Star Equity Holdings, Inc. annual report, FY2018

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Business context and reporting period

This is Hudson Global, Inc.’s Form 10-K for the fiscal year ended December 31, 2018—not a Star Equity Holdings filing. Although the request identifies Star Equity Holdings, the filing names Hudson Global, Inc. (NASDAQ: HSON). The filing reports annual results, not standalone fourth-quarter financial results.

Hudson completed the sale of its Recruitment and Talent Management (RTM) businesses on March 31, 2018 and retained its global Recruitment Process Outsourcing (RPO) business. Continuing operations comprise three geographic segments: Americas, Asia Pacific and Europe, with approximately 350 employees in nine countries.

Financial results and liquidity

  • Revenue: $66.9 million, up 12.3% from $59.6 million in 2017; constant-currency growth was 12.7%. RPO recruitment revenue was $45.2 million and RPO contracting revenue was $21.7 million.
  • Gross profit and margin: $42.1 million, essentially unchanged from $42.1 million. Gross margin was approximately 62.9%, down from 70.5%, reflecting higher direct costs, including contractor costs in Asia Pacific.
  • Operating and continuing results: Operating loss was $5.2 million versus a $1.8 million loss. Continuing-operations net loss was $5.3 million, or $0.16 per share, versus a $2.8 million loss, or $0.09 per share.
  • Reported net income: $7.9 million, or $0.24 per share, compared with a $2.9 million net loss in 2017. The 2018 result includes $13.1 million of income from discontinued operations, including a $13.9 million pretax gain on the RTM sale; it does not indicate profitable continuing operations.
  • EBITDA: Continuing-operations EBITDA loss was $5.4 million, compared with a $1.6 million loss in 2017. EBITDA is a non-GAAP measure.
  • Cash flow: Operating activities used $15.5 million, versus providing $2.2 million in 2017. Investing activities provided $27.3 million, primarily from the divestiture; financing activities provided $7.2 million. Cash, cash equivalents and restricted cash ended the year at $41.1 million.
  • Balance sheet and liquidity: Cash and cash equivalents were $40.6 million; total assets were $53.2 million and total liabilities $12.7 million. Management reported no debt obligations at year-end and believed liquidity was sufficient for at least 12 months. Expected 2019 capital expenditures were less than $0.5 million.
  • Other metrics: One client represented approximately 44% of 2018 revenue; the top 25 clients generated over 90%. Approximately 74% of gross profit was earned outside the U.S. The company reported a $2.0 million liability for unrecognized tax benefits, including interest and penalties.

Material changes versus 2017

  • The RTM divestiture changed the company’s continuing business focus to RPO. Gross sale proceeds were $39.0 million; net cash proceeds reported in the cash flow statement were $27.8 million after cash sold and transaction costs. Buyers assumed $17.6 million of debt.
  • Revenue growth was led by Asia Pacific and the U.K.; Americas revenue declined, partly following the loss of a global contract, while Continental Europe revenue fell sharply for the same contract-related reason. Gross profit remained flat despite higher revenue.
  • Continuing-operations expenses and losses increased overall. Management cited additional executive compensation expense, higher Asia Pacific consultant and support costs, and higher European support costs. Corporate expenses were $7.7 million, including $2.6 million of severance expense for three former corporate executives.
  • Cash and cash equivalents rose from $5.6 million to $40.6 million, primarily reflecting sale proceeds; operating cash flow moved from positive to negative.

Outlook, commentary and risks

Management’s stated priorities are organic RPO growth through investment in people and technology, lower corporate and regional overhead, and consideration of acquisitions. It cited improving economic conditions in many major markets during 2018 but anticipated slower growth in Australia and China in 2019 and uncertainty related to Brexit. The filing does not provide a numerical revenue or earnings forecast.

  • Key risks include economic sensitivity, client hiring changes or termination of contracts on short notice, intense competition and the ability to execute the post-sale strategy and cost reductions.
  • Client concentration is significant, and the company faces collection, staffing, international currency, regulatory, cybersecurity and service-continuity risks.
  • Use of substantial U.S. net operating losses may be restricted by ownership-change rules. A rights plan adopted in October 2018 is intended to help protect tax benefits and generally penalizes acquisitions of 4.99% or more without Board approval; stockholder approval was to be sought at the 2019 annual meeting.
  • Management reported no material pending legal proceedings and no reserves for probable and estimable legal or regulatory contingencies at year-end. Ordinary-course audits, claims and disputes remain possible.
  • After year-end, the Board approved a tender offer for up to 3.15 million shares at $1.50 per share; it commenced February 22, 2019 and was scheduled to expire March 22, 2019.

Important facts for investors to verify

  1. Confirm the issuer: the supplied filing is Hudson Global, Inc., not Star Equity Holdings, Inc.
  2. Separate continuing RPO performance from discontinued RTM results and the one-time sale gain when assessing 2018 profitability.
  3. Review the drivers and sustainability of negative operating cash flow, segment margins and the increase in Asia Pacific expenses.
  4. Assess the implications of the 44% revenue concentration in one client and the company’s dependence on a small number of major clients.
  5. Verify the status and terms of the tender offer, the rights plan’s stockholder approval, and potential limits on NOL utilization.