Thursday, January 27, 2011

Volt: The Business Looks Good, The Accounting Doesn't

Volt Information Sciences (VOL) provides staffing and other business services. It trades for $132 million, but has net current assets (current assets less total liabilities) of $200 million according to its latest full set of financial results. The problem is that these financials are more than a year old!

The company announced that it is undergoing an accounting review, and therefore it has had to miss some deadlines with respect to its financial reporting. However, it has provided some information to investors, even though it cannot provide all of it. For example, the company estimated its revenues by segment for 2010, and reports strong revenue growth and stable gross margins in its staffing business from 2009. It also reports progress towards closing down its money-losing telecommunications services segment.

But while business appears to be headed in the right direction, the accounting issues could result in poor results for investors. First and most obvious, it is not known what the effect of the accounting restatements will be. While the company did just recently report the size of its cash balance, it is not known whether other asset or liability accounts will change for the worse.

Second, this accounting review has directly cost the company a rather large amount of money. The company has had to spend an extra $22 million in 2010 to get its accounting right, and it's still not done! For some companies, this wouldn't get noticed. But when the company only trades for $130 million, this is a rather sizable amount that cuts into the investor's margin of safety.

Finally, the NYSE is tired of waiting for the financials. The exchange stated that it will commence de-listing procedures if the company does not meet the latest deadline. Volt does not anticipate being able to meet this deadline; therefore, investors buying the stock now could find themselves dealing with an over-the-counter stock very soon! This could actually present an opportunity for investors in the future, as the company has stated that it will continue to file with the SEC and plans to re-list on the exchange once its accounting house is in order.

If the price falls after de-listing, investors may want to think about getting in at a much more favourable price. Until then, the upside may not justify the risks.


Anonymous said...

Checked the situation myself a few days ago. I completely agree with your thesis.


Mario R.

Anonymous said...

By the way, have you checked M & F WORLDWIDE CORP? The valuation is absurdly low (specially considering FCF), albeit their high use of leverage, and the fact that most of their revenues come from a declining industry: bank check printing.

Still, probably a good reward/risk ratio, all things considered.

Cheers Saj!

Mario R.

Anonymous said...

It moved to OTC a few hours after you posted on the 27th. New ticker is VISI.

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