VOLT INFORMATION SCIENCES, INC.
Management's discussion and analysis ("MD&A") of financial condition and results
of operations is provided as a supplement to and should be read in conjunction
with the unaudited condensed consolidated financial statements and related notes
to enhance the understanding of our results of operations, financial condition
and cash flows. This MD&A contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements that involve expectations, plans or
intentions (such as those relating to future business, future results of
operations or financial condition, including with respect to the anticipated
effects of COVID-19 and related government actions). You can identify these
forward-looking statements by words such as "may," "will," "would," "should,"
"could," "expect," "anticipate," "believe," "estimate," "intend," "plan" and
other similar expressions. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from
those expressed or implied in our forward-looking statements. This MD&A should
be read in conjunction with the MD&A included in our Form 10-K for the fiscal
year ended November 1, 2020 , as filed with the SEC on January 14, 2021 (the
"2020 Form 10-K"). References in this document to "Volt," "Company," "we," "us"
and "our" mean Volt Information Sciences, Inc. and our consolidated
subsidiaries, unless the context requires otherwise. The statements below should
also be read in conjunction with the description of the risks and uncertainties
set forth from time to time in our reports and other filings made with the SEC ,
including under Part I, "Item 1A. Risk Factors" of the 2020 Form 10-K and Part
II, "Item 1A. Risk Factors" of this report. We do not intend, and undertake no
obligation except as required by law, to update any of our forward-looking
statements after the date of this report to reflect actual results or future
events or circumstances. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements.
Note Regarding the Use of Non-GAAP Financial Measures
We have provided certain Non-GAAP financial information, which includes
adjustments for special items and certain line items on a constant currency
basis, as additional information for segment revenue, our consolidated net
income (loss) and segment operating income (loss). These measures are not in
accordance with, or an alternative for, measures prepared in accordance with
generally accepted accounting principles ("GAAP") and may be different from
Non-GAAP measures reported by other companies. Our Non-GAAP measures are
generally presented on a constant currency basis, and exclude (i) the impact of
businesses sold or exited, (ii) the impact from the migration of certain clients
from a traditional staffing model to a managed service model ("MSP transitions")
as we believe that the difference in revenue recognition accounting under each
model of the MSP transitions could be misleading on a comparative period basis
and (iii) the elimination of special items. Special items generally include
impairments, restructuring and severance costs, as well as certain income or
expenses which the Company does not consider indicative of the current and
future period performance. We believe that the use of Non-GAAP measures provides
useful information to management and investors regarding certain financial and
business trends relating to our financial condition and results of operations
because they permit evaluation of the results of operations without the effect
of currency fluctuations or special items that management believes make it more
difficult to understand and evaluate our results of operations.
Segments
Our reportable segments are (i) North American Staffing, (ii) International Staffing and (iii) North American MSP. All other business activities that do not meet the criteria to be reportable segments are aggregated with corporate services under the category Corporate and Other. Our reportable segments have been determined in accordance with our internal management structure, which is based on operating activities. We evaluate business performance based upon several metrics, primarily using revenue and segment operating income as the primary financial measures. We believe segment operating income provides management and investors a measure to analyze operating performance of each business segment against historical and competitors' data, although historical results, including operating income, may not be indicative of future results as operating income is highly contingent on many factors including the state of the economy, competitive conditions and customer preferences. We allocate all support-related costs to the operating segments except for costs not directly relating to our operating activities such as corporate-wide general and administrative costs. These costs are not allocated to individual operating segments because we believe that doing so would not enhance the understanding of segment operating performance and such costs are not used by management to measure segment performance. We report our segment information in accordance with the provisions of theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification 280, Segment Reporting ("ASC 280"), aligning with the way the Company evaluates its business performance and manages its operations. 19 --------------------------------------------------------------------------------
Overview
We are a global provider of staffing services (traditional time and
materials-based as well as project-based). Our staffing services consist of
workforce solutions that include providing contingent workers, personnel
recruitment services and managed staffing services programs supporting primarily
administrative and light industrial (commercial) as well as technical,
information technology and engineering (professional) positions. Our managed
service programs ("MSP") involves managing the procurement and on-boarding of
contingent workers from multiple providers.
We operate in approximately 60 of our own locations and have an on-site presence
in over 50 customer locations. Approximately 87% of our revenue is generated in
the United States . Our principal international markets include Europe , Asia
Pacific and Canada locations. The industry is highly fragmented and very
competitive in all of the markets we serve.
Employees and Human Capital Resource Management
Volt operates on the fundamental philosophy that people are our most valuable asset as every personwho works for us has the potential to impact our success as well as the success of our clients. As a staffing company, identifying quality talent is at the core of everything we do and our success is dependent upon our ability to attract, develop and retain highly qualified employees, both in-house and for our clients. The Company's core values of integrity, customer centric, ownership, innovation, empowerment, collaborative change and teamwork establish the foundation on which the culture is built and represent the key expectations we have of our employees. We believe our culture and commitment to our employees attract and retain our qualified talent, while simultaneously providing significant value to our Company and its shareholders.
Demographics
As ofAugust 1, 2021 , we employed approximately 14,600 people, including 13,500who were on contingent staffing assignments with our clients, and the remainder as full-time in-house employees. Approximately 70% of the full-time in-house employees are located inNorth America and the remaining are withinAsia Pacific andEurope . The workers on contingent staffing assignments are on our payroll for the length of their assignment with the client.
Diversity and Inclusion
Volt values building diverse teams, embracing different perspectives and fostering an inclusive, empowering work environment for our employees and clients. We have a long-standing commitment to equal employment opportunity as evidenced by the Company's EEO policy. Of our North American in-house employee population, approximately 70% are women and approximately 45% have self-identified as Hispanic or Latino, Native American, Pacific Islander, Asian, Black orAfrican American , or of two or more races. As part of Volt's commitment to continued enhancements in this area, we launched our Expert Momentum Diversity and Inclusion Program. This program involved the creation of a task force made up of a group of employees from across the organization. The program has established initiatives to strengthen the promotion of workplace diversity for our employees and clients, to create a collaborative environment that promotes authenticity and a culture that celebrates our differences, and embraces a collaborative environment with unique experiences and diverse perspectives. The program's task force will enhance company-wide engagement on diversity and inclusion, provide education opportunities for our employees, help identify areas for improvement and monitor progress in achieving these initiatives.
Compensation and Benefits
Critical to our success is identifying, recruiting, retaining, and incentivizing
our existing and future employees. We strive to attract and retain the most
talented employees in the staffing industry by offering competitive compensation
and benefits. Our pay-for-performance compensation philosophy is based on
rewarding each employee's individual contributions and striving to achieve equal
pay for equal work regardless of gender, race or ethnicity. We use a combination
of fixed and variable pay including base salary, bonus, commissions and merit
increases which vary across the business. In addition, as part of our long-term
incentive plan for executives and certain employees, we provide share-based
compensation to foster our pay-for-performance culture and to attract, retain
and motivate our key leaders.
As the success of our business is fundamentally connected to the well-being of
our people, we offer benefits that support their physical, financial and
emotional well-being. We provide our employees with access to flexible and
convenient medical programs intended to meet their needs and the needs of their
families. In addition to standard medical coverage, we offer eligible employees
dental and vision coverage, health savings and flexible spending accounts, paid
time off, employee assistance programs, voluntary short-term and long-term
disability insurance and term life insurance. Additionally, we offer a 401(k)
Savings Plan and Deferred Compensation Plan to certain employees. Our benefits
vary by location and are designed to meet or exceed local laws and to be
competitive in the marketplace.
20
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In response to the COVID-19 pandemic, government legislation and key
authorities, we implemented changes that we determined were in the best interest
of our employees, as well as the communities in which we operate. This included
having the majority of our employees work from home, while implementing
additional safety measures for employees continuing critical on-site work. We
continue to embrace a flexible working arrangement for a majority of our
in-house employees, as well as a portion of our contingent workforce where we
continue to provide key services to customers remotely.
Commitment to Values and Ethics
Along with our core values, we act in accordance with our Code of Business
Conduct and Ethics ("Code of Conduct"), which sets forth expectations and
guidance for employees to make appropriate decisions. Our Code of Conduct covers
topics such as anti-corruption, discrimination, harassment, privacy, appropriate
use of company assets, protecting confidential information, and reporting Code
of Conduct violations. The Code of Conduct reflects our commitment to operating
in a fair, honest, responsible and ethical manner and also provides direction
for reporting complaints in the event of alleged violations of our policies
(including through an anonymous hotline). Our executive officers and supervisors
maintain "open door" policies and any form of retaliation is strictly
prohibited.
We believe a key factor in employee retention is training and professional development for our talent. We have training programs across all levels of the Company to meet the needs of various roles, specialized skill sets and departments across the Company. All field associates receive Volt's General Safety Orientation prior to assignment and site-specific job task training from our clients. Volt offers the Federal Ten Hour and other specialty safety programs to key employees and clients as a value-add feature of our services. Volt is committed to the security and confidentiality of our employees' personal information and employs software tools and periodic employee training programs to promote security and information protection at all levels. Additionally, in the second quarter of fiscal 2021, we invested in an online educational platform to upskill our field associates acrossNorth America . This platform provides significant benefit and support to our employees in furthering their education and achieving their personal and professional goals, while at the same time cultivating a better-skilled pool of talent for our clients. We utilize certain employee turnover rates and productivity metrics in assessing our employee programs to ensure that they are structured to instill high levels of in-house employee tenure, low levels of voluntary turnover and the optimization of productivity and performance across our entire workforce. Additionally, we have implemented a new performance evaluation program which adopts a modern approach to valuing and strengthening individual performance through on-going interactive progress assessments related to established goals and objectives. Communication and Engagement We strongly believe that Volt's success depends on employees understanding how their work contributes to the Company's overall strategy. To this end, we communicate with our workforce through a variety of channels and encourage open and direct communication, including: (i) quarterly company-wide CEO update calls; (ii) regular company-wide calls with executives; (iii) frequent Corporate email communications and (iv) employee engagement surveys.
COVID-19 and Our Response
The global spread of COVID-19, which was declared a global pandemic by theWorld Health Organization ("WHO") onMarch 11, 2020 , created significant volatility, uncertainty and global macroeconomic disruption. Our business experienced significant changes in revenue trends at the mid-point of our second quarter of fiscal 2020 as market conditions rapidly deteriorated and continued to decline through the beginning of our third quarter of fiscal 2020. Beginning in the second half of fiscal 2020 however, revenue increased sequentially as a result of a combination of existing customers returning to work, expanding business with existing customers and winning new customers. Beginning inmid-March 2020 , a number of countries andU.S. federal, state and local governments issued varying levels of stay-at-home orders requiring personswho were not engaged in essential activities and businesses as defined in those specific orders to remain at home or requiring reduced operations and capacity to comply with social distancing. Our first priority, with regard to the COVID-19 pandemic, was to ensure the health and safety of our employees, clients, suppliers and others with whom we partner in our business activities to continue our business operations in this unprecedented business environment. Our business was largely converted to a remote in-house workforce and remained open as we provided key services to essential businesses, both remotely and onsite at our customers' locations. We continue to operate on a hybrid-model with certain locations fully staffed and others opening on a limited voluntary basis. OurCOVID-19 Incident Response Team , comprised of key senior leaders in the organization, continues to monitor the most up-to-date developments and safety standard from theCenters for Disease Control and Prevention ,WHO ,Occupational Safety and Health Administration and other key authorities to determine an appropriate response for our employees and clients. While this team is currently monitoring COVID-19 developments globally, we remain focused on the regulations and vaccine requirements in theU.S. to 21 --------------------------------------------------------------------------------
ensure we are complying with all relevant regulations. We are also monitoring developments related to vaccine mandates from certain customers.
We expect the global business environment will continue to operate in various stages of economic turbulence. We are encouraged by the increase in order activity and demand throughout the Company, however the pace of such increase may be impacted if a resurgence in COVID-19 infections leads to additional disruptions, government mandates or increased lack of available talent to match our customers' demands. Long-lived Assets Long-lived assets primarily consist of right-of-use assets, capitalized software costs, leasehold improvements and office equipment. We review these assets for impairment under Accounting Standards Codification 360 Property, Plant and Equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors that could trigger an impairment review include a current period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. If circumstances require a long-lived asset or asset group be reviewed for possible impairment, the Company first compares undiscounted cash flows expected to be generated by each asset or asset group to its carrying value. An impairment loss is recognized if its carrying amount is not recoverable and exceeds its fair value. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on discounted cash flow analysis or other valuation techniques. In the first nine months of fiscal 2021, we recorded an impairment charge of$0.4 million of capitalized software costs related to a change in the expected use of certain assets. Due to the economic impact and uncertainty related to the COVID-19 pandemic, we assessed our real estate footprint to evaluate potential opportunities for consolidation and downscaling. During the second half of fiscal 2020, the Company made decisions that impacted several leased office locations throughoutNorth America , triggering impairment reviews which resulted in impairment charges of$16.1 million to reduce the carrying value of these assets to their estimated fair value. Recent Developments None 22
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Consolidated Results by Segment
Three Months Ended
North American International North Corporate and
(in thousands) Total Staffing Staffing American MSP Other Eliminations
Net revenue $ 217,534 $ 179,381 $ 28,256 $ 9,790 $ 121 $ (14)
Cost of services 181,334 150,552 22,928 7,794 74 (14)
Gross margin 36,200 28,829 5,328 1,996 47 -
Selling, administrative and
other operating costs 34,039 20,483 4,148 1,425 7,983 -
Restructuring and severance
costs 489 27 - - 462 -
Impairment charges 112 - - - 112 -
Operating income (loss) 1,560 8,319 1,180 571 (8,510) -
Other income (expense), net (631)
Income tax provision 314
Net income $ 615 Three Months Ended
North American International North Corporate and
(in thousands) Total Staffing Staffing American MSP Other Eliminations
Net revenue $ 185,941 $ 154,711 $ 21,749 $ 9,436 $ 149 $ (104)
Cost of services 155,983 130,829 17,805 7,375 78 (104)
Gross margin 29,958 23,882 3,944 2,061 71 -
Selling, administrative and
other operating costs 31,245 19,053 3,312 1,117 7,763 -
Restructuring and severance
costs 546 335 81 - 130 -
Impairment charges 2,384 1,803 - - 581 -
Operating income (loss) (4,217) 2,691 551 944 (8,403) -
Other income (expense), net (64)
Income tax provision 556
Net loss $ (4,837) Results of Operations Consolidated (Q3 2021 vs. Q3 2020)
Net revenue in the third quarter of fiscal 2021 increased$31.6 million , or 17.0%, to$217.5 million from$185.9 million in the third quarter of fiscal 2020. The net revenue increase was primarily due to an increase in our North American Staffing segment, net of eliminations, of$24.8 million and an increase in our International Staffing segment of$6.6 million . Excluding the positive impact of foreign currency fluctuations of$2.3 million , net revenue increased$29.3 million , or 15.5%. Operating results in the third quarter of fiscal 2021 improved$5.8 million , to operating income of$1.6 million from an operating loss of$4.2 million in the third quarter of fiscal 2020. Excluding the restructuring and severance costs and impairment charges, operating results improved$3.4 million to operating income of$2.2 million . This increase in operating results of$3.4 million was primarily the result of improvements in our North American Staffing segment of$3.5 million . 23 -------------------------------------------------------------------------------- Results of Operations by Segment (Q3 2021 vs. Q3 2020) Net Revenue The North American Staffing segment revenue in the third quarter of fiscal 2021 increased$24.7 million , or 15.9%, to$179.4 million from$154.7 million in the third quarter of fiscal 2020. The increase is attributable to new business wins in a combination of retail and mid-market clients, combined with the expansion of business within existing clients. In addition, revenue was negatively impacted by the COVID-19 pandemic in the third quarter of fiscal 2020. The International Staffing segment revenue in the third quarter of fiscal 2021 increased$6.6 million , or 29.9%, to$28.3 million from$21.7 million in the third quarter of fiscal 2020, primarily due to increased payroll service and staffing business primarily in theUnited Kingdom andFrance and direct hire revenue in theUnited Kingdom andSingapore . Excluding the positive impact of foreign exchange rate fluctuations of$2.3 million , revenue increased$4.3 million , or 17.3%. The North American MSP segment revenue in the third quarter of fiscal 2021 increased$0.4 million , or 3.8%, to$9.8 million from$9.4 million in the third quarter of fiscal 2020. The increase is primarily attributable to increased demand in its payroll service business partially offset by a decline in managed service business. Cost of Services and Gross Margin Cost of services in the third quarter of fiscal 2021 increased$25.3 million , or 16.3%, to$181.3 million from$156.0 million in the third quarter of fiscal 2020. This increase is primarily due to a$19.7 million increase in our North American Staffing segment related to the 15.9% increase in revenue and a lower workers' compensation adjustment in the current quarter partially offset by a$1.3 million benefit from government wage subsidies. In addition, our International Staffing segment increased$5.1 million primarily as a result of the 29.9% increase in revenue. Gross margin as a percent of revenue in the third quarter of fiscal 2021 increased to 16.6% from 16.1% in the third quarter of fiscal 2020. Our North American Staffing segment gross margin as a percent of revenue increased primarily due to lower employee-related costs and a mix of higher margin business. Our International Staffing segment gross margin as a percent of revenue primarily increased due to increased contract margins and higher direct hire revenue. Our North American MSP segment gross margin as a percent of revenue decreased primarily due to an increase in lower-margin payroll service business. Government wage subsidies accounted for 60 basis points of the increase in the third quarter of fiscal 2021. Selling, Administrative and Other Operating Costs Selling, administrative and other operating costs in the third quarter of fiscal 2021 increased$2.8 million , or 8.9%, to$34.0 million from$31.2 million in the third quarter of fiscal 2020. The increase was primarily due to$4.0 million in labor and related costs as a result of an increase in incentives on the higher sales volume, changes in headcount and higher medical claims experience partially offset by a government wage subsidy in the current quarter. This net increase was offset by$1.2 million in lower facility related costs due to consolidating our real estate footprint. As a percent of revenue, selling, administrative and other operating costs were 15.6% and 16.8% in the third quarter of fiscal 2021 and 2020, respectively. Restructuring and Severance Costs Restructuring and severance costs in the third quarter of fiscal 2021 remained consistent with the prior year at$0.5 million . Restructuring and severance costs in the third quarter of fiscal 2021 were primarily due to ongoing costs of facilities impaired in the second half of fiscal 2020. The restructuring and severance costs in the third quarter of fiscal 2020 were primarily due to actions taken by the Company as part of its continued efforts to reduce costs and to offset COVID-19 related revenue losses. Impairment Charges Impairment charges in the third quarter of fiscal 2021 decreased$2.3 million , to$0.1 million from$2.4 million in the third quarter of fiscal 2020. Impairment charges incurred in the prior year quarter primarily related to consolidating and exiting certain leased office locations throughoutNorth America based on where we could be fully operational and successfully support our clients and business operations remotely. Other Income (Expense), net Other expense in the third quarter of fiscal 2021 increased$0.5 million , to$0.6 million from$0.1 million in the third quarter of fiscal 2020 due to an increase in non-cash foreign exchange losses primarily on intercompany balances. 24 -------------------------------------------------------------------------------- Income Tax Provision The income tax provisions of$0.3 million and$0.6 million in the third quarter of fiscal 2021 and 2020, respectively, were primarily related to locations outside ofthe United States . Consolidated Results by Segment
Nine Months Ended
North American International North Corporate and
(in thousands) Total Staffing Staffing American MSP Other Eliminations
Net revenue $ 657,584 $ 547,892 $ 80,149 $ 29,291 $ 357 $ (105)
Cost of services 552,223 463,059 65,467 23,596 206 (105)
Gross margin 105,361 84,833 14,682 5,695 151 -
Selling, administrative and
other operating costs 100,736 60,999 12,022 4,275 23,440 -
Restructuring and severance
costs 1,716 (131) 1 8 1,838 -
Impairment charges 404 - - - 404 -
Operating income (loss) 2,505 23,965 2,659 1,412 (25,531) -
Other income (expense), net (1,528)
Income tax provision 929
Net income $ 48 Nine Months Ended
North American International North Corporate and
(in thousands) Total Staffing Staffing American MSP Other Eliminations
Net revenue $ 610,982 $ 510,492 $ 72,275 $ 28,550 $ 539 $ (874)
Cost of services 517,360 435,646 60,117 22,212 259 (874)
Gross margin 93,622 74,846 12,158 6,338 280 -
Selling, administrative and
other operating costs 106,931 66,905 10,845 4,149 25,032 -
Restructuring and severance
costs 2,203 761 192 - 1,250 -
Impairment charges 2,395 1,814 - - 581 -
Operating income (loss) (17,907) 5,366 1,121 2,189 (26,583) -
Other income (expense), net (2,389)
Income tax provision 774
Net loss $ (21,070) Results of Operations Consolidated (Q3 2021 YTD vs. Q3 2020 YTD)
Net revenue in the first nine months of fiscal 2021 increased$46.6 million , or 7.6%, to$657.6 million from$611.0 million in the first nine months of fiscal 2020. The net revenue increase was primarily due to increases in our North American Staffing segment, net of eliminations, of$38.2 million , International Staffing segment of$7.8 million and North American MSP segment of$0.7 million . Excluding$2.0 million related to MSP transitions and the positive impact of foreign currency fluctuations of$6.1 million , net revenue increased$42.5 million , or 6.9%. Operating results in the first nine months of fiscal 2021 improved$20.4 million , to operating income of$2.5 million from an operating loss of$17.9 million in the first nine months of fiscal 2020. Excluding the restructuring and severance costs and impairment charges, operating results increased$17.9 million to operating income of$4.6 million . This increase in operating results of$17.9 million was primarily the result of improvements in our North American Staffing segment of$15.9 million and our International Staffing segment of$1.3 million partially offset by a$0.8 million decrease in the North American MSP segment. In addition, the Corporate and Other category improved$1.5 million primarily as a result of reductions in corporate support costs. 25 -------------------------------------------------------------------------------- Results of Operations by Segment (Q3 2021 YTD vs. Q3 2020 YTD) Net Revenue The North American Staffing segment revenue in the first nine months of fiscal 2021 increased$37.4 million , or 7.3%, to$547.9 million from$510.5 million in the first nine months of fiscal 2020. Excluding$2.1 million in revenue from MSP transitions, adjusted revenue increased$39.5 million , or 7.8%. The increase is attributable to new business wins in a combination of retail and mid-market clients, combined with the expansion of business within existing clients. In addition, revenue was negatively impacted by the COVID-19 pandemic in the prior year period. The International Staffing segment revenue in the first nine months of fiscal 2021 increased$7.8 million , or 10.9%, to$80.1 million from$72.3 million in the first nine months of fiscal 2020, primarily due to the positive impact of foreign exchange rate fluctuations, increases in payroll service and direct hire businesses primarily in theUnited Kingdom , as well as staffing revenue inFrance andSingapore . Theses increases were partially offset by lower staffing revenue inBelgium . Excluding the impact of foreign exchange rate fluctuations of$6.1 million , revenue increased$1.7 million , or 2.2%. The North American MSP segment revenue in the first nine months of fiscal 2021 increased$0.7 million , or 2.6%, to$29.3 million from$28.6 million in the first nine months of fiscal 2020. The increase is primarily attributable to increased demand in its payroll service business, partially offset by declines in managed service business. Cost of Services and Gross Margin Cost of services in the first nine months of fiscal 2021 increased$34.8 million , or 6.7%, to$552.2 million from$517.4 million in the first nine months of fiscal 2020. This increase is primarily due to a$27.4 million increase in the North American Staffing segment related to the 7.3% increase in revenue, partially offset by a$3.1 million benefit from government wage subsidies. In addition, the International Staffing segment increased$5.4 million related to the 10.9% increase in revenue. Gross margin as a percent of revenue in the first nine months of fiscal 2021 increased to 16.0% from 15.3% in the first nine months of fiscal 2020. Our North American Staffing segment gross margin as a percent of revenue increased primarily due to lower employee-related costs and a mix of higher margin business. Our International Staffing segment gross margin as a percent of revenue increased primarily due to higher contract revenue margins and an increase in direct hire revenue. Our North American MSP segment gross margin as a percent of revenue decreased primarily due to an increase in lower-margin payroll service business. Government wage subsidies accounted for 50 basis points of the increase in the first nine months of fiscal 2021. Selling, Administrative and Other Operating Costs Selling, administrative and other operating costs in the first nine months of fiscal 2021 decreased$6.2 million , or 5.8%, to$100.7 million from$106.9 million in the first nine months of fiscal 2020. The decrease was primarily due to certain cost reductions, including$6.5 million in labor and related costs due to lower headcount and a government wage subsidy partially offset by higher medical claims experience. Additional reductions included$4.1 million in facility related costs due to consolidating our real estate footprint and$1.3 million in lower travel, professional fees, depreciation and software expenses. These decreases were partially offset by a$5.3 million increase in incentives on the higher sales volume and an$0.8 million increase in general insurance. As a percent of revenue, selling, administrative and other operating costs were 15.3% and 17.5% in the first nine months of fiscal 2021 and 2020, respectively. Restructuring and Severance Costs Restructuring and severance costs in the first nine months of fiscal 2021 decreased$0.5 million , to$1.7 million from$2.2 million in the first nine months of fiscal 2020. Restructuring and severance costs in the first nine months of fiscal 2021 primarily included$0.4 million of severance costs resulting from the elimination of certain positions as part of our continued efforts to reduce costs and$1.6 million related to the ongoing costs of facilities impaired in the second half of fiscal 2020 offset by a$0.3 million lease termination gain. The restructuring and severance costs in the first nine months of fiscal 2020 were primarily due to our plan to leverage the global capabilities of our staffing operations based inBangalore, India and offshore a significant number of strategically identified roles to this location, continued efforts to reduce costs and to offset COVID-19 related revenue losses. Impairment Charges Impairment charges in the first nine months of fiscal 2021 decreased$2.0 million , to$0.4 million from$2.4 million in the first nine months of fiscal 2020. Impairment charges in the first nine months of fiscal 2021 primarily related to capitalized software costs. Impairment charges in the first nine months of fiscal 2020 were primarily due to charges related to consolidating and exiting certain leased office locations throughoutNorth America based on where we could be fully operational and successfully support our clients and business operations remotely. 26 -------------------------------------------------------------------------------- Other Income (Expense), net Other expense in the first nine months of fiscal 2021 decreased$0.9 million , to$1.5 million from$2.4 million in the first nine months of fiscal 2020 due to lower interest expense resulting from lower rates and a decrease in non-cash foreign exchange losses primarily on intercompany balances. Income Tax Provision The income tax provisions of$0.9 million and$0.8 million in the first nine months of fiscal 2021 and 2020, respectively, were primarily related to locations outside ofthe United States . 27 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows from operations and proceeds
from our financing arrangement ("DZ Financing Program") with DZ Bank AG Deutsche
Zentral-Genossenschaftsbank ("DZ Bank "). Borrowing capacity under this
arrangement is directly impacted by the level of accounts receivable, which
fluctuates during the year due to seasonality and other factors. Our business is
subject to seasonality with our fiscal first quarter billings typically the
lowest due to the holiday season and generally increasing in the fiscal third
and fourth quarters when our customers increase the use of contingent labor.
Generally, the first and fourth quarters of our fiscal year are the strongest
for operating cash flows. Our operating cash flows consist primarily of
collections of customer receivables offset by payments for payroll and related
items for our contingent staff and in-house employees; federal, foreign, state
and local taxes; and trade payables. We generally provide customers with 15 - 45
day credit terms, with few extenuating exceptions, while our payroll and certain
taxes are paid weekly.
We manage our cash flow and related liquidity on a global basis. We fund
payroll, taxes and other working capital requirements using cash supplemented as
needed from our borrowings. Our weekly payroll payments inclusive of
employment-related taxes and payments to vendors are approximately $16.5
million . We generally target minimum global liquidity to be approximately 1.5
times our average weekly requirements. We also maintain minimum effective cash
balances in foreign operations and use a multi-currency netting and overdraft
facility for our European entities to further minimize overseas cash
requirements. We believe our cash flow from operations and planned liquidity
will be sufficient to meet our cash needs for the next twelve months.
On March 27, 2020 , the U.S. government enacted the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act") which, among other things, permits the
deferral of the employer's portion of social security tax payments between March
27, 2020 and December 31, 2020 . As a result, $26.2 million of employer payroll
tax payments were deferred with 50% due by December 31, 2021 and the remaining
50% by December 31, 2022 . In addition, certain state governments have delayed
payment of various state payroll taxes for a shorter period of time. State
payroll taxes of approximately $6.8 million deferred from the second quarter of
fiscal 2021 were paid beginning in the third quarter of fiscal 2021. The
Company's payment of approximately $4.7 million of state payroll taxes will be
deferred from the third quarter of fiscal 2021 with payments scheduled to begin
in the fourth quarter of fiscal 2021. We also benefited from certain government
wage subsidies during the first nine months of fiscal 2021. We are in the
process of assessing our benefit and further potential credits as well as other
impacts of the CARES Act on our business.
Capital Allocation
We have prioritized our capital allocation strategy to strengthen our balance sheet and increase our competitiveness in the marketplace. The timing of these capital allocation priorities is highly dependent upon attaining the profitability objectives outlined in our plan and the generation of positive cash flow. We also see this as an opportunity to demonstrate our ongoing commitment to Volt shareholders as we continue to execute on our plan and return to sustainable profitability. Our capital allocation strategy includes the following elements: •Maintaining appropriate levels of working capital. Our business requires a certain level of cash resources to efficiently execute operations. We estimate the amount to be 1.5 times our weekly cash distributions on a global basis and must accommodate seasonality and cyclical trends; •Reinvesting in our business. We continue to execute on our company-wide initiative of disciplined reinvestment in our business including new information technology systems, which will support our front-end recruitment and placement capabilities as well as increase efficiencies in our back-office financial suite. We are also investing in our sales and recruiting process and resources, which are critical to drive profitable revenue growth; and
•Deleveraging our balance sheet. By lowering our debt level, we will strengthen our balance sheet, reduce interest costs and reduce risk going forward.
Recent Initiatives to Improve Operating Income, Cash Flows and Liquidity
We continue to make progress on several initiatives undertaken to enhance our liquidity position and shareholder value.
InJuly 2019 , the Company amended and restated its long-term DZ Financing Program, which was originally executed onJanuary 25, 2018 . The restated agreement allows for the inclusion of certain accounts receivable from originators in theUnited Kingdom , which added an additional$5.0 -$7.0 million in borrowing availability. InJune 2020 , the Maximum Facility Amount, as defined in the DZ Financing Program, was reduced from$115.0 million to$100.0 million .
In
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Maturity Date, as defined in the DZ Financing Program, from July 25, 2023 to
July 25, 2024 ; (3) revise an existing covenant to maintain positive net income
in any fiscal year ending after 2020 to any fiscal year ending after 2021; (4)
replace the existing Tangible Net Worth ("TNW") covenant requirement, as defined
in the DZ Financing Program, to a minimum TNW of $20.0 million through the
Company's fiscal quarter ending on or about July 31, 2021 and $25.0 million in
each quarter thereafter; and (5) revise the eligibility threshold for the
receivables of a large North American Staffing customer from 5% of eligible
receivables to 8%, which increased our overall availability under the Program by
$1.0 - $3.0 million . All other terms and conditions of the DZ Financing Program
remain substantially unchanged.
Entering fiscal 2021, we have significant tax benefits including federal net
operating loss carryforwards of $212.0 million , U.S. state net operating loss
carryforwards of $230.0 million , international NOL carryforwards of
$10.3 million and federal tax credits of $54.7 million , which are fully reserved
with a valuation allowance which we will be able to utilize against future
profits. As of November 1, 2020 , the U.S. federal NOL carryforwards will expire
at various dates beginning in 2031 (with some indefinite), the U.S. state NOL
carryforwards will expire at various dates beginning in 2021 (with some
indefinite), the international NOL carryforwards will expire at various dates
beginning in 2021 (with some indefinite) and federal tax credits will expire
between 2021 and 2040.
Liquidity Outlook and Further Considerations
As previously noted, our primary sources of liquidity are cash flows from operations and proceeds from our financing arrangements. Both operating cash flows and borrowing capacity under our financing arrangements are directly related to the levels of accounts receivable generated by our businesses. Our level of borrowing capacity under the DZ Financing Program increases or decreases in tandem with any increases or decreases in accounts receivable based on revenue fluctuations. We experienced a decline in the demand for our services in fiscal 2020 due to the impact of the COVID-19 pandemic. As a result, our operating cash flow increased and accounts receivable balances decreased as customer collections outpaced sales. This pattern is not sustainable in the event the pandemic continues at resurgence levels or an economic downturn continues for an extended period. However, we experienced improved client payment patterns beginning in the second half of fiscal 2020 and we expect this trend to continue through fiscal 2021. We will continue to monitor default risks and diligently pursue payments from our customers consistent with original payment terms. Many governments in countries and territories in which we do business have announced that certain payroll, income and other tax payments may be deferred without penalty for a certain period of time as well as providing other cash flow related relief packages. We determined that we qualify for the payroll tax deferral which allows us to delay payment of the employer portion of payroll taxes and we are evaluating whether we qualify for certain employment tax credits. If we qualify for such credits, the credits will be treated as government wage subsidies which will offset related operating expenses. We continue to actively monitor these relief packages to take advantage of all of those which are available to us. AtAugust 1, 2021 , the Company had outstanding borrowings under the DZ Financing Program of$60.0 million . Borrowing availability, as defined under the DZ Financing Program, was$4.0 million and global liquidity was$47.1 million atAugust 1, 2021 .
Our DZ Financing Program is subject to termination under certain events of
default such as breach of covenants, including the financial covenants. At
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The following table sets forth our cash and global liquidity levels at the end
of our last five quarters (in thousands):
Global Liquidity
August 2, 2020 November 1, 2020
40,062 $ 47,231 $ 49,595
Total outstanding debt $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000
Cash in banks (b)(c) $ 26,126 $ 36,218 $ 36,962 $ 39,288 $ 43,076
DZ Financing Program 5,122 2,828 2,225 2,868 3,990
Global liquidity 31,248 39,046 39,187 42,156 47,066
Minimum liquidity threshold 15,000 15,000 15,000 15,000 15,000
Available liquidity $ 16,248 $ 24,046 $ 24,187 $ 27,156 $ 32,066
a.Per financial statements.
b.Amount generally includes outstanding checks.
c.Amounts in the USB collections account are excluded from cash in banks as the
balance is included in the borrowing availability under the DZ Financing
Program. As of August 1, 2021 , the balance in the USB collections account
included in the DZ Financing Program availability was $7.8 million .
Cash flows from operating, investing and financing activities, as reflected in our Condensed Consolidated Statements of Cash Flows, are summarized in the following table (in thousands):
Nine Months Ended
August 1, 2021 August 2, 2020
Net cash provided by operating activities $ 4,874 $ 13,082
Net cash used in investing activities (2,615)
(3,336)
Net cash (used in) provided by financing activities (594)
4,595
Effect of exchange rate changes on cash, cash equivalents and restricted cash (29)
(463)
Net increase in cash, cash equivalents and restricted cash $ 1,636$ 13,878
Cash Flows - Operating Activities
The net cash provided by operating activities in the nine months endedAugust 1, 2021 decreased$8.2 million from the cash provided by operating activities in the nine months endedAugust 2, 2020 . This decrease resulted primarily from a$27.5 million decrease in cash provided by operating assets and liabilities, primarily from an increase in accounts receivable due to increased sales volume and other current assets partially offset by a decrease in accounts payable. This decrease in cash used in operating activities was partially offset by a decrease in net loss of$21.1 million .
Cash Flows - Investing Activities
The net cash used in investing activities in the nine months endedAugust 1, 2021 was$2.6 million , as a result of purchases of property, equipment and software. The net cash used in investing activities in the nine months endedAugust 2, 2020 was$3.3 million , principally for the purchases of property, equipment and software of$3.9 million , partially offset by proceeds of$0.4 million from the sale of property, equipment and software.
Cash Flows - Financing Activities
The net cash used in financing activities was$0.6 million in the nine months endedAugust 1, 2021 primarily as a result of withholding tax payment on vesting of stock awards of$0.5 million and debt issuance costs of$0.2 million . The net cash provided by financing activities in the nine months endedAugust 2, 2020 was$4.6 million as a result of a$5.0 million net drawdown of borrowing under the DZ Financing Program. 30 --------------------------------------------------------------------------------
Financing Program
The DZ Financing Program is fully collateralized by certain receivables of the Company that are sold to a wholly-owned, consolidated, bankruptcy-remote subsidiary. To finance the purchase of such receivables, that subsidiary may request thatDZ Bank make loans from time-to-time to that subsidiary which are secured by liens on those receivables. Loan advances may be made under the DZ Financing Program throughJanuary 25, 2024 and all loans will mature no later thanJuly 25, 2024 . Loans will accrue interest (i) with respect to loans that are funded through the issuance of commercial paper notes, at the CP rate, and (ii) otherwise, at a rate per annum equal to adjusted LIBOR. The CP rate will be based on the rates paid by the applicable lender on notes it issues to fund related loans. Adjusted LIBOR is based on LIBOR for the applicable interest period and the rate prescribed by theBoard of Governors of theFederal Reserve System for determining the reserve requirements with respect to Eurocurrency funding. If an event of default occurs, all loans shall bear interest at a rate per annum equal to the prime rate (the federal funds rate plus 3%) plus 2.5%. The DZ Financing Program also includes a letter of credit sub-facility with a sub-limit of$35.0 million . As ofAugust 1, 2021 , the letter of credit participation was$22.1 million inclusive of$20.9 million for the Company's casualty insurance program and$1.2 million for the security deposit required under certain real estate lease agreements. The DZ Financing Program contains customary representations and warranties as well as affirmative and negative covenants. The agreement also contains customary default, indemnification and termination provisions. The DZ Financing Program is not an off-balance sheet arrangement, as the bankruptcy-remote subsidiary is a 100%-owned consolidated subsidiary of the Company. The Company is subject to certain financial and portfolio performance covenants under the DZ Financing Program, including (1) a minimum TNW, as defined in the DZ Financing Program, of$20.0 million through the Company's fiscal quarter ending on or aboutJuly 31, 2021 and$25.0 million in each quarter thereafter; (2) positive net income in any fiscal year ending after 2021; (3) maximum debt to TNW ratio of 3:1; and (4) a minimum of$15.0 million in liquid assets, as defined in the DZ Financing Program. AtAugust 1, 2021 , there was$4.0 million of borrowing availability, as defined in the DZ Financing Program and the Company was in compliance with all debt covenants.
Off-Balance Sheet Arrangements
As of
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