comparable prior year quarter included increases of
approximately $4 million of sales to new customers, or customers with
substantial increased business, as well as $25 million attributable to net
increases in sales to continuing customers. This was partially offset by sales
decreases of approximately $1 million from customers whose business with the
Company either ceased or was substantially lower than in the comparable quarter
of fiscal 2007. The Technical division's increase in net sales in the second
quarter of fiscal 2008 from the comparable quarter in fiscal 2007 was comprised
of increases of $29.2 million, or 10%, in traditional alternative staffing
partially offset by decreases of $5.1 million, or 16%, in VMC Consulting project
management and consulting sales, and $1.5 million, or 12%, in net managed
service associate vendor sales.
The division's decrease in the operating profit was the result of the decrease
in gross margin percentage, partially offset by the increase in sales. The
decrease in gross margin was primarily due to the decrease in the gross margins
in VMC Consulting due to losses on six projects along with decreases in markups
at some of the larger customers within the region due to wage pressure. The
increase in overhead in the current fiscal quarter was a result of increased
indirect labor at VMC and the European operation, startup costs in the current
quarter at VMC for a few new projects and costs related to the new Momemtum RPO
operation, partially offset by a reduction in the current quarter of $0.9
million in health insurance costs due to improved claims experience. The
increase in selling and administrative costs are due to increased indirect labor
in the European operation related to its sales growth. Indirect labor costs
which are included in overhead and selling and administrative costs increased by
7% from the comparable 2007 three months.
Three months Ended
------------------
April 27, 2008 April 29, 2007
-------------- --------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
--------------------------------------------------------------------------------------------------------------------------------
Gross Sales $163.0 $163.0 - -
--------------------------------------------------------------------------------------------------------------------------------
Net Sales * $155.5 $155.7 ($0.2) (0.1%)
--------------------------------------------------------------------------------------------------------------------------------
Direct Costs $130.6 84.0% $130.0 83.5% ($0.6) (0.4%)
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit $24.9 16.0% $25.7 16.5% ($0.8) (3.0%)
--------------------------------------------------------------------------------------------------------------------------------
Overhead $20.1 13.0% $21.1 13.5% $1.0 4.2%
--------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $3.4 2.2% $3.3 2.1% ($0.1) (1.7%)
--------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.7 0.4% $0.7 0.5% - -
--------------------------------------------------------------------------------------------------------------------------------
Division Operating Profit $0.7 0.4% $0.6 0.4% $0.1 27.6%
--------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The A&I division's gross sales remained the same in the current quarter as
compared to the comparable quarter of fiscal 2007. The current quarter's sales
included growth of approximately $10 million from new customers, or customers
whose business with the Company in the comparable fiscal period was
substantially below the current quarter's volume. This was offset by
approximately $11 million of sales to customers which the Company either ceased
or substantially reduced servicing in the current year, as well as $1 million
attributable to net increases in sales to continuing customers.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE THREE MONTHS ENDED APRIL 29, 2007--Continued
Staffing Services--Continued
-----------------
The division's improved operating results in the current quarter were the result
of the decrease in overhead in dollars and as a percentage of sales, partially
offset by the decreased gross margin percentage and the decrease in net sales.
The decrease in overhead costs from the comparable quarter in fiscal 2007
primarily resulted from a reduction of indirect headcount of approximately 3%.
The division is focused on reducing overhead costs to compensate for lower
sales. In each of the past four quarters, the overhead costs have been lower
than the comparable prior fiscal year quarters. The decrease in gross margin
percentage was primarily due to a decrease in permanent placement sales and
reduced markups on direct labor due to competitive pressure, partially offset by
a 0.6 percentage point reduction in payroll taxes. This reduction in two of
A&I's more significant states is expected to continue throughout the remainder
of the fiscal year.
Telephone Directory
-------------------
Three months Ended
------------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
--------------------------------------------------------------------------------------------------------------------------------
Net Sales $18.3 $17.1 $1.2 7.1%
---------------------------------------------------------------------------------------------------------------------------------
Direct Costs $8.9 48.7% $8.2 47.7% ($0.7) (9.3%)
---------------------------------------------------------------------------------------------------------------------------------
Gross Profit $9.4 51.3% $8.9 52.3% $0.5 5.1%
---------------------------------------------------------------------------------------------------------------------------------
Overhead $1.5 8.1% $1.6 9.4% $0.1 7.9%
---------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $4.7 25.8% $4.1 23.9% ($0.6) (15.5%)
---------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.4 2.4% $0.5 2.8% $0.1 8.6%
---------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $2.8 15.0% $2.7 16.2% $0.1 0.6%
---------------------------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's sales increase for the
second quarter of fiscal 2008 from the comparable quarter of fiscal 2007 were
increases of $1.2 million in the printing operation in Uruguay and $0.1 million
in telephone production and other sales, partially offset by a decrease of $0.1
million in DataNational community telephone directory publishing sales. The
increase in printing sales in Uruguay included $0.9 million of sales to new
customers. DataNational added four directories in the quarter with sales
totaling $0.3 million and discontinued 1 directory with prior year sales of $0.1
million.
The segment's operating profit remained the same as the comparable 2007 fiscal
quarter, with a decrease in the gross margin percentage, and an increase in
selling and administrative costs, offset by the sales increase. The decreased
gross margin percentage is primarily related to the increase in lower margin
printing sales in Uruguay, as compared to the comparable 2007 fiscal quarter.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE THREE MONTHS ENDED APRIL 29, 2007--Continued
Telecommunications Services
---------------------------
Three months Ended
------------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
--------------------------------------------------------------------------------------------------------------------------------
Net Sales $49.3 $27.2 $22.1 81.2%
--------------------------------------------------------------------------------------------------------------------------------
Direct Costs $34.2 69.4% $20.9 76.8% ($13.3) (63.9%)
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit $15.1 30.6% $6.3 23.2% $8.8 138.5%
--------------------------------------------------------------------------------------------------------------------------------
Overhead $12.4 25.1% $5.4 19.8% ($7.0) (129.6%)
--------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $0.1 0.3% $0.1 0.3% - -
--------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.7 1.4% $0.4 1.7% ($0.3) (46.8%)
--------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $1.9 3.8% $0.4 1.4% $1.5 395.0%
--------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the second quarter
of fiscal 2008 from the comparable quarter of fiscal 2007 was comprised of
increases of $21.5 million, or 133%, in the Construction and Engineering
division and $0.6 million, or 6%, in the Network Enterprise Solutions division.
The sales increase in the Construction and Engineering division in the current
quarter was largely due to a large fiber optic contract which ramped up in the
latter half of fiscal 2007 and the recognition of several large utility projects
and government contracts accounted for using the percentage-of-completion method
of accounting.
The segment's increased operating results for the current quarter were due to
increased sales and gross margin percentage, partially offset by increased
overhead and depreciation. An increase in gross margin is attributable to higher
margins on the utility projects and government contracts. The increase in
overhead was due to the costs incurred to support the increased sales.
Computer Systems
----------------
Three months Ended
------------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
---------------------------------------------------------------------------------------------------------------------------------
Net Sales $52.1 $45.2 $6.9 15.4%
---------------------------------------------------------------------------------------------------------------------------------
Direct Costs $23.2 44.6% $22.8 50.4% ($0.4) (2.0%)
---------------------------------------------------------------------------------------------------------------------------------
Gross Profit $28.9 55.4% $22.4 49.6% $6.5 28.2%
---------------------------------------------------------------------------------------------------------------------------------
Overhead $16.3 31.2% $11.8 26.1% ($4.5) (37.8%)
---------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $2.5 4.8% $1.8 4.0% ($0.7) (36.6%)
---------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $4.8 9.1% $3.8 8.4% ($1.0) (27.1%)
---------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $5.3 10.3% $5.0 11.1% $0.3 6.9%
---------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the second quarter of fiscal
2008 from the comparable quarter of fiscal 2007 was comprised of increases of
$1.8 million, or 13%, in database access transaction fee revenue, including ASP
directory assistance, $3.5 million, or 25%, in the Maintech division's IT
maintenance and $1.6 million, or 9%, in projects and other income. The increase
in transaction fee revenue for the current
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 27, 2008 COMPARED
TO THE THREE MONTHS ENDED APRIL 29, 2007--Continued
Computer Systems
----------------
quarter included $6.3 million from the LSSi operations (enterprise data
transactions) acquired in September 2007. The remaining transaction fee revenue
decreased primarily due to a reduction of such services to a major customer as
it transitions to a fixed monthly fee model from a variable transaction-based
pricing model.
The segment's increased operating profit was due to the increase in sales and
gross margin percentage, partially offset by the increase in overhead, selling
and administrative expenses and depreciation and amortization in dollars and as
a percentage of sales. The increased gross profit percentage was a result of the
increased database access fees from LSSi. The increased overhead and general
administrative expenses were primarily due to the inclusion of the LSSi
operations. The increased depreciation and amortization was due to the
intangible amortization related to the LSSi acquisition.
General Corporate Expenses and Other Income (Expense)
-----------------------------------------------------
Three months Ended
------------------
April 27, 2008 April 29, 2007
-------------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
-----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $8.0 1.3% $8.3 1.5% $0.3 3.8%
-----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.6 0.1% $1.6 0.3% $1.0 60.8%
-----------------------------------------------------------------------------------------------------------------------------
Interest Income $1.3 0.2% $1.4 0.2% ($0.1) (8.8%)
-----------------------------------------------------------------------------------------------------------------------------
Other Expense ($1.5) (0.2%) ($1.6) (0.3%) $0.1 7.8%
-----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss - - ($0.4) (0.1%) $0.4 87.7%
-----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.6) (0.3%) ($0.8) (0.2%) ($0.8) (81.3%)
-----------------------------------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the
second quarter of fiscal 2008 as compared to the comparable 2007 quarter, were:
The decrease in selling and administrative expenses in the current quarter of
fiscal 2008 from the comparable 2007 fiscal quarter was primarily the result of
decreased salaries and communication costs.
The decrease in depreciation and amortization in the current quarter of fiscal
2008 from the comparable 2007 fiscal quarter was due to portions of the
corporate enterprise resource planning system becoming fully amortized.
Interest income decreased due to lower interest rates and a reduction in premium
deposits held by insurance companies.
Interest expense increased due to additional borrowings used to fund 2007
acquisitions and working capital requirements.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, increased by $7.0 million to $47.4 million in the six
months ended April 27, 2008.
Operating activities provided $38.0 million of cash in the first six months of
fiscal 2008. Operating activities provided $1.0 million of cash in the first six
months of fiscal 2007.
Operating activities in the first six months of fiscal 2008, exclusive of
changes in operating assets and liabilities, produced $6.0 million of cash, as
the Company's net loss of $9.8 million included non-cash charges primarily for
depreciation and amortization of $20.0 million, accounts receivable provisions
of $2.9 million and a deferred tax benefit of $7.1 million. Operating activities
in the first six months of fiscal 2007, exclusive of changes in operating assets
and liabilities, produced $25.5 million of cash, as the Company's net income of
$7.1 million included non-cash charges primarily for depreciation and
amortization of $19.1 million and accounts receivable provisions of $1.3
million, partially offset by a deferred tax benefit of $2.1 million.
Changes in operating assets and liabilities produced $32.0 million of cash, net,
in the first six months of fiscal 2008 principally due to an increase in
securitization of receivables of $20.0 million, an increase in deferred income
and other liabilities of $11.1 million, a decrease in the level of inventory,
primarily in the Telecommunications Services segment, of $11.7 million and a
decrease in prepaid insurance and other current assets of $9.4 million offset by
a decrease in income tax liability of $12.6 million. Changes in operating assets
and liabilities used $24.5 million of cash, net, in the first six months of
fiscal 2007 principally due to a reduction in the Securitization Program of
$50.0 million, a decrease in income taxes of $7.5 million and an increase in the
level of inventory of $6.0 million partially offset by an increase in deferred
income and other liabilities of $16.4 million, an increase in the level of
accounts payable of $15.8 million, a decrease in the level of trade accounts
receivable of $3.4 million and an increase in accrued expenses of $3.3 million.
The $16.8 million of cash applied to investing activities for the first six
months of fiscal 2008 resulted primarily from expenditures of $15.8 million for
net additions to property, plant and equipment and $0.9 million for an
acquisition of a staffing and consulting services provider in South America. The
$12.8 million of cash applied to investing activities for the first six months
of fiscal 2007 resulted from the $12.5 million for net additions to property,
plant and equipment and expenditures of $0.2 million for acquisitions.
The principal factors in the $14.3 million of cash used by financing activities
in the first six months of fiscal 2008 were a payment of $8.1 million for the
purchase of treasury shares and a reduction in notes payable of $6.2 million.
The principal factors in the $20.4 million of cash provided by financing
activities in the first six months of fiscal 2007 were an increase in the level
of bank loans of $28.1 million partially offset by a payment of $8.0 million for
the purchase of treasury shares.
Commitments
-----------
There has been no material change through April 27, 2008 in the Company's
contractual obligations and other commercial commitments from that reported in
the Company's Annual Report on Form 10-K for the fiscal year ended October 28,
2007.
40
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
April 27, 2008, TRFCO had purchased from Volt Funding a participation interest
of $140.0 million out of a pool of approximately $263.6 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100%-owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company beyond its interest in the pool of receivables owned by Volt
Funding.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 156, "Accounting for Transfers and Servicing of Financial Assets
and an amendment of SFAS No. 140." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization. At April 27, 2008, the Company was
in compliance with all requirements of its Securitization Program.
On June 3, 2008, the Securitization Program, which was due to expire within the
next year, was transferred to a multi-buyer program administered by PNC Bank.
The amended $200 Million program has a five-year term (subject to 364 day
liquidity) and uses the existing special purpose entity (Volt Funding) to
continue to sell pro-rata shares of trade accounts receivable to two commercial
paper conduits (Market Street Funding, a PNC Bank affiliate, and Relationship
Funding, a Fifth Third Bank affiliate).
Credit Lines
------------
At April 27, 2008, the Company had credit lines with domestic and foreign banks
which provided for borrowings and letters of credit of up to an aggregate of
$153.9 million, including the Company's $42.0 million five-year unsecured
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $100.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility").The Company had
total outstanding bank borrowings of $78.1 million as of April 27, 2008.
Included in these borrowings were $16.1 million of foreign currency borrowings
which provide economic hedges against foreign denominated net assets.
Credit Agreement
----------------
On February 28, 2008, the Company entered into the Credit Agreement to replace
the Company's then expiring $40.0 million secured credit agreement with a credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit and
$25.0 million for borrowing in alternative currencies. At April 27, 2008, the
Company had no borrowings against this facility. The administrative agent for
the Credit Facility is Bank of America, N.A. The other banks participating in
the Credit Facility are JP Morgan Chase Bank, N.A. as syndicated agent, Wells
Fargo Bank, N.A.and HSBC Bank USA, N.A.
Borrowings under the Credit Agreement bear interest at various rate options
selected by the Company at the time of each borrowing. Certain rate options,
together with a facility fee, are based on a leverage ratio, as defined. Based
upon the Company's leverage ratio at April 27, 2008, if a three-month U.S.
Dollar LIBO rate were the interest rate option selected by the Company,
borrowings would have borne interest at the rate of 3.8% per annum, excluding a
fee of 0.3% 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 total
funded debt to EBITDA of 3.0 to 1.0; and a requirement that the Company maintain
a minimum ratio of EBITDA, as defined, to interest expense, as defined, of 4.0
to 1.0 for the twelve months ended as of the last day of each fiscal quarter.
The Credit Agreement also imposes limitations on, among other things, the
incurrence of additional indebtedness, the level of annual capital expenditures,
and the amount of investments, including business acquisitions and mergers, and
loans that may be made by the Company to its subsidiaries. The Company was in
compliance with all covenants at April 27, 2008.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
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 two of the other three
lenders under the Delta Credit Facility, Bank of America, N.A. and JPMorgan
Chase, also participate in the Company's $42.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At April 27, 2008, $71.4 million was drawn on
this facility. Certain interest rate options, as well as the commitment fee, are
based on a leverage ratio, as defined, which resets quarterly. Based upon Volt
Delta's leverage ratio at April 27, 2008, if a three-month U.S. Dollar LIBO rate
were the interest rate option selected by the Company, borrowings would have
borne interest at the rate of 4.3% per annum. Volt Delta also pays a commitment
fee on the unused portion of the Delta Credit Facility which varies based on
Volt Delta's leverage ratio. At April 27, 2008, the commitment fee was 0.3% per
annum.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.5 to 1.0 for the twelve months ended as of the last day of each fiscal quarter
and the maintenance of a consolidated net worth, as defined. The Delta Credit
Facility also imposes limitations on, among other things, incurrence of
additional indebtedness or liens, the amount of investments including business
acquisitions, creation of contingent obligations, sales of assets (including
sale leaseback transactions) and annual capital expenditures. At April 27, 2008,
Volt Delta was in compliance with all covenants in the Delta Credit Facility.
Summary
-------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through at least the next twelve months.
On June 2, 2008, the Company's Board of Directors authorized the repurchase of
up to one million five hundred thousand (1,500,000) shares of the Company's
common stock from time to time in open market or private transactions at the
Company's discretion, subject to market conditions and other factors. The timing
and exact number of shares purchased will be at the Company's discretion and
will depend on market conditions and is subject to institutional approval for
purchases in excess of $11.6 million in fiscal year 2008 under the terms of the
Company's credit agreements. This stock buyback program does not obligate the
Company to acquire any specific number of shares and may be suspended or
discontinued at any time.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments. Revenue is generally recognized when
persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed and determinable and collectibility is
probable. The determination of whether and when some of the criteria below have
been satisfied sometimes involves assumptions and judgments that can have a
significant impact on the timing and amount of revenue we report.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its customers,
and has credit risk for collecting its billings after it has paid its
employees. The Company reflects revenues for these services on a gross basis
in the period the services are rendered. In the first six months of fiscal
2008, this revenue comprised approximately 74% of the Company's net
consolidated sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, for which the Company receives an
administrative fee for arranging for, billing for and collecting the
billings related to staffing companies ("associate vendors") who have
supplied personnel to the Company's customers. The administrative fee is
either charged to the customer or subtracted from the Company payment to the
associate vendor. The customer is typically responsible for assessing the
work of the associate vendor, and has responsibility for the acceptability
of its personnel, and in most instances the customer and associate vendor
have agreed that the Company does not pay the associate vendor until the
customer pays the Company. Based upon the revenue recognition principles
prescribed in Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue
Gross as a Principal versus Net as an Agent," revenue for these services,
where the customer and the associate vendor have agreed that the Company is
not at risk for payment, is recognized net of associated costs in the period
the services are rendered. In addition, sales for certain contracts
generated by the Company's Staffing Solutions Group's managed services
operations have similar attributes. In the first six months of fiscal 2008,
this revenue comprised approximately 2% of the Company's net consolidated
sales.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 81-1, "Accounting for
Performance of Construction-Type Contracts" The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
services are rendered when on a time and material basis, and when the
Company is responsible for project completion, revenue is recognized when
the project is complete and the customer has approved the work. In the first
six months of fiscal 2008, this revenue comprised approximately 5% of the
Company's net consolidated sales.
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and delivered. In the first six months of fiscal 2008,
this revenue comprised approximately 2% of the Company's net consolidated
sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
the first six months of fiscal 2008, this revenue comprised approximately 1%
of the Company's net consolidated sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in SOP
81-1, using the completed-contract method, to recognize revenue on a gross
basis upon customer acceptance of the project or by the
percentage-of-completion method, when applicable. In the first six months of
fiscal 2008, this revenue comprised approximately 6% of the Company's net
consolidated sales.
Non-Construction: Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and, if applicable, any completed
units are delivered and accepted by the customer. In the first six months
of fiscal 2008, this revenue comprised approximately 2% of the Company's
net consolidated sales.
Computer Systems:
Database Access: Sales are derived from the Company granting access to its
proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases. In the first six months of fiscal
2008, this revenue comprised approximately 3% of the Company's net
consolidated sales.
45
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 six months of fiscal 2008, this revenue comprised approximately 3% of
the Company's net consolidated sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in SOP 97-2 "Software Revenue Recognition" and EITF 00-21,
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value or by the use of the percentage-of-completion method, when
applicable. In the first six months of fiscal 2008, this revenue comprised
approximately 2% of the Company's net consolidated sales.
For those contracts accounted for under SOP 81-1, the Company records provisions
for estimated losses on contracts when losses become evident.
Accumulated unbilled costs on contracts are carried in inventory at the lower of
actual cost or estimated realizable value.
Allowance for Uncollectible Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for accounts receivable are maintained based
upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company also makes judgments about the creditworthiness
of significant customers based upon ongoing credit evaluation, and might assess
current economic trends that might impact the level of credit losses in the
future. However, since a reliable prediction of future changes in the financial
stability of customers is not possible, the Company cannot guarantee that
allowances will continue to be adequate. If actual credit losses are
significantly higher or lower than the allowance established, it would require a
related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill and indefinite-lived intangible
assets are subject to annual impairment testing using fair value methodologies.
The Company performs its annual impairment testing during its second fiscal
quarter, or more frequently if indicators of impairment arise. The timing of the
impairment test may result in charges to earnings in the second fiscal quarter
that could not have been reasonably foreseen in prior periods. The testing
process includes the comparison of the Company's business units' multiples of
sales and EBITDA to those multiples of its business units' competitors. The
Company performs a sensitivity analysis on its annual goodwill impairment test
by changing the sales and EBITDA factors used in its impairment analysis by
10%.If these estimates or their related assumptions change in the future as a
result of changes in strategy and/or market conditions, the Company may be
required to record an impairment charge in the future.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. Intangible assets, other than goodwill and indefinite-lived intangible
assets, and property, plant and equipment are reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Under SFAS No. 144, these assets are tested for
recoverability whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Circumstances which could trigger a
review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or legal
factors; the accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of the asset; current
period cash flow or operating losses combined with a history of losses or a
forecast of continuing losses associated with the use of the asset; and a
current expectation that the asset will more likely than not be sold or disposed
of significantly before the end of its estimated useful life. Recoverability is
assessed based on the carrying amount of the asset and the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset or asset group. An impairment loss is recognized when the
carrying amount exceeds the estimated fair value of the asset or asset group.
The impairment loss is measured as the amount by which the carrying amount
exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with SOP No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Subsequent
to the preliminary project planning and approval stage, all appropriate costs
are capitalized until the point at which the software is ready for its intended
use. Subsequent to the software being used in operations, the capitalized costs
are transferred from costs-in-process to completed property, plant and
equipment, and are accounted for as such. All post-implementation costs, such as
maintenance, training and minor upgrades that do not result in additional
functionality, are expensed as incurred. The capitalization process involves
judgment as to what types of projects and tasks are capitalizable. Although the
Company believes the decisions made in the past concerning the accounting
treatment of these software costs have been reasonable and appropriate,
different decisions could materially impact financial results.
Income Taxes - Estimates of Effective Tax Rates, Deferred Taxes and Valuation
Allowance - When the financial statements are prepared, the Company estimates
its income taxes based on the various jurisdictions in which business is
conducted. Significant judgment is required in determining the Company's
worldwide income tax provision. Liabilities for anticipated tax audit issues in
the United States and other tax jurisdictions are based on estimates of whether,
and the extent to which, additional taxes will be due. The recognition of these
provisions for income taxes is recorded in the period in which it is determined
that such taxes are due. If in a later period it is determined that payment of
this additional amount is unnecessary, a reversal of the liability is
recognized. As a result, the ongoing assessments of the probable outcomes of the
audit issues and related tax positions require judgment and can materially
increase or decrease the effective tax rate and materially affect the Company's
operating results. This also requires the Company to estimate its current tax
exposure and to assess temporary differences that result from differing
treatments of certain items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are reflected on the
balance sheet. The Company must then assess the likelihood that its deferred tax
assets will be realized. To the extent it is believed that realization is not
likely, a valuation allowance is established. When a valuation allowance is
increased or decreased, a corresponding tax expense or benefit is recorded in
the statement of operations.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 156, "Accounting for Transfers and
Servicing of Financial Assets, an amendment of SFAS No. 140." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $140.0 million and
$120.0 million at April 27, 2008 and October 28, 2007, respectively.
Accordingly, the trade receivables included on the April 27, 2008 and October
28, 2007 balance sheets have been reduced to reflect the participation interest
sold. TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding Corp., a wholly-owned special purpose
subsidiary of the Company) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds, and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For each policy year, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of services in the period in which such
determination is made.
Medical Insurance Program -The Company is self-insured for the majority of its
medical benefit programs. The Company remains insured for a portion of its
medical program (primarily HMOs) as well as the entire dental program. The
Company provides the self-insured medical benefits through an arrangement with a
third party administrator. However, the liability for the self-insured benefits
is limited by the purchase of stop loss insurance. The contributed and withheld
funds and related liabilities for the self-insured program together with unpaid
premiums for the insured programs are held in a 501(c)9 employee welfare benefit
trust. These amounts, other than the current provisions, do not appear on the
balance sheet of the Company. In order to establish the self-insurance reserves,
the Company utilized actuarial estimates of expected losses based on statistical
analyses of historical data. The provision for future payments is initially
adjusted by the enrollment levels in the various plans. Periodically, the
resulting liabilities are monitored and will be adjusted as warranted by
changing circumstances. Should the amount of claims occurring exceed what was
estimated or medical costs increase beyond what was expected, liabilities might
not be sufficient, and additional expense may be recorded by the Company.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2008
------------------------------------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within that fiscal year. The Company is
currently evaluating the impact of adopting this statement.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FAS 115".
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, including
interim periods within that fiscal year. The Company is currently evaluating the
impact of adopting this statement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB NO. 51" This statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This statement is
effective for financial statements issued for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2008. The Company is
currently evaluating the impact of adopting this statement.
Related Party Transactions
--------------------------
During the first six months of fiscal 2008, the Company paid or accrued $0.6
million to the law firm of which Lloyd Frank, a director, is of counsel, for
services rendered to the Company and expenses reimbursed. In addition, the
Company paid $7,000 to Michael Shaw, Ph. D., a brother to Steven Shaw, an
executive officer and director, for services rendered to the Company.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $200 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease the Company's annual net interest expense and securitization costs by
$1.4 million, respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $13.6 million
at April 27, 2008. This fair value was calculated by applying the appropriate
fiscal year-end interest rate to the Company's present stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At April 27, 2008, 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 April 27, 2008, the total of the Company's net investment in foreign
operations was $17.4 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
April 27, 2008, the Company had an outstanding foreign currency option contract
in the nominal amount equivalent to $9.5 million, which is accounted for as a
hedge under SFAS No. 52, "Foreign Currency Translation". The amount of risk and
the use of foreign exchange instruments described above are not material to the
Company's financial position or results of operations and the Company does not
use these instruments for trading or other speculative purposes. Based upon the
current levels of net foreign assets, a hypothetical weakening of the U.S.
dollar against these currencies at April 27, 2008 by 10% would result in a
pretax gain of $1.7 million related to these positions. Similarly, a
hypothetical strengthening of the U.S. dollar against these currencies at April
27, 2008 by 10% would result in a pretax loss of $1.2 million related to these
positions.
50
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at April 27, 2008.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The
information is presented in U.S. dollar equivalents, which is the Company's
reporting currency.
Interest Rate Market Risk Payments Due By Period as of April 27, 2008
------------------------- -------------------------------------------
Less than 1-3 3-5 After 5
Total 1 Year Years Years Years
------ ------- ------ ------ -----
(Dollars in thousands of US$)
Cash and Cash Equivalents and Restricted Cash
---------------------------------------------
Money Market and Cash Accounts $81,163 $81,163
Weighted Average Interest Rate 2.35% 2.35%
------ ------
Total Cash, Cash Equivalents and Restricted
Cash $81,163 $81,163
======= =======
Securitization Program
----------------------
Accounts Receivable Securitization $140,000 $140,000
Finance Rate 2.72% 2.72%
-------- --------
Securitization Program $140,000 $140,000
======== ========
Debt
----
Term Loan $12,577 $532 $1,203 $1,417 $9,425
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Note Payable $495 $124 $189 $182
Interest Rate 5.0% 5.0% 5.0% 5.0%
-------- --------- ------ ------ ------
Total Long Term Debt $13,072 $656 $1,392 $1,599 $9,425
======== ==== ====== ====== ======
Notes Payable to Banks $78,117 $78,117 - - -
Weighted Average Interest Rate 4.76% 4.76% - - -
-------- -------- ------ ------ ------
Total Debt $91,189 $78,773 $1,392 $1,599 $9,425
======== ======== ======= ====== ======
51
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Foreign Exchange Market Risk
----------------------------
Contract Values
---------------
Fair Value
Contract Less than Option
Exchange Rate Total 1 Year Premium (1)
------------- ------ ------ ------------
(Dollars in thousands of U.S.$)
Option Contracts
Canadian $ to U.S.$ 1.05 $9,524 $9,524 $188
------ ------ ------------
Total Option Contracts $9,524 $9,524 $188
====== ====== ============
(1) Represents the fair value of the foreign contracts at April 27, 2008.
52
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company's management is responsible for maintaining adequate internal
controls over financial reporting and for its assessment of the effectiveness of
internal controls over financial reporting.
The Company carried out an evaluation of the effectiveness of the design and
operation of its "disclosure controls and procedures," as defined in, and
pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of April 27,
2008 under the supervision and with the participation of the Company's
management, including the Company's President and Principal Executive Officer
and its Senior Vice President and Principal Financial Officer. Based on that
evaluation, management concluded that the Company's disclosure controls and
procedures are effective in ensuring that material information relating to the
Company and its subsidiaries is made known to them on a timely basis.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
Legal Contingencies - The Company is subject to certain legal proceedings, as
well as demands, claims and threatened litigation that arise in the normal
course of our business. A quarterly review is performed of each significant
matter to assess any potential financial exposure. If the potential loss from
any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, a liability and an expense are recorded for the estimated
loss. Significant judgment is required in both the determination of probability
and the determination of whether an exposure is reasonably estimable. Any
accruals are based on the best information available at the time. As additional
information becomes available, a reassessment is performed of the potential
liability related to any pending claims and litigation and may revise the
Company's estimates. Potential legal liabilities and the revision of estimates
of potential legal liabilities could have a material impact on the results of
operations and financial position.
53
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2008 Annual Meeting of Shareholders held on April 10, 2008,
shareholders:
(a) elected the following to serve as Class II directors of the Company
until the 2010 Annual Meeting of the shareholders by the following
votes:
For Vote Withheld
--- -------------
Lloyd Frank 17,145,211 1,269,554
Bruce G. Goodman 18,223,497 191,268
Mark N. Kaplan 18,200,155 214,610
Steven A. Shaw 18,343,704 71,061
(b) ratified the action of the Board of Directors in appointing Ernst &
Young LLP as the Company's independent registered public accounting
firm for the fiscal year ending October 28, 2007 by the following vote:
For Against Abstain
--- ------- -------
18,305,406 107,710 1,649
The following continue to serve as Class I directors of the Company until the
2009 Annual Meeting:
Theresa A. Havell
Deborah Shaw
William H. Turner
54
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
--------------------------------------------------------------------------------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent
Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
Date: June 6, 2008
By: /s/Jack Egan
--------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
55
EXHIBIT INDEX
-------------
Exhibit
Number Description
----- -----------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002