VOLT INFORMATION SCIENCES, INC. The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto.
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")
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 difference in revenue recognition
accounting under each model of the MSP transitions could be misleading on a
comparative period basis. We further 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.
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.
As of October 31, 2021 , we employed approximately 15,400 people, including
14,300 contingent workers. Contingent workers are on our payroll for the length
of their assignment. We operate in approximately 65 of our own locations and
have an on-site presence in over 60 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.
20
--------------------------------------------------------------------------------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 also remain focused on the regulations and vaccine requirements in theU.S. to 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. Recent Developments None 21
--------------------------------------------------------------------------------
Consolidated Results of Operations and Financial Highlights (Fiscal 2021 vs.
Fiscal 2020)
Results of Operations by Segment (Fiscal 2021 vs. Fiscal 2020)
Year Ended October 31, 2021
North
North American International American Corporate and
(in thousands) Total Staffing Staffing MSP Other Eliminations
Net revenue $ 885,393 $ 738,767 $ 106,963 $ 39,312 $ 456 $ (105)
Cost of services 741,871 623,346 86,716 31,655 259 (105)
Gross margin 143,522 115,421 20,247 7,657 197 -
Selling, administrative and other
operating costs 135,427 82,449 15,956 5,409 31,613 -
Restructuring and severance costs 2,839 (57) 213 130 2,553 - Impairment charges 424 - - - 424 - Operating income (loss) 4,832 33,029 4,078 2,118 (34,393) - Other income (expense), net (2,055) Income tax provision 1,403 Net income$ 1,374 Year Ended November 1, 2020 North North American International American Corporate and (in thousands) Total Staffing Staffing MSP Other Eliminations Net revenue$ 822,055 $ 689,095 $ 95,308 $ 37,915 $ 674 $ (937) Cost of services 694,204 586,255 79,087 29,471 328 (937) Gross margin 127,851 102,840 16,221 8,444 346 - Selling, administrative and other operating costs 137,666 85,776 14,484 5,370 32,036
-
Restructuring and severance costs 2,641 883 338 - 1,420 - Impairment charges 16,913 1,859 - - 15,054 - Operating income (loss) (29,369) 14,322 1,399 3,074 (48,164) - Other income (expense), net (3,173) Income tax provision 1,045 Net loss$ (33,587) Results of Operations Consolidated (Fiscal 2021 vs. Fiscal 2020) Net revenue in fiscal 2021 increased$63.3 million , or 7.7%, to$885.4 million from$822.1 million in fiscal 2020. The revenue increase was primarily due to increases in our North American Staffing segment of$49.7 million , our International Staffing segment of$11.7 million and our North American MSP segment of$1.4 million . Excluding the impact on net revenue of the positive foreign currency fluctuations of$6.6 million and$2.0 million related to MSP transitions, net revenue increased$58.7 million , or 7.1%. Operating income in fiscal 2021 increased$34.2 million , or 116.5%, to$4.8 million from a loss of$29.4 million in fiscal 2020 primarily due to a$16.5 million decrease in impairment charges and an increase in revenue at improved margins. Excluding restructuring and severance costs and impairment charges, operating income in fiscal 2021 increased$17.9 million , or 182.5%. This increase in operating income of$17.9 million was primarily due to improved results in our North American Staffing segment of$15.9 million and our International Staffing segment of$2.6 million , partially offset by a decrease in our North American MSP segment of$0.8 million . Results of Continuing Operations by Segments (Fiscal 2021 vs. Fiscal 2020) Net Revenue The North American Staffing segment revenue increased$49.7 million , or 7.2%, to$738.8 million in fiscal 2021 from$689.1 million in fiscal 2020. Excluding the impact of$2.0 million in revenue from MSP transitions, revenue increased$51.7 million , or 7.5%, in fiscal 2021. 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 fiscal 2020. 22 -------------------------------------------------------------------------------- The International Staffing segment revenue increased$11.7 million , or 12.2%, to$107.0 million in fiscal 2021 from$95.3 million in fiscal 2020. Excluding the positive impact of foreign currency fluctuations of$6.7 million , International Staffing revenue increased by$5.0 million , or 4.9%, primarily due to increased staffing business inFrance andSingapore . In addition, revenue in theUnited Kingdom increased slightly as a result of higher payroll service business demand and direct hire revenue partially offset by lower contract revenue. The North American MSP segment revenue increased$1.4 million , or 3.7%, to$39.3 million in fiscal 2021 from$37.9 million in 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 fiscal 2021 increased$47.7 million , or 6.9%, to$741.9 million from$694.2 million in fiscal 2020. The increase in our North American Staffing segment related to the 7.2% increase in revenue and a lower workers' compensation adjustment in the current fiscal year partially offset by a$3.8 million benefit from government wage subsidies. In addition, our International Staffing segment increased$7.6 million primarily as a result of the 12.2% increase in revenue. Gross margin as a percent of revenue in fiscal 2021 increased to 16.2% from 15.6% in fiscal 2020. Our North American Staffing segment gross margin as a percentage 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 percentage of revenue primarily increased due to improved contract margins and higher direct hire revenue. Our North American MSP segment gross margin as a percentage of revenue decreased primarily due to an increase in lower-margin payroll service business. Government wage subsidies accounted for 40 basis points of the increase in fiscal 2021. Selling, Administrative and Other Operating Costs Selling, administrative and other operating costs in fiscal 2021 decreased$2.3 million , or 1.6%, to$135.4 million from$137.7 million in fiscal 2020. The decrease was primarily due to$4.7 million in lower facility related costs due to consolidating our real estate footprint and$1.2 million in lower software and travel expenses. This decrease was partially offset by a$2.1 million increase in labor and related costs as a result of an increase in incentives on the higher sales volume and higher medical claims experience partially offset by government wage subsidies and changes in headcount in the current fiscal year. In addition, professional fees were$1.7 million higher in fiscal 2021. As a percentage of revenue, selling, administrative and other operating costs were 15.3% and 16.7% in fiscal 2021 and 2020, respectively. Restructuring and Severance Costs Restructuring and severance costs in fiscal 2021 increased$0.2 million to$2.8 million from$2.6 million in fiscal 2020. Restructuring and severance costs in fiscal 2021 were primarily due to$1.8 million of ongoing costs of facilities exited in the second half of fiscal 2020 and$1.0 million in severance costs. The costs in fiscal 2020 were primarily due to our continued efforts to reduce costs and to offset COVID-19 related revenue losses. This included 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. Impairment Charges Impairment charges in fiscal 2021 decreased$16.5 million to$0.4 million from$16.9 million in fiscal 2020. Impairment charges incurred in the current fiscal year primarily related to capitalized software. In fiscal 2020, impairment charges 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 fiscal 2021 decreased$1.1 million , or 35.2%, to$2.1 million from$3.2 million in fiscal 2020 due to a decrease in interest expense as a result of lower rates and a decrease in non-cash foreign exchange losses primarily on intercompany balances. Income Tax Provision Income tax provision of$1.4 million and$1.0 million in fiscal 2021 and 2020, respectively, was primarily related to locations outside ofthe United States . 23 -------------------------------------------------------------------------------- Liquidity and Capital Resources Overview Our primary sources of liquidity are cash flows generated from operations and proceeds from our financing agreement ("DZ Financing Program") withDZ Bank AG Deutsche Zentral-Genossenschaftsbank ("DZ Bank "). Both operating cash flows and borrowing capacity under our financing arrangement are directly related to the levels of accounts receivable generated by our business. Our primary capital requirements include funding working capital, operating lease obligations and software-related expenditures. We define our working capital as cash plus trade accounts receivable minus current liabilities. Our working capital requirements consist primarily of payroll, employee-related benefits and employment-related tax payments for our contingent staff and in-house employees and trade payables, offset by collections of customer receivables. Our operations are such that our most significant current asset is trade accounts receivable, which are generally on 15 - 45 day credit terms, and our most significant current liabilities are payroll related costs, which are generally paid weekly. Consequently, as the demand for our services increases, we generally see an increase in our working capital requirements, as we continue to pay our contingent employees on a weekly basis while the related accounts receivable is outstanding for much longer, which may result in a decline in operating cash flows. Conversely, as the demand for our services declines, we generally see a decrease in our working capital needs, as the existing accounts receivable are collected and not replaced at the same level. This may result in an increase in our operating cash flows; however, any such increase would not be expected to be sustained in the event that an economic downturn continued for an extended period. Our business is subject to seasonality with our first fiscal quarter billings typically the lowest due to the holiday season and generally increasing in the third and fourth fiscal quarters when our customers increase the use of contingent labor. Accordingly, the first and fourth quarters of our fiscal year are generally the strongest for operating cash flows. We manage our cash flow and related liquidity on a global basis. As mentioned, we fund payroll, taxes and other working capital requirements using cash generated by operating activities supplemented, as needed, from our borrowings. Our weekly payroll payments inclusive of employment-related taxes and payments to vendors are approximately$16.0 -$17.0 million . We generally target minimum global liquidity to be 1.5 times our average weekly requirements taking into account seasonality and cyclical trends. 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, as well as our borrowing availability under our financing program, will be sufficient to meet our cash needs for the next twelve months based on current business plans. Our capital allocation strategy is focused to strengthen our balance sheet and financial flexibility, as well as continue to invest in our growth and profitability initiatives. This strategy includes effectively managing working capital to maximize operational efficiency, re-investing in our core growth initiatives, in both technology enhancements and sales and recruiting talent. These priorities demonstrate our ongoing commitment to Volt shareholders as we continue to execute on our overall strategic plan and return to sustainable profitability. Fiscal Year EndedOctober 31, 2021 compared to the Fiscal Year EndedNovember 1, 2020
Our liquidity and available capital resources are impacted by four key components: cash, including cash equivalents and restricted cash, operating activities, investing activities and financing activities, as shown below compared to the prior fiscal year.
As of
24
--------------------------------------------------------------------------------Cash flows from operating, investing and financing activities, as reflected in our Consolidated Statements of Cash Flows, are summarized in the following table:
For the Year Ended
(in thousands) October 31, 2021 November 1, 2020
Net cash provided by operating activities $ 23,867 $ 18,154
Net cash used in investing activities (3,060) (4,629)
Net cash provided by (used in) financing activities (580) 4,580
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(51) (116)
Net increase in cash, cash equivalents and restricted cash $ 20,176 $ 17,989
Cash Flows - Operating Activities
The net cash provided by operating activities in fiscal 2021 was$23.9 million , an increase of$5.7 million from fiscal 2020. This increase resulted primarily from the$18.5 million improvement in operating results, net of impairment charges in fiscal 2021 and an increase from accounts payable and accrued expenses of$5.4 million , partially offset by a decrease from accounts receivable of$19.2 million . In the second half ofMarch 2020 , we experienced a decline in the demand for our services 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. However, as client demand for our services improved in the latter part of fiscal 2020 and continued to grow in fiscal 2021, our operating cash flows increased. This pattern could repeat itself and would not be sustainable in the event the pandemic continues at resurgence levels or an economic downturn continues for an extended period. During fiscal 2020 and the first two months of fiscal 2021, cash generated from operations was supplemented by the enactment of laws providing COVID-19 relief, most notably the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which allowed for the deferral of payments of the Company'sU.S. social security taxes. As a result,$26.2 million of employer payroll tax payments were deferred with$13.1 million paid onJanuary 3, 2022 and the remaining payable with theDecember 31, 2022 tax payment inJanuary 2023 . In addition, certain state governments have delayed payment of various state payroll taxes for a shorter period of time. State payroll taxes of approximately$4.7 million deferred from the third quarter of fiscal 2021 were paid beginning in the fourth quarter of fiscal 2021. The Company's payment of approximately$4.4 million of state payroll taxes will be deferred from the fourth quarter of fiscal 2021 with payments scheduled to begin in the first quarter of fiscal 2022. Additionally, during fiscal 2021 we determined that we were eligible for the employee retention tax credit ("ERTC"), under the CARES Act, as our operations were fully or partially suspended due to government orders enacted in response to the COVID-19 pandemic. These credits reduced our payroll tax payments by$11.1 million and were treated as government subsidies. Cash Flows - Investing Activities The net cash used in investing activities in fiscal 2021 was$3.1 million , principally from the purchases of property, equipment and software primarily relating to our investment in updating our business processes, back-office financial suite and information technology tools. The net cash used in investing activities in fiscal 2020 was$4.6 million , principally from the purchases of property, equipment and software of$5.3 million partially offset by$0.4 million of proceeds from the sale of property, equipment and software.
See Note 18, "Segment Disclosures," within our consolidated financial statements for the detail of purchases of property, equipment and software by segment. Cash Flows - Financing Activities
The net cash used in financing activities in fiscal 2021 was$0.6 million principally from withholding tax payment on vesting of restricted stock awards of$0.5 million . The net cash provided by financing activities in fiscal 2020 was$4.6 million principally from a$5.0 million increase in net borrowing under the DZ Financing Program, partially offset by the payment of debt issuance costs of$0.3 million related to the DZ Financing Program. 25 --------------------------------------------------------------------------------
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, we may request thatDZ Bank make loans from time to time to the Company that are secured by liens on those receivables. 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 . InDecember 2020 , the Company amended the DZ Financing Program. The modifications to the agreement were to (1) extend the Amortization Date, as defined in the DZ Financing Program, fromJanuary 25, 2023 toJanuary 25, 2024 , (2) extend the Facility Maturity Date, as defined in the DZ Financing Program, fromJuly 25, 2023 toJuly 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 TangibleNet 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 aboutJuly 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 remained substantially unchanged. 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 ofOctober 31, 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 ,$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. AtOctober 31, 2021 , the Company was in compliance with all debt covenants, as amended.
At
Our DZ Financing Program is subject to termination under certain events of default such as breach of covenants, including financial covenants. AtOctober 31, 2021 , we were in compliance with all debt covenants, as defined in the DZ Financing Program. We believe, based on our 2022 Plan, we will continue to be able to meet our financial covenants under the amended DZ Financing Program. 26 -------------------------------------------------------------------------------- The following table sets forth our cash and global liquidity levels at the end of our last five fiscal quarters: Global Liquidity (in thousands) November 1, 2020 January 31,
2021
$ 38,550 $ 40,062 $ 47,231 $ 49,595 $ 71,373
Total outstanding debt $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000
Cash in banks (b) (c) $ 36,218 $ 36,962 $ 39,288 $ 43,076 $ 52,938
DZ Financing Program 2,828 2,225 2,868 3,990 6,046
Global liquidity 39,046 39,187 42,156 47,066 58,984
Minimum liquidity threshold 15,000 15,000 15,000 15,000 15,000
Available liquidity $ 24,046 $ 24,187 $ 27,156 $ 32,066 $ 43,984
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 October 31, 2021 , the balance in the USB collections account
included in the DZ Financing Program availability was $6.9 million .
Liquidity Outlook
As previously noted, our primary sources of liquidity are cash flows from
operations and proceeds from our financing arrangement. Both operating cash
flows and borrowing capacity under our financing arrangement 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, among other factors.
While we believe our cash provided by operating activities and borrowing
availability under our DZ Financing Program, will be sufficient to meet our
operating working capital and capital expenditure requirements at a minimum for
the next twelve months, the extent to which any on-going or resurgence of
COVID-19 related impacts could affect our business, financial condition, results
of operations and cash flows in the short- and medium-term cannot be predicted
with certainty. We may also face unexpected costs or an adverse impact on our
business operations, in connection with government mandated COVID-19
vaccine-related policies and procedures. Any of the above could have a material
adverse effect on our business, financial condition, results of operations and
cash flows and require us to seek additional sources of liquidity and capital
resources.
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. As noted above, we determined that we qualify for
the payroll tax deferral which allows us to delay payment of the employer
portion of payroll taxes and for certain employment tax credits. We are
evaluating whether we qualify for additional employment tax credits. If we
qualify for such credits, the credits will be treated as government subsidies,
which will offset related expenses. We continue to actively monitor these relief
packages to take advantage of all of those which are available to us.
As of October 31 2021, we have significant tax benefits including federal net
operating loss ("NOL") carryforwards of $210.0 million , U.S. state NOL
carryforwards of $226.3 million , international NOL carryforwards of $8.3 million
and federal tax credits of $53.3 million , which are fully reserved with a
valuation allowance which we may be able to utilize against future profits. As
of October 31, 2021 , the U.S. federal NOL carryforwards will expire at various
dates between 2031and 2038 (with some indefinite), the U.S. state NOL
carryforwards expire at various dates beginning in 2022 (with some indefinite),
the international NOL carryforwards expire at various dates beginning in 2022
(with some indefinite) and federal tax credits expire between 2022 and 2040.
In addition to our discussion and analysis surrounding our liquidity and capital
resources, our significant contractual obligations and commitments as of October
31, 2021 , include:
•Debt Obligations and Interest Payments - As of October 31, 2021 , our
outstanding debt balance was $60.0 million . See Note 12, "Debt" within our
consolidated financial statements for further detail of our debt and the timing
of expected future principal and interest payments.
27
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•Operating Leases - As of October 31, 2021 , our remaining contractual commitment
for operating leases was $51.1 million . See Note 2, "Leases," within our
consolidated financial statements for further detail of our obligations and the
timing of expected future payments, including a five-year maturity schedule.
•Software-Related Expenditures - As of October 31, 2021 , we had contractual
commitments for software-related expenditures of $2.3 million . We anticipate
capital expenditures in fiscal 2022 of approximately $4.0 - $5.0 million as we
continue to support our strategic initiatives through improved technology, as
necessary. While the majority of our software-related contractual obligations
does not currently extend beyond fiscal 2022, we anticipate annual payments of
approximately $5.5 million for the on-going use of our core technology.
•Casualty Insurance - As of October 31, 2021 , we had accrued casualty claims of
$13.9 million under our Casualty Insurance Program. While we cannot accurately
predict future insurance claim liability, we estimate our related expenditures
in fiscal 2022 to be in the range of $8.0 - $11.0 million , based on historical
data.
Off-Balance Sheet Arrangements
As ofOctober 31, 2021 , we issued letters of credit against our DZ Financing Program totaling$22.1 million including$20.9 million for the Company's casualty insurance program and$1.2 million for the security deposit required under certain lease agreements. As ofNovember 1, 2020 , we issued letters of credit against our DZ Financing Program totaling$24.5 million including$23.3 million for the Company's casualty insurance program and$1.2 million for the security deposit required under certain lease agreements.
As of
Critical Accounting Policies and Estimates Management's discussion and analysis of our financial position and results of operations are based upon our Consolidated Financial Statements, which are included in Item 8, Financial Statements and Supplementary Data of this report and have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires management to make estimates, judgments, assumptions and valuations that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. While management believes that its estimates, judgments and assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect our future results. Management believes the critical accounting policies and areas that require the most significant estimates, judgments, assumptions or valuations used in the preparation of our financial statements are those summarized below.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. 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 the fair value of a reporting unit, then the impairment analysis for goodwill is performed at the reporting unit level 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 28 --------------------------------------------------------------------------------
stand-alone basis and this combination is indicative of the factors a market participant would consider when performing a similar valuation.
The Company's goodwill is within its International Staffing segment. Our fiscal 2021 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 13.0%. 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. It was determined that the fair value of the reporting unit exceeded its carrying value, therefore no adjustment to the carrying value of goodwill of$5.8 million was required. There were no triggering events in any subsequent quarter of fiscal 2021 that required the Company to perform an interim impairment assessment. 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 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. In fiscal 2021, the Company's analyses resulted in impairment charges of$0.4 million of capitalized costs related to a change in the expected use of certain software assets in the Corporate and Other category. There were no additional triggering events in fiscal 2021 that would indicate that the carrying amounts of any other of the Company's long-lived assets may not be recoverable as of the end of the period. As a result, the Company did not perform any additional steps under ASC 360 which required significant judgement or assumptions. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using current tax laws and rates in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We must then assess the likelihood that our deferred tax assets will be realized. If we do not believe that it is more likely than not that our deferred tax assets will be realized, a valuation allowance is established. When a valuation allowance is increased or decreased, a corresponding tax expense or benefit is recorded. Accounting for income taxes involves uncertainty and judgment in how to interpret and apply tax laws and regulations within our annual tax filings. Such uncertainties may result in tax positions that may be challenged and overturned by a tax authority in the future which would result in additional tax liability, interest charges and possible penalties. Interest and penalties are classified as a component of income tax expense. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in estimate occurs. Realization of deferred tax assets is dependent upon reversals of existing taxable temporary differences, taxable income in prior carryback years and future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. We have a three-year cumulative loss position which is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets. A valuation allowance has been recognized due to the uncertainty of realization of our loss carryforwards and other deferred tax assets. Management believes that the remaining deferred tax assets are more likely than not to be realized based upon consideration of all positive and negative evidence, including scheduled reversal of deferred tax liabilities and tax planning strategies determined on a jurisdiction-by-jurisdiction basis. 29 -------------------------------------------------------------------------------- Casualty Insurance Program We purchase workers' compensation insurance through mandated participation in certain state funds and the experience-rated premiums in these state plans relieve us of any additional liability. Liability for workers' compensation in all other states as well as automobile and general liability is insured under a paid loss deductible casualty insurance program for losses exceeding specified deductible levels and we are financially responsible for losses below the specified deductible limits. The casualty program is secured by a letter of credit against the DZ Financing Program of$20.9 million as ofOctober 31, 2021 . We recognize expenses and establish accruals for amounts estimated to be incurred, both reported and not yet reported, policy premiums and related legal and other claims administration costs. We develop estimates for claims as well as claims incurred but not yet reported using actuarial principles and assumptions based on historical and projected claim incidence patterns, claim size and the length of time over which payments are expected to be made. Actuarial estimates are updated as loss experience develops, additional claims are reported or settled and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed. Depending on the policy year, adjustments to final expected paid amounts are determined through the ultimate life of the claim. AtOctober 31, 2021 andNovember 1, 2020 , the casualty insurance liability was$13.9 million and$15.2 million , respectively. Medical Insurance Program We are self-insured for a portion of our medical benefit programs for our employees. Eligible contingent staff on assignment with customers are offered medical benefits through a fully insured program administered through a third party. Employees contribute a portion of the cost of these medical benefit programs. To limit exposure on a per claimant basis for the self-insured medical benefits, the Company purchases stop-loss insurance. Our retained liability for the self-insured medical benefits is determined utilizing actuarial estimates of expected claims based on statistical analysis of historical data. Litigation We are subject to certain legal proceedings as well as demands, claims and threatened litigation that arise in the normal course of our business. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, a liability and an expense are recorded for the estimated loss. Significant judgment is required in both the determination of probability and the determination of whether an exposure is reasonably estimable. Development of the accrual includes consideration of many factors including potential exposure, the status of proceedings, negotiations, discussions with internal and outside counsel, results of similar litigation and, in the case of class action lawsuits, participation rates. As additional information becomes available, we will revise the estimates. If the actual outcome of these matters is different than expected, an adjustment is charged or credited to expense in the period the outcome occurs or the period in which the estimate changes. To the extent that an insurance company is contractually obligated to reimburse us for a liability, we record a receivable for the amount of the probable reimbursement. Accounts Receivable We make ongoing estimates relating to the collectability of our trade accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance for uncollectible accounts receivable, we make judgments on a customer-by-customer basis based on the customer's current financial situation, such as bankruptcies and other difficulties collecting amounts billed. Losses from uncollectible accounts have not exceeded our allowance historically. As we cannot predict with certainty future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. In the event we determined that a smaller or larger allowance was appropriate, we would record a credit or a charge to Selling, administrative and other operating costs in the period in which we made such a determination. New Accounting Standards For additional information regarding new accounting guidance see Note 1 - Summary of Business and Significant Accounting Policies in our Consolidated Financial Statements. 30
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