Business context and reporting period
This filing is Hudson Global, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018—not a filing identified as Star Equity Holdings, Inc. Hudson provides recruitment and talent solutions. On March 31, 2018, it sold its recruitment and talent management businesses and retained its Recruitment Process Outsourcing (RPO) business, operating in nine countries. The former businesses are reported as discontinued operations.
Financial results
Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue from continuing operations | $17.0 million | $14.5 million | $33.2 million | $28.5 million |
| Gross margin | $10.8 million | $10.7 million | $21.0 million | $20.7 million |
| Operating income (loss) | $(1.3) million | $(0.5) million | $(3.9) million | $(0.8) million |
| Net income (loss), including discontinued operations | $(1.4) million | $1.2 million | $9.4 million | $(0.1) million |
| Net income (loss) per diluted share | $(0.04) | $0.04 | $0.29 | $0.00 |
- Q2 revenue rose 17.2% year over year, but gross margin increased only 0.9%; gross margin was 63.5% of revenue, versus 73.8% a year earlier.
- Six-month net income included a $14.0 million pretax divestiture gain; continuing operations recorded a $4.3 million net loss. The gain included a $10.8 million reclassification of previously accumulated foreign-currency translation gains.
- Q2 EBITDA loss from continuing operations, a non-GAAP measure, was $1.3 million, versus a $0.4 million loss. The six-month EBITDA loss was $4.0 million, versus $0.7 million.
- Cash and cash equivalents were $38.6 million at June 30, 2018, versus $5.6 million at year-end 2017. Total liabilities were $12.6 million and stockholders’ equity was $41.9 million. The company reported no long-term debt obligations.
- Six-month operating cash flow was $(18.2) million, investing cash flow was $27.7 million (including $28.0 million net sale proceeds), and financing cash flow was $7.4 million. Cash, cash equivalents, and restricted cash ended the period at $39.1 million.
Material changes versus the prior comparable period
- Continuing revenue growth came mainly from Asia Pacific, particularly Australia; Americas revenue declined, and Europe’s growth was limited. Management cited loss of a global contract as a factor in Americas and Continental Europe declines.
- Despite revenue growth, gross margin was nearly flat in Q2. Management attributed pressure in Asia Pacific partly to higher contractor costs; Americas and Europe also experienced lower margins.
- Higher corporate compensation and severance contributed to increased expenses. The company recorded $601,000 of severance for two corporate employees and $2.0 million of additional former-CEO compensation in the first half.
- Reported prior-year comparisons include the sold businesses as discontinued operations. Their six-month revenue was $108.5 million in 2018 through the sale date, versus $188.5 million in the first half of 2017.
Outlook, risks and unusual items
- Management said liquidity was sufficient for at least the next 12 months and expected 2018 capital expenditures below $1.0 million. No specific revenue or earnings guidance was provided.
- The company’s strategy is to focus on RPO, with planned investment in people, technology and innovation, brand differentiation, and support-function efficiency.
- Risks highlighted include operating losses and negative cash flows, client termination rights, competition, foreign-currency movements, Brexit-related uncertainty, hiring and retention, receivables collection, and dependence on key personnel. Management said pending legal matters were not expected to have a material adverse effect and reported no legal reserves.
- The CEO resigned effective April 1, 2018; the board chair became CEO. The filing also disclosed the departure of corporate executives and related severance. Management stated disclosure controls were effective at June 30, 2018.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Hudson Global, Inc., although the request metadata names Star Equity Holdings, Inc.
- Review the sale’s final purchase-price adjustments and the reconciliation of gross proceeds, assumed debt, transaction costs, and net cash proceeds.
- Assess whether RPO growth can improve gross margins and reduce operating losses, particularly given contractor-cost pressure and corporate expenses.
- Monitor operating cash use, receivables, and the sustainability of liquidity after divestiture proceeds; the first-half cash balance benefited materially from the sale.
- Distinguish recurring continuing-operations performance from the one-time divestiture gain and compare periods on a continuing-operations basis.