Business context and reporting period
Issuer discrepancy: The request identifies Star Equity Holdings, Inc., but the supplied filing is Hudson Global, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. This summary covers the filing provided, not Star Equity.
Hudson provides professional recruitment and talent solutions in 12 countries through Americas, Asia Pacific, and Europe segments. Unless stated otherwise, figures below are in U.S. dollars; financial statement amounts are in millions.
Financial results and liquidity
- Third quarter: Revenue was $108.1 million, down 1.7% year over year as reported; on a constant-currency basis it rose 1.6%. Gross margin was $43.5 million (40.3% of revenue), versus $45.1 million (41.0%). Operating loss was $0.8 million, compared with a $3.8 million loss; net loss was $1.9 million, or $0.06 per share, versus a $2.1 million loss, also $0.06 per share. EBITDA loss, a non-GAAP measure, was $0.3 million versus $2.6 million.
- Nine months: Revenue was $322.4 million, down 9.7% reported and 5.9% on a constant-currency basis. Gross margin was $131.6 million (40.8%), down 8.1% reported. Operating loss was $6.9 million versus operating income of $3.1 million; net loss was $8.5 million, or $0.25 per share, versus net income of $5.0 million, or $0.15 per share. EBITDA loss was $5.1 million versus EBITDA income of $6.4 million.
- Cash flow: Cash used in operations was $15.1 million, improved from $18.2 million used in the prior-year period. Investing used $1.8 million, compared with $22.3 million provided in 2015, when business-sale proceeds were received. Financing used $2.9 million, including $3.4 million in dividends and $4.9 million in treasury-stock purchases. Cash fell $20.3 million to $17.4 million from year-end 2015.
- Balance sheet and debt: Total assets were $104.9 million and stockholders’ equity $44.7 million at September 30. Current assets were $87.2 million and current liabilities $50.2 million. Short-term borrowings were $8.1 million; outstanding borrowings were principally $7.7 million under the Australian facility and $0.4 million under the U.K. facility. The company reported $19.1 million of additional availability across facilities and compliance with applicable financial covenants.
Material changes versus prior comparable periods
- Quarterly constant-currency revenue growth in Australia, the Americas, and Continental Europe was offset by declines in the U.K. and China. The U.K. decline reflected reduced demand from large financial-services clients; China performance remained weak.
- For the nine-month period, reported revenue and gross margin were affected by currency translation and the prior-year divestitures of the U.S. IT, Netherlands, Luxembourg, and Central and Eastern Europe businesses. The prior-year results also included material gains on sale and exit of businesses; the 2015 nine-month cash flows included sale proceeds.
- Asia Pacific revenue grew, led by Australian contracting, but China declines and lower regional gross margin weighed on results. Europe’s U.K. contracting business declined, while Continental Europe improved excluding prior-year divestitures.
- Cash decreased materially, while borrowings under credit facilities increased. The company also paid dividends and repurchased shares, including 1.1 million shares from Sagard Capital for $2.0 million.
Outlook, commentary, risks, contingencies, and unusual items
- Management said it believed liquidity was sufficient for at least the next 12 months. For full-year 2016, it expected capital expenditures of approximately $2–$3 million and restructuring payments of $3–$4 million.
- Management described global conditions as mixed and cited uncertainty surrounding Brexit, foreign-exchange movements, slower Australian growth, and China’s outlook. It said demand for its services under changing economic conditions was difficult to predict.
- Risks include continued operating losses and negative operating cash flow, client concentration or termination, competition, collection of receivables, foreign currency exposure, credit-facility restrictions, execution of cost reductions, and employment-related or regulatory claims. About 92% of nine-month gross margin was generated outside the U.S.
- A former CEO’s arbitration resulted in an award of approximately $1.8 million in additional compensation and benefits and approximately $0.7 million in legal-fee reimbursement. The company recorded an additional $3.025 million charge in the first nine months of 2016; no additional charge was recorded in the third quarter.
- The filing says an October 27, 2016 press-release financial statement had inadvertently included a $0.6 million impairment charge for the China asset group. The Form 10-Q statements exclude that charge; the company’s interim goodwill test concluded goodwill was not impaired.
- The company recorded a $1.2 million income-tax provision despite a pretax continuing-operations loss for the nine months, citing limits on recognizing tax benefits in certain jurisdictions and other tax items. It reported $2.246 million of unrecognized tax benefits, including interest and penalties.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect; recorded reserves were $0.112 million. The filing also notes that the company’s views on future cash needs could change if external conditions deteriorate or financing becomes unavailable.
Important facts for investors to verify
- Confirm issuer identity: the supplied filing is for Hudson Global, Inc., not Star Equity Holdings, Inc.
- Review the corrected financial statements and the treatment of the $0.6 million China impairment referenced in the prior press release.
- Track operating cash use, cash balances, borrowing availability, covenant compliance, and the geographic accessibility of cash.
- Assess whether management’s 2016 restructuring-payment and capital-expenditure expectations were met, and whether restructuring produces sustainable savings.
- Monitor the U.K. and China businesses, currency effects, and the extent to which reported comparisons reflect prior-year divestitures rather than underlying trends.