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 should be read in conjunction with the MD&A included in our Form 10-K for the fiscal year ended November 1, 2015, as filed with the SEC on January 13, 2016 (the “2015 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 2015 Form 10-K.
Note Regarding the Use of Non-GAAP Financial Measures
We have provided certain Non-GAAP financial information, which includes adjustments for special items, as additional information for our consolidated income (loss) from continuing operations and segment operating income (loss). These measures are not in accordance with, or an alternative for, generally accepted accounting principles (“GAAP”) and may be different from Non-GAAP measures reported by other companies. We believe that the presentation 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 it permits evaluation of the results of our continuing operations without the effect of special items that management believes make it more difficult to understand and evaluate our results of operations.
Overview
We are a global provider of staffing services (traditional time and materials-based as well as project-based), and information technology infrastructure services. Our staffing services consist of workforce solutions that include providing contingent workers, personnel recruitment services, and managed staffing services programs supporting primarily light industrial, professional administration, technical, information technology and engineering positions. Our project-based staffing assists with individual customer assignments as well as customer care call centers and gaming industry quality assurance testing services. Our managed service programs consist of managing the procurement and on-boarding of contingent workers from multiple providers. Our information technology infrastructure services ("Maintech") provide server, storage, network and desktop IT hardware maintenance, data center and network monitoring and operations.
As of May 1, 2016, we employed approximately 24,700 people, including 22,300 contingent workers. Contingent workers are on our payroll for the length of their assignment. We operate from 110 locations worldwide with approximately 85% of our revenues generated in the United States. Our principal international markets include Canada, Europe and several Asia Pacific locations. The industry is highly fragmented and very competitive in all of the markets we serve.
Results of Continuing Operations
The following discussion and analysis of operating results is presented at the reporting segment level. Since this discussion would be substantially the same at the consolidated level, we have therefore not included a redundant discussion.
RESULTS OF CONTINUING OPERATIONS
Consolidated Results by Segment
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Three Months Ended May 1, 2016
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Three Months Ended May 3, 2015
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(in thousands)
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Total
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Staffing Services
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|
Other
|
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Total
|
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Staffing Services
|
|
Other
|
Net revenue
|
$
|
335,439
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|
|
$
|
317,247
|
|
|
$
|
18,192
|
|
|
$
|
385,189
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|
|
$
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362,277
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|
|
$
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22,912
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Expenses
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Direct cost of staffing services revenue
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267,826
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267,826
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—
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303,837
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303,837
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—
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Cost of other revenue
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15,887
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—
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15,887
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19,909
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—
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19,909
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Selling, administrative and other operating costs
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42,946
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41,460
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1,486
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50,806
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46,851
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3,955
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Restructuring and severance costs
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622
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27
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595
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251
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275
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(24
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)
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Impairment charges
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—
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—
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—
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5,374
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977
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4,397
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Segment operating income (loss)
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8,158
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7,934
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224
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5,012
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10,337
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(5,325
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)
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Corporate general and administrative
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8,436
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9,106
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Corporate restructuring and severance costs
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218
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—
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Gain on sale of building
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(1,663
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)
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—
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Operating income (loss)
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1,167
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(4,094
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)
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Other income (expense), net
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(1,861
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)
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(2,287
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)
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Income tax provision
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1,091
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532
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Net loss from continuing operations
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$
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(1,785
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)
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$
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(6,913
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)
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Results of Operations (Q2 2016 vs. Q2 2015)
Staffing Services
Net revenue
: The segment’s net revenue in the second quarter of fiscal 2016
decreased
$45.1 million
, or
12.4%
, to
$317.2 million
from
$362.3 million
in fiscal 2015. The revenue decline was primarily driven by our traditional staffing, project-based and managed services programs. Traditional staffing experienced lower demand from our customers in both our technical and non-technical administrative and light industrial ("A&I") skill sets as well as a change in the overall mix from technical to A&I skill sets. Declines were most prevalent with our customers in the industrial and commercial manufacturing (primarily supporting the oil and gas industry) and utility industries, partially offset by increases in communications and transportation manufacturing industries. Project-based programs experienced decreases primarily attributed to the exit of a large customer in both our application testing and call center service offerings. Managed services programs experienced a decrease primarily due to the decision not to pursue continued business with certain customers as well as lower volume.
Direct cost of staffing services revenue
: Direct cost of staffing services revenue in the second quarter of 2016
decreased
$36.0 million
, or
11.9%
, to
$267.8 million
from
$303.8 million
in 2015. The
decrease
was primarily the result of fewer contingent staff on assignment within our traditional staffing business as well as a reduction in revenues in our project-based and managed services programs. Direct margin of staffing services revenue as a percent of staffing revenue was
15.6%
compared to
16.1%
in 2015. Despite the slight increase in our traditional staffing direct margin percentage from 2015, the decline in direct margin percentage was primarily experienced in our higher margin other related staffing businesses.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the second quarter of 2016
decreased
$5.4 million
, or
11.5%
, to
$41.5 million
from
$46.9 million
in 2015, primarily due to lower headcount across all businesses and the impact of the sale of our Uruguayan staffing business during the first quarter of 2016. As a percent of staffing revenue, these costs were
13.1%
in the second quarter of 2016 from
12.9%
in the second quarter of 2015.
Impairment charges
: The
$1.0 million
impairment charge during 2015 was a result of our annual impairment test for goodwill related to our staffing reporting unit in Uruguay. We perform our annual impairment test for goodwill during the second quarter of the fiscal year, according to ASU No. 2011-08,
Intangibles - Goodwill and Other
. We performed a Step 1 analysis of the goodwill impairment test for our European operations utilizing the same Income and Market approach as was applied in the fourth quarter of 2015 quantitative analysis to estimate the implied fair value. The results of our Step 1 analysis in the second quarter of 2016 indicated that there was no impairment of our goodwill of $6.1 million as of May 1, 2016.
Segment operating income
: The segment’s operating income in the second quarter of 2016
decreased
$2.4 million
to
$7.9 million
from
$10.3 million
in 2015. The decrease in operating income is primarily due to a decline in the results of our project-based programs and to a lesser extent in our traditional staffing and managed services programs due to the decline in revenue and related direct margin, partially offset by reductions in selling, administrative and other operating costs as well as impairment charges. Operating income in 2015 of
$10.3 million
included
$1.3 million
of special items related to impairment charges and restructuring and severance costs. Excluding the impact of these special items, segment operating income would have been
$11.6 million
on a Non-GAAP basis.
Other
Net revenue
: The segment’s net revenue in the second quarter of fiscal 2016
decreased
$4.7 million
, or
20.6%
, to
$18.2 million
from
$22.9 million
in fiscal 2015. This decline is primarily due to the sale of substantially all of the assets of the telecommunications infrastructure and security services business ("VTG") in the fourth quarter of 2015 and the sale of our telephone directory publishing and printing business ("printing") in the third quarter of 2015. The remaining decrease was attributable to our information technology infrastructure services business due in part from lower volume from one of our aeronautical defense contractor customers resulting from decreased federal funding.
Cost of other revenue
: The segment’s cost of other revenue in the second quarter of 2016
decreased
$4.0 million
, or
20.2%
, to
$15.9 million
from
$19.9 million
in 2015. This
decrease
is primarily due to the sale of our VTG and printing businesses as discussed above as well as the decrease in our information technology infrastructure services business.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs
decreased
$2.5 million
, or
62.4%
, to
$1.5 million
in the second quarter of 2016 from
$4.0 million
in 2015, primarily in our information technology infrastructure services business in response to the decrease in revenue as well as the sales of our VTG and printing businesses as discussed above.
Impairment charges
: In conjunction with the initiative to exit certain non-core operations, we performed an assessment of the telephone directory publishing and printing business in Uruguay in 2015. Consequently, the net assets of the business of
$4.4 million
were fully impaired during the second quarter of 2015.
Segment operating income (loss)
: The segment’s operating results in the second quarter of 2016 increased
$5.5 million
to operating income of
$0.2 million
from an operating loss of
$5.3 million
in 2015 primarily from the impairment charge recorded in 2015 as well as the sale of our printing business.
Corporate and Other Expenses
Corporate general and administrative:
Corporate general and administrative costs in the second quarter of 2016
decreased
$0.7 million
, or
7.4%
, to
$8.4 million
from
$9.1 million
in 2015 primarily from a decrease in costs incurred in connection with responding to activist shareholders and related Board of Directors' search fees as well as audit fees, partially offset in the current year for costs incurred in executive search and consulting fees on corporate-wide initiatives linked to our turn-around strategies.
Gain on sale of building:
Volt Opportunity Road Realty Corp., an indirect wholly-owned subsidiary of Volt, closed on the sale of real property comprised of land and building in San Diego, California during the second quarter of 2016. There was no mortgage on the property and the gain recorded on the sale was
$1.7 million
.
Operating income (loss)
: Operating results in the second quarter of 2016
increased
to operating income of
$1.2 million
from a loss of
$4.1 million
in 2015. This
increase
was primarily from decreased impairment charges, the gain on the sale of our building in San Diego, California as well as a reduction of our Corporate general and administrative costs, partially offset by a decrease in operating results from our Staffing Services segment.
Other income (expense), net
: Other expense in the second quarter of 2016
decreased
$0.4 million
to
$1.9 million
from
$2.3 million
in 2015, primarily related to non-cash foreign exchange net losses on intercompany balances, partially offset by the amortization of deferred financing fees.
Income tax provision
: Income tax provision was
$1.1 million
compared to
$0.5 million
in the second quarter of 2016 and 2015, respectively. The provision in both periods primarily related to locations outside of the United States.
Consolidated Results by Segment
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Six Months Ended May 1, 2016
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Six Months Ended May 3, 2015
|
(in thousands)
|
Total
|
|
Staffing Services
|
|
Other
|
|
Total
|
|
Staffing Services
|
|
Other
|
Net revenue
|
$
|
662,269
|
|
|
$
|
625,928
|
|
|
$
|
36,341
|
|
|
$
|
768,255
|
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$
|
723,098
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|
$
|
45,157
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|
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Expenses
|
|
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|
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|
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|
|
|
Direct cost of staffing services revenue
|
531,998
|
|
|
531,998
|
|
|
—
|
|
|
613,355
|
|
|
613,355
|
|
|
—
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|
Cost of other revenue
|
32,675
|
|
|
—
|
|
|
32,675
|
|
|
39,514
|
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—
|
|
|
39,514
|
|
Selling, administrative and other operating costs
|
85,675
|
|
|
82,750
|
|
|
2,925
|
|
|
101,404
|
|
|
94,524
|
|
|
6,880
|
|
Restructuring and severance costs
|
2,400
|
|
|
1,512
|
|
|
888
|
|
|
251
|
|
|
275
|
|
|
(24
|
)
|
Impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
5,374
|
|
|
977
|
|
|
4,397
|
|
Segment operating income (loss)
|
9,521
|
|
|
9,668
|
|
|
(147
|
)
|
|
8,357
|
|
|
13,967
|
|
|
(5,610
|
)
|
Corporate general and administrative
|
18,632
|
|
|
|
|
|
|
18,798
|
|
|
|
|
|
Corporate restructuring and severance costs
|
1,201
|
|
|
|
|
|
|
975
|
|
|
|
|
|
Gain on sale of building
|
(1,663
|
)
|
|
|
|
|
|
—
|
|
|
|
|
|
Operating loss
|
(8,649
|
)
|
|
|
|
|
|
(11,416
|
)
|
|
|
|
|
Other income (expense), net
|
(2,454
|
)
|
|
|
|
|
|
(2,386
|
)
|
|
|
|
|
Income tax provision
|
1,644
|
|
|
|
|
|
|
1,911
|
|
|
|
|
|
Net loss from continuing operations
|
$
|
(12,747
|
)
|
|
|
|
|
|
$
|
(15,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations (Q2 2016 YTD vs. Q2 2015 YTD)
Staffing Services
Net revenue
: The segment’s net revenue in the first six months of fiscal 2016
decreased
$97.2 million
, or
13.4%
, to
$625.9 million
from
$723.1 million
in fiscal 2015. The revenue decline is primarily driven by our traditional staffing, project-based and managed services programs. Traditional staffing experienced lower demand from our customers in both our technical and non-technical A&I skill sets as well as a change in overall mix from technical to A&I skill sets. Declines were most prevalent with our customers in the industrial and commercial manufacturing (primarily supporting the oil and gas industry) and utility industries, partially offset by increases in communications and transportation manufacturing industries. Project-based programs experienced decreases primarily attributed to the exit of a large customer in both our application testing and call center service offerings. Managed services programs experienced a decrease primarily due to the decision not to pursue continued business with certain customers as well as lower volume.
Direct cost of staffing services revenue
: Direct cost of staffing services revenue in the first six months of 2016
decreased
$81.4 million
, or
13.3%
, to
$532.0 million
from
$613.4 million
in 2015. The
decrease
was primarily the result of fewer contingent staff on assignment within our traditional staffing business as well as a reduction in revenues in our project-based and managed services programs. Direct margin of staffing services revenue as a percent of staffing revenue in 2016 was
15.0%
from
15.2%
in 2015. Despite the slight increase in our traditional staffing direct margin percentage from 2015, the decline in direct margin percentage was primarily experienced in our higher margin other related staffing businesses.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the first six months of 2016
decreased
$11.7 million
, or
12.5%
, to
$82.8 million
from
$94.5 million
in 2015, primarily due to lower headcount across all businesses and the impact of the sale of our Uruguayan staffing business during the first quarter of 2016. As a percent of staffing services revenue, these costs were
13.2%
and
13.1%
for 2016 and 2015, respectively.
Restructuring and severance costs
: The segment's restructuring and severance costs of
$1.5 million
, primarily severance, were incurred as part of our overall cost reduction plan.
Impairment charges
: The $1.0 million impairment charge during 2015 was a result of our annual impairment test for goodwill related to our staffing reporting unit in Uruguay.
Segment operating income
: The segment’s operating income in the first six months of 2016
decreased
$4.3 million
to
$9.7 million
from
$14.0 million
in 2015. The decrease in operating income is primarily due to a decline in the results of our project-based programs and to a lesser extent in our traditional staffing and managed services programs due to the decline in revenue and related direct margin, partially offset by reductions in selling, administrative and other operating costs as well as impairment charges. Operating income in 2016 of
$9.7 million
included special items related to restructuring and severance costs of
$1.5 million
. Excluding the impact of this special item, segment operating income would have been
$11.2 million
on a Non-GAAP basis. Operating income in 2015 of
$14.0 million
included
$1.3 million
of special items related to impairment charges of
$1.0 million
and restructuring and severance costs of
$0.3 million
. Excluding the impact of this special item, segment operating income would have been
$15.3 million
on a Non-GAAP basis.
Other
Net revenue
: The segment’s net revenue in the first six months of fiscal 2016
decreased
$8.9 million
, or
19.5%
, to
$36.3 million
from
$45.2 million
in fiscal 2015. This decline is primarily due to the sale of substantially all of the assets of the VTG business in the fourth quarter of 2015 and the sale of our printing business in the third quarter of 2015. The remaining decrease was attributable to our information technology infrastructure services business due in part from lower volume from one of our aeronautical defense contractor customers resulting from decreased federal funding.
Cost of other revenue
: The segment’s cost of other revenue in the first six months of 2016
decreased
$6.8 million
, or
17.3%
, to
$32.7 million
from
$39.5 million
in 2015. The
decrease
is primarily due to the sale of our VTG and printing businesses as discussed above as well as the decrease in our information technology infrastructure services business.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs
decreased
$4.0 million
, or
57.5%
, to
$2.9 million
in the first six months of 2016 from
$6.9 million
in 2015, primarily from the sales of our VTG and printing businesses as discussed above as well as in our information technology infrastructure services business in response to the decrease in revenue.
Impairment charges:
In conjunction with the initiative to potentially exit certain non-core operations, we performed an assessment of the printing business during 2015. Consequently, the net assets of the business of
$4.4 million
were fully impaired during the first six months of 2015.
Segment operating loss
: The segment’s operating loss in the first six months of 2016 decreased
$5.5 million
to
$0.1 million
from
$5.6 million
in 2015 primarily from the impairment charge recorded in 2015, the sale of our printing business as well as decreased results in our information technology infrastructure services business primarily from lower volume from one of our aeronautical defense contractor customers resulting from decreased federal funding.
Corporate and Other Expenses
Corporate general and administrative:
Corporate general and administrative costs
decreased
$0.2 million
, or
0.9%
, to
$18.6 million
from
$18.8 million
in 2015 primarily from a decrease in costs incurred in connection with responding to activist shareholders and related Board of Directors' search fees as well as higher audit fees, partially offset in the current year for costs incurred in executive search and consulting fees on corporate-wide initiatives linked to our turn-around strategies.
Corporate restructuring and severance costs:
Corporate restructuring and severance costs in the first six months of fiscal 2016 included
$1.2 million
of severance costs incurred as part of our overall cost reduction plan. Corporate restructuring costs in the first six months of fiscal 2015 included
$1.0 million
of severance charges associated with the departure of our former Chief Financial Officer.
Gain on sale of building:
Volt Opportunity Road Realty Corp., an indirect wholly-owned subsidiary of Volt, closed on the sale of real property comprised of land and building in San Diego, California during the second quarter of 2016. There was no mortgage on the property and the gain recorded on the sale was
$1.7 million
.
Operating loss
: Operating loss in the first six months of 2016 decreased to
$8.6 million
from
$11.4 million
in 2015. The decrease in operating loss was primarily from impairments within our Staffing Services and Other segments in 2015, the decrease in selling, administrative and other operating costs and the gain on the sale of our building in San Diego, California. These items were partially offset by the decrease in operating results from our Staffing Services segment.
Other income (expense), net
: Other expense in the first six months of 2016 increased
$0.1 million
to
$2.5 million
from
$2.4 million
in 2015, primarily due to the amortization of deferred financing fees partially offset by non-cash foreign exchange net losses on intercompany balances.
Income tax provision
: Income tax provision was
$1.6 million
compared to
$1.9 million
in the first six months of 2016 and 2015, respectively. The provision in both periods 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 Program. Borrowing capacity under this program 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 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. In February 2016, Maintech entered into a $10.0 million short-term credit facility with Bank of America, N.A. ("BofA"), which supplements our existing Financing Program and provides additional liquidity for working capital and general corporate purposes.
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 30 - 45 day credit terms, with few extenuating exceptions to 60 days, 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 short-term borrowings. Our weekly payroll payments inclusive of employment related taxes and payments to vendors approximates
$20.0 million
. We generally target minimum global liquidity to be 1.5 to 2.0 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.
While our overall liquidity continues to improve, our current Financing Program provides for a minimum liquidity covenant which is measured daily and consists of cash in banks plus undrawn amounts of the program. Prior to July 31, 2016, the required minimum liquidity covenant level is $35.0 million, and thereafter is $50.0 million. This places restrictions on our ability to utilize this cash. As of May 1, 2016, our liquidity, as defined in our debt agreement, was
$58.8 million
and at June 3, 2016 was
$50.0 million
. We believe our cash flow from operations and planned liquidity will be sufficient to meet our projected cash needs for the foreseeable future. As part of our upcoming financing negotiations, we are looking to replace or modify this covenant.
Capital Allocation
In addition to our planned improvements in technology and overall processes which are anticipated to increase cash flows from operations over time, we have prioritized our capital allocation strategy to strengthen our balance sheet and increase our competitiveness in the marketplace. The timing of these initiatives is highly dependent upon attaining the profitability objectives outlined in our plan and the cash flow resulting from the completion of our liquidity initiatives. 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 1.5 to 2.0 times our weekly cash distributions on a global basis and must accommodate seasonality and cyclical trends;
|
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•
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Reinvesting in our business.
We are executing a company-wide initiative to reinvest 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 will enhance our ability to win in the marketplace;
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•
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Deleveraging our balance sheet.
By lowering our debt level, we will strengthen our balance sheet, reduce interest costs and reduce risk going forward;
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•
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Returning capital to shareholders.
Part of our strategy is to return capital to our shareholders in connection with share buybacks through our existing share buyback program; and
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•
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Acquiring value-added businesses.
Potentially in the longer-term identifying and acquiring companies which would be accretive to our operating income and that could leverage Volt's scale, infrastructure and capabilities. Strategic acquisitions would strengthen Volt in certain industry verticals or in specific geographic locations.
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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. We continue to actively manage our portfolio of business units and have exited both non-core businesses that were incurring losses and core businesses that were marginally profitable. We completed a number of significant divestitures in the latter part of fiscal 2015 and the first quarter of 2016, including the sale of our printing and staffing businesses in Uruguay, and the sale of substantially all the assets of our telecommunications, infrastructure and security services business. The above transactions netted nominal proceeds, however, we expect these transactions will be accretive to future operating cash flows.
We sold and simultaneously entered into a lease on our Orange, California property in March 2016 for a purchase price of
$35.9 million
. After the repayment of the mortgage on the property along with transaction-related expenses and fees, we received net cash proceeds of
$27.1 million
from the sale of the property. The lease on the property will expire in March 2031 with an annual base rent of $2.9 million for the first year with a 3.0% annual increase on the then-current base rent. The net proceeds from the sale will be used to ensure adequate levels of liquidity for working capital purposes, as well as to fund investments in technology and sales and marketing activities in support of our growth objectives. As previously disclosed, we are engaged in a sales process of Maintech. The timeline to complete a transaction could extend beyond the third quarter of fiscal 2016.
In March 2016, Volt Opportunity Road Realty Corp., an indirect wholly-owned subsidiary of Volt, closed on the sale of real property comprised of land and building with office space of approximately 19,000 square feet in San Diego, California with a private commercial real estate investor. There was no mortgage on the property and net proceeds, after transaction-related expenses and fees, totaled
$2.0 million
.
We have significant tax benefits including recoverable tax receivables of $16.0 million which, although dependent on the IRS, we expect to collect in the fourth quarter of fiscal 2016. Entering fiscal 2016 we also have federal net operating loss carryforwards, which are fully reserved with a valuation allowance of $133.6 million, capital loss carryforwards of $82.3 million and federal tax credits of $41.3 million which we will be able to utilize against future profits.
We remain committed to delivering superior client service at a reasonable cost. In an effort to reduce our future operating costs, we are making a significant investment to update our business processes, back-office financial suite and information technology tools that are critical to our success and offer more functionality at a lower cost. Our estimate of $12.0 million in expensed and capitalized costs remains on target. We expect that these activities will reduce costs of service through either the consolidation and/or elimination of certain systems and processes along with other reductions in discretionary spending. Through our strategy of improving efficiency in all aspects of our operations, we believe we can realize organic growth opportunities, reduce costs and increase profitability.
In the first quarter of fiscal 2016, we implemented a cost reduction plan as part of our overall initiative to become more efficient, competitive and profitable. We incurred restructuring charges of
$3.6 million
primarily resulting from a reduction in workforce, facility consolidation and lease termination costs. As a result of our cost reduction plan, we anticipate annual cost savings of approximately $10.0 million. Cost savings will be used consistent with our ongoing strategic efforts to strengthen our operations.
The following table sets forth our cash and available liquidity levels at the end of our last five quarters and our most recent week ended (in thousands):
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|
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|
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|
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|
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Global Liquidity
|
|
|
|
|
|
|
|
May 3, 2015
|
August 2, 2015
|
November 1, 2015
|
January 31, 2016
|
May 1, 2016
|
June 3, 2016
|
|
|
|
|
|
|
|
Cash and cash equivalents
(a)
|
$
|
6,070
|
|
$
|
12,332
|
|
$
|
10,188
|
|
$
|
16,515
|
|
$
|
23,171
|
|
|
|
|
|
|
|
|
|
Cash in banks
(b)
|
$
|
9,015
|
|
$
|
18,134
|
|
$
|
13,652
|
|
$
|
21,140
|
|
$
|
29,626
|
|
$
|
20,186
|
|
Financing Program - PNC
|
7,900
|
|
8,900
|
|
35,700
|
|
23,584
|
|
26,053
|
|
26,766
|
|
Short-Term Credit Facility - BofA
|
—
|
|
—
|
|
—
|
|
—
|
|
3,105
|
|
3,032
|
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Available liquidity
(c)
|
$
|
16,915
|
|
$
|
27,034
|
|
$
|
49,352
|
|
$
|
44,724
|
|
$
|
58,784
|
|
$
|
49,984
|
|
(a) Per financial statements.
(b) Amount generally includes unpresented checks.
(c) Our Financing Program contains a minimum liquidity covenant of
$35.0 million
effective January 31, 2016, which increases to
$50.0 million
effective July 31, 2016 and thereafter.
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):
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|
|
|
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|
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Six Months Ended
|
|
May 1, 2016
|
|
May 3, 2015
|
Net cash provided by operating activities
|
$
|
2,489
|
|
|
$
|
982
|
|
Net cash provided by (used in) investing activities
|
27,553
|
|
|
(2,754
|
)
|
Net cash provided by (used in) financing activities
|
(15,831
|
)
|
|
7,344
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(1,228
|
)
|
|
(1,958
|
)
|
Net cash used in discontinued operations
|
—
|
|
|
(4,056
|
)
|
Net increase (decrease) in cash and cash equivalents
|
$
|
12,983
|
|
|
$
|
(442
|
)
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Cash Flows - Operating Activities
The net cash provided by operating activities in the first six months ended May 1, 2016 was
$2.5 million
, an
increase
of
$1.5 million
from the same period in 2015. This increase resulted primarily from increased working capital relating to accrued expenses and other liabilities (accrued compensation and related taxes), partially offset by net assets held for sale and prepaid insurance and other assets. This was partially offset by an increase in our net loss when adjusted for non-cash items related to impairment charges, gain on dispositions of property and equipment and unrealized foreign currency exchange loss.
Cash Flows - Investing Activities
The net cash provided by investing activities in the first six months ended May 1, 2016 was
$27.6 million
, principally from the sale of property and equipment of
$36.9 million
, partially offset by the purchases of property, equipment and software of
$8.5 million
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 the first six months ended May 3, 2015 was
$2.8 million
, principally from the purchase of property, equipment and software of
$3.3 million
.
Cash Flows - Financing Activities
The net cash used in financing activities in the first six months ended May 1, 2016 was
$15.8 million
principally from the net repayment of borrowings of
$8.0 million
and repayment of long-term debt of
$7.3 million
as a result of the sale-leaseback of our Orange, California facility. The net cash provided by financing activities in the first six months of 2015 was
$7.3 million
resulting from the elimination of cash restricted as collateral for borrowings of
$10.4 million
, partially offset by
$4.3 million
for the purchase of common stock.
Availability of Credit
At May 1, 2016 and November 1, 2015, we had a financing program that provided for multi-currency borrowing and issuance of letters of credit up to an aggregate of
$150.0 million
, and up to
$250.0 million
under an accordion feature in our Financing Program, subject to bank credit review and Volt board approval. At May 1, 2016 and November 1, 2015, we had outstanding borrowings of
$90.0 million
and
$100.0 million
, respectively, under the Financing Program and bore a weighted average annual interest rate of 2.2% and 1.7%, respectively, inclusive of certain facility fees.
In February 2016, Maintech entered into a
$10.0 million
364-day short-term revolving credit facility with Bank of America, N.A., as lender. The provisions of the agreement will not preclude structuring and other activities required in anticipation of our sale of Maintech. As of May 1, 2016, the amount drawn under this facility was
$2.0 million
.
Financing Program
In January 2016, we amended our
$150.0 million
Financing Program with PNC Bank, National Association (“PNC”) to (1) extend the termination date to January 31, 2017; (2) eliminate the interest coverage ratio and modify the liquidity level requirement; (3) reduce the minimum funding threshold, as defined, from 60% to 40%, and (4) revise pricing from a LIBOR based rate plus 1.75% per the prior agreement, to a LIBOR based rate plus 1.90% on outstanding borrowings, and to increase the facility fee from 0.65% to 0.70%. The Financing Program is secured by receivables from certain Staffing Services businesses in the United States, Europe and Canada that are sold to a wholly-owned, consolidated, bankruptcy remote subsidiary. The subsidiary's sole business consists of the purchase of the receivables and subsequent granting of a security interest to PNC under the program, and its assets are available first to satisfy obligations to PNC and are not available to pay creditors of our other legal entities. Borrowing capacity under the Financing Program is directly impacted by the level of accounts receivable. As of November 1, 2015, the Financing Program was classified as long-term debt on the Condensed Consolidated Balance Sheets, however, as of the end of our fiscal first quarter 2016, the Financing Program was classified as short-term as the termination date is within twelve months of our first quarter 2016 balance sheet date.
In addition to customary representations, warranties and affirmative and negative covenants, the program is subject to a minimum liquidity covenant which increased under the aforementioned amendment from
$20.0 million
in cash and cash equivalents and borrowing availability under the Financing Program, to
$35.0 million
effective January 31, 2016, which increases to
$50.0 million
effective July 31, 2016. The program is subject to termination under standard events of default including change of control, failure to pay principal or interest, breach of the liquidity covenant, triggering of portfolio ratio limits, or other material adverse events as defined. As of May 1, 2016, we were in compliance with all debt covenant requirements.
The Financing Program has a feature under which the facility limit can be increased from
$150.0 million
up to
$250.0 million
subject to credit approval from PNC. Borrowings are priced based upon a fixed program rate plus the daily adjusted one-month LIBOR index, as defined. The program also contains a revolving credit provision under which proceeds can be drawn for a definitive tranche period of 30, 60, 90 or 180 days priced at the adjusted LIBOR index rate in effect for that period. In addition to United States dollars, drawings can be denominated in Canadian dollars, subject to a Canadian dollar
$30.0 million
limit, and British Pounds Sterling, subject to a
£20.0 million
limit. The program also includes a letter of credit sublimit of
$50.0 million
and minimum borrowing requirements. As of May 1, 2016, there were no foreign currency denominated borrowings, and the letter of credit participation was
$31.0 million
inclusive of
$28.9 million
for the Company's casualty insurance program and
$2.1 million
for the security deposit required under the Orange facility lease agreement.
Bank of America Short-Term Credit Facility
In February 2016, Maintech, Incorporated, an indirect wholly-owned subsidiary of Volt, as borrower, entered into a
$10.0 million
364-day secured revolving credit agreement with Bank of America, N.A. The credit agreement provides for revolving loans as well as a
$0.1 million
sub-line for letters of credit and is subject to borrowing base and availability restrictions and requirements. The credit agreement is secured by assets of the borrower, including accounts receivable, and the Company has guaranteed the obligations of the borrower under the agreement not to exceed
$3.0 million
. The credit agreement contains certain customary representations and warranties, events of default and affirmative and negative covenants.
The borrower may optionally terminate the credit agreement and repay the borrowings prior to the expiration date, without premium or penalty at any time by the delivery of a notice to that effect as provided under the credit agreement. It is anticipated that the credit agreement will be terminated before a sale of the borrower. Borrowings will be used for working capital and general corporate purposes. Interest under the credit agreement is one month LIBOR plus
2.75%
on drawn amounts and a fixed rate of
0.375%
on undrawn amounts.