Volt Information Services, Inc. F1Q08 (Quarter End 1/27/08) Earnings Call Transcript

Mar.31.08 | About: Volt Information (VOL)

Volt Information Services, Inc. (VOL) F1Q08 Earnings Call March 12, 2008 11:00 AM ET

Executives

Ronald Kochman – Head of Investor Relations & Vice President

Jack Egan – Principal Financial Officer & Senior Vice President

Steven A. Shaw – President, Chief Executive Officer & Chief Operating Officer

Analysts

Josh Fogel – Sidoti & Company

Operator

Good morning and welcome to the Volt Information Sciences Incorporated first quarter 2008 earnings conference call. At this time all participants are in a listen only mode. After the presentation we will conduct a question and answer session. (Operator Instructions) Today’s conference is being recorded. Now, I will turn the meeting over to Mr. Ron Kochman, Head of Investor Relations and Vice President of Volt Information Sciences Incorporated. Sir, you may begin.

Ronald Kochman

Good morning. I’m Ron Kochman, Head of Investor Relations and Vice President of Volt Information Sciences and I would like to welcome you to Volt’s fiscal 2008 first quarter investment community conference call. In a moment Jack Egan, Senior Vice President and Chief Financial Officer will be reviewing our quarterly financials and then Steven Shaw our President and Chief Executive Officer will be providing additional commentary.

Before officially starting the discussion of our results, I’d like to read to you our standard corporate disclaimer. Statements in this conference call and associated webcast concerning the future results, performance, expectations or intentions are forward-looking statements. Actual results, performance or developments may differ materially from forward-looking statements as a result of known or unknown risks, uncertainties and other factors including those identified in the company’s filings with the Securities & Exchange Commission, press releases and other public communication. Volt Information Sciences Inc undertakes no obligation to update any information presented in this discussion.

Now, I’d like to turn the call over to Jack Egan, Chief Financial Officer for Volt Information Sciences Inc.

Jack Egan

Good morning. For the first quarter of fiscal 2008 that ended January 27, the company reported a net loss of $13.2 million or $0.59 per share compared to a net profit of $700,000 in the previous year’s comparable quarter. Loss before minority interest and income taxes was $21 million for the quarter compared to income of $1.2 million the previous year. Net sales increased by $41 million or 8% to $590 million from the comparable quarter of fiscal 2007. The increase in the current quarter’s net sales resulted from increases in staffing services of $15 million, telecommunication services of $26 million and computer systems of $4 million partially offset by decreases in telephone directory of $3 million. The company reported a segment operating loss for the quarter of $9.8 million on $590 million in total net sales compared to a segment operating profit of $12.5 million on $549 million the previous year’s quarter.

I would like to turn the conference call over to Steven Shaw, President, Chief Executive officer of Volt Information Sciences for further explanation and his insights into the factors that affected the quarter and his review of operations. Then, he, Ron and I will be able to answer any questions you may have during the Q&A.

Steven A. Shaw

Good morning. The company reported an operating loss of $18.7 million in the first quarter compared to a profit of $2.2 million in the comparable quarter of fiscal 2007. The decrease in segment operating profit was primarily the result of the $18.5 million operating loss in the telecommunications services segment and additional declines in the computer systems and telephone directory segment operating profits compared to the first quarter of 2007. The decrease in segment operating profit was partially offset by $1.4 million in lower general corporate expenses primarily due to a reduction in depreciation and communication costs. If we exclude the reserve for the telecommunication group and the integration charges for the computer systems group our first quarter would have shown a breakeven which is typical.

I’d like to start the segment discussion by updating you on what occurred in the telecommunications segment and why we created such a reserve. The telecommunications services segment has been working under a fiber optic installation contract for a major customer. Towards the end of the first quarter the company learned that certain work that was being performed and that we had expected to be paid for was, in the customer’s opinion, out of scope. Since the company recognizes revenue under this contract only when individual jobs are completed, accepted and billed and not on a percentage of completion basis we were required to take a reserve for the cost already incurred. In addition, we took into consideration reductions in expected revenue per job, cost overruns on the work already completed and additional costs to complete the work in process. Over the last few weeks we have also been working with the customer and the segment to address the factors that contributed to the need to take the reserve. But know, the contract has been amended to address pricing issues and to better define the process for handling, documenting and approving change orders in ongoing and future work orders.

Turning to other business, the staffing services segment while basically reporting a flat year-over-year quarterly result had some meaningful development. Administrative and light industrial divisions operating profit increased by $2.7 million despite a reduction in revenue which offset a $2.6 million decrease in the operating profit of the technical services group. The improved operating results of the administrative industrial division was the result of a reduction in payroll taxes which improved gross margins as a percentage of revenue. In addition, the closing of eight unperforming branches in 2007 decreased overhead in both dollars and as a percentage of sales. The division is focused on reducing overhead costs to compensate for the lower sales volume. In each of the past three quarters overhead costs have been lower than the comparable prior fiscal year’s quarter.

Although technical staffing revenue increased for the quarter, operating profit declined as a result of decreases in gross margin percentages and an increase in overhead. The decrease in gross margin was primarily due to activity at VMC, our project management business related to startup costs for a new project while the 2007 quarter benefitted from the gain on the settlement of a vendor dispute. The telephone director segment sales and operating profit decreased for the quarter from the comparable quarter of fiscal 2007 and was primarily related to the timing and deliveries of higher margin directories in both Uruguay and the community phone book business. This decrease was partially offset by higher margin projects in the telephone production operation.

The computer system segment sales increased in the first quarter over the comparable 2007 quarter and was primarily the result of increased transaction revenue from LLSI which we acquired in the fourth quarter of fiscal 2007. Additional business from Maintech, our IT maintenance division was partially offset by the reduction in the Volt Delta International due to two projects recognized in the 2007 period. The decrease in the computer systems quarterly operating profit was the result of not replacing last year’s two high margin projects this year and expenses related to the LLSI acquisition which included a $1.5 million restructuring charge and additional amortization of intangible assets. The integration of the acquisition into LLSI Data is proceeding on schedule and we are very happy with the market acceptance as we believe the combination of both Delta’s application development, integration and hosting capabilities with LLSI’s highly efficient data processing and diverse client base allows Delta to provide its customers the most current and accurate business and consumer information in the marketplace.

I think that it is obvious that given the current economic environment and the first quarter’s results it will be a challenging year for the company in terms of earnings and growth. On that note, I would like to open the conference call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question does come from Josh Fogel with Sidoti & Company. Sir you may ask your question.

Josh Fogel – Sidoti & Company

I just wanted to start first in telecom services, what do you think is the likelihood that you will be reimbursed partially from this client?

Jack Egan

It’s tough to say at this time. We definitely think we’ll recuperate some of the money but at this time it’s too early to give guidance on numbers.

Josh Fogel – Sidoti & Company

Okay. But, the relationship remains intact? There’s no chance of losing this business?

Steven A. Shaw

We’re continuing to get orders from the client and we’re continuing to provide services to them.

Josh Fogel – Sidoti & Company

Okay. Could you maybe discuss the contract pipeline at all? I see that inventory came down a lot since the end of last quarter and I was wondering if this was fully to reflect the contract dispute or just overall contract opportunities were drying up?

Steven A. Shaw

Specifically in the telecom I take it?

Josh Fogel – Sidoti & Company

Yes, in telecom.

Jack Egan

The backlog Josh is about $69 million compared to $76 million a year ago.

Josh Fogel – Sidoti & Company

Okay. I guess looking at the segment’s operating profit if you pull out x the charge segment revenue was much higher than what I was looking for but operating profits x the charge were basically flat, or actually significantly lower than the $4 million you put up the quarter before and I was wondering what was driving the margin weakness here?

Jack Egan

They had some much better profitable jobs that they were working last year compared to this year and this year had a higher overhead rate.

Josh Fogel – Sidoti & Company

Shifting to staffing, in the technical placement business there’s a big drop in the operating profit there and outside of the startup costs you mentioned for VMC you said that there was a change in the sales mix and I was just wondering now if you’re targeting lower margin staffing assignments there or are you seeing a deterioration in the pricing power of this business?

Jack Egan

It’s actually the sales was on a good side for the A&I division which increased their profitability. On the technical side the weakness was almost totally related to the startup costs of the new projects and VMC and they also benefited last year as Steven mentioned before, from a settlement of a vendor dispute.

Josh Fogel – Sidoti & Company

Okay. Can you maybe give me a sense of the startup costs that we’ll be seeing in Q2? Are they going to be similar to Q1?

Jack Egan

No, most of that was expensed in the first quarter, it was to open up a new facility, or actually two different facilities.

Josh Fogel – Sidoti & Company

Okay. With the LLSI integration can you maybe give us a timeline when you expect the integration to be fully completed?

Jack Egan

We expect that to happen probably toward the end of the second quarter beginning of the third.

Josh Fogel – Sidoti & Company

And as far as integration costs should they be similar to what we saw in Q1 in Q2?

Jack Egan

It will probably be much smaller. The cost in the first quarter Josh are mostly severance separation costs. So, those reductions were completed.

Josh Fogel – Sidoti & Company

Just lastly some housekeeping, do you have the cost of goods sold G&A and D&A numbers?

Jack Egan

Sure. For 2008 cost of goods sold was $572 million, last year $512. SG&A $25 million this year versus $23.8 last year, depreciation and amortization $9.8 million this year versus $9.6 last year and this year we have the restructuring charge of $1.5 million.

Operator

(Operator Instructions) Our next questions does come from Josh Fogel of Sidoti & Company. You may ask your question.

Jose Fogel – Sidoti & Company

I mind as well take advantage is no one else is going to ask. In the telephone directory business I know that timing has – the delivery of the telephone directories has been tied to the operating profits that we’ve been seeing at least last year and I was wondering now is there going to be a typical seasonality in this business going forward? Are basically Q3 and 4 going to be strongest here?

Jack Egan

Yes, history should repeat itself this year compared with last year. It will be a step up ladder.

Steven A. Shaw

The only thing that will really reflect the change in that Josh is if there are any big weather conditions that affect the distribution schedules.

Jose Fogel – Sidoti & Company

Okay. Just lastly, Steve you just highlighted with the current economic environment it’s going to be a challenging year for you but are you seeing any notable pockets of weakness or deterioration in any of your business right now, notably on the staffing side?

Steven A. Shaw

I have seen some flattening out and we’re watching it very carefully. Given that most of our costs are in the human capital environment we need to be very careful as in past economic downturns to right size the business quickly and efficiently so we’re tracking and monitoring what’s going on in the economy very carefully. On the upside or the beneficial side is one of the great things about Volt is we’re well diversified with a number of business and some are counter cyclical so in a downturn we do actually well. So, having a nice diverse portfolio of businesses has enabled Volt through the years to weather a hard and difficult economic situation.

Jose Fogel – Sidoti & Company

So it’s fair to say at least when looking at the A&I business in staffing the majority of the decline was you cycling out of the unprofitable work not necessarily a decline in demand?

Steven A. Shaw

I would say that we have a good portfolio in our technical business and we’re not heavily in any sectors that were affected by the subprime. We’re in areas that had very strong growth such as IT areas of manufacturing of which there is exporting and strong exports and in other areas. So, even our diversification in the segment has been so far so good. But, as the economy as a whole starts to slow it will affect us as well so we’re just watching it and if it does we’ll take the right steps.

Jose Fogel – Sidoti & Company

Just the last thing, can you remind me if you guys have a buyback in place?

Jack Egan

No. Today, we do not.

Operator

At this time we show no further questions.

Steven A. Shaw

On that note I would like to thank you all for participating in our quarterly conference call and I wish you all a very happy day. Thank you for participating with us.

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