Star Equity Holdings, Inc. quarterly report, Q2 FY2017

Filing summary

Issuer discrepancy: The supplied filing is Hudson Global, Inc.’s Form 10-Q, not a filing for Star Equity Holdings, Inc. The summary below describes Hudson Global and should not be attributed to Star Equity.

Business context and reporting period

Unaudited quarterly report for the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Hudson Global provides professional recruitment and talent solutions, operating in 13 countries through Americas, Asia Pacific, and Europe segments.

Key financial metrics

For the first half, cash used in operating activities was $4.5 million, investing activities used $0.4 million, and financing activities used $2.2 million. Cash decreased by $6.5 million from year-end 2016. Current assets were $93.0 million and current liabilities $56.7 million at June 30. Total liabilities were $65.4 million and stockholders’ equity was $44.6 million.

Material changes versus prior comparable periods

• Second-quarter revenue rose 0.5% as reported; management said it rose 3.6% on a constant-currency basis. First-half revenue grew 1.3% reported and 4.5% constant currency.
• Second-quarter gross margin increased 3.2% reported, and first-half gross margin increased 3.0%. Permanent recruitment growth contributed, while contracting gross margin declined.
• Second-quarter operating income improved from a $2.4 million loss to $2.3 million income; first-half operating loss of $6.1 million turned into $1.6 million income. Net loss for the first half narrowed from $6.6 million to $0.1 million.
• Management attributed much of the improvement to lower corporate expense, including the absence of the prior-year arbitration-related charge, and lower overall SG&A relative to revenue.
• Asia Pacific revenue and gross margin grew, while Europe revenue fell on a constant-currency basis, principally from weaker U.K. contracting demand. Continental Europe grew. The U.K. pound’s weakness reduced reported U.S.-dollar results.
• Operating cash use improved from $10.1 million to $4.5 million year over year, but accounts receivable increased $9.8 million during the first half and contributed to cash use.

Outlook, commentary, risks, and unusual items

Management stated it believed available liquidity was sufficient for at least the next 12 months. For full-year 2017, it expected capital expenditures of approximately $1.5–$2.5 million and restructuring payments of $2.0–$2.5 million. It cautioned that uncertain economic and credit conditions could increase cash needs and that additional funding, if needed, might not be available on reasonable terms.

At June 30, the company reported $14.9 million of cash and approximately $22.7 million of additional borrowing availability under its facilities and local arrangements; it reported compliance with applicable financial covenants. It cited Brexit-related currency and business uncertainty, global economic conditions, client demand, collections, foreign exchange, and access to credit among relevant risks. About 92% of first-half gross margin was generated outside the United States; the company did not hedge interest-rate exposure and said a 1% rate change would not materially affect earnings.

Business reorganization included a $0.1 million credit in the second quarter and $0.2 million of expense for the first half, mainly reflecting estimates and lease-exit costs. The filing discusses ordinary-course claims and legal matters, with reserves of approximately $0.1 million; management did not expect pending matters to have a material adverse effect. The 2016 period included a significant charge related to an arbitration award to a former CEO. The six-month 2017 effective tax rate was 107.3%, primarily reflecting inability to recognize certain tax benefits and differences among jurisdictions. No material change to previously disclosed risk factors was reported.

Important facts for investors to verify

• Confirm the issuer: the document identifies Hudson Global, Inc., despite the request naming Star Equity Holdings, Inc.
• Review whether operating cash use and the increase in receivables indicate persistent working-capital pressure.
• Assess whether U.K. contracting weakness and currency movements continue to offset growth in Asia Pacific and Continental Europe.
• Verify the composition and availability of borrowing capacity, facility covenants, and the company’s stated 12-month liquidity assessment.
• Check the tax-rate effects, restructuring estimates and payments, and the status of legal, tax, and other contingencies.