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 Three Months Ended January 28, 2007.
Or
---
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from to
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Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-5658129
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 704-2400
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.
Large Accelerated Filer Accelerated Filer X Non-Accelerated Filer
--- --- ---
Indicate by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
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The number of shares of the registrant's common stock, $.10 par value,
outstanding as of March 2, 2007 was 23,480,103.
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) -
Three Months Ended January 28, 2007 and January 29, 2006 3
Condensed Consolidated Balance Sheets -
January 28, 2007 (Unaudited) and October 29, 2006 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended January 28, 2007 and January 29, 2006 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 39
PART II - OTHER INFORMATION
Item 6. Exhibits 40
SIGNATURE 40
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-----------------------------------------
January 28, January 29,
2007 2006
----------- -----------
(In thousands, except per share amounts)
NET SALES $548,799 $549,508
COST AND EXPENSES:
Cost of sales 513,082 515,467
Selling and administrative 23,882 24,460
Depreciation and amortization 9,601 7,862
-------- --------
546,565 547,789
-------- --------
OPERATING INCOME 2,234 1,719
OTHER INCOME (EXPENSE):
Interest income 1,213 1,038
Other expense-net (1,532) (1,611)
Foreign exchange loss-net (87) (253)
Interest expense (628) (456)
-------- --------
Income before minority interest and income taxes 1,200 437
Minority interest - (1,021)
-------- --------
Income (loss) before income taxes 1,200 (584)
Income tax (provision) benefit (473) 207
-------- --------
NET INCOME (LOSS) $727 ($377)
==== ====
Per Share Data
--------------
Net income (loss) per share -basic and diluted $0.03 ($0.02)
===== =====
Weighted average number of shares
Basic 23,161 23,015
====== ======
Diluted 23,211 23,015
====== ======
See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 2007 October 29, 2006
(Unaudited) (Audited)
----------- ---------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $71,814 $38,481
Restricted cash 28,958 30,713
Short-term investments 4,717 4,709
Trade accounts receivable, net of allowances of $7,521
(2007) and $7,491 (2006) 409,798 390,799
Inventories 25,612 28,735
Recoverable income taxes 966 -
Deferred income taxes 7,865 9,167
Prepaid expenses and other assets 34,262 37,280
------- -------
TOTAL CURRENT ASSETS 583,992 539,884
Investment in securities 227 188
Property, plant and equipment, net 72,622 74,135
Deposits and other assets 1,852 2,059
Goodwill 50,355 50,896
Other intangible assets, net 31,253 31,959
------- -------
$740,301 $699,121
======== ========
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $43,572 $4,639
Current portion of long-term debt 480 470
Accounts payable 185,418 190,431
Accrued wages and commissions 55,557 59,387
Accrued taxes other than income taxes 26,378 20,186
Accrued insurance and other accruals 30,983 29,241
Deferred income and other liabilities 46,298 37,519
Income tax payable - 3,626
------- -------
TOTAL CURRENT LIABILITIES 388,686 345,499
Accrued insurance 3,799 4,760
Long-term debt 12,703 12,827
Deferred income taxes 8,784 10,787
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000
shares; issued--none
Common stock, par value $.10; Authorized--30,000,000
shares; issued--23,480,103 shares (2007) and
23,456,974 shares (2006) 2,348 2,346
Paid-in capital 50,766 50,203
Retained earnings 281,131 280,404
Accumulated other comprehensive income 34 245
------- -------
334,279 333,198
Less treasury stock - 300,000 shares at cost (7,950) (7,950)
------- -------
TOTAL STOCKHOLDERS' EQUITY 326,329 325,248
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $740,301 $699,121
======== ========
See accompanying notes to condensed consolidated financial statements (unaudited).
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
------------------
January 28, January 29,
2007 2006
----------- -----------
(In thousands)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $727 ($377)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 9,601 7,862
Accounts receivable provisions 1,119 1,117
Minority interest - 1,021
(Gain) loss on dispositions of property, plant and equipment (36) 36
Gain on foreign currency translation (111) (4)
Deferred income tax benefit (619) (542)
Share-based compensation expense related to employee stock
options 14 24
Excess tax benefits from share-based compensation (110) 105
Changes in operating assets and liabilities, net of assets
acquired:
Accounts receivable 30,965 41,727
Reduction in securitization program (50,000) -
Inventories 3,123 (1,074)
Prepaid insurance and other assets 3,121 (4,192)
Deposits and other assets 207 242
Accounts payable (3,962) (13,401)
Accrued expenses 2,519 95
Deferred income and other liabilities 16,985 8,347
Income taxes (4,366) (4,222)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,177 36,764
----- ------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Three Months Ended
------------------
January 28, January 29,
2007 2006
----------- -----------
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments $469 $450
Purchases of investments (459) (320)
Decrease in restricted cash 1,755 3,599
(Decrease) in payables related to restricted cash (1,755) (3,599)
Acquisitions - business (225) (46,753)
Proceeds from disposals of property, plant and equipment, net 48 341
Purchases of property, plant and equipment (6,836) (6,470)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (7,003) (52,752)
------ ------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (114) (105)
Cash in lieu of fractional shares (18) -
Exercises of stock options 345 800
Excess tax benefits from share-based compensation 110 (105)
Purchase of treasury shares (7,950) -
Increase in notes payable to banks 38,823 26
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,196 616
------ ------
Effect of exchange rate changes on cash (37) (25)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,333 (15,397)
Cash and cash equivalents, beginning of period 38,481 61,988
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $71,814 $46,591
======= =======
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $471 $456
Income taxes $6,235 $4,489
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 January 28, 2007 and consolidated
results of operations and consolidated cash flows for the three months ended
January 28, 2007 and January 29, 2006.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended October 29, 2006. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
Certain amounts in the first quarter of fiscal 2006 have been reclassified to
conform to the fiscal 2007 presentation.
NOTE B--Securitization Program
The Company has a $200.0 million accounts receivable securitization program
("Securitization Program"), which expires in April 2009. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $200.0 million). The Company retains the servicing responsibility
for the accounts receivable. At January 28, 2007, TRFCO had purchased from Volt
Funding a participation interest of $60.0 million out of a pool of approximately
$230.5 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) for any of the sold receivables.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE B--Securitization Program--Continued
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 156, "Accounting for Transfers and Servicing of Financial Assets
an amendment of SFAS No. 140." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges in connection with the sale of receivables under
the Securitization Program, of $1.3 million in both the three months ended
January 28, 2007 and January 29, 2006, which are included in Other Expense on
the condensed consolidated statement of operations. The equivalent cost of funds
in the Securitization Program was 5.6% per annum and 5.2% per annum in the
three-month 2007 and 2006 fiscal periods, respectively. The Company's carrying
retained interest in the receivables approximated fair value due to the
relatively short-term nature of the receivable collection period. In addition,
the Company performed a sensitivity analysis, changing various key assumptions,
which also indicated that the retained interest in receivables approximated fair
values.
At January 28, 2007 and October 29, 2006, the Company's carrying retained
interest in a revolving pool of receivables was approximately $169.9 million and
$164.2 million, respectively, net of a service fee liability, out of a total
pool of approximately $230.5 million and $275.2 million, respectively. The
outstanding balance of the undivided interest sold to TRFCO was $60.0 million
and $110.0 million at January 28, 2007 and October 29, 2006, respectively.
Accordingly, the trade accounts receivable included on the January 28, 2007 and
October 29, 2006 balance sheets have been reduced to reflect the participation
interest sold of $60.0 million and $110.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At January 28, 2007, the Company was in
compliance with all requirements of the Securitization Program.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves, by segment are as follows:
January 28, October 29,
2007 2006
----------- -----------
(In thousands)
Telephone Directory $9,753 $11,527
Telecommunications Services 11,458 12,606
Computer Systems 4,401 4,602
------- -------
Total $25,612 $28,735
======= =======
The cumulative amounts billed under service contracts at January 28, 2007 and
October 29, 2006 of $15.5 million and $10.9 million, respectively, are credited
against the related costs in inventory. In addition, reserves at January 28,
2007 and October 29, 2006 of $3.8 million and $4.5 million, respectively, are
credited against the related costs in inventory.
NOTE D--Short-Term Borrowings
At January 28, 2007, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit of up to an aggregate
of $118.9 million, including the Company's $40.0 million secured, syndicated
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $70.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility"). The Company had
total outstanding bank borrowings of $43.6 million. Included in these borrowings
were $8.6 million of foreign currency borrowings which provide a hedge against
devaluation in foreign denominated assets.
Credit Agreement
----------------
The Credit Agreement, which expires in April 2008, established a secured credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit.
Borrowings by subsidiaries are limited to $25.0 million in the aggregate. At
January 28, 2007, there were no borrowings against this facility. The
administrative agent for the Credit Facility is JPMorgan Chase Bank, N.A. The
other banks participating in the Credit Facility are Mellon Bank, N.A., Wells
Fargo Bank, N.A., Lloyds TSB Bank PLC and Bank of America, N.A.
Borrowings under the Credit Agreement are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided by a
nationally recognized rating agency. The Credit Agreement requires the
maintenance of specified accounts receivable collateral in excess of any
outstanding borrowings. Based upon the Company's leverage ratio and debt rating
at January 28, 2007, if a three-month U.S. Dollar LIBO rate were the interest
rate option selected by the Company, borrowings would have borne interest at the
rate of 6.2% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
maintain a ratio of EBIT, as defined, to interest expense, as defined, of 1.25
to 1.0 for the twelve months ended as of the last day of each fiscal quarter.
The Credit Agreement also imposes limitations on, among other things, the
incurrence of additional indebtedness, the incurrence of additional liens, sales
of assets, the level of annual capital expenditures, and the amount of
investments, including business acquisitions and investments in joint ventures,
and loans that may be made by the Company and its subsidiaries. At January 28,
2007, the Company was in compliance with all covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At January 28, 2007, four of those guarantors have pledged
approximately $48.3 million of accounts receivable, other than those in the
Securitization Program, as collateral for the guarantee obligations. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the Delta Credit Facility, which
expires in December 2009, with Wells Fargo, N.A. as the administrative agent and
arranger, and as a lender thereunder. Wells Fargo and the other three lenders
under the Delta Credit Facility, Lloyds TSB Bank Plc., Bank of America, N.A. and
JPMorgan Chase also participate in the Company's $40.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $70.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At January 28, 2007, $38.9 million was drawn
on this facility. Certain rate options, as well as the commitment fee, are based
on a leverage ratio, as defined. Based upon Volt Delta's leverage ratio at
January 28, 2007, if a three-month U.S. Dollar LIBO rate were the interest rate
option selected by the Company, borrowings would have borne interest at the rate
of 6.5% per annum. Volt Delta also pays a commitment fee of 0.2% on the unused
portion of the Delta Credit Facility.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.0 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At January 28, 2007, Volt Delta was in compliance with all covenants outlined in
the Delta Credit Facility.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Long-Term Debt and Financing Arrangements
In September 2001, a subsidiary of the Company entered into a $15.1 million loan
agreement with General Electric Capital Business Asset Funding Corporation.
Principal payments have reduced the loan to $13.2 million, of which $0.5 million
is current, at January 28, 2007. The 20-year loan, which bears interest at 8.2%
per annum and requires principal and interest payments of $0.4 million per
quarter, is secured by a deed of trust on certain land and buildings that had a
carrying amount at January 28, 2007 of $9.8 million. The obligation is
guaranteed by the Company.
NOTE F--Stockholders' Equity
On December 19, 2006, the Company's Board of Directors authorized and approved a
three-for-two stock split in the form of a dividend on the Company's common
stock, par value $.10 per share. Shares of common stock were distributed on
January 26, 2007, to all stockholders of record as of January 15, 2007. Any
fractional shares resulting from the dividend were paid in cash. Information
pertaining to shares, earnings per share, common stock and paid-in capital has
been adjusted in the accompanying financial statements and footnotes, except for
the table below, to reflect the stock split.
Changes in the major components of stockholders' equity for the three months
ended January 28, 2007 are as follows:
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
----- ------- -------- -----
(In thousands)
Balance at October 29, 2006 $1,564 $50,985 $280,404 ($7,950)
Stock options exercised--15,750 shares 2 581
Three-for-two stock split 782 (800)
Net income for the three months - - 727 -
------ ------- -------- -------
Balance at January 28, 2007 $2,348 $50,766 $281,131 ($7,950)
====== ======= ======== =======
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, a loss of $42,000 and a gain of $192,000 at January
28, 2007 and October 29, 2006, respectively, and an unrealized gain, net of
taxes, of $76,000 and $53,000 in marketable securities at January 28, 2007 and
October 29, 2006, respectively. Changes in these items, net of income taxes, are
included in the calculation of comprehensive income as follows:
Three Months Ended
------------------
January 28, January 29,
2007 2006
----------- -----------
(In thousands)
Net income (loss) $727 ($377)
Foreign currency translation adjustments, net (234) 387
Unrealized gain on marketable securities, net 23 14
---- ----
Comprehensive income $516 $24
==== ===
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
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.
Three Months Ended
------------------
January 28, January 29,
2007 2006
----------- -----------
Denominator for basic earnings per share:
Weighted average number of shares 23,161,023 23,014,557
Effect of dilutive securities:
Employee stock options 49,923 -
----------- -----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 23,210,946 23,014,557
========== ==========
Options to purchase 598,767 shares of the Company's common stock were
outstanding at January 29, 2006, but were not included in the computation of
diluted earnings per share because the effect of inclusion would have been
antidilutive. All stock options outstanding at January 28, 2007 were included in
the computation.
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the three months ended January 28,
2007 and January 29, 2006 are as follows:
Three Months Ended
------------------
January 28, January 29,
2007 2006
----------- -----------
Net Sales:
Staffing Services
Staffing $455,095 $445,627
Managed Services 294,499 251,076
----------- -----------
Total Gross Sales 749,594 696,703
Less: Non-Recourse Managed Services (282,645) (239,061)
----------- -----------
Net Staffing Services 466,949 457,642
Telephone Directory 17,643 15,785
Telecommunications Services 21,381 40,114
Computer Systems 46,532 41,274
Elimination of intersegment sales (3,706) (5,307)
----------- -----------
Total Net Sales $548,799 $549,508
======== ========
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures--Continued
Three Months Ended
------------------
January 28, January 29,
2007 2006
----------- -----------
Segment Operating Profit (Loss):
Staffing Services $5,348 $4,829
Telephone Directory 2,152 2,261
Telecommunications Services (677) 768
Computer Systems 5,694 5,749
------- -------
Total Segment Operating Profit 12,517 13,607
General corporate expenses (10,283) (11,888)
------- -------
Total Operating Profit 2,234 1,719
Interest income and other (expense), net (319) (573)
Foreign exchange loss, net (87) (253)
Interest expense (628) (456)
------- -------
Income Before Minority Interest and Income Taxes $1,200 $437
====== ====
During the three months ended January 28, 2007, consolidated assets increased by
$41.2 million primarily due to a decrease in the use of the Company's
Securitization Program and an increase in cash and cash equivalents, partially
offset by decreases in receivables of the Staffing Services segment.
NOTE I--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations. At January 28, 2007, the Company had no outstanding
foreign currency option contracts.
Restricted cash at January 28, 2007 and October 29, 2006 was approximately $29.0
million and $30.7 million, respectively, restricted to cover obligations that
were reflected in accounts payable at that date. These amounts primarily related
to certain contracts with customers, for whom the Company manages the customers'
alternative staffing requirements, including the payment of associate vendors.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses
On December 29, 2005, Volt Delta purchased from Nortel Networks its 24% minority
interest in Volt Delta. Under the terms of the agreement, Volt Delta was
required to pay Nortel Networks approximately $56.4 million for its minority
interest in Volt Delta, and an excess cash distribution of approximately $5.4
million. Under the terms of the agreement, Volt Delta paid $25.0 million on
December 29, 2005 and paid the remaining $36.8 million on February 15, 2006. The
transaction resulted in an increase in goodwill and intangible assets of
approximately $6.8 million and $5.7 million, respectively and the elimination of
a deferred tax liability of $5.0 million.
On December 30, 2005, Volt Delta acquired varetis AG's Varetis Solutions
subsidiary for $24.8 million. The acquisition of Varetis Solutions provided Volt
Delta with the resources to focus on the evolving global market for directory
information systems and services. Varetis Solutions added technology in the area
of wireless handset information delivery to Volt Delta's significant technology
portfolio.
The Company has valued both transactions to determine the final allocation of
the purchase price to various types of potential intangible assets. The types of
intangible assets which exist as of consummation of the transactions are: the
existing technology of the businesses, the value of their customer
relationships, the value of trade names, the value of contract backlogs, the
value of non-compete agreements and the value of their reseller network. The
value of each of the intangible assets identified was determined with the use of
a discounted cash flow methodology. This methodology involved discounting
forecasted revenues and earnings attributable to each of the potential
intangible assets.
The assets and liabilities of Varetis Solutions are accounted for under the
purchase method of accounting at the date of acquisition at their fair values.
The results of operations have been included in the condensed consolidated
statements of operations since the acquisition date.
The purchase price allocation of the fair value of assets acquired and
liabilities assumed and established is as follows:
(In thousands)
Cash $3,310
Accounts receivable 8,878
Inventories 7
Prepaid expenses and other assets 324
Property, plant and equipment 1,318
Goodwill 10,896
Intangible assets 15,300
-------
Total Assets 40,033
-------
Accrued wages and commissions (1,012)
Other accrued expenses (3,325)
Other liabilities (1,741)
Income taxes payable (1,266)
Deferred income tax (7,876)
-------
Total Liabilities (15,220)
-------
Purchase price $24,813
=======
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
The following unaudited pro forma information reflects the purchase from Nortel
Networks of its 24% minority interest in Volt Delta and combines the
consolidated results of operations of the Company with those of the Varetis
Solutions business as if the transactions had occurred in November 2005. This
pro forma financial information is presented for comparative purposes only and
is not necessarily indicative of the operating results that actually would have
occurred had this acquisition been consummated at the start of fiscal 2006. In
addition, these results are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from the combined
operations.
Pro Forma Results
-----------------
Three Months Ended
------------------
January 29,
2006
-----------
(In thousands, except per share amounts)
Net sales $553,447
========
Operating income $2,475
======
Net income $667
====
Earnings per share
Basic and Diluted $0.03
=====
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-life 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 following table represents the balance of intangible assets:
January 28, 2007 October 29, 2006
---------------- ----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(In thousands)
Customer relationships $18,038 $3,330 $17,645 $2,890
Existing technology 13,164 1,872 13,164 1,466
Contract backlog 3,200 867 3,200 667
Trade name (a) 2,016 - 2,016 -
Reseller network 816 111 816 85
Non-compete agreements and trademarks 325 126 325 99
------- ------ ------- ------
Total $37,559 $6,306 $37,166 $5,207
======= ====== ======= ======
(a) Trade names have an indefinite life and are not amortized.
In fiscal 2007, the total intangible assets acquired were $0.2 million for
acquisition of two directories by the Telephone Directory Segment.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At January 28, 2007, the Company's net prepaid for the
outstanding plan years was $16.0 million compared to $18.9 million at October
29, 2006.
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 January
28, 2007 were granted at 100% of the market price on the date of grant and
become fully vested within one to five years after the grant date.
Compensation expense of $14,000 and $24,000 for the three months ended January
28, 2007 and January 29, 2006, respectively, is recognized in the selling and
administrative expenses in the Company's condensed consolidated statement of
operations on a straight-line basis over the vesting periods. As of January 28,
2007, there was $0.1 million of total unrecognized compensation cost related to
non-vested share-based compensation arrangements to be recognized over a
weighted average period of 1.1 years.
The intrinsic values of options exercised during the periods ended January 28,
2007 and January 29, 2006 were $0.6 million and $0.2 million, respectively. The
total cash received from the exercise of stock options was $0.3 million and $0.8
million in the three month periods ended January 28, 2007 and January 29, 2006,
respectively, and is classified as financing cash flows in the condensed
consolidated statement of cash flows. The actual tax benefit realized on the
exercise of options was $0.2 million and $0.1 million for the three-month period
ended January 28, 2007 and January 29, 2006, respectively.
There were no options granted during the three months ended January 28, 2007 or
January 29, 2006.
In September 6, 2006, the Company's Board of Directors adopted the Volt
Information Sciences, Inc. 2006 Incentive Stock Plan subject to approval by vote
of shareholders of the Company. The Plan permits the grant of Incentive Stock
Options, Non-Qualified Stock Options, Restricted Stock and Restricted Stock
Units to employees and non-employee directors of the Company through September
6, 2016. The maximum aggregate number of shares that may be issued pursuant to
awards made under the Plan shall not exceed one million five hundred thousand
(1,500,000) shares.
16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
--------
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to our consolidated financial
statements and notes thereto included in Part I of this Form 10-Q and to provide
an understanding of our consolidated results of operations, financial condition
and changes in financial condition. Our MD&A is organized as follows:
o Forward-Looking Statements - This section describes some of the
language and assumptions used in this document that may have an impact
on the readers' interpretation of the financial statements.
o Critical Accounting Policies - This section discusses those accounting
policies that are considered to be both important to our financial
condition and results of operations and require us to exercise
subjective or complex judgments in their application.
o Summary of Operating Results by Segment - This section provides a
summary of operating results by segment in a tabular format.
o Executive Overview - This section provides a general description of
our business segments and provides a brief overview of the results of
operations during the accounting period.
o Results of Operations - This section provides our analysis of the line
items on our summary of operating results by segment for the current
and comparative accounting periods on both a company-wide and segment
basis. The analysis is in both a tabular and narrative format.
o Liquidity and Capital Resources - This section provides an analysis of
our liquidity and cash flows, as well as our discussion of our
commitments, securitization program and credit lines.
o New Accounting Pronouncements - This section includes a discussion of
recently published accounting authoritative literature that may have
an impact on our historical or prospective results of operations or
financial condition.
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth in the Company's Annual Report on Form 10-K, in this Form 10-Q and in the
Company's press releases and other public filings. Such risks and uncertainties
could cause the Company's actual results, performance and achievements to differ
materially from those described in or implied by the forward-looking statements.
Accordingly, readers should not place undue reliance on any forward-looking
statements made by or on behalf of the Company. The Company does not assume any
obligation to update any forward-looking statements after the date they are
made.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered. In the first three
months of fiscal 2007, this revenue comprised approximately 77% of net
consolidated sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, for which the Company receives an
administrative fee for arranging for, billing for and collecting the
billings related to staffing companies ("associate vendors") who have
supplied personnel to the Company's customers. The administrative fee is
either charged to the customer or subtracted from the Company 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
three months of fiscal 2007, this revenue comprised approximately 2% of the
Company's net sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with the 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 three months of fiscal 2007, this revenue
comprised approximately 5% of the Company's net sales.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and delivered. In the first three months of fiscal 2007,
this revenue comprised approximately 2% of net consolidated sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
the first three months of fiscal 2007, this revenue comprised approximately
2% of net consolidated sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in SOP
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 three months of fiscal
2007, this revenue comprised approximately 2% of net consolidated sales.
Non-Construction: Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and, if applicable, any completed
units are delivered and accepted by the customer. In the first three months
of fiscal 2007, this revenue comprised approximately 2% of net consolidated
sales.
Computer Systems:
Database Access: Sales are derived from the Company granting access to its
proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases. In the first three months of
fiscal 2007, this revenue comprised approximately 5% of net consolidated
sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems, on a time and material basis or a contract basis. The
Company uses its own employees and inventory in the performance of the
services, and has credit risk for collecting its billings. Revenue for
these services is recognized on a gross basis in the period in which the
services are performed, contingent upon customer acceptance when on a time
and material basis, or over the life of the contract, as applicable. In the
first three months of fiscal 2007, this revenue comprised approximately 2%
of net consolidated sales.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in 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 in
accordance with SOP 81-1, when applicable. In the first three months of
fiscal 2007, this revenue comprised approximately 1% of net consolidated
sales.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectible Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for accounts receivable are maintained based
upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Goodwill: Under 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 impairment testing
using comparable multiples of sales and EBITDA and other valuation methods to
assist the Company in the determination of the fair value of the reporting units
measured.
Long-Lived Assets: Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount exceeds the estimated fair value of the asset or asset
group. The impairment loss is measured as the amount by which the carrying
amount exceeds fair value.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
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.
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 $60.0 million and
$110.0 million at January 28, 2007 and October 29, 2006, respectively.
Accordingly, the trade receivables included on the January 28, 2007 and October
29, 2006 balance sheets have been reduced to reflect the participation interest
sold. TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding Corp., a wholly-owned special purpose
subsidiary of the Company) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds, and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For each policy year, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of services in the period in which such
determination is made.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Medical Insurance Program -The Company is self-insured for the majority of its
medical benefit programs. The Company remains insured for a portion of its
medical program (primarily HMOs) as well as the entire dental program. The
Company provides the self-insured medical benefits through an arrangement with a
third party administrator. However, the liability for the self-insured benefits
is limited by the purchase of stop loss insurance. The contributed and withheld
funds and related liabilities for the self-insured program together with unpaid
premiums for the insured programs are held in 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Three Months Ended
------------------
January 28, January 29,
2007 2006
----------- -----------
Net Sales:
----------
Staffing Services
Staffing $455,095 $445,627
Managed Services 294,499 251,076
-------- --------
Total Gross Sales 749,594 696,703
Less: Non-Recourse Managed Services (282,645) (239,061)
-------- --------
Net Staffing Services 466,949 457,642
Telephone Directory 17,643 15,785
Telecommunications Services 21,381 40,114
Computer Systems 46,532 41,274
Elimination of intersegment sales (3,706) (5,307)
-------- --------
Total Net Sales $548,799 $549,508
======== ========
Segment Operating Profit (Loss):
--------------------------------
Staffing Services $5,348 $4,829
Telephone Directory 2,152 2,261
Telecommunications Services (677) 768
Computer Systems 5,694 5,749
------- --------
Total Segment Operating Profit 12,517 13,607
General corporate expenses (10,283) (11,888)
------- --------
Total Operating Profit 2,234 1,719
Interest income and other (expense), net (319) (573)
Foreign exchange loss, net (87) (253)
Interest expense (628) (456)
------- --------
Income Before Minority Interest and Income Taxes $1,200 $437
======= ====
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
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, direct hire placement
and workforce solutions.
o E-Procurement Solutions provides global vendor neutral human
capital acquisition and management solutions by combining
web-based tools and business process outsourcing services.
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.
Telephone Directory: This segment publishes independent telephone
directories and provides telephone directory production services, database
management and printing.
Telecommunications Services: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services in
the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry and provides IT
maintenance services.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales and operating profit are always
lowest in the Company's first fiscal quarter due to the Thanksgiving, Christmas
and New Year holidays, as well as certain customer facilities closing for one to
two weeks. During the third and fourth quarters of the fiscal year, this segment
benefits from a reduction of payroll taxes when the annual tax contributions for
higher salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the first fiscal
quarter of fiscal 2007. In the current fiscal quarter, the sales of the Staffing
Services segment, in addition to the factors noted above, were positively
impacted by a continued increase in the use of contingent staffing in the
Technical Placement division. Operating profits of the segment for the quarter
were higher than in the comparable quarter of fiscal 2006 due to the sales
increase and an improvement in gross margin percentages due to lower workers'
compensation and payroll tax costs, partially offset by an increase in overhead
costs as a percentage of sales. The reduction in workers' compensation costs in
the quarter, of approximately $1.5 million from the comparable quarter of fiscal
2006, is due to the Company working closely with customers to better manage
workers' compensation costs and to the regulatory environment within several
states. The Company anticipates this reduced level of workers' compensation
costs will continue for the remainder of fiscal 2007.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
EXECUTIVE OVERVIEW--Continued
------------------
In the current fiscal quarter, the sales of the Telephone Directory segment
increased from the comparable quarter of fiscal 2006, but due to decreased gross
margins, the operating profits of the segment declined slightly.
In the current fiscal quarter, the sales of the Telecommunications Services
segment decreased from the comparable quarter in fiscal 2006, and with reduced
gross margins, the operating results of the segment declined from the comparable
2006 first quarter.
In the current fiscal quarter, sales of the Computer Systems segment increased
from the comparable quarter of fiscal 2006, but operating profits remained
approximately the same due to increased overhead costs necessary to support its
increase in sales, and the amortization related to its increased intangible
assets.
The Company has focused, and will continue to focus, on aggressively increasing
its market share while attempting to maintain margins in order to increase
profits. All segments have emphasized cost containment measures, along with
improved credit and collections procedures designed to improve the Company's
cash flow.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives and upgrading its financial reporting systems.
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results which
may be expected for any subsequent period. The following discussion should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
which appear in Item 1 of this Report.
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the first fiscal quarter of fiscal 2007, consolidated net sales decreased by
$0.7 million, or 0.1%, to $548.8 million, from the comparable quarter of fiscal
2006. The decrease in the current quarter's net sales resulted from a decrease
in Telecommunications Services of $18.7 million, partially offset by increases
in Staffing Services of $9.3 million, Computer Systems of $5.2 million and
Telephone Directory of $1.8 million.
The net income in the current quarter of fiscal 2007 was $0.7 million compared
to a loss of $0.4 million in the comparable quarter of fiscal 2006. The
Company's pre-tax income before minority interest for the current quarter was
$1.2 million compared to $0.4 million in the comparable quarter of fiscal 2006.
The Company's operating segments reported an operating profit of $12.5 million
in the current quarter, a decrease of $1.1 million, or 8%, from the comparable
quarter of fiscal 2006. The change in operating profit was due to the decreased
operating profits of the Telecommunications Services segment of $1.5 million,
and the Telephone Directory segment of $0.1 million, partially offset by an
increase in the Staffing Services segment of $0.5 million.
General corporate expenses decreased by $1.6 million, or 14%, primarily due to a
reduction in costs incurred relating to compliance with the Sarbanes-Oxley Act.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Three Months Ended
------------------
January 28, 2007 January 29, 2006
---------------- ----------------
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Staffing Sales (Gross) $455.1 $445.6 $9.5 2.1%
Managed Service Sales (Gross) $294.5 $251.1 $43.4 17.2%
Sales (Net) * $466.9 $457.6 $9.3 2.1%
Gross Profit $71.4 15.3% $66.2 14.5% $5.2 7.9%
Overhead $66.1 14.2% $61.4 13.4% ($4.7) (7.6%)
Operating Profit $5.3 1.1% $4.8 1.1% $0.5 10.4%
*Sales (Net) only includes the gross margin on managed service sales.
The sales increase of the Staffing Services segment in the first quarter of
fiscal 2007 from the comparable quarter in fiscal 2006 was due to increased
staffing business in the Technical Placement division, partially offset by a
sales decrease in the Administrative and Industrial division.
The increase in the operating profit of the segment in the current quarter, as
compared to the comparable quarter in fiscal 2006, was due to increased profits
in the Technical Placement division, partially offset by a decrease in the
Administrative and Industrial division.
Three Months Ended
------------------
January 28, 2007 January 29, 2006
---------------- ----------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Gross) $587.9 $522.5 $65.4 12.5%
Sales (Net) $312.1 $289.3 $22.8 7.9%
Gross Profit $47.9 15.4% $43.6 15.1% $4.3 9.8%
Overhead $40.6 13.1% $38.3 13.2% ($2.3) (6.0%)
Operating Profit $7.3 2.3% $5.3 1.8% $2.0 37.7%
The Technical Placement division's increase in net sales in the first quarter of
fiscal 2007 from the comparable quarter in fiscal 2006 was due to a $20.6
million, or 8%, sales increase in traditional alternative staffing and a $2.9
million, or 11%, increase in VMC Consulting project management and consulting
sales, partially offset by a $0.7 million, or 7%, decrease in net managed
service associate vendor sales. The increase in the operating profit was the
result of the increases in sales and gross margin percentage, and the decrease
in overhead as a percentage of net sales. The increase in gross margin
percentage was due to increased markups within VMC Consulting, together with
higher margin permanent placement sales. The first quarter of fiscal 2007 also
included a $0.8 million gain on the settlement of a vendor dispute.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
STAFFING SERVICES--Continued
-----------------
Three Months Ended
------------------
January 28, 2007 January 29, 2006
---------------- ----------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Gross) $161.7 $174.2 ($12.5) (7.1%)
Sales (Net) $154.8 $168.3 ($13.5) (8.0%)
Gross Profit $23.5 15.2% $22.6 13.4% $0.9 4.1%
Overhead $25.5 16.5% $23.1 13.7% ($2.4) (10.4%)
Operating Loss ($2.0) (1.3%) ($0.5) (0.3%) ($1.5) (312.2%)
The Administrative and Industrial division's decrease in gross sales in the
first quarter of fiscal 2007 resulted from reduced revenue from existing
accounts, partially offset by revenue from new accounts. The increased operating
loss was the result of the sales decrease, the increase in overhead as a
percentage of sales, partially offset by the increase in gross margin
percentage. The increase in gross margin percentage was primarily due to a 1.1%
percentage point reduction in workers' compensation costs as a percentage of
direct labor resulting from improvements in claims experience and the regulatory
environment within several states, together with higher margin permanent
placement sales, increased mark-ups and decreases in payroll taxes. The increase
in overhead percentage for the quarter was due to the sales decrease, without a
corresponding reduction in overhead costs. The division is focused on reducing
overhead costs to compensate for lower sales.
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.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
TELEPHONE DIRECTORY
-------------------
Three Months Ended
------------------
January 28, 2007 January 29, 2006
---------------- ----------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Net) $17.6 $15.8 $1.8 11.8%
Gross Profit $8.0 45.5% $7.8 49.3% $0.2 3.3%
Overhead $5.8 33.3% $5.5 35.0% ($0.3) (6.6%)
Operating Profit $2.2 12.2% $2.3 14.3% ($0.1) (4.8%)
The components of the Telephone Directory segment's sales increase for the first
quarter of fiscal 2007 from the comparable quarter of fiscal 2006 were an
increase of $2.9 million in the printing and telephone directory publishing
operation in Uruguay, partially offset by decreases of $0.8 million in telephone
production and other sales, and $0.3 million in the DataNational community
telephone directory publishing sales. The sales increase in Uruguay was
comprised of $1.6 million in publishing sales and $1.3 million in printing
sales. The sales variances in the telephone directory publishing operations at
DataNational and Uruguay were due to the timing of the delivery of their
directories. The slight decrease in the segment's operating profit from the
comparable fiscal quarter of 2006 was the result of the decrease in gross margin
percentage, partially offset by the sales increase and the decrease in overhead
as a percentage of sales. The gross margin for the Uruguayan division increased
by 15% from the comparable quarter of fiscal 2006 due to the increased sales of
its higher margin telephone directory books. The DataNational division's gross
margin decreased by 7% in the current quarter due to the decreased distribution
volume of its higher margin directory books.
Other than the DataNational division and the telephone directory publishing
operation in Uruguay, which accounted for 55% of the segment's sales in the
first quarter of fiscal 2007, the segment's business is obtained through
submission of competitive proposals for production and other contracts. These
short and long-term contracts are re-bid after expiration. Many of this
segment's long-term contracts contain cancellation provisions under which the
customer can cancel the contract, even if the segment is not in default under
the contract and generally do not provide for a minimum amount of work to be
awarded to the segment. While the Company has historically secured new contracts
and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue from DataNational's directories, which
could be affected by general economic conditions.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Three Months Ended
------------------
January 28, 2007 January 29, 2006
---------------- ----------------
Telecommunications % of % of Favorable Favorable
Services Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Net) $21.4 $40.1 ($18.7) (46.7%)
Gross Profit $4.8 22.3% $9.8 24.5% ($5.0) (51.4%)
Overhead $5.5 25.5% $9.0 22.5% $3.5 39.8%
Operating Profit (Loss) ($0.7) (3.2%) $0.8 2.0% ($1.5) (188.2%)
The Telecommunications Services segment's sales decrease in the first quarter of
fiscal 2007 from the comparable quarter of fiscal 2006 was due to decreases of
$16.1 million, or 59%, in the Construction and Engineering division, and $2.6
million, or 20%, in the Network Enterprise Solutions division. The sales
decrease in the Construction and Engineering division in the current quarter was
largely due to the customer acceptance and revenue recognition in fiscal 2006 of
a large construction job accounted for using the completed-contract method. The
sales decrease in the Network Enterprise Solutions division was primarily due to
reduced volumes with existing customers. The decrease in operating results was
due to the decreases in sales and gross margin percentages, accompanied by an
increase in overhead costs as a percentage of sales. The decrease in gross
margin percentage was due to a change in the mix of jobs completed during the
current and comparable quarters. The segment continues to monitor its overhead
costs. In the current quarter, indirect labor and fringes decreased by 22% as
compared to the comparable quarter in fiscal 2006. Despite an emphasis on cost
controls, the results of the segment continue to be affected by the decline in
capital spending by telephone companies caused by the consolidation within the
segment's telecommunications industry fixed-line customer base and an increasing
shift by consumers to wireless communications and alternatives. This factor has
also increased competition for available work, pressuring pricing and gross
margins throughout the segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically 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.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
COMPUTER SYSTEMS
----------------
Three Months Ended
------------------
January 28, 2007 January 29, 2006
---------------- ----------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Sales (Net) $46.5 $41.3 $5.2 12.7%
Gross Profit $24.7 53.2% $21.9 53.1% $2.8 13.0%
Overhead $19.0 41.0% $16.2 39.1% ($2.8) (18.0%)
Operating Profit $5.7 12.2% $5.7 14.0% - -
The Computer Systems segment's sales increase in the first quarter of fiscal
2007 from the comparable quarter of fiscal 2006 was primarily due to increases
of $4.2 million from the Varetis Solutions operation which was acquired in
December 2005, $0.5 million, or 4%, in the Maintech division's IT maintenance,
and $1.4 million, or 11%, from other products and services, partially offset by
decreases in the segment's database access transaction fee revenue, including
ASP directory assistance, of $0.9 million, or 6%. The database access
transaction volume was higher in the current quarter than in the comparable
quarter of fiscal 2006, but due to the mix of transaction volume, the revenue
has decreased in the current quarter The increased gross profit was a result of
the sales increase, and the overhead increase was due to the addition of Varetis
Solutions, including the amortization of its intangible assets.
During the first quarter of fiscal 2006, Volt Delta, the principal business unit
of the Computer Systems segment, purchased from Nortel Networks its 24% minority
interest in Volt Delta for $62.0 million. Nortel Networks had originally
purchased its 24% interest in August 2004, and under the terms of the original
purchase agreement, each party had a one year option to cause Nortel Networks to
sell and Volt Delta to buy the minority interest for an amount ranging from $25
million to $70 million. The Company purchased Nortel's minority interest prior
to this contract provision becoming effective. During the first quarter of
fiscal 2006, Volt Delta also purchased Varetis Solutions from varetis AG for
$24.8 million. The acquisition provided Volt Delta with the resources to focus
on the evolving global market for directory information systems and services.
Varetis Solutions added technology in the area of wireless and wireline database
management, directory assistance/inquiry automation, and wireless handset
information delivery to Volt Delta's significant technology portfolio.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services, its continued ability to sell products and
services to new and existing customers and consumer demands for its customers'
services.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 28, 2007 COMPARED
TO THE THREE MONTHS ENDED JANUARY 29, 2006--Continued
RESULTS OF OPERATIONS--OTHER
----------------------------
Three Months Ended
------------------
January 28, 2007 January 29, 2006
---------------- ----------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Selling & Administrative $23.9 4.4% $24.5 4.5% $0.6 2.4%
Depreciation & Amortization $9.6 1.7% $7.9 1.4% ($1.7) (22.1%)
Interest Income $1.2 0.2% $1.0 0.1% $0.2 16.9%
Other Expense ($1.5) (0.3%) ($1.6) (0.2%) $0.1 4.9%
Foreign Exchange Loss ($0.1) - ($0.3) - $0.2 65.6%
Interest Expense ($0.6) (0.1%) ($0.5) (0.1%) ($0.1) (37.7%)
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal periods were:
The decrease in selling and administrative expenses in the current quarter from
the comparable 2006 fiscal quarter was primarily the result of reductions in
costs related to compliance with the Sarbanes-Oxley Act partially offset by an
increase in salaries and other expenses.
The increase in depreciation and amortization in the current quarter from the
comparable 2006 fiscal quarter was attributable to increases in fixed assets,
primarily in the Computer Systems and Staffing Services segments, as well as
increased amortization of intangibles in the Computer Systems segment due to
fiscal 2006 acquisitions.
Interest income increased due to higher interest rates together with additional
funds available for investment.
The Company's effective tax provision rate on its financial reporting pre-tax
income was 39.4% in the first quarter of fiscal 2007 compared to an effective
tax benefit rate of 35.4% on its financial reporting pre-tax loss in the
comparable quarter in fiscal 2006. The effective rate was lower in fiscal 2006
due to certain foreign losses in fiscal 2006 for which no tax benefit was
provided.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, increased by $33.3 million to $71.8 million in the
three months ended January 28, 2007.
Operating activities provided $9.2 million of cash in the first three months of
fiscal 2007. In the comparable fiscal 2006 period, operating activities provided
$36.8 million in cash.
Operating activities in the first three months of fiscal 2007, exclusive of
changes in operating assets and liabilities, produced $10.6 million of cash, as
the Company's net income of $0.7 million included non-cash charges primarily for
depreciation and amortization of $9.6 million, accounts receivable provisions of
$1.1 million and a deferred tax benefit of $0.6 million. Operating activities in
the first three months of fiscal 2006, exclusive of changes in operating assets
and liabilities, produced $9.3 million of cash, as the Company's net loss of
$0.4 million included non-cash charges primarily for depreciation and
amortization of $7.9 million, accounts receivable provisions of $1.1 million,
minority interest of $1.0 million and a deferred tax benefit of $0.5 million.
Changes in operating assets and liabilities used $1.4 million of cash, net, in
the first three months of fiscal 2007 principally due to a reduction in
securitization of receivables of $50.0 million substantially offset by a
decrease in the level of accounts receivable of $31.0 million and an increase in
deferred income and other liabilities of $17.0 million. Changes in operating
assets and liabilities produced $27.5 million of cash net, in the first three
months of fiscal 2006 principally due to a decrease in the level of accounts
receivable of $41.7 million and an increase in deferred income and other
liabilities of $8.3 million, partially offset by a decrease in accounts payable
of $13.4 million and income taxes payable of $4.2 million, and increases in
prepaid expenses and other current assets of $4.2 million and inventories of
$1.1 million.
The $7.0 million of cash applied to investing activities for the first three
months of fiscal 2007 resulted from the expenditures of $6.8 million for net
additions to property, plant and equipment and $0.2 million for acquisitions.
The $52.8 million of cash applied to investing activities for the first three
months of fiscal 2006 resulted from $46.8 million for acquisitions and net
additions of $6.1 million for property, plant and equipment.
The principal factors in the $31.2 million of cash provided by financing
activities in the first three months of fiscal 2007 were an increase in notes
payable of $38.8 million and cash provided from exercises of stock options
totaling $0.3 million partially offset by a payment of $8.0 million for the
purchase of treasury shares. The principal factor in the $0.6 million of cash
provided by financing activities in the first three months of fiscal 2006 was
cash provided from exercises of stock options totaling $0.8 million.
Commitments
-----------
There has been no material change through January 28, 2007 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended October
29, 2006.
32
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
January 28, 2007, TRFCO had purchased from Volt Funding a participation interest
of $60.0 million out of a pool of approximately $230.5 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
above, to the security interest that the Company granted in the common stock of
Volt Funding in favor of the lenders under the Company's Credit Facility). TRFCO
has no recourse to the Company (beyond its interest in the pool of receivables
owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 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 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.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold or the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At
January 28, 2007, the Company was in compliance with all requirements of its
Securitization Program.
Credit Lines
------------
At January 28, 2007, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit of up to an aggregate
of $118.9 million, including the Company's $40.0 million secured, syndicated
revolving credit agreement ("Credit Agreement") and the Company's wholly owned
subsidiary, Volt Delta Resources, LLC's ("Volt Delta") $70.0 million secured,
syndicated revolving credit agreement ("Delta Credit Facility") The Company had
total outstanding bank borrowings of $43.6 million. Included in these borrowings
were $8.6 million of foreign currency borrowings which provide a hedge against
devaluation in foreign denominated assets.
Credit Agreement
----------------
The Credit Agreement, which expires in April 2008, established a secured credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit.
Borrowings by subsidiaries are limited to $25.0 million in the aggregate. At
January 28, 2007, there were no borrowings against this facility. The
administrative agent for the Credit Facility is JPMorgan Chase Bank, N.A. The
other banks participating in the Credit Facility are Mellon Bank, N.A., Wells
Fargo Bank, N.A., Lloyds TSB Bank PLC and Bank of America, N.A.
Borrowings under the Credit Agreement are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility as provided by a
nationally recognized rating agency. The Credit Agreement requires the
maintenance of specified accounts receivable collateral in excess of any
outstanding borrowings. Based upon the Company's leverage ratio and debt rating
at January 28, 2007, if a three-month U.S. Dollar LIBO rate were the interest
rate option selected by the Company, borrowings would have borne interest at the
rate of 6.2% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At January 28, 2007, the Company was in compliance with all
covenants in the Credit Agreement.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At January 28, 2007, four of those guarantors have pledged
approximately $48.3 million of accounts receivable, other than those in the
Securitization Program, as collateral for the guarantee obligations. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the Delta Credit Facility, which
expires in December 2009, with Wells Fargo, N.A. as the administrative agent and
arranger, and as a lender thereunder. Wells Fargo and the other three lenders
under the Delta Credit Facility, Lloyds TSB Bank Plc., Bank of America, N.A. and
JPMorgan Chase also participate in the Company's $40.0 million revolving Credit
Facility. Neither the Company nor Volt Delta guarantees each other's facility
but certain subsidiaries of each are guarantors of their respective parent
company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $70.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At January 28, 2007, $38.9 million was drawn
on this facility. Certain rate options, as well as the commitment fee, are based
on a leverage ratio, as defined. Based upon Volt Delta's leverage ratio at
January 28, 2007, if a three-month U.S. Dollar LIBO rate were the interest rate
option selected by the Company, borrowings would have borne interest at the rate
of 6.5% per annum. Volt Delta also pays a commitment fee of 0.2% on the unused
portion of the Delta Credit Facility
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.0 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At January 28, 2007, Volt Delta was in compliance with all covenants outlined 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.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2007
------------------------------------------------------------
In July 2006, the FASB issued interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") which
prescribes a recognition threshold and measurement attribute, as well as
criteria for subsequently recognizing, derecognizing and measuring uncertain tax
position for financial statement purposes. FIN 48 also requires expanded
disclosure with respect to the uncertainty in income taxes assets and
liabilities. FIN 48 is effective for the Company on October 29, 2007 and is
required to be recognized as a change in accounting principle through a
cumulative-effect adjustment to retained earnings as of the beginning of the
year of adoption. The Company is currently evaluating the impact of adopting the
provisions of FIN 48 in fiscal 2008.
Related Party Transactions
--------------------------
During the first three months of fiscal 2007, the Company paid or accrued $0.2
million to the law firm of which Lloyd Frank, a director, is of counsel, for
services rendered to the Company and expenses reimbursed.
In October 2006, the Company purchased 300,000 shares of common stock from the
Estate of William Shaw at a price of $26.50 per share, for a total of
$7,950,000. The Company intends to use these shares to fund awards under the
Volt Information Sciences, Inc. 2006 Incentive Stock Plan. The shares were
purchased at a price below the price at which the Company's common stock was
then being traded on the New York Stock Exchange. The decision to make the
purchase was made by the Board of Directors which delegated negotiation of the
price to senior management of the Company. The funds were transferred in
November 2006.
36
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
$28,000, 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 $13.5 million
at January 28, 2007. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender to the Company's present
stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At January 28, 2007, the total market value of these
investments was $4.7 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 January 28, 2007, the total of the Company's net investment in foreign
operations was $10.3 million which was reduced to $6.4 million on February 5,
2007 when Volt Delta increased its Euro and British Pounds Sterling borrowings
under the Delta Credit Facility. 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
January 28, 2007, the Company had no outstanding exchange contracts. The amount
of risk and the use of foreign exchange instruments described above are not
material to the Company's financial position or results of operations and the
Company does not use these instruments for trading or other speculative
purposes. Based upon the current levels of net foreign assets, a hypothetical
weakening of the U.S. dollar against these currencies at January 28, 2007 by 10%
would result in a pretax gain of $1.0 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at January 28, 2007 by 10% would result in a pretax loss of $1.0
million related to these positions.
37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at January 28,
2007. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of January 28, 2007
------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 Year Years Years Years
----- ------ ----- ----- -----
(Dollars in thousands of US$)
Cash and Cash Equivalents and
-----------------------------
Restricted Cash
---------------
Money Market and Cash Accounts $100,772 $100,772
Weighted Average Interest Rate 5.08% 5.08%
-------- --------
Total Cash, Cash Equivalents
and Restricted Cash $100,772 $100,772
======== ========
Securitization Program
----------------------
Accounts Receivable Securitization $60,000 $60,000
Finance Rate 5.31% 5.31%
------- -------
Securitization Program $60,000 $60,000
======= =======
Debt
----
Term Loan $13,183 $480 $1,086 $1,279 $10,338
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $43,572 $43,572
Weighted Average Interest Rate 6.27% 6.27% - - -
------- ------- ------ ------ -------
Total Debt $56,755 $44,052 $1,086 $1,279 $10,338
======= ======= ====== ====== =======
38
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 January
28, 2007 under the supervision and with the participation of the Company's
management, including the Company's President and Principal Executive Officer
and its Senior Vice President and Principal Financial Officer. Based on that
evaluation, management concluded that, the Company's disclosure controls and
procedures are effective in ensuring that material information relating to the
Company and its subsidiaries is made known to them on a timely basis.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
39
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: March 9, 2007
By: /s/ Jack Egan
--------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
40
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
41