VOLT Volt Information Sciences, Inc. - 10-K

ITEM 1A.     RISK FACTORS

Risk Factors

We maintain a risk management program which incorporates assessments by our officers, senior management and board of directors, as periodically updated. The following risks have been identified. You should carefully consider these risks along with the other information contained in this report. The following risks could materially and adversely affect our business and, as a result, our financial condition, results of operations and the market price of our common stock. Other risks and uncertainties not known to us or that we currently do not recognize as material could also materially adversely affect our business and, as a result, our financial condition, results of operations and the market price of our common stock.

Risks Related to the Company’s Industry and Business Environment

Our business, results of operations and financial condition has been and may continue to be adversely impacted by global public health epidemics, including the strain of coronavirus known as COVID-19, and future adverse impacts could be material and difficult to predict

The global spread of COVID-19, which was declared a global pandemic by the World Health Organization on March 11, 2020, has created significant volatility, uncertainty and global macroeconomic disruption due to related government actions, non-governmental agency recommendations and public perceptions and disruption in global economic and labor market conditions. These effects have had, and could in the future have, an adverse impact on our business, including reduced demand for our services, worker absences, client shutdowns and reduced operations. Additionally, adverse changes in economic or operating conditions impacting our estimates and assumptions can result in the impairment of our goodwill or long-lived assets, including our lease right-of-use assets. In fiscal 2020, impairment charges were recorded on certain of our lease assets as a result of COVID-19 related actions. In fiscal 2021, we continued to experience the negative impacts of the COVID-19 crisis, particularly related to the impact of labor shortages and wage inflation, due in part to a certain portion of the workforce not returning to the labor market in many industries, as well as market concerns about the COVID-19 variants. In addition, the global pandemic has resulted in a significant number of new rules and regulations, the cost of compliance and monitoring of which may have a continued impact on our business and existing resources.

The future impact of the pandemic on global and local economies will continue to depend on future developments such as the emergence of future variant strains of COVID-19, the availability and distribution of effective medical treatments and vaccines, vaccination rates, as well as government-imposed restrictions or mandates. Further, any new or tightened government-imposed restrictions or mandates on the conduct of business, including vaccination mandates, could adversely impact our business, liquidity and results of operations.

Our results of operations and liquidity could be adversely impacted by economic conditions affecting our clients

Our business depends on the overall demand for labor and on the economic health of current and prospective clients. The spread of COVID-19 and resulting restrictions and labor shortages across the United States are having, and may continue to have, a negative impact on the operating results of the Company. As our clients respond to the effects of efforts to address the consequences of the pandemic, including the measures taken at various levels of government to contain the virus ’ spread, we expect that our ability to add new customers, as well as to grow revenues from existing customers, will be adversely affected due to economic slowdown, business closures, labor shortages and reductions in hours worked.

Any significant weakening of the economy including the worsening of the ongoing labor shortage and rise in inflation, as well as the ongoing uncertainty related to the pandemic, may adversely impact our business. These conditions may impact our ability to meet the increasing demand for our services across certain markets. Additionally, in response to the pandemic and further heightened by the current labor shortages, many businesses are looking at how to accelerate deployment of new technologies in their operations to minimize costs, improve productivity and reduce dependency on human capital, which may reduce demand for our services and impact our operations. Across many industries we serve, labor costs have risen dramatically in recent months, which could result in compression on our operating margins in situations in which we are not able to pass those costs on to our customers.

Our working capital is primarily in the form of trade receivables which generally increase as sales increase. Our working capital requirements are primarily generated from employee payroll which is paid weekly and customer accounts receivable which is generally outstanding for longer periods. Since receipts from customers lag payroll payments to temporary employees, working capital requirements increase and operating cash flows decrease substantially in periods of growth. During periods of economic decline or uncertainty, our clients may slow the rate at which they pay their vendors, or they may become unable to pay their obligations. In addition, some clients have begun to impose more challenging billing terms, which increases the length of time

before we receive payment for services provided. If our clients become unable to pay amounts owed to us or pay us more slowly, our cash flow, liquidity, and profitability may be impacted. Conversely, when economic activity slows, working capital requirements may substantially decrease and operating cash flows increase. Such increases dissipate over time if the economic downturn continues for an extended period.

Our business depends on uninterrupted service to clients

Our operations depend on our ability to protect our facilities, computer and telecommunication equipment, and software systems against damage or interruption from fire, power loss, natural disasters, weather conditions, telecommunications interruption and other similar events. Additionally, the occurrence of any such events may cause our employees to miss work and interrupt delivery of our service, potentially resulting in a loss of revenue. While we have enhanced controls and recovery plans in place, we have a high concentration of operations in high-risk geographies, such events could have a materially adverse effect on our business, financial condition and results of operations, if recovery plans are unsuccessful.

Risks Related to the Company’s Capital Structure and Finances

Our credit facility contains financial covenants that may limit our ability to take certain actions

We remain dependent upon our financing agreement which includes certain financial covenants. These covenants could constrain the execution of our business strategy and growth plans. Our ability to continue to meet these financial covenants is not assured. If we default under any of these requirements, our lenders could restrict our ability to access funds in our customer collections account, declare all outstanding borrowings, accrued interest and fees due and payable, or significantly increase the cost of the facility. Under such circumstances, there could be no assurance that we would have sufficient liquidity to repay or refinance the indebtedness at favorable rates or at all. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and rates. As of October 31, 2021, we were in compliance with all covenant requirements.

Turmoil in the financial markets could limit our ability to fully utilize available credit, which could negatively affect our operations and limit our liquidity

We rely on financing for future working capital, capital expenditures and other corporate purposes. Turmoil in financial markets may create additional risks to our business in the future which may limit our ability to fully utilize available credit provided by our financing program. Volatility in the credit markets or a contraction in the availability of credit or higher borrowing costs due to increasing interest rates may make it more difficult for us to meet our working capital requirements and could have a material adverse effect on our business, results of operations and financial position.

Our ability to retain acceptable insurance coverage limits at commercially reasonable cost and terms may adversely impact our financial results

We cannot be certain we will be able to obtain appropriate types or levels of insurance in the future, that adequate replacement policies will be available on acceptable terms, if at all, and at commercially reasonable cost, or that the companies from which we have obtained insurance will be able to pay claims we make under such policies. Our coverage under certain insurance policies is limited and the losses that we may face may not be covered, may be subject to high deductibles or may exceed the limits purchased.

Some customers require extensive insurance coverage and request insurance endorsements that are not available under standard monoline policies. There can be no assurance that we will be able to negotiate acceptable compromises with customers or negotiate appropriate changes in our insurance contracts. This may adversely affect our ability to take on new customers or accepted changes in insurance terms with existing customers.

Risks Related to the Company’s Operations

The loss of major customers could adversely impact our business

We experience revenue concentration with large customers within certain operating segments, as well as concentrations of interrelated customers. Although we have no customer that represents over 10% of our consolidated revenues, there are customers that exceed 10% of revenues within both the International Staffing and North American MSP segments. The deterioration of the financial condition or significant change to the business or staffing model of these customers or multiple customers in a similar industry, or similar customers that are interdependent could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations and ability to grow may be negatively affected if we are not able to keep pace with rapid changes in technology

The Company’s success depends on our ability to keep pace with rapid technological changes in the development, implementation and operation of our services and solutions. The increased use of mobile technology is attracting additional technology-oriented companies and resources to our industry. Our clients and candidates increasingly demand technological innovation to improve the entire cycle of our services so we must continue to invest in new technology in order to meet these needs and remain competitive in the industry. Acquiring and implementing new technology for our business may require us to incur significant expenses and capital costs and if we do not sufficiently invest in and implement new technology, or evolve our business at sufficient speed and scale, our business results may decline materially.

Unexpected changes in workers’ compensation and other insurance plans may negatively impact our financial condition

We purchase workers’ compensation insurance through mandated participation in certain state funds and the experience-rated premiums in these state plans relieve the Company 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. We are financially responsible for losses below the specified deductible limits.

The Company is self-insured for a portion of its medical benefit programs. The liability for the self-insured medical benefits is limited on a per-claimant basis through the purchase of stop-loss insurance. The Company’s retained liability for the self-insured medical benefits is determined by utilizing actuarial estimates of expected claims based on statistical analysis of historical data.

Unexpected changes related to our workers’ compensation, medical and disability benefit plans may negatively impact our financial condition. Changes in the severity and frequency of claims, state laws regarding benefit levels and allowable claims, actuarial estimates, or medical cost inflation could result in costs that are significantly higher. If future claims-related liabilities increase beyond our expectations, or if we must make unfavorable adjustments to accruals for prior accident years, our costs could increase significantly. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover the increased costs that result from any changes in claims-related liabilities.

Many of our contracts provide no minimum purchase requirements, are cancellable during the term, or both

In our staffing services business, most of our contracts, even those with multi-year terms, provide no assurance of any minimum amount of revenue and under many of these contracts we still must compete for each individual placement or project. In addition, many of our contracts contain cancellation provisions under which the customer can cancel the contract at any time or on relatively short notice, even if we are not in default under the contract. Therefore, these contracts do not provide the assurances that typical long-term contracts often provide and are inherently uncertain with respect to the amount of revenues and earnings we may realize.

Risks Related to the Company’s Information Technology, Cybersecurity and Data Protection

We could incur liabilities, or our reputation could be damaged, from a cyber-attack or improper disclosure or loss of sensitive or confidential company, employee, associate, candidate or client data, including personal data

Our business involves the use, storage and transfer of certain information about our full-time and contingent employees, customers and other individuals. We rely upon multiple information technology systems and networks, some of which are web-based or managed by third parties, to process, transmit and store electronic information and to manage or support a variety of critical business processes and activities. This information contains sensitive or confidential employee and customer data, including personally identifiable information. The secure and consistent operation of these systems, networks and processes is critical to our business operations. Our systems and networks have been, and will continue to be, the target of cyber-attacks, computer viruses, worms, phishing attacks, ransomware, malicious software programs and other cyber-security incidents that could result in the unauthorized release, gathering, monitoring, use, loss or destruction of our customers’ or employees’ sensitive and personal data. Successful cyber-attacks or other data breaches, as well as risks associated with compliance with applicable data privacy laws, could harm our reputation, divert management attention and resources, increase our operating expenses due to the employment of consultants and third-party experts and the purchase of additional infrastructure and/or subject us to legal liability, resulting in increased costs and loss of revenues.

While we proactively safeguard our data and have enhanced security software and controls, it is possible that our security controls over sensitive or confidential data and other practices we and our third-party service providers follow may not prevent improper access to, or disclosure of, such information. Any such disclosure or security breach could subject us to significant monetary damages or losses, litigation, regulatory enforcement actions or fines. In addition, our liability insurance might not be sufficient in scope or amount to cover us against claims related to security breaches, social engineering, cyber-attacks and other related data disclosure, loss or breach.

As cyber-attacks increase in frequency and sophistication, our cyber-security and business continuity plans may not be effective in anticipating, preventing and effectively responding to all potential cyber-risk exposures. Further, data privacy is subject to frequently changing rules and regulations, which are not uniform and may possibly conflict in jurisdictions and countries where we provide services. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace.

Additionally, our employees and certain of our third-party service providers may have access or exposure to sensitive customer data and systems. The misuse or unauthorized disclosure of information could result in contractual and legal liability for us due to the actions or inactions of our employees or vendors.

We rely extensively on our information technology systems which are vulnerable to damage and interruption

We rely on information technology networks and systems, including the Internet and cloud services, to process, transmit and store electronic and financial information, manage a variety of business processes and activities and comply with regulatory, legal and tax requirements. We depend on our information technology infrastructure for digital marketing activities, collection and retention of customer data, employee information and for electronic communications among our locations, personnel, customers and suppliers around the world. While we take various precautions and have enhanced controls around our systems, our information technology systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. Our sales, financial condition and results of operations may be materially and adversely affected and we could experience delays in reporting our financial results, if our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner.

Risks Related to Our Common Stock

Our stock price has experienced volatility and, as a result, investors may not be able to resell their shares at or above the price they paid for them

Our stock price may fluctuate as a result of a variety of factors, including:

• our failure to meet the expectations of the investment community or our estimates of our future results of operations;

• industry trends and the business success of our customers;

• loss of one or more key customers;

• strategic moves by our competitors, such as product or service announcements or acquisitions;

• regulatory developments;

• rising labor costs that affect our operating margins;

• litigation;

• general economic conditions;

• other domestic and international macroeconomic factors unrelated to our performance; and

• any of the other previously noted risk factors.

The stock market has experienced and is likely to experience in the future, volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations, as well as our relatively low daily trading volume, may also adversely affect the market price of our common stock.

Certain shareholders, whose interests may differ from those of other shareholders, own a significant percentage of our common stock and may be able to exercise significant influence over Volt

Ownership of a significant amount of our outstanding common stock is concentrated among certain shareholders, including related family members and certain funds. Although there can be no assurance as to how these shareholders will vote, if they were to vote in the same manner, certain combinations of such persons might be able to control or materially influence the

outcome of advisory votes or matters requiring shareholder approval. The interests or motivations of such individual shareholders may not align with those of our shareholders generally.

Our business could be negatively affected as a result of a potential proxy contest for the election of directors at our annual meeting or other shareholder activism

A proxy contest would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and the Board of Directors. The potential of a proxy contest or other shareholder activism could interfere with our ability to execute our strategic plan, give rise to perceived uncertainties as to our future direction, adversely affect our relationships with key business partners, result in the loss of potential business opportunities or make it more difficult to attract and retain qualified personnel, any of which could materially and adversely affect our business and operating results.

The market price of our common stock could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties related to stockholder activism.

New York State law, our Articles of Incorporation and By-laws contain provisions that could make corporate ownership changes at Volt more difficult

Certain provisions of New York State law and our articles of incorporation and by-laws could have the effect of delaying or preventing a third party from acquiring Volt, even if a change in control would be beneficial to our shareholders.

The provisions of the New York Business Corporation Law, to which we are subject, require the affirmative vote of the holders of two-thirds of all of our outstanding shares entitled to vote to adopt a plan of merger or consolidation between us and another entity or to approve any sale, lease, exchange or other disposition of all or substantially all of our assets not made in the ordinary course of business. Accordingly, our substantial shareholders, if they were to act together, could prevent approval of such transactions even if such transactions are in the best interest of our other shareholders.

In addition, our articles of incorporation and by-laws provide:

• an advance notice requirement for shareholder proposals and director nominees;

• that removal of directors shall only be for cause; and

• that vacancies on the Board of Directors be filled for the unexpired term by a majority vote of the remaining directors then in office.

General Risk Factors

The contingent staffing industry is very competitive with few significant barriers to entry

The markets for Volt’s staffing services are highly competitive with few barriers to entry. Our industry is large and fragmented, comprised of thousands of firms employing millions of people and generating billions of dollars in annual revenue. In most areas, no single company has a dominant share of the employment services market. Some of our competitors are larger than us, have substantial marketing and financial resources and may be better positioned in certain markets than we are. These companies may be better able than we are to attract and retain qualified personnel, to offer more favorable pricing and terms, or otherwise attract and retain the business that we seek. Any inability to compete effectively could adversely affect our business and financial results. Clients may also take advantage of low-cost alternatives including using their own in-house resources rather than engaging a third party. In addition, some of our staffing services customers, generally larger companies, are mandated or otherwise motivated to utilize the services of small or minority-owned companies rather than large corporations. There can be no assurance that we will be able to continue to compete effectively in our business segments.

We are dependent upon the quality of our human capital

Our operations are dependent upon our ability to attract and retain personnel, for temporary assignments and projects, as well as internally, including in the areas of maintenance and protection of our systems. The availability of such personnel is dependent upon a number of economic and demographic conditions. Our ability to fulfill customer requirements may be impeded by a scarcity of talent in the current labor markets and rising labor costs as well as by the potential impact of future vaccine mandates. As a result, we may find it difficult or costlier to hire such personnel in the face of competition from our competitors, which could directly impact our gross margins and overall results of operations.

We are subject to employment–related claims and losses, including class action lawsuits, which could have a material adverse effect on our business

Our staffing services business employs or engages individuals on a contingent basis and places them in a customer’s workplace. Our ability to control the customer’s workplace is limited and we risk incurring liability to our employees for injury (which can result in increased workers’ compensation costs) or other harm that they suffer in the scope of employment at the customer’s workplace or while under the customer’s control.

Additionally, we risk liability to our customers for the actions or inactions of our employees, including those individuals employed on a contingent basis that may cause harm to our customers or other employees. Such actions may be the result of errors and omissions in the application of laws, rules, policies and procedures, discrimination, retaliation, negligence or misconduct on the part of our employees, damage to customer facilities or property due to negligence, criminal activity and other similar claims. In addition, we may face claims related to violations of wage and hour regulations, Fair Credit Reporting Act violations and claims relating to the misclassification of independent contractors, among other types of claims. In some cases, we must indemnify our customers for certain acts of our employees and certain customers have negotiated broad indemnification provisions. We may also incur fines, penalties and losses that are not covered by insurance or negative publicity with respect to these matters. We have increased potential exposure to employment-related claims and litigation based on our concentration of business in higher regulation geographies. We maintain policies, procedures and guidelines to promote compliance with laws, rules, regulations and best practices applicable to our business, but there can be no assurances that these policies, procedures and guidelines will be effective or that we will not experience losses due to such risks.

Our operational results could be negatively impacted by currency fluctuations and other global business risks and regulations

Our global operations subject us to risks relating to our international business activities, including global economic conditions, fluctuations in currency exchange rates and numerous legal and regulatory requirements placed upon the Company’s international clients.

Variation in the economic condition or unemployment levels in any of the foreign countries in which the Company does business may severely reduce the demand for the Company’s services.

Our business is exposed to fluctuations in exchange rates. Our operations outside the United States are reported in the applicable local currencies and then translated into U.S. dollars at the applicable currency exchange rates for inclusion in our Consolidated Financial Statements. Exchange rates for currencies of these countries may fluctuate in relation to the U.S. dollar and these fluctuations may have an adverse or favorable effect on our operating results when translating foreign currencies into U.S. dollars.

In addition, the Company faces risks in complying with various foreign laws and technical standards and unpredictable changes in foreign regulations, including U.S. legal requirements governing U.S. companies operating in foreign countries, legal and cultural differences in the conduct of business, potential adverse tax consequences, difficulty in staffing and managing international operations.

We are additionally subject to numerous legal and regulatory requirements that prohibit bribery and corrupt acts. These include the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, as well as similar legislation in many of the countries and territories in which we operate. While we have training programs and appropriate internal controls in place, there can be no assurances that these will be effective to prevent and detect all potential business practices that are prohibited by our policies and these laws and regulations.

The United Kingdom’s (“U.K.”) referendum to exit from the European Union (“E.U.”) may continue to have uncertain effects and could adversely impact our business, results of operations and financial condition

As a result of a referendum in June 2016, the U.K. withdrew from the E.U. (“Brexit”) on January 31, 2020. It began a transition period in which to negotiate a new trading relationship for goods and services that ended on December 31, 2020. During the time since the June 2016 referendum, there have been periods of significant volatility in the global stock markets and currency exchange rates, as well as challenging market conditions in the U.K. On December 24, 2020, the U.K. and E.U. announced they had entered into a post-Brexit deal on certain aspects of trade and other strategic and political issues. Although we have not experienced any material disruptions in our business as a result of Brexit to date, the ultimate effects are still difficult to predict and adverse consequences concerning Brexit or the E.U. could include a decline in global economic conditions, instability in

global financial markets, political uncertainty and volatility in currency exchange rates, among others, any of which could have an adverse impact on our business operations and financial results.

New or increased government regulation, employment costs or taxes could have a material adverse effect on our business, especially for our contingent staffing business

Certain of our businesses are subject to licensing and regulation in some states and most foreign jurisdictions. There can be no assurance that we will be able to continue to comply with these requirements, or that the cost of compliance will not become material. Additionally, the jurisdictions in which we do or intend to do business may:

• create new or additional regulations that mandate additional requirements or prohibit or restrict the types of services that we currently provide;

• change regulations in ways that cause short-term disruption or impose costs to comply;

• impose new or additional employment costs that we may not be able to pass on to customers or that could cause customers to reduce their use of our services;

• require us to obtain additional licenses; or

• increase taxes (especially payroll and other employment-related taxes) or enact new or different taxes payable by the providers or users of services such as those offered by us, thereby increasing our costs, some of which we may not be able to pass on to customers or that could cause customers to reduce their use of our services especially in our staffing services, which could adversely impact our results of operations or cash flows.

From time to time, the staffing industry has come under criticism from unions, works councils, regulatory agencies and other constituents that maintain that labor and employment protections, such as wage and benefits regulations, are subverted when customers use contingent staffing services. Our business is dependent on the continued acceptance of contingent staffing arrangements as a source of flexible labor for our customers. If attitudes or business practices in some locations change due to pressure from organized labor, political groups or regulatory agencies, it could have a material adverse effect on our business, results of operations and financial condition. In some of our foreign markets, new and proposed regulatory activity may impose additional requirements and costs, which could have an adverse effect on our contingent staffing business.

Failure to maintain adequate financial and management processes and internal controls could lead to errors in our financial reporting

The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide a report from management to our shareholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, resource challenges and fraud. Due to these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. If we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, fail to meet our public reporting requirements in a timely fashion, be unable to properly report on our business and our results of operations, or be required to restate our financial statements. These circumstances could lead to a significant decrease in the trading price of our shares, or the delisting of our shares from the NYSE AMERICAN, which would harm our shareholders.

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto.

Note Regarding the Use of Non-GAAP Financial Measures

We have provided certain Non-GAAP financial information, which includes adjustments for special items and certain line items on a constant currency basis, as additional information for segment revenue, our consolidated net income (loss) and segment operating income (loss). These measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles (“GAAP”) and may be different from Non-GAAP measures reported by other companies. Our Non-GAAP measures are generally presented on a constant currency basis, and exclude (i) the impact of businesses sold or exited, (ii) the impact from the migration of certain clients from a traditional staffing model to a managed service model (“MSP transitions”) and (iii) the elimination of special items. Special items generally include impairments, restructuring and severance costs, as well as certain income or expenses which the Company does not consider indicative of the current and future period performance. We believe that the difference in revenue recognition accounting under each model of the MSP transitions could be misleading on a comparative period basis. We further believe that the use of Non-GAAP measures provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations because they permit evaluation of the results of operations without the effect of currency fluctuations or special items that management believes make it more difficult to understand and evaluate our results of operations.

Segments

Our reportable segments are (i) North American Staffing, (ii) International Staffing and (iii) North American MSP. All other business activities that do not meet the criteria to be reportable segments are aggregated with corporate services under the category Corporate and Other. Our reportable segments have been determined in accordance with our internal management structure, which is based on operating activities. We evaluate business performance based upon several metrics, primarily using revenue and segment operating income as the primary financial measures. We believe segment operating income provides management and investors a measure to analyze operating performance of each business segment against historical and competitors’ data, although historical results, including operating income, may not be indicative of future results as operating income is highly contingent on many factors including the state of the economy, competitive conditions and customer preferences.

We allocate all support-related costs to the operating segments except for costs not directly relating to our operating activities such as corporate-wide general and administrative costs. These costs are not allocated to individual operating segments because we believe that doing so would not enhance the understanding of segment operating performance and such costs are not used by management to measure segment performance.

We report our segment information in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 280, Segment Reporting (“ASC 280”), aligning with the way the Company evaluates its business performance and manages its operations.

Overview

We are a global provider of staffing services (traditional time and materials-based as well as project-based). Our staffing services consist of workforce solutions that include providing contingent workers, personnel recruitment services and managed staffing services programs supporting primarily administrative and light industrial (commercial) as well as technical, information technology and engineering (professional) positions. Our managed service programs (“MSP”) involves managing the procurement and on-boarding of contingent workers from multiple providers.

As of October 31, 2021, we employed approximately 15,400 people, including 14,300 contingent workers. Contingent workers are on our payroll for the length of their assignment. We operate in approximately 65 of our own locations and have an on-site presence in over 60 customer locations. Approximately 87% of our revenue is generated in the United States. Our principal international markets include Europe, Asia Pacific and Canada locations. The industry is highly fragmented and very competitive in all of the markets we serve.

COVID-19 and Our Response

The global spread of COVID-19, which was declared a global pandemic by the World Health Organization (“WHO”) on March 11, 2020, created significant volatility, uncertainty and global macroeconomic disruption. Our business experienced significant changes in revenue trends at the mid-point of our second quarter of fiscal 2020 as market conditions rapidly deteriorated and continued to decline through the beginning of our third quarter of fiscal 2020. Beginning in the second half of fiscal 2020 however, revenue increased sequentially as a result of a combination of existing customers returning to work, expanding business with existing customers and winning new customers.

Beginning in mid-March 2020, a number of countries and U.S. federal, state and local governments issued varying levels of stay-at-home orders requiring persons who were not engaged in essential activities and businesses as defined in those specific orders to remain at home or requiring reduced operations and capacity to comply with social distancing. Our first priority, with regard to the COVID-19 pandemic, was to ensure the health and safety of our employees, clients, suppliers and others with whom we partner in our business activities to continue our business operations in this unprecedented business environment. Our business was largely converted to a remote in-house workforce and remained open as we provided key services to essential businesses, both remotely and onsite at our customers’ locations.

We continue to operate on a hybrid-model with certain locations fully staffed and others opening on a limited voluntary basis. Our COVID-19 Incident Response Team, comprised of key senior leaders in the organization, continues to monitor the most up-to-date developments and safety standard from the Centers for Disease Control and Prevention, WHO, Occupational Safety and Health Administration and other key authorities to determine an appropriate response for our employees and clients. While this team is currently monitoring COVID-19 developments globally, we also remain focused on the regulations and vaccine requirements in 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.

Recent Developments

None

Consolidated Results of Operations and Financial Highlights (Fiscal 2021 vs. Fiscal 2020)

Results of Operations by Segment (Fiscal 2021 vs. Fiscal 2020)

Year Ended October 31, 2021

(in thousands)

Total

North American Staffing

International Staffing

North American

MSP

Corporate and Other

Eliminations

Net revenue

Cost of services

Gross margin

Selling, administrative and other operating costs

Restructuring and severance costs

Impairment charges

Operating income (loss)

Other income (expense), net

Income tax provision

Net income

Year Ended November 1, 2020

(in thousands)

Total

North American Staffing

International Staffing

North American

MSP

Corporate and Other

Eliminations

Net revenue

Cost of services

Gross margin

Selling, administrative and other operating costs

Restructuring and severance costs

Impairment charges

Operating income (loss)

Other income (expense), net

Income tax provision

Net loss

Results of Operations Consolidated (Fiscal 2021 vs. Fiscal 2020)

Net revenue in fiscal 2021 increased $63.3 million, or 7.7%, to $885.4 million from $822.1 million in fiscal 2020. The revenue increase was primarily due to increases in our North American Staffing segment of $49.7 million, our International Staffing segment of $11.7 million and our North American MSP segment of $1.4 million. Excluding the impact on net revenue of the positive foreign currency fluctuations of $6.6 million and $2.0 million related to MSP transitions, net revenue increased $58.7 million, or 7.1%.

Operating income in fiscal 2021 increased $34.2 million, or 116.5%, to $4.8 million from a loss of $29.4 million in fiscal 2020 primarily due to a $16.5 million decrease in impairment charges and an increase in revenue at improved margins. Excluding restructuring and severance costs and impairment charges, operating income in fiscal 2021 increased $17.9 million, or 182.5%. This increase in operating income of $17.9 million was primarily due to improved results in our North American Staffing segment of $15.9 million and our International Staffing segment of $2.6 million, partially offset by a decrease in our North American MSP segment of $0.8 million.

Results of Continuing Operations by Segments (Fiscal 2021 vs. Fiscal 2020)

Net Revenue

The North American Staffing segment revenue increased $49.7 million, or 7.2%, to $738.8 million in fiscal 2021 from $689.1 million in fiscal 2020. Excluding the impact of $2.0 million in revenue from MSP transitions, revenue increased $51.7 million, or 7.5%, in fiscal 2021. The increase is attributable to new business wins in a combination of retail and mid-market clients, combined with the expansion of business within existing clients. In addition, revenue was negatively impacted by the COVID-19 pandemic in fiscal 2020.

The International Staffing segment revenue increased $11.7 million, or 12.2%, to $107.0 million in fiscal 2021 from $95.3 million in fiscal 2020. Excluding the positive impact of foreign currency fluctuations of $6.7 million, International Staffing revenue increased by $5.0 million, or 4.9%, primarily due to increased staffing business in France and Singapore. In addition, revenue in the United Kingdom increased slightly as a result of higher payroll service business demand and direct hire revenue partially offset by lower contract revenue.

The North American MSP segment revenue increased $1.4 million, or 3.7%, to $39.3 million in fiscal 2021 from $37.9 million in fiscal 2020. The increase is primarily attributable to increased demand in its payroll service business partially offset by a decline in managed service business.

Cost of Services and Gross Margin

Cost of services in fiscal 2021 increased $47.7 million, or 6.9%, to $741.9 million from $694.2 million in fiscal 2020. The increase in our North American Staffing segment related to the 7.2% increase in revenue and a lower workers’ compensation adjustment in the current fiscal year partially offset by a $3.8 million benefit from government wage subsidies. In addition, our International Staffing segment increased $7.6 million primarily as a result of the 12.2% increase in revenue.

Gross margin as a percent of revenue in fiscal 2021 increased to 16.2% from 15.6% in fiscal 2020. Our North American Staffing segment gross margin as a percentage of revenue increased primarily due to lower employee-related costs and a mix of higher margin business. Our International Staffing segment gross margin as a percentage of revenue primarily increased due to improved contract margins and higher direct hire revenue. Our North American MSP segment gross margin as a percentage of revenue decreased primarily due to an increase in lower-margin payroll service business. Government wage subsidies accounted for 40 basis points of the increase in fiscal 2021.

Selling, Administrative and Other Operating Costs

Selling, administrative and other operating costs in fiscal 2021 decreased $2.3 million, or 1.6%, to $135.4 million from $137.7 million in fiscal 2020. The decrease was primarily due to $4.7 million in lower facility related costs due to consolidating our real estate footprint and $1.2 million in lower software and travel expenses. This decrease was partially offset by a $2.1 million increase in labor and related costs as a result of an increase in incentives on the higher sales volume and higher medical claims experience partially offset by government wage subsidies and changes in headcount in the current fiscal year. In addition, professional fees were $1.7 million higher in fiscal 2021. As a percentage of revenue, selling, administrative and other operating costs were 15.3% and 16.7% in fiscal 2021 and 2020, respectively.

Restructuring and Severance Costs

Restructuring and severance costs in fiscal 2021 increased $0.2 million to $2.8 million from $2.6 million in fiscal 2020. Restructuring and severance costs in fiscal 2021 were primarily due to $1.8 million of ongoing costs of facilities exited in the second half of fiscal 2020 and $1.0 million in severance costs. The costs in fiscal 2020 were primarily due to our continued efforts to reduce costs and to offset COVID-19 related revenue losses. This included our plan to leverage the global capabilities of our staffing operations based in Bangalore, India and offshore a significant number of strategically identified roles to this location.

Impairment Charges

Impairment charges in fiscal 2021 decreased $16.5 million to $0.4 million from $16.9 million in fiscal 2020. Impairment charges incurred in the current fiscal year primarily related to capitalized software. In fiscal 2020, impairment charges primarily related to consolidating and exiting certain leased office locations throughout North America based on where we could be fully operational and successfully support our clients and business operations remotely.

Other Income (Expense), net

Other expense in fiscal 2021 decreased $1.1 million, or 35.2%, to $2.1 million from $3.2 million in fiscal 2020 due to a decrease in interest expense as a result of lower rates and a decrease in non-cash foreign exchange losses primarily on intercompany balances.

Income Tax Provision

Income tax provision of $1.4 million and $1.0 million in fiscal 2021 and 2020, respectively, was primarily related to locations outside of the United States.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash flows generated from operations and proceeds from our financing agreement (“DZ Financing Program”) with DZ Bank AG Deutsche Zentral-Genossenschaftsbank (“DZ Bank”). Both operating cash flows and borrowing capacity under our financing arrangement are directly related to the levels of accounts receivable generated by our business. Our primary capital requirements include funding working capital, operating lease obligations and software-related expenditures.

We define our working capital as cash plus trade accounts receivable minus current liabilities. Our working capital requirements consist primarily of payroll, employee-related benefits and employment-related tax payments for our contingent staff and in-house employees and trade payables, offset by collections of customer receivables. Our operations are such that our most significant current asset is trade accounts receivable, which are generally on 15 - 45 day credit terms, and our most significant current liabilities are payroll related costs, which are generally paid weekly. Consequently, as the demand for our services increases, we generally see an increase in our working capital requirements, as we continue to pay our contingent employees on a weekly basis while the related accounts receivable is outstanding for much longer, which may result in a decline in operating cash flows. Conversely, as the demand for our services declines, we generally see a decrease in our working capital needs, as the existing accounts receivable are collected and not replaced at the same level. This may result in an increase in our operating cash flows; however, any such increase would not be expected to be sustained in the event that an economic downturn continued for an extended period.

Our business is subject to seasonality with our first fiscal quarter billings typically the lowest due to the holiday season and generally increasing in the third and fourth fiscal quarters when our customers increase the use of contingent labor. Accordingly, the first and fourth quarters of our fiscal year are generally the strongest for operating cash flows.

We manage our cash flow and related liquidity on a global basis. As mentioned, we fund payroll, taxes and other working capital requirements using cash generated by operating activities supplemented, as needed, from our borrowings. Our weekly payroll payments inclusive of employment-related taxes and payments to vendors are approximately $16.0 - $17.0 million. We generally target minimum global liquidity to be 1.5 times our average weekly requirements taking into account seasonality and cyclical trends. We also maintain minimum effective cash balances in foreign operations and use a multi-currency netting and overdraft facility for our European entities to further minimize overseas cash requirements. We believe our cash flow from operations, as well as our borrowing availability under our financing program, will be sufficient to meet our cash needs for the next twelve months based on current business plans.

Our capital allocation strategy is focused to strengthen our balance sheet and financial flexibility, as well as continue to invest in our growth and profitability initiatives. This strategy includes effectively managing working capital to maximize operational efficiency, re-investing in our core growth initiatives, in both technology enhancements and sales and recruiting talent. These priorities demonstrate our ongoing commitment to Volt shareholders as we continue to execute on our overall strategic plan and return to sustainable profitability.

Fiscal Year Ended October 31, 2021 compared to the Fiscal Year Ended November 1, 2020

Our liquidity and available capital resources are impacted by four key components: cash, including cash equivalents and restricted cash, operating activities, investing activities and financing activities, as shown below compared to the prior fiscal year.

As of October 31, 2021, our cash, cash equivalents and restricted cash totaled $76.6 million compared to $56.4 million as of November 1, 2020.

Cash flows from operating, investing and financing activities, as reflected in our Consolidated Statements of Cash Flows, are summarized in the following table:

For the Year Ended

(in thousands)

October 31, 2021

November 1, 2020

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net increase in cash, cash equivalents and restricted cash

Cash Flows – Operating Activities

The net cash provided by operating activities in fiscal 2021 was $23.9 million, an increase of $5.7 million from fiscal 2020. This increase resulted primarily from the $18.5 million improvement in operating results, net of impairment charges in fiscal 2021 and an increase from accounts payable and accrued expenses of $5.4 million, partially offset by a decrease from accounts receivable of $19.2 million.

In the second half of March 2020, we experienced a decline in the demand for our services due to the impact of the COVID-19 pandemic. As a result, our operating cash flow increased, and accounts receivable balances decreased as customer collections outpaced sales. However, as client demand for our services improved in the latter part of fiscal 2020 and continued to grow in fiscal 2021, our operating cash flows increased. This pattern could repeat itself and would not be sustainable in the event the pandemic continues at resurgence levels or an economic downturn continues for an extended period.

During fiscal 2020 and the first two months of fiscal 2021, cash generated from operations was supplemented by the enactment of laws providing COVID-19 relief, most notably the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which allowed for the deferral of payments of the Company's U.S. social security taxes. As a result, $26.2 million of employer payroll tax payments were deferred with $13.1 million paid on January 3, 2022 and the remaining payable with the December 31, 2022 tax payment in January 2023. In addition, certain state governments have delayed payment of various state payroll taxes for a shorter period of time. State payroll taxes of approximately $4.7 million deferred from the third quarter of fiscal 2021 were paid beginning in the fourth quarter of fiscal 2021. The Company’s payment of approximately $4.4 million of state payroll taxes will be deferred from the fourth quarter of fiscal 2021 with payments scheduled to begin in the first quarter of fiscal 2022.

Additionally, during fiscal 2021 we determined that we were eligible for the employee retention tax credit (“ERTC”), under the CARES Act, as our operations were fully or partially suspended due to government orders enacted in response to the COVID-19 pandemic. These credits reduced our payroll tax payments by $11.1 million and were treated as government subsidies.

Cash Flows – Investing Activities

The net cash used in investing activities in fiscal 2021 was $3.1 million, principally from the purchases of property, equipment and software primarily relating to our investment in updating our business processes, back-office financial suite and information technology tools. The net cash used in investing activities in fiscal 2020 was $4.6 million, principally from the purchases of property, equipment and software of $5.3 million partially offset by $0.4 million of proceeds from the sale of property, equipment and software.

See Note 18, “Segment Disclosures,” within our consolidated financial statements for the detail of purchases of property, equipment and software by segment.

Cash Flows – Financing Activities

The net cash used in financing activities in fiscal 2021 was $0.6 million principally from withholding tax payment on vesting of restricted stock awards of $0.5 million. The net cash provided by financing activities in fiscal 2020 was $4.6 million principally from a $5.0 million increase in net borrowing under the DZ Financing Program, partially offset by the payment of debt issuance costs of $0.3 million related to the DZ Financing Program.

Financing Program

The DZ Financing Program is fully collateralized by certain receivables of the Company that are sold to a wholly-owned, consolidated, bankruptcy-remote subsidiary. To finance the purchase of such receivables, we may request that DZ Bank make loans from time to time to the Company that are secured by liens on those receivables.

In July 2019, the Company amended and restated its long-term DZ Financing Program, which was originally executed on January 25, 2018. The restated agreement allows for the inclusion of certain accounts receivable from originators in the United Kingdom, which added an additional $5.0 - $7.0 million in borrowing availability. In June 2020, the Maximum Facility Amount, as defined in the DZ Financing Program, was reduced from $115.0 million to $100.0 million.

In December 2020, the Company amended the DZ Financing Program. The modifications to the agreement were to (1) extend the Amortization Date, as defined in the DZ Financing Program, from January 25, 2023 to January 25, 2024, (2) extend the Facility Maturity Date, as defined in the DZ Financing Program, from July 25, 2023 to July 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 Tangible Net 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 about July 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 through January 25, 2024 and all loans will mature no later than July 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 the Board of Governors of the Federal Reserve System for determining the reserve requirements with respect to Eurocurrency funding. If an event of default occurs, all loans shall bear interest at a rate per annum equal to the prime rate (the federal funds rate plus 3%) plus 2.5%.

The DZ Financing Program also includes a letter of credit sub-facility with a sub-limit of $35.0 million. As of October 31, 2021, the letter of credit participation was $22.1 million inclusive of $20.9 million for the Company’s casualty insurance program and $1.2 million for the security deposit required under certain real estate lease agreements.

The DZ Financing Program contains customary representations and warranties as well as affirmative and negative covenants. The agreement also contains customary default, indemnification and termination provisions. The DZ Financing Program is not an off-balance sheet arrangement, as the bankruptcy-remote subsidiary is a 100%-owned consolidated subsidiary of the Company.

The Company is subject to certain financial and portfolio performance covenants under the DZ Financing Program, including (1) a minimum TNW, as defined in the DZ Financing Program, of $20.0 million through the Company's fiscal quarter ending on or about July 31, 2021, $25.0 million in each quarter thereafter; (2) positive net income in any fiscal year ending after 2021; (3) maximum debt to TNW ratio of 3:1; and (4) a minimum of $15.0 million in liquid assets, as defined in the DZ Financing Program. At October 31, 2021, the Company was in compliance with all debt covenants, as amended.

At October 31, 2021, the Company had outstanding borrowings under the DZ Financing Program of $60.0 million, borrowing availability, as defined in the DZ Financing Program, of $6.0 million and global liquidity of $59.0 million.

Our DZ Financing Program is subject to termination under certain events of default such as breach of covenants, including financial covenants. At October 31, 2021, we were in compliance with all debt covenants, as defined in the DZ Financing Program. We believe, based on our 2022 Plan, we will continue to be able to meet our financial covenants under the amended DZ Financing Program.

The following table sets forth our cash and global liquidity levels at the end of our last five fiscal quarters:

Global Liquidity

(in thousands)

November 1, 2020

January 31, 2021

May 2, 2021

August 1, 2021

October 31, 2021

Cash and cash equivalents (a)

Total outstanding debt

Cash in banks (b) (c)

DZ Financing Program

Global liquidity

Minimum liquidity threshold

Available liquidity

a. Per financial statements.

b.    Amount generally includes outstanding checks.

c.    Amounts in the USB collections account are excluded from cash in banks as the balance is included in the borrowing availability under the DZ Financing Program. As of October 31, 2021, the balance in the USB collections account included in the DZ Financing Program availability was $6.9 million.

Liquidity Outlook

As previously noted, our primary sources of liquidity are cash flows from operations and proceeds from our financing arrangement. Both operating cash flows and borrowing capacity under our financing arrangement are directly related to the levels of accounts receivable generated by our businesses. Our level of borrowing capacity under the DZ Financing Program increases or decreases in tandem with any increases or decreases in accounts receivable based on revenue fluctuations, among other factors.

While we believe our cash provided by operating activities and borrowing availability under our DZ Financing Program, will be sufficient to meet our operating working capital and capital expenditure requirements at a minimum for the next twelve months, the extent to which any on-going or resurgence of COVID-19 related impacts could affect our business, financial condition, results of operations and cash flows in the short- and medium-term cannot be predicted with certainty. We may also face unexpected costs or an adverse impact on our business operations, in connection with government mandated COVID-19 vaccine-related policies and procedures. Any of the above could have a material adverse effect on our business, financial condition, results of operations and cash flows and require us to seek additional sources of liquidity and capital resources.

Many governments in countries and territories in which we do business have announced that certain payroll, income and other tax payments may be deferred without penalty for a certain period of time, as well as providing other cash flow related relief packages. As noted above, we determined that we qualify for the payroll tax deferral which allows us to delay payment of the employer portion of payroll taxes and for certain employment tax credits. We are evaluating whether we qualify for additional employment tax credits. If we qualify for such credits, the credits will be treated as government subsidies, which will offset related expenses. We continue to actively monitor these relief packages to take advantage of all of those which are available to us.

As of October 31 2021, we have significant tax benefits including federal net operating loss (“NOL”) carryforwards of $210.0 million, U.S. state NOL carryforwards of $226.3 million, international NOL carryforwards of $8.3 million and federal tax credits of $53.3 million, which are fully reserved with a valuation allowance which we may be able to utilize against future profits. As of October 31, 2021, the U.S. federal NOL carryforwards will expire at various dates between 2031and 2038 (with some indefinite), the U.S. state NOL carryforwards expire at various dates beginning in 2022 (with some indefinite), the international NOL carryforwards expire at various dates beginning in 2022 (with some indefinite) and federal tax credits expire between 2022 and 2040.

In addition to our discussion and analysis surrounding our liquidity and capital resources, our significant contractual obligations and commitments as of October 31, 2021, include:

• Debt Obligations and Interest Payments - As of October 31, 2021, our outstanding debt balance was $60.0 million. See Note 12, “Debt” within our consolidated financial statements for further detail of our debt and the timing of expected future principal and interest payments.

• Operating Leases – As of October 31, 2021, our remaining contractual commitment for operating leases was $51.1 million. See Note 2, “Leases,” within our consolidated financial statements for further detail of our obligations and the timing of expected future payments, including a five-year maturity schedule.

• Software-Related Expenditures – As of October 31, 2021, we had contractual commitments for software-related expenditures of $2.3 million. We anticipate capital expenditures in fiscal 2022 of approximately $4.0 - $5.0 million as we continue to support our strategic initiatives through improved technology, as necessary. While the majority of our software-related contractual obligations does not currently extend beyond fiscal 2022, we anticipate annual payments of approximately $5.5 million for the on-going use of our core technology.

• Casualty Insurance - As of October 31, 2021, we had accrued casualty claims of $13.9 million under our Casualty Insurance Program. While we cannot accurately predict future insurance claim liability, we estimate our related expenditures in fiscal 2022 to be in the range of $8.0 - $11.0 million, based on historical data.

Off-Balance Sheet Arrangements

As of October 31, 2021, we issued letters of credit against our DZ Financing Program totaling $22.1 million including $20.9 million for the Company’s casualty insurance program and $1.2 million for the security deposit required under certain lease agreements.

As of November 1, 2020, we issued letters of credit against our DZ Financing Program totaling $24.5 million including $23.3 million for the Company’s casualty insurance program and $1.2 million for the security deposit required under certain lease agreements.

As of October 31, 2021, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial position and results of operations are based upon our Consolidated Financial Statements, which are included in Item 8, Financial Statements and Supplementary Data of this report and have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates, judgments, assumptions and valuations that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. While management believes that its estimates, judgments and assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect our future results. Management believes the critical accounting policies and areas that require the most significant estimates, judgments, assumptions or valuations used in the preparation of our financial statements are those summarized below.

Goodwill

We perform our annual impairment test for goodwill during the second quarter of the fiscal year and when a triggering event occurs between annual impairment tests. When testing goodwill, the Company has the option to first assess qualitative factors for reporting units that carry goodwill. The qualitative assessment includes assessing the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit. These events and circumstances include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. We may also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value. If the qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.

When a qualitative assessment is not used, or if the qualitative assessment is not conclusive and it is necessary to calculate the fair value of a reporting unit, then the impairment analysis for goodwill is performed at the reporting unit level under Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment . In conducting our goodwill impairment testing, we compare the fair value of the reporting unit with goodwill to the carrying value, using various valuation techniques including income (discounted cash flow) and market approaches. The Company believes the blended use of both approaches compensates for the inherent risk associated with using either one on a

stand-alone basis and this combination is indicative of the factors a market participant would consider when performing a similar valuation.

The Company’s goodwill is within its International Staffing segment. Our fiscal 2021 test performed in the second quarter used significant assumptions including expected revenue and expense growth rates, forecasted capital expenditures, working capital levels and a discount rate of 13.0%. Under the market-based approach, significant assumptions included relevant comparable company earnings multiples including the determination of whether a premium or discount should be applied to those comparables. It was determined that the fair value of the reporting unit exceeded its carrying value, therefore no adjustment to the carrying value of goodwill of $5.8 million was required. There were no triggering events in any subsequent quarter of fiscal 2021 that required the Company to perform an interim impairment assessment.

Long-Lived Assets

Long-lived assets primarily consist of right-of-use assets, capitalized software costs, leasehold improvements and office equipment. We review these assets for impairment under Accounting Standards Codification 360 Property, Plant and Equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors that could trigger an impairment review include a current period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. If circumstances require a long-lived asset or asset group be reviewed for possible impairment, the Company first compares undiscounted cash flows expected to be generated by each asset or asset group to its carrying value. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on discounted cash flow analysis or other valuation techniques.

In fiscal 2021, the Company’s analyses resulted in impairment charges of $0.4 million of capitalized costs related to a change in the expected use of certain software assets in the Corporate and Other category. There were no additional triggering events in fiscal 2021 that would indicate that the carrying amounts of any other of the Company’s long-lived assets may not be recoverable as of the end of the period. As a result, the Company did not perform any additional steps under ASC 360 which required significant judgement or assumptions.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using current tax laws and rates in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We must then assess the likelihood that our deferred tax assets will be realized. If we do not believe that it is more likely than not that our deferred tax assets will be realized, a valuation allowance is established. When a valuation allowance is increased or decreased, a corresponding tax expense or benefit is recorded.

Accounting for income taxes involves uncertainty and judgment in how to interpret and apply tax laws and regulations within our annual tax filings. Such uncertainties may result in tax positions that may be challenged and overturned by a tax authority in the future which would result in additional tax liability, interest charges and possible penalties. Interest and penalties are classified as a component of income tax expense.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in estimate occurs.

Realization of deferred tax assets is dependent upon reversals of existing taxable temporary differences, taxable income in prior carryback years and future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. We have a three-year cumulative loss position which is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets. A valuation allowance has been recognized due to the uncertainty of realization of our loss carryforwards and other deferred tax assets. Management believes that the remaining deferred tax assets are more likely than not to be realized based upon consideration of all positive and negative evidence, including scheduled reversal of deferred tax liabilities and tax planning strategies determined on a jurisdiction-by-jurisdiction basis.

Casualty Insurance Program

We purchase workers’ compensation insurance through mandated participation in certain state funds and the experience-rated premiums in these state plans relieve us of any additional liability. Liability for workers’ compensation in all other states as well as automobile and general liability is insured under a paid loss deductible casualty insurance program for losses exceeding specified deductible levels and we are financially responsible for losses below the specified deductible limits. The casualty program is secured by a letter of credit against the DZ Financing Program of $20.9 million as of October 31, 2021.

We recognize expenses and establish accruals for amounts estimated to be incurred, both reported and not yet reported, policy premiums and related legal and other claims administration costs. We develop estimates for claims as well as claims incurred but not yet reported using actuarial principles and assumptions based on historical and projected claim incidence patterns, claim size and the length of time over which payments are expected to be made. Actuarial estimates are updated as loss experience develops, additional claims are reported or settled and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed. Depending on the policy year, adjustments to final expected paid amounts are determined through the ultimate life of the claim. At October 31, 2021 and November 1, 2020, the casualty insurance liability was $13.9 million and $15.2 million, respectively.

Medical Insurance Program

We are self-insured for a portion of our medical benefit programs for our employees. Eligible contingent staff on assignment with customers are offered medical benefits through a fully insured program administered through a third party. Employees contribute a portion of the cost of these medical benefit programs.

To limit exposure on a per claimant basis for the self-insured medical benefits, the Company purchases stop-loss insurance. Our retained liability for the self-insured medical benefits is determined utilizing actuarial estimates of expected claims based on statistical analysis of historical data.

Litigation

We are subject to certain legal proceedings as well as demands, claims and threatened litigation that arise in the normal course of our business. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, a liability and an expense are recorded for the estimated loss. Significant judgment is required in both the determination of probability and the determination of whether an exposure is reasonably estimable. Development of the accrual includes consideration of many factors including potential exposure, the status of proceedings, negotiations, discussions with internal and outside counsel, results of similar litigation and, in the case of class action lawsuits, participation rates. As additional information becomes available, we will revise the estimates. If the actual outcome of these matters is different than expected, an adjustment is charged or credited to expense in the period the outcome occurs or the period in which the estimate changes. To the extent that an insurance company is contractually obligated to reimburse us for a liability, we record a receivable for the amount of the probable reimbursement.

Accounts Receivable

We make ongoing estimates relating to the collectability of our trade accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance for uncollectible accounts receivable, we make judgments on a customer-by-customer basis based on the customer’s current financial situation, such as bankruptcies and other difficulties collecting amounts billed. Losses from uncollectible accounts have not exceeded our allowance historically. As we cannot predict with certainty future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. In the event we determined that a smaller or larger allowance was appropriate, we would record a credit or a charge to Selling, administrative and other operating costs in the period in which we made such a determination.

New Accounting Standards

For additional information regarding new accounting guidance see Note 1 - Summary of Business and Significant Accounting Policies in our Consolidated Financial Statements.