UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---
/X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934
For The Six Months Ended April 29, 2007.
Or
---
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from to
--------------------- ----------------------
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 13-5658129
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 704-2400
Not Applicable
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Indicate by check mark whether registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of the registrant's common stock, $.10 par value,
outstanding as of June 1, 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) -
Six and Three Months Ended April 29, 2007 and April 30, 2006 3
Condensed Consolidated Balance Sheets -
April 29, 2007 (Unaudited) and October 29, 2006 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended April 29, 2007 and April 30, 2006 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
Item 4. Controls and Procedures 48
PART II - OTHER INFORMATION
Item 1A Risk Factors 48
Item 4. Submission of Matters to a Vote of Security Holders 49
Item 6. Exhibits 50
SIGNATURE 50
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
-------------------------- --------------------------
April 29, April 30, April 29, April 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
NET SALES $ 1,117,001 $ 1,143,319 $ 568,202 $ 593,811
COST AND EXPENSES:
Cost of sales 1,034,583 1,059,840 521,501 544,373
Selling and administrative 48,934 47,172 25,052 22,712
Depreciation and amortization 19,111 16,947 9,510 9,085
----------- ----------- ----------- -----------
1,102,628 1,123,959 556,063 576,170
----------- ----------- ----------- -----------
OPERATING PROFIT 14,373 19,360 12,139 17,641
OTHER INCOME (EXPENSE):
Interest income 2,588 1,659 1,375 621
Other expense, net (3,167) (3,903) (1,635) (2,292)
Foreign exchange loss, net (453) (356) (366) (103)
Interest expense (1,489) (903) (861) (447)
----------- ----------- ----------- -----------
Income before minority interest and income taxes 11,852 15,857 10,652 15,420
Minority interest -- (1,021) -- --
----------- ----------- ----------- -----------
Income before income taxes 11,852 14,836 10,652 15,420
Income tax provision (4,732) (6,103) (4,259) (6,310)
----------- ----------- ----------- -----------
NET INCOME $ 7,120 $ 8,733 $ 6,393 $ 9,110
=========== =========== =========== ===========
Per Share Data
--------------
Net income per share - basic and diluted $ 0.31 $ 0.38 $ 0.28 $ 0.39
=========== =========== =========== ===========
Weighted average number of shares - basic 23,171 23,080 23,181 23,146
=========== =========== =========== ===========
Weighted average number of shares - diluted 23,221 23,214 23,232 23,274
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 29, October 29,
2007 2006
(Unaudited) (Audited)
----------- -----------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $ 45,958 $ 38,481
Restricted cash 32,307 30,713
Short-term investments 4,967 4,709
Trade accounts receivable less allowances of $6,398 (2007) and $7,491 (2006) 438,077 390,799
Inventories 34,766 28,735
Recoverable income taxes 4,463 --
Deferred income taxes 7,566 9,167
Prepaid expenses and other assets 38,043 37,280
----------- -----------
TOTAL CURRENT ASSETS 606,147 539,884
Property, plant and equipment-net 69,894 74,135
Deposits and other assets 1,742 2,247
Goodwill 50,354 50,896
Other intangible assets-net 30,154 31,959
----------- -----------
TOTAL ASSETS $ 758,291 $ 699,121
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 32,933 $ 4,639
Current portion of long-term debt 490 470
Accounts payable 209,000 190,431
Accrued wages and commissions 58,033 59,387
Accrued taxes other than income taxes 25,342 20,186
Accrued insurance and other accruals 31,240 29,241
Deferred income and other liabilities 46,310 37,519
Income tax payable -- 3,626
----------- -----------
TOTAL CURRENT LIABILITIES 403,348 345,499
Accrued insurance 1,408 4,760
Long-term debt 12,576 12,827
Deferred income taxes 7,371 10,787
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none -- --
Common stock, par value $.10; Authorized 120,000,000 shares (2007) and
30,000,000 shares (2006); issued --23,480,103 shares
(2007) and 23,456,974 shares (2006) 2,348 2,346
Paid-in capital 50,710 50,203
Retained earnings 287,524 280,404
Accumulated other comprehensive income 877 245
----------- -----------
341,459 333,198
Less treasury stock -297,000 shares (2007) and 300,000 shares (2006), at cost (7,871) (7,950)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 333,588 325,248
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 758,291 $ 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)
Six Months Ended
----------------------
April 29, April 30,
2007 2006
--------- ---------
(In thousands)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 7,120 $ 8,733
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 19,111 16,947
Accounts receivable provisions 1,343 2,061
Minority interest -- 1,021
Loss (gain) on disposition of fixed assets 27 (2)
Loss (gain) on foreign currency translation 23 (9)
Deferred income tax (benefit) provision (2,090) 1,484
Share-based compensation expense related to employee stock options 31 36
Excess tax (benefit) provision from share-based compensation (110) 232
Changes in operating assets and liabilities, net of assets acquired:
Trade accounts receivable 3,449 11,180
(Reduction in) increase in securitization of accounts receivable (50,000) 40,000
Inventories (6,031) (3,632)
Prepaid insurance and other assets (518) (4,109)
Deposits and other assets 516 331
Accounts payable 15,838 (1,250)
Accrued expenses 3,342 (1,128)
Deferred income and other liabilities 16,434 4,963
Income taxes (7,489) (4,152)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 996 72,706
--------- ---------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Six Months Ended
--------- ---------
April 29, April 30,
2007 2006
--------- ---------
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments $ 697 $ 690
Purchases of investments (812) (578)
(Increase) decrease in restricted cash (1,594) 5,653
Increase (decrease) in payables related to restricted cash 1,594 (5,653)
Acquisitions (225) (83,503)
Proceeds from disposals of property, plant and equipment, net 206 908
Purchases of property, plant and equipment (12,682) (13,629)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (12,816) (96,112)
--------- ---------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (230) (2,212)
Cash paid in lieu of fractional shares (18) --
Exercises of stock options 345 3,948
Excess tax benefit (provision) from share-based compensation 110 (232)
Purchase of treasury shares (7,950) --
Increase in notes payable to bank 28,137 4,896
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,394 6,400
--------- ---------
Effect of exchange rate changes on cash (1,097) (197)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,477 (17,203)
Cash and cash equivalents, beginning of period 38,481 61,988
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 45,958 $ 44,785
========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $ 1,305 $ 866
Income taxes $ 14,978 $ 8,238
See accompanying notes to condensed consolidated financial statements (unaudited).
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at April 29, 2007 and consolidated
results of operations for the six and three months ended April 29, 2007 and
April 30, 2006 and consolidated cash flows for the six months ended April 29,
2007 and April 30, 2006.
These statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended October 29, 2006. The accounting policies used in preparing
these financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
Certain amounts in the second 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 April 29, 2007, TRFCO had purchased from Volt
Funding a participation interest of $60.0 million out of a pool of approximately
$265.0 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 $2.2 million and $0.9 million in the six and three
months ended April 29, 2007, respectively, compared to $3.4 million and $2.1
million in the six and three months ended April 30, 2006, respectively, which
are included in Other Expense on the condensed consolidated statement of
operations. The equivalent cost of funds in the Securitization Program was 6.0%
per annum and 5.5% per annum in the six-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 April 29, 2007 and October 29, 2006, the Company's carrying retained interest
in a revolving pool of receivables was approximately $204.4 million and $164.2
million, respectively, net of a service fee liability, out of a total pool of
approximately $265.0 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 April 29, 2007 and October 29, 2006, respectively. Accordingly, the
trade accounts receivable included on the April 29, 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 April 29, 2007, the Company was in compliance
with all requirements of the Securitization Program.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves by segment are as follows:
April 29, October 29,
2007 2006
----------- -----------
(In thousands)
Telephone Directory $ 9,897 $ 11,527
Telecommunications Services 19,526 12,606
Computer Systems 5,343 4,602
----------- -----------
Total $ 34,766 $ 28,735
=========== ===========
The cumulative amounts billed under service contracts at April 29, 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 April 29, 2007
and October 29, 2006 of $2.9 million and $4.5 million, respectively, are
credited against the related costs in inventory.
NOTE D--Short-Term Borrowings
At April 29, 2007, the Company had credit lines with domestic and foreign banks
which provided for borrowings and letters of credit of up to an aggregate of
$119.0 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 $32.9 million. Included in these borrowings
were $11.4 million of foreign currency borrowings which provide a hedge against
foreign denominated net assets.
Credit Agreement
----------------
The Credit Agreement, which expires in April 2008, established a secured credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit.
Borrowings by subsidiaries are limited to $25.0 million in the aggregate. At
April 29, 2007, the Company borrowed $2.0 million 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 April 29, 2007, if a three-month U.S. Dollar LIBO rate were the interest rate
option selected by the Company, borrowings would have borne interest at the rate
of 6.2% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
50% of consolidated net income, as defined, for the prior fiscal year; and a
requirement that the Company maintain a ratio of EBIT, as defined, to interest
expense, as defined, of 1.25 to 1.0 for the twelve months ended as of the last
day of each fiscal quarter. The Credit Agreement also imposes limitations on,
among other things, the incurrence of additional indebtedness, the incurrence of
additional liens, sales of assets, the level of annual capital expenditures, and
the amount of investments, including business acquisitions and investments in
joint ventures, and loans that may be made by the Company and its subsidiaries.
At April 29, 2007, the Company was in compliance with all covenants in the
Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At April 29, 2007, four of those guarantors have pledged approximately
$41.5 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 April 29, 2007, $27.1 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 April
29, 2007, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
6.2% per annum. Volt Delta also pays a commitment fee of 0.2% on the unused
portion of the Delta Credit Facility.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.0 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At April 29, 2007, Volt Delta was in compliance with all covenants in the Delta
Credit Facility.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Long-Term Debt and Financing Arrangements
In September 2001, a subsidiary of the Company entered into a $15.1 million loan
agreement with General Electric Capital Business Asset Funding Corporation.
Principal payments have reduced the loan to $13.1 million, of which $0.5 million
is current, at April 29, 2007. The 20-year loan, which bears interest at 8.2%
per annum and requires principal and interest payments of $0.4 million per
quarter, is secured by a deed of trust on certain land and buildings that had a
carrying amount at April 29, 2007 of $9.6 million. The obligation is guaranteed
by the Company.
NOTE F--Stockholders' Equity
On December 19, 2006, the Company's Board of Directors authorized and approved a
three-for-two stock split in the form of a dividend on the Company's common
stock, 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 six months ended
April 29, 2007 are as follows:
Common Paid-In Treasury Retained
Stock Capital Stock Earnings
-------- -------- -------- --------
Balance at October 29, 2006 $ 1,564 $ 50,985 ($ 7,950) $280,404
Stock options exercised--23,625 shares 2 602 --
Three-for-two stock split 782 (800)
Issuance of restricted stock (79) 79
Amortization of restricted stock 2
Net income for the six months -- -- -- 7,120
-------- -------- -------- --------
Balance at April 29, 2007 $ 2,348 $ 50,710 ($ 7,871) $287,524
======== ======== ======== ========
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation
adjustments, net of taxes, a gain of $0.8 million and a gain of $192,000 at
April 29, 2007 and October 29, 2006, respectively, and an unrealized gain, net
of taxes, of $59,000 and $53,000 in marketable securities at April 29, 2007 and
October 29, 2006, respectively. Changes in these items, net of income taxes, are
included in the calculation of comprehensive income as follows:
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Stockholders' Equity--Continued
Six Months Ended Three Months Ended
--------------------- ----------------------
April 29, April 30, April 29, April 30,
2007 2006 2007 2006
--------- --------- --------- ---------
(In thousands)
Net income $ 7,120 $ 8,733 $ 6,393 $ 9,110
Foreign currency translation adjustments, net 626 684 860 297
Unrealized gain (loss) on marketable securities, net 6 21 (17) 7
--------- --------- --------- ---------
Comprehensive income $ 7,752 $ 9,438 $ 7,236 $ 9,414
========= ========= ========= =========
NOTE G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Six Months Ended Three Months Ended
----------------------- -----------------------
April 29, April 30, April 29, April 30,
2007 2006 2007 2006
---------- ---------- ---------- ----------
Denominator for basic earnings per share:
Weighted average number of shares 23,170,959 23,080,393 23,180,894 23,146,228
Effect of dilutive securities:
Employee stock options 50,422 133,135 50,921 128,086
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 23,221,381 23,213,528 23,231,815 23,274,314
========== ========== ========== ==========
Options to purchase 3,000 and 66,300 shares of the Company's common stock were
outstanding at April 29, 2007 and April 30, 2006, respectively, but were not
included in the computation of diluted earnings per share because the effect of
inclusion would have been antidilutive.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the six and three months ended April
29, 2007 and April 30, 2006:
Six Months Ended Three Months Ended
-------------------------- --------------------------
April 29, April 30, April 29, April 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
(In thousands)
Net Sales:
----------
Staffing Services
Staffing $ 924,005 $ 930,184 $ 468,910 $ 484,557
Managed Services 628,825 524,867 334,326 273,791
----------- ----------- ----------- -----------
Total Gross Sales 1,552,830 1,455,051 803,236 758,348
Less: Non-Recourse Managed Services (602,532) (495,103) (319,887) (256,042)
----------- ----------- ----------- -----------
Net Staffing Services 950,298 959,948 483,349 502,306
Telephone Directory 34,725 33,011 17,082 17,226
Telecommunications Services 48,550 67,409 27,169 27,295
Computer Systems 91,718 93,411 45,186 52,137
Elimination of intersegment sales (8,290) (10,460) (4,584) (5,153)
----------- ----------- ----------- -----------
Total Net Sales $ 1,117,001 $ 1,143,319 $ 568,202 $ 593,811
=========== =========== =========== ===========
Segment Operating Profit (Loss):
--------------------------------
Staffing Services $ 19,215 $ 19,325 $ 13,867 $ 14,496
Telephone Directory 4,919 6,278 2,767 4,017
Telecommunications Services (294) 728 383 (40)
Computer Systems 10,707 15,586 5,013 9,837
----------- ----------- ----------- -----------
Total Segment Operating Profit 34,547 41,917 22,030 28,310
General corporate expenses (20,174) (22,557) (9,891) (10,669)
----------- ----------- ----------- -----------
Total Operating Profit 14,373 19,360 12,139 17,641
Interest income and other (expense), net (579) (2,244) (260) (1,671)
Foreign exchange loss, net (453) (356) (366) (103)
Interest expense (1,489) (903) (861) (447)
----------- ----------- ----------- -----------
Income Before Minority Interest and Income Taxes $ 11,852 $ 15,857 $ 10,652 $ 15,420
=========== =========== =========== ===========
During the six months ended April 29, 2007, consolidated assets increased by
$59.2 million primarily due to a $50.0 million decrease in the use of the
Company's Securitization Program and an increase in cash, cash equivalents and
restricted cash of $9.1 million.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE I--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge.
Generally, changes in fair values of derivatives accounted for as fair value
hedges are recorded in income along with the portions of the changes in the fair
values of the hedged items that relate to the hedged risks. Changes in fair
values of derivatives accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in other comprehensive income, net of deferred
taxes. Changes in fair values of derivatives not qualifying as hedges are
reported in the results of operations. At April 29, 2007, the Company had no
outstanding foreign currency option contracts.
Restricted cash at April 29, 2007 and October 29, 2006 was approximately $32.3
million and $30.7 million, respectively, restricted to cover obligations that
were reflected in accounts payable at such dates. These amounts primarily relate
to contracts with customers in which the Company manages the customers'
alternative staffing requirements, including the payment of associate vendors.
NOTE J--Acquisition of Businesses
On December 29, 2005, Volt Delta purchased from Nortel Networks its 24% minority
interest in Volt Delta. Under the terms of the agreement, Volt Delta was
required to pay Nortel Networks approximately $56.4 million for its minority
interest in Volt Delta, and an excess cash distribution of approximately $5.4
million. Under the terms of the agreement, Volt Delta paid $25.0 million on
December 29, 2005 and paid the remaining $36.8 million on February 15, 2006. The
transaction resulted in an increase in goodwill and intangible assets of
approximately $6.8 million and $5.7 million, respectively.
On December 30, 2005, Volt Delta acquired varetis AG's Varetis Solutions
subsidiary for $24.8 million. The acquisition of Varetis Solutions provided Volt
Delta with the resources to focus on the evolving global market for directory
information systems and services. Varetis Solutions added technology in the area
of wireless and wireline database management, directory assistance/enquiry
automation, and wireless handset information delivery to Volt Delta's
significant technology portfolio.
The Company has valued both transactions to determine the final allocation of
the purchase price to various types of potential intangible assets. The types of
intangible assets which exist as of consummation of the transactions are: the
existing technology of the businesses, the value of their customer
relationships, the value of trade names, the value of contract backlogs, the
value of non-compete agreements and the value of their reseller network. The
value of each of the intangible assets identified was determined with the use of
a discounted cash flow methodology. This methodology involved discounting
forecasted revenues and earnings attributable to each of the intangible assets.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses--Continued
The assets and liabilities of Varetis Solutions were accounted for using the
purchase method of accounting at the date of acquisition at their fair values.
The results of operations of Varetis Solutions have been included in the
condensed consolidated statements of operations since the acquisition date.
The purchase price allocation of the fair value of assets acquired and
liabilities assumed of Varetis Solutions is as follows:
(In thousands)
Cash $3,310
Accounts receivable 8,878
Inventories 7
Prepaid expenses and other assets 324
Property, plant and equipment 1,318
Goodwill 10,896
Intangible assets 15,300
------
Total Assets 40,033
------
Accrued wages and commissions (1,012)
Other accrued expenses (3,325)
Other liabilities (1,741)
Income taxes payable (1,266)
Deferred income tax (7,876)
--------
Total Liabilities (15,220)
--------
Purchase price $24,813
========
The following unaudited pro forma information reflects the purchase from Nortel
Networks of its 24% minority interest in Volt Delta and combines the
consolidated results of operations of the Company with those of the Varetis
Solutions business as if the transactions had occurred in November 2005. This
pro forma financial information is presented for comparative purposes only and
is not necessarily indicative of the operating results that actually would have
occurred had the acquisitions been consummated at the beginning of fiscal 2006.
In addition, these results are not intended to be a projection of future
results.
Pro Forma Results
-----------------
Six Months Ended
----------------
April 30,
2006
---------
(In thousands, except per share amounts)
Net sales $1,147,257
==========
Operating profit $19,870
=======
Net income $9,632
======
Earnings per share
Basic $0.63
=====
Diluted $0.62
=====
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE K--Goodwill and Intangibles
Goodwill and intangibles with indefinite lives are subject to annual impairment
testing using fair value methodology. An impairment charge is recognized for the
amount, if any, by which the carrying value of an indefinite-life intangible
asset exceeds its fair value. The test for goodwill, which is performed in the
Company's second fiscal quarter each year, primarily uses comparable multiples
of sales and EBITDA and other valuation methods to assist the Company in the
determination of the fair value of the goodwill and the reporting units
measured. The fiscal 2007 second quarter testing did not result in any
impairment.
The following table represents the balance of intangible assets:
April 29, 2007 October 29, 2006
------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- -------------- -------------- --------------
(In thousands)
Customer relationships $ 18,038 $ 3,771 $ 17,645 $ 2,890
Existing technology 13,164 2,278 13,164 1,466
Contract backlog 3,200 1,067 3,200 667
Trade name (a) 2,016 -- 2,016 --
Reseller network 816 136 816 85
Non-compete agreements and trademarks 325 153 325 99
-------------- -------------- -------------- --------------
Total $ 37,559 $ 7,405 $ 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.
NOTE L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At April 29, 2007, the Company's net prepaid for the outstanding
plan years was $19.2 million compared to $18.9 million at October 29, 2006.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Incentive Stock Plans
The Non-Qualified Option Plan ("1995 Plan") adopted by the Company in fiscal
1995 terminated on May 16, 2005 except for options previously granted under the
plan. Unexercised options expire ten years after grant. Outstanding options at
April 29, 2007 were granted at 100% of the market price on the date of grant and
become fully vested within one to five years after the grant date.
Under the 1995 Plan, compensation expense of $29,000 and $36,000 for the six
months ended April 29, 2007 and April 30, 2006, respectively, is recognized in
the selling and administrative expenses in the Company's condensed consolidated
statement of operations on a straight-line basis over the vesting periods. As of
April 29, 2007, there was $54,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements to be recognized
over a weighted average period of 0.9 years.
The intrinsic values of options exercised during the periods ended April 29,
2007 and April 30, 2006 were $0.6 million and $1.7 million, respectively. The
total cash received from the exercise of stock options was $0.3 million and $3.3
million in the six month periods ended April 29, 2007 and April 30, 2006,
respectively, and is classified as financing cash flows in the condensed
consolidated statement of cash flows. The actual tax benefit realized on the
exercise of options was $0.2 million and $0.7 million for the six-month period
ended April 29, 2007 and April 30, 2006, respectively.
There were no options granted under the 1995 Plan during the six months ended
April 29, 2007 or April 30, 2006.
In April 2007, the shareholders of the Company approved the Volt Information
Sciences, Inc. 2006 Incentive Stock Plan ("2006 Plan"). The 2006 Plan permits
the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock and Restricted Stock Units to employees and non-employee directors of the
Company through September 6, 2016. The maximum aggregate number of shares that
may be issued pursuant to awards made under the 2006 Plan shall not exceed one
million five hundred thousand (1,500,000) shares.
There were 3,000 shares of restricted stock granted under the 2006 Plan (500
shares of restricted stock to each non-employee member of the Board of
Directors) on April 5, 2007. Compensation expense of $2,000 is recognized in the
selling and administrative expenses in the Company's condensed consolidated
statement of operations for the six month period ended April 29, 2007 on a
straight-line basis over the vesting period. As of April 29, 2007, there was
$79,000 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements to be recognized over a weighted average
period of three years.
17
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.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments. We generally recognize revenue when
persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed and determinable and collectibility is
probable. The determination of whether and when some of the criteria below have
been satisfied sometimes involves assumptions and judgments that can have a
significant impact on the timing and amount of revenue we report.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its customers,
and has credit risk for collecting its billings after it has paid its
employees. The Company reflects revenues for these services on a gross basis
in the period the services are rendered. In the first six 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 six months of fiscal 2007,
this revenue comprised approximately 2% of the Company's net sales.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with the AICPA Statement of Position ("SOP")
81-1, "Accounting for Performance of Construction-Type Contracts" The
Company's employees perform the services and the Company has credit risk for
collecting its billings. Revenue for these services is recognized on a gross
basis in the period the services are rendered when on a time and material
basis; and when the Company is responsible for project completion, revenue
is recognized when the project is complete and the customer has approved the
work. In the first six months of fiscal 2007, this revenue comprised
approximately 6% of the Company's net sales.
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and delivered. In the first six months of fiscal 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 six months of fiscal 2007, this revenue comprised approximately 1%
of net consolidated sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in SOP
No. 81-1, using the completed-contract method, to recognize revenue on a
gross basis upon customer acceptance of the project. In the first six 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 six 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 six months of fiscal
2007, this revenue comprised approximately 5% of net consolidated sales.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems, on a time and material basis or a contract basis. The
Company uses its own employees and inventory in the performance of the
services, and has credit risk for collecting its billings. Revenue for
these services is recognized on a gross basis in the period in which the
services are performed, contingent upon customer acceptance when on a time
and material basis, or over the life of the contract, as applicable. In the
first six months of fiscal 2007, this revenue comprised approximately 2% of
net consolidated sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in SOP 97-2, "Software Revenue Recognition" and EITF 00-21,
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value or by the use of the percentage of completion method when
applicable. In the first six 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 also makes judgments about the creditworthiness
of significant customers based upon ongoing credit evaluations, and might assess
current economic trends that might impact the level of credit losses in the
future. However, since a reliable prediction of future changes in the financial
stability of customers is not possible, the Company cannot guarantee that
allowances will continue to be adequate. If actual credit losses are
significantly higher or lower than the allowance established, it would require a
related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill and indefinite-lived intangible
assets are subject to annual impairment testing using fair value methodologies.
The Company performs its annual impairment testing during its second fiscal
quarter, or more frequently if indicators of impairment arise. The timing of the
impairment test may result in charges to earnings in the second fiscal quarter
that could not have been reasonably foreseen in prior periods. The testing
process includes the comparison of the Company's business units' multiples of
sales and EBITDA to those multiples of its business units' competitors. Although
it is believed the assumptions and estimates made in the past have been
reasonable and appropriate, different assumptions and estimates could materially
impact financial results.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount exceeds the estimated fair value of the asset or asset
group. The impairment loss is measured as the amount by which the carrying
amount exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with SOP No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Subsequent
to the preliminary project planning and approval stage, all appropriate costs
are capitalized until the point at which the software is ready for its intended
use. Subsequent to the software being used in operations, the capitalized costs
are transferred from costs-in-process to completed property, plant and
equipment, and are accounted for as such. All post-implementation costs, such as
maintenance, training and minor upgrades that do not result in additional
functionality, are expensed as incurred. The capitalization process involves
judgment as to what types of projects and tasks are capitalizable. Although the
Company believes the accounting decisions made in the past concerning the
accounting treatment of these software costs have been reasonable and
appropriate, different decisions could materially impact financial results.
Income Taxes - Estimates of Effective Tax Rates, Deferred Taxes and Valuation
Allowance - When the financial statements are prepared, the Company estimates
its income taxes based on the various jurisdictions in which business is
conducted. Significant judgment is required in determining the Company's
worldwide income tax provision. Liabilities for anticipated tax audit issues in
the United States and other tax jurisdictions are based on estimates of whether,
and the extent to which, additional taxes will be due. The recognition of these
provisions for income taxes is recognized in the period in which it is
determined that such taxes are due. If in a later period it is determined that
payment of this additional amount is unnecessary, a reversal of the liability is
recognized. As a result, the ongoing assessments of the probable outcomes of the
audit issues and related tax positions require judgment and can materially
increase or decrease the effective tax rate and materially affect the Company's
operating results. This also requires the Company to estimate its current tax
exposure and to assess temporary differences that result from differing
treatments of certain items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are reflected on the
balance sheet. The Company must then assess the likelihood that its deferred tax
assets will be realized. To the extent it is believed that realization is not
likely, a valuation allowance is established. When a valuation allowance is
established or increased, a corresponding tax expense is recorded in the
statement of operations.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
The net deferred tax asset at April 29, 2007 was $0.2 million, net of the
valuation allowance of $6.2 million. The valuation allowance was recorded to
reflect uncertainties about whether the Company will be able to utilize some of
its deferred tax assets (consisting primarily of foreign net operating loss
carryforwards) before they expire. The valuation allowance is based on estimates
of taxable income for the applicable jurisdictions and the period over which the
deferred tax assets will be realizable.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 156, "Accounting for Transfers and
Servicing of Financial Assets an amendment of SFAS No. 140." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $60.0 million and
$110.0 million at April 29, 2007 and October 29, 2006, respectively.
Accordingly, the trade receivables included on the April 29, 2007 and October
29, 2006 balance sheets have been reduced to reflect the participation interest
sold. TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding Corp., a wholly-owned special purpose
subsidiary of the Company) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds, and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For each policy year, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of services in the period in which such
determination is made.
23
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.
Legal Contingencies - The Company is subject to certain legal proceedings, as
well as demands, claims and threatened litigation that arise in the normal
course of our business. A quarterly review is performed of each significant
matter to assess any potential financial exposure. If the potential loss from
any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, a liability and an expense are recorded for the estimated
loss. Significant judgment is required in both the determination of probability
and the determination of whether an exposure is reasonably estimable. Any
accruals are based on the best information available at the time. As additional
information becomes available, a reassessment is performed of the potential
liability related to any pending claims and litigation and may revise the
Company's estimates. Potential legal liabilities and the revision of estimates
of potential legal liabilities could have a material impact on the results of
operations and financial position.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Six Months Ended Three Months Ended
-------------------------- --------------------------
April 29, April 30, April 29, April 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
(In thousands)
Net Sales:
----------
Staffing Services
Staffing $ 924,005 $ 930,184 $ 468,910 $ 484,557
Managed Services 628,825 524,867 334,326 273,791
----------- ----------- ----------- -----------
Total Gross Sales 1,552,830 1,455,051 803,236 758,348
Less: Non-Recourse Managed Services (602,532) (495,103) (319,887) (256,042)
----------- ----------- ----------- -----------
Net Staffing Services 950,298 959,948 483,349 502,306
Telephone Directory 34,725 33,011 17,082 17,226
Telecommunications Services 48,550 67,409 27,169 27,295
Computer Systems 91,718 93,411 45,186 52,137
Elimination of intersegment sales (8,290) (10,460) (4,584) (5,153)
----------- ----------- ----------- -----------
Total Net Sales $ 1,117,001 $ 1,143,319 $ 568,202 $ 593,811
=========== =========== =========== ===========
Segment Operating Profit (Loss):
--------------------------------
Staffing Services $ 19,215 $ 19,325 $ 13,867 $ 14,496
Telephone Directory 4,919 6,278 2,767 4,017
Telecommunications Services (294) 728 383 (40)
Computer Systems 10,707 15,586 5,013 9,837
----------- ----------- ----------- -----------
Total Segment Operating Profit 34,547 41,917 22,030 28,310
General corporate expenses (20,174) (22,557) (9,891) (10,669)
----------- ----------- ----------- -----------
Total Operating Profit 14,373 19,360 12,139 17,641
Interest income and other (expense), net (579) (2,244) (260) (1,671)
Foreign exchange loss, net (453) (356) (366) (103)
Interest expense (1,489) (903) (861) (447)
----------- ----------- ----------- -----------
Income Before Minority Interest and Income Taxes $ 11,852 $ 15,857 $ 10,652 $ 15,420
=========== =========== =========== ===========
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
EXECUTIVE OVERVIEW
------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 domestic and foreign
branch offices.
o Staffing Solutions provides a full spectrum of managed staffing,
temporary/contract personnel employment, direct hire placement
and workforce solutions. This functional area is comprised of the
Technical Placement division and the Administrative and
Industrial division.
o E-Procurement Solutions provides global vendor neutral human
capital acquisition and management solutions by combining
web-based tools and business process outsourcing services. This
functional area, which is part of the Technical Placement
division, is comprised of the ProcureStaff operation.
o Information Technology Solutions provides a wide range of
services including consulting, outsourcing and turnkey project
management in the product development lifecycle, IT and customer
contact markets. This functional area, which is part of the
Technical Placement division, is comprised of the VMC Consulting
operation.
Telephone Directory: This segment publishes independent telephone
directories and provides telephone directory production services,
database management and printing. This segment is comprised of the
DataNational directory publishing operation, the Uruguay directory
publishing and printing operations, and other domestic directory
production locations.
Telecommunications Services: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services
in the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities. This
segment is comprised of the Construction and Engineering division and the
Network Enterprise Solutions division.
Computer Systems: This segment provides directory and operator systems
and services primarily for the telecommunications industry and provides
IT maintenance services. This segment is comprised of Volt Delta
Resources, Volt Delta International, DataServ and the Maintech computer
maintenance division.
The Company's operating segments have been determined in accordance with the
Company's internal management structure, which is based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment operating profit. The Company defines
operating profit as pre-tax income, before general corporate expenses, interest
income and expense, and other non-operating income and expense items. Operating
profit provides management, investors and equity analysts a measure to analyze
operating performance of each business segment against historical and
competitors' data, although historical results, including operating profit, may
not be indicative of future results (as operating profit is highly contingent on
many factors, including the state of the economy and customer preferences).
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
EXECUTIVE OVERVIEW--Continued
-----------------------------
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 six and three
months of fiscal 2007. In the current six and three month periods, the sales and
operating profits of the Staffing Services segment, in addition to the factors
noted above, were negatively impacted by a decrease in the use of contingent
staffing in the Administrative and Industrial division. Operating profits of the
segment for the six and three months were lower than in the comparable periods
of fiscal 2006 due to the sales decrease and an increase in overhead costs in
absolute dollars and as a percentage of sales, partially offset by an
improvement in gross margin percentages due to lower workers' compensation and
payroll tax costs. The workers' compensation cost run rate per quarter for the
current six and three-month periods is lower than the comparable periods by
approximately $1.6 million due to the segment working closely with customers to
better manage workers' compensation costs and the improved regulatory
environment within several states. The Company anticipates this reduced level of
workers' compensation costs will continue for the remainder of fiscal 2007.
The Telephone Directory segment's sales increased in the six months of fiscal
2007 as compared to the comparable fiscal 2006 period, but operating profits
decreased, and in the current fiscal quarter, sales decreased slightly and
operating profits also decreased from the comparable 2006 fiscal period. The
decreased operating profit in the six and three-month periods was primarily due
to a decrease in gross margin percentage attributable to the mix of telephone
directories delivered.
In the Telecommunications Services segment, sales have decreased in the six and
three months of fiscal 2007 from the comparable fiscal 2006 periods, with
operating results improving in the current quarter from the comparable 2006
quarter, although losses for the six months are higher than the comparable
period. The gross margin percentages have improved in the six and three-month
periods, however, overhead costs have increased as a percentage of sales.
The Computer Systems segment's sales and operating profits decreased in the six
and three months of fiscal 2007 from the comparable 2006 fiscal periods. Gross
margin percentages have decreased slightly and overhead costs have increased in
absolute dollars and as a percentage of sales.
The Company has focused, and will continue to focus, on aggressively increasing
its market share while attempting to maintain margins in order to increase
profits. Despite an increase in costs to solidify and expand their presence in
their respective markets, the segments have emphasized cost containment
measures, along with improved credit and collections procedures designed to
improve the Company's cash flow.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
EXECUTIVE OVERVIEW--Continued
-----------------------------
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 six months of fiscal 2007, consolidated net sales decreased by
$26.3 million, or 2%, remaining at $1.1 billion, from the comparable period in
fiscal 2006. The decrease was primarily attributable to the Telecommunications
Services segment, $18.9 million, the Staffing Services segment, $9.7 million,
the Computer Systems segment, $1.7 million, partially offset by an increase in
the Telephone Directory segment, $1.7 million.
Net income for the first six months of fiscal 2007 was $7.1 million compared to
net income of $8.7 million in the comparable 2006 period. The Company reported a
pre-tax profit before minority interest for the six months of fiscal 2007 of
$11.9 million, compared to $15.9 million in the prior year period.
The Company's operating segments reported an operating profit of $34.5 million
in the first six months of fiscal 2007, a decrease of $7.4 million, or 18%, from
the comparable 2006 period. The decrease was attributable to the Computer
Systems segment, $4.9 million, the Telephone Directory segment, $1.4 million,
the Telecommunications Services segment, $1.0 million, and the Staffing Services
segment, $0.1 million.
General corporate expenses decreased by $2.4 million, or 11%, primarily due to a
one-time accrual of $1.2 million in the second quarter of fiscal 2006 for death
benefits related to two senior corporate executives together with a reduction in
professional fees.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Six Months Ended
----------------
April 29, 2007 April 30, 2006
-------------- --------------
Staffing Services % of % of Favorable Favorable
------------------ Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $924.0 $930.2 ($6.2) (0.7%)
--------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $628.8 $524.9 $103.9 19.8%
--------------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $950.3 $959.9 ($9.6) (1.0%)
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit $154.6 16.3% $144.9 15.1% $9.7 6.7%
--------------------------------------------------------------------------------------------------------------------------------
Overhead $135.4 14.2% $125.6 13.1% ($9.8) (7.8%)
--------------------------------------------------------------------------------------------------------------------------------
Operating Profit $19.2 2.1% $19.3 2.0% ($0.1) (0.5%)
--------------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The decrease in net sales of the Staffing Services segment in the first six
months of fiscal 2007 from the comparable fiscal 2006 period was due to
decreased staffing business in the Administrative and Industrial division,
partially offset by sales increases within the Technical Placement division. The
decrease in operating profit was due to the overall decrease in net sales, and
the increase in overhead costs in absolute dollars and as a percentage of sales,
partially offset by the increased gross margin percentage. The increased gross
margin percentage was due to a 0.5 percentage point reduction in workers'
compensation costs as a percentage of direct labor resulting from improvements
in claims experience and the regulatory environment in several states, a 0.5
percentage point reduction in payroll taxes as a percentage of direct labor,
together with an increase in higher margin permanent placement revenue. The
increase in overhead percentage was due to the sales decrease without a
corresponding reduction in overhead costs. The segment is focused on reducing
overhead costs to compensate for lower sales.
Six Months Ended
----------------
April 29, 2007 April 30, 2006
Technical Placement -------------- --------------
Division % of % of Favorable Favorable
-------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $1,228.1 $1,099.1 $129.0 11.7%
--------------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $639.7 $617.1 $22.6 3.7%
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit $105.4 16.5% $97.0 15.7% $8.4 8.7%
--------------------------------------------------------------------------------------------------------------------------------
Overhead $84.8 13.3% $78.3 12.7% ($6.5) (8.3%)
--------------------------------------------------------------------------------------------------------------------------------
Operating Profit $20.6 3.2% $18.7 3.0% $1.9 10.4%
--------------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
STAFFING SERVICES--Continued
----------------------------
The Technical Placement division's increase in net sales in the first six months
of fiscal 2007 from the comparable fiscal 2006 period was due to a $19.3
million, or 4%, increase in traditional alternative staffing, a $6.9 million, or
12%, increase in higher margin VMC Consulting project management and consulting
sales, partially offset by a decrease of $3.6 million, or 13%, in net managed
service associate vendor sales. The net sales increase was from net new accounts
and from the net growth within existing accounts. The increase in the operating
profit was the result of the increase in net sales and gross margin percentage,
partially offset by the increase in overhead in absolute dollars and as a
percentage of net sales. The increase in gross margin percentage was due to the
increase in the higher margin VMC Consulting sales, a 0.4 percentage reduction
in payroll taxes as a percentage of direct labor, together with an increase in
higher margin permanent placement revenue. The increase in overhead percentage
for the six months was a result of sales growth that was less than expected.
Six Months Ended
----------------
April 29, 2007 April 30, 2006
Administrative & -------------- --------------
Industrial Division % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $324.7 $356.0 ($31.3) (8.8%)
--------------------------------------------------------------------------------------------------------------------------
Sales (Net)* $310.6 $342.8 ($32.2) (9.4%)
--------------------------------------------------------------------------------------------------------------------------
Gross Profit $49.2 15.8% $47.9 14.0% $1.3 2.6%
--------------------------------------------------------------------------------------------------------------------------
Overhead $50.6 16.3% $47.3 13.8% ($3.3) (7.0%)
--------------------------------------------------------------------------------------------------------------------------
Operating (Loss) Profit ($1.4) (0.5%) $0.6 0.2% ($2.0) (315.8%)
--------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The Administrative and Industrial division's decrease in gross sales of $31.3
million in the first six months of fiscal 2007 from the comparable fiscal 2006
period included a decline of approximately $28 million of sales to customers
which the Company either ceased or substantially reduced servicing due to low
mark-ups or high workers' compensation risks, as well as $14 million
attributable to decreases in sales to continuing customers. This was partially
offset by growth from new or substantially new accounts of approximately $11
million in the current period. The decrease in operating results was the result
of the decrease in net sales, the increase in overhead in absolute dollars and
as a percentage of sales, partially offset by the increased gross margin
percentage. The increase in gross margin percentage was primarily due to a 1.2
percentage point reduction in workers' compensation costs as a percentage of
direct labor resulting from improvements in claims experience and the regulatory
environment in several states, a 0.4 percentage point reduction in payroll taxes
as a percentage of direct labor, together with an increase in higher margin
permanent placement revenue. The increase in overhead percentage for the current
six months was due to the sales decrease without a corresponding reduction in
overhead costs and increases in overhead costs related to high-margin permanent
placement revenue. The division is focused on reducing overhead costs to
compensate for lower sales.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
STAFFING SERVICES--Continued
----------------------------
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could, in the future, affect the profitability of the segment. In addition,
the segment's business is obtained through submission of competitive proposals
for production and other contracts. These short and long-term contracts are
re-bid after expiration. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract and generally do not provide
for a minimum amount of work to be awarded to the segment. While the Company has
historically secured new contracts and believes it can secure renewals and/or
extensions of most of these contracts, some of which are material to this
segment, and obtain new business, there can be no assurance that contracts will
be renewed or extended, or that additional or replacement contracts will be
awarded to the Company on satisfactory terms.
TELEPHONE DIRECTORY
-------------------
Six Months Ended
----------------
April 29, 2007 April 30, 2006
-------------- --------------
Telephone Directory % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $34.7 $33.0 $1.7 5.2%
----------------------------------------------------------------------------------------------------------------------------
Gross Profit $17.0 48.9% $17.6 53.3% ($0.6) (3.6%)
----------------------------------------------------------------------------------------------------------------------------
Overhead $12.1 34.7% $11.3 34.3% ($0.8) (6.3%)
----------------------------------------------------------------------------------------------------------------------------
Operating Profit $4.9 14.2% $6.3 19.0% ($1.4) (21.6%)
----------------------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's sales increase for the first
six months of fiscal 2007 from the comparable 2006 period were increases of $3.6
million, or 88%, in printing and telephone directory publishing sales in
Uruguay, partially offset by decreases of $1.3 million, or 13%, in telephone
production operation and other sales and $0.6 million, or 3%, in the
DataNational community telephone directory publishing sales. The sales increase
in Uruguay was comprised of $2.1 million in the printing sales and $1.5 million
in publishing sales. The sales decrease in the DataNational directories are a
reflection of the timing of the delivery of their directories. The printing
sales increase in Uruguay is due to increased business in the current year, and
the publishing sales increase is due to the timing of the delivery of its
directories. The segment's decreased operating profit was primarily due to the
mix of telephone directories delivered in the current six-month period in
DataNational and Uruguay, as compared to the prior year's comparable period and
the slight increase in overhead in absolute dollars and as a percentage of
sales, partially offset by the sales increase.
Other than the DataNational division and the telephone directory publishing
operation in Uruguay, which accounted for 64% of the segment's sales in the
six-month period of fiscal 2007, the segment's business is obtained through
submission of competitive proposals for production and other contracts. These
short and long-
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
TELEPHONE DIRECTORY--Continued
------------------------------
term contracts are re-bid after expiration. Many of this segment's long-term
contracts contain cancellation provisions under which the customer can cancel
the contract, even if the segment is not in default under the contract and
generally do not provide for a minimum amount of work to be awarded to the
segment. While the Company has historically secured new contracts and believes
it can secure renewals and/or extensions of most of these contracts, some of
which are material to this segment, and obtain new business, there can be no
assurance that contracts will be renewed or extended, or that additional or
replacement contracts will be awarded to the Company on satisfactory terms. In
addition, this segment's sales and profitability are highly dependent on
advertising revenue for DataNational's directories, which could be affected by
general economic conditions.
TELECOMMUNICATIONS SERVICES
---------------------------
Six Months Ended
----------------
April 29, 2007 April 30, 2006
-------------- --------------
Telecommunications Services % of % of Favorable Favorable
--------------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $48.6 $67.4 ($18.8) (28.0%)
-----------------------------------------------------------------------------------------------------------------------------
Gross Profit $11.1 22.8% $14.6 21.7% ($3.5) (24.2%)
-----------------------------------------------------------------------------------------------------------------------------
Overhead $11.4 23.4% $13.9 20.6% $2.5 18.1%
-----------------------------------------------------------------------------------------------------------------------------
Operating (Loss) Profit ($0.3) (0.6%) $0.7 1.1% ($1.0) (140.4%)
-----------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the first six months
of fiscal 2007 from the comparable 2006 period was due to decreases of $14.9
million, or 35%, in the Construction and Engineering division, and $3.9 million,
or 16%, in the Network Enterprise Solutions division. The sales decrease in the
Construction and Engineering division in the current six-month period 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 decreased operating results were
due to the sales decrease, the increase in overhead costs as a percentage of
sales, partially offset by the improvement in gross margin percentage due to a
change in the mix of jobs completed during the current period as compared to the
comparable fiscal 2006 period. The segment continues to monitor its overhead
costs. In the current six-month fiscal period, indirect labor and fringes
decreased by 9% as compared to the comparable 2006 fiscal period. 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 are completed
within one to three years. Many of this segment's master contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract, and generally do not
provide for a minimum amount of work to be awarded
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
TELECOMMUNICATIONS SERVICES--Continued
--------------------------------------
to the segment. While the Company believes it can secure renewals and/or
extensions of these contracts, some of which are material to this segment, and
obtain new business, there can be no assurances that contracts will be renewed
or extended or that additional or replacement contracts will be awarded to the
Company on satisfactory terms.
COMPUTER SYSTEMS
----------------
Six Months Ended
----------------
April 29, 2007 April 30, 2006
-------------- --------------
Computer Systems % of % of Favorable Favorable
---------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $91.7 $93.4 ($1.7) (1.8%)
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $47.3 51.5% $48.5 51.9% ($1.2) (2.5%)
------------------------------------------------------------------------------------------------------------------------------
Overhead $36.6 39.9% $32.9 35.2% ($3.7) (11.2%)
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $10.7 11.7% $15.6 16.7% ($4.9) (31.3%)
------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales decrease in the first six months of fiscal
2007 from the comparable 2006 period was primarily due to decreases in the
database access transaction fee revenue, including ASP directory assistance, of
$1.2 million, or 4%, Maintech division's IT maintenance sales of $0.4 million,
or 2%, product and other revenue recognized of $0.2 million, partially offset by
increased revenue in the European operations of $0.1 million, or 1%. Included in
the European sales increase is a $3.8 million increase in sales from its Varetis
Solutions operation acquired in December 2006 which was substantially offset by
the recognition of a project in the prior year period.. The database transaction
fee decreased revenue is due to the mix of transaction volumes and prices,
partially offset by increased transaction volumes from new and existing
customers. The revenue decrease in Maintech is due to a reduction at one large
customer, partially offset by increases elsewhere. The decrease in operating
profit from the comparable 2006 period was the result of the decreased sales,
increased overhead in absolute dollars and as a percentage of sales and the
decreases in gross margin.
During the first quarter of fiscal 2006, Volt Delta, the principal business unit
of the Computer Systems segment, purchased from Nortel Networks its 24% minority
interest in Volt Delta for $62.0 million. During the first fiscal quarter of
2006, Volt Delta also purchased Varetis Solutions GmbH from varetis AG for $24.8
million. The acquisition provided Volt Delta with the resources to focus on the
evolving global market for directory information systems and services. Varetis
Solutions added technology in the area of wireless and wireline database
management, directory assistance/inquiry automation, and wireless handset
information delivery to Volt Delta's significant technology portfolio.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services, its continued ability to sell products and
services to new and existing customers and consumer demands for its customers'
services.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE SIX MONTHS ENDED APRIL 30, 2006--Continued
RESULTS OF OPERATIONS--OTHER
----------------------------
Six Months Ended
----------------
April 29, 2007 April 30, 2006
-------------- --------------
Other % of % of Favorable Favorable
----- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $48.9 4.4% $47.2 4.1% ($1.7) (3.7%)
--------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $19.1 1.7% $16.9 1.5% ($2.2) (12.8%)
--------------------------------------------------------------------------------------------------------------------------
Interest Income $2.6 0.2% $1.7 0.1% $0.9 56.0%
--------------------------------------------------------------------------------------------------------------------------
Other Expense ($3.2) 0.3% ($3.9) 0.3% $0.7 18.9%
--------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.5) - ($0.4) - ($0.1) (27.2%)
--------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.5) 0.1% ($0.9) 0.1% ($0.6) (64.9%)
--------------------------------------------------------------------------------------------------------------------------
The changes in other items affecting the results of operations for the first six
months of fiscal 2007 as compared to the comparable period in fiscal 2006,
discussed on a consolidated basis, were:
The increase in selling and administrative expenses was a result of increased
salaries and other expenses, partially offset by a one-time accrual of $1.2
million in the second quarter of fiscal 2006 for death benefits related to two
senior corporate executives together with a reduction in professional fees.
The increase in depreciation and amortization was attributable to increases in
fixed assets, primarily in the Computer Systems and Staffing Services segments,
as well as increased amortization of intangibles in the Computer Systems segment
due to fiscal 2006 acquisitions.
The increase in interest income was due to additional funds available for
investment, along with higher interest rates.
The decrease in other expense was primarily due to a decrease in the amount of
accounts receivable sold under the Company's Securitization Program.
The increase in interest expense was due to increased borrowings under the Delta
Credit Facility.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 39.9% in the first six months of 2007 compared to
41.1% in 2006. The effective rate was lower in 2007 due to the effect of 2007
general business credits.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE THREE MONTHS ENDED APRIL 30, 2006
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the second quarter of fiscal 2007, consolidated net sales decreased by $25.6
million, or 4%, to $568.2 million, from the comparable period in fiscal 2006.
The decrease was primarily attributable to the Staffing Services segment, $19.0
million, and the Computer Systems segment, $7.0 million.
Net income for the second quarter of fiscal 2007 was $6.4 million compared to
$9.1 million in the comparable 2006 second quarter. The Company reported a
pre-tax income from continuing operations before minority interest for the
second quarter of fiscal 2007 of $10.7 million, compared to $15.4 million in the
prior year's second quarter.
The Company's operating segments reported an operating profit of $22.0 million
in the second fiscal 2007 quarter, a decrease of $6.3 million, or 22%, from the
comparable 2006 quarter. The decrease was attributable to the Computer Systems
segment, $4.8 million, the Telephone Directory segment, $1.3 million, the
Staffing Services segment, $0.6 million, partially offset by an increase in the
Telecommunications Services segment, $0.4 million.
General corporate expenses decreased by $0.8 million, or 7%, primarily due to a
one-time accrual of $1.2 million in the second quarter of fiscal 2006 for death
benefits related to two senior corporate executives.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Three Months Ended
------------------
April 29, 2007 April 30, 2006
-------------- --------------
Staffing Services % of % of Favorable Favorable
----------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $468.9 $484.6 ($15.7) (3.2%)
-------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales $334.3 $273.8 $60.5 22.1%
-------------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $483.3 $502.3 ($19.0) (3.8%)
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $83.1 17.2% $78.6 15.7% $4.5 5.7%
-------------------------------------------------------------------------------------------------------------------------------
Overhead $69.2 14.3% $64.1 12.8% ($5.1) (8.0%)
-------------------------------------------------------------------------------------------------------------------------------
Operating Profit $13.9 2.9% $14.5 2.9% ($0.6) (4.3%)
-------------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE THREE MONTHS ENDED APRIL 30, 2006--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
---------------------------------------------
STAFFING SERVICES--Continued
----------------------------
The net sales decrease of the Staffing Services segment in the second quarter of
fiscal 2007 from the comparable fiscal 2006 quarter was due to decreased
staffing business in the Administrative and Industrial division and a slight
decrease in sales in the Technical Placement division. The decrease in operating
profit in the segment resulted from the decrease in net sales, the increase in
overhead costs in absolute dollars and as a percentage of net sales, partially
offset by the increased gross margin percentage. The increase in gross margin
percentage was due to a 0.4 percentage point decrease in workers' compensation
costs as a percentage of direct labor due to improvements in claims experience
and the regulatory environment in several states, a 0.5 percentage point
reduction in payroll taxes as a percentage of direct labor, together with an
increase in permanent placement revenue. The increase in overhead percentage was
due to the sales decrease without a corresponding reduction in overhead costs.
Three Months Ended
------------------
April 29, 2007 April 30, 2006
Technical Placement -------------- --------------
Division % of % of Favorable Favorable
-------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $640.2 $576.6 $63.6 11.0%
---------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $327.6 $327.7 ($0.1) -
---------------------------------------------------------------------------------------------------------------------------
Gross Profit $57.4 17.5% $53.3 16.3% $4.1 7.8%
---------------------------------------------------------------------------------------------------------------------------
Overhead $44.1 13.4% $39.9 12.2% ($4.2) (10.5%)
---------------------------------------------------------------------------------------------------------------------------
Operating Profit $13.3 4.1% $13.4 4.1% ($0.1) (0.4%)
---------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The Technical Placement division's slight decrease in net sales in the second
quarter of fiscal 2007 from the comparable fiscal 2006 period was due to a $2.8
million, or 17%, decrease in net managed service associate vendor sales, a $1.3
million, or 0.5%, decrease in traditional alternative staffing, partially offset
by a $4.0 million, or 14%, increase in higher margin VMC Consulting project
management and consulting sales. The decrease in the operating profit was the
result of the decrease in net sales and the increase in overhead in absolute
dollars and as a percentage of net sales, partially offset by the increase in
gross margin percentage. The increase in gross margin percentage was due to the
increase in the higher margin VMC sales, a 0.3 percentage point decrease in
payroll taxes as a percentage of direct labor, together with an increase in
higher margin permanent placement revenue. The increase in overhead percentage
for the quarter was due to the sales decrease without a corresponding reduction
in overhead costs.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE THREE MONTHS ENDED APRIL 30, 2006--Continued
STAFFING SERVICES--Continued
----------------------------
Three Months Ended
------------------
April 29, 2007 April 30, 2006
Administrative & -------------- --------------
Industrial Division % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $163.0 $181.8 ($18.8) (10.3%)
---------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $155.7 $174.6 ($18.9) (10.8%)
---------------------------------------------------------------------------------------------------------------------------
Gross Profit $25.7 16.5% $25.3 14.5% $0.4 1.3%
---------------------------------------------------------------------------------------------------------------------------
Overhead $25.1 16.1% $24.2 13.9% ($0.9) (3.8%)
---------------------------------------------------------------------------------------------------------------------------
Operating Profit $0.6 0.4% $1.1 0.6% ($0.5) (51.2%)
---------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The Administrative and Industrial division's decrease in net sales in the second
quarter of fiscal 2007 compared to the fiscal 2006 second quarter resulted from
a reduced demand for contingent labor from existing customers along with a
reduction of the client base. The decrease in operating profit was due to the
decrease in net sales and the increase in overhead in absolute dollars and as a
percentage of sales, partially offset by the increase in gross margin
percentage. The increase in gross margin percentage was due to a 1.2 percentage
point decrease in workers' compensation costs resulting from improvements in
claims experience and the regulatory environment in several states, a 0.4
percentage point decrease in payroll taxes, together with an increase in higher
margin permanent placement fees. The increase in overhead 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.
TELEPHONE DIRECTORY
-------------------
Three Months Ended
------------------
April 29, 2007 April 30, 2006
-------------- --------------
Telephone Directory % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Sales (Net) $17.1 $17.2 ($0.1) (0.8%)
---------------------------------------------------------------------------------------------------------------------------
Gross Profit $8.9 52.3% $9.8 57.1% ($0.9) (9.1%)
---------------------------------------------------------------------------------------------------------------------------
Overhead $6.1 36.1% $5.8 33.8% ($0.3) (6.2%)
---------------------------------------------------------------------------------------------------------------------------
Operating Profit $2.8 16.2% $4.0 23.3% ($1.2) (31.1%)
---------------------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's slight sales decrease in the
second quarter of fiscal 2007 from the comparable 2006 period were decreases of
$0.4 million, or 3%, in the DataNational community telephone directory
publishing sales, $0.4 million, or 9%, in telephone production and other sales,
partially offset by increased printing sales in Uruguay of $0.7 million, or
127%. The sales decrease in DataNational was
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE THREE MONTHS ENDED APRIL 30, 2006--Continued
TELEPHONE DIRECTORY--Continued
------------------------------
due to the timing of the delivery of their directories, although the sales
canvassing for the current quarter reflected a 1% growth as compared to the
comparable 2006 fiscal quarter. The increased canvassed sales will be reflected
in subsequent quarters of the current year. The segment's decreased operating
profit was primarily due to the mix of telephone directories delivered in the
current year in DataNational, as compared to the prior year, the increase in
lower margin printing sales in Uruguay, and the overhead increase in absolute
dollars and as a percentage of sales.
TELECOMMUNICATIONS SERVICES
---------------------------
Three Months Ended
------------------
April 29, 2007 April 30, 2006
-------------- --------------
Telecommunications % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------------------------------------------
Sales (Net) $27.2 $27.3 ($0.1) (0.5%)
-----------------------------------------------------------------------------------------------------------------------------
Gross Profit $6.3 23.2% $4.8 17.6% $1.5 31.3%
-----------------------------------------------------------------------------------------------------------------------------
Overhead $5.9 21.9% $4.8 17.9% ($1.1) (22.5%)
-----------------------------------------------------------------------------------------------------------------------------
Operating Profit $0.4 1.3% - - $0.4 -
-----------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's slight sales decrease in the second
quarter of fiscal 2007 from the comparable 2006 period was due to a decrease of
$1.3 million, or 11%, in the Network Enterprise Solutions division, partially
offset by an increase in the Construction and Engineering division of $1.2
million, or 8%. The sales increase in the Construction and Engineering division
in the current quarter was primarily the result of increased water projects. The
sales decrease in the Network Enterprise Solutions division was primarily due to
reduced volumes with existing customers. The increased operating profits were
due to the improved gross margins, partially offset by the increase in overhead
costs in absolute dollars and as a percentage of sales. The increased gross
margin percentage was due to a change in the mix of jobs completed during the
current period as compared to the comparable fiscal 2006 period. The results of
the segment continue to be affected by the decline in capital spending by
telephone companies caused by the consolidation within the segment's
telecommunications industry fixed-line customer base and an increasing shift by
consumers to wireless communications and alternatives. This factor has also
increased competition for available work, pressuring pricing and gross margins
throughout the segment.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE THREE MONTHS ENDED APRIL 30, 2006--Continued
COMPUTER SYSTEMS
----------------
Three Months Ended
------------------
April 29, 2007 April 30, 2006
-------------- --------------
Computer Systems % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $45.2 $52.1 ($6.9) (13.3%)
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $22.5 49.9% $26.6 51.0% ($4.1) (15.2%)
------------------------------------------------------------------------------------------------------------------------------
Overhead $17.5 38.8% $16.8 32.1% ($0.7) (5.3%)
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $5.0 11.1% $9.8 18.9% ($4.8) (49.0%)
------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales decrease in the second quarter of fiscal
2007 from the comparable 2006 quarter was primarily due to decreases in the
European operations of $3.3 million, or 31%, database access transaction fee
revenue, including ASP directory assistance, of $1.2 million, or 8%, Maintech
division's IT maintenance sales of $1.0 million, or 7% and product and other
revenue recognized of $1.4 million. The decrease in the European operations'
revenue is primarily due to the recognition of a project in the second quarter
of fiscal 2006. The database transaction fee decreased revenue is due to the mix
of transaction volumes and prices, partially offset by increased transaction
volumes from new and existing customers. The Maintech revenue decrease is due to
a reduction at one large customer, partially offset by increased business
elsewhere. The decrease in operating profit from the comparable 2006 period was
the result of the decreased sales, increased overhead in absolute dollars and as
a percentage of sales and the decrease in gross margin.
RESULTS OF OPERATIONS--OTHER
----------------------------
Three Months Ended
------------------
April 29, 2007 April 30, 2006
-------------- --------------
Other % of % of Favorable Favorable
------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $25.0 4.4% $22.7 3.8% ($2.3) (10.3%)
---------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $9.5 1.7% $9.1 1.5% ($0.4) (4.7%)
---------------------------------------------------------------------------------------------------------------------------
Interest Income $1.4 0.2% $0.6 0.1% $0.8 121.4%
---------------------------------------------------------------------------------------------------------------------------
Other Expense ($1.6) (0.3%) ($2.3) (0.4%) $0.7 28.7%
---------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.4) (0.1%) ($0.1) - ($0.3) (255.3%)
---------------------------------------------------------------------------------------------------------------------------
Interest Expense ($0.9) (0.2%) ($0.4) (0.1%) ($0.5) (92.6%)
---------------------------------------------------------------------------------------------------------------------------
The changes in other items affecting the results of operations for the second
quarter of fiscal 2007 as compared to the comparable period in fiscal 2006,
discussed on a consolidated basis, were:
The increase in selling and administrative expenses was a result of increased
salaries and other expenses, partially offset by a one-time accrual of $1.2
million in the second quarter of fiscal 2006 for death benefits related to two
senior corporate executives.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED APRIL 29, 2007 COMPARED
TO THE THREE MONTHS ENDED APRIL 30, 2006--Continued
RESULTS OF OPERATIONS--OTHER--Continued
---------------------------------------
The increase in depreciation and amortization was attributable to increases in
fixed assets, primarily in the Computer Systems and Staffing Services segments.
The increase in interest income was due to additional funds available for
investment, along with higher interest rates.
The decrease in other expense was primarily due to a decrease in the amount of
accounts receivable sold under the Company's Securitization Program.
The increase in interest expense was due to increased borrowings under the Delta
Credit Facility.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 40.0% in the second quarter of fiscal 2007 compared to
40.9% in 2006. The effective rate was lower in 2007 due to the effect of foreign
losses in fiscal 2006 for which no benefit was provided.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, increased by $7.5 million to $46.0 million in the six
months ended April 29, 2007.
Operating activities provided $1.0 million of cash in the first six months of
fiscal 2007. In the comparable fiscal 2006 period, operating activities provided
$72.7 million of cash.
Operating activities in the first six months of fiscal 2007, exclusive of
changes in operating assets and liabilities, produced $25.5 million of cash, as
the Company's net income of $7.1 million included non-cash charges primarily for
depreciation and amortization of $19.1 million and accounts receivable
provisions of $1.3 million, partially offset by a deferred tax benefit of $2.1
million. In the first six months of fiscal 2006, operating activities, exclusive
of changes in operating assets and liabilities, produced $30.5 million of cash,
as the Company's net income of $8.7 million included non-cash charges primarily
for depreciation and amortization of $16.9 million, and accounts receivable
provisions of $2.1 million, minority interest of $1.0 million, and a deferred
tax provision of $1.5 million.
Changes in operating assets and liabilities used $24.5 million of cash, net, in
the first six months of fiscal 2007 principally due to a reduction in the
Securitization Program of $50.0 million, a decrease in income taxes of $7.5
million and an increase in the level of inventory of $6.0 million partially
offset by an increase in deferred income and other liabilities of $16.4 million,
an increase in the level of accounts payable of $15.8 million, a decrease in the
level of trade accounts receivable of $3.4 million and an increase in accrued
expenses of $3.3 million. In the first six months of fiscal 2006, changes in
operating assets and liabilities provided $42.2 million of cash, net,
principally due to proceeds from the Securitization Program of $40.0 million, a
decrease in the level of accounts receivable of $11.2 million and an increase in
deferred income and other liabilities of $5.0 million, partially offset by an
increase in prepaid and other assets of $4.1 million, an increase in inventory
of $3.6 million, a decrease in income taxes payable of $4.2 million and a
decrease in the level of accounts payable and accrued expenses of $2.4 million.
The $12.8 million of cash applied to investing activities for the first six
months of fiscal 2007 resulted from the $12.5 million for net additions to
property, plant and equipment and expenditures of $0.2 million for acquisitions.
The $96.1 million of cash applied to investing activities for the first six
months of fiscal 2006 resulted from the expenditures of $83.5 million for
acquisitions and $12.7 million for net additions to property, plant and
equipment.
The principal factors in the $20.4 million of cash provided by financing
activities in the first six months of fiscal 2007 were an increase in the level
of bank loans of $28.1 million partially offset by a payment of $8.0 million for
the purchase of treasury shares. The principal factors in the $6.4 million of
cash provided by financing activities in the first six months of fiscal 2006
were an increase in the level of bank loans of $4.9 million and funds received
from employees' exercises of stock options of $3.9 million, partially offset by
the repayment of long-term debt of $2.2 million.
Commitments
-----------
There has been no material change through April 29, 2007 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended October
29, 2006.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Off-Balance Sheet Financing
---------------------------
The Company has no off-balance sheet financing arrangements, as that term has
meaning in Item 303(a) (4) of Regulation S-K.
Securitization Program
----------------------
The Company has a $200.0 million accounts receivable securitization program
("Securitization Program"), which expires in April 2009. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $200.0 million). The
Company retains the servicing responsibility for the accounts receivable. At
April 29, 2007, TRFCO had purchased from Volt Funding a participation interest
of $60.0 million out of a pool of approximately $265.0 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.
42
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 April
29, 2007, the Company was in compliance with all requirements of its
Securitization Program.
Credit Lines
------------
At April 29, 2007, the Company had credit lines with domestic and foreign banks
which provided for borrowings and letters of credit of up to an aggregate of
$119.0 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 $32.9 million. Included in these borrowings
were $11.4 million of foreign currency borrowings which provide a hedge against
devaluation in foreign denominated assets.
Credit Agreement
----------------
The Credit Agreement, which expires in April 2008, established a secured credit
facility ("Credit Facility") in favor of the Company and designated
subsidiaries, of which up to $15.0 million may be used for letters of credit.
Borrowings by subsidiaries are limited to $25.0 million in the aggregate. At
April 29, 2007, the Company borrowed $2.0 million 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 April 29, 2007, if a three-month U.S. Dollar LIBO rate were the interest rate
option selected by the Company, borrowings would have borne interest at the rate
of 6.2% per annum, excluding a fee of 0.3% per annum paid on the entire
facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At April 29, 2007, the Company was in compliance with all
covenants in the Credit Agreement.
43
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 April 29, 2007, four of those guarantors have pledged approximately
$41.5 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 April 29, 2007, $27.1 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 April
29, 2007, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
6.2% per annum. Volt Delta also pays a commitment fee of 0.2% on the unused
portion of the Delta Credit Facility.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.0 to 1.0 and the maintenance of a consolidated net worth, as defined. The
Delta Credit Facility also imposes limitations on, among other things,
incurrence of additional indebtedness or liens, the amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At April 29, 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.
44
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 Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48") which prescribes a
recognition threshold and measurement attribute, as well as criteria for
subsequently recognizing, derecognizing and measuring uncertain tax position for
financial statement purposes. FIN 48 also requires expanded disclosure with
respect to the uncertainty in income taxes assets and liabilities. FIN 48 is
effective for the Company on October 29, 2007 and is required to be recognized
as a change in accounting principle through a cumulative-effect adjustment to
retained earnings as of the beginning of the year of adoption. The Company is
currently evaluating the impact of adopting the provisions of FIN 48 in fiscal
2008.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within that fiscal year. The Company is
currently evaluating the impact of adopting this statement.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FAS 115".
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, including
interim periods within that fiscal year. The Company is currently evaluating the
impact of adopting this statement.
Related Party Transactions
--------------------------
During the first six months of fiscal 2007, the Company paid or accrued $0.6
million to the law firm of which Lloyd Frank, a director, is of counsel, for
services rendered to the Company and expenses reimbursed.
45
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
$147,000, 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 April 29, 2007. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender to the Company's present
stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At April 29, 2007, the total market value of these
investments was $5.0 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuates against the dollar, which may impact reported earnings. As
of April 29, 2007, the total of the Company's net investment in foreign
operations was $1.9 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
April 29, 2007, the Company had no outstanding exchange contracts. The amount of
risk and the use of foreign exchange instruments described above are not
material to the Company's financial position or results of operations and the
Company does not use these instruments for trading or other speculative
purposes. Based upon the current levels of net foreign assets, a hypothetical
weakening of the U.S. dollar against these currencies at April 29, 2007 by 10%
would result in a pretax gain of $0.2 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at April 29, 2007 by 10% would result in a pretax loss of $0.2
million related to these positions.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at April 29, 2007.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of April 29, 2007
------------------------- -------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
------ ------- ------ ------ -----
(Dollars in thousands of US$)
Cash and Cash Equivalents
-------------------------
and Restricted Cash
-------------------
Money Market and Cash Accounts $78,265 $78,265
Weighted Average Interest Rate 5.10% 5.10%
------- -------
Total Cash, Cash Equivalents, and
Restricted Cash $78,265 $78,265
======= =======
Securitization Program
----------------------
Accounts Receivable Securitization $60,000 $60,000
Finance Rate 5.32% 5.32%
------- -------
Securitization Program $60,000 $60,000
======= =======
Debt
----
Term Loan $13,066 $490 $1,108 $1,306 $10,162
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $32,933 $32,933
Weighted Average Interest Rate 6.28% 6.28% - - -
------- ------- ------- ------ -------
Total Debt $45,999 $33,423 $1,108 $1,306 $10,162
======== ======== ======= ======= =======
47
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company's management is responsible for maintaining adequate internal
controls over financial reporting and for the assessment of the effectiveness of
internal controls over financial reporting.
The Company carried out an evaluation of the effectiveness of the design and
operation of its "disclosure controls and procedures," as defined in, and
pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of April 29,
2007 under the supervision and with the participation of the Company's
management, including the Company's President and Principal Executive Officer
and its Senior Vice President and Principal Financial Officer. Based on that
evaluation, management concluded that the Company's disclosure controls and
procedures are effective in ensuring that material information relating to the
Company and its subsidiaries is made known to them on a timely basis.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A RISK FACTORS
Legal Contingencies - The Company is subject to certain legal proceedings, as
well as demands, claims and threatened litigation that arise in the normal
course of our business. A quarterly review is performed of each significant
matter to assess any potential financial exposure. If the potential loss from
any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, a liability and an expense are recorded for the estimated
loss. Significant judgment is required in both the determination of probability
and the determination of whether an exposure is reasonably estimable. Any
accruals are based on the best information available at the time. As additional
information becomes available, a reassessment is performed of the potential
liability related to any pending claims and litigation and may revise the
Company's estimates. Potential legal liabilities and the revision of estimates
of potential legal liabilities could have a material impact on the results of
operations and financial position.
48
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2007 Annual Meeting of Shareholders held on April 5, 2007,
shareholders:
(a) elected the following to serve as Class II directors of the Company
until the 2009 Annual Meeting of the shareholders by the following
votes:
For Vote Withheld
--- -------------
Theresa A. Havell 19,289,120 1,467,326
Deborah Shaw 19,047,445 1,709,001
William H. Turner 19,257,490 1,498,956
(b) ratified the action of the Board of Directors in appointing Ernst &
Young LLP as the Company's independent registered public accounting
firm for the fiscal year ending October 28, 2007 by the following vote:
For Against Abstain
--- ------- -------
20,729,337 16,376 10,733
(c) ratified the adoption by the Board of Directors of the Volt Information
Sciences, Inc. 2006 Incentive Stock Plan by the following vote:
For Against Abstain Broker Non Votes
--- ------- ------- ----------------
17,302,909 1,507,398 83,412 1,862,727
(d) ratified the amendment of the Company's Certificate of Incorporation to
increase number of authorized shares of common stock ($.10 par value)
from 30,000,000 to 120,000,000 by the following vote:
For Against Abstain
--- ------- -------
13,177,475 7,558,800 20,171
49
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
--------------------------------------------------------------------------------
10.01 Form of Restricted Stock Agreement for Non-Employee Directors
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent
Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
Date: June 7, 2007
By: /s/Jack Egan
------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
50
EXHIBIT INDEX
-------------
Exhibit
Number Description
----- -----------
10.01 Form of Restricted Stock Agreement for Non-Employee Directors
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