ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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). 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 3, 2019, as filed with the SEC on January 15, 2020 (the “2019 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 2019 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, exclude the impact of businesses sold or exited, the impact from the migration of certain clients from a traditional staffing model to a managed service model (“MSP transitions”) as the difference in revenue recognition accounting under each model could be misleading on a comparative period basis, and 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 provide 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 operation.
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 relevant 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 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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 280, Segment Reporting (“ASC 280”), which aligns with the way the Company evaluates its business performance and manages its operations.
In June 2019, the Company exited its customer care solutions business, which was reported as a part of the Corporate and Other category. This exit allows the Company to further strengthen its focus on its core staffing business and align its resources to streamline operations, improve cost competitiveness and increase profitability. The Company’s other non-reportable businesses will continue to be combined and disclosed with corporate services under the category Corporate and Other.
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. Until our exit from this business in June 2019, our customer care solutions business specialized in serving as an extension of our customers’ consumer relationships and processes including collaborating with customers, from help desk inquiries to advanced technical support.
As of May 3, 2020, we employed approximately 12,500 people, including 11,400 contingent workers. Contingent workers are on our payroll for the length of their assignment. We operate in approximately 70 of our own locations and have an on-site presence in over 50 customer locations. Approximately 88% of our revenue is generated in the United States. Our principal international markets include Europe, Canada and Asia Pacific locations. The industry is highly fragmented and very competitive in all of the markets we serve.
COVID-19
The global spread of COVID-19, which was declared a global pandemic by the World Health Organization ("WHO") on March 11, 2020, has 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.
Beginning in mid-March 2020, a number of countries and U.S. federal, state, and local governments issued stay-at-home orders requiring persons who were not engaged in essential activities and businesses as defined in those specific orders to remain at home. Many other countries and jurisdictions without stay-at-home orders required nonessential businesses to close or otherwise reduce operations. 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.
In late January, we created a COVID-19 Incident Response Team, comprised of key senior leaders in the organization, to track and manage our COVID-19 activities, including monitoring the most up-to-date developments and safety standards from the Centers for Disease Control and Prevention, WHO, Occupational Safety and Health Administration and other key authorities. All internal and external information and communications relating to our COVID-19 safety protocols, FAQs, and reporting on COVID-19 incidents are managed by this central team. In addition to updating our external website, we actively shared information with clients and employees on how companies and workers can protect themselves via regular emails, conference and video calls and other digital communications. This same team is now responsible for the planning of our Return to the Workplace activities, which we intend to begin implementing for our Volt locations over the next several months subject to federal, state and local regulations as well as guidance from the key authorities described above.
The impact on sales has and will vary for each segment based on different levels of COVID-19 related measures enacted across geographies, the varied customer industries we serve, as well as, the quality and capability of the talent provided to successfully work remotely to support the customers’ needs. In our largest segment, North American Staffing, essential businesses represented approximately 80% of the segment's portfolio of business and in our International segment most of our contractors were able to work from home during the lockdown.
We shifted our sales approach to include a response to the pandemic and secured new business wins in opportunities that arose as a direct result of COVID-19. These work orders included making face shields and masks to help protect our healthcare professionals, requests to meet the needs of additional cleaning requirements and safety protocols, as well as expanding into other COVID-19 impacted industries. Our focus on sales and recruitment has shifted to be centered around businesses that are actively hiring in the current environment, and these COVID-19 specific opportunities are likely to remain available throughout 2020 and may remain in some form into 2021 until a vaccine is available and widely distributed.
Prior to the outbreak of COVID-19, we were focused on reducing our operating expenses and as the impact of the pandemic began to unfold, we took additional measures to manage our costs, including:
•Reduced compensation for the CEO, CFO and members of the Board of Directors
•Managing our cost base through a combination of headcount reductions, furloughs, and reduced hours
•Implementing an early halt on all domestic and international travel
•Eliminating most discretionary spending
•Continuing to negotiate reductions of committed spend
•Assessing our real estate footprint
•Temporary suspension of the matching contributions under the Volt Information Sciences, Inc. Savings Plan
In addition, we continue to actively pursue further options to increase financial flexibility.
While our global business environment is and will continue to be in various stages of economic reopening based on local government restrictions, advice from healthcare authorities and public perceptions, we have started to see a gradual increase in order activity and demand throughout the Company, including certain positive impacts of customers beginning to reopen previously shut down site operations within these early phases. Although there is still significant uncertainty related to COVID-19, our ability to continue successfully serving our existing customers during this pandemic as well as our agility in responding to immediate and critical demands in new areas has allowed us to mitigate the more significant adverse impacts of this global environment to date.
Goodwill
We perform our annual impairment test for goodwill during the second quarter of the fiscal year and when a triggering event occurs between annual impairment tests. When testing goodwill, the Company has the option to first assess qualitative factors for reporting units that carry goodwill. International Staffing is the only segment which carries goodwill. The qualitative assessment includes assessing the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit. These events and circumstances include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. We may also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value. If the qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.
When a qualitative assessment is not used, or if the qualitative assessment is not conclusive and it is necessary to calculate fair value of a reporting unit, then the impairment analysis for goodwill is performed at the reporting unit level using a one-step approach (“Step 1”) under Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. In conducting our goodwill impairment testing, we compare the fair value of the reporting unit with goodwill to the carrying value, using various valuation techniques including income (discounted cash flow) and market approaches. The Company believes the blended use of both approaches compensates for the inherent risk associated with using either one on a standalone basis, and this combination is indicative of the factors a market participant would consider when performing a similar valuation.
Our fiscal 2020 annual test performed in the second quarter used significant assumptions including expected revenue and expense growth rates, forecasted capital expenditures, working capital levels and a discount rate of 15.0%. Under the market-based approach, significant assumptions included relevant comparable company earnings multiples including the determination of whether a premium or discount should be applied to those comparables. During the second quarter of fiscal 2020, it was determined that no adjustment to the carrying value of goodwill of $5.2 million was required, as our Step 1 analysis resulted in the fair value of the reporting unit exceeding its carrying value.
Long-lived Assets
Long-lived assets consist of right-of-use assets, capitalized software costs, leasehold improvements and office equipment. We review these assets for impairment under ASC 360 Property, Plant and Equipment (“ASC 360”), 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 when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. 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.
Due to the economic impact and continued uncertainty related to the COVID-19 pandemic and declines in our common stock price over recent quarters, we reviewed our long-lived assets for impairment. We determined the undiscounted cash flows of each asset group based on management’s current estimates and projections using information available as of the balance sheet date. The cash flows for each of the assets groups were compared to the current carrying values which concluded that there was no impairment necessary for the quarter ended May 3, 2020.
The adverse impact COVID-19 will continue to have on our business, operating results, cash flows and overall financial condition is uncertain. In response, we will consider real estate rationalization initiatives which may result in impairment changes if we exit and/or consolidate certain locations.
Recent Developments
On June 11, 2020 the Company amended the DZ Financing Program to replace the existing Tangible Net Worth (“TNW”) covenant requirement, as defined, to a minimum TNW of $20.0 million through the Company’s fiscal quarter ending on or about July 31, 2021 and $40.0 million in each quarter thereafter. In addition to this change, the Company elected to reduce the Maximum Facility Amount, as defined, from $115.0 million to $100.0 million to better reflect our asset base level and reduce borrowings costs going forward. All other terms and conditions remain unchanged.
Consolidated Results by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 3, 2020
|
(in thousands)
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
North American MSP
|
|
Corporate and Other
|
|
Eliminations
|
Net revenue
|
$
|
207,275
|
|
|
$
|
173,386
|
|
|
$
|
24,303
|
|
|
$
|
9,745
|
|
|
$
|
187
|
|
|
$
|
(346
|
)
|
Cost of services
|
175,038
|
|
|
147,423
|
|
|
20,282
|
|
|
7,582
|
|
|
97
|
|
|
(346
|
)
|
Gross margin
|
32,237
|
|
|
25,963
|
|
|
4,021
|
|
|
2,163
|
|
|
90
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
36,189
|
|
|
23,043
|
|
|
3,714
|
|
|
1,672
|
|
|
7,760
|
|
|
—
|
|
Restructuring and severance costs
|
411
|
|
|
344
|
|
|
111
|
|
|
—
|
|
|
(44
|
)
|
|
—
|
|
Operating income (loss)
|
(4,363
|
)
|
|
2,576
|
|
|
196
|
|
|
491
|
|
|
(7,626
|
)
|
|
—
|
|
Other income (expense), net
|
(1,039
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
23
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(5,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 28, 2019
|
(in thousands)
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
North American MSP
|
|
Corporate and Other (1)
|
|
Eliminations (2)
|
Net revenue
|
$
|
252,070
|
|
|
$
|
208,871
|
|
|
$
|
28,809
|
|
|
$
|
9,579
|
|
|
$
|
5,431
|
|
|
$
|
(620
|
)
|
Cost of services
|
215,813
|
|
|
179,678
|
|
|
24,095
|
|
|
7,186
|
|
|
5,474
|
|
|
(620
|
)
|
Gross margin
|
36,257
|
|
|
29,193
|
|
|
4,714
|
|
|
2,393
|
|
|
(43
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
38,939
|
|
|
26,439
|
|
|
3,894
|
|
|
1,252
|
|
|
7,354
|
|
|
—
|
|
Restructuring and severance costs
|
724
|
|
|
210
|
|
|
192
|
|
|
41
|
|
|
281
|
|
|
—
|
|
Impairment charge
|
347
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
347
|
|
|
—
|
|
Operating income (loss)
|
(3,753
|
)
|
|
2,544
|
|
|
628
|
|
|
1,100
|
|
|
(8,025
|
)
|
|
—
|
|
Other income (expense), net
|
(1,179
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
233
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(5,165
|
)
|
|
|
|
|
|
|
|
|
|
|
(1) Revenues are primarily derived from Volt Customer Care Solutions business through June 7, 2019.
(2) The majority of intersegment sales results from North American Staffing segment providing resources to Volt Customer Care Solutions business.
Results of Operations Consolidated (Q2 2020 vs. Q2 2019)
Net revenue in the second quarter of fiscal 2020 decreased $44.8 million, to $207.3 million from $252.1 million in the second quarter of fiscal 2019. The net revenue decrease was primarily due to a decrease in our North American Staffing segment of $35.5 million, a decrease in the Corporate and Other category of $5.2 million (related to the exit from our customer care solutions business in June 2019) and a decrease in our International Staffing segment of $4.5 million. Excluding $5.3 million of revenue from the customer care solutions business exited during fiscal 2019, $4.7 million related to MSP transitions and the negative impact of foreign currency fluctuations of $0.8 million, net revenue decreased $34.0 million, or 14.1%.
Operating loss in the second quarter of fiscal 2020 increased $0.6 million, to $4.4 million from $3.8 million in the second quarter of fiscal 2019. Excluding the customer care solutions business exited during fiscal 2019, as well as restructuring and severance costs and impairment charges, operating loss increased $1.5 million. This increase in operating loss of $1.5 million was primarily the result of increases in our North American MSP segment of $0.7 million, our International Staffing segment of $0.5 million and the Corporate and Other category of $0.5 million.
Results of Operations by Segment (Q2 2020 vs. Q2 2019)
Net Revenue
The North American Staffing segment revenue decreased $35.5 million, or 17.0%, in the second quarter of fiscal 2020. Excluding $4.8 million in revenue from MSP transitions and $0.3 million in revenue to our customer care solutions business exited in June 2019, adjusted revenue decreased $30.4 million, or 14.9%. While difficult to estimate an exact amount, approximately $16.0 million to $20.0 million of this decline is attributable to the impact of COVID-19 in the form of business shutdowns or reduced hours from some of our customers and remain at home orders from various states and municipalities. The decrease was primarily experienced in our light industrial as well as administrative and office job categories.
The International Staffing segment revenue decreased $4.5 million, or 15.6% in the second quarter of fiscal 2020, primarily due to adjustments of work orders related to pending statutory legislation changes in the United Kingdom partially offset by improvements in Belgium and Singapore. Excluding the negative impact of foreign exchange rate fluctuations of $0.8 million, revenue decreased $3.7 million, or 13.2%. In this segment the most significant impact from COVID-19 was on the direct hire business which was down approximately 45% from pre-COVID expectations.
The North American MSP segment revenue increased $0.2 million, or 1.7%, in the second quarter of fiscal 2020 as a result of new business and increased demand in its payroll service business, partially offset by COVID-19 headcount reductions in a small number of clients.
The Corporate and Other category revenue decreased $5.2 million, or 96.6%, in the second quarter of fiscal 2020 primarily as a result of our exit from the customer care solutions business in the beginning of June 2019.
Cost of Services and Gross Margin
Cost of services in the second quarter of fiscal 2020 decreased $40.8 million, or 18.9%, to $175.0 million from $215.8 million in the second quarter of fiscal 2019. Gross margin as a percent of revenue in the second quarter of fiscal 2020 increased to 15.6% from 14.4% in the second quarter of fiscal 2019. Our North American Staffing segment margin as a percent of revenue increased primarily due to a $1.1 million positive workers compensation adjustment in the second quarter of fiscal 2020 and lower payroll tax rates. Our North American MSP segment margin decreased as a result of a higher mix of payroll service revenue and lower margins in the managed service business.
Selling, Administrative and Other Operating Costs
Selling, administrative and other operating costs in the second quarter of fiscal 2020 decreased $2.7 million, or 7.1%, to $36.2 million from $38.9 million in the second quarter of fiscal 2019. The decrease was primarily due to cost reductions in all areas of the business, including $3.3 million in labor and related costs due to lower headcount, lower incentives and a decrease in the valuation of share-based compensation as a result of a decline in market value. In addition, the second quarter of fiscal 2019 included the amortization of a deferred gain on the sale of real estate of $0.5 million. As a percent of revenue, selling, administrative and other operating costs were 17.5% and 15.4% in the second quarter of fiscal 2020 and 2019, respectively.
Restructuring and Severance Costs
Restructuring and severance costs in the second quarter of fiscal 2020 decreased $0.3 million, to $0.4 million from $0.7 million in the second quarter of fiscal 2019. These cost reductions were primarily due to actions taken by the Company as part of its continued efforts to reduce costs and achieve operational efficiency. Restructuring and severance costs accrued in the second quarter of fiscal 2019 also included costs incurred in connection with exiting our customer care solutions business in the third quarter of fiscal 2019.
Impairment Charges
In the second quarter of fiscal 2019, there was a $0.3 million impairment of equipment used in our customer care solutions business.
Other Income (Expense), net
Other expense in the second quarter of fiscal 2020 decreased $0.2 million, to $1.0 million from $1.2 million in the second quarter of fiscal 2019 due to a decrease in interest expense and non-cash foreign exchange losses primarily on intercompany balances.
Income Tax Provision
The income tax provisions of less than $0.1 million and $0.2 million in the second quarter of fiscal 2020 and 2019, respectively, were primarily related to locations outside of the United States.
Consolidated Results by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 3, 2020
|
(in thousands)
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
North American MSP
|
|
Corporate and Other
|
|
Eliminations
|
Net revenue
|
$
|
425,041
|
|
|
$
|
355,781
|
|
|
$
|
50,526
|
|
|
$
|
19,114
|
|
|
$
|
390
|
|
|
$
|
(770
|
)
|
Cost of services
|
361,377
|
|
|
304,817
|
|
|
42,312
|
|
|
14,837
|
|
|
181
|
|
|
(770
|
)
|
Gross margin
|
63,664
|
|
|
50,964
|
|
|
8,214
|
|
|
4,277
|
|
|
209
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
75,686
|
|
|
47,852
|
|
|
7,533
|
|
|
3,032
|
|
|
17,269
|
|
|
—
|
|
Restructuring and severance costs
|
1,657
|
|
|
426
|
|
|
111
|
|
|
—
|
|
|
1,120
|
|
|
—
|
|
Impairment charge
|
11
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating income (loss)
|
(13,690
|
)
|
|
2,675
|
|
|
570
|
|
|
1,245
|
|
|
(18,180
|
)
|
|
—
|
|
Other income (expense), net
|
(2,325
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
218
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(16,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 28, 2019
|
(in thousands)
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
North American MSP
|
|
Corporate and Other (1)
|
|
Eliminations (2)
|
Net revenue
|
$
|
505,506
|
|
|
$
|
420,719
|
|
|
$
|
55,075
|
|
|
$
|
17,796
|
|
|
$
|
13,277
|
|
|
$
|
(1,361
|
)
|
Cost of services
|
431,550
|
|
|
361,363
|
|
|
46,233
|
|
|
13,104
|
|
|
12,211
|
|
|
(1,361
|
)
|
Gross margin
|
73,956
|
|
|
59,356
|
|
|
8,842
|
|
|
4,692
|
|
|
1,066
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
78,749
|
|
|
52,717
|
|
|
7,636
|
|
|
2,559
|
|
|
15,837
|
|
|
—
|
|
Restructuring and severance costs
|
783
|
|
|
208
|
|
|
274
|
|
|
68
|
|
|
233
|
|
|
—
|
|
Impairment charge
|
347
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
347
|
|
|
—
|
|
Operating income (loss)
|
(5,923
|
)
|
|
6,431
|
|
|
932
|
|
|
2,065
|
|
|
(15,351
|
)
|
|
—
|
|
Other income (expense), net
|
(1,951
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
506
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(8,380
|
)
|
|
|
|
|
|
|
|
|
|
|
(1) Revenues are primarily derived from Volt Customer Care Solutions business through June 7, 2019.
(2) The majority of intersegment sales results from North American Staffing segment providing resources to Volt Customer Care Solutions business.
Results of Operations Consolidated (Q2 2020 YTD vs. Q2 2019 YTD)
Net revenue in the first six months of fiscal 2020 decreased $80.5 million, to $425.0 million from $505.5 million in the first six months of fiscal 2019. The net revenue decrease was primarily due to decreases in our North American Staffing segment of $64.9 million, a decrease in the Corporate and Other category of $13.0 million (related to the exit from our customer care solutions business in June 2019) and a decrease in our International Staffing segment of $4.5 million. Excluding a $13.0 million revenue decline from the customer care solutions business exited during fiscal 2019, a $7.2 million decrease related to MSP transitions and the negative impact of foreign currency fluctuations of $0.9 million, net revenue decreased $59.4 million, or 12.3%.
Operating loss in the first six months of fiscal 2020 increased $7.8 million, to $13.7 million from $5.9 million in the first six months of fiscal 2019. Excluding the customer care solutions business exited during fiscal 2019, as well as restructuring and severance costs and impairment charges, operating loss increased $6.8 million. This increase in operating loss of $6.8 million was primarily the result of declines in our North American Staffing segment of $3.5 million and in the Corporate and Other category of $1.8 million.
Results of Operations by Segment (Q2 2020 YTD vs. Q2 2019 YTD)
Net Revenue
The North American Staffing segment revenue decreased $64.9 million, or 15.4%, in the first six months of fiscal 2020. Excluding $7.4 million in revenue from MSP transitions and $0.6 million in revenue to our customer care solutions business exited in June 2019, adjusted revenue decreased $56.9 million, or 13.8%. While difficult to estimate an exact amount, approximately $16.0 million to $20.0 million of this decline is attributable to the impact of COVID-19 in the form of business shutdowns or reduced hours from some of our customers and remain at home orders from various states and municipalities. In addition, the segment's revenue was impacted by lower demand from certain large customers, partially offset by growth from new and existing customers. The decrease was primarily experienced in our light industrial as well as administrative and office job categories.
The International Staffing segment revenue decreased $4.5 million in the first six months of fiscal 2020 primarily due to adjustments of work orders related to pending statutory legislation changes in the United Kingdom partially offset by improvements in Belgium and Singapore. Excluding the negative impact of foreign exchange rate fluctuations of $0.9 million, revenue decreased $3.6 million, or 6.7%.
The North American MSP segment revenue increased $1.3 million, or 7.4%, in the first six months of fiscal 2020 as a result of new business and increased demand in its payroll service business.
The Corporate and Other category revenue decreased $12.9 million, or 97.1%, in the first six months of fiscal 2020 primarily as a result of our exit from the customer care solutions business in the beginning of June 2019.
Cost of Services and Gross Margin
Cost of services in the first six months of fiscal 2020 decreased $70.2 million, or 16.3%, to $361.4 million from $431.6 million in the first six months of fiscal 2019. Gross margin as a percent of revenue in the first six months of fiscal 2020 increased to 15.0% from 14.6% in the first six months of fiscal 2019. Excluding the customer care solutions business which we exited in June 2019, gross margin as a percent of revenue in the first six months of fiscal 2020 increased to 15.0% from 14.8% in the first six months of fiscal 2019. Our North American Staffing segment margin as a percent of revenue increased primarily due to a positive workers compensation adjustment and payroll tax expense as a percent of direct labor offset by other state-mandated benefit costs as a percent of revenue. This was partially offset by a decrease in direct hire revenue in the first six months of fiscal 2020 and a decline in administrative fee revenue as a result of the exit from our customer care solutions business. Our North American MSP segment margin decreased as a result of a higher mix of payroll service revenue and lower margins in both payroll service and managed service businesses.
Selling, Administrative and Other Operating Costs
Selling, administrative and other operating costs in the first six months of fiscal 2020 decreased $3.0 million, or 3.9%, to $75.7 million from $78.7 million in the first six months of fiscal 2019. The decrease was primarily due to cost reductions in all areas of the business, including $3.5 million in labor and related costs due to lower headcount, $1.0 million in consulting fees, $0.3 million in facility related costs, partially offset by an increase in depreciation expense of $0.7 million. In addition, the first six months of fiscal 2019 included amortization of a deferred gain on the sale of real estate of $1.0 million and a positive medical claims true-up of $0.3 million compared to a negative medical claims true-up of $0.3 million in fiscal 2020. As a percent of revenue, selling, administrative and other operating costs were 17.8% and 15.6% in the first six months of fiscal 2020 and 2019, respectively.
Restructuring and Severance Costs
Restructuring and severance costs in the first six months of fiscal 2020 increased $0.9 million, to $1.7 million from $0.8 million in the first six months of fiscal 2019. The costs in the first six months of fiscal 2020 were primarily due to our plan to leverage the global capabilities of our staffing operations based in Bangalore, India and offshore a significant number of strategically identified roles to this location. In the second quarter of fiscal 2019, restructuring and severance costs included costs incurred in connection with exiting our customer care solutions business in the third quarter of fiscal 2019.
Impairment Charges
In the first six months of fiscal 2019, there was a $0.3 million impairment of equipment used in our customer care solutions business.
Other Income (Expense), net
Other expense in the first six months of fiscal 2020 increased $0.3 million, to $2.3 million from $2.0 million in the first six months of fiscal 2019 due to an increase in non-cash foreign exchange losses primarily on intercompany balances.
Income Tax Provision
The income tax provisions of $0.2 million and $0.5 million in the first six months of fiscal 2020 and 2019, respectively, were primarily related to locations outside of the United States.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows from operations and proceeds from our financing arrangements with DZ Bank AG Deutsche Zentral-Genossenschafsbank (“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 $16.0 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 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. The Company estimates approximately $22.0 million to $24.0 million of employer payroll taxes otherwise due in 2020 will be delayed 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. The Company’s payment of approximately $5.5 million in state payroll taxes will be deferred from the second quarter of fiscal 2020 with payments scheduled to begin in the third quarter of fiscal 2020.
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. Consistent with similar companies in our industry and operational capabilities, we estimate this amount to be approximately 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;
|
|
|
•
|
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.
On July 19, 2019, we amended and restated the DZ Financing Program, which was originally executed on January 25, 2018. The restated agreement allows for the inclusion of certain accounts receivable from originators in the United Kingdom, which adds an
additional $5.0 - $7.0 million in borrowing availability. This will improve available liquidity allowing us to continue to advance our capital allocation plan and will provide us with additional resources to execute our business strategy.
On January 14, 2020, the Company executed an amendment to the DZ Financing Program. The modifications to the agreement were to (1) extend the Amortization Date, as defined under the DZ Financing Program, from January 25, 2021 to January 25, 2023; (2) extend the Facility Maturity Date, as defined under the DZ Financing Program, from July 25, 2021 to July 25, 2023; and (3) revise an existing covenant to maintain positive net income in any fiscal year ending after 2020. All other terms and conditions remain unchanged.
On March 12, 2020, the Company executed an amendment to the DZ Financing Program. The modifications to the agreement were to revise an existing covenant to maintain a Tangible Net Worth, as defined, from $40.0 million to $35.0 million through the Company’s fiscal quarter ending on or about July 31, 2020 and at least $40.0 million in each quarter thereafter. All other terms and conditions remain unchanged.
On June 11, 2020 the Company amended the DZ Financing Program to replace the existing Tangible Net Worth (“TNW”) covenant requirement, as defined, to a minimum TNW of $20.0 million through the Company’s fiscal quarter ending on or about July 31, 2021 and $40.0 million in each quarter thereafter. In addition to this change, the Company elected to reduce the Maximum Facility Amount, as defined, from $115.0 million to $100.0 million to better reflect our asset base level and reduce borrowings costs going forward. All other terms and conditions remain unchanged.
Entering fiscal 2020, we have significant tax benefits including federal net operating loss carryforwards of $207.2 million and U.S. state net operating loss carryforwards of $239.3 million, international NOL carryforwards of $9.3 million and federal tax credits of $53.5 million, which are fully reserved with a valuation allowance, and can be utilized against future profits. We also have capital loss carryforwards of $12.9 million, which we will be able to utilize against potential future capital gains that may arise in the near future. As of November 3, 2019, our U.S. federal NOL carryforwards will expire at various dates between 2031 and 2038 (with some indefinite), our U.S. state NOL carryforwards will expire at various dates between 2020 and 2038, our international NOL carryforwards will expire at various dates beginning in 2020 (with some indefinite), capital loss carryforwards will expire between 2020 and 2022 and federal tax credits will expire between 2020 and 2037.
As previously discussed, we approved a restructuring plan during the first quarter of fiscal 2020 (the "2020 Plan") as part of our strategic initiative to optimize cost infrastructure. The 2020 Plan will leverage the global capabilities of our staffing operations based in Bangalore, India and offshore a significant number of strategically identified roles to this location. The 2020 Plan affects approximately 125 employees. To date, we incurred a total pre-tax restructuring charge of approximately $1.2 million of severance and benefit costs in the first half of fiscal year ending November 1, 2020. As a result of the offshoring under the 2020 Plan, along with executing on additional organizational cost savings initiatives during fiscal 2020, we estimate we will realize annualized net savings of approximately $10.0 million.
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 long-term accounts receivable securitization program (“DZ Financing Program”) increases or decreases in tandem with any increases or decreases in accounts receivable based on revenue fluctuations.
As the demand for our services decline, as we saw in the second half of March 2020 due to the impact of the COVID-19 crisis, we generally see a decrease in our working capital needs as the existing accounts receivable are collected and not replaced at the same level, resulting in a decline of our accounts receivable balance with less of an effect on current liabilities due to the shorter cycle time of the payroll related items. This may result in an increase in our operating cash flows; however, any such increase would not be sustainable in the event that an economic downturn continued for an extended period. We do expect a similar underlying trend of increased operating cash flows through the beginning of the third quarter of 2020, if we experience consistent client payment patterns. In May 2020, we have not experienced a significant decrease in cash collections from clients. We will continue to monitor default risks and we intend to focus our collection teams to diligently pursue payments 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 have determined that we will qualify for the payroll tax deferral which allows us to delay payment of the employer portion of payroll taxes and we are in the process of determining if we qualify for certain employment tax credits. If we qualify for such credits, the credits will be treated as government subsidies which will offset related operating expenses. At this time, we do not anticipate this to be material. As part of our working capital strategy to improve our cash flow needs in the short-term, especially in the next three to six months, we continue to actively monitor these relief packages to take advantage of all of those which are available to us.
In June 2019, we exited our customer care solutions business. This business previously contributed accounts receivable as collateral under the DZ Financing Program and its exit had a diminishing effect on our borrowing base under the DZ Financing Program.
At May 3, 2020, the Company had outstanding borrowings under the DZ Financing Program of $60.0 million. Borrowing availability, as defined under the DZ Financing Program, was $4.2 million and global liquidity was $27.1 million at May 3, 2020.
Our DZ Financing Program is subject to termination under certain events of default such as breach of covenants, including the financial covenants. At May 3, 2020, we were in compliance with all debt covenants. We believe, based on our current outlook, we will continue to be able to meet our financial covenants, as amended.
The following table sets forth our cash and global liquidity levels at the end of our last five quarters (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Liquidity
|
|
|
|
|
|
|
April 28, 2019
|
July 28, 2019
|
November 3, 2019
|
February 2, 2020
|
May 3, 2020
|
Cash and cash equivalents (a)
|
$
|
39,689
|
|
$
|
36,031
|
|
$
|
28,672
|
|
$
|
30,876
|
|
$
|
26,223
|
|
|
|
|
|
|
|
Total outstanding debt
|
$
|
55,000
|
|
$
|
55,000
|
|
$
|
55,000
|
|
$
|
55,000
|
|
$
|
60,000
|
|
|
|
|
|
|
|
Cash in banks (b)(c)
|
$
|
29,946
|
|
$
|
24,224
|
|
$
|
19,945
|
|
$
|
21,287
|
|
$
|
22,876
|
|
DZ Financing Program (d)
|
22,222
|
|
16,416
|
|
22,271
|
|
11,302
|
|
4,202
|
|
Global liquidity
|
52,168
|
|
40,640
|
|
42,216
|
|
32,589
|
|
27,078
|
|
Minimum liquidity threshold
|
15,000
|
|
15,000
|
|
15,000
|
|
15,000
|
|
15,000
|
|
Available liquidity
|
$
|
37,168
|
|
$
|
25,640
|
|
$
|
27,216
|
|
$
|
17,589
|
|
$
|
12,078
|
|
|
|
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 May 3, 2020, the balance in the USB collections account included in the DZ Financing Program availability was $13.5 million.
|
|
|
d.
|
The borrowing base included the receivables from the United Kingdom effective July 19, 2019 and excluded the receivables from the customer care solutions business which we exited in June 2019.
|
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):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
May 3, 2020
|
|
April 28, 2019
|
Net cash provided by operating activities
|
$
|
2,910
|
|
|
$
|
9,458
|
|
Net cash used in investing activities
|
(2,477
|
)
|
|
(4,079
|
)
|
Net cash provided by financing activities
|
4,751
|
|
|
4,783
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(521
|
)
|
|
(249
|
)
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
$
|
4,663
|
|
|
$
|
9,913
|
|
Cash Flows - Operating Activities
The net cash provided by operating activities in the six months ended May 3, 2020 decreased $6.6 million from $9.5 million in the six months ended April 28, 2019. This decrease resulted primarily from an increase in net loss of $7.9 million partially offset by an increase in depreciation and amortization of $4.7 million, higher equity compensation of $1.2 million and the absence of the amortization of a $1.0 million gain on sale of leaseback property in the first six months of fiscal 2020. In addition, there was a $5.6 million decrease in cash provided by operating assets and liabilities, primarily from payment of accrued expenses.
Cash Flows - Investing Activities
The net cash used in investing activities in the six months ended May 3, 2020 was $2.5 million, principally for purchases of property, equipment and software of $3.1 million, partially offset by proceeds of $0.4 million from the sale of property, equipment and software. The net cash used in investing activities in the six months ended April 28, 2019 was $4.1 million, principally for the purchases of property, equipment and software of $4.1 million.
Cash Flows - Financing Activities
The net cash used in financing activities in the six months ended May 3, 2020 was $4.8 million as a result of a $5.0 million net drawdown of borrowing under the DZ Financing Program. The net cash provided by financing activities in the six months ended April 28, 2019 was $4.8 million primarily due to a $5.0 million net drawdown of borrowings under the DZ Financing Program.
Financing Program
On July 19, 2019, we amended and restated our DZ Financing Program, which was originally executed on January 25, 2018. The restated agreement allows for the inclusion of certain accounts receivable from originators in the United Kingdom, which adds an additional $5.0- $7.0 million in borrowing availability. All other material terms and conditions of the original agreement remain substantially unchanged.
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 that DZ Bank make loans from time-to-time to that subsidiary which are secured by liens on those receivables.
On January 14, 2020, the Company executed an amendment to the DZ Financing Program. The modifications to the agreement were to (1) extend the Amortization Date, as defined under the DZ Financing Program, from January 25, 2021 to January 25, 2023; (2) extend the Facility Maturity Date, as defined under the DZ Financing Program, from July 25, 2021 to July 25, 2023; and (3) revise an existing covenant to maintain positive net income in any fiscal year ending after 2020. All other terms and conditions remain unchanged.
On March 12, 2020, the Company executed an amendment to the DZ Financing Program. The modifications to the agreement were to revise an existing covenant to maintain a Tangible Net Worth, as defined, from $40.0 million to $35.0 million through the Company’s fiscal quarter ending on or about July 31, 2020 and at least $40.0 million in each quarter thereafter. All other terms and conditions remain unchanged.
On June 11, 2020 the Company amended the DZ Financing Program to replace the existing Tangible Net Worth (“TNW”) covenant requirement, as defined, to a minimum TNW of $20.0 million through the Company’s fiscal quarter ending on or about July 31, 2021 and $40.0 million in each quarter thereafter. In addition to this change, the Company elected to reduce the Maximum Facility Amount, as defined, from $115.0 million to $100.0 million to better reflect our asset base level and reduce borrowings costs going forward. All other terms and conditions remain unchanged.
Loan advances may be made under the DZ Financing Program through January 25, 2023 and all loans will mature no later than July 25, 2023. 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 the Board of Governors of the Federal 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 of May 3, 2020, the letter of credit participation was $24.8 million inclusive of $23.3 million for the Company’s casualty insurance program, $1.2 million for the security deposit required under certain real estate lease agreements and $0.3 million for the Company's corporate credit card program.
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 Tangible Net Worth, as defined under the DZ Financing Program, of at least $35.0 million through the Company's fiscal quarter ending on or about July 31, 2020 and at least $40.0 million in each quarter thereafter; (2) positive net income in any fiscal year ending after 2020; (3) maximum debt to tangible net worth ratio of 3:1; and (4) a minimum of $15.0 million in liquid assets. as defined under the DZ Financing Program. At May 3, 2020, the Company was in compliance with all debt covenants. At May 3, 2020, there was $4.2 million of borrowing availability, as defined under the DZ Financing Program.
Off-Balance Sheet Arrangements
As of May 3, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.