Notes to Condensed Consolidated Financial Statements
For the Fiscal Periods Ended July 30, 2017 and July 31, 2016
(Unaudited)
NOTE 1: Basis of Presentation
Basis of Presentation
The accompanying interim condensed consolidated financial statements of Volt Information Sciences, Inc. (“Volt” or the “Company”) have been prepared in conformity with generally accepted accounting principles, consistent in all material respects with those applied in the Annual Report on Form 10-K for the year ended October 30, 2016. The Company makes estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates and changes in estimates are reflected in the period in which they become known. Accounting for certain expenses, including income taxes, are based on full year assumptions, and the financial statements reflect all normal adjustments that, in the opinion of management, are necessary for fair presentation of the interim periods presented. The interim information is unaudited and is prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”), which provides for omission of certain information and footnote disclosures. This interim financial information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended October 30, 2016.
Certain reclassifications have been made to the prior year financial statements in order to conform to the current year’s presentation.
NOTE 2: Recently Issued Accounting Pronouncements
New Accounting Standards Not Yet Adopted by the Company
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments are effective for annual periods beginning after December 15, 2017, which for the Company will be the first quarter of fiscal 2019. The Company is currently assessing the impact that this ASU will have upon adoption.
In February 2017, the FASB issued ASU 2017-05,
Other Income - Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets.
This ASU clarifies the scope and application of Accounting Standards Codification (“ASC”) 610-20 on the sale or transfer of non-financial assets and in substance non-financial assets to non-customers, including partial sales. The amendments are effective for annual reporting periods beginning after December 15, 2017, which for the Company will be the first quarter of fiscal 2019. The Company does not anticipate a significant impact upon adoption.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230)
-
Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force
. The amendments provide guidance on eight specific cash flow classification issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, corporate and bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, which for the Company will be the first quarter of fiscal 2019. The Company does not anticipate a significant impact upon adoption.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This ASU provides guidance for recognizing credit losses on financial instruments based on an estimate of current expected credit losses model. The amendments are effective for fiscal years beginning after December 15, 2019, which for the Company will be the first quarter of fiscal 2021. Although the impact upon adoption will depend on the financial instruments held by the Company at that time, the Company does not anticipate a significant impact on its consolidated financial statements based on the instruments currently held and its historical trend of bad debt expense relating to trade accounts receivable.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The
amendments are effective for annual periods beginning after December 15, 2016, which for the Company will be the first quarter of fiscal 2018. The Company does not anticipate a significant impact upon adoption.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This ASU requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The amendments are effective for fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of fiscal 2020. The Company has preliminarily evaluated the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements on a modified retrospective basis, and currently expects that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption, which will increase the Company’s total assets and total liabilities that the Company reports relative to such amounts prior to adoption.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern. The ASU is effective for the annual period ending after December 15, 2016, which for the Company will be the fourth quarter of fiscal 2017.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The FASB issued subsequent amendments to improve and clarify the implementation guidance of Topic 606. This standard is effective for annual reporting periods beginning after December 15, 2017, which for the Company will be the first quarter of fiscal 2019. After the preliminary assessment, the Company does not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems. As the Company continues to evaluate the impacts of our pending adoption of Topic 606 in fiscal 2017, our preliminary assessments are subject to change.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on the Company’s consolidated financial statements and related disclosures.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and other (Topic 350)
. This ASU simplifies the accounting for goodwill impairment and removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value limited to the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. This ASU was early adopted by the Company on a prospective basis in the second quarter of fiscal 2017 for its annual impairment test resulting in no impact on its consolidated financial statements. It was determined that
no
adjustment to the carrying value of goodwill of
$5.4 million
was required as our Step 1 analysis resulted in the fair value of the reporting unit exceeding its carrying value. No triggering event has occurred since the annual impairment test.
In April 2015, the FASB issued ASU No. 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract and expense the cost as the services are received. This ASU was adopted by the Company in the first quarter of fiscal 2017 on a prospective basis. The Company does not currently have any projects that meet the criteria to be in scope of the internal-use software guidance and it did not have any impact on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
. The ASU requires that debt issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. In August 2015, the FASB issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. ASU 2015-15 clarifies the guidance in ASU 2015-03 regarding presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC Staff announced they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These ASUs were adopted by the Company in the first quarter of fiscal 2017. The Company has continued to defer and present debt issuance costs as an asset and to amortize the deferred issuance costs ratably over the term of the line-of-credit arrangement resulting in no impact on its consolidated financial statements.
All other ASUs that became effective for Volt in the first nine months of fiscal 2017 were not applicable to the Company at this time and therefore did not have any impact during the period.
NOTE 3: Discontinued Operations
On December 1, 2014, the Company completed the sale of its Computer Systems segment to NewNet Communication Technologies, LLC (“NewNet”), a Skyview Capital, LLC, portfolio company. The proceeds of the transaction were a
$10.0 million
note bearing interest at one half percent (
0.5
percent) per year due in
four
years and convertible into a capital interest of up to
20%
in NewNet. The Company may convert the note at any time and is entitled to receive early repayment in the event of certain events such as a change in control of NewNet. The note was valued at
$8.4 million
which approximated its fair value. At July 30, 2017, the note is carried at net realizable value and the unamortized discount is
$1.1 million
.
The Company and NewNet are in discussions regarding the final working capital adjustment amount based on the comparison of the actual transaction date working capital amount to an expected working capital amount, along with certain minor indemnity claims. The Company does not believe the resolution will have a material impact on its financial statements or net income.
The Company may consider monetizing the note prior to maturity in either a secondary market or an early extinguishment, if NewNet agrees, at some value less than the face amount and may offset a settlement on the working capital adjustment and indemnity claims against the note. Accordingly, the Company has ceased accreting interest on the note until the matter is resolved. At this time, although there is no certainty, the Company does not believe that any associated adjustment to the value of the note would result in a material difference from its current carrying value.
NOTE 4: Assets and Liabilities Held for Sale
In October 2015, the Company’s Board of Directors approved a plan to sell the Company’s information technology infrastructure services business, Maintech, Incorporated (“Maintech”). Maintech met all of the criteria to classify its assets and liabilities as held for sale in the fourth quarter of fiscal 2015. The disposal of Maintech did not represent a strategic shift that would have a major effect on the Company’s operations and financial results and was, therefore, not classified as discontinued operations in accordance with ASU 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)
. As part of the required evaluation under the held for sale guidance, the Company determined that the approximate fair value less costs to sell the operations exceeded the carrying value of the net assets and no impairment charge was recorded. Maintech’s financial results were reported within the Corporate and Other category in our segment data.
On March 6, 2017, the Company completed the sale of Maintech to Maintech Holdings, LLC, a newly-formed holding company and affiliate of Oak Lane Partners, LLC (“Buyer”). Under the terms of the Stock Purchase Agreement, the Company received proceeds of
$18.3 million
, subject to a
$0.1 million
holdback and certain adjustments including a customary working capital adjustment that was finalized within
60
days of the sale. Net proceeds from the transaction amounted to
$13.1 million
after certain transaction-related fees, expenses and repayment of an outstanding Bank of America, N.A. (“BofA”) loan balance. The Company recognized a gain on disposal of
$3.9 million
from the sale transaction in the second quarter of fiscal 2017.
Concurrently with the sale, the Company entered into a Transition Services and Asset Transfer Agreement (the “Transition Services Agreement”). Given that the Buyer had not yet formed legal entities in certain international jurisdictions, the Company still holds legal title to approximately
$0.4 million
, net, of certain of Maintech’s international assets and liabilities. Pursuant to the Transition Services Agreement, the Buyer is entitled to all of the economic benefit and burden of such international assets and liabilities commencing on the sale date, March 6, 2017, as if legal title had transferred. Following the sale, for a period of up to
twelve
months, both parties will work in good faith to enter into definitive documentation for the conveyance of these assets and liabilities. Also under the terms of the Transition Services Agreement, the Company will continue to provide certain accounting and operational support services to the Buyer, on a monthly fee-for-service basis for a period of up to
six
months post-closing.
The Company and Maintech have also executed a
three
-year IT as a service agreement, whereby Maintech will continue to provide helpdesk and network monitoring services to the Company, similar to the services that were provided before the transaction.
As of July 30, 2017, the Maintech assets and liabilities which have not yet legally transferred will continue to be presented as held for sale in the Condensed Consolidated Balance Sheets. The following table reconciles the major classes of assets and liabilities classified as held for sale as part of continuing operations in the Condensed Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
July 30, 2017
|
|
October 30, 2016
|
Assets included as part of continuing operations
|
|
|
|
Trade accounts receivable, net
|
$
|
483
|
|
|
$
|
13,553
|
|
Recoverable income taxes
|
—
|
|
|
15
|
|
Other assets
|
203
|
|
|
3,339
|
|
Property, equipment and software, net
|
12
|
|
|
178
|
|
Purchased intangible assets
|
—
|
|
|
495
|
|
Total major classes of assets as part of continuing operations
|
$
|
698
|
|
|
$
|
17,580
|
|
|
|
|
|
Liabilities included as part of continuing operations
|
|
|
|
Accrued compensation
|
$
|
—
|
|
|
$
|
2,432
|
|
Accounts payable
|
136
|
|
|
921
|
|
Accrued taxes other than income taxes
|
—
|
|
|
833
|
|
Accrued insurance and other
|
210
|
|
|
1,574
|
|
Total major classes of liabilities as part of continuing operations
|
$
|
346
|
|
|
$
|
5,760
|
|
NOTE 5: Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
The changes in accumulated other comprehensive loss for the three and nine months ended July 30, 2017 were (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
July 30, 2017
|
|
|
Foreign Currency Translation
|
Accumulated other comprehensive loss at the beginning of the period
|
|
$
|
(9,515
|
)
|
|
$
|
(10,612
|
)
|
Other comprehensive income
|
|
3,625
|
|
|
4,722
|
|
Accumulated other comprehensive loss at July 30, 2017
|
|
$
|
(5,890
|
)
|
|
$
|
(5,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications from accumulated other comprehensive loss for the three and nine months ended July 30, 2017 and July 31, 2016 were (in thousands):
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
July 30, 2017
|
|
July 31, 2016
|
|
July 30, 2017
|
|
July 31, 2016
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
Sale of foreign subsidiaries
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(612
|
)
|
|
$
|
—
|
|
Closure of foreign subsidiary
|
|
$
|
—
|
|
|
$
|
(643
|
)
|
|
$
|
—
|
|
|
$
|
(643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Fiscal Year
|
|
Amount Reclassified
|
|
Affected Line Item in the Statement Where Net Loss is Presented
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
Sale of foreign subsidiaries
|
|
2017
|
|
$
|
(612
|
)
|
|
Foreign exchange gain (loss), net
|
Closure of foreign subsidiary
|
|
2016
|
|
$
|
(643
|
)
|
|
Foreign exchange gain (loss), net
|
NOTE 6: Restricted Cash and Short-Term Investments
Restricted cash primarily includes amounts related to requirements under certain contracts with managed service program customers for whom the Company manages the customers’ contingent staffing requirements, including processing of associate vendor billings into single, combined customer billings and distribution of payments to associate vendors on behalf of customers, as well as minimum cash deposits required to be maintained as collateral. Distribution of payments to associate vendors is generally made shortly after receipt of payment from customers, with undistributed amounts included in restricted cash and accounts payable between receipt and distribution of these amounts. Changes in restricted cash collateral are classified as an operating activity, as this cash is directly related to the operations of this business. At July 30, 2017 and October 30, 2016, restricted cash included
$15.6 million
and
$8.4 million
, respectively, restricted for payment to associate vendors and
$1.9 million
and
$1.9 million
, respectively, restricted for other collateral accounts.
At July 30, 2017 and October 30, 2016, short-term investments were
$3.4 million
and
$3.6 million
, respectively. These short-term investments consisted primarily of the fair value of deferred compensation investments corresponding to employees’ selections, primarily in mutual funds, based on quoted prices in active markets.
NOTE 7: Income Taxes
The income tax provision (benefit) reflects the geographic mix of earnings in various federal, state and foreign tax jurisdictions and their applicable rates resulting in a composite effective tax rate. The Company’s cumulative results for substantially all United States and certain non-United States jurisdictions for the most recent three-year period is a loss. Accordingly, a valuation allowance has been established for substantially all loss carryforwards and other net deferred tax assets for these jurisdictions, resulting in an effective tax rate that is significantly different than the statutory rate.
The Company adjusts its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate, consistent with ASC 270,
Interim Reporting
, and ASC 740-270,
Income Taxes – Intra Period Tax Allocation
. Jurisdictions with a projected loss for the full year where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. The Company’s future effective tax rates could be affected by earnings being different than anticipated in countries with differing statutory rates, increases in recorded valuation allowances of tax assets, or changes in tax laws.
The Company’s provision for income taxes primarily includes foreign jurisdictions and state taxes. In the third quarter of fiscal 2017 and fiscal 2016, income taxes were a provision of
$1.1 million
and
$0.4 million
, respectively. For the nine months ended July 30, 2017 and July 31, 2016, income taxes were a provision of
$0.9 million
and
$2.0 million
, respectively. The Company’s quarterly income
taxes are measured using an estimated annual effective tax rate, adjusted for discrete items that occur within the periods presented.
In the third quarter of fiscal 2017, the income tax provision was higher than the comparable 2016 period due to the timing of profits in foreign jurisdictions. For the nine months ended July 30, 2017, the Company recorded a net discrete tax benefit of approximately
$1.3 million
resulting from the resolution of uncertain tax positions upon the completion and effective settlement of the audit of the Company’s fiscal 2004 through 2010 federal income tax returns and associated state tax audits. The Company received
$13.8 million
of federal refunds related to the completion of the audit periods in March 2017. The Company continues to work with the IRS to resolve one remaining matter related to fiscal 2010 and anticipates having the matter resolved within the next several quarters.
NOTE 8: Real Estate Transactions
Orange, CA
In March 2016, Volt Orangeca Real Estate Corp., an indirect wholly-owned subsidiary of the Company completed the sale of real property comprised of land and buildings with office space of approximately
191,000
square feet in Orange, California for a purchase price of
$35.9 million
. The sale was effected pursuant to a Purchase and Sale Agreement (the “PSA”) with, and the Company also concurrently entered into a Lease Agreement (the “Lease”) with, Glassell Grand Avenue Partners, LLC (the “Buyer”), a limited liability company formed by Hines, a real estate investment and management firm, and funds managed by Oaktree Capital Management L.P., an investment management firm. The Buyer assigned the PSA and the Lease to Glassell Acquisitions Partners LLC, an affiliate, prior to the closing.
The transaction was accounted for as a sale-leaseback transaction and as an operating lease. The initial lease term is
15
years plus renewal options for
two
terms of
five
years each based on the greater of fair market value at the time of the renewal or the base annual rent payable during the last month of the then-current term immediately preceding the extended period. The annual base rent was
$2.9 million
for the first year of the initial term and increases on each adjustment date by
3.0%
of the then-current annual base rent. A security deposit of
$2.1 million
was required for the first year of the lease term which is secured by a letter of credit under the Company’s existing financing program (the “Financing Program”) with PNC Bank National Association (“PNC”), which was reduced to
$1.4 million
in the second quarter of fiscal 2017. The security deposit will subsequently be reduced if certain conditions are met. Accordingly, the gain on sale of
$29.4 million
will be deferred and recognized in proportion to the related gross rental charges to expense over the lease term.
San Diego, CA
In March 2016, Volt Opportunity Road Realty Corp., an indirect wholly-owned subsidiary of the Company, completed the sale with a private commercial real estate investor of real property comprised of land and a building with office space of approximately
19,000
square feet in San Diego, California for a purchase price of
$2.2 million
. The Company recognized a gain of
$1.7 million
from the transaction during the second quarter of fiscal 2016.
NOTE 9: Debt
In January 2017, the Company amended its
$160.0 million
Financing Program with PNC. Key changes to the agreement were to: (1) extend the termination date to January 31, 2018; (2) increase the minimum global liquidity covenant to
$25.0 million
upon the sale of Maintech in March 2017, which will increase to
$35.0 million
if the Company pays a dividend or repurchases shares of its stock; (3) reduce the unbilled receivables eligibility from
15%
to
10%
of total eligible receivables, (4) permit a
$5.0 million
basket for supply chain finance receivables and (5) introduce a performance covenant requiring a minimum level of Earnings Before Interest and Taxes (“EBIT”), as defined, which is measured quarterly. As Maintech was sold and the IRS refund was received in March 2017, up to
$0.5 million
in distributions can be made per fiscal quarter provided that available liquidity is at least
$40.0 million
after the distribution. All other material terms and conditions remain substantially unchanged, including interest rates. With the sale of Maintech in March 2017, the minimum liquidity requirement increased from
$20.0 million
to
$25.0 million
,
until subsequently amended on August 25, 2017.
On July 14, 2017, the Company amended its Financing Program to increase the permitted ratio of delinquent receivables to
2.5%
from
2.0%
for the period of July 2017 through September 2017. The threshold of
2.0%
will be unchanged from October 2017. On August 25, 2017, the Company further amended its Financing Program to lower EBIT minimum targets for the fiscal quarter ended July 30, 2017 and the fiscal quarter ending October 29, 2017. Additionally, effective from the date of execution, the amendment lowers the required liquidity level amount, as defined, to
$5.0 million
from
$25.0 million
. This decrease is offset by the establishment of a minimum
$10.0 million
block on its borrowing base availability, resulting in a net
$10.0 million
increase in overall availability under this agreement. Also effective from the date of execution, the amendment includes an increase in both the program and LC fees from
1.2%
to
1.8%
.
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 bankruptcy remote 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 the Company’s other legal entities. Borrowing capacity under the Financing Program is directly impacted by the level of accounts receivable. At July 30, 2017, the accounts receivable borrowing base was
$142.7 million
.
In addition to customary representations, warranties and affirmative and negative covenants, 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 or performance covenants, triggering of portfolio ratio limits, or other material adverse events, as defined. At July 30, 2017, the Company was in compliance with all debt covenant requirements.
The Financing Program has an accordion feature under which the facility limit can be increased 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
sub-limit, and British Pounds Sterling, subject to a
£20.0 million
sub-limit. The program also includes a letter of credit sub-limit of
$50.0 million
and minimum borrowing requirements. As of July 30, 2017, there were no foreign currency denominated borrowings, and the letter of credit participation was
$28.3 million
inclusive of
$26.9 million
for the Company’s casualty insurance program and
$1.4 million
for the security deposit required under the Orange facility lease agreement.
At July 30, 2017 and October 30, 2016, the Company had outstanding borrowings under the Financing Program of
$100.0 million
and
$95.0 million
, respectively, that had a weighted average annual interest rate of
3.1%
and
2.4%
during the third quarter of fiscal 2017 and 2016, respectively, and
2.9%
and
2.3%
during the first nine months of fiscal 2017 and 2016, respectively, which is inclusive of certain facility fees. At July 30, 2017, there was
$14.4 million
additional availability under this program, exclusive of any potential availability under the accordion feature.
In February 2016, Maintech, as borrower, entered into a
$10.0 million
364
-day secured revolving credit agreement with BofA. The credit agreement provided 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 was secured by assets of the borrower, including accounts receivable, and the Company had guaranteed the obligations of the borrower up to
$3.0 million
. The credit agreement contained certain customary representations and warranties, events of default and affirmative and negative covenants, including a minimum interest requirement based on
$2.0 million
drawn.
The borrower could 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. Borrowings were used for working capital and general corporate purposes. Interest under the credit agreement was one month LIBOR plus
2.75%
on drawn amounts and a fixed rate of
0.375%
on undrawn amounts.
The agreement was extended for
one
month in February 2017. Subsequently, all amounts outstanding under the credit agreement as of March 6, 2017 were satisfied with the proceeds from the sale of Maintech, at which time the Company’s obligation as a guarantor was discharged. At October 30, 2016, the amount outstanding was
$2.1 million
, with
$3.3 million
of additional availability.
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
July 30, 2017
|
|
October 30, 2016
|
Financing programs
|
$
|
100,000
|
|
|
$
|
97,050
|
|
Less: current portion
|
100,000
|
|
|
2,050
|
|
Total long-term debt
|
$
|
—
|
|
|
$
|
95,000
|
|
NOTE 10: Earnings (Loss) Per Share
Basic and diluted net loss per share is calculated as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 30, 2017
|
|
July 31, 2016
|
|
July 30, 2017
|
|
July 31, 2016
|
Numerator
|
|
|
|
|
|
|
|
Net loss
|
$
|
(5,518
|
)
|
|
$
|
(4,610
|
)
|
|
$
|
(10,949
|
)
|
|
$
|
(17,357
|
)
|
Denominator
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
20,963
|
|
|
20,846
|
|
|
20,934
|
|
|
20,824
|
|
Diluted weighted average number of shares
|
20,963
|
|
|
20,846
|
|
|
20,934
|
|
|
20,824
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.26
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.83
|
)
|
Diluted
|
$
|
(0.26
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.83
|
)
|
Options to purchase
2,572,091
and
1,898,397
shares of the Company’s common stock were outstanding at July 30, 2017 and July 31, 2016, respectively. Additionally, there were
324,277
and
237,864
unvested restricted shares outstanding at July 30, 2017 and July 31, 2016, respectively. The options were not included in the computation of diluted loss per share in the three and nine months of fiscal 2017 and 2016 because the effect of their inclusion would have been anti-dilutive as a result of the Company’s net loss position in those periods.
NOTE 11: Stock Compensation Plan
During the third quarter of fiscal 2017, pursuant to the terms of the Company’s 2015 Equity Incentive Plan (the “2015 Plan”), the Company granted an aggregate of
809,554
stock options,
240,428
restricted stock units (“RSUs”) and
71,311
phantom units in the form of cash-settled RSUs. This was comprised of: (i)
809,554
stock options and
166,658
RSUs granted to certain employees including executive management as long-term incentive awards, (ii)
73,770
RSUs granted to independent members of the Board as part of their annual compensation and (iii)
71,311
phantom units granted to certain senior management level employees.
During the third quarter of fiscal 2016, the Company granted an aggregate of
938,767
stock options and
253,271
RSUs under the 2015 Plan in addition to
26,031
stock options and
5,233
RSUs under the 2006 Incentive Stock Plan. This was comprised of: (i)
782,748
stock options and
156,608
RSUs granted to certain employees including executive management as long term incentive awards, (ii)
182,050
stock options and
40,016
RSUs granted to the Chief Executive Officer which was subject to shareholder approval of the 2015 Plan pursuant to his employment agreement dated October 19, 2015 and (iii)
61,880
RSUs granted to members of the Board as part of their annual compensation.
The total fair value at the grant date of these stock options and RSUs were approximately
$2.5 million
and
$3.8 million
in fiscal 2017 and 2016, respectively. The grants for the Board members vested immediately whereas the grants for the employees will vest in tranches ratably over
three
years provided the employees remain employed on each of those vesting dates. The weighted average fair value per unit for the RSUs in fiscal 2017 and 2016 was
$4.35
and
$6.06
, respectively. Compensation expense for the vested RSUs was recognized on the grant date. The stock options expire
10
years from the initial grant date and have a weighted average exercise price of
$4.36
in fiscal 2017 and
$6.49
in fiscal 2016. Compensation expense for the stock options and RSUs that did not immediately vest is recognized over the vesting period.
Determining Fair Value - Stock Options
The fair value of the stock option grant was estimated using the Black-Scholes option pricing model, which requires estimates of key assumptions based on both historical information and management judgment regarding market factors and trends.
Expected volatility - We developed the expected volatility by using the historical volatilities of the Company for a period equal to the expected life of the option.
Expected term - We derived our expected term assumption based on the simplified method due to a lack of historical exercise data, which results in an expected term based on the midpoint between the graded vesting dates and contractual term of an option.
Risk-free interest rate - The rates are based on the average yield of a U.S. Treasury bond, with a term that was consistent with the expected life of the stock options.
Expected dividend yield - We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield was assumed to be zero.
The weighted average assumptions used to estimate the fair value of stock options for the three months ended July 30, 2017 and July 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
July 30, 2017
|
July 31, 2016
|
Fair value of stock option granted
|
$
|
1.79
|
|
$
|
2.32
|
|
Expected volatility
|
40.0
|
%
|
40.0
|
%
|
Expected term (in years)
|
6.0
|
|
6.0
|
|
Risk-free interest rate
|
1.91
|
%
|
1.29
|
%
|
Expected dividend yield
|
0.0
|
%
|
0.0
|
%
|
The total fair value at the grant date of the phantom units was approximately
$0.3
million. The units vest in tranches ratably over
three
years provided the employees remain employed on each of those vesting dates. The weighted average fair value per unit was
$4.35
. These cash-settled awards are classified as a liability and remeasured at the end of each reporting period based on the change in fair value of one share of the Company’s common stock. Compensation expense is recognized over the vesting period. The liability and corresponding expense are adjusted accordingly until the awards are settled.
The total stock compensation expense for the three and nine months ended July 30, 2017 was
$0.9 million
and
$2.1 million
, respectively, and for the three and nine months ended July 31, 2016 was
$0.6 million
and
$1.0 million
, respectively. Stock compensation expense was recognized in Selling, administrative and other operating costs in the Company’s Condensed Consolidated Statements of Operations. As of July 30, 2017, total unrecognized compensation expense of
$3.4 million
related to stock options and RSUs and of
$0.2 million
related to the phantom units will be recognized over the remaining weighted average vesting period of
3 years
, of which
$0.7 million
,
$2.0 million
,
$0.8 million
and
$0.1 million
is expected to be recognized in fiscal 2017, 2018, 2019 and 2020, respectively.
NOTE 12: Restructuring and Severance Costs
The Company implemented a cost reduction plan in fiscal 2016 and incurred restructuring and severance costs primarily resulting from a reduction in workforce, facility consolidation and lease termination costs. The total costs since inception are approximately
$6.8 million
consisting of
$1.3 million
in North American Staffing,
$0.7 million
in International Staffing,
$0.4 million
in Technology Outsourcing Services and Solutions and
$4.4 million
in Corporate and Other.
The Company incurred total restructuring and severance costs of approximately
$0.2 million
and
$1.0 million
for the three months ended July 30, 2017 and July 31, 2016, respectively, and
$1.1 million
and
$4.6 million
for the nine months ended July 30, 2017 and July 31, 2016, respectively. The following tables present the restructuring and severance costs for the three and nine months ended July 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 30, 2017
|
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
Technology Outsourcing Services and Solutions
|
|
Corporate and Other
|
Severance and benefit costs
|
$
|
211
|
|
|
$
|
34
|
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
168
|
|
Other
|
38
|
|
|
41
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Total costs
|
$
|
249
|
|
|
$
|
75
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 30, 2017
|
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
Technology Outsourcing Services and Solutions
|
|
Corporate and Other
|
Severance and benefit costs
|
$
|
998
|
|
|
$
|
131
|
|
|
$
|
24
|
|
|
$
|
39
|
|
|
$
|
804
|
|
Other
|
74
|
|
|
84
|
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
Total costs
|
$
|
1,072
|
|
|
$
|
215
|
|
|
$
|
14
|
|
|
$
|
39
|
|
|
$
|
804
|
|
Accrued restructuring and severance costs are included in Accrued compensation and Accrued insurance and other in the Condensed Consolidated Balance Sheets. Activity for the nine months ended July 30, 2017 are summarized as follows (in thousands):
|
|
|
|
|
|
July 30, 2017
|
Beginning balance
|
$
|
1,653
|
|
Charged to expense
|
1,072
|
|
Cash payments
|
(2,111
|
)
|
Ending balance
|
$
|
614
|
|
The remaining charges as of July 30, 2017 of
$0.6 million
, primarily related to Corporate and Other, are expected to be paid through the second quarter of fiscal 2018.
NOTE 13: Commitments and Contingencies
Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. The Company’s loss contingencies not discussed elsewhere consist primarily of claims and legal actions arising in the normal course of business, a majority of which generally consist of employment-related claims involving contingent workers. These matters are at varying stages of investigation, arbitration or adjudication. The Company has accrued for losses on individual matters that are both probable and reasonably estimable.
Estimates are based on currently available information and assumptions. Significant judgment is required in both the determination of probability and the determination of whether a matter is reasonably estimable. The Company’s estimates may change and actual expenses could differ in the future as additional information becomes available.
Other Matters
In August 2017, the Company determined that it will need to perform recalculations in connection with its compliance testing on its 401(k) plans for certain prior periods, which will result in the Company making additional contributions to such plans. The Company is currently in the process of conducting an assessment and, at this time, is unable to reasonably estimate the amount or range of such contributions. The Company anticipates completing its internal assessment of the matter in the fourth quarter of fiscal 2017.
NOTE 14: Segment Data
The Company changed its operating and reportable segments during the fourth quarter of fiscal 2016. Our current reportable segments are (i) North American Staffing, (ii) International Staffing and (iii) Technology Outsourcing Services and Solutions. The non-reportable businesses are combined and disclosed with corporate services under the category Corporate and Other. Accordingly, all prior periods have been recast to reflect the current segment presentation. The change in reportable segments did not have any impact on previously reported consolidated financial results.
Segment operating income (loss) is comprised of segment net revenue less cost of services, selling, administrative and other operating costs, impairment charges and restructuring and severance costs. The Company allocates to the segments all operating costs except for costs not directly related to the operating activities such as corporate-wide general and administrative costs. These costs are not allocated because doing so would not enhance the understanding of segment operating performance and are not used by management to measure segment performance.
Effective in the first quarter of fiscal 2017, in an effort to simplify and refine its internal reporting, the Company modified its intersegment sales structure between North American Staffing and Technology Outsourcing Services and Solutions segments. The resulting changes are as follows:
|
|
•
|
Intersegment revenue for North American Staffing from Technology Outsourcing Services and Solutions is now based on a set percentage of direct labor dollars for recruiting and administrative services; and
|
|
|
•
|
The direct labor costs associated with the contingent employees placed by North American Staffing on behalf of Technology, Outsourcing Services and Solutions’ customers are now directly borne by the Technology Outsourcing Services and Solutions segment instead of by North American Staffing.
|
To provide period over period comparability, the Company has reclassified the prior period segment data to conform to the current presentation. This change does not have any impact on the consolidated financial results for any period presented.
Financial data pertaining to the Company’s segment revenue and operating income (loss) as well as results from Corporate and Other for the three and nine months ended July 30, 2017 and July 31, 2016 are summarized in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 30, 2017
|
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
Technology Outsourcing Services and Solutions
|
|
Corporate and Other (1)
|
|
Eliminations (2)
|
Net revenue
|
$
|
289,924
|
|
|
$
|
229,372
|
|
|
$
|
29,018
|
|
|
$
|
24,323
|
|
|
$
|
9,042
|
|
|
$
|
(1,831
|
)
|
Cost of services
|
244,205
|
|
|
194,594
|
|
|
24,459
|
|
|
19,788
|
|
|
7,195
|
|
|
(1,831
|
)
|
Gross margin
|
45,719
|
|
|
34,778
|
|
|
4,559
|
|
|
4,535
|
|
|
1,847
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
46,931
|
|
|
28,962
|
|
|
3,824
|
|
|
3,561
|
|
|
10,584
|
|
|
—
|
|
Restructuring and severance costs
|
249
|
|
|
75
|
|
|
4
|
|
|
2
|
|
|
168
|
|
|
—
|
|
Operating income (loss)
|
(1,461
|
)
|
|
5,741
|
|
|
731
|
|
|
972
|
|
|
(8,905
|
)
|
|
—
|
|
Other income (expense), net
|
(2,983
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
1,074
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(5,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2016
|
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
Technology Outsourcing Services and Solutions
|
|
Corporate and Other (1)
|
|
Eliminations (2)
|
Net revenue
|
$
|
330,625
|
|
|
$
|
249,730
|
|
|
$
|
32,565
|
|
|
$
|
23,857
|
|
|
$
|
27,206
|
|
|
$
|
(2,733
|
)
|
Cost of services
|
282,098
|
|
|
211,806
|
|
|
27,672
|
|
|
21,820
|
|
|
23,533
|
|
|
(2,733
|
)
|
Gross margin
|
48,527
|
|
|
37,924
|
|
|
4,893
|
|
|
2,037
|
|
|
3,673
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
49,543
|
|
|
30,757
|
|
|
3,888
|
|
|
2,929
|
|
|
11,969
|
|
|
—
|
|
Restructuring and severance costs
|
970
|
|
|
482
|
|
|
138
|
|
|
—
|
|
|
350
|
|
|
—
|
|
Operating income (loss)
|
(1,986
|
)
|
|
6,685
|
|
|
867
|
|
|
(892
|
)
|
|
(8,646
|
)
|
|
—
|
|
Other income (expense), net
|
(2,231
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
393
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(4,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 30, 2017
|
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
Technology Outsourcing Services and Solutions
|
|
Corporate and Other (1)
|
|
Eliminations (2)
|
Net revenue
|
$
|
905,953
|
|
|
$
|
695,041
|
|
|
$
|
89,599
|
|
|
$
|
74,493
|
|
|
$
|
51,371
|
|
|
$
|
(4,551
|
)
|
Cost of services
|
766,225
|
|
|
592,504
|
|
|
75,786
|
|
|
60,196
|
|
|
42,290
|
|
|
(4,551
|
)
|
Gross margin
|
139,728
|
|
|
102,537
|
|
|
13,813
|
|
|
14,297
|
|
|
9,081
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
146,992
|
|
|
90,695
|
|
|
11,895
|
|
|
10,625
|
|
|
33,777
|
|
|
—
|
|
Restructuring and severance costs
|
1,072
|
|
|
215
|
|
|
14
|
|
|
39
|
|
|
804
|
|
|
—
|
|
Impairment charge
|
290
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
290
|
|
|
—
|
|
Gain from divestitures
|
(3,938
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,938
|
)
|
|
—
|
|
Operating income (loss)
|
(4,688
|
)
|
|
11,627
|
|
|
|
1,904
|
|
|
3,633
|
|
|
(21,852
|
)
|
|
—
|
|
Other income (expense), net
|
(5,331
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
930
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(10,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 31, 2016
|
|
Total
|
|
North American Staffing
|
|
International Staffing
|
|
Technology Outsourcing Services and Solutions
|
|
Corporate and Other (1)
|
|
Eliminations (2)
|
Net revenue
|
$
|
993,169
|
|
|
$
|
739,186
|
|
|
$
|
99,766
|
|
|
$
|
76,052
|
|
|
$
|
87,201
|
|
|
$
|
(9,036
|
)
|
Cost of services
|
847,602
|
|
|
633,139
|
|
|
85,133
|
|
|
63,583
|
|
|
74,783
|
|
|
(9,036
|
)
|
Gross margin
|
145,567
|
|
|
106,047
|
|
|
14,633
|
|
|
12,469
|
|
|
12,418
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other operating costs
|
153,294
|
|
|
92,418
|
|
|
12,453
|
|
|
9,833
|
|
|
38,590
|
|
|
—
|
|
Restructuring and severance costs
|
4,571
|
|
|
1,074
|
|
|
608
|
|
|
225
|
|
|
2,664
|
|
|
—
|
|
Gain from divestitures
|
(1,663
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,663
|
)
|
|
—
|
|
Operating income (loss)
|
(10,635
|
)
|
|
12,555
|
|
|
1,572
|
|
|
2,411
|
|
|
(27,173
|
)
|
|
—
|
|
Other income (expense), net
|
(4,685
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
2,037
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(17,357
|
)
|
|
|
|
|
|
|
|
|
|
|
(1) Revenues are primarily derived from managed service programs and information technology infrastructure services through the date of the sale of Maintech.
(2) The majority of intersegment sales results from North American Staffing providing resources to Technology Outsourcing Services and Solutions.
NOTE 15: Subsequent Events
On August 25, 2017, the Company entered into Amendment No. 8 to its Receivables Financing Agreement with PNC dated as of July 30, 2015.
Amendment No. 8 amends Section 8.04 of the Financing Program to adjust its financial covenants by: (1) lowering the required Liquidity Level amount, as defined therein, to
$5.0 million
from
$25.0 million
, and (2) lowering minimum targets for the Company’s earnings before interest and taxes for its fiscal quarter ended July 30, 2017 and its fiscal quarter ending October 29, 2017. Amendment No. 8 also establishes a minimum
$10.0 million
block on our borrowing availability through the current term of the Financing Program.