UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---
/X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the Three Months Ended February 1, 2009.
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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 704-2400
Not Applicable
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark whether registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer X
----- -----
Non-Accelerated Filer Smaller Reporting Company
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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 March 9, 2009 was 20,842,806.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended February 1, 2009 and January 27, 2008 3
Condensed Consolidated Balance Sheets -
February 1, 2009 (Unaudited) and November 2, 2008 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended February 1, 2009 and January 27, 2008 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 47
PART II - OTHER INFORMATION
Item 6. Exhibits 48
SIGNATURE 48
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
February 1, January 27,
2009 2008
------------ ------------
(In thousands, except per share amounts)
NET SALES $ 499,699 $ 581,054
COST AND EXPENSES:
Cost of sales 477,916 567,085
Selling and administrative 22,046 22,337
Impairment and restructuring costs 8,680 1,504
Depreciation and amortization 8,865 9,589
------------ ------------
517,507 600,515
------------ ------------
OPERATING LOSS (17,808) (19,461)
OTHER INCOME (EXPENSE):
Interest income 613 1,302
Other expense, net (244) (1,650)
Foreign exchange gain (loss), net 282 (309)
Interest expense (1,613) (1,622)
------------ ------------
Loss from continuing operations before minority
interest and income taxes (18,770) (21,740)
Minority interest 352 33
------------ ------------
Loss from continuing operations before income taxes (18,418) (21,707)
Income tax benefit 5,360 8,069
------------ ------------
Loss from continuing operations ($ 13,058) ($ 13,638)
Discontinued operations, net of taxes -- 430
------------ ------------
NET LOSS ($ 13,058) ($ 13,208)
============ ============
Per Share Data
--------------
Basic and Diluted:
Loss from continuing operations ($0.63) ($0.61)
Discontinued operations -- 0.02
------------ ------------
Net loss ($0.63) ($0.59)
============ ============
Weighted average number of shares 20,843 22,301
============ ============
See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 1, 2009 November 2, 2008
(Unaudited) (Audited)
---------------- ----------------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $ 134,708 $ 120,929
Restricted cash 28,160 48,581
Short-term investments 3,830 4,178
Trade accounts receivable, net of allowances of $4,147 (2009) and
$5,328 (2008) 399,301 488,482
Inventories, net of allowances of $3,638 (2009) and $4,145 (2008) 20,948 29,025
Recoverable income taxes 8,222 --
Deferred income taxes 8,626 9,685
Prepaid insurance and other assets 29,754 36,684
---------------- ----------------
TOTAL CURRENT ASSETS 633,549 737,564
Property, plant and equipment, net 66,799 68,173
Insurance and other assets 1,448 1,276
Deferred income taxes 17,491 17,081
Goodwill 51,442 57,481
Other intangible assets, net 42,231 44,204
---------------- ----------------
TOTAL ASSETS $ 812,960 $ 925,779
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings, including current portion of long-term debt $ 117,364 $ 108,216
Accounts payable 171,400 215,265
Accrued wages and commissions 41,533 50,918
Accrued taxes other than income taxes 22,870 22,227
Accrued insurance and other accruals 35,053 33,327
Deferred income and other liabilities 12,798 14,183
Income taxes payable -- 55,569
---------------- ----------------
TOTAL CURRENT LIABILITIES 401,018 499,705
Long-term debt, excluding current portion 11,912 12,082
Deferred income 3,497 3,360
Income taxes payable 937 937
Deferred income taxes 13,780 14,551
Minority interest 1,000 2,010
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none -- --
Common stock, par value $.10; Authorized--120,000,000 shares; issued
--23,498,103 shares 2,350 2,350
Paid-in capital 51,016 51,006
Retained earnings 369,432 381,832
Accumulated other comprehensive loss (328) (400)
---------------- ----------------
422,470 434,788
Less treasury stock--2,655,297 shares, at cost (41,654) (41,654)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 380,816 393,134
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 812,960 $ 925,779
================ ================
See accompanying notes to condensed consolidated financial statements (unaudited).
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
----------------------------
February 1, January 27,
2009 2008
------------ ------------
(In thousands)
CASH PROVIDED BY OPERATING ACTIVITIES
Net loss ($13,058) ($13,208)
Discontinued operations, net of taxes -- (430)
------------ ------------
Net loss from continuing operations (13,058) (13,638)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization 8,865 9,589
Impairment of goodwill 6,039 --
Accounts receivable provisions 26 4,163
Minority interest (352) (33)
Gain on dispositions of property, plant and equipment (119) --
Impairment charge - property, plant and equipment 1,211 --
(Gain) loss on foreign currency translation (382) 91
Deferred income tax benefit (37) (8,095)
Share-based compensation expense related to employee stock options 10 37
Changes in operating assets and liabilities, net of assets acquired :
Accounts receivable 88,986 38,058
Reduction in securitization of accounts receivable -- (20,000)
Inventories 8,333 21,645
Prepaid insurance and other current assets 7,320 8,734
Insurance and other long-term assets (182) (631)
Accounts payable (23,277) (17,978)
Accrued expenses (6,592) (2,117)
Deferred income and other liabilities (2,078) 394
Income taxes (63,350) (9,334)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,363 10,885
------------ ------------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Three Months Ended
----------------------------
February 1, January 27,
2009 2008
------------ ------------
(In thousands)
CASH USED IN INVESTING ACTIVITIES
Sales of investments $ 446 $ 696
Purchases of investments (463) (727)
Decrease in restricted cash 20,421 2,936
Decrease in payables related to restricted cash (20,421) (2,936)
Proceeds from disposals of property, plant and equipment, net 257 2
Purchases of property, plant and equipment (7,348) (7,745)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (7,108) (7,774)
------------ ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Payment of long-term debt (167) (123)
Purchase of treasury shares -- (8,081)
Proceeds of short term borrowings 9,131 1,768
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,964 (6,436)
------------ ------------
Effect of exchange rate changes on cash 560 1,382
------------ ------------
CASH FLOWS FROM DISCONTINUED OPERATIONS
Operating activities from discontinued operations -- 5,100
Investing activities from discontinued operations -- 534
------------ ------------
CASH PROVIDED BY DISCONTINUED OPERATIONS -- 5,634
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,779 3,691
Increase in discontinued operations cash -- (21)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,779 3,670
Cash and cash equivalents, beginning of period 120,929 40,343
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 134,708 $ 44,013
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $ 1,654 $ 1,724
Income taxes $ 58,480 $ 9,831
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 February 1, 2009 and consolidated
results of operations and consolidated cash flows for the three months ended
February 1, 2009 and January 27, 2008.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the fiscal
year ended November 2, 2008. 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.
Effective November 3, 2008, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" for certain
financial assets and liabilities. This standard establishes a framework for
measuring fair value and requires enhanced disclosures about fair value
measurements. SFAS 157 clarifies that fair value is an exit price, representing
the amount that would be received in the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants. SFAS 157 also
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The statement requires that assets and
liabilities carried at fair value be classified and disclosed in one of the
following three categories:
Level 1: Quoted market prices in active markets for identical assets or
liabilities.
Level 2: Quoted prices in active markets for similar assets and liabilities,
quoted prices for identically similar assets or liabilities in markets
that are not active and models for which all significant inputs are
observable either directly or indirectly.
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions
or external inputs for inactive markets.
The determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement. As of February 1, 2009, the Company held approximately $165.2
million of "level 1" cash equivalents, restricted cash, short-term investments
and investments in securities are measured at fair value on a recurring basis.
The Company does not have any assets or liabilities that are based on "level 2"
or "level 3" inputs.
Certain amounts in the first quarter of fiscal 2008 have been reclassified to
conform to the fiscal 2009 presentation.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves, by segment are as follows:
February 1, November 2,
2009 2008
------------ ------------
(In thousands)
Telecommunications Services $ 11,682 $ 16,874
Computer Systems 6,297 8,090
Printing and Other 2,969 4,061
------------ ------------
Total $ 20,948 $ 29,025
============ ============
The cumulative amounts billed under service contracts at February 1, 2009 and
November 2, 2008 of $33.3 million and $21.7 million, respectively, are credited
against the related costs in inventory. In addition, inventory reserves at
February 1, 2009 and November 2, 2008 of $3.6 million and $4.1 million,
respectively, are credited against the related costs in inventory primarily for
the Telecommunications Services segment.
NOTE C--Short-Term Borrowings
At February 1, 2009, the Company had credit facilities with various banks and
financial conduits which provided for borrowings and letters of credit of up to
an aggregate of $326.8 million, including the Company's $175.0 million five-year
accounts receivable securitization program (the "Amended Securitization
Program"), a $42.0 million five-year unsecured revolving credit agreement
("Credit Agreement") and the Company's wholly owned subsidiary, Volt Delta
Resources, LLC's ("Volt Delta") $100.0 million secured, syndicated revolving
credit agreement ("Delta Credit Facility"). The Company had total outstanding
short-term borrowings of $116.7 million as of February 1, 2009. Included in
these borrowings were $22.7 million of foreign currency borrowings which provide
economic hedges against foreign denominated net assets.
Amended Securitization Program
------------------------------
On June 3, 2008, the Company's $200.0 million accounts receivable securitization
program, which was due to expire within the next year, was transferred to a
multi-buyer program administered by PNC Bank. The Amended Securitization Program
has a five-year term. The conduits' commercial paper facilities are backed by
liquidity agreements which are periodically renewed with the sponsor banks and
have initial terms of 364 days ("364 day liquidity"). On January 7, 2009, the
Amended Securitization Program was further amended to reduce the size of the
facility from $200.0 million to $175.0 million and to extend the 364-day
liquidity to January 6, 2010. The scheduled expiration of the Amended
Securitization Program was not amended, and remains 2013.
Under the Amended 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 Inc.
("Volt Funding"), a wholly-owned special purpose subsidiary of the Company. Volt
Funding, in turn, borrows from two commercial paper conduits (Market Street
Funding LLC, a PNC Bank affiliate, and Relationship Funding LLC), secured by an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company. The Company retains the servicing responsibility for
the accounts receivable.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Short-Term Borrowings--Continued
The Amended Securitization Program is not an off-balance sheet arrangement as
Volt Funding is a 100% owned consolidated subsidiary of the Company. The
receivables and related borrowings remain on the balance sheet since Volt
Funding effectively retains control over the receivables, which are no longer
treated as sold assets. Accordingly, pledged receivables are included as trade
accounts receivable, net, while the corresponding borrowings are included as
short-term borrowings on the condensed consolidated balance sheet. At February
1, 2009, Volt Funding had borrowed $42.9 million and $17.1 million from Market
Street Funding and Relationship Funding, respectively. At February 1, 2009,
borrowings bear a weighted-average interest rate of 2.3% per annum, excluding a
facility fee of 0.75% per annum paid on the entire facility and a program fee of
0.5% paid on the outstanding borrowings.
The Company incurred charges of $1.5 million in the prior year fiscal quarter in
connection with the sale of receivables under the Expiring Securitization
Program, which are included in Other Expense in the consolidated statement of
operations. The equivalent cost of funds in the Expiring Securitization Program
was 5.6% per annum in the first quarter of fiscal 2008.
The Amended Securitization Program is subject to termination by PNC Bank (with
the consent of the majority purchasers) under certain circumstances, including,
among other things, the default rate, as defined, on receivables exceeding a
specified threshold, or the rate of collections on receivables failing to meet a
specified threshold.
At February 1, 2009, the Company was in compliance with all requirements of the
Amended Securitization Program.
Credit Agreement
----------------
On February 28, 2008, the Company entered into the Credit Agreement to replace
the Company's then expiring $40.0 million secured credit agreement with an
unsecured credit facility ("Credit Facility") in favor of the Company and
designated subsidiaries, of which up to $15.0 million may be used for letters of
credit and $25.0 million for borrowing in alternative currencies. At February 1,
2009, $12.0 million was drawn on this facility. The administrative agent for the
Credit Facility is Bank of America, N.A. The other banks participating in the
Credit Facility are JP Morgan Chase Bank, N.A. as syndicated agent, Wells Fargo
Bank, N.A. and HSBC Bank USA, N.A.
Borrowings under the Credit Agreement bear interest at various rate options
selected by the Company at the time of each borrowing. Certain rate options,
together with a facility fee, are based on a leverage ratio, as defined. Based
upon the Company's leverage ratio at February 1, 2009, 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 1.9% per annum, excluding a
fee of 0.2% 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 year; a
limitation on total funded debt to EBITDA of 3.0 to 1.0; and a requirement that
the Company maintain a minimum ratio of EBITDA, as defined, to interest expense,
as defined, of 4.0 to 1.0 for the twelve months ended as of the last day of each
fiscal quarter. The Credit Agreement also imposes limitations on, among other
things, the incurrence of additional indebtedness,
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Short-Term Borrowings--Continued
the level of annual capital expenditures, and the amount of investments,
including business acquisitions and mergers, and loans that may be made by the
Company to its subsidiaries. At February 1, 2009, the Company was in compliance
with all requirements of the Credit Agreement.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the secured Delta Credit Facility,
which expires in December 2009, with Wells Fargo, N.A. as the administrative
agent and arranger, and as a lender thereunder. Wells Fargo and two of the other
three lenders under the Delta Credit Facility, Bank of America, N.A. and
JPMorgan Chase, also participate in the Company's $42.0 million unsecured
revolving Credit Facility. Neither the Company nor Volt Delta guarantees each
other's facility but certain subsidiaries of each are guarantors of their
respective parent company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At February 1, 2009, $40.6 million was drawn
on this facility. Certain interest rate options, as well as the commitment fee,
are based on a leverage ratio, as defined, which resets quarterly. Based upon
Volt Delta's leverage ratio at February 1, 2009, 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 1.2% per annum. Volt Delta also pays a
commitment fee on the unused portion of the Delta Credit Facility which varies
based on Volt Delta's leverage ratio. At February 1, 2009, the commitment fee
was 0.3% per annum.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.5 to 1.0 for the twelve months ended as of the last day of each fiscal quarter
and the maintenance of a consolidated net worth, as defined. The Delta Credit
Facility also imposes limitations on, among other things, incurrence of
additional indebtedness or liens, the amount of investments including business
acquisitions, creation of contingent obligations, sales of assets (including
sale leaseback transactions) and annual capital expenditures.
At February 1, 2009, the Company was in compliance with all requirements of the
Delta Credit Facility.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
February 1, November 2,
2009 2008
------------ ------------
(Dollars in thousands)
8.2% term loan (a) $ 12,182 $ 12,316
Note payable for an acquisition (b) 425 450
------------ ------------
12,607 12,766
Less amounts due within one year 695 684
------------ ------------
Total long-term debt $ 11,912 $ 12,082
============ ============
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $12.2 million at
February 1, 2009. 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 February 1, 2009 of $9.5 million. The obligation is
guaranteed by the Company.
(b) Represents the present value of a $0.6 million payment due in sixty monthly
installments, discounted at 5% per annum.
NOTE E--Stockholders' Equity
Changes in the major components of stockholders' equity for the three months
ended February 1, 2009 are as follows:
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
--------------- --------------- --------------- ---------------
(In thousands)
Balance at November 2, 2008 $ 2,350 $ 51,006 $ 381,832 ($41,654)
Amortization of restricted stock and stock units 7
Compensation expense - stock options 3
Change in fair value of minority interest 658
Net loss for the three months (13,058)
--------------- --------------- --------------- ---------------
Balance at February 1, 2009 $ 2,350 $ 51,016 $ 369,432 ($41,654)
=============== =============== =============== ===============
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation loss, net
of taxes, of $0.3 million and $0.4 million at February 1, 2009 and November 2,
2008, respectively, and unrealized loss in marketable securities, net of taxes,
of $22,000 and $23,000 at February 1, 2009 and November 2, 2008, respectively.
Changes in these items, net of income taxes, are included in the calculation of
comprehensive (loss) income as follows:
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Stockholders' Equity
Three Months Ended
------------------
February 1, January 27,
2009 2008
-------- --------
(In thousands)
Net loss ($13,058) ($13,208)
Change in fair value of minority interest 658 (50)
Foreign currency translation adjustments, net 71 (272)
Unrealized gain (loss) on marketable securities, net 1 (43)
-------- --------
Comprehensive loss ($12,328) ($13,573)
======== ========
NOTE F--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Three Months Ended
------------------
February 1, January 27,
2009 2008
---------- ----------
Denominator for basic earnings per share:
Weighted average number of shares 20,842,806 22,301,204
Effect of dilutive securities:
Employee stock options -- --
---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 20,842,806 22,301,204
========== ==========
Options to purchase 200,085 and 251,111 shares of the Company's common stock
were outstanding at February 1, 2009 and January 27, 2008, respectively, but
were not included in the computation of diluted earnings per share because the
effect of inclusion would have been antidilutive.
NOTE G--Segment Disclosures
The Company's operating segments have been determined in accordance with the
Company's internal management structure, which is based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment operating profit. Operating profit provides
management, investors and equity analysts a measure to analyze operating
performance of each business segment against historical and competitors' data,
although historical results, including operating profit, may not be indicative
of future results, as operating profit is highly contingent on many factors,
including the state of the economy and customer preferences.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE G--Segment Disclosures--Continued
On September 5, 2008, the Company sold the net assets of its DataNational and
Directory Systems and Services divisions, whose operations for the current and
comparable three-month periods have been reclassified to Discontinued
Operations, with the remainder of the segment being renamed Printing and Other.
The operations of this segment were part of the Telephone Directory segment
until the fourth quarter of fiscal 2008.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value.
Segment operating profit is comprised of segment sales less its overhead,
selling and administrative costs and depreciation, and excludes general
corporate expenses, interest income earned by the Company on excess cash
generated by its segments, interest expended on corporate debt necessary to
finance the segments' operations and capital expenditures, fees related to sales
of interests in accounts receivable, foreign exchange gains and losses and
income taxes.
General corporate expenses consists of the Company's shared service centers, and
includes, among other items, enterprise resource planning, human resources,
corporate accounting and finance, treasury, legal and executive functions. In
order to leverage the Company's infrastructure, these functions are operated
under a centralized management platform, providing support services throughout
the organization. The costs of these functions are included within general
corporate expenses as they are not directly allocable to a specific segment.
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the three months ended February 1,
2009 and January 27, 2008 are summarized in the table below.
During the three months ended February 1, 2009, consolidated assets decreased by
$112.8 million primarily due to decreases in accounts receivable in all segments
due to the decrease in sales, reduced levels in inventory primarily in the
Telecommunication Services and a reduction in Corporate prepaid expenses and
other current assets due to the reduction of insurance deposits related to the
Casualty Program.
Three Months Ended
------------------
February 1, January 27,
2009 2008
--------- ---------
(In thousands)
Net Sales:
----------
Staffing Services
Staffing $ 412,650 $ 468,571
Managed Services 255,749 296,545
--------- ---------
Total Gross Sales 668,399 765,116
Less: Non-Recourse Managed Services (243,411) (283,312)
--------- ---------
Net Staffing Services 424,988 481,804
Telecommunications Services 24,376 47,203
Computer Systems 48,487 50,783
Printing and Other 5,852 5,229
Elimination of intersegment sales (4,004) (3,965)
--------- ---------
Total Net Sales $ 499,699 $ 581,054
========= =========
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE G--Segment Disclosures--Continued
Three Months Ended
------------------
February 1, January 27,
2009 2008
-------- --------
(In thousands)
Segment Operating (Loss) Profit:
--------------------------------
Staffing Services ($10,602) $ 5,469
Telecommunications Services (46) (19,165)
Computer Systems 2,428 3,252
Printing and Other 188 (113)
-------- --------
Total Segment Operating Loss (8,032) (10,557)
General corporate expenses (9,776) (8,904)
-------- --------
Total Operating Loss (17,808) (19,461)
Interest income and other (expense), net 369 (348)
Foreign exchange gain (loss), net 282 (309)
Interest expense (1,613) (1,622)
-------- --------
Loss from continuing operations before minority
interest and income taxes ($18,770) ($21,740)
======== ========
NOTE H--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and,
if so, whether it qualifies as a fair value hedge or cash flow hedge.
Generally, changes in fair values of derivatives accounted for as fair value
hedges are recorded in income along with the portions of the changes in the fair
values of the hedged items that relate to the hedged risks. Changes in fair
values of derivatives accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in other comprehensive income, net of deferred
taxes. Changes in fair values of derivatives not qualifying as hedges are
reported in the results of operations. As of February 1, 2009, the Company had
no outstanding foreign derivative instruments.
Restricted cash at February 1, 2009 and November 2, 2008 was $28.2 million and
$48.6 million, respectively, to cover obligations that were reflected in
accounts payable at that date. These amounts primarily related to certain
contracts with customers, for which the Company manages the customers'
alternative staffing requirements, including the payments to associate vendors.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE I--Sale and Acquisitions of Businesses
On September 5, 2008, the Company sold the net assets of its directory systems
and services and North American publishing operations to Yellow Page Group for
cash proceeds of $179.3 million. The transaction included the net assets of Volt
Directory Systems and DataNational but excluded the Uruguayan operations, which
combined were historically reported as the Company's Telephone Directory
segment. The Company recorded a pre-tax gain of $156.4 million ($93.3 million
net of taxes) that was included in discontinued operations in the consolidated
statement of operations in the fourth quarter of fiscal 2008. In accordance with
SFAS No. 144, the results of operations of Volt Directory Systems and
DataNational have been classified as discontinued in the prior period.
The following summarizes the discontinued operations:
Three Months Ended
------------------
January 27,
2008
--------
(In thousands)
Revenue $ 10,484
========
Income before taxes $ 718
Income tax provision (288)
--------
Income from discontinued operations $ 430
========
NOTE J--Goodwill and Intangibles
Under SFAS 142, goodwill and indefinite-lived intangible assets are subject to
annual impairment testing using fair value methodologies, which compare the fair
value of each reporting unit to its carrying value. 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 a quarter that could not have been reasonably foreseen
in prior periods. The Company generally determines the fair value of a reporting
unit using the income approach, which is based on the present value of estimated
future cash flows, or the market approach, which compares the business unit's
multiples of sales and EBITDA to those multiples of the business unit's
competitors. If the carrying value of the reporting unit's net assets including
goodwill exceeds the fair value of the reporting unit, then the Company performs
step two of the impairment test which allocates the fair value of the reporting
unit's assets and liabilities in a manner similar to a purchase price
allocation, with any residual fair value being allocated to goodwill. If the
carrying value of a reporting unit's goodwill exceeds its implied fair value,
then an impairment of goodwill has occurred for such amount, and is reported as
a component of operating income.
Based upon indicators of impairment in the fourth quarter of fiscal 2008, which
included a significant decrease in market capitalization, a decline in recent
operating results, and a decline in the Company's business outlook primarily due
to the macroeconomic environment, the Company performed an interim impairment
test as of November 2, 2008. The Company completed step one of the impairment
analysis and concluded that, as of November 2, 2008, the fair value of the
Computer Systems and Staffing Services segments were below their respective
carrying values including goodwill. Step two of the impairment test, as required
in SFAS 142, was initiated but, due to the time consuming nature, had not been
completed. The Company recorded estimates of impairment in the amount of $41.5
million and $4.9 million, in the Computer Systems and Staffing Services
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Goodwill and Intangibles -- Continued
segments, respectively as of November 2, 2008. During the first quarter of
fiscal 2009, the Company completed the step two analyses and recorded an
additional impairment in the amount of $6.0 million in the Staffing Services
segment.
Intangible assets, other than goodwill and indefinite-lived intangible assets,
are tested for recoverability whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. An impairment loss
is recognized when the carrying amount exceeds the estimated fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value.
The following table represents the balance of intangible assets:
February 1, 2009 November 2, 2008
---------------- ----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------- ------- ------- -------
(In thousands)
Customer relationships $41,298 $11,134 $41,298 $ 9,862
Existing technology 13,164 5,120 13,164 4,714
Contract backlog 3,200 2,467 3,200 2,266
Trade names (a) 2,936 253 2,936 207
Reseller network 816 314 816 289
Non-compete agreements and trademarks 451 346 451 323
------- ------- ------- -------
Total $61,865 $19,634 $61,865 $17,661
======= ======= ======= =======
(a) Certain trade names have an indefinite life and are not amortized.
NOTE K--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 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 sales in the period in which such determination is
made. At February 1, 2009, the Company's net prepaid for the outstanding policy
years was $16.1 million compared to $23.1 million at November 2, 2008.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE L--Incentive Stock Plans
The Non-Qualified Option Plan adopted by the Company in fiscal 1995 terminated
on May 16, 2005 except for options previously granted under the plan.
Unexercised options expire ten years after grant. Outstanding options at
February 1, 2009 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.
The Company recorded compensation expense of $2,000 and $7,000 for the
three-month periods ended February 1, 2009 and January 27, 2008, respectively.
Compensation expense is recognized in the selling and administrative expenses in
the Company's statement of operations on a straight-line basis over the vesting
periods. As of February 1, 2009, there was $5,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
under the 1995 plan to be recognized over a weighted average period of 0.5
years.
There were no options exercised under the 1995 plan during the three-month
periods ended February 1, 2009 and January 27, 2008.
In April 2007, the shareholders of the Company approved the Volt Information
Sciences, Inc. 2006 Incentive Stock Plan ("2006 Plan"). The 2006 Plan permits
the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock and Restricted Stock Units to employees and non-employee directors of the
Company through September 6, 2016. The maximum aggregate number of shares that
may be issued pursuant to awards made under the 2006 Plan shall not exceed one
million five hundred thousand (1,500,000) shares.
Compensation expense of $7,000 was recognized in selling and administrative
expenses in the Company's condensed consolidated statement of operations for
both the three-month periods ended February 1, 2009 and January 27, 2008, on a
straight-line basis over the vesting period for grants issued in fiscal 2008. As
of February 1, 2009, there was $32,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements for these options to
be recognized over a weighted average period of 1.2 years.
On December 18, 2007, the Company granted to employees (i) 233,000 restricted
stock units and (ii) non-qualified stock options to purchase 152,996 shares of
the Company's common stock at $13.32 per share under the 2006 Plan. If certain
net income targets are met in fiscal years 2007 through 2011, the restricted
stock units begin to vest over a five-year period through 2016. Similarly, if
certain net income targets are met in fiscal years 2008 through 2012,
substantially all the stock options will vest over a four-year period and expire
on December 17, 2017. There was no compensation expense recognized on the grants
with certain targets for the three-month period ended February 1, 2009.
Compensation expense of $1,500 was recognized in cost of sales in the Company's
condensed consolidated statement of operations for the three-month period ended
February 1, 2009 for options without targets. Compensation expense of $22,000
was recognized in cost of sales for the three-month period ended January 27,
2008. As of February 1, 2009, there was $16,000 of unrecognized compensation
costs related to non-vested share-based compensation arrangements to be
recognized over a weighted average period of 2.4 years.
There were no options granted during the three months ended February 1, 2009.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Restructuring
During the first quarter of fiscal 2009, the Company recorded a pre-tax
restructuring charge of approximately $2.7 million ($1.9 million, net of taxes)
related to the elimination of employee positions in the Staffing Services and
Computer Services segments from a series of cost cutting initiatives and the
closing of a facility in the Staffing Services segment due to the early
termination of a contract. The restructuring charge included: (1) $0.9 million
in severance, which was paid in the first quarter of fiscal 2009; (2) a $1.2
million non-cash charge for the impairment of property, plant and equipment and
the closed facility; and (3) an accrual of $0.6 million in rent for the
remaining term of the lease at the closed facility, which will be paid during
fiscal 2009. These costs are presented on a separate line item in the Company's
condensed consolidated statement of operations.
During the first quarter of fiscal 2008, the Company recorded a pre-tax
restructuring charge of approximately $1.5 million ($0.9 million net of taxes)
related to the elimination of employee positions in Europe and North America.
The workforce reduction at Volt Delta resulted from the integration of LSSiData
into the segment's database access line of business. The restructuring charge
consists of severance and termination benefits for the affected employees and is
presented on a separate line item in the Company's condensed consolidated
statement of operations. The restructuring charge was paid during fiscal 2008.
NOTE N--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 the Company's
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 adverse impact on the
Company's results of operations. As of February 1, 2009, the Company had accrued
costs related to a number of purported class actions brought by current and
former employees working in California alleging various violations of California
law.
NOTE O -- Subsequent Events
As previously announced, on February 12, 2009, the Delta Credit Facility was
voluntarily reduced from $100.0 million to $75.0 million.
In response to the decrease in Staffing Services revenue and ongoing economic
uncertainty, the Company is consolidating operations to reduce redundancies and
achieve economies of scale and efficiencies. As a result of these changes,
including office consolidations, the segment anticipates taking a restructuring
charge of approximately $4.4 million in the second quarter.
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Organization of Information
---------------------------
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to our consolidated financial
statements and notes thereto included in Part I of this Form 10-Q and to provide
an understanding of our consolidated results of operations, financial condition
and changes in financial condition. Our MD&A is organized as follows:
o Forward-Looking Statements - This section describes some of the
language and assumptions used in this document that may have an impact
on the readers' interpretation of the financial statements.
o Executive Overview - This section provides a general description of
our business segments and provides a brief overview of the results of
operations during the accounting period.
o Consolidated Results of Operations - This section provides an analysis
of the line items on the Statements of Operations for the current and
comparative accounting periods.
o Results of Operations by Segment - This section provides a summary of
the results of operations by segment in tabular format and an analysis
of the line items by segment for the current and comparative
accounting periods.
o Liquidity and Capital Resources - This section provides an analysis of
our liquidity and cash flows, as well as our discussion of our
commitments, securitization program and credit lines.
o Critical Accounting Policies - This section discusses those accounting
policies that are considered to be both important to our financial
condition and results of operations and require us to exercise
subjective or complex judgments in their application.
o New Accounting Pronouncements - This section includes a discussion of
recently published accounting authoritative literature that may have
an impact on our historical or prospective results of operations or
financial condition.
o Related Person Transactions - This section describes any business
relationships, or transaction or series of similar transactions,
between the Company and its directors, executive officers,
shareholders (with a 5% or greater interest in the Company), or any
entity in which an executive officer has more than a 10% equity
ownership interest, as well as members of the immediate families of
any of the foregoing persons during the first quarter of fiscal year
2008 and 2009. Excluded from the transactions are employment
compensation and directors' fees.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth in the Company's Annual Report on Form 10-K, in this Form 10-Q and in the
Company's press releases and other public filings. Such risks and uncertainties
could cause the Company's actual results, performance and achievements to differ
materially from those described in or implied by the forward-looking statements.
Accordingly, readers should not place undue reliance on any forward-looking
statements made by or on behalf of the Company. The Company does not assume any
obligation to update any forward-looking statements after the date they are
made.
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
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 follows:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions provides a full spectrum of managed staffing,
temporary/contract personnel employment, and workforce solutions.
This functional area is comprised of the Technical Resources
("Technical") division and the Administrative and Industrial
("A&I") division. The employees and contractors on assignment are
usually on the payroll of the Company for the length of their
assignment and are then eligible to be re-assigned to another
customer. This functional area also uses employees and
subcontractors from other staffing providers ("associate
vendors") when necessary. This functional area also provides
direct placement services and, upon request from customers,
subject to contractual conditions, will allow the customer to
convert the temporary employees to full-time customer employees,
under negotiated terms. In addition, the Company's Recruitment
Process Outsourcing ("RPO") services deliver end-to-end
recruitment and hiring outsourced solutions to customers. The
Technical division provides skilled employees, such as computer
and other IT specialties, engineering, design, life sciences and
technical support. The A&I division provides administrative,
clerical, office automation, accounting and financial, call
center and light industrial personnel. The length of an
employee's assignments in the Technical division may be as short
as a few weeks but in many cases can last for six to twelve
months. Assignments in the A&I division are generally shorter
than in the Technical division.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Executive Overview--Continued
------------------
o E-Procurement Solutions provides global competitively bid human
capital acquisition and management solutions by combining
web-based tools and business process outsourcing services. The
employees and contractors on assignment are usually from
associate vendor firms, although at times, Volt-recruited
employees and contractors may be selected to fill some
assignments, but in those cases, Volt competes on an equal basis
with other unaffiliated firms. The Company receives a fee for
managing the process, and the revenue for such services is
recognized net of its associated costs. This functional area,
which is part of the Technical division, is comprised of the
ProcureStaff operation.
o Information Technology Solutions provides a wide range of
services including consulting, outsourcing and turnkey project
management in the software and hardware development, IT
infrastructure services and customer contact markets. This
functional area offers higher margin project-oriented services to
its customers and assumes greater responsibility in contrast to
the other areas within the segment. This functional area, which
is part of the Technical division, is comprised of the VMC
Consulting operation.
Telecommunications Services: This segment provides a full spectrum of
turnkey telecommunications and related services solutions for commercial
and government sectors. It designs, engineers, constructs, installs and
maintains voice, data, video and utility infrastructure for public and
private businesses, military and government agencies. This segment also
installs distribution piping for potable and re-use water systems for
municipalities.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry and provides IT
maintenance services. The segment also sells information service systems to
its customers and, in addition, provides an Application Service Provider
("ASP") model which also provides information services, including
infrastructure and database content, on a transactional fee basis. It also
provides third-party IT and data services to others. This segment is
comprised of VoltDelta, Volt Delta International, LSSiDATA and the Maintech
computer maintenance division.
Printing and Other: This segment provides printing services and publishes
telephone directories in Uruguay. The telephone directory revenues of this
segment are derived from the sales of telephone directory advertising for
the books it publishes. The operations of this segment were part of the
Telephone Directory segment until the third quarter of fiscal 2008. In
September 2008, the Company sold the net assets of its DataNational and
Directory Systems divisions, whose operations for the prior fiscal years
have been reclassified to Discontinued Operations in these financial
statements, with the remainder of the segment being renamed Printing and
Other.
This report includes information extracted from consolidated financial
information that is not required by Generally Accepted Accounting Principles
("GAAP") to be presented in the financial statements. Certain of this
information is considered "non-GAAP financial measures" as defined by Securities
Exchange Commission ("SEC") rules. Some of these measures are as follows:
Gross profit for a segment is comprised of its total net sales less direct
costs.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Executive Overview--Continued
------------------
Segment operating profit is comprised of segment gross profit less its overhead,
selling and administrative costs and depreciation, and has limitations as an
analytical tool. It should not be considered in isolation or as a substitute for
analysis of the Company's results as reported under GAAP. Some of these
limitations are due to the omission of: (a) general corporate expenses; (b)
interest income earned by the Company on excess cash generated by its segments;
(c) interest expended on corporate debt necessary to finance the segments'
operations and capital expenditures; and (d) interest and fees related to sales
of interests in accounts receivable. Because of these limitations, segment
operating profit (loss) should only be used on a supplemental basis combined
with GAAP results when evaluating the Company's performance.
Overhead is comprised of indirect costs required to support each segment's
operations, and is included in cost of sales in the statements of operations,
along with selling and administrative and depreciation expenses, which are
reflected separately in the statements of operations.
General corporate expenses are comprised of the Company's shared service
centers, and include, among other items, enterprise resource planning, human
resource, corporate accounting and finance, treasury, legal and executive
functions. In order to leverage the Company's infrastructure, these functions
are operated under a centralized management platform, providing support services
throughout the organization. The costs of these functions are included within
general corporate expenses as they are not directly allocable to a specific
segment.
The Company's operating segments have been determined in accordance with the
Company's internal management structure, which is based on operating activities.
The Company evaluates performance based upon several factors, of which the
primary financial measure is segment operating profit. Operating profit provides
management, investors and equity analysts a measure to analyze operating
performance of each business segment against historical and competitors' data,
although historical results, including operating profit, may not be indicative
of future results, as operating profit is highly contingent on many factors,
including the state of the economy and customer preferences.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales and operating profit are always
lowest in the Company's first fiscal quarter due to the Thanksgiving, Christmas
and New Year holidays, as well as certain customer facilities closing for one to
two weeks. During the third and fourth quarters of the fiscal year, this segment
benefits from a reduction of payroll taxes when the annual tax contributions for
higher salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
Due to the fact that the Company's fiscal year-end is the last Sunday closest to
the end of October, periodically its fiscal year is comprised of 53 weeks.
Fiscal year 2008 was comprised of 53 weeks.
The demand for the Company's services in all segments, both domestically and in
its foreign operations, is dependent upon general economic conditions. The
Company's business tends to suffer during economic downturns, such as the
current recession. The slowing of the economy which has continued into the first
quarter of fiscal 2009 has adversely affected the Company's revenue and
operating profit.
In the three-month period of fiscal 2009, the Company's consolidated net sales
totaled $499.7 million and consolidated segment operating loss totaled $8.0
million. The explanations by segment for the three-month period of fiscal 2009
are detailed below.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Executive Overview-Continued
------------------
Staffing Services: The Staffing Services segment's net sales for the three-month
period of fiscal 2009 decreased by $56.8 million, or 12%, from the comparable
fiscal quarter of 2008. The operating results for the current three-month period
decreased by $16.1 million, or 294%, from the comparable fiscal 2008 period. The
decrease in operating results in the current quarter from the comparable fiscal
2008 quarter was primarily due to impairment and restructuring charges, the
sales decrease and a decrease in gross margin percentage.
Telecommunications Services: The Telecommunications Services segment's sales
decreased by $22.8 million, or 48%, from the three-month period of fiscal 2008
year; however, the operating results improved by $19.2 million. The improved
operating results for three-month period of fiscal 2009 were due to the absence
of a $19.3 million reserve taken in the first quarter of fiscal 2008 for certain
costs included in inventory related to work performed and for additional costs
expected to be incurred to complete work under an installation contract. The
installation work on this contract is complete. The Company continues to
negotiate with the customer in order for it to be reimbursed for disputed
billings under this contract.
Computer Systems: The Computer Systems segment's sales decreased by $2.3
million, or 5%, from the three-month period of fiscal 2009, while its operating
profit decreased by $0.9 million, or 25%, in the three-month period of fiscal
2009. The decrease in operating results in the three-month period of fiscal 2009
was primarily due to increased overhead costs.
Printing and Other: On September 5, 2008, the Company sold the net assets of its
directory systems and services and North American telephone directory publishing
operations to Yellow Page Group ("YPG"). The net purchase price of $179.3
million was paid in cash at closing. The transaction included the operations of
Volt Directory Systems and DataNational, formerly part of the Telephone
Directory segment, but excluded the Uruguayan printing and telephone directory
operations, which now comprise this new segment. The results of operations of
Volt Directory Systems and DataNational have been classified as discontinued and
the prior period results have been reclassified. The Printing and Other
segment's sales increased by $0.6 million from the three-month period of fiscal
2008, and its operating profit increased by $0.3 million in three-month period
of fiscal 2009 due to an increase in the gross margin percentage.
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. While the Company has implemented a series of
cost cutting initiatives, including branch closings, designed to improve
performance, a return to historical profit levels will be dependent on a
significant economic recovery.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008
Results of Operations
---------------------
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results which
may be expected for any subsequent period. The following discussion should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
which appear in Item 1 of this Report.
Consolidated Results of Operations
----------------------------------
In the first three months of fiscal 2009, consolidated net sales decreased by
$81.4 million, or 14%, to approximately $499.7 million, from the comparable
period of fiscal 2008. The decrease in the three months' net sales resulted from
decreases in Staffing Services of $56.8 million, Telecommunications Services of
$22.8 million and Computer Systems of $2.3 million, partially offset by an
increase in Printing and Other of $0.6 million.
Cost of sales decreased by $89.3 million, or 16%, to $477.8 million, and was 96%
of sales, in the three months of fiscal 2009 as compared to 98% of sales in the
comparable period of fiscal 2008. The decrease in the cost of sales percentage
was primarily due to the $19.3 million loss reserve established in the first
quarter of fiscal 2008 in the Telecommunication Services segment.
Selling and administrative costs decreased by $0.2 million, or 1%, in the
current three-month period from the comparable period in fiscal 2008, and was
4.4% of sales, as compared to 3.8% of sales in the comparable period of fiscal
2008. The increase as a percentage of sales was due to the 14% reduction in
sales with no comparable reduction in costs.
Impairment and restructuring charges totaled $8.7 million in fiscal 2009. Based
upon indicators of impairment in the fourth quarter of fiscal 2008, which
included a significant decrease in market capitalization, a decline in recent
operating results, and a decline in the Company's business outlook primarily due
to the macroeconomic environment, the Company performed an interim impairment
test as of November 2, 2008. The Company completed step one of the impairment
analysis and concluded that, as of November 2, 2008, the fair value of the
Computer Systems and Staffing Services segments were below their respective
carrying values including goodwill. Step two of the impairment test was
initiated but, due to the time-consuming nature, had not been completed. The
Company recorded estimates of impairment in the amount of $41.5 million and $4.9
million, in the Computer Systems and Staffing Services segments, respectively,
as of November 2, 2008. During the first quarter of fiscal 2009, the Company
completed the step two analysis and recorded an additional impairment in the
amount of $6.0 million in the Staffing Services segment. In addition, during the
first quarter of fiscal 2009, the Company recorded a pre-tax restructuring
charge of approximately $2.7 million related to the elimination of employee
positions in the Staffing Services and Computer Services segments from a series
of cost cutting initiatives and the closing of a facility in the Staffing
Services segment due to the early termination of a contract. In the first
quarter of fiscal 2008, a restructuring charge of $1.5 million in the Computer
Systems segment was due to the reduction of foreign and domestic personnel as a
result of the acquisition and integration of LSSi.
Depreciation and amortization decreased by $0.7 million, or 8%, in the current
three-month period from the comparable period in fiscal 2008, and was 1.8% of
sales, as compared to 1.7% of sales in the comparable period of fiscal 2008. The
decrease in depreciation and amortization in the current three months from the
comparable 2008 fiscal period was attributable to assets becoming fully
depreciated during fiscal 2008.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Consolidated Results of Operations -- Continued
----------------------------------
The Company reported an operating loss of $17.8 million in the current three
months, as compared to $19.4 million in the comparable period of fiscal 2008 due
to a decrease in segment operating losses of $2.5 million, or 24%, partially
offset by an increase of $0.9 million, or 10%, in general corporate expenses.
The decrease in segment operating losses was attributable to the decreased
operating losses of the Telecommunications Services segment of $19.2 million and
increased operating profits in the Printing and Other segment of $0.3 million,
partially offset by decreased operating results of the Staffing Services segment
of $16.1 million and the Computer Systems segment of $0.9 million.
Other expense decreased by $1.4 million, or 85%, in the current three months
from the comparable period in fiscal 2008 due to an amended securitization
program which resulted in a reduction in securitization fees and an increase in
interest expense.
Interest expense remained at $1.6 million as a decrease in interest expense due
to the reduction in borrowings under the Delta Credit Facility was substantially
offset by increases from the aforementioned amended securitization program and
increased borrowing under the Company's Credit Facility.
The loss from continuing operations before income taxes for the three months of
fiscal 2009 totaled $18.8 million compared to a loss from continuing operations
of $21.7 million in the comparable three months of fiscal 2008.
The Company's effective tax benefit rate on its financial reporting pre-tax loss
was 29.1 % in the three months of fiscal 2009 compared to 37.2% in the
comparable period in fiscal 2008.
Discontinued operations totaled $0.4 million (net of income taxes of $0.3
million) in the three months of fiscal 2008.
The net loss in the three months of fiscal 2009 was $13.1 million compared to a
net loss of $13.2 million in the comparable period of fiscal 2008.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Results of Operations by Segment
--------------------------------
The following two tables reconcile the operating profit by segment to the
consolidated statements of operations for the three months ended February 1,
2009:
Three Months Ended February 1, 2009
-----------------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
-------- -------- ------- ------- ------ -------
Net Sales $ 499.7 $ 425.0 $ 24.4 $ 48.5 $ 5.8 ($ 4.0)
Direct Costs 403.3 363.3 17.6 22.0 4.4 (4.0)
Overhead 74.5 51.2 6.1 17.2 -- --
-------- -------- ------- ------- ------ -------
Cost of Sales 477.8 414.5 23.7 39.2 4.4 (4.0)
Selling and Administrative 22.1 9.8 0.1 1.8 1.0 9.4
Impairment and Restructuring Costs 8.7 8.2 -- 0.5 -- --
Depreciation and Amortization 8.9 3.1 0.6 4.6 0.2 0.4
-------- -------- ------- ------- ------ -------
Operating (Loss) Profit (17.8) (10.6) -- 2.4 0.2 (9.8)
Interest Income 0.6 -- -- -- -- 0.6
Other Expense, net (0.3) -- -- -- -- (0.3)
Foreign Exchange Gain 0.3 -- -- -- -- 0.3
Interest Expense (1.6) -- -- -- -- (1.6)
-------- -------- ------- ------- ------ -------
(Loss) Income from Continuing
Operations before Minority
Interest and Income Taxes ($ 18.8) ($ 10.6) -- $ 2.4 $ 0.2 (10.8)
======== ======== ======= ======= ====== =======
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Three Months Ended January 27, 2008
-----------------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
-------- -------- ------- ------- ------ -------
Net Sales $ 581.1 $ 481.8 $ 47.2 $ 50.8 $ 5.2 ($ 3.9)
Direct Costs 484.6 409.3 51.4 23.6 4.2 (3.9)
Overhead 82.5 52.7 14.3 15.5 -- --
-------- -------- ------- ------- ------ -------
Cost of Sales 567.1 462.0 65.7 39.1 4.2 (3.9)
Selling and Administrative 22.3 11.0 0.1 2.1 0.9 8.2
Impairment and Restructuring
Costs 1.5 -- -- 1.5 -- --
Depreciation and Amortization 9.6 3.3 0.6 4.8 0.2 0.7
-------- -------- ------- ------- ------ -------
Operating (Loss) Profit (19.4) 5.5 (19.2) 3.3 (0.1) (8.9)
Interest Income 1.3 -- -- -- -- 1.3
Other Expense, net (1.7) -- -- -- -- (1.7)
Foreign Exchange Loss (0.3) -- -- -- -- (0.3)
Interest Expense (1.6) -- -- -- -- (1.6)
-------- -------- ------- ------- ------ -------
(Loss) Income from Continuing
Operations before
Minority Interest and
Income Taxes ($ 21.7) $ 5.5 ($ 19.2) $ 3.3 ($ 0.1) ($ 11.2)
======== ======== ======= ======= ====== =======
Staffing Services
-----------------
Three Months Ended
------------------
February 1, 2009 January 27, 2008
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------------------------------
Gross Staffing Sales $412.7 $468.6 ($55.9) (11.9%)
--------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $255.7 $296.5 ($40.8) (13.7%)
--------------------------------------------------------------------------------------------------------------------------------
Net Sales * $425.0 $481.8 ($56.8) (11.8%)
--------------------------------------------------------------------------------------------------------------------------------
Direct Costs $363.3 85.5% $409.3 85.0% $46.0 11.3%
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit $61.7 14.5% $72.5 15.0% ($10.8) (14.9%)
--------------------------------------------------------------------------------------------------------------------------------
Overhead $51.2 12.1% $52.7 10.9% $1.5 2.8%
--------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $9.8 2.3% $11.0 2.3% $1.2 11.4%
--------------------------------------------------------------------------------------------------------------------------------
Impairment and restructuring costs $8.2 1.9% -- -- ($8.2) (100.0%)
--------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $3.1 0.7% $3.3 0.7% $0.2 5.5%
--------------------------------------------------------------------------------------------------------------------------------
Segment Operating (Loss) Profit ($10.6) (2.5%) $5.5 1.1% ($16.1) (293.8%)
--------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
The decrease in net sales of the Staffing Services segment for the three months
of fiscal 2009 from the comparable period in fiscal 2008 was comprised of
decreases of $34.8 million, or 23%, in net A&I sales and $22.0 million, or 7%,
in net Technical sales. Foreign generated net sales for the three months
decreased by 29% from the comparable three months of fiscal 2008, and accounted
for 6% of total net Staffing Services sales for the current three months. On a
constant currency basis, foreign sales increased by 9% from the comparable 2008
three months. In the current three months, the segment's permanent placement
sales decreased by 42% and RPO sales decreased by 63% from the comparable three
months of fiscal 2008. The decrease in sales was affected by the economic
downturn as many of the segment's customers announced layoffs and hiring
freezes.
The decrease in the segment's operating profit was comprised of decreases of
$11.2 million in the Technical division and $4.9 million in the A&I division.
The segment's gross margin percentage decreased by 0.5 percentage point, due to
decreases of 1.8 percentage points in the A&I division. Overhead percentage
increased by 1.2 percentage points from the comparable 2008 period percentages,
due to increases of 1.8 percentage points in the A&I division and 1.0 percentage
points in the Technical division. While the segment has implemented a series of
cost cutting initiatives, including branch closings, designed to improve
performance, a return to historical profit levels will be dependent on a
significant economic recovery.
Three Months Ended
------------------
February 1, 2009 January 27, 2008
---------------- ----------------
Technical Resources % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Gross Sales $546.2 $604.5 ($58.3) (9.7%)
------------------------------------------------------------------------------------------------------------------------------
Net Sales * $306.0 $328.0 ($22.0) (6.7%)
------------------------------------------------------------------------------------------------------------------------------
Direct Costs $260.9 85.3% $279.9 85.3% $19.0 6.8%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $45.1 14.7% $48.1 14.7% ($3.0) (6.4%)
------------------------------------------------------------------------------------------------------------------------------
Overhead $34.0 11.1% $33.0 10.1% ($1.0) (3.1%)
------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $7.0 2.3% $7.8 2.4% $0.8 10.4%
------------------------------------------------------------------------------------------------------------------------------
Impairment and Restructuring Costs $8.1 2.6% -- -- ($8.1) (100.0%)
------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $2.5 0.8% $2.6 0.8% $0.1 3.4%
------------------------------------------------------------------------------------------------------------------------------
Division Operating (Loss) Profit ($6.5) (2.1%) $4.7 1.4% ($11.2) (238.9%)
------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The Technical division's decrease in gross sales in the current three months of
fiscal 2009 from the comparable prior year period included decreases of
approximately $6 million from customers whose business with the Company either
ceased or was substantially lower than in the comparable three months of fiscal
2009, as well as $68 million attributable to net decreases in sales to
continuing customers. This was partially offset by increases of approximately
$16 million of sales to new customers or customers with substantial increased
business. The Technical division's decrease in net sales in the three months of
fiscal 2009 from the comparable period in fiscal 2008 was comprised of decreases
of $21.9 million, or 8%, in traditional alternative staffing and $0.5 million,
or 4%, in net managed service associate vendor sales partially offset by a $0.4
million increase in VMC Consulting project management and consulting sales.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Staffing Services--Continued
-----------------
The decrease in the division's operating profit was the result of the sales
decrease and the impairment and restructuring costs. Based upon indicators of
impairment in the fourth quarter of fiscal 2008, which included a significant
decrease in market capitalization, a decline in recent operating results, and a
decline in the Company's business outlook primarily due to the macroeconomic
environment, the Company performed an interim impairment test at of November 2,
2008. The Company completed step one of the impairment analysis and concluded
that, as of November 2, 2008, the fair value of the Staffing Services segment
was below its carrying value including goodwill. Step two of the impairment test
was initiated but, due to the time-consuming nature, had not been completed. The
Company recorded an estimate of impairment in the amount of $4.9 million as of
November 2, 2008. During the first quarter of fiscal 2009, the Company completed
the step two analyses and recorded an additional impairment in the amount of
$6.0 million in the Staffing Services segment. In addition, the division
recorded $2.1 million in restructuring costs due the elimination of employee
positions from a series of cost cutting initiatives and the closing of a
facility due to the early termination of a contract. The restructuring charge
included: (1) $0.3 million in severance, which was paid in the first quarter of
fiscal 2009; (2) a $1.2 million non-cash charge for the impairment of property,
plant and equipment and the closed facility; and (3) an accrual of $0.6 million
in rent for the remaining term of the lease at the closed facility. The Company
is currently evaluating its overhead structure to determine where additional
reductions can be made.
Three Months Ended
------------------
February 1, 2009 January 27, 2008
---------------- ----------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
---------------------------------------------------------------------------------------------------------------------------
Gross Sales $122.2 $160.6 ($38.4) (23.9%)
---------------------------------------------------------------------------------------------------------------------------
Net Sales * $119.0 $153.8 ($34.8) (22.6%)
---------------------------------------------------------------------------------------------------------------------------
Direct Costs $102.4 86.0% $129.4 84.2% $27.0 21.0%
---------------------------------------------------------------------------------------------------------------------------
Gross Profit $16.6 14.0% $24.4 15.8% ($7.8) (31.6%)
---------------------------------------------------------------------------------------------------------------------------
Overhead $17.2 14.6% $19.7 12.8% $2.5 12.6%
---------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $2.8 2.3% $3.2 2.1% $0.4 13.6%
---------------------------------------------------------------------------------------------------------------------------
Restructuring costs $0.1 -- -- -- ($0.1) (100.0%)
---------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.6 0.5% $0.7 0.4% $0.1 13.9%
---------------------------------------------------------------------------------------------------------------------------
Division Operating (Loss) Profit ($4.1) (3.4%) $0.8 0.5% ($4.9) (641.7%)
---------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The A&I division's decrease in gross sales in the first three months of fiscal
2009 as compared to the comparable period of fiscal 2008 included a decline of
approximately $14 million of sales to customers which the Company either ceased
or substantially reduced servicing in the current year, as well as $33 million
attributable to net decreases in sales to continuing customers. This was
partially offset by a growth of approximately $9 million from new customers, or
customers whose business with the Company in the comparable fiscal period was
substantially below their volume for the first three-months of fiscal 2009.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Staffing Services--Continued
-----------------
The decreased operating results were primarily due to the sales decrease, the
decrease in gross margin percentage and the increase in overhead as a percentage
of sales. The decrease in gross margin percentage was primarily due to a 0.4
percentage point decrease in markup on recruited sales, a 0.6 percentage point
increase in workers' compensation costs as a percentage of direct labor, a $1.2
million reduction in higher margin permanent placement sales, partially offset
by a 0.4 percentage reduction in payroll taxes as a percentage of sales. The
increase in workers' compensation costs was a result of a $1.2 million
adjustment recognized in the first quarter of fiscal 2008 related to
improvements in claims experience and the regulatory environment in several
states. These improvements are now reflected in lower accrual rates and no
further adjustment was required in the first quarter of fiscal 2009. The payroll
tax reduction is expected to continue throughout the remainder of the fiscal
year. Although overheads have decreased from the comparable 2008 quarter, the
increase in overhead percentage in the first three months of fiscal 2009 is a
result of the sales reduction with a slower decrease in overhead. The indirect
labor headcount has been decreased by 5% from the comparable quarter in fiscal
2008, and the Company is currently evaluating its overhead structure to
determine where additional overhead reductions can be made.
Although the markets for the segment's services include a broad range of
industries throughout the United States, Europe and Asia, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could in the future affect the profitability of the segment. Much of the
segment's business is obtained through submission of competitive proposals for
staffing services and other contracts which are frequently re-bid after
expiration. Many of this segment's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the segment
is not in default under the contract, and generally do not provide for a minimum
amount of work to be awarded to the segment. While the Company has historically
secured new contracts and believes it can secure renewals and/or extensions of
most of these contracts, some of which are material to this segment, and obtain
new business, there can be no assurance that contracts will be renewed or
extended, or that additional or replacement contracts will be awarded to the
Company on satisfactory terms.
Telecommunications Services
---------------------------
Three Months Ended
------------------
February 1, 2009 January 27, 2008
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-----------------------------------------------------------------------------------------------------------------------------
Net Sales $24.4 $47.2 ($22.8) (48.4%)
-----------------------------------------------------------------------------------------------------------------------------
Direct Costs $17.6 72.2% $51.4 108.8% $33.8 65.7%
-----------------------------------------------------------------------------------------------------------------------------
Gross Profit (Loss) $6.8 27.8% ($4.2) (8.8%) $11.0 262.5%
-----------------------------------------------------------------------------------------------------------------------------
Overhead $6.1 25.0% $14.3 30.3% $8.2 57.2%
-----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $0.1 0.4% $0.1 0.3% -- --
-----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.6 2.4% $0.6 1.2% -- --
-----------------------------------------------------------------------------------------------------------------------------
Segment Operating Loss -- -- ($19.2) (40.6%) $19.2 100.0%
-----------------------------------------------------------------------------------------------------------------------------
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Telecommunications Services--Continued
---------------------------
The Telecommunications Services segment's sales decrease in the first three
months of fiscal 2009 from the comparable period of fiscal 2008 was due to
decreases of $22.3 million, or 59% in the Construction and Engineering division
and $0.5 million, or 6%, in other divisions. The sales decrease in the
Construction and Engineering division in the first three months of fiscal 2009
was largely due to a large installation contract with substantial revenue in the
first quarter of fiscal 2008 that was completed by the end of fiscal 2008,
partially offset by a net increase in the recognition of revenue in fiscal 2009
for several large contracts accounted for using the percentage-of-completion
method of accounting. The segment's sales backlog at the end of the first
quarter of fiscal 2009 was $30 million, as compared to a backlog of
approximately $69 million at the end of the comparable 2008 quarter.
The increased operating results for the three months were due to a $19.3 million
loss reserve established in the first quarter of fiscal 2008 for certain costs
included in inventory related to work performed and for additional costs
expected to be incurred to complete work under that contract. That contract was
completed at the end of fiscal 2008, and the Company continues to negotiate with
the customer to be reimbursed for disputed billings under the contract. The
decreased overhead for the first three months of fiscal 2009 was related to an
indirect headcount reduction of approximately 50% from the first quarter of
fiscal 2008. The segment continues to focus on reducing overhead costs to
compensate for lower sales.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurances that contracts will be renewed or extended or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms.
Computer Systems
----------------
Three Months Ended
------------------
February 1, 2009 January 27, 2008
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
-----------------------------------------------------------------------------------------------------------
Net Sales $48.5 $50.8 ($2.3) (4.5%)
-----------------------------------------------------------------------------------------------------------
Direct Costs $22.0 45.4% $23.6 46.4% $1.6 6.7%
-----------------------------------------------------------------------------------------------------------
Gross Profit $26.5 54.6% $27.2 53.6% ($0.7) (2.6%)
-----------------------------------------------------------------------------------------------------------
Overhead $17.2 35.5% $15.5 30.6% ($1.7) (11.0%)
-----------------------------------------------------------------------------------------------------------
Selling & Administrative $1.8 3.7% $2.1 4.0 % $0.3 12.6%
-----------------------------------------------------------------------------------------------------------
Restructuring $0.5 1.0% $1.5 3.0% $1.0 69.1%
-----------------------------------------------------------------------------------------------------------
Depreciation & Amortization $4.6 9.4% $4.8 9.6% $0.2 6.2%
-----------------------------------------------------------------------------------------------------------
Segment Operating Profit $2.4 5.0% $3.3 6.4% ($0.9) (25.3%)
-----------------------------------------------------------------------------------------------------------
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Computer Systems--Continued
----------------
The Computer Systems segment's sales decrease in the three months of fiscal 2009
from the comparable period of fiscal 2008 was comprised of a decrease of $4.2
million, or 22%, in database access transaction fee revenue, including ASP
directory assistance, partially offset by increases of $1.4 million, or 9%, in
the Maintech division's IT maintenance and $0.5 million, or 3%, in projects and
other. The reduction in sales in fiscal 2009 from the comparable 2008 fiscal
quarter included decreases of approximately $3 million of sales from customers
whose business with the Company either ceased or was substantially lower than in
the first quarter of fiscal 2008, as well as $3 million attributable to net
decreases in sales to continuing customers. This was partially offset by sales
increases of approximately $4 million to new customers, or customers with
substantial increased business. The decrease in transaction fee revenue was
primarily due to a reduction of such services to a major customer as the
customer agreement transitions to a fixed monthly fee model from a variable
transaction-based pricing model, partially offset by an increase at a major
customer.
The segment's decreased operating profit was primarily due to the decrease in
sales and the increase in overhead in dollars and as a percentage of sales,
partially offset by the increase in gross margin percentage. The increased gross
profit percentage was a result of increased margins from the database access
fees and projects and other revenue. The increased overhead costs were primarily
due to increased communications costs related to a new business initiative,
along with increased indirect labor.
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.
Printing and Other
------------------
Three Months Ended
------------------
February 1, 2009 January 27, 2008
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
--------------------------------------------------------------------------------------------------------
Net Sales $5.8 $5.2 $0.6 11.9%
--------------------------------------------------------------------------------------------------------
Direct Costs $4.4 75.5% $4.2 80.8% ($0.2) (4.5%)
--------------------------------------------------------------------------------------------------------
Gross Profit $1.4 24.5% $1.0 19.2% $0.4 43.0%
--------------------------------------------------------------------------------------------------------
Selling & Administrative $1.0 18.1% $0.9 17.6% ($0.1) (15.2%)
--------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.2 3.2% $0.2 3.8% -- --
--------------------------------------------------------------------------------------------------------
Segment Operating Profit
(Loss) $0.2 3.2% ($0.1) (2.2%) $0.3 266.4%
--------------------------------------------------------------------------------------------------------
On September 5, 2008, the Company sold the net assets of its directory systems
and services and North American telephone directory publishing operations to
Yellow Page Group. The net purchase price of approximately $179 million was paid
in cash at closing.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Printing and Other - Continued
------------------
The transaction included the operations of Volt Directory Systems and Services
and DataNational, formerly part of the Telephone Directory segment, but excluded
the Uruguayan printing and telephone directory operations, which now comprise
this new segment. The results of operations of Volt Directory Systems and
DataNational have been classified as discontinued operations in the prior period
results.
The Printing and Other segment's sales increased by $0.6 million from the
comparable three-month period in fiscal 2008. The sales increase was comprised
of printing sales. The Printing and Other sales in the first three months of
fiscal 2009 as compared to the comparable period of fiscal 2008 included a
growth of approximately $1.1 million from new customers, or customers whose
business with the Company in the comparable fiscal period was substantially
below the volume for the three-month 2009 fiscal period volume, partially offset
by a decline of approximately $0.3 million of sales to customers which the
Company either ceased or substantially reduced servicing in the first quarter of
fiscal 2009, as well as $0.2 million attributable to net decreases in sales to
continuing customers. The improved operating results for the three months of
fiscal 2009 were predominantly due to the increase in sales and gross margin
percentage.
General Corporate Expenses and Other Income (Expense)
-----------------------------------------------------
Three Months Ended
------------------
February 1, 2009 January 27, 2008
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
----------------------------------------------------------------------------------------------------
Selling & Administrative $9.4 1.9% $8.2 1.4% ($1.2) (13.9%)
----------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.4 0.1% $0.7 0.1% $0.3 38.0%
----------------------------------------------------------------------------------------------------
Interest Income $0.6 0.1% $1.3 0.2% ($0.7) (52.9%)
----------------------------------------------------------------------------------------------------
Other Expense ($0.3) -- ($1.7) (0.3%) $1.4 85.2%
----------------------------------------------------------------------------------------------------
Foreign Exchange Gain (Loss) $0.3 0.1% ($0.3) (0.1%) $0.6 191.3%
----------------------------------------------------------------------------------------------------
Interest Expense ($1.6) (0.3%) ($1.6) (0.3%) -- --
----------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the
three months of fiscal 2009 as compared to the comparable 2008 period, were:
The increase in selling and administrative expenses in the current three months
from the comparable 2008 fiscal period was primarily the result of increased
labor and communications costs.
The decrease in depreciation and amortization in the three months of fiscal 2009
from the comparable 2008 fiscal period was due to portions of the corporate
resource planning system becoming fully amortized.
The decrease in interest income from the comparable period in fiscal 2008 was
due to lower interest rates and a reduction in premium deposits held by
insurance companies and restricted cash.
The decrease in other expense from the comparable period in fiscal 2008 was due
to an amended securitization program which resulted in a reduction in
securitization fees and an increase in interest expense.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2009 COMPARED
TO THE THREE MONTHS ENDED JANUARY 27, 2008--Continued
Interest expense reflected no change from the comparable period in fiscal 2008
due to lower borrowings under the securitization agreement offset by the
aforementioned amendment to the securitization program.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, increased by $13.8 million to $134.7 million in the
three months ended February 1, 2009.
Operating activities provided $11.4 million of cash in the first three months of
fiscal 2009. In the comparable fiscal 2008 period, operating activities provided
$10.9 million in cash.
Operating activities in the first three months of fiscal 2009, exclusive of
changes in operating assets and liabilities, provided $2.2 million of cash, as
the Company's net loss of $13.1 million included non-cash charges primarily for
depreciation and amortization of $8.9 million, goodwill impairment of $6.0
million and the impairment of property, plant and equipment of $1.2 million.
Operating activities in the first three months of fiscal 2008, exclusive of
changes in operating assets and liabilities, used $7.9 million of cash, as the
Company's net loss of $13.2 million included non-cash charges primarily for
depreciation and amortization of $9.6 million, accounts receivable provisions of
$4.2 million partially offset by a deferred tax benefit of $8.1 million.
Changes in operating assets and liabilities produced $9.2 million of cash, net,
in the first three months of fiscal 2009 principally due to a decrease in the
level of accounts receivable of $89.0 million and a decrease in the level of
inventory, primarily in the Telecommunications Services segment, of $8.3 million
offset by a decrease in income tax liability of $63.4 million, and a decrease in
accounts payable of $23.3 million. Changes in operating assets and liabilities
produced $18.8 million of cash, net, in the first three months of fiscal 2008
principally due to a decrease in the level of accounts receivable of $38.1
million and a decrease in the level of inventory, primarily in the
Telecommunications Services segment, of $21.6 million offset by a reduction in
securitization of receivables of $20.0 million and a decrease in accounts
payable of $18.0 million.
The $7.1 million of cash applied to investing activities for the first three
months of fiscal 2009 resulted from the expenditures for net additions to
property, plant and equipment. The $7.8 million of cash applied to investing
activities for the first three months of fiscal 2008 resulted primarily from the
expenditures of $7.7 million for net additions to property, plant and equipment.
The principal factor in the $9.0 million of cash provided by financing
activities in the first three months of fiscal 2009 was an increase in notes
payable. The principal factors in the $6.4 million of cash used by financing
activities in the first three months of fiscal 2008 were a payment of $8.1
million for the purchase of treasury shares partially offset by an increase in
notes payable of $1.8 million.
Commitments
-----------
There has been no material change through February 1, 2009 in the Company's
contractual obligations and other commercial commitments from that reported in
the Company's Annual Report on Form 10-K for the fiscal year ended November 2,
2008.
34
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.
Credit Lines
------------
At February 1, 2009, the Company had credit facilities with various banks and
financial conduits which provided for borrowings and letters of credit of up to
an aggregate of $326.8 million, including the Company's $175.0 million five-year
accounts receivable securitization program (the "Amended Securitization
Program"), $42.0 million five-year unsecured revolving credit agreement ("Credit
Agreement") and the Company's wholly owned subsidiary, Volt Delta Resources,
LLC's ("Volt Delta") $100.0 million secured, syndicated revolving credit
agreement ("Delta Credit Facility").The Company had total outstanding borrowings
of $116.7 million as of February 1, 2009. Included in these borrowings were
$22.7 million of foreign currency borrowings which provide economic hedges
against foreign denominated net assets.
Amended Securitization Program
------------------------------
On June 3, 2008, the Company's $200.0 million accounts receivable securitization
program (see Note B), which was due to expire within the next year, was
transferred to a multi-buyer program administered by PNC Bank. The Amended
Securitization Program has a five-year term. The conduits' commercial paper
facilities are backed by liquidity agreements which are periodically renewed
with the sponsor banks and have initial terms of 364 days ("364 day liquidity").
Under the Amended 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, borrows from two commercial paper conduits (Market Street
Funding LLC, a PNC Bank affiliate, and Relationship Funding LLC), secured by an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company. The Company retains the servicing responsibility for
the accounts receivable.
The Amended Securitization Program is not an off-balance sheet arrangement as
Volt Funding is a 100% owned consolidated subsidiary of the Company. The
receivables and related borrowings remain on the balance sheet since Volt
Funding effectively retains control over the receivables, which are no longer
treated as sold assets. Accordingly, pledged receivables are included as trade
accounts receivable, net, while the corresponding borrowings are included as
short-term borrowings on the condensed consolidated balance sheet. At February
1, 2009, Volt Funding had borrowed from $42.9 million and $17.1 million from
Market Street Funding and Relationship Funding, respectively. At February 1,
2009, borrowings bear a weighted-average interest rate of 2.3% per annum,
excluding a facility fee of 0.75% per annum paid on the entire facility and a
program fee of 0.5% paid on the outstanding borrowings.
The Amended Securitization Program is subject to termination by PNC Bank (with
the consent of the majority purchasers) under certain circumstances, including,
among other things, the default rate, as defined, on receivables exceeding a
specified threshold, or the rate of collections on receivables failing to meet a
specified threshold.
At February 1, 2009, the Company was in compliance with all requirements of the
Amended Securitization Program.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
Credit Agreement
----------------
On February 28, 2008, the Company entered into the Credit Agreement to replace
the Company's then expiring $40.0 million secured credit agreement with an
unsecured credit facility ("Credit Facility") in favor of the Company and
designated subsidiaries, of which up to $15.0 million may be used for letters of
credit and $25.0 million for borrowing in alternative currencies. At February 1,
2009, $12.0 million was drawn on this facility. The administrative agent for the
Credit Facility is Bank of America, N.A. The other banks participating in the
Credit Facility are JP Morgan Chase Bank, N.A. as syndicated agent, Wells Fargo
Bank, N.A. and HSBC Bank USA, N.A.
Borrowings under the Credit Agreement bear interest at various rate options
selected by the Company at the time of each borrowing. Certain rate options,
together with a facility fee, are based on a leverage ratio, as defined. Based
upon the Company's leverage ratio at February 1, 2009, 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 1.9% per annum, excluding a
fee of 0.2% per annum paid on the entire facility.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on total
funded debt to EBITDA of 3.0 to 1.0; and a requirement that the Company maintain
a minimum ratio of EBITDA, as defined, to interest expense, as defined, of 4.0
to 1.0 for the twelve months ended as of the last day of each fiscal quarter.
The Credit Agreement also imposes limitations on, among other things, the
incurrence of additional indebtedness, the level of annual capital expenditures,
and the amount of investments, including business acquisitions and mergers, and
loans that may be made by the Company to its subsidiaries. The Company was in
compliance with all covenants of the Credit Agreement at February 1, 2009.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into the secured Delta Credit Facility,
which expires in December 2009, with Wells Fargo, N.A. as the administrative
agent and arranger, and as a lender thereunder. Wells Fargo and two of the other
three lenders under the Delta Credit Facility, Bank of America, N.A. and
JPMorgan Chase, also participate in the Company's $42.0 million unsecured
revolving Credit Facility. Neither the Company nor Volt Delta guarantees each
other's facility but certain subsidiaries of each are guarantors of their
respective parent company's facility.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $100.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At February 1, 2009, $40.6 million was drawn
on this facility. Certain interest rate options, as well as the commitment fee,
are based on a leverage ratio, as defined, which resets quarterly. Based upon
Volt Delta's leverage ratio at February 1, 2009, 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 1.2% per annum. Volt Delta also pays a
commitment fee on the unused portion of the Delta Credit Facility which varies
based on Volt Delta's leverage ratio. At February 1, 2009, the commitment fee
was 0.3% per annum.
The Delta Credit Facility provides for the maintenance of various financial
ratios and covenants, including, among other things, a total debt to EBITDA
ratio, as defined, which cannot exceed 2.0 to 1.0 on the last day of any fiscal
quarter, a fixed charge coverage ratio, as defined, which cannot be less than
2.5 to 1.0 for the twelve months ended as of the last day of each fiscal quarter
and the maintenance of a consolidated net worth, as
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
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 February 1, 2009, Volt Delta was in compliance with all
covenants in the Delta Credit Facility.
On February 12, 2009, the Delta Credit Facility was voluntarily reduced from
$100.0 million to $75.0 million.
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.
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 different from what actually occurs. Management believes the
critical accounting policies and areas that require the most significant
estimates, judgments, assumptions or valuations used in the preparation of the
Company's financial statements are as follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments. Revenue is generally recognized when
persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed and determinable and collectibility is
probable. The determination of whether and when some of the criteria below have
been satisfied sometimes involves assumptions and judgments that can have a
significant impact on the timing and amount of revenue we report.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered. In the first three
months of fiscal 2009, this revenue comprised approximately 76% of the
Company's net consolidated sales.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, for which the Company receives an
administrative fee for arranging for, billing for and collecting the
billings related to staffing companies ("associate vendors") who have
supplied personnel to the Company's customers. The administrative fee is
either charged to the customer or subtracted from the Company's payment to
the associate vendor. The customer is typically responsible for assessing
the work of the associate vendor, and has responsibility for the
acceptability of its personnel, and in most instances the customer and
associate vendor have agreed that the Company does not pay the associate
vendor until the customer pays the Company. Based upon the revenue
recognition principles prescribed in Emerging Issues Task Force ("EITF")
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent,"
revenue for these services, where the customer and the associate vendor
have agreed that the Company is not at risk for payment, is recognized net
of associated costs in the period the services are rendered. In addition,
sales for certain contracts generated by the Company's Staffing Solutions
Group's managed services operations have similar attributes. In the first
three months of fiscal 2009, this revenue comprised approximately 2% of the
Company's net consolidated sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables, in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 81-1, "Accounting for
Performance of Construction-Type Contracts." The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period the services are rendered when on a time and material basis, and
when the Company is responsible for project completion, revenue is
recognized when the project is complete and the customer has approved the
work. In the first three months of fiscal 2009, this revenue comprised
approximately 7% of the Company's net consolidated sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in SOP
81-1, using the completed-contract method, to recognize revenue on a gross
basis upon customer acceptance of the project or by the
percentage-of-completion method, when applicable. When using the
percentage-of-completion method, revenue is recognized based on the extent
of progress towards completion of the contract. For those contracts in
which the customers approve the progress of our work, the extent of
progress towards completion is measured based on the ratio of revenue
approved-to-date to the total estimated revenue at completion of the job.
For those contracts in which the customers do not approve the progress of
our work, the extent of progress towards completion is measured based on
the ratio of direct labor incurred-to-date to the total estimated direct
labor at completion of the contract. In the first three months of fiscal
2009, this revenue comprised approximately 3% of the Company's net
consolidated sales.
Non-Construction: Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and, if applicable, any completed
units are delivered and accepted by the customer. In the first three months
of fiscal 2009, this revenue comprised approximately 2% of the Company's
net consolidated sales.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Computer Systems:
Database Access: Sales are derived from the Company granting access to its
proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases. In the first three months of
fiscal 2009, this revenue comprised approximately 3% of the Company's net
consolidated sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems, on a time and material basis or a contract basis. The
Company uses its own employees and inventory in the performance of the
services, and has credit risk for collecting its billings. Revenue for
these services is recognized on a gross basis in the period in which the
services are performed, contingent upon customer acceptance when on a time
and material basis, or over the life of the contract, as applicable. In the
first three months of fiscal 2009, this revenue comprised approximately 3 %
of the Company's net consolidated sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in SOP 97-2 "Software Revenue Recognition" and EITF 00-21,
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value or by the use of the percentage-of-completion method, when
applicable. In the first three months of fiscal 2009, this revenue
comprised approximately 3% of the Company's net consolidated sales.
Printing and Other:
Printing: Sales are derived from the Company's sales of printing services
in 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 printed documents have been
delivered. In the first three months of fiscal 2009, this revenue comprised
approximately 1% of the Company's net consolidated sales.
Other: Sales are derived from the Company's sales of telephone directory
advertising for books it publishes as an independent publisher in Uruguay.
The Company's employees perform the services and the Company has credit
risk for collecting its billings. Revenue for these services is recognized
on a gross basis in the period the books are printed and delivered. In the
first three months of fiscal 2009, this revenue comprised less than 1% of
the Company's net consolidated sales.
For those contracts accounted for under SOP 81-1, the Company records provisions
for estimated losses on contracts when losses become evident.
Accumulated unbilled costs on contracts are carried in inventory at the lower of
actual cost or estimated realizable value.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Allowance for Uncollectible Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for accounts receivable are maintained based
upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company also makes judgments about the creditworthiness
of significant customers based upon ongoing credit evaluation, and might assess
current economic trends that might impact the level of credit losses in the
future. However, since a reliable prediction of future changes in the financial
stability of customers is not possible, the Company cannot guarantee that
allowances will continue to be adequate. If actual credit losses are
significantly higher or lower than the allowance established, it would require a
related charge or credit to earnings.
Goodwill and Indefinite-Lived Intangible Assets - 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, which compare the fair value of each
reporting unit to its carrying value. 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 a quarter that could not have been reasonably foreseen in prior
periods. The Company generally determines the fair value of a reporting unit
using the income approach, which is based on the present value of estimated
future cash flows, or the market approach, which compares the business unit's
multiples of sales and EBITDA to those multiples of its competitors. If the
carrying value of the reporting unit's net assets including goodwill exceeds the
fair value of the reporting unit, then the Company performs step two of the
impairment test which allocates the fair value of the reporting unit's assets
and liabilities in a manner similar to a purchase price allocation, with any
residual fair value being allocated to goodwill. If the carrying value of a
reporting unit's goodwill exceeds its implied fair value, then an impairment of
goodwill has occurred for such amount and is reported as a component of
operating income. If these estimates or their related assumptions used in the
impairment test change in the future as a result of changes in strategy and/or
market conditions, the Company may be required to record an impairment charge in
the future.
Based upon indicators of impairment in the fourth quarter of fiscal 2008, which
included a significant decrease in market capitalization, a decline in recent
operating results, and a decline in the Company's business outlook primarily due
to the current macroeconomic environment, the Company performed an interim
impairment test as of November 2, 2008 on each of its four segments. The Company
completed step one of the impairment analysis and concluded that, as of November
2, 2008, the fair value of the Computer Systems and Staffing Services segments
were below their respective carrying values including goodwill. Step two of the
impairment test was initiated but, due to the time-consuming nature, had not
been completed at that time. The Company recorded estimates of impairment in the
amount of $41.5 million and $4.9 million, in the Computer Systems and Staffing
Services segments, respectively, as of November 2, 2008. During the first
quarter of fiscal 2009, the Company completed the step two analyses and recorded
an additional impairment in the amount of $6.0 million in the Staffing Services
segment.
The Company considered the income, market and cost approaches in arriving at our
indicators of value. The Company relied on the income and market approaches to
arrive at its valuation conclusion. The cost approach was viewed as the floor
for the value of the reporting units and was calculated based on the book value
of working capital. The income approach was given greater weight than the market
approach due to the lack of strongly comparable companies, the significant
fluctuations in the financial markets and the lack of recently comparable
transactions. The material assumptions used for the income approach were the
forecasted revenue growth by reporting unit as well as the discount rate and
long-term growth rate. The Company considered historical rates and current
market conditions when determining the discount and growth rates used in its
analyses. For the market approach the material assumptions were financial data
for comparable companies,
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
adjusted for differences in size, diversification and profitability. The Company
also considered the control premium (which can be defined as the difference
between fair value and market price) and other qualitative factors including its
low float, concentrated ownership and limited analyst coverage.
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line or accelerated
methods at rates calculated to allocate the cost of the assets over their period
of use. Intangible assets, other than goodwill and indefinite-lived intangible
assets, and property, plant and equipment are reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Under SFAS No. 144, these assets are tested for
recoverability whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Circumstances which could trigger a
review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or legal
factors; the accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of the asset; current
period cash flow or operating losses combined with a history of losses or a
forecast of continuing losses associated with the use of the asset; and a
current expectation that the asset will more likely than not be sold or disposed
of significantly before the end of its estimated useful life. Recoverability is
assessed based on the carrying amount of the asset and the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset or asset group. An impairment loss is recognized when the
carrying amount exceeds the estimated fair value of the asset or asset group.
The impairment loss is measured as the amount by which the carrying amount
exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with SOP No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Subsequent
to the preliminary project planning and approval stage, all appropriate costs
are capitalized until the point at which the software is ready for its intended
use. Subsequent to the software being used in operations, the capitalized costs
are transferred from costs-in-process to completed property, plant and
equipment, and are accounted for as such. All post-implementation costs, such as
maintenance, training and minor upgrades that do not result in additional
functionality, are expensed as incurred. The capitalization process involves
judgment as to what types of projects and tasks are capitalizable. Although the
Company believes the decisions made in the past concerning the accounting
treatment of these software costs have been reasonable and appropriate,
different decisions could materially impact financial results.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
Income Taxes - Estimates of Effective Tax Rates, Deferred Taxes and Valuation
Allowance - When the financial statements are prepared, the Company estimates
its income taxes based on the various jurisdictions in which business is
conducted. Significant judgment is required in determining the Company's
worldwide income tax provision. Liabilities for anticipated tax audit issues in
the United States and other tax jurisdictions are based on estimates of whether,
and the extent to which, additional taxes will be due. The recognition of these
provisions for income taxes is recorded in the period in which it is determined
that such taxes are due. If in a later period it is determined that payment of
this additional amount is unnecessary, a reversal of the liability is
recognized. As a result, the ongoing assessments of the probable outcomes of the
audit issues and related tax positions require judgment and can materially
increase or decrease the effective tax rate and materially affect the Company's
operating results. This also requires the Company to estimate its current tax
exposure and to assess temporary differences that result from differing
treatments of certain items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are reflected on the
balance sheet. The Company must then assess the likelihood that its deferred tax
assets will be realized. To the extent it is believed that realization is not
likely, a valuation allowance is established. When a valuation allowance is
increased or decreased, a corresponding tax expense or benefit is recorded in
the statement of operations.
The deferred tax asset at February 1, 2009 was $11.8 million, net of the
valuation allowance of $5.6 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.
Effective October 29, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
There was no material impact on the Company's consolidated financial position
and results of operations as a result of the adoption of the provisions of FIN
48.
Securitization Program - On June 3, 2008, the Company's $200.0 million accounts
receivable securitization program (see Note B), which was due to expire within
the next year, was transferred to a multi-buyer program administered by PNC
Bank. The Amended Securitization Program has a five-year term (subject to 364
day liquidity). On January 7, 2009, the Amended Securitization Program was
further amended to reduce the size of the facility from $200.0 million to $175.0
million and to extend the 364-day liquidity to January 6, 2010. The scheduled
expiration of the Amended Securitization Program was not amended, and remains
2013.
Under the Amended 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, a
wholly-owned special purpose subsidiary of the Company. Volt Funding, in turn,
borrows from two commercial paper conduits (Market Street Funding LLC, a PNC
Bank affiliate, and Relationship Funding LLC), secured by an undivided
percentage ownership interest in the pool of receivables Volt Funding acquires
from the Company. The Company retains the servicing responsibility for the
accounts receivable.
The Amended Securitization Program is not an off-balance sheet arrangement as
Volt Funding is a 100% owned consolidated subsidiary of the Company. The
receivables and related borrowings remain on the balance sheet since Volt
Funding effectively retains control over the receivables, which are no longer
treated as sold assets. Accordingly, pledged receivables are included as trade
accounts receivable, net, while the corresponding
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
borrowings are included as short-term borrowings on the condensed consolidated
balance sheet. At February 1, 2009, Volt Funding had borrowed $42.9 million and
$17.1 million from Market Street Funding and Relationship Funding, respectively.
At February 1, 2009, borrowings bear a weighted-average interest rate of 2.3%
per annum, excluding a facility fee of 0.75% per annum paid on the entire
facility and a program fee of 0.5% paid on the outstanding borrowings.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds, and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For each policy year, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of services in the period in which such
determination is made.
Medical Insurance Program -The Company is self-insured for the majority of its
medical benefit programs. The Company remains insured for a portion of its
medical program (primarily HMOs) as well as the entire dental program. The
Company provides the self-insured medical benefits through an arrangement with a
third party administrator. However, the liability for the self-insured benefits
is limited by the purchase of stop loss insurance. The contributed and withheld
funds and related liabilities for the self-insured program together with unpaid
premiums for the insured programs are held in a 501(c)9 employee welfare benefit
trust. These amounts, other than the current provisions, do not appear on the
balance sheet of the Company. In order to establish the self-insurance reserves,
the Company utilized actuarial estimates of expected losses based on statistical
analyses of historical data. The provision for future payments is initially
adjusted by the enrollment levels in the various plans. Periodically, the
resulting liabilities are monitored and will be adjusted as warranted by
changing circumstances. Should the amount of claims occurring exceed what was
estimated or medical costs increase beyond what was expected, liabilities might
not be sufficient, and additional expense may be recorded by the Company.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2010
------------------------------------------------------------
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations." This statement amends the requirements for an acquirer's
recognition and measurement of the assets acquired and the liabilities assumed
in a business combination. This statement is effective for financial statements
issued for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008 and should be applied prospectively for all
business combinations entered into after the adoption date. The impact of
adopting this statement is not material.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB NO. 51." This statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This statement is
effective for financial statements issued for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2008. The Company is
currently evaluating the impact of adopting this statement.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133."
This statement requires enhanced disclosures about an entity's derivative and
hedging activities by explaining how and why derivatives are used by the entity,
how they are accounted for under Statement 133, and how derivatives affect the
entity's various financial statements. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early adoption encouraged. The Company is currently evaluating
the impact of adopting this statement.
In April 2008, the FASB issued FASB Staff Position ("FSP") No. 142-3,
"Determination of the Useful Life of Intangible Assets." This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, "Goodwill and Other Intangible Assets." This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
Company is currently evaluating the impact of adopting this statement.
Related Party Transactions
--------------------------
During the first three months of fiscal 2009 and 2008, the Company paid or
accrued $0.6 million and $0.2 million, respectively, to the law firms of which
Lloyd Frank, a director of the Company, is and was of counsel, for services
rendered to the Company and expenses reimbursed. In addition, the Company paid
or accrued $17,500 and $1,900, respectively, during the first three months of
fiscal 2009 and 2008 to Michael Shaw, Ph.D., a brother of Steven Shaw, the Chief
Executive Officer and a director of the Company, for services rendered to the
Company.
44
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 $175 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 in interest rates would increase the Company's
annual net interest expense by $0.5 million. Similarly, a hypothetical
100-basis-point (1%) decrease in interest rates would decrease the Company's
annual net interest expense by $27,000.
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 $13.9 million
at February 1, 2009. This fair value was calculated by applying the appropriate
fiscal year-end interest rate to the Company's present stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At February 1, 2009, the total market value of these
investments was $3.8 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 February 1, 2009, the total of the Company's net investment in foreign
operations was $11.3 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
February 1, 2009, the Company did not have any outstanding foreign currency
option 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 February
1, 2009 by 10% would result in a pretax gain of $1.1 million related to these
positions. Similarly, a hypothetical strengthening of the U.S. dollar against
these currencies at February 1, 2009 by 10% would result in a pretax loss of
$1.1 million related to these positions.
45
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at February 1,
2009. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The
information is presented in U.S. dollar equivalents, which is the Company's
reporting currency.
Interest Rate Market Risk Payments Due By Period as of February 1, 2009
------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 Year Years Years Years
------ ------- ------ ------ -----
(Dollars in thousands of US$)
Cash and Cash Equivalents and Restricted Cash
---------------------------------------------
Money Market and Cash Accounts $162,868 $162,868
Weighted Average Interest Rate 0.7% 0.7%
-------- --------
Total Cash, Cash Equivalents and Restricted
Cash $162,868 $162,868
======== ========
Debt
----
Term Loan $ 12,182 $565 $1,280 $1,506 $8,831
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Note Payable $425 $130 $188 $107 --
Interest Rate 5.0% 5.0% 5.0% 5.0%
-------- -------- ------ ------ ------
Total Long Term Debt $ 12,607 $ 695 $1,468 $1,613 $8,831
Short-term Borrowings $116,669 $116,669 -- -- --
Weighted Average Interest Rate 2.9% 2.9% -- -- --
-------- ------- ------ ------ ------
Total Debt $129,276 $117,364 $1,468 $1,613 $8,831
======== ======== ====== ====== ======
46
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company's management is responsible for maintaining adequate internal
controls over financial reporting and for its assessment of the effectiveness of
internal controls over financial reporting.
The Company carried out an evaluation of the effectiveness of the design and
operation of its "disclosure controls and procedures," as defined in, and
pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of February
1, 2009 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.
As of November 2, 2008, the Company's management concluded that the Company did
not maintain effective internal controls over financial reporting at one of the
Company's subsidiaries because of the effect of a material weakness in the
Company's system of internal controls, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Management
concluded that the subsidiary did not maintain effective policies and procedures
to timely review and evaluate the appropriate recognition of revenue related to
sales contracts with multiple deliverables. Additionally, management concluded
that the subsidiary did not timely and/or accurately review and monitor certain
other transactional control functions. These deficiencies resulted in multiple
adjustments which caused a reasonable possibility that a material misstatement
of the Company's annual or interim financial statements will not be prevented or
detected on a timely basis.
Remediation Efforts Related to the Material Weakness in Internal Controls
The Company's management reviewed and evaluated the design of the control
procedures relating to revenue recognition and other transactions, and is taking
the following actions to remediate the reported material weakness in internal
controls over financial reporting.
Management continues its evaluation of the design of certain controls and the
organizational structure of the subsidiary. During the financial statement close
process for the first quarter of fiscal 2009, the subsidiary's management
initiated revisions to existing processes to ensure timely execution of controls
and corporate provided additional oversight over key accounting processes and
the application of GAAP requirements to bolster the subsidiary's accounting
accuracy and compliance.
The Company's management has discussed this material weakness and initial
corrective actions and future plans with the Audit Committee and the Company's
Board of Directors who concurred with management's plans.
Changes in Internal Control over Financial Reporting
Except as set forth above, there were no changes in the Company's internal
control over financial reporting that occurred during the Company's most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
47
PART II
OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
------- ----------------------------------------------------------------------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
Date: March 13, 2009
By: /s/Jack Egan
---------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
48
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002