Star Equity Holdings, Inc. quarterly report, Q3 FY2022

Filing identity and reporting period

Important metadata discrepancy: The supplied filing is Hudson Global, Inc.’s Form 10-Q for the quarter ended September 30, 2022, not a filing for Star Equity Holdings, Inc. The summary below reflects Hudson Global’s filing. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.

Business context

Hudson provides recruitment process outsourcing (RPO), permanent recruitment, and contracting services through its Americas, Asia Pacific, and Europe segments. It operates in 14 countries. The filing reports both the three-month quarter and nine-month year-to-date periods ended September 30, 2022, compared with 2021.

Financial performance

Q3 revenue rose 8.2% year over year, while net income declined by $0.5 million. Nine-month revenue increased 27.2% and net income increased by $5.9 million. Calculated operating margin was approximately 2.6% in Q3 2022 versus 3.0% in Q3 2021, and 5.8% year to date versus 1.4% in the prior-year period. Management’s non-GAAP adjusted net revenue—revenue less direct contracting costs—was $24.2 million in Q3, up 34.2%, and $77.0 million year to date, up 68.1%.

RPO recruitment drove much of the year-to-date growth: reported RPO revenue rose to $75.8 million from $44.6 million; contracting revenue was $75.8 million versus $74.5 million. Q3 RPO revenue was $23.8 million versus $17.6 million, while contracting revenue declined to $24.9 million from $27.4 million. The Americas had strong growth, while Asia Pacific’s Q3 results included lower contracting demand in Australia; Europe also grew, led by U.K. RPO recruitment.

Balance sheet, cash flow, and capital

• At September 30, cash and cash equivalents were $22.4 million; cash plus restricted cash was $22.7 million. Current assets were $54.2 million and current liabilities $21.6 million.
• Total note payable was $1.25 million, classified as short-term at quarter-end. Hudson also had operating lease obligations of about $0.8 million. No borrowings were outstanding under its Australian invoice finance facility, which permits borrowing up to A$4 million; the company reported compliance with its covenants.
• Nine-month operating cash flow was $5.1 million. Investing used $1.3 million, including $0.8 million net cash paid for the HnB acquisition; financing used $2.0 million, including $1.1 million of share repurchases and $0.6 million of acquisition-related loan repayment. Foreign exchange reduced cash, cash equivalents, and restricted cash by $1.2 million.
• Stockholders’ equity was $44.4 million, compared with $39.3 million at December 31, 2021. Foreign currency translation losses increased accumulated other comprehensive loss to $2.5 million from $0.1 million.

Material changes and unusual items

• Hudson acquired India-based Hunt & Badge Consulting (HnB) on August 19, 2022. Consideration was estimated at $1.274 million, including $1.064 million cash at closing and contingent earn-outs of up to $0.350 million. HnB contributed $18,000 of Q3 revenue and $3,000 of net income. The filing’s purchase accounting was preliminary.
• The 2021 Karani acquisition contributed $7.7 million of revenue and $0.7 million of net income during the first nine months of 2022.
• A contracting customer ended its agreement in Q1 2022. It generated $44.9 million of 2021 revenue, but only $0.9 million of revenue less direct contracting costs. Management stated it did not expect the loss to have a material adverse impact.
• Hudson repurchased 32,615 shares for $1.131 million during the first nine months, at an average price of $34.67 per share. A $100 million shelf registration became effective in July 2022; no securities had been issued under it by September 30.

Outlook, risks, and contingencies

Management expected challenging market conditions to continue through the remainder of 2022 and into 2023, citing inflation, higher interest rates, reduced labor demand in some markets, customer service reductions, wage inflation, the war in Ukraine, currency volatility, and continuing COVID-19 uncertainty. The company stated that it believed available liquidity was sufficient for at least the next 12 months and expected full-year 2022 capital expenditures below $1.0 million. It did not provide numerical revenue or earnings guidance.

Hudson cited exposure to customer losses and termination rights, foreign exchange, labor-market changes, recruitment and retention, collections, cost control, acquisitions, and international operations. It reported no legal reserves and said pending matters were not expected to materially harm financial condition, results, or liquidity. It also disclosed $360,000 of unrecognized tax benefits and $124,000 of accrued related interest and penalties; up to $400,000 of unrecognized benefits could decrease within 12 months. The company maintains a stockholder rights plan through October 15, 2024, intended in part to protect tax attributes.

Key facts investors should verify

• Confirm the issuer: the filing is Hudson Global, Inc. (NASDAQ: HSON), not Star Equity Holdings, Inc.
• Assess whether RPO growth and improved year-to-date earnings can persist as management anticipates weaker market conditions and customer demand.
• Review the effects of the HnB acquisition, preliminary purchase accounting, and contingent earn-out remeasurement.
• Track operating cash conversion, receivables, the remaining acquisition-related note, and currency impacts on reported results and equity.
• Distinguish GAAP results from management’s non-GAAP adjusted net revenue, EBITDA, and constant-currency comparisons.