Business context and reporting period
Important entity mismatch: The supplied filing is Hudson Global, Inc. (NASDAQ: HSON), not Star Equity Holdings, Inc. It is a Form 10-Q for the quarter ended March 31, 2019, filed May 9, 2019. Confirm that this is the intended filing before relying on this summary. Unless stated otherwise, amounts below are U.S. dollars.
Hudson provides professional recruitment and talent solutions. Following its March 2018 sale of its Recruitment and Talent Management businesses, continuing operations focus on Recruitment Process Outsourcing (RPO), comprising RPO recruitment and RPO contracting, across three regional segments: Americas, Asia Pacific, and Europe.
Financial results and liquidity
Amounts are in millions except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $16.2 | $16.2 |
| Gross profit | $9.4 | $10.2 |
| Gross margin | 58.0% | 62.6% |
| Operating loss | $(2.0) | $(2.7) |
| Loss from continuing operations | $(1.8) | $(2.9) |
| Net income (loss) | $(1.9) | $10.7 |
| Basic and diluted EPS | $(0.06) | $0.33 |
| EBITDA loss from continuing operations (non-GAAP) | $(2.0) | $(2.7) |
| Cash used in operating activities | $(6.2) | $(14.7) |
Revenue was nearly flat as reported, but rose 9.2% on a constant-currency basis. RPO contracting revenue increased 77.0% on that basis, while RPO recruitment revenue declined 13.7%. Gross profit fell 7.5% as reported, or 2.5% in constant currency. The Q1 2018 net income included a $14.0 million pretax gain on the sale of discontinued businesses; Q1 2019 included a $0.1 million loss from discontinued operations.
Cash, cash equivalents and restricted cash were $30.8 million at March 31, 2019, down from $41.1 million at year-end 2018. Cash and cash equivalents alone were $30.3 million. Total assets were $45.9 million and total liabilities $11.0 million. The company reported no long-term debt at quarter-end; operating lease liabilities were $0.6 million after adoption of the new lease standard. Financing cash outflow was $4.0 million, mainly reflecting share repurchases. Investing cash flow was approximately neutral, compared with $27.7 million inflow in Q1 2018 from the business sale.
Management said liquidity was sufficient for at least the next 12 months and expected 2019 capital expenditures of less than $0.5 million. Approximately $24.6 million of cash and cash equivalents was held in the U.S.; most offshore cash was described as available, subject to tax obligations or assessments.
Material changes and management commentary
- Corporate expenses declined materially year over year, contributing to the smaller consolidated operating loss; management attributed this largely to lower staff costs and higher corporate allocations.
- Americas revenue declined 15.1% as reported, with weaker client demand; the region recorded a $0.4 million EBITDA loss versus $0.3 million EBITDA income in Q1 2018.
- Asia Pacific revenue increased 12.8% in constant currency, supported by new and existing client demand and a new Australian contract. Gross margin fell to 52.9% from 58.1%, partly due to a higher contracting mix, and EBITDA was approximately breakeven.
- Europe revenue increased 26.9% in constant currency, primarily from U.K. contracting demand. Gross margin declined to 46.8% from 59.3%; the region recorded a $0.3 million EBITDA loss.
- The company repurchased 2.575 million shares during the quarter: 2.469 million through a tender offer and 106,298 under its existing repurchase authorization. The tender offer was priced at $1.50 per share; reported aggregate cost was $3.703 million plus $0.125 million in fees and expenses.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance was provided. Management described global markets as generally stable but expected global growth to slow somewhat in 2019, and said it could not predict the effect of economic and political developments on demand.
- Disclosed risks include global economic fluctuations, Brexit and foreign-exchange volatility, client termination rights, competition, recurring operating losses and negative cash flows, receivable collection, talent retention, international operations, and the ability to execute the RPO strategy. About 73% of continuing-operations gross profit was generated outside the U.S.
- On April 8, 2019, an Australian subsidiary entered into a receivables-based credit facility with a maximum availability of AUD 4 million. It bears a variable rate plus 1.60%, is secured by substantially all of that subsidiary’s assets, and includes financial covenants. This facility was entered into after quarter-end.
- The company reported no reserves for legal or regulatory contingencies and said pending matters were not expected to have a material adverse effect. Unrecognized tax benefits, including interest and penalties, were $2.036 million; management said they could decrease by $0 to $0.2 million over the next 12 months.
- The company adopted lease accounting guidance on January 1, 2019, recording approximately $0.7 million of operating lease assets and liabilities. It also maintained a stockholder rights plan intended to protect tax attributes; stockholders approved the plan at the May 6, 2019 annual meeting.
- Management concluded disclosure controls were effective as of March 31, 2019, and reported no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Confirm the issuer: the source is Hudson Global, Inc. (HSON), not Star Equity Holdings, Inc.
- Review the reported and constant-currency results together, especially the differences in revenue growth and gross-profit trends.
- Separate Q1 2018 continuing results from discontinued operations and the $14.0 million sale gain when comparing earnings.
- Check the share-repurchase and tender-offer costs, share counts, and remaining authorization against the company’s capital-allocation disclosures.
- Assess cash burn, offshore cash availability, and the terms and covenant compliance of the post-quarter Australian credit facility.
- Monitor the regional margin declines, uncertain tax positions, foreign-exchange and Brexit exposure, and management’s lack of specific earnings guidance.