UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
--
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934
For the Six Months Ended May 3, 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.)
1600 Stewart Avenue, Westbury, New York 11590
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (516) 228-6700
560 Lexington Ave, New York, New York 10022
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer X
----- -----
Non-Accelerated Filer Smaller Reporting Company
----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of the registrant's common stock, $.10 par value,
outstanding as of June 5, 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) -
Six Months and Three Months Ended May 3, 2009 and April 27, 2008 3
Condensed Consolidated Balance Sheets -
May 3, 2009 (Unaudited) and November 2, 2008 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended May 3, 2009 and April 27, 2008 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 56
Item 4. Controls and Procedures 58
PART II - OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders 59
Item 6. Exhibits 60
SIGNATURE
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
---------------- ------------------
May 3, April 27, May 3, April 27,
2009, 2008 2009 2008
----- ---- ---- ----
(In thousands, except per share amounts)
NET SALES $946,767 $1,186,141 $447,068 $605,087
COST AND EXPENSES:
Cost of sales 898,533 1,135,318 420,617 568,233
Selling and administrative 43,491 45,262 21,445 22,925
Impairment and restructuring costs 14,429 1,504 5,749 -
Depreciation and amortization 18,630 19,442 9,765 9,853
---------- ----------- ---------- ----------
975,083 1,201,526 457,576 601,011
---------- ----------- ---------- ----------
OPERATING (LOSS) INCOME (28,316) (15,385) (10,508) 4,076
OTHER INCOME (EXPENSE):
Interest income 909 2,556 296 1,254
Other expense, net (954) (3,062) (710) (1,412)
Foreign exchange gain (loss), net 149 (354) (133) (45)
Interest expense (2,488) (3,183) (875) (1,561)
---------- ----------- ---------- ----------
(Loss) Income from continuing operations before
minority interest and income taxes (30,700) (19,428) (11,930) 2,312
Minority interest 314 77 (38) 44
---------- ----------- ---------- ----------
(Loss) income from continuing operations before
income taxes (30,386) (19,351) (11,968) 2,356
Income tax benefit (provision) 8,640 7,014 3,280 (1,055)
---------- ----------- ---------- ----------
(Loss) income from continuing operations (21,746) (12,337) (8,688) 1,301
Discontinued operations, net of taxes - 2,499 - 2,069
---------- ----------- ---------- ----------
NET (LOSS) INCOME ($21,746) ($9,838) ($8,688) $3,370
========== =========== ========== ==========
Per Share Data
--------------
Basic and Diluted:
(Loss) income from continuing operations ($1.04) ($0.56) ($0.42) $0.06
Discontinued operations - 0.12 - 0.09
---------- ----------- ---------- ----------
Net (loss) income ($1.04) ($0.44) ($0.42) $0.15
========== =========== ========== ==========
Weighted average number of shares - basic 20,843 22,146 20,843 21,991
========== =========== ========== ==========
Weighted average number of shares - diluted 20,843 22,146 20,843 22,016
========== =========== ========== ==========
See accompanying notes to condensed consolidated financial statements (unaudited).
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 3, 2009 November 2, 2008
(Unaudited) (Audited)
----------- ---------
ASSETS (In thousands, except share amounts)
CURRENT ASSETS
Cash and cash equivalents $141,492 $120,929
Restricted cash 27,838 48,581
Short-term investments 4,125 4,178
Trade accounts receivable, net of allowances of $3,607 (2009) and
$5,328 (2008) 382,132 488,482
Inventories, net of allowances of $1,992 (2009) and $4,145 (2008) 23,167 29,025
Recoverable income taxes 10,838 -
Deferred income taxes 7,800 9,685
Prepaid insurance and other assets 30,830 36,684
-------- ---------
TOTAL CURRENT ASSETS 628,222 737,564
Property, plant and equipment, net 61,177 68,173
Insurance and other assets 1,882 1,276
Deferred income taxes 19,111 17,081
Goodwill 51,442 57,481
Other intangible assets, net 39,036 44,204
-------- ---------
TOTAL ASSETS $800,870 $925,779
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings, including current portion of long-term debt $105,756 $108,216
Accounts payable 190,488 215,265
Accrued wages and commissions 40,235 50,918
Accrued taxes other than income taxes 15,889 22,227
Accrued insurance and other accruals 31,861 33,327
Deferred income and other liabilities 15,210 14,183
Income taxes payable - 55,569
-------- ---------
TOTAL CURRENT LIABILITIES 399,439 499,705
Long-term debt, excluding current portion 11,737 12,082
Deferred income 2,707 3,360
Income taxes payable 937 937
Deferred income taxes 13,169 14,551
Minority interest 635 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 51,064 51,006
Retained earnings 361,148 381,832
Accumulated other comprehensive loss (662) (400)
-------- ---------
413,900 434,788
Less treasury stock--2,655,297 shares, at cost (41,654) (41,654)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 372,246 393,134
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $800,870 $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)
Six Months Ended
----------------
May 3, April 27,
2009 2008
---- ----
(In thousands)
CASH PROVIDED BY OPERATING ACTIVITIES
Net loss ($21,746) ($9,838)
Discontinued operations, net of taxes - (2,499)
---------- ----------
Net loss from continuing operations (21,746) (12,337)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization 18,630 19,442
Impairment of goodwill and intangible assets 7,278 -
Accounts receivable provisions 1,475 1,937
Minority interest (314) (77)
(Gain) loss on dispositions of property, plant and equipment (319) 30
Impairment charge - property, plant and equipment 1,683 -
(Gain) loss on foreign currency translation (191) 105
Deferred income tax benefit (1,389) (7,126)
Share-based compensation expense related to employee stock options 58 29
Excess tax benefits from share-based compensation - (12)
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable 105,464 (5,759)
Increase in securitization of accounts receivable - 20,000
Inventories 5,978 15,056
Prepaid insurance and other current assets 5,970 9,819
Insurance and other long-term assets (399) 105
Accounts payable (4,053) (390)
Accrued expenses (18,478) (3,082)
Deferred income and other liabilities 71 7,163
Decrease in income taxes (66,488) (12,622)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,230 32,281
---------- ----------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Six Months Ended
----------------
May 3, April 27,
2009 2008
---- ----
(In thousands)
CASH USED IN INVESTING ACTIVITIES
Sales of investments $667 $997
Purchases of investments (763) (1,100)
Decrease (increase) in restricted cash 20,743 (8,264)
(Decrease) increase in payables related to restricted cash (20,743) 8,264
Acquisitions - (873)
Proceeds from disposals of property, plant and equipment, net 2,732 60
Purchases of property, plant and equipment (12,425) (15,471)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (9,789) (16,387)
----------- ----------
CASH USED IN FINANCING ACTIVITIES
Payment of long-term debt (335) (249)
Exercises of stock options - 166
Excess tax benefits from share-based compensation - 12
Purchase of treasury shares - (8,081)
Decrease in notes payable - banks (2,474) (6,189)
----------- ----------
NET CASH USED IN FINANCING ACTIVITIES (2,809) (14,341)
----------- ----------
Effect of exchange rate changes on cash (69) 80
----------- ----------
CASH FLOWS FROM DISCONTINUED OPERATIONS
Operating activities from discontinued operations - 5,768
Investing activities from discontinued operations - (382)
----------- ----------
CASH PROVIDED BY DISCONTINUED OPERATIONS - 5,386
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS - CONTINUING OPERATIONS 20,563 7,019
Increase in discontinued operations cash - 6
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 20,563 7,025
Cash and cash equivalents, beginning of year 120,929 40,343
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $141,492 $47,368
=========== ==========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $2,557 $3,336
Income taxes $58,929 $15,541
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 May 3, 2009 and consolidated
results of operations for the six and three months ended May 3, 2009 and April
27, 2008 and consolidated cash flows for the six months ended May 3, 2009 and
April 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 May 3, 2009, the Company held approximately $167.8
million of "level 1" cash equivalents, restricted cash, short-term investments
and investments in securities which 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.
Effective February 2, 2009, the Company adopted SFAS No. 161, "Disclosures
about Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133," which enhances the disclosure requirements related to
derivative instruments and hedging activity to improve the transparency of
financial reporting.
As part of the Company's risk management strategy, periodically we borrow
against our short-term credit facilities in foreign currencies in order to hedge
against fluctuations in the exchange rates related to the foreign denominated
net assets in the Company's foreign operations. In accordance with Statement of
SFAS No. 133, "Accounting for
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--Basis of Presentation--Continued
Derivative Instruments and Hedging Activities", the Company periodically
tests for ineffectiveness of its hedges. Ineffectiveness results when either the
notional amount of the nonderivative hedging instrument does not match the
portion of the net assets designated as being hedged or the nonderivative
hedging instrument is denominated in a currency other than the functional
currency of the hedged net assets. The effective portion of qualifying hedges is
reported in the same manner as the translation adjustment of the net investment
or in other comprehensive income.
As of May 3, 2009, the Company had total short-term borrowings of $105.0
million. Included in these borrowings were $20.0 million of foreign denominated
borrowings which provide economic hedges against foreign denominated net assets.
There was no ineffectiveness related to these hedges and $0.2 million and $0.6
million of losses related to these hedges were included in other comprehensive
income for the six and three-month periods ended May 3, 2009.
Certain amounts in the first six months of fiscal 2008 have been reclassified to
conform to the fiscal 2009 presentation.
NOTE B--Inventories
Inventories of accumulated unbilled costs, principally work in process, and
materials, net of related reserves, by segment are as follows:
May 3, November 2,
2009 2008
---- ----
(In thousands)
Telecommunications Services $13,389 $16,874
Computer Systems 7,141 8,090
Printing and Other 2,637 4,061
--------- ---------
Total $23,167 $29,025
========= =========
The cumulative amounts billed under service contracts at May 3, 2009 and
November 2, 2008 of $30.2 million and $21.7 million, respectively, are credited
against the related costs in inventory. In addition, inventory reserves at May
3, 2009 and November 2, 2008 of $2.0 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 May 3, 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 $297.4 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") $75.0 million secured, syndicated revolving
credit agreement ("Delta Credit Facility"). The Company had total outstanding
short-term borrowings of $105.0 million as of May 3, 2009. Included in these
borrowings were $20.0 million of foreign currency borrowings which provide
economic hedges against foreign denominated net assets.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Short-Term Borrowings--Continued
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 Fifth Third Bank), 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 Company's 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 May 3,
2009, Volt Funding had borrowed $35.7 million and $14.3 million from Market
Street Funding and Fifth Third Bank, respectively. At May 3, 2009, borrowings
bear a weighted-average interest rate of 0.8% 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 $2.8 million and $1.3 million in the six and
three months ended April 27, 2008, respectively, in connection with the sale of
receivables under the prior securitization program, which are included in Other
Expense in the consolidated statement of operations. The equivalent cost of
funds in the prior securitization program was 4.5% per annum in the six months
ended April 27, 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 May 3, 2009, the Company was in compliance with all requirements of the
Amended Securitization Program.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Short-Term Borrowings--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 May 3,
2009, $10.7 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 May 3, 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 1.8% 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, 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 May
3, 2009, the Company was in compliance with all requirements of the Credit
Agreement.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into a $100.0 million 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. On February 12, 2009, the Delta
Credit Facility was voluntarily reduced to $75.0 million.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $75.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At May 3, 2009, $41.7 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 May 3, 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 1.4% 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 May 3, 2009, the commitment fee was 0.25% per
annum.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE C--Short-Term Borrowings--Continued
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, amount of investments including business
acquisitions, creation of contingent obligations, sales of assets (including
sale leaseback transactions) and annual capital expenditures.
At May 3, 2009, the Company was in compliance with all requirements of the Delta
Credit Facility.
NOTE D--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
May 3, November 2,
2009 2008
---- ----
(Dollars in thousands)
8.2% term loan (a) $12,044 $12,316
Note payable for an acquisition (b) 400 450
---------- ---------
12,444 12,766
Less amounts due within one year (707) (684)
---------- ----------
Total long-term debt $11,737 $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 $12.0 million at
May 3, 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 May 3, 2009 of $9.3 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.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Stockholders' Equity
Changes in the major components of stockholders' equity for the six months ended
May 3, 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 13
Compensation expense - stock options 45
Change in fair value of minority interest 1,062
Net loss for the six months - (21,746) -
---------- ----------- ---------- ----------
Balance at May 3, 2009 $2,350 $51,064 $361,148 ($41,654)
========== =========== ========== ===========
Another component of stockholders' equity, the accumulated other comprehensive
income, consists of cumulative unrealized foreign currency translation loss of
$0.9 million ($0.7 million net of taxes) and $0.5 million ($0.4 million net of
taxes) at May 3, 2009 and November 2, 2008, respectively, and unrealized loss in
marketable securities, net of taxes, of $20,000 ($12,000 net of taxes) and
$39,000 ($23,000 net of taxes) at May 3, 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:
Six Months Ended Three Months Ended
---------------- ------------------
May 3, April 27, May 3, April 27,
2009 2008 2009 2008
---- ---- ---- ----
(In thousands)
Net (loss) income ($21,746) ($9,838) ($8,688) $3,370
Change in fair value of minority interest 1,062 (833) 404 (783)
Foreign currency translation adjustments, net (237) (324) (308) (52)
Unrealized gain (loss) on marketable securities, net 11 (70) 10 (27)
----------- ----------- ---------- -----------
Comprehensive (loss) income ($20,910) ($11,065) ($8,582) $2,508
=========== =========== ========== ===========
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.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Per Share Data--Continued
Six Months Ended Three Months Ended
---------------- ------------------
May 3, April 27, May 3, April 27,
2009 2008 2009 2008
---- ---- ---- ----
Denominator for basic earnings per share:
Weighted average number of shares 20,842,806 22,146,081 20,842,806 21,990,959
Effect of dilutive securities:
Employee stock options - - - 24,654
---------- ----------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 20,842,806 22,146,081 20,842,806 22,015,613
========== ============ ========== ==========
Options to purchase 859,869 and 157,746 shares of the Company's common stock
were outstanding at May 3, 2009 and April 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.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value.
Segment operating profit is comprised of segment sales less its overhead,
selling and administrative costs and depreciation, and excludes general
corporate expenses, interest income earned by the Company on excess cash
generated by its segments, interest expended on corporate debt necessary to
finance the segments' operations and capital expenditures, fees related to sales
of interests in accounts receivable, foreign exchange gains and losses and
income taxes.
General corporate expenses consist of the costs incurred in the operations of
shared service centers, and include, among other items, enterprise resource
planning, human resources, corporate accounting and finance, treasury, legal and
executive functions. In order to leverage the Company's infrastructure, these
functions are operated under a centralized management platform, providing
support services throughout the organization. The costs of these functions are
included within general corporate expenses as they are not directly allocable to
a specific segment.
On September 5, 2008, the Company sold the net assets of its DataNational and
Directory Systems and Services divisions, whose operations for the comparable
prior six and 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.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE G--Segment Disclosures--Continued
Financial data concerning the Company's sales and segment operating (loss)
profit by reportable operating segment for the six and three months ended May 3,
2009 and April 27, 2008 are summarized in the table below.
During the six months ended May 3, 2009, consolidated assets decreased by $124.9
million primarily due to decreases in receivables in all segments due to the
decrease in sales and the Company's focus on collection of receivables; reduced
levels in inventory, primarily in the Telecommunications Services segment; and
impairment charges in the Staffing Services and Computer Systems segments.
Six Months Ended Three Months Ended
----------------- ------------------
May 3, April 27, May 3, April 27,
2009 2008 2009 2008
---- ---- ---- ----
(In thousands)
Net Sales:
Staffing Services
Staffing $785,462 $960,342 $372,812 $491,771
Managed Services 585,649 635,718 329,900 339,173
------------ ---------- ------- -------
Total Gross Sales 1,371,111 1,596,060 702,712 830,944
Less: Non-Recourse Managed Services (562,203) (608,542) (318,792) (325,230)
------------ ----------- --------- ---------
Net Staffing Services 808,908 987,518 383,920 505,714
Telecommunications Services 44,336 96,443 19,960 49,240
Computer Systems 92,947 102,923 44,460 52,140
Printing and Other 7,990 7,628 2,138 2,399
Elimination of intersegment sales (7,414) (8,371) (3,410) (4,406)
----------- -------------- ----------- ----------
Total Net Sales $946,767 $1,186,141 $447,068 $605,087
======== ========== ======== ========
Segment Operating (Loss) Profit:
--------------------------------
Staffing Services (a) ($11,638) $11,694 ($1,036) $6,225
Telecommunications Services 53 (17,269) 99 1,896
Computer Systems (b) 1,409 8,610 (1,019) 5,358
Printing and Other (419) (908) (607) (795)
---------- ------- -------- --------
Total Segment Operating (Loss) Profit (10,595) 2,127 (2,563) 12,684
General corporate expenses (17,721) (17,512) (7,945) (8,608)
----------- ------- -------- ------
Total Operating (Loss) Profit (28,316) (15,385) (10,508) 4,076
Interest income and other (expense), net (45) (506) (414) (158)
Foreign exchange gain (loss), net 149 (354) (133) (45)
Interest expense (2,488) (3,183) (875) (1,561)
--------- ---------- ---------- ------
(Loss) income from continuing operations before minority
interest and income taxes ($30,700) ($19,428) ($11,930) $2,312
======== ======== ======== ======
(a) Staffing Services segment operating loss includes impairment and
restructuring costs of $12.7 million and $4.5 million in the six and
three-month periods of fiscal 2009, respectively.
(b) Computer Systems segment operating results includes impairment and
restructuring costs of $1.7 million and $1.2 million in the six month
and three-month periods of fiscal 2009, respectively. Computer Systems
segment operating results includes restructuring costs of $1.5 million
in the six-month period of fiscal 2008.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
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 May 3, 2009, the Company had no
outstanding foreign derivative instruments.
Restricted cash at May 3, 2009 and November 2, 2008 was $27.8 million and $48.6
million, respectively, to cover certain obligations that were reflected in
accounts payable at that date. These amounts primarily related to certain
contracts with customers, for which the Company manages the customers'
alternative staffing requirements, including the payments to associate vendors.
NOTE 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 reclassified as discontinued in the prior period.
The following summarizes the discontinued operations:
Six Months Ended Three Months Ended
April 27, 2008 April 27,2008
-------------- -------------
(In thousands)
Revenue $27,509 $17,025
======= =======
Income before taxes $4,170 $3,452
Income tax provision (1,671) (1,383)
------ ------
Income from discontinued operations $2,499 $2,069
====== ======
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
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 as of the time of the filing of the Company's Annual Report. The
Company recorded estimates of goodwill 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 goodwill
impairment in the amount of $6.0 million in the Staffing Services segment.
During the Company's annual impairment testing in the second quarter of 2009,
the Company recorded an indefinite-lived intangible impairment charge of $1.2
million in the Computer Systems 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:
May 3, 2009 November 2, 2008
----------- ----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(In thousands)
Customer relationships $41,298 $12,406 $41,298 $9,862
Existing technology 13,164 5,526 13,164 4,714
Contract backlog 3,200 2,667 3,200 2,266
Trade names (a) 1,697 299 2,936 207
Reseller network 816 340 816 289
Non-compete agreements and trademarks 451 352 451 323
------- ------- -------- -------
Total $60,626 $21,590 $61,865 $17,661
======= ======= ======= =======
(a) Certain trade names have an indefinite life and are not amortized.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
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 May 3, 2009, the Company's net prepaid for the outstanding policy years
was $17.8 million compared to $23.1 million at November 2, 2008.
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 May 3,
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 $4,000 and $9,000 for the six month
periods ended May 3, 2009 and April 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
May 3, 2009, there was $3,000 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 0.3 years.
There were no options exercised under the 1995 plan during the six month periods
ended May 3, 2009. The intrinsic value of options exercised during the six-month
period ended April 27, 2008 was $0.1 million. The total cash received from the
exercise of stock options was $0.2 million in the six-month period ended April
27, 2008 and is classified as financing cash flows. The actual tax benefit from
realized from the exercise of stock options for the six-month period ended April
27, 2008 was $0.1 million.
In April 2007, the shareholders of the Company approved the Volt Information
Sciences, Inc. 2006 Incentive Stock Plan ("2006 Plan"). The 2006 Plan permits
the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock and Restricted Stock Units to employees and non-employee directors of the
Company through September 6, 2016. The maximum aggregate number of shares that
may be issued pursuant to awards made under the 2006 Plan shall not exceed one
million five hundred thousand (1,500,000) shares.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE L--Incentive Stock Plans--Continued
Compensation expense of $13,000 and $14,000 was recognized in selling and
administrative expenses in the Company's condensed consolidated statement of
operations in the six-month periods ended May 3, 2009 and April 27, 2008,
respectively, on a straight-line basis over the vesting period for grants issued
in fiscal 2008. As of May 3, 2009, there was $25,000 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 0.9 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 six-month period ended May 3, 2009. Compensation
expense of $3,000 was recognized in cost of sales in the Company's condensed
consolidated statement of operations for the six-month period ended May 3, 2009
for options without targets. No compensation expense on these grants was
recognized in cost of sales for the six-month period ended April 27, 2008. As of
May 3, 2009, there was $15,000 of unrecognized compensation costs related to
non-vested share-based compensation arrangements to be recognized over a
weighted average period of 2.1 years.
On April 7, 2009, the Company granted to employees and non-employee directors of
the Company non-qualified stock options to purchase 667,750 shares of the
company's common stock at $6.39 per share under the 2006 Plan. As a result, the
Company recorded compensation expense of $37,000 for the six months ended May 3,
2009. 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 May 3, 2009, there was $2.9 million of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements under the 2006 Plan to be recognized over a weighted average period
of 2.9 years.
NOTE M--Restructuring
During the first six months of fiscal 2009, the Company recorded a pre-tax
restructuring charge of approximately $7.2 million ($4.2 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, office
consolidations and the closing of a facility in the Staffing Services segment
due to the early termination of a contract. The restructuring charge included:
(1) $2.5 million in severance, which was paid in the first six months of fiscal
2009; (2) a $1.7 million non-cash charge for the impairment of property, plant
and equipment in the closed facilities; and (3) an accrual of $3.0 million in
rent for the remaining term of the leases at the closed facilities. These costs
are presented on a separate line item in the Company's condensed consolidated
statement of operations.
The following table presents the 2009 restructuring charge and activity in the
restructuring accrual for the six months ended May 3, 2009:
Severance Facilities Other Total
--------- ---------- ----- -----
(Dollars in thousands)
Restructuring charge $2,463.6 $3,004.0 $1,683.1 $7,150.7
Payments and disposals (2,463.6) (395.7) (1,683.1) ($4,542.4)
-------- --------- -------- ---------
Accrued as of May 3, 2009 - $2,608.3 - $2,608.3
========= ========= ======== =========
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Restructuring--Continued
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 Volt Delta 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 in 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 May 3, 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. In May 2009, the Company deposited $3.5 million with a third party in
connection with a settlement in one of the class actions.
NOTE O--Subsequent Event
In response to the decrease in the Company's revenue and ongoing economic
uncertainty, the Company continues to evaluate its overhead structure and
anticipates taking a restructuring charge of approximately $2.0 million in the
third quarter.
19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Organization of Information
---------------------------
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to our consolidated financial
statements and notes thereto included in Part I of this Form 10-Q and to provide
an understanding of our consolidated results of operations, financial condition
and changes in financial condition. Our MD&A is organized as follows:
o Forward-Looking Statements - This section describes some of the
language and assumptions used in this document that may have an impact
on the readers' interpretation of the financial statements.
o 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 a discussion of our
commitments, securitization program and credit lines.
o Critical Accounting Policies - This section discusses those accounting
policies that are both considered to be important to our financial
condition and results of operations and require us to exercise
subjective or complex judgments in their application.
o New Accounting Pronouncements - This section includes a discussion of
recently published accounting authoritative literature that may have
an impact on our historical or prospective results of operations or
financial condition.
o Related Person Transactions - This section describes any business
relationships, or transaction or series of similar transactions,
between the Company and its directors, executive officers,
shareholders (with a 5% or greater interest in the Company), or any
entity in which an executive officer has more than a 10% equity
ownership interest, as well as members of the immediate families of
any of the foregoing persons, during the first six months of fiscal
year 2008 and 2009. Excluded from the transactions are employment
compensation and directors' fees.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact could be deemed
forward-looking statements, including but not limited to projections of revenue,
margins, expenses, tax provisions, earnings, cash flows or other financial
items; statements of plans, strategies and objectives of management for future
operations, including the execution or results of cost reduction programs and
restructurings; statements concerning utilization of our services by customers
or our ability to renew contracts with customers; statements regarding future
economic conditions or performance; statements of expectation or belief; and any
statements of assumptions underlying any of the foregoing. Forward-looking
statements may include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," or variations thereof or similar or comparable
words or phrases. Forward-looking statements involve risks, uncertainties and
assumptions. If the risks or uncertainties ever materialize or the assumptions
prove incorrect, the results of the Company may differ materially from those
expressed or implied by such forward-looking statements and assumptions. Risks,
uncertainties and assumptions include general economic, competitive and other
business conditions, the degree and timing of customer utilization of the
Company's services, the rate of renewals of contracts with the Company,
potential employment- and customer-related liability, new and expanded
government regulations, continued access to qualified employees, continued
compliance with loan agreements and the other risks that are described herein
and that are otherwise described from time to time in the Company's Securities
and Exchange Commission reports, including the Company's Annual Report on Form
10-K for the fiscal year ended November 2, 2008. The Company assumes no
obligation and does not intend to update these forward-looking statements.
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 this management discussion and analysis addresses
each segment. A brief description of these segments and the predominant source
of their sales follows:
Staffing Services: During the second quarter of fiscal 2009, the Company
consolidated the operations of Volt Technical Resources ("VTR division") and
Volt Services Group ("VSG division") to reduce redundancies and achieve
efficiencies in response to the decrease in Staffing Services revenue and
ongoing economic uncertainty. These changes include, but are not limited to,
office consolidations and the realignment of in-house staff. In some
geographical markets, VTR and VSG will continue to operate separately, while in
some markets they will operate full-service offices under the brand of Volt
Workforce Solutions ("VWS"). As a result of these changes, including office
consolidations and closures, the segment recorded a restructuring charge of $6.7
million in the first six months of fiscal 2009.
This segment is now divided into two major functional areas and operates through
a network of over 200 branch offices.
o Staffing Solutions provides a full spectrum of managed staffing,
temporary/contract personnel employment, and workforce solutions. 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 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. Staffing Solutions provides skilled employees,
such as computer and other IT specialties, engineering, design, life
sciences and technical support (which were formerly part of the VTR
division ("Technical")), as well as administrative, clerical, office
automation, accounting and financial, call center and light industrial
personnel (which were formerly part of the Administrative and
Industrial, or VSG division ("A&I")). The length of an employee's
assignments may be as short as a few weeks but in many cases can last
for six to twelve months.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Executive Overview--Continued
------------------
o Technology and Consulting is comprised of the Procurestaff and VMC
Consulting operations. Procurestaff 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. Prior to
the Staffing Services consolidation, Procurestaff was part of the
Technical division. VMC Consulting 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. VMC Consulting offers higher margin
project-oriented services to its customers and assumes greater
responsibility and risk in contrast to the other areas within the
segment. Prior to the Staffing Services consolidation, VMC Consulting
was part of the Technical division.
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 periods 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.
22
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 costs incurred in the operations
of 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
second quarter of fiscal 2009 has adversely affected the Company's revenue and
operating profit.
In the six and three month periods of fiscal 2009, the Company's consolidated
net sales totaled $946.8 million and $447.1 million, respectively, and the
consolidated segment operating loss totaled $10.5 million and $2.1 million,
respectively. The explanations by segment for the six and three month periods of
fiscal 2009 are detailed below.
23
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 six and
three-month periods of fiscal 2009 decreased by $178.6 million and $121.8
million, respectively, from the comparable fiscal periods of 2008. The operating
results for the current six and three-month periods decreased by $23.3 million
and $7.2 million, respectively, from the comparable fiscal 2008 periods. The
decrease in operating results in the six months and current quarter from the
comparable fiscal 2008 periods was primarily due to impairment and restructuring
charges of $12.7 million and $4.5 million, respectively, and the sales decrease.
Telecommunications Services: The Telecommunications Services segment's sales
decreased by $52.0 million and $29.2 million from the respective six and
three-month periods of fiscal 2008; however, the operating results improved by
$17.4 million from the six-month period and decreased $1.8 million from the
three-month period. The improved operating results for the six-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. The decreased
operating results for the current quarter were primarily due to the decrease in
sales.
Computer Systems: The Computer Systems segment's sales decreased by $10.0
million and $7.7 million respectively, from the six and three-month periods of
fiscal 2008, while its operating profit decreased by $7.2 million and $6.3
million, in the six and three-month periods of fiscal 2009. The decrease in
operating results in the six and three month periods of fiscal 2009 was
primarily due to the sales decreases.
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 reclassified as discontinued
operations in the prior period. The Printing and Other segment's sales increased
by $0.4 million and decreased by $0.2 million from the six and three-month
periods of fiscal 2008, and its operating profit increased by $0.5 million and
$0.2 million in the six and three-month periods of fiscal 2009, respectively.
The Company has implemented a series of cost cutting initiatives, including
branch closings and staff reductions, designed to improve performance. 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.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 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 six months of fiscal 2009, consolidated net sales decreased by
$239.3 million, or 20%, to approximately $946.8 million, from the comparable
period of fiscal 2008. The decrease in the six months' net sales resulted
primarily from decreases in Staffing Services of $178.6 million,
Telecommunications Services of $52.0 million and Computer Systems of $10.0
million.
Cost of sales decreased by $236.8 million, or 21%, to $898.5 million, and was
95% of sales, in the six months of fiscal 2009 as compared to 96% of sales in
the comparable period of fiscal 2008. The decrease in the cost of sales
percentage was primarily due to the absence of $19.3 million loss reserve
established in the first quarter of fiscal 2008 in the Telecommunication
Services segment.
Selling and administrative costs decreased by $1.8 million, or 4%, in the
current six-month period from the comparable period in fiscal 2008, and was 4.6%
of sales, as compared to 3.8% of sales in the comparable period of fiscal 2008.
Impairment and restructuring charges totaled $14.4 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 values 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 as of
the time of the filing of the Company's Annual Report. 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. During the second quarter of fiscal 2009, the
Company recorded an impairment charge in its Computer Systems segment based on
its annual testing of goodwill and intangible assets of $1.2 million. In
addition, in the six months of fiscal 2009, as a result of declines in revenue,
profits and the ongoing economic uncertainty, the Company recorded a pre-tax
restructuring charge of approximately $7.2 million related to the elimination of
employee positions in the Staffing Services and Computer Systems segments and
the closing of 55 facilities in the Staffing Services segment. In the first
quarter of fiscal 2008, a restructuring charge of $1.5 million in the Computer
Systems segment was recorded due to the reduction of foreign and domestic
personnel as a result of the acquisition and integration of LSSi.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Consolidated Results of Operations -- Continued
----------------------------------
Depreciation and amortization decreased by $0.7 million, or 4%, in the current
six-month period from the comparable period in fiscal 2008, and was 2.0% of
sales, as compared to 1.6% of sales in the comparable period of fiscal 2008. The
decrease in depreciation and amortization in the current six months from the
comparable 2008 fiscal period was attributable to assets becoming fully
depreciated during fiscal 2008.
The Company reported an operating loss of $28.3 million in the current six
months, as compared to $15.4 million in the comparable period of fiscal 2008.
This decrease was due to the segments reporting an operating loss of $10.5
million compared to an operating profit of $2.1 million and an increase of $0.3
million, or 1%, in general corporate expenses. The increase in segment operating
losses was attributable to the decreased operating results of the Staffing
Services segment of $23.3 million and the Computer Systems segment of $7.2
million, partially offset by increased operating results of the
Telecommunications Services segment of $17.4 million and the Printing and Other
segment of $0.5 million.
Interest income decreased by $1.7 million, or 64%, in the current six months
from the comparable period in fiscal 2008, primarily due to lower interest
rates.
Other expense decreased by $2.0 million, or 69%, in the current six 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 decreased by $0.7 million as a result of lower interest rates
and a reduction in borrowings under the Delta Credit Facility, partially offset
by the aforementioned amended securitization program.
The loss from continuing operations before income taxes for the six months of
fiscal 2009 totaled $30.4 million compared to a loss from continuing operations
of $19.4 million in the comparable six months of fiscal 2008.
The Company's effective tax benefit rate on its financial reporting pre-tax loss
was 28.4% in the six months of fiscal 2009 compared to 36.2% in the comparable
period in fiscal 2008. The Company's fiscal 2009 effective tax benefit for the
three months ended was impacted by foreign tax cumulative losses requiring a
valuation allowance and for the six months ended also included the impact of the
non-deductible portion of goodwill impairment. The Company's 2008 effective tax
provision was primarily impacted by discontinued operations, foreign operations
and the adoption of FIN 48.
Discontinued operations totaled $2.5 million (net of income taxes of $1.7
million) in the six months of fiscal 2008.
The net loss in the six months of fiscal 2009 was $21.7 million compared to a
net loss of $9.8 million in the comparable period of fiscal 2008.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Results of Operations by Segment
--------------------------------
The following two tables reconcile the operating (loss) profit by segment to the
consolidated statements of operations for the six months ended May 3, 2009 and
April 27, 2008:
Six Months Ended May 3, 2009
----------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
----- -------- -------- ------- --------- ------------
Net Sales $946.8 $808.9 $44.4 $92.9 $8.0 ($7.4)
Direct Costs 757.6 685.3 30.8 42.7 6.2 (7.4)
Overhead 140.9 96.7 12.2 32.0 - -
------- ------- ------ ---- ------ --------
Cost of Sales 898.5 782.0 43.0 74.7 6.2 (7.4)
Selling and Administrative 43.5 19.5 0.2 5.1 1.8 16.9
Impairment and
Restructuring Costs 14.4 12.7 - 1.7 - -
Depreciation and
Amortization 18.7 6.3 1.1 10.0 0.4 0.9
-------- --- ---- ----- ----- -----
Operating (Loss) Profit (28.3) (11.6) 0.1 1.4 (0.4) (17.8)
Interest Income 0.9 - - - - 0.9
Other Expense, net (1.0) - - - - (1.0)
Foreign Exchange Gain 0.2 - - - - 0.2
Interest Expense (2.5) - - - - (2.5)
-------- --- ---- ----- ----- -----
(Loss) Income from Continuing
Operations before Minority
Interest and Income Taxes ($30.7) ($11.6) $0.1 $1.4 ($0.4) ($20.2)
======== ====== ==== ==== ===== ======
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Six Months Ended April 27, 2008
-------------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
----- -------- -------- ------- --------- ------------
Net Sales $1,186.1 $987.5 $96.4 $102.9 $7.6 ($8.3)
Direct Costs 965.0 834.7 85.6 46.8 6.2 (8.3)
Overhead 170.3 111.9 26.6 31.8 - -
------- ------ ------ ---- ------ --------
Cost of Sales 1,135.3 946.6 112.2 78.6 6.2 (8.3)
Selling and Administrative 45.3 22.3 0.3 4.6 1.9 16.2
Impairment and
Restructuring Costs 1.5 - - 1.5 - -
Depreciation and
Amortization 19.4 6.9 1.2 9.6 0.4 1.3
------- ------ ------ ---- ------ --------
Operating (Loss) Profit (15.4) 11.7 (17.3) 8.6 (0.9) (17.5)
Interest Income 2.6 - - - - 2.6
Other Expense, net (3.0) - - - - (3.0)
Foreign Exchange Loss (0.4) - - - - (0.4)
Interest Expense (3.2) - - - - (3.2)
------- ------ ------ ---- ------ --------
(Loss) Income from Continuing
Operations before Minority
Interest and Income Taxes ($19.4) $11.7 ($17.3) $8.6 ($0.9) ($21.5)
======= ======= ====== ==== ===== ======
Starffing Services
------------------
Six Months Ended
----------------
May 3, 2009 April 27, 2008
----------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
Gross Staffing Sales $785.5 $960.3 ($174.8) (18.2%)
--------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $585.7 $635.6 ($49.9) (7.9%)
--------------------------------------------------------------------------------------------------------------------------------
Net Sales * $808.9 $987.5 ($178.6) (18.1%)
--------------------------------------------------------------------------------------------------------------------------------
Direct Costs $685.3 84.7% $834.7 84.5% $149.4 17.9%
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit $123.6 15.3% $152.8 15.5% ($29.2) (19.1%)
--------------------------------------------------------------------------------------------------------------------------------
Overhead $96.7 11.9% $111.9 11.3% $15.2 13.6%
--------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $19.5 2.4% $22.3 2.3% $2.8 12.5%
--------------------------------------------------------------------------------------------------------------------------------
Impairment and Restructuring Costs $12.7 1.6% - - ($12.7) -
--------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $6.3 0.8% $6.9 0.7% $0.6 8.5%
--------------------------------------------------------------------------------------------------------------------------------
Segment Operating (Loss) Profit ($11.6) (1.4%) $11.7 1.2% ($23.3) (199.5%)
--------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
The decrease in net sales of the Staffing Services segment for the six months of
fiscal 2009 from the comparable period in fiscal 2008 was comprised of decreases
of $157.6 million, or 18%, in net Staffing Solution sales and $21.0 million, or
16%, in net Technology and Consulting sales. Foreign net sales for the six
months decreased by 20% from the comparable six months of fiscal 2008, and
accounted for 7% of total net Staffing Services sales for the current six
months. On a constant currency basis, foreign sales increased by 4% from the
comparable 2008 six months. In the current six months, the segment's permanent
placement sales decreased by 39% and RPO sales decreased by 74% from the
comparable six months of fiscal 2008. The decrease in sales is a reflection of
the overall state of the economy, as customers have reduced the use of their
contingent workforce and direct placement hirings.
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 of goodwill 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 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 as of the time of the filing of
the Company's Annual Report. The segment 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 the segment
recorded an additional impairment in the amount of $6.0 million. In addition, in
the six months, the segment recorded $6.7 million in restructuring costs ($4.6
million in Staffing Solutions and $2.1 million in Technology and Consulting) due
to the elimination of employee positions from a series of cost cutting
initiatives and the closing of 55 offices. The restructuring charge included
$2.0 million in severance and a $4.7 million non-cash charge for the closed
facilities and the impairment of property, plant and equipment.
The decrease in the segment's operating profit was comprised of a decrease of
$27.7 million in Staffing Solutions partially offset by an increase of $4.4
million in Technology and Consulting. The segment's gross margin percentage
decreased by 0.2 percentage points, due to a decrease of 1.3 percentage points
in Staffing Solutions, partially offset by an increase of 6.3 percentage points
in Technology and Consulting. The overhead percentage of sales increased by 0.6
percentage points from the comparable 2008 period's percentage, due to increases
of 0.6 percentage points in Staffing Solutions and 0.3 percentage points in
Technology and Consulting. The segment has implemented a series of cost cutting
initiatives, including branch closings and staff reductions, designed to improve
financial performance.
Although the markets for the segment's services include a broad range of
industries throughout the United States, Europe and Asia, general economic
conditions 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, some of which are
material to this segment, 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 segment has historically secured new contracts
and obtained 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 segment on satisfactory terms.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Six Months Ended
----------------
May 3, 2009 April 27, 2008
----------- --------------
Staffing Solutions
------------------ % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Gross Sales $779.1 $974.8 ($195.7) (20.1%)
-------------------------------------------------------------------------------------------------------------------------------
Net Sales * $697.6 $855.2 ($157.6) (18.4%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $604.5 86.7% $730.3 85.4% $125.8 17.2%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $93.1 13.3% $124.9 14.6% ($31.8) (25.5%)
-------------------------------------------------------------------------------------------------------------------------------
Overhead $73.5 10.5% $84.8 9.9% $11.3 13.3%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $18.0 2.6% $21.5 2.5% $3.5 16.6%
-------------------------------------------------------------------------------------------------------------------------------
Impairment and Restructuring Costs $10.6 1.5% - - ($10.6) -
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $3.1 0.4% $3.0 0.4% ($0.1) (5.6%)
-------------------------------------------------------------------------------------------------------------------------------
Division Operating (Loss) Profit ($12.1) (1.7%) $15.6 1.8% ($27.7) (177.8%)
-------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
Staffing Solution's $196 million decrease in gross sales in the current six
months of fiscal 2009 from the comparable prior year period included decreases
of approximately $45 million from customers whose business with the Company
either ceased or was substantially lower than in the comparable six months of
fiscal 2009, as well as $171 million attributable to net decreases in sales to
continuing customers. This was partially offset by increases of approximately
$20 million of sales to new customers or customers with substantially increased
business. Staffing Solution's decrease in net sales in the six months of fiscal
2009 from the comparable period in fiscal 2008 was comprised of a decrease of
$161.9 million, or 19%, in traditional contingent staffing, partially offset by
an increase of $4.3 million, or 41%, in net managed service associate vendor
sales. The decrease in sales is a reflection of the overall state of the
economy, as customers have reduced the use of their contingent workforce and
direct placement hirings.
The decrease in the Staffing Solutions' operating results was due to the sales
decrease, the impairment and restructuring costs, the decrease in gross profit
as a percentage of sales and the increase in overhead costs as a percentage of
sales. As noted above, in the six months, Staffing Solutions recorded an
impairment charge of $6.0 million and recorded $4.6 million in restructuring
costs due to the elimination of indirect employee positions from a series of
cost cutting initiatives and the closing of 54 offices. The restructuring charge
included $1.7 million in severance and a non-cash charge for the closed
facilities and the impairment of property, plant and equipment of $2.9 million.
The decrease in gross profit percentage was primarily due to a $9.7 million
reduction in higher margin permanent placement and RPO sales. The increase in
overhead as a percentage of sales was due to the downsizing being phased in over
the six-month period. The average indirect labor headcount for the six months
was reduced from the comparable 2008 fiscal period by 11%. On an annualized
basis, the savings in indirect labor and rent due to the current year downsizing
will approximate $37 million. The Company will continue to evaluate its overhead
structure to determine if additional reductions are necessary.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Staffing Services--Continued
-----------------
Six Months Ended
----------------
May 3, 2009 April 27, 2008
----------- --------------
Technology and Consulting
------------------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Gross Sales $592.0 $621.2 ($29.2) (4.7%)
-------------------------------------------------------------------------------------------------------------------------------
Net Sales * $111.3 $132.3 ($21.0) (15.9%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $80.8 72.6% $104.4 78.9% $23.6 22.6%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $30.5 27.4% $27.9 21.1% $2.6 9.4%
-------------------------------------------------------------------------------------------------------------------------------
Overhead $23.2 20.8% $27.1 20.5% $3.9 14.4%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $1.5 1.4% $0.8 0.5% ($0.7) (110.0%)
-------------------------------------------------------------------------------------------------------------------------------
Restructuring costs $2.1 1.9% - - ($2.1) -
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $3.2 2.9% $3.9 3.0% $0.7 19.0%
-------------------------------------------------------------------------------------------------------------------------------
Division Operating Profit (Loss) $0.5 0.4% ($3.9) (2.9%) $4.4 112.2%
-------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
Technology and Consulting's decrease in gross sales of $29 million in the first
six months of fiscal 2009 as compared to the comparable period of fiscal 2008
included a decrease of $2 million of sales to customers which the Company either
ceased or substantially reduced servicing in the current year, as well as $44
million attributable to net decreases in sales to continuing customers,
partially offset by growth of approximately $17 million from new customers, or
customers whose business with the Company in the comparable fiscal period was
substantially below their volume for the first six months of fiscal 2009. The
decrease in net sales in the six months of fiscal 2009 from the comparable
period in fiscal 2008 was comprised of a decrease of $12.9 million, or 11%, in
traditional contingent staffing or project management and consulting sales,
along with a decrease of $8.1 million, or 49%, in net managed service associate
vendor sales.
The increase in the Technology and Consulting's operating results was due to the
increase in gross profit percentage, partially offset by the restructuring
charge, the sales decrease and the increase in overhead and selling and
administrative costs as a percentage of sales. The increase in the gross profit
percentage was due to a $2.5 million increase in higher margin licensing fees in
fiscal 2009, and a $3.3 million loss recognized in one large project in the
comparable six months of fiscal 2008. The restructuring charge included a
non-cash charge for the closing of a facility and the impairment of property,
plant and equipment of $1.8 million, and $0.3 million due to the elimination of
indirect labor positions. The increase in overhead and selling and
administrative costs as a percentage of sales was due to the downsizing being
phased in over the six-month period. The average indirect labor headcount was
reduced from the 2008 fiscal period by 9%. The Company will continue to evaluate
its overhead structure to determine if additional reductions are necessary.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Telecommunications Services
---------------------------
Six Months Ended
----------------
May 3, 2009 April 27, 2008
----------- --------------
(Dollars in Millions) % of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change %Change
------- ----- ------- ---- -------- -------
Net Sales $44.4 $96.4 ($52.0) (54.0%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $30.8 69.6% $85.6 88.7% $54.8 63.9%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $13.6 30.4% $10.8 11.3% $2.8 23.7%
-------------------------------------------------------------------------------------------------------------------------------
Overhead $12.2 27.4% $26.6 27.6% $14.4 54.4%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $0.2 0.4% $0.3 0.3% $0.1 43.5%
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.1 2.5% $1.2 1.3% $0.1 10.4%
-------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit (Loss) $0.1 0.1% ($17.3) (17.9%) $17.4 100.3%
-------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the first six months
of fiscal 2009 from the comparable period of fiscal 2008 was due to decreases of
$49.3 million, or 65%, in the Construction and Engineering division and $2.7
million, or 13%, in other divisions. The sales decrease in the Construction and
Engineering division in the first six months of fiscal 2009 was primarily due to
a large installation contract with substantial revenue in the comparable six
months of fiscal 2008 that was completed by the end of fiscal 2008, along with a
decrease 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 second quarter of fiscal 2009 was
$24 million, as compared to a backlog of approximately $51 million at the end of
the comparable 2008 quarter.
The increased operating results for the six months were primarily due to the
increased gross profit percentage, partially offset by the decrease in sales.
The lower gross margin percentage in the comparable period was due to the
Company's establishment of a $19.3 million loss reserve in the first quarter of
fiscal 2008 for certain costs included in inventory related to work performed
and for additional costs 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. As a
result of the recent sales declines, the segment reduced overhead during the
current six months by 54% from the comparable 2008 fiscal period. The decreased
overhead for the first six months of fiscal 2009 was related to indirect
headcount reduction.
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,
some of which are material to this segment, 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 segment has historically secured
new contracts and obtained 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 segment on satisfactory terms.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Computer Systems
----------------
Six Months Ended
----------------
May 3, 2009 April 27, 2008
----------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Net Sales $92.9 $102.9 ($10.0) (9.7%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $42.7 46.0% $46.8 45.5% $4.1 8.8%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $50.2 54.0% $56.1 54.5% ($5.9) (10.5%)
-------------------------------------------------------------------------------------------------------------------------------
Overhead $32.0 34.4% $31.8 30.9% ($0.2) (0.5%)
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $5.1 5.5% $4.6 4.5% ($0.5) (13.0%)
-------------------------------------------------------------------------------------------------------------------------------
Restructuring and Impairment Costs $1.7 1.8% $1.5 1.5% ($0.2) (13.3%)
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $10.0 10.8% $9.6 9.3% ($0.4) (4.0%)
-------------------------------------------------------------------------------------------------------------------------------
Segment Operating Profit $1.4 1.5% $8.6 8.3% ($7.2) (83.6%)
-------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales decrease in the six months of fiscal 2009
from the comparable period of fiscal 2008 was comprised of decreases of $8.2
million, or 23%, in projects, maintenance and other, and $2.9 million, or 9%, in
database access transaction fees, including ASP directory assistance, partially
offset by an increase of $1.1 million, or 3%, in the Maintech division's IT
maintenance. The reduction in sales in fiscal 2009 from the comparable 2008
fiscal period included decreases of approximately $5 million of sales from
customers whose business with the Company either ceased or was substantially
lower than in the comparable period of fiscal 2008, as well as $15 million
attributable to net decreases in sales to continuing customers. This was
partially offset by sales increases of approximately $10 million to new
customers, or customers with substantial increased business. The decrease in
transaction fees was primarily due to a reduction of such services to a major
customer who transitioned to a fixed monthly fee model, partially offset by an
increase to another major customer who transitioned to a variable
transaction-based fee model from a fixed monthly fee model.
The segment's decreased operating profit was primarily due to the decrease in
sales, the impairment and restructuring charges and the increase in overhead as
a percentage of sales. 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 continued ability to sell
products and services to new and existing customers and consumer demands for its
customers' services.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
Printing and Other
------------------
Six Months Ended
----------------
May 3, 2009 April 27, 2008
------------ --------------
% of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Net Sales $8.0 $7.6 $0.4 4.8%
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $6.2 77.8% $6.2 81.1% - -
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $1.8 22.2% $1.4 18.9% $0.4 23.8%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $1.8 22.7% $1.9 25.6% $0.1 6.9%
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.4 4.7% $0.4 5.2% - -
-------------------------------------------------------------------------------------------------------------------------------
Segment Operating Loss ($0.4) (5.2%) ($0.9) (11.9%) $0.5 53.9%
-------------------------------------------------------------------------------------------------------------------------------
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.
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 reclassified as discontinued operations in the prior
period results.
The Printing and Other segment's sales increased by $0.4 million from the
comparable six-month period in fiscal 2008. The sales increase was comprised of
printing sales. The Printing and Other sales in the first six months of fiscal
2009 as compared to the comparable period of fiscal 2008 included a growth of
approximately $0.8 million from continuing customers, partially offset by a
decline of approximately $0.4 million of sales to customers which the Company
either ceased or substantially reduced servicing in the first half of fiscal
2009. The improved operating results for the six months of fiscal 2009 were
predominantly due to the increase in sales and the increased gross margin
percentage.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 3, 2009 COMPARED
TO THE SIX MONTHS ENDED APRIL 27, 2008--Continued
General Corporate Expenses and Other Income (Expense)
-----------------------------------------------------
Six Months Ended
----------------
May 3, 2009 April 27, 2008
----------- --------------
% of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- ------
Selling & Administrative $16.9 1.8% $16.2 1.4% ($0.7) (4.2%)
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.9 0.1% $1.3 0.1% $0.4 35.6%
-------------------------------------------------------------------------------------------------------------------------------
Interest Income $0.9 0.1% $2.6 0.2% ($1.7) (64.4%)
-------------------------------------------------------------------------------------------------------------------------------
Other Expense ($1.0) (0.1%) ($3.0) (0.3%) $2.0 68.8%
-------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Gain (Loss) $0.2 - ($0.4) - $0.6 142.1%
-------------------------------------------------------------------------------------------------------------------------------
Interest Expense ($2.5) (0.3%) ($3.2) (0.3%) $0.7 21.8%
-------------------------------------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the six
months of fiscal 2009 as compared to the comparable 2008 period, were:
The increase in selling and administrative expenses in the current six months
from the comparable 2008 fiscal period was primarily the result of increased
labor costs.
The decrease in depreciation and amortization in the six 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.
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.
The foreign exchange gain in the six months of fiscal 2009 compared to a foreign
exchange loss in the prior period was primarily due to variations in exchange
rates.
The decrease in interest expense from the comparable period in fiscal 2008 was
due to lower bank and securitization program borrowings, partially offset by the
aforementioned amendment to the securitization program.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008
Consolidated Results of Operations
----------------------------------
In the second quarter of fiscal 2009, consolidated net sales decreased by $157.9
million, or 26%, to $447.1 million, from the comparable quarter of fiscal 2008.
The decrease in the current quarter's net sales resulted primarily from
decreases in Staffing Services of $121.8 million, Telecommunications Services of
$29.2 million and Computer Systems of $7.7 million.
Cost of sales decreased by $147.5 million, or 26%, to $420.7 million, and
remained at 94% of sales, in the second quarter of fiscal 2009 as compared to
the comparable quarter of fiscal 2008.
Selling and administrative costs decreased by $1.5 million, or 7%, in the second
quarter of fiscal 2009 over the comparable period in fiscal 2008, and were 4.8%
of sales, as compared to 3.8% in the comparable prior 2008 period.
As explained in the Executive Overview, in the second quarter of fiscal 2009 the
Company consolidated the operations within the Staffing Services segment and
recorded a restructuring charge of $4.5 million. In addition, the Company
recorded a $1.2 million impairment charge in its Computer Systems segment.
The Company reported an operating loss of $10.5 million in the current quarter,
as compared to an operating profit of $4.0 million in the comparable period of
fiscal 2008. This decrease was due to the segments reporting an operating loss
of $2.5 million compared to an operating profit of $12.6 million partially
offset by a decrease of $0.6 million, or 8%, in general corporate expenses. The
decrease in segment operating results was attributable to the decreases of $7.2
million in the Staffing Services segment, $6.3 million in Computer Systems and
$1.8 million in Telecommunications Services, partially offset by an increase of
$0.2 million in Printing and Other.
Interest income decreased by $1.0 million, or 76%, in the current six months
from the comparable period in fiscal 2008 primarily due to lower interest rates.
Other expense decreased by $0.6 million, or 50%, in the current six 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 decreased by $0.7 million, or 44%, in the current quarter over
the comparable quarter in fiscal 2008. The decrease was due to lower interest
rates and a reduction in borrowings under the Delta Credit Facility, partially
offset by the aforementioned amended securitization program.
The Company's effective tax benefit rate on its financial reporting pre-tax loss
was 27.4% in the second quarter of fiscal 2009 compared to an effective tax
provision rate of 44.8% on its financial reporting pre-tax income in the
comparable period in fiscal 2008. The Company's fiscal 2009 effective tax
benefit for the three months ended was impacted by foreign tax cumulative losses
requiring a valuation allowance and for the six months ended also included the
impact of the non-deductible portion of goodwill impairment. The Company's 2008
effective tax provision was primarily impacted by discontinued operations,
foreign operations and the adoption of FIN 48.
The Company reported a net loss in the second quarter of fiscal 2009 of $8.7
million compared to a net income of $3.4 million in the comparable quarter of
fiscal 2008.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
Results of Operations by Segment
--------------------------------
The following two tables reconcile the operating (loss) profit by segment to the
consolidated statements of operations for the three months ended May 3, 2009 and
April 27, 2008:
Three Months Ended May 3, 2009
------------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
----- -------- -------- ------- --------- ------------
Net Sales $447.1 $383.9 $20.0 $44.4 $2.2 ($3.4)
Direct Costs 354.3 322.0 13.2 20.7 1.8 (3.4)
Overhead 66.4 45.5 6.1 14.8 - -
------- ------- ------ ------- ------ --------
Cost of Sales 420.7 367.5 19.3 35.5 1.8 (3.4)
Selling and Administrative 21.4 9.7 0.1 3.3 0.8 7.5
Impairment and Restructuring
Costs 5.7 4.5 - 1.2 - -
Depreciation and Amortization 9.8 3.2 0.5 5.4 0.2 0.5
------- ------ ----- ----- ----- -----
Operating (Loss) Profit (10.5) (1.0) 0.1 (1.0) (0.6) (8.0)
Interest Income 0.3 - - - - 0.3
Other Expense, net (0.7) - - - - (0.7)
Foreign Exchange Loss (0.1) - - - - (0.1)
Interest Expense (0.9) - - - - (0.9)
---- -------- -------- -------- -------- ----
(Loss) Income from Continuing
Operations before Minority
Interest and Income Taxes ($11.9) ($1.0) $0.1 ($1.0) ($0.6) ($9.4)
====== ===== ==== ===== ===== =====
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
Three Months Ended April 27, 2008
---------------------------------
(Dollars in Millions)
Staffing Telecommunications Computer Printing Corporate &
Total Services Services Systems and Other Eliminations
----- -------- -------- ------- --------- ------------
Net Sales $605.0 $505.7 $49.2 $52.1 $2.4 ($4.4)
Direct Costs 480.4 425.4 34.2 23.2 2.0 (4.4)
Overhead 87.8 59.2 12.3 16.3 - -
------- ------- ------- ------- ------ --------
Cost of Sales 568.2 484.6 46.5 39.5 2.0 (4.4)
Selling and Administrative 22.9 11.3 0.1 2.5 1.0 8.0
Impairment and Restructuring
Costs - - - - - -
Depreciation and Amortization 9.9 3.6 0.7 4.8 0.2 0.6
------- ------ ----- ----- ----- -----
Operating Profit (Loss) 4.0 6.2 1.9 5.3 (0.8) (8.6)
Interest Income 1.3 - - - - 1.3
Other Expense, net (1.3) - - - - (1.3)
Foreign Exchange Loss (0.1) - - - - (0.1)
Interest Expense (1.6) - - - - (1.6)
---- -------- -------- -------- -------- ----
Income (Loss) from Continuing
Operations before
Minority Interest and
Income Taxes $2.3 $6.2 $1.9 $5.3 ($0.8) ($10.3)
==== ==== ==== ==== ===== ======
Staffing Services
-----------------
Three Months Ended
------------------
May 3, 2009 April 27, 2008
----------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- ------ --------
Gross Staffing Sales $372.8 $491.8 ($119.0) (24.2%)
-------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $329.9 $339.2 ($9.3) (2.7%)
-------------------------------------------------------------------------------------------------------------------------------
Net Sales * $383.9 $505.7 ($121.8) (24.1%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $322.0 83.9% $425.4 84.1% $103.4 24.3%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $61.9 16.1% $80.3 15.9% ($18.4) (22.9%)
-------------------------------------------------------------------------------------------------------------------------------
Overhead $45.5 11.8% $59.2 11.7% $13.7 23.3%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $9.7 2.6% $11.3 2.3% $1.6 13.6%
-------------------------------------------------------------------------------------------------------------------------------
Impairment and Restructuring Costs $4.5 1.2% - - ($4.5) -
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $3.2 0.4% $3.6 0.7% $0.4 11.1%
-------------------------------------------------------------------------------------------------------------------------------
Segment Operating (Loss) Profit ($1.0) (0.1%) $6.2 1.2% ($7.2) (116.6%)
-------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
The decrease in net sales of the Staffing Services segment for the second
quarter of fiscal 2009 from the comparable quarter in fiscal 2008 was comprised
of decreases of $111.8 million, or 25%, in net Staffing Solutions sales and
$10.0 million, or 16%, in net Technology and Consulting sales. Foreign net sales
for the current quarter decreased by 23% from the comparable quarter of fiscal
2008, and accounted for 7% of total net Staffing Services sales for the current
three months. On a constant currency basis, foreign sales increased by 2% from
the comparable 2008 three months. In the current three months, the segment's
permanent placement sales decreased by 36% and RPO sales decreased by 82% from
the comparable period 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 a decrease of
$13.5 million in Staffing Solutions partially offset by an increase of $6.3
million in the Technology and Consulting. The segment's gross margin percentage
increased by 0.2 percentage points, due to an increase of 6.9 percentage points
in Technology and Consulting, partially offset by a decrease of 0.9 percentage
points in Staffing Solutions. The selling and administrative costs percentage
increased by 0.3 percentage points from the comparable 2008 period percentages,
due to an increase of 0.1 percentage points in Staffing Solutions and 1.9
percentage points in Technology and Consulting. The segment has implemented a
series of cost cutting initiatives, including branch closings and staff
reductions, designed to improve financial performance.
Three Months Ended
------------------
May 3, 2009 April 27, 2008
----------- --------------
Staffing Solutions % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Gross Sales $368.7 $505.8 ($137.1) (27.1%)
-------------------------------------------------------------------------------------------------------------------------------
Net Sales * $330.5 $442.3 ($111.8) (25.3%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $283.8 85.9% $375.8 85.0% $92.0 25.5%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $46.7 14.1% $66.5 15.0% ($19.8) (29.9%)
-------------------------------------------------------------------------------------------------------------------------------
Overhead $34.4 10.4% $43.3 9.8% $8.6 20.6%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $8.5 2.6% $10.8 2.5% $2.3 22.0%
-------------------------------------------------------------------------------------------------------------------------------
Impairment and Restructuring Costs $4.3 1.3% - - ($4.3) -
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.8 0.5% $1.5 0.3% ($0.3) (17.0%)
-------------------------------------------------------------------------------------------------------------------------------
Division Operating (Loss) Profit ($2.3) (0.7%) $10.9 2.4% ($13.5) (84.2%)
-------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The Staffing Solution's decrease in gross staffing sales in the current quarter
of fiscal 2009 from the comparable prior year period included decreases of
approximately $23 million from customers whose business with the Company either
ceased or was substantially lower than in the comparable quarter of fiscal 2008,
as well as $122 million attributable to net decreases in sales to continuing
customers. This was partially offset by increases of approximately $8 million of
sales to new customers or customers with substantial increased business. The
Staffing Solutions' decrease in net sales in the second quarter of fiscal 2009
from the comparable period in
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
Staffing Services--Continued
-----------------
fiscal 2008 was comprised of a decrease of $114.5 million, or 26%, in
traditional contingent staffing, partially offset by an increase of $2.7
million, or 49%, in net managed service associate vendor sales.
The decrease in the Staffing Solutions' operating profit was the result of the
sales decrease, the impairment and restructuring costs, the decrease in gross
profit as a percentage of sales, and the increase in overhead costs as a
percentage of sales. In the three months, Staffing Solutions recorded a $4.3
million restructuring charge due to the elimination of indirect employee
positions from a series of cost cutting initiatives and the closing of 54
offices. The restructuring charge included $1.4 million in severance, and a
non-cash charge for the closed facilities and the impairment of property, plant
and equipment of $2.9 million. The decrease in gross profit percentage was
primarily due to a $6.1 million reduction in higher margin permanent placement
and RPO sales. The increase in overhead as a percentage of sales was due to the
downsizing being phased in over the six-month period. The average indirect labor
headcount for the three months was reduced from the comparable 2008 fiscal
period by 20%. The Company will continue to evaluate its overhead structure to
determine if additional reductions are necessary.
Three Months Ended
------------------
May 3, 2009 April 27, 2008
----------- --------------
Technology and Consulting
------------------------- % of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Gross Sales $334.0 $325.1 $8.9 2.7%
-------------------------------------------------------------------------------------------------------------------------------
Net Sales * $53.4 $63.4 ($10.0) (15.8%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $38.2 71.4% $49.6 78.3% $11.4 23.2%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $15.2 28.6% $13.8 21.7% $1.4 10.6%
-------------------------------------------------------------------------------------------------------------------------------
Overhead $11.1 20.9% $15.9 25.1% $5.1 30.2%
-------------------------------------------------------------------------------------------------------------------------------
Selling &Administrative $1.2 2.4% $0.5 0.5% ($0.7) (256.0%)
-------------------------------------------------------------------------------------------------------------------------------
Restructuring Costs $0.2 - - - ($0.2) -
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $1.4 2.6% $2.1 3.3% $0.7 33.1%
-------------------------------------------------------------------------------------------------------------------------------
Division Operating Profit (Loss) $1.3 2.7% ($4.7) (7.2%) $6.3 138.9%
-------------------------------------------------------------------------------------------------------------------------------
*Net Sales only includes the gross margin on managed service sales.
The Technology and Consulting's increase in gross sales in the second quarter of
fiscal 2009 as compared to the comparable quarter of fiscal 2008 included a
growth of approximately $3 million from new customers, or customers whose
business with the Company in the comparable fiscal period was substantially
below their volume for the second quarter of fiscal 2009, as well as $41 million
attributable to net increases in sales to continuing customers. This increase
was partially offset by a decline of approximately $35 million of sales to
customers which the Company either ceased or substantially reduced servicing in
the current year. The decrease in net sales is a reflection of the overall state
of the economy, as customers have reduced the use of their contingent workforce
and direct placement hirings.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
Staffing Services--Continued
The increase in the Technology and Consulting's operating profit was the result
of the increase in gross profit percentage and the decrease in overhead costs as
a percentage of sales, partially offset by the sales decrease. The increase in
the gross profit percentage was due to a $2.4 million increase in higher margin
licensing fees in fiscal 2009, and a $3.3 million loss recognized in one large
project in the comparable period of fiscal 2008. The decrease in overhead as a
percentage of sales was due to the downsizing of the operations that
predominantly took place in the first quarter of fiscal 2009. The indirect labor
headcount was reduced from the 2008 fiscal period by 16%. The Company will
continue to evaluate its overhead structure to determine if additional
reductions are necessary.
Telecommunications Services
---------------------------
Three Months Ended
------------------
May 3, 2009 April 27, 2008
----------- --------------
(Dollars in Millions) % of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ---- -------- --------
Net Sales $20.0 $49.2 ($29.2) (59.5%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $13.2 66.4% $34.2 69.4% $21.0 61.2%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit (Loss) $6.8 33.6% $15.0 30.6% ($8.2) (55.4%)
-------------------------------------------------------------------------------------------------------------------------------
Overhead $6.1 30.2% $12.3 25.1% $6.2 51.2%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $0.1 0.3% $0.1 0.3% - 47.1%
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.5 2.6% $0.7 1.4% $0.2 24.6%
-------------------------------------------------------------------------------------------------------------------------------
Segment Operating Loss $0.1 0.5% $1.9 3.8% ($1.8) (94.8%)
-------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the second quarter
of fiscal 2009 from the comparable period of fiscal 2008 was due to decreases of
$27.0 million, or 72%, in the Construction and Engineering division and $2.2
million, or 19%, in other divisions. The sales decrease in the Construction and
Engineering division in the second quarter of fiscal 2009 was largely due to a
large installation contract with substantial revenue in the second quarter of
fiscal 2008 that was completed by the end of fiscal 2008, and a net decrease in
the recognition of revenue in fiscal 2009 for several large contracts accounted
for using the percentage-of-completion method of accounting.
The decreased operating results for the current quarter were primarily due to
the sales decrease and the increase in overhead as a percentage of sales,
partially offset by the increase in gross profit percentage The increase in the
gross profit percentage as compared to the 2008 second quarter was due to slight
improvements in margins from jobs accounted for using the
percentage-of-completion method of accounting. As a result of the recent sales
declines, the segment reduced overhead during the quarter by 51% from the
comparable 2008 fiscal period. The decreased overhead for the second quarter of
fiscal 2009 was related to indirect headcount reduction.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
Computer Systems
----------------
Three Months Ended
------------------
May 3, 2009 April 27, 2008
----------- --------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Net Sales $44.4 $52.1 ($7.7) (14.7%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $20.7 46.6% $23.2 44.6% $2.5 10.8%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $23.7 53.4% $28.9 55.4% ($5.2) (17.9%)
-------------------------------------------------------------------------------------------------------------------------------
Overhead $14.8 33.1% $16.3 31.2% $1.5 9.5%
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $3.3 7.5% $2.5 4.8% ($0.8) (33.9%)
-------------------------------------------------------------------------------------------------------------------------------
Impairment cost $1.2 2.8% - - ($1.2) -
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $5.4 12.3% $4.8 9.1% ($0.6) (14.6%)
-------------------------------------------------------------------------------------------------------------------------------
Segment Operating (Loss) Profit ($1.0) (2.3%) $5.3 10.3% ($6.3) (119.0%)
-------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales decrease in the second quarter of fiscal
2009 from the comparable period of fiscal 2008 was comprised of decreases of
$7.9 million, or 41%, in projects, maintenance and other and $0.3 million, or
2%, in the Maintech division's IT maintenance, partially offset by an increase
of $0.5 million, or 4%, in database access transaction fee revenue, including
ASP directory assistance. The reduction in sales in the second quarter of fiscal
2009 from the comparable 2008 fiscal period included decreases of approximately
$5 million of sales from customers whose business with the Company either ceased
or was substantially lower than in the comparable period of fiscal 2008, as well
as $4 million attributable to net decreases in sales to continuing customers.
This was partially offset by sales increases of approximately $1 million to new
customers, or customers with substantial increased business. The increase in
transaction fee revenue was primarily due to an increase of such services to a
major customer as the customer agreement transitions to a variable
transaction-based pricing model from a fixed monthly fee model, partially offset
by a decrease at another major customer.
The segment's decreased operating profit was primarily due to the decrease in
sales, the impairment charge of $1.2 million and the increase in overhead as a
percentage of sales. The increased overhead costs as a percentage of sales were
primarily due to increased communications costs related to a new business
initiative, along with increased indirect labor.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
Printing and Other
------------------
Three Months Ended
------------------
May 3, 2009 April 27, 2008
----------- --------------
% of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Net Sales $2.2 $2.4 ($0.2) (10.9%)
-------------------------------------------------------------------------------------------------------------------------------
Direct Costs $1.8 84.1% $2.0 82.0% $0.2 8.6%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $0.4 15.9% $0.4 18.0% - -
-------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $0.8 35.4% $1.0 43.0% $0.2 26.6%
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.2 8.9% $0.2 8.1% - 2.6%
-------------------------------------------------------------------------------------------------------------------------------
Segment Operating Loss ($0.6) (28.4%) ($0.8) (33.1%) $0.2 23.6%
-------------------------------------------------------------------------------------------------------------------------------
The Printing and Other segment's sales decreased by $0.2 million from the
comparable period in fiscal 2008. The sales decrease was comprised of printing
sales. The Printing and Other sales decrease in the second quarter of fiscal
2009 as compared to the comparable period of fiscal 2008 included $0.3 million
attributable to net decreases in sales to continuing customers, partially offset
by approximately $0.1 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. The improved operating
results for the second quarter of fiscal 2009 were predominantly due to the
decrease in selling and administrative costs, partially offset by the decrease
in sales.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 3, 2009 COMPARED
TO THE THREE MONTHS ENDED APRIL 27, 2008--Continued
General Corporate Expenses and Other Income (Expense)
-----------------------------------------------------
Three Months Ended
------------------
May 3, 2009 April 27, 2008
----------- --------------
% of % of Favorable Favorable
(Dollars in Millions) Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- ------
Selling & Administrative $7.5 1.7% $8.0 1.3% $0.5 5.7%
-------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $0.5 0.1% $0.6 0.1% $0.1 32.9%
-------------------------------------------------------------------------------------------------------------------------------
Interest Income $0.3 0.1% $1.3 0.2% ($1.0) (76.4%)
-------------------------------------------------------------------------------------------------------------------------------
Other Expense ($0.7) (0.2%) ($1.3) (0.2%) $0.6 49.7%
-------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.1) (0.1%) ($0.1) - - -
-------------------------------------------------------------------------------------------------------------------------------
Interest Expense ($0.9) (0.2%) ($1.6) (0.3%) $0.7 43.9%
-------------------------------------------------------------------------------------------------------------------------------
The changes in general corporate expenses and other income (expense) for the
current period of fiscal 2009 as compared to the comparable 2008 period, were:
The decrease in selling and administrative expenses in the current period from
the comparable 2008 fiscal period was primarily the result of decreased
communications costs, partially offset by increased labor costs.
The decrease in depreciation and amortization in the current period 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.
The decrease in interest expense from the comparable period in fiscal 2008 due
to lower borrowings under the securitization agreement offset by the
aforementioned amendment to the securitization program.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, increased by $20.6 million to $141.5 million in the
six months ended May 3, 2009.
Operating activities provided $33.2 million of cash in the first six months of
fiscal 2009. In the comparable fiscal 2008 period, operating activities provided
$32.3 million in cash.
Operating activities in the first six months of fiscal 2009, exclusive of
changes in operating assets and liabilities, provided $5.2 million of cash, as
the Company's net loss of $21.7 million included non-cash charges primarily for
depreciation and amortization of $18.6 million, impairment charges of $7.3
million, the impairment of property, plant and equipment of $1.7 million and a
deferred tax benefit of $1.4 million. Operating activities in the first six
months of fiscal 2008, exclusive of changes in operating assets and liabilities,
provided $2.0 million of cash, as the Company's net loss from continuing
operations of $12.3 million included non-cash charges primarily for depreciation
and amortization of $19.4 million, accounts receivable provisions of $1.9
million partially offset by a deferred tax benefit of $7.1 million.
Changes in operating assets and liabilities produced $28.0 million of cash in
the first six months of fiscal 2009 principally due to a decrease in the level
of accounts receivable of $105.5 million principally due to the decline in sales
and the Company's focus on collections, a decrease in the level of inventory,
primarily in the Telecommunications Services segment, of $6.0 million and a
decrease in prepaid insurance and other assets of $6.0 million partially offset
by a net decrease in income tax liability of $66.5 million principally due to
the payment of income taxes on the fiscal 2008 gain from the sale of the net
assets of the Company's directory systems and services business and North
American telephone directory publishing operations, a decrease in accrued
expenses of $18.5 million and a decrease in accounts payable of $4.1 million.
Changes in operating assets and liabilities produced $30.3 million of cash, net,
in the first six months of fiscal 2008 principally due to a decrease in the
level of accounts receivable securitization of $20.0 million, a decrease in the
level of inventory, primarily in the Telecommunications Services segment, of
$15.1 million and a decrease in prepaid insurance and other current assets of
$9.8 million offset by a decrease in income tax liability of $12.6 million.
The $9.8 million of cash applied to investing activities for the first six
months of fiscal 2009 resulted primarily from the net expenditures of $9.7
million for net additions to property, plant and equipment. The $16.4 million of
cash applied to investing activities for the first six months of fiscal 2008
resulted primarily from the net expenditures of $15.4 million for net additions
to property, plant and equipment.
The principal factor in the $2.8 million of cash provided by financing
activities in the first six months of fiscal 2009 was a decrease in notes
payable of $2.5 million and $0.3 million payment of long-term debt. The
principal factors in the $14.3 million of cash used by financing activities in
the first six months of fiscal 2008 were a payment of $8.1 million for the
purchase of treasury shares and offset a decrease in notes payable of $6.2
million.
Commitments
-----------
There has been no material change through May 3, 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.
45
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 May 3, 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 $297.4 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") $75.0 million secured, syndicated revolving credit
agreement ("Delta Credit Facility"). The Company had total outstanding
borrowings of $105.0 million as of May 3, 2009. Included in these borrowings
were $20.0 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 Fifth Third Bank), 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 May 3,
2009, Volt Funding had borrowed from $35.7 million and $14.3 million from Market
Street Funding and Fifth Third Bank, respectively. At May 3, 2009, borrowings
bear a weighted-average interest rate of 0.8% 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 May 3, 2009, the Company was in compliance with all requirements of the
Amended Securitization Program.
46
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 May 3,
2009, $10.7 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 May 3, 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 1.8% 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 May 3, 2009.
Delta Credit Facility
---------------------
In December 2006, Volt Delta entered into a $100 million 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. On February 12, 2009, the Delta
Credit Facility was voluntarily reduced to $75.0 million.
The Delta Credit Facility allows for the issuance of revolving loans and letters
of credit in the aggregate of $75.0 million with a sublimit of $10.0 million on
the issuance of letters of credit. At May 3, 2009, $41.7 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 May 3, 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 1.4% 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 May 3, 2009, the commitment fee was 0.25% 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
47
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, amount of investments
including business acquisitions, creation of contingent obligations, sales of
assets (including sale leaseback transactions) and annual capital expenditures.
At May 3, 2009, Volt Delta was in compliance with all covenants in the Delta
Credit Facility.
Summary
-------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through at least the next twelve months.
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 six
months of fiscal 2009, this revenue comprised approximately 76% of the
Company's net consolidated sales.
48
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
six 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 subsidiary, VMC Consulting, for which the Company
provides outsource services for a customer in the form of project work, for
which the Company is responsible for deliverables, in accordance with the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 81-1, "Accounting for Performance of Construction-Type
Contracts." The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the services are rendered when on
a time and material basis, and when the Company is responsible for project
completion, revenue is recognized when the project is complete and the
customer has approved the work. In the first six months of fiscal 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 six 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 six months
of fiscal 2009, this revenue comprised approximately 2% of the Company's
net consolidated sales.
49
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 six 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 six 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 six 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 six 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 six 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.
50
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. During the second quarter, the Company recorded an impairment charge of
$1.2 million in its Computer Systems segment based on its annual testing of
goodwill and intangible assets.
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
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
----------------------------
analyses. For the market approach the material assumptions were financial data
for comparable companies, 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 of the Company)
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.
52
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 May 3, 2009 was $13.3 million, net of the valuation
allowance of $5.9 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 Fifth Third Bank), 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
53
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 May 3, 2009, Volt Funding had borrowed $35.7 million and $14.3
million from Market Street Funding and Fifth Third Bank, respectively. At May 3,
2009, borrowings bear a weighted-average interest rate of 0.8% 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 reserve 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 reserves 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, reserves might not be
sufficient, and additional expense may be recorded by the Company.
54
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 (R), "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 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 six months of fiscal 2009 and 2008, the Company paid or accrued
$0.9 million and $0.6 million, respectively, to the law firm 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
$27,000 and $7,000, respectively, during the first six 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.
55
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 decrease the Company's
annual net interest expense by $0.6 million. Similarly, a hypothetical
100-basis-point (1%) decrease in interest rates would increase the Company's
annual net interest expense by $0.2 million.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $13.5 million
at May 3, 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 May 3, 2009, the total market value of these
investments was $4.1 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 May 3, 2009, the total of the Company's net investment in foreign operations
was $3.1 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 May 3, 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 May 3, 2009 by 10%
would result in a pretax gain of $0.3 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at May 3, 2009 by 10% would result in a pretax loss of $0.3 million
related to these positions.
56
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at May 3, 2009.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The
information is presented in U.S. dollar equivalents, which is the Company's
reporting currency.
Interest Rate Market Risk Payments Due By Period as of May 3, 2009
------------------------- ----------------------------------------
Less than 1-3 3-5 After 5
Total 1 Year Years Years Years
------ ------- ------ ------ -----
(Dollars in thousands of US$)
Cash and Cash Equivalents and Restricted
----------------------------------------
Cash
----
Money Market and Cash Accounts $169,330 $169,330
Weighted Average Interest Rate 0.75% 0.75%
----- --------
Total Cash, Cash Equivalents and Restricted
Cash $169,330 $169,330
======== ========
Debt
----
Term Loan $12,044 $577 $1,306 $1,538 $8,623
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Note Payable $400 $130 $188 $82 -
Interest Rate 5.0% 5.0% 5.0% 5.0%
---- ---- ---- ---- ------
Total Long Term Debt $12,444 $707 $1,494 $1,620 $8,623
Short-term Borrowings $105,049 $105,049 - - -
Weighted Average Interest Rate 1.62% 1.62% - - -
----- ----- ---- ----- ------
Total Debt $117,493 $105,756 $1,494 $1,620 $8,623
======== ======== ====== ====== ======
57
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 May 3,
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
During the current quarter, the Company completed the remediation of the
material weakness over revenue recognition and other transactions. In effecting
such remediation, the Company implemented the following:
o Enhanced procedures and documentation supporting our revenue
recognition process
o Implemented more robust management review of revenue recognition
o Hired a Director of Accounting Policies and Procedures to oversee the
revenue recognition process
o Increased Corporate oversight, including more frequent financial
statement reviews and earlier identification of potential accounting
issues
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.
58
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2009 Annual Meeting of Shareholders held on March 30, 2009,
shareholders:
(a) elected the following to serve as Class II directors of the
Company until the 2011 Annual Meeting of the shareholders by the
following votes:
For Vote Withheld
--- -------------
Theresa A Havell 16,246,393 530,632
Deborah Shaw 16,497,076 279,949
William Turner 16,492,188 284,837
(b) ratified the action of the Board of Directors in appointing Ernst
& Young LLP as the Company's independent registered public
accounting firm for the fiscal year ending November 1, 2009 by
the following vote:
For Against Abstain
--- ------- -------
16,686,178 71,128 19,719
The following continue to serve as Class I directors of the Company until the
2010 Annual Meeting:
Lloyd Frank
Bruce G. Goodman
Mark N. Kaplan
Steven A. Shaw
59
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: June 12, 2009
By: /s/Jack Egan
--------------------------
Jack Egan
Senior Vice President and
Principal Financial Officer
60
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