VOLT INFORMATION SCIENCES, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
Management's discussion and analysis ("MD&A") of financial condition and results
of operations is provided as a supplement to and should be read in conjunction
with the unaudited condensed consolidated financial statements and related notes
to enhance the understanding of our results of operations, financial condition
and cash flows. This MD&A contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements that involve expectations, plans or
intentions (such as those relating to future business, future results of
operations or financial condition, including with respect to the anticipated
effects of COVID-19 and related government actions). You can identify these
forward-looking statements by words such as "may," "will," "would," "should,"
"could," "expect," "anticipate," "believe," "estimate," "intend," "plan" and
other similar expressions. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from
those expressed or implied in our forward-looking statements. This MD&A should
be read in conjunction with the MD&A included in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2021 , as filed with the SEC on January 12,
2022 (the "2021 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 2021 Form 10-K and Part
II, "Item 1A. Risk Factors" of this report. We do not intend, and undertake no
obligation except as required by law, to update any of our forward-looking
statements after the date of this report to reflect actual results or future
events or circumstances. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements.
Note regarding the use of non-GAAP financial measures
We have provided certain Non-GAAP financial information, which includes
adjustments for special items and certain line items on a constant currency
basis, as additional information for segment revenue, our consolidated net
income (loss) and segment operating income (loss). These measures are not in
accordance with, or an alternative for, measures prepared in accordance with
generally accepted accounting principles ("GAAP") and may be different from
Non-GAAP measures reported by other companies. Our Non-GAAP measures are
generally presented on a constant currency basis, and exclude (i) the impact of
businesses sold or exited, (ii) the impact from the migration of certain clients
from a traditional staffing model to a managed service model ("MSP transitions")
as we believe that the difference in revenue recognition accounting under each
model of the MSP transitions could be misleading on a comparative period basis
and (iii) the elimination of special items. Special items generally include
impairments, restructuring and severance costs, as well as certain income or
expenses which the Company does not consider indicative of the current and
future period performance. We believe that the use of Non-GAAP measures provides
useful information to management and investors regarding certain financial and
business trends relating to our financial condition and results of operations
because they permit evaluation of the results of operations without the effect
of currency fluctuations or special items that management believes make it more
difficult to understand and evaluate our results of operations.
segments
Our reportable segments are (i) North American Staffing, (ii) International Staffing and (iii) North American MSP. All other business activities that do not meet the criteria to be reportable segments are aggregated with corporate services under the category Corporate and Other. Our reportable segments have been determined in accordance with our internal management structure, which is based on operating activities. We evaluate business performance based upon several metrics, primarily using revenue and segment operating income as the primary financial measures. We believe segment operating income provides management and investors a measure to analyze operating performance of each business segment against historical and competitors' data, although historical results, including operating income, may not be indicative of future results as operating income is highly contingent on many factors including the state of the economy, competitive conditions and customer preferences. We allocate all support-related costs to the operating segments except for costs not directly relating to our operating activities such as corporate-wide general and administrative costs. These costs are not allocated to individual operating segments because we believe that doing so would not enhance the understanding of segment operating performance and such costs are not used by management to measure segment performance. We report our segment information in accordance with the provisions of theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification 280, Segment Reporting ("ASC 280"), aligning with the way the Company evaluates its business performance and manages its operations. 16 --------------------------------------------------------------------------------
Overview
We are a global provider of staffing services (traditional time and
materials-based as well as project-based). Our staffing services consist of
workforce solutions that include providing contingent workers, personnel
recruitment services and managed staffing services programs supporting primarily
administrative and light industrial (commercial) as well as technical,
information technology and engineering (professional) positions. Our managed
service programs ("MSP") involves managing the procurement and on-boarding of
contingent workers from multiple providers.
We operate in approximately 65 of our own locations and have an on-site presence
in over 60 customer locations. Approximately 88% of our revenue is generated in
the United States . Our principal international markets include Europe , Asia
Pacific and Canada locations. The industry is highly fragmented and very
competitive in all of the markets we serve.
Environmental, Social and Governance (“ESG”) Matters
The Company recognizes the importance of ESG matters, with a specific focus onHuman Capital Management , as integral to creating a sustainable foundation for our long-term business strategy. While theNominating and Corporate Governance Committee of the Board of Directors holds primary responsibility for ESG oversight and guidance, our entire Board of Directors, composed of independent directors, is fully engaged in these efforts.
Volt operates on the fundamental philosophy that people are our most valuable asset as every personwho works for us has the potential to impact our success as well as the success of our clients. As a staffing company, identifying quality talent is at the core of everything we do and our success is dependent upon our ability to attract, develop and retain highly qualified employees, both in-house and for our clients. The Company's core values of integrity, customer centric, ownership, innovation, empowerment, collaborative change and teamwork establish the foundation on which the culture is built and represent the key expectations we have of our employees. We believe our culture and commitment to our employees attract and retain our qualified talent, while simultaneously providing significant value to our Company and its shareholders.
Demography
As ofJanuary 30, 2022 , we employed approximately 14,600 people, including approximately 13,500who were on contingent staffing assignments with our clients, and the remainder as full-time in-house employees. Approximately 70% of the full-time in-house employees are located inNorth America and the remaining are withinAsia Pacific andEurope . The workers on contingent staffing assignments are on our payroll for the length of their assignment with the client.
Diversity and Inclusion
Volt values building diverse teams, embracing different perspectives and fostering an inclusive, empowering work environment for our employees and clients. We have a long-standing commitment to equal employment opportunity as evidenced by the Company's Equal Employment Opportunity policy. Of our North American in-house employee population, approximately 71% are women and approximately 48% have self-identified as Hispanic or Latino, Native American, Pacific Islander, Asian, Black orAfrican American , or of two or more races. As part of Volt's commitment to continued enhancements in this area, we launched our Expert Momentum Diversity and Inclusion Program. This program involved the creation of a task force made up of a group of employees from across the organization. The program has established initiatives to strengthen the promotion of workplace diversity for our employees and clients, to create a collaborative environment that promotes authenticity and a culture that celebrates our differences, and embraces a collaborative environment with unique experiences and diverse perspectives. The program's task force will enhance company-wide engagement on diversity and inclusion, provide education opportunities for our employees, help identify areas for improvement and monitor progress against these initiatives.
Benefits and Compensation
Critical to our success is identifying, recruiting, retaining, and incentivizing
our existing and future employees. We strive to attract and retain the most
talented employees in the staffing industry by offering competitive compensation
and benefits. Our pay-for-performance compensation philosophy is based on
rewarding each employee's individual contributions and striving to achieve equal
pay for equal work regardless of gender, race or ethnicity. We use a combination
of fixed and variable pay including base salary, bonus, commissions and merit
increases which vary across the business. In addition, as part of our long-term
incentive plan for executives and certain employees, we provide share-based
compensation to foster our pay-for-performance culture and to attract, retain
and motivate our key leaders.
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As the success of our business is fundamentally connected to the well-being of
our people, we offer benefits that support their physical, financial and
emotional well-being. We provide our employees with access to flexible and
convenient medical programs intended to meet their needs and the needs of their
families. In addition to standard medical coverage, we offer eligible employees
dental and vision coverage, health savings and flexible spending accounts, paid
time off, employee assistance programs, voluntary short-term and long-term
disability insurance and term life insurance. Additionally, we offer a 401(k)
Savings Plan and Deferred Compensation Plan to certain employees. Our benefits
vary by location and are designed to meet or exceed local laws and to be
competitive in the marketplace.
In response to the COVID-19 pandemic, government legislation and key
authorities, we implemented changes that we determined were in the best interest
of our employees, as well as the communities in which we operate. This included
having the majority of our employees work from home for several months, while
implementing additional safety measures for employees continuing critical
on-site work. We continue to embrace a flexible working arrangement for a
majority of our in-house employees, as well as a portion of our contingent
workforce where we continue to provide key services to customers remotely.
We believe a key factor in employee retention is training and professional development for our talent. We have training programs across all levels of the Company to meet the needs of various roles, specialized skill sets and departments across the Company. All field associates receive Volt's General Safety Orientation prior to assignment and site-specific job task training from our clients. Volt offers the Federal Ten Hour and other specialty safety programs to key employees and clients as a value-add feature of our services. Volt is committed to the security and confidentiality of our employees' personal information and employs software tools and periodic employee training programs to promote security and information protection at all levels. Additionally, in the second quarter of fiscal 2021, we invested in an online educational platform to upskill our field associates acrossNorth America . This platform provides significant benefit and support to our employees in furthering their education and achieving their personal and professional goals, while at the same time cultivating a better-skilled pool of talent for our clients. We utilize certain employee turnover rates and productivity metrics in assessing our employee programs to ensure that they are structured to instill high levels of in-house employee tenure, low levels of voluntary turnover and the optimization of productivity and performance across our entire workforce. Additionally, we have implemented a new performance evaluation program which adopts a modern approach to valuing and strengthening individual performance through on-going interactive progress assessments related to established goals and objectives. Communication and Engagement We strongly believe that Volt's success depends on employees understanding how their work contributes to the Company's overall strategy. To this end, we communicate with our workforce through a variety of channels and encourage open and direct communication, including: (i) quarterly company-wide CEO update calls; (ii) regular company-wide calls with executives; (iii) frequent corporate email communications; and (iv) employee engagement surveys.
Commitment to Values and Ethics through Governance
Along with our core values, we act in accordance with our Code of Business
Conduct and Ethics ("Code of Conduct"), which sets forth expectations and
guidance for employees to make appropriate decisions. Our Code of Conduct covers
topics such as anti-corruption, discrimination, harassment, privacy, appropriate
use of company assets, protecting confidential information and reporting Code of
Conduct violations. The Code of Conduct reflects our commitment to operating in
a fair, honest, responsible and ethical manner and also provides direction for
reporting complaints in the event of alleged violations of our policies
(including through an anonymous hotline). Our executive officers and supervisors
maintain "open door" policies and any form of retaliation is strictly
prohibited. We take all reports of suspected violations of the Code of Conduct
and unethical behavior seriously and will take appropriate actions to correct
the situation.
Environmental
As a global provider of staffing services, Volt does not produce or manufacture
any products or materials and therefore our environmental impact has been
relatively small. Nevertheless, we understand that certain areas of our business
and operations have an impact on the environment and we are dedicated to
promoting internal sustainability initiatives and keeping our ecological
footprint to a minimum. In addition to certain on-going internal initiatives,
including office waste reduction practices such as printing less and recycling
furniture and electronics, we were able to take advantage of more impactful
opportunities using actions implemented during the COVID-19 pandemic. During
fiscal 2020, we were able to quickly shift to a fully remote in-house workforce
and we continue to have the majority of our in-house employees work remotely
thereby reducing the environmental impact of commuting and office energy
consumption. This work model has allowed us to further decrease our carbon
footprint by exiting and consolidating certain
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offices. We have also been able to reduce certain business travel by using
virtual and collaborative tools whenever possible, further limiting our
ecological impact. Volt is committed to enhancing its environmental protection
measures and continuing to promote an eco-friendly culture both internally and
in the communities it serves.
COVID-19 and Our Response
The global spread of the COVID-19 pandemic created significant volatility,
uncertainty and global macroeconomic disruption. Our business experienced
significant changes in revenue trends at the mid-point of our second quarter of
fiscal 2020 through the beginning of our third quarter of fiscal 2020, as a
number of countries and U.S. federal, state and local governments issued varying
levels of stay-at-home orders and other restrictions and mandates. Our business
was largely converted to a remote in-house workforce and remained open as we
provided key services to essential businesses, both remotely and onsite at our
customers' locations. Beginning in the second half of fiscal 2020, revenue
steadily increased as a result of a combination of existing customers returning
to work, expanding business with existing customers and winning new customers.
We continue to operate on a hybrid-model with certain locations fully staffed
and others opening on a limited voluntary basis. Our COVID-19 Incident Response
Team continues to monitor the most up-to-date developments and safety standards
from the Centers for Disease Control and Prevention , World Health Organization ,
Occupational Safety and Health Administration and other key authorities to
determine an appropriate response for our employees and clients. While this team
is continuing to monitor COVID-19 developments globally, we remain focused on
the regulations and vaccine requirements in the U.S. to ensure we are complying
with all relevant regulations. We are also monitoring developments related to
vaccine mandates from certain customers.
We expect the global business environment will continue to operate in various
stages of economic turbulence. We are encouraged by the increase in order
activity and demand throughout the Company, however, the pace of such increase
may be impacted if a resurgence in COVID-19 infections leads to additional
disruptions, government mandates or increased lack of available talent to match
our customers' demands.
For additional discussion of the uncertainties and business risks associated with COVID-19, see Part I, “Item 1A. Risk Factors” of the 2021 Form 10-K.
Critical Accounting Estimates
Casualty Insurance Program
We purchase workers' compensation insurance through mandated participation in
certain state funds and the experience-rated premiums in these state plans
relieve us of any additional liability. Liability for workers' compensation in
all other states as well as automobile and general liability is insured under a
paid loss deductible casualty insurance program for losses exceeding specified
deductible levels and we are financially responsible for losses below the
specified deductible limits. The casualty program is secured by a letter of
credit against our financing arrangement ("DZ Financing Program") with DZ Bank
AG Deutsche Zentral-Genossenschaftsbank ("DZ Bank ") of $20.9 million as of
January 30, 2022 .
We recognize expenses and establish accruals for amounts estimated to be
incurred, both reported and not yet reported, policy premiums and related legal
and other claims administration costs. We develop estimates for claims as well
as claims incurred but not yet reported using actuarial principles and
assumptions based on historical and projected claim incidence patterns, claim
size and the length of time over which payments are expected to be made.
Actuarial estimates are updated as loss experience develops, additional claims
are reported or settled and new information becomes available. Any changes in
estimates are reflected in operating results in the period in which the
estimates are changed. Depending on the policy year, adjustments to final
expected paid amounts are determined through the ultimate life of the claim. At
January 30, 2022 and October 31, 2021 , the casualty insurance liability was
$14.2 million and $13.9 million , respectively.
RECENT DEVELOPMENTS
OnFebruary 4, 2022 , we reported that our Chief Financial Officer,Herbert Mueller , is currently unable to perform his duties due to a medical illness and will temporarily step away from his role as Chief Financial Officer. InMr. Mueller's absence, the Company's former Chief Financial Officer,Paul Tomkins , will serve as Interim Chief Financial Officer, effectiveFebruary 4, 2022 , and will assume the day-to-day responsibilities of such role until further notice. The Company andVega Consulting, Inc. ("Vega"), an affiliate of ACS Solutions, a global provider of information technology solutions and services, announced onMarch 14, 2022 , that Volt and Vega entered into a definitive merger agreement under which Volt will be acquired for$6.00 per share in cash. This per share purchase price represents a premium of 99% to the Company's closing stock price onMarch 11, 2022 . Vega will commence a tender offer no later thanMarch 25, 2022 , to acquire all outstanding shares of Volt for$6.00 per share in cash. The merger agreement was approved by Volt's board of directors, which recommends that Volt stockholders tender their shares in the tender offer. Additional information related to the Merger Agreement can be found within the Form 8-K filed by the Company onMarch 14, 2022 . 19 --------------------------------------------------------------------------------
Consolidated results by segment
Three months completed
North American International North Corporate and (in thousands) Total Staffing Staffing American MSP Other Eliminations Net revenue$ 226,928 $ 191,196 $ 26,018$ 9,709 $ 78 $ (73) Cost of services 191,835 163,145 20,800 7,921 42 (73) Gross margin 35,093 28,051 5,218 1,788 36 - Selling, administrative and other operating costs 34,976 21,409 4,280 815 8,472 - Restructuring and severance costs 591 67 70 - 454 - Impairment charge 23 - - - 23 - Operating income (loss) (497) 6,575 868 973 (8,913) - Other income (expense), net (569) Income tax provision 153 Net loss$ (1,219)
Three months completed
North American International North Corporate and (in thousands) Total Staffing Staffing American MSP Other Eliminations Net revenue$ 217,958 $ 184,216 $ 24,013$ 9,669 $ 119 $ (59) Cost of services 185,276 157,636 19,851 7,784 64 (59) Gross margin 32,682 26,580 4,162 1,885 55 - Selling, administrative and other operating costs 33,747 20,646 3,788 1,353 7,960 - Restructuring and severance costs 632 (241) (8) - 881 - Impairment charge 31 - - - 31 - Operating income (loss) (1,728) 6,175 382 532 (8,817) - Other income (expense), net (391) Income tax provision 327 Net loss$ (2,446)
Consolidated operating results (Q1 2022 vs. Q1 2021)
Net revenue in the first quarter of fiscal 2022 increased$8.9 million , or 4.1%, to$226.9 million from$218.0 million in the first quarter of fiscal 2021. The net revenue increase was primarily due to an increase in our North American Staffing segment of$7.0 million and an increase in our International Staffing segment of$2.0 million . Excluding the negative impact of foreign currency fluctuations of$0.8 million , net revenue increased$9.8 million , or 4.5%. Operating results in the first quarter of fiscal 2022 improved$1.2 million , to an operating loss of$0.5 million from$1.7 million in the first quarter of fiscal 2021. Excluding the restructuring and severance costs and impairment charges, operating results improved$1.2 million to operating income of$0.1 million . This increase in operating results of$1.2 million was primarily the result of improvements in our North American Staffing segment of$0.7 million , our International Staffing segment of$0.6 million and our North American MSP segment of$0.4 million , partially offset by a$0.5 million increase in operating loss in the Corporate and Other category. 20 --------------------------------------------------------------------------------
Operating results by segment (Q1 2022 vs. Q1 2021)
Net revenue
The North American Staffing segment revenue in the first quarter of fiscal 2022 increased$7.0 million , or 3.8%, to$191.2 million from$184.2 million in the first quarter of fiscal 2021. The increase is attributable to new business wins in a combination of retail and mid-market clients, combined with the expansion of business within existing clients and improvements in direct hire revenue. The International Staffing segment revenue in the first quarter of fiscal 2022 increased$2.0 million , or 8.3%, to$26.0 million from$24.0 million in the first quarter of fiscal 2021, primarily due to increased direct hire revenue in theUnited Kingdom andSingapore , as well as increases in other staffing business inFrance ,Belgium and theUnited Kingdom . Excluding the negative impact of foreign exchange rate fluctuations of$0.8 million , revenue increased$2.8 million , or 12.3%.
Revenues from the North American MSP segment in the first quarter of fiscal 2022 were flat compared to the first quarter of fiscal 2021. The slight improvement was mainly due to increased demand in its payroll services business , partially offset by a decline in its managed services business.
Cost of services in the first quarter of fiscal 2022 increased$6.5 million , or 3.5%, to$191.8 million from$185.3 million in the first quarter of fiscal 2021. This increase is primarily due to a$5.5 million increase in our North American Staffing segment related to the 3.8% increase in revenue and slightly unfavorable workers' compensation development in the current period partially offset by an increase of$0.3 million in government wage subsidies. In addition, our International Staffing segment increased$0.9 million primarily as a result of the 8.3% increase in revenue. Gross margin as a percent of revenue in the first quarter of fiscal 2022 increased to 15.5% from 15.0% in the first quarter of fiscal 2021. Our North American Staffing segment gross margin as a percent of revenue increased primarily due to a mix of higher margin business, partially offset by slightly unfavorable workers' compensation development in the current quarter. Our International Staffing segment gross margin as a percent of revenue primarily increased due to an increase in direct hire revenue. Our North American MSP segment gross margin as a percent of revenue decreased primarily due to the mix of business. Government wage subsidies accounted for 40 basis points of the increase in the first quarter of fiscal 2022 compared to 30 basis points in the first quarter of fiscal 2021.
Selling, administrative and other operating expenses
Selling, administrative and other operating costs in the first quarter of fiscal 2022 increased$1.3 million , or 3.6%, to$35.0 million from$33.7 million in the first quarter of fiscal 2021. The increase was primarily due to$0.7 million in labor as a result of changes in headcount and$0.5 million in equity compensation, partially offset by an increase in government wage subsidies of$1.4 million . In addition, there was an increase in professional fees of$0.8 million and depreciation expense of$0.3 million . As a percent of revenue, selling, administrative and other operating costs were 15.4% and 15.5% in the first quarter of fiscal 2022 and 2021, respectively.
Restructuring and redundancy costs
Restructuring and severance costs remained consistent at$0.6 million in both the first quarter of fiscal 2022 and 2021. Restructuring and severance costs in the first quarter of fiscal 2022 were primarily due to$0.5 million in ongoing costs of facilities exited in fiscal 2020. Restructuring and severance costs in the first quarter of fiscal 2021 primarily included$0.3 million of severance costs resulting from the elimination of certain positions as part of our continued efforts to reduce costs and$0.6 million related to the ongoing costs of facilities exited in fiscal 2020 partially offset by a$0.3 million lease termination gain. Other Income (Expense), net Other expense in the first quarter of fiscal 2022 increased$0.2 million , to$0.6 million from$0.4 million in the first quarter of fiscal 2021 due to an increase in non-cash foreign exchange losses primarily on intercompany balances.
Provision for income tax
The income tax provision of
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CASH AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows generated from operations and proceeds from the DZ Financing Program. Both operating cash flows and borrowing capacity under our financing arrangement are directly related to the levels of accounts receivable generated by our business. Our primary capital requirements include funding working capital, operating lease obligations and software-related expenditures. We define our working capital as cash plus trade accounts receivable minus current liabilities. Our working capital requirements consist primarily of payroll, employee-related benefits and employment-related tax payments for our contingent staff and in-house employees and trade payables, offset by collections of customer receivables. Our most significant current asset is trade accounts receivable, which are generally on 15 - 45 day credit terms, and our most significant current liabilities are payroll related costs, which are generally paid weekly. Consequently, as the demand for our services increases, we generally see an increase in our working capital requirements, as we continue to pay our contingent employees on a weekly basis while the related accounts receivable is outstanding for much longer, which may result in a decline in operating cash flows. Conversely, as the demand for our services declines, we generally see a decrease in our working capital needs, as the existing accounts receivable are collected and not replaced at the same level. This may result in an increase in our operating cash flows; however, any such increase would not be expected to be sustained in the event that an economic downturn continued for an extended period. Our business is subject to seasonality with our first fiscal quarter billings typically the lowest due to the holiday season and generally increasing in the third and fourth fiscal quarters when our customers increase the use of contingent labor. Accordingly, the first and fourth quarters of our fiscal year are generally the strongest for operating cash flows. We manage our cash flow and related liquidity on a global basis. As mentioned, we fund payroll, taxes and other working capital requirements using cash generated by operating activities supplemented as needed from our borrowings. Our weekly payroll payments inclusive of employment-related taxes and payments to vendors are approximately$16.0 -$17.0 million . We generally target minimum global liquidity to be 1.5 times our average weekly requirements taking into account seasonality and cyclical trends. We also maintain minimum effective cash balances in foreign operations and use a multi-currency netting and overdraft facility for our European entities to further minimize overseas cash requirements. We believe our cash flow from operations, as well as our borrowing availability under our financing program, will be sufficient to meet our cash needs for the next twelve months based on current business plans. Our capital allocation strategy is focused on strengthening our balance sheet and financial flexibility, as well as continuing to invest in our growth and profitability initiatives. This strategy includes effectively managing working capital to maximize operational efficiency, re-investing in our core growth initiatives, in both technology enhancements and sales and recruiting talent. These priorities demonstrate our ongoing commitment to Volt shareholders as we continue to execute on our overall strategic plan and return to sustainable profitability.
End of the first financial quarter
Our available liquidity and capital resources are influenced by four key elements: cash, including cash equivalents and restricted cash, operating activities, investing activities and financing activities, as shown below. below compared to the previous year.
From
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):
Three Months
Ended
January 30, 2022 January 31, 2021
Net cash used in operating activities $ (11,916) $
(6,499)
Net cash used in investing activities (641)
(963)
Net cash used in financing activities (16)
(166)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (597)
(13)
Net decrease in cash, cash equivalents and restricted cash $ (13,170)$ (7,641) 22
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Cash Flow – Operating Activities
The net cash used in operating activities in the three months endedJanuary 30, 2022 increased$5.4 million from the cash used in operating activities in the three months endedJanuary 31, 2021 . This increase resulted primarily from a$6.6 million increase in cash used in operating assets and liabilities, primarily from a$13.1 million payment made towards deferred tax payments (discussed below), partially offset by an increase related to customer receipts and vendor payments. This increase in cash used in operating activities was partially offset by a decrease in net loss of$1.2 million . Cash generated from operations was supplemented by the enactment of laws providing COVID-19 relief, most notably the CARES Act which allowed for the deferral of payments of the Company'sU.S. social security taxes betweenMarch 27, 2020 andDecember 31, 2020 . As a result,$26.2 million of employer payroll tax payments were deferred with$13.1 million paid onJanuary 3, 2022 and the remaining amounts payable with theDecember 31, 2022 tax payment inJanuary 2023 . In addition, certain state governments have delayed payment of various state payroll taxes for a shorter period of time. State payroll taxes of approximately$4.4 million deferred from the fourth quarter of fiscal 2021 were paid beginning in the first quarter of fiscal 2022. The Company's payment of approximately$5.1 million of state payroll taxes will be deferred from the first quarter of fiscal 2022 with payments scheduled to begin in the second quarter of fiscal 2022. Additionally in fiscal 2021, we determined that we were eligible for the employee retention tax credit ("ERTC") under the CARES Act for certain wages paid throughSeptember 30, 2021 , as our operations were fully or partially suspended due to government orders enacted in response to the COVID-19 pandemic. These credits reduced our payroll tax payments during fiscal 2021 through the first half of fiscal 2022 by$12.2 million and were treated as government wage subsidies.
Cash Flow – Investing Activities
The net cash used in investing activities in the three months endedJanuary 30, 2022 was$0.6 million , as a result of purchases of property, equipment and software primarily relating to our investment in updating our business processes, back-office financial suite and information technology tools. The net cash used in investing activities in the three months endedJanuary 31, 2021 was$1.0 million , principally for the purchases of property, equipment and software.
Cash flow – Financing activities
The net cash used in financing activities was minimal in the three months endedJanuary 30, 2022 . The net cash used in financing activities in the three months endedJanuary 31, 2021 was$0.2 million as a result of debt issuance costs.
Funding program
The DZ Financing Program is fully collateralized by certain receivables of the Company that are sold to a wholly-owned, consolidated, bankruptcy-remote subsidiary. To finance the purchase of such receivables, that subsidiary may request thatDZ Bank make loans from time-to-time to that subsidiary which are secured by liens on those receivables. The Maximum Facility Amount, as defined in the DZ Financing Program is$100.0 million . InDecember 2020 , the Company amended the DZ Financing Program, which was originally executed onJanuary 25, 2018 . The modifications to the agreement were to (1) extend the Amortization Date, as defined in the DZ Financing Program, fromJanuary 25, 2023 toJanuary 25, 2024 ; (2) extend the Facility Maturity Date, as defined in the DZ Financing Program, fromJuly 25, 2023 toJuly 25, 2024 ; (3) revise an existing covenant to maintain positive net income in any fiscal year ending after 2020 to any fiscal year ending after 2021; (4) replace the existing TangibleNet Worth ("TNW") covenant requirement, as defined in the DZ Financing Program, to a minimum TNW of$20.0 million through the Company's fiscal quarter ending on or aboutJuly 31, 2021 and$25.0 million in each quarter thereafter; and (5) revise the eligibility threshold for the receivables of a large North American Staffing customer from 5% of eligible receivables to 8%, which increased our overall availability under the Program by$1.0 -$3.0 million . All other terms and conditions remained substantially unchanged. Loan advances may be made under the DZ Financing Program throughJanuary 25, 2024 and all loans will mature no later thanJuly 25, 2024 . Loans will accrue interest (i) with respect to loans that are funded through the issuance of commercial paper notes, at the CP rate, and (ii) otherwise, at a rate per annum equal to adjusted LIBOR. The CP rate will be based on the rates paid by the applicable lender on notes it issues to fund related loans. Adjusted LIBOR is based on LIBOR for the applicable interest period and the rate prescribed by theBoard of Governors of theFederal Reserve System for determining the reserve requirements with respect to Eurocurrency funding. If an event of default occurs, all loans shall bear interest at a rate per annum equal to the prime rate (the federal funds rate plus 3%) plus 2.5%. 23 -------------------------------------------------------------------------------- The DZ Financing Program also includes a letter of credit sub-facility with a sub-limit of$35.0 million . As ofJanuary 30, 2022 , the letter of credit participation was$22.1 million inclusive of$20.9 million for the Company's casualty insurance program and$1.2 million for the security deposit required under certain real estate lease agreements. The DZ Financing Program contains customary representations and warranties as well as affirmative and negative covenants. The agreement also contains customary default, indemnification and termination provisions. The DZ Financing Program is not an off-balance sheet arrangement, as the bankruptcy-remote subsidiary is a 100%-owned consolidated subsidiary of the Company. The Company is subject to certain financial and portfolio performance covenants under the DZ Financing Program, including (1) a minimum TNW, as defined in the DZ Financing Program, of$20.0 million through the Company's fiscal quarter ending on or aboutJuly 31, 2021 and$25.0 million in each quarter thereafter; (2) positive net income in any fiscal year ending after 2021; (3) maximum debt to TNW ratio of 3:1; and (4) a minimum of$15.0 million in liquid assets, as defined in the DZ Financing Program. AtJanuary 30, 2022 , the Company had outstanding borrowings under the DZ Financing Program of$60.0 million . Borrowing availability, as defined under the DZ Financing Program, was$2.7 million and global liquidity was$49.6 million atJanuary 30, 2022 .
Our DZ financing program is subject to termination upon certain events of default, such as breach of covenants, including financial covenants. AT
The following table shows our global cash and liquidity levels at the end of our last five fiscal quarters (in thousands):
Global liquidity
January 31, 2021 May 2, 2021
Cash and cash equivalents (a) $40,062
$49,595 $71,373 $54,864
Total outstanding debt $60,000
60,000 $ 60,000 $ 60,000 Cash in banks (b)(c) $ 36,962$ 39,288 $ 43,076 $ 52,938 $ 46,930 DZ Financing Program 2,225 2,868 3,990 6,046 2,657 Global liquidity 39,187 42,156 47,066 58,984 49,587 Minimum liquidity threshold 15,000 15,000 15,000 15,000 15,000 Available liquidity $ 24,187$ 27,156 $ 32,066 $ 43,984 $ 34,587 a.Per financial statements. b.Amount generally includes outstanding checks. c.Amounts in the USB collections account are excluded from cash in banks as the balance is included in the borrowing availability under the DZ Financing Program. As ofJanuary 30, 2022 , the balance in the USB collections account included in the DZ Financing Program availability was$7.5 million .
Liquidity outlook
As previously noted, our primary sources of liquidity are cash flows from
operations and proceeds from our financing arrangements. Both operating cash
flows and borrowing capacity under our financing arrangements are directly
related to the levels of accounts receivable generated by our businesses. Our
level of borrowing capacity under the DZ Financing Program increases or
decreases in tandem with any increases or decreases in accounts receivable based
on revenue fluctuations.
While we believe our cash provided by operating activities and borrowing
availability under the DZ Financing Program will be sufficient to meet our
operating working capital and capital expenditure requirements at a minimum for
the next twelve months, the extent to which any on-going or resurgence of
COVID-19 related impacts could affect our business, financial condition, results
of operations and cash flows in the short- and medium-term cannot be predicted
with certainty. We may also face unexpected costs or an adverse impact on our
business operations in connection with government mandated COVID-19
vaccine-related policies and procedures. Any of the above could have a material
adverse effect on our business, financial condition, results of operations and
cash flows and require us to seek additional sources of liquidity and capital
resources.
Many governments in countries and territories in which we do business have
announced that certain payroll, income and other tax payments may be deferred
without penalty for a certain period of time as well as providing other cash
flow related relief packages. As noted above, we determined that we qualify for
the payroll tax deferral under the CARES Act which allows us to delay payment of
the employer portion of payroll taxes and we are evaluating whether we qualify
for certain employment tax credits. If we qualify for such
24
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credits, the credits will be treated as government wage subsidies which will
offset related operating expenses. We continue to monitor these relief packages
to take advantage of all of those which are available to us.
Entering fiscal 2022, we have significant tax benefits including federal net
operating loss ("NOL") carryforwards of $210.0 million , U.S. state NOL
carryforwards of $226.3 million , international NOL carryforwards of $8.3 million
and federal tax credits of $53.3 million , which are fully reserved with a
valuation allowance which we will be able to utilize against future profits. As
of October 31, 2021 , the U.S. federal NOL carryforwards will expire at various
dates between 2031 and 2038 (with some indefinite), the U.S. state NOL
carryforwards will expire at various dates beginning in 2022 (with some
indefinite), the international NOL carryforwards will expire at various dates
beginning in 2022 (with some indefinite) and federal tax credits will expire
between 2022 and 2040.
In addition to our discussion and analysis surrounding our liquidity and capital
resources, our significant contractual obligations and commitments as of January
30, 2022 , include:
• Debt securities and interest payments – From
• Lease obligations – From
•Software-Related Expenditures - As ofJanuary 30, 2022 , we had contractual commitments for software-related expenditures of$3.7 million . We anticipate capital expenditures in fiscal 2022 of approximately$4.0 -$5.0 million as we continue to support our strategic initiatives through improved technology, as necessary. While the majority of our software-related contractual obligations does not currently extend beyond fiscal 2022, we anticipate annual payments of approximately$5.5 million for the on-going use of our core technology. •Casualty Insurance - As ofJanuary 30, 2022 , we had accrued casualty claims of$14.2 million under our Casualty Insurance Program. While we cannot accurately predict future insurance claim liability, we estimate our related expenditures in fiscal 2022 to be in the range of$8.0 -$11.0 million , based on historical data.
Off-balance sheet arrangements
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