Star Equity Holdings, Inc. quarterly report, Q2 FY2014

Business context and reporting period

Important entity mismatch: The supplied filing is Hudson Global, Inc.’s Form 10-Q for the quarter ended June 30, 2014; it is not a Star Equity Holdings, Inc. filing. The summary below reflects the filing provided. Hudson provides recruitment and talent solutions across three regions and operates in 20 countries.

Financial performance and liquidity

Amounts below are in millions of U.S. dollars, except per-share data and percentages.

For the six months ended June 30, operating cash flow was negative $18.3 million, versus negative $7.2 million a year earlier; capital expenditures were $2.7 million. Cash fell to $17.9 million from $37.4 million at year-end 2013, primarily reflecting a $12.6 million increase in accounts receivable and operating cash use. At June 30, current assets were $128.7 million and current liabilities were $70.2 million. Short-term borrowings were $2.2 million; total liabilities were $87.3 million and stockholders’ equity was $68.6 million.

Material changes versus the prior comparable period

• Q2 revenue declined 2.3% reported, while gross margin rose 3.8%; six-month revenue also declined 2.3%, while gross margin increased 2.7%.
• Permanent recruitment and talent management grew, partly offsetting lower temporary contracting revenue. For the first half, contracting revenue fell $18.2 million, while permanent recruitment increased $7.4 million.
• Regional performance diverged: Europe’s first-half EBITDA improved to $2.8 million from a $5.8 million loss, while Americas and Asia Pacific reported first-half EBITDA losses of $2.0 million and $0.9 million, respectively.
• Net losses improved year over year, but cash used in operations worsened substantially, largely due to receivables growth. The filing reports $1.4 million of costs related to the proxy contest and organizational strategy review.

Outlook, management commentary, risks and unusual items

• Management said Q2 was its best gross-margin and EBITDA performance since Q4 2012 and described progress toward sustained profitability. It provided no specific revenue or earnings guidance.
• On July 29, 2014, the company approved a plan to divest Legal eDiscovery, expected to be completed within 12 months. The business was classified as held for sale after quarter-end; its June 30 assets were $12.0 million and liabilities $2.8 million.
• A new 2014 restructuring plan approved July 29 could incur charges of up to $7.0 million over the following 12 months. Management estimated an eventual annualized return of 1.5–2 times the charge; timing depends partly on strategic actions, including the eDiscovery sale.
• The RBS revolving facility, with an August 5, 2014 maturity, was not renewed. On August 1, the company entered replacement facilities: a U.K. receivables facility of up to $25.2 million with Lloyds and a U.S. facility of up to $10.0 million with Siena, both subject to borrowing-base limits and covenants. A sale of eDiscovery reduces the Siena limit to $5.0 million.
• Management believed liquidity was sufficient for at least 12 months, citing June 30 cash and then-available facilities. It estimated next-12-month capital expenditures of $3–4 million, payments for prior restructuring of $2–3 million, and up to $7 million for the new plan. It cautioned that deteriorating markets, cash generation, receivables or credit availability could increase funding needs.
• Market risks include mixed global economic conditions, weaker Asia-Pacific conditions amid slower China growth, foreign-exchange exposure, client demand variability, execution of strategic initiatives, and activist-stockholder disruption. The filing notes employee disputes associated with reorganizations; recorded legal and other contingency reserves were $0.2 million at June 30. Management did not expect pending matters to have a material adverse effect.

Most important facts for investors to verify

• Confirm the intended issuer: this filing identifies Hudson Global, Inc., not Star Equity Holdings, Inc.
• Track receivables, operating cash flow and cash conversion; first-half operating cash use increased despite a smaller net loss.
• Assess actual borrowing availability and covenant compliance under Lloyds, Siena and Westpac facilities, including the effects of receivables eligibility and any eDiscovery sale.
• Verify progress, proceeds and timing of the Legal eDiscovery divestiture and the associated reduction in U.S. facility capacity.
• Monitor restructuring charges against the $7.0 million ceiling and whether projected savings and returns are achieved.
• Compare subsequent operating results with management’s profitability commentary, especially contracting trends and performance across regions.