Hudson Global, Inc. — Q2 2015 Form 10-Q
Issuer note: The filing is for Hudson Global, Inc., not Star Equity Holdings, Inc. It covers the quarter and six months ended June 30, 2015; financial amounts below are in U.S. dollars.
Business context and reporting period
Hudson provides professional recruitment and talent solutions, operating in 13 countries through Americas, Asia Pacific and Europe segments. The filing presents unaudited results for the three and six months ended June 30, 2015, compared with the same 2014 periods.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $122.7 million | $151.1 million | $247.1 million | $295.2 million |
| Gross margin | $50.2 million | $59.9 million | $98.1 million | $113.9 million |
| Gross margin as % of revenue | 40.9% | 39.6% | 39.7% | 38.6% |
| Operating income (loss) | $13.6 million | ($2.9 million) | $6.9 million | ($6.2 million) |
| Net income (loss) | $13.9 million | ($4.4 million) | $7.0 million | ($8.9 million) |
| Diluted EPS | $0.41 | ($0.13) | $0.21 | ($0.27) |
Operating results included a $20.0 million gain on sales and exits of businesses; reported profits therefore do not represent underlying operating performance alone. EBITDA from continuing operations was $14.6 million in Q2 and $9.0 million for the first half, versus losses of $1.8 million and $4.0 million, respectively, in 2014. EBITDA is a non-GAAP measure.
- Cash flow: First-half operating cash use was $23.0 million, compared with $18.3 million in 2014. Investing activities provided $23.4 million, largely from divestiture proceeds; financing activities provided $1.1 million. Cash increased $0.9 million to $34.8 million.
- Balance sheet: Cash was $34.8 million; total assets were $137.3 million, liabilities $68.6 million and stockholders’ equity $68.6 million at June 30. Short-term borrowings were $1.34 million.
- Debt and liquidity: The company reported $22.3 million of additional borrowing availability across disclosed facilities, and stated that it was in compliance with facility covenants. Management believed liquidity was sufficient for at least 12 months.
Material changes versus the prior period
- Reported Q2 revenue declined 18.8% and first-half revenue declined 16.3%. On a constant-currency basis, declines were 6.9% and 5.1%, respectively; divestitures and exits were major drivers.
- Asia Pacific retained-business revenue and gross margin improved, led by permanent recruitment growth in China. Europe weakened, including softness in U.K. recruitment and the Netherlands business sale. Americas results were affected by the US IT business sale and reduced activity ahead of the sale.
- Q2 gross margin fell 16.1% as reported, but improved as a percentage of revenue. First-half gross margin fell 13.8% as reported.
- The company sold its US IT business for $17.0 million cash and recognized a $15.9 million gain; it sold the Netherlands business for $9.0 million, including cash retained, and recognized a $2.9 million gain. Exits in Central and Eastern Europe and Luxembourg were also part of its restructuring. These current-year dispositions were generally retained in continuing operations under the accounting presentation.
Outlook, commentary and risks
- Management described global market conditions as mixed: Europe showed improvement but remained exposed to uncertainty, Australia had a slow-growth outlook, and Asia’s outlook was uncertain. It did not provide revenue or earnings guidance.
- For 2015, management expected capital expenditures of approximately $3–$4 million and restructuring payments of $4–$5 million.
- Operating cash use, restructuring costs, foreign-exchange exposure and dependence on credit facilities are key considerations. Management cautioned that weaker conditions or insufficient operating cash generation could require additional cost actions, asset sales or financing, with no assurance such funding would be available on reasonable terms.
- A former CEO disputed the company’s interpretation of his termination benefits and sought up to approximately $2.0 million in additional amounts; the company had accrued $0.665 million and intended to defend against the claim. The company reported $0.156 million of reserves for probable and estimable legal and other contingencies and said pending matters were not expected to have a material adverse effect.
- A board-approved authorization announced July 30, 2015 permits repurchases of up to $10 million of common stock; no repurchases had been made under that authorization as of the announcement date.
Important facts for investors to verify
- Confirm the issuer identity: this source is Hudson Global, Inc., not Star Equity Holdings, Inc.
- Separate recurring results from the $20.0 million divestiture and exit gain, and review continuing versus discontinued operations.
- Assess the sustainability of operating cash flow, working-capital requirements and the company’s reliance on available credit facilities.
- Review revenue and margin trends in the retained businesses, especially U.K. operations and Asia Pacific, and the impact of currency movements.
- Track restructuring cash costs, the former CEO compensation dispute, facility covenant compliance and any use of the new share-repurchase authorization.