UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31, 2010
or
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from to
Commission
file number: 000-50129
HUDSON
HIGHLAND GROUP, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
59-3547281
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
560
Lexington Avenue, New York, New York 10022
(Address
of principal executive offices) (Zip Code)
(212) 351-7300
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
o
|
|
Accelerated filer
|
x
|
||
|
Non-accelerated
filer
|
o
|
|
Smaller reporting company
|
o
|
||
Indicate
by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Class
|
Outstanding
on April 7, 2010
|
|
|
Common
Stock - $0.001 par value
|
32,148,895
|
HUDSON
HIGHLAND GROUP, INC.
INDEX
|
|
Page
|
||
|
|
PART
I – FINANCIAL INFORMATION
|
||
|
Item 1.
|
|
Financial
Statements (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Operations - Three Months Ended March 31, 2010
and 2009
|
3
|
|
|
|
Condensed
Consolidated Balance Sheets - March 31, 2010 and December 31,
2009
|
4
|
|
|
|
Condensed
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2010
and 2009
|
5
|
|
|
|
Condensed
Consolidated Statement of Changes in Stockholders’ Equity – Three Months
Ended March 31, 2010
|
6
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
Item 2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
15
|
|
Item 3.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
27
|
|
Item 4.
|
|
Controls
and Procedures
|
27
|
|
|
PART II
– OTHER INFORMATION
|
||
|
Item 1.
|
|
Legal
Proceedings
|
27
|
|
Item 1A.
|
|
Risk
Factors
|
27
|
|
Item 2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
|
Item 3.
|
|
Defaults
Upon Senior Securities
|
28
|
|
Item 4.
|
|
Removed
and
Reserved
|
28
|
|
Item 5.
|
|
Other
Information
|
28
|
|
Item 6.
|
|
Exhibits
|
28
|
|
|
Signatures
|
29
|
|
|
|
Exhibit
Index
|
30
|
|
- 2
- -
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(unaudited)
|
Three Months Ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | 180,118 | $ | 165,150 | ||||
|
Direct
costs
|
113,697 | 103,146 | ||||||
|
Gross
margin
|
66,421 | 62,004 | ||||||
|
Operating
expenses:
|
||||||||
|
Selling,
general and administrative
expenses
|
68,333 | 71,702 | ||||||
|
Depreciation
and amortization
|
2,287 | 3,788 | ||||||
|
Business
reorganization and integration
expenses
|
113 | 5,839 | ||||||
|
Operating
loss
|
(4,312 | ) | (19,325 | ) | ||||
|
Other
(expense) income :
|
||||||||
|
Interest,
net
|
(232 | ) | (191 | ) | ||||
|
Other,
net
|
658 | 621 | ||||||
|
Loss
from continuing operations before provision for income
taxes
|
(3,886 | ) | (18,895 | ) | ||||
|
Provision
for (benefit from) income
taxes
|
252 | (4,060 | ) | |||||
|
Loss
from continuing operations
|
(4,138 | ) | (14,835 | ) | ||||
|
(Loss)
income from discontinued operations, net of income
taxes
|
(69 | ) | 9,276 | |||||
|
Net
loss
|
$ | (4,207 | ) | $ | (5,559 | ) | ||
|
(Loss)
earnings per share:
|
||||||||
|
Basic
and diluted
|
||||||||
|
(Loss)
income from continuing
operations
|
$ | (0.16 | ) | $ | (0.59 | ) | ||
|
Income
from discontinued operations
|
- | 0.37 | ||||||
|
Net
(loss) income
|
$ | (0.16 | ) | $ | (0.22 | ) | ||
|
Basic
and diluted weighted average shares
outstanding:
|
26,257 | 25,171 | ||||||
See
accompanying notes to condensed consolidated financial statements.
- 3
- -
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except per share amounts)
(unaudited)
|
March 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 24,128 | $ | 36,064 | ||||
|
Accounts
receivable, less allowance for doubtful accounts of $2,006 and $2,423,
respectively
|
113,213 | 98,994 | ||||||
|
Prepaid
and other
|
13,752 | 13,308 | ||||||
|
Total
current assets
|
151,093 | 148,366 | ||||||
|
Property
and equipment, net
|
17,874 | 19,433 | ||||||
|
Other
assets
|
12,420 | 14,145 | ||||||
|
Total
assets
|
$ | 181,387 | $ | 181,944 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 12,844 | $ | 12,811 | ||||
|
Accrued
expenses and other current
liabilities
|
62,395 | 54,103 | ||||||
|
Short-term
borrowings
|
11,380 | 10,456 | ||||||
|
Accrued
business reorganization
expenses
|
5,315 | 8,784 | ||||||
|
Total
current liabilities
|
91,934 | 86,154 | ||||||
|
Other
non-current liabilities
|
9,603 | 10,768 | ||||||
|
Income
tax payable, non-current
|
8,573 | 8,415 | ||||||
|
Accrued
business reorganization expenses,
non-current
|
369 | 347 | ||||||
|
Total
liabilities
|
110,479 | 105,684 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.001 par value, 10,000 shares authorized; none issued or
outstanding
|
- | - | ||||||
|
Common
stock, $0.001 par value, 100,000 shares authorized; issued 27,319 and
26,836 shares, respectively
|
27 | 27 | ||||||
|
Additional
paid-in capital
|
446,118 | 445,541 | ||||||
|
Accumulated
deficit
|
(407,721 | ) | (403,514 | ) | ||||
|
Accumulated
other comprehensive income—translation
adjustments
|
32,484 | 34,509 | ||||||
|
Treasury
stock, 0 and 114 shares, respectively, at
cost
|
- | (303 | ) | |||||
|
Total
stockholders’ equity
|
70,908 | 76,260 | ||||||
|
Total
liabilities and stockholders'
equity
|
$ | 181,387 | $ | 181,944 | ||||
See
accompanying notes to condensed consolidated financial statements.
- 4
- -
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
Three Months Ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating
activities:
|
||||||||
|
Net
loss
|
$ | (4,207 | ) | $ | (5,559 | ) | ||
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
2,287 | 3,818 | ||||||
|
Recovery
of doubtful accounts
|
(228 | ) | (150 | ) | ||||
|
Benefit
from deferred income taxes
|
(766 | ) | (2,324 | ) | ||||
|
Stock-based
compensation
|
371 | 449 | ||||||
|
Net
gain on disposal of assets
|
- | (11,625 | ) | |||||
|
Other,
net
|
(762 | ) | - | |||||
|
Changes
in assets and liabilities, net of effects of business
acquisitions:
|
||||||||
|
(Increase)
decrease in accounts
receivable
|
(16,495 | ) | 22,992 | |||||
|
(Increase)
decrease in other assets
|
(1,318 | ) | 757 | |||||
|
Increase
(decrease) in accounts payable, accrued expenses and other
liabilities
|
9,704 | (18,422 | ) | |||||
|
(Decrease)
increase in accrued business reorganization
expenses
|
(3,409 | ) | 2,513 | |||||
|
Net
cash used in operating
activities
|
(14,823 | ) | (7,551 | ) | ||||
|
Cash
flows from investing
activities:
|
||||||||
|
Capital
expenditures
|
(1,102 | ) | (500 | ) | ||||
|
Payment
received on note from asset
sale
|
3,500 | - | ||||||
|
Net
cash provided by (used in) investing
activities
|
2,398 | (500 | ) | |||||
|
Cash
flows from financing
activities:
|
||||||||
|
Borrowings
under credit facility and other short term
financing
|
10,963 | 39,985 | ||||||
|
Repayments
under credit facility and other short term
financing
|
(10,039 | ) | (34,035 | ) | ||||
|
Purchase
of treasury stock, including
fees
|
- | (703 | ) | |||||
|
Purchase
of restricted stock from
employees
|
(32 | ) | (55 | ) | ||||
|
Net
cash provided by financing
activities
|
892 | 5,192 | ||||||
|
Effect
of exchange rates on cash and cash
equivalents
|
(403 | ) | (90 | ) | ||||
|
Net
decrease in cash and cash
equivalents
|
(11,936 | ) | (2,949 | ) | ||||
|
Cash
and cash equivalents, beginning of the
period
|
36,064 | 49,209 | ||||||
|
Cash
and cash equivalents, end of the
period
|
$ | 24,128 | $ | 46,260 | ||||
|
Supplemental
disclosures of cash flow
information:
|
||||||||
|
Cash
paid during the period for
interest
|
$ | 315 | $ | 238 | ||||
|
Cash
payment (refund), net during the period for income
taxes
|
$ | 582 | $ | (609 | ) | |||
See
accompanying notes to condensed consolidated financial statements.
- 5
- -
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in
thousands)
(unaudited)
|
Common stock
|
Additional
paid-in
|
Accumulated
|
Accumulated
other
comprehensive
|
Treasury
|
||||||||||||||||||||||||
|
Shares
|
Value
|
capital
|
deficit
|
income (loss)
|
stock
|
Total
|
||||||||||||||||||||||
|
Balance
at January 1,
2010
|
26,722 | $ | 27 | $ | 445,541 | $ | (403,514 | ) | $ | 34,509 | $ | (303 | ) | $ | 76,260 | |||||||||||||
|
Net
loss
|
- | - | - | (4,207 | ) | - | - | (4,207 | ) | |||||||||||||||||||
|
Other
comprehensive loss, translation adjustments
|
- | - | - | - | (2,025 | ) | - | (2,025 | ) | |||||||||||||||||||
|
Purchase
of restricted stock from employees
|
(7 | ) | - | - | - | - | (32 | ) | (32 | ) | ||||||||||||||||||
|
Issuance
of shares for 401(k) plan contribution
|
121 | - | 206 | - | - | 335 | 541 | |||||||||||||||||||||
|
Stock-based
compensation
|
483 | - | 371 | - | - | - | 371 | |||||||||||||||||||||
|
Balance
at March 31, 2010
|
27,319 | $ | 27 | $ | 446,118 | $ | (407,721 | ) | $ | 32,484 | $ | - | $ | 70,908 | ||||||||||||||
See
accompanying notes to condensed consolidated financial statements.
- 6
- -
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share amounts)
(unaudited)
NOTE
1 – BASIS OF PRESENTATION
These
interim unaudited condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (“GAAP”) for interim
financial information and with the instructions to Form 10-Q and should be read
in conjunction with the consolidated financial statements and related notes of
Hudson Highland Group, Inc. and its subsidiaries (the “Company”) filed in its
Annual Report on Form 10-K for the year ended December 31,
2009.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of operating revenues and expenses. These estimates are based
on management’s knowledge and judgments. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been included. The results
of operations for interim periods are not necessarily indicative of the results
of operations for the full year. The
Condensed Consolidated Financial Statements include the accounts of the Company
and all of its wholly-owned and majority-owned subsidiaries. All significant
intra-entity balances and transactions between and among the Company and its
subsidiaries have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform to the current period
presentation.
NOTE
2 – DESCRIPTION OF BUSINESS
The
Company provides professional staffing services on a permanent and contract
basis and a range of human capital services to businesses operating in a wide
variety of industries. The Company’s operations, assets and liabilities are
organized into
four reportable segments—Hudson Americas, Hudson Europe, Hudson Australia
and New Zealand (‘ANZ”),
and Hudson Asia (“Hudson
regional businesses” or “Hudson”),
which constituted approximately 14%,
49%, 27%,
and 10%, respectively,
of the Company’s gross margin for the three months ended March 31,
2010.
Corporate
expenses are reported separately from the four reportable segments and pertain
to certain functions, such as executive management, corporate governance, human
resources, accounting, administration, tax and treasury some of which are
attributable and have been allocated to the reportable
segments.
Hudson
Americas operates from 28 offices in the United States (“U.S.”) and Canada,
with
98% of its gross margin generated in the U.S. during
the three months ended March 31, 2010. Hudson Europe operates from 38
offices in 13 countries, with 45% of its gross margin generated in the United
Kingdom (“U.K.”) during the three months ended March 31, 2010.
Hudson ANZ operates from 12 offices in Australia and New Zealand, with 89% of
its gross margin generated in Australia during the three months ended
March 31, 2010. Hudson Asia operates from 5 offices in China, Hong Kong and
Singapore, with 48% of
its gross margin generated in China during the three months ended March 31,
2010.
The
Hudson regional businesses provide professional contract personnel and permanent
recruitment services to a wide range of clients. With respect to contract
personnel, Hudson focuses on providing to its clients candidates with
specialized functional skills and competencies, such as accounting and finance,
legal and information technology. Hudson provides permanent recruitment services
on both a retained and contingent basis and focuses on mid-level professionals.
The Hudson regional businesses also provide human capital services, the largest
of which are assessment and development services, through their Talent
Management Solutions units.
NOTE
3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Updates (“ASU”) 2010-09 “Amendments
to Certain Recognition and Disclosure Requirements” amending FASB
Accounting Standards Codification (“ASC”) Topic 855, “Subsequent
Events.” The amendment eliminates the requirement in ASC Topic 855 to
disclose the date through which subsequent events have been evaluated in the
consolidated financial statements of SEC filers and is effective for reports
filed after February 24, 2010. The Company evaluated all events and transactions
through the issuance date of our condensed consolidated financial statements. No
recognized or unrecognized subsequent events and transactions were
noted.
In
January 2010, the FASB issued ASU 2010-6, “Improving
Disclosures about Fair Measurements." ASU 2010-6 provides amendments to
ASC Topic 820 that require separate disclosure of significant transfers in and
out of Level 1 and Level 2 fair value measurements and the presentation of
separate information regarding purchases, sales, issuances and settlements for
Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to
ASC Topic 820 that clarify existing disclosures about the level of
disaggregation and inputs and valuation techniques. The new disclosures and
clarification of existing disclosures of ASU 2010-6 are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosure about purchases, sales, issuance, and settlements in the rollforward
of activity in Level 3 fair value measurements. Those disclosures are effective
for fiscal years beginning after December 15, 2010 and for interim periods
within those fiscal years. The Company expects the adoption of ASU 2010-06 will
not have a material impact on the Company’s results of operations or financial
position.
- 7
- -
NOTE
4 – EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share are computed by dividing the Company’s net (loss)
income by the weighted average number of shares outstanding during the period.
When the effects are not anti-dilutive, diluted earnings (loss) per share are
computed by dividing the Company’s net (loss) income by the weighted average
number of shares outstanding and the impact of all dilutive potential common
shares, primarily stock options and unvested restricted stock. The dilutive
impact of stock options and unvested restricted stock is determined by applying
the “treasury stock” method. For the periods in which losses are presented,
dilutive loss per share calculations do not differ from basic loss per share
because the effects of any potential common stock were anti-dilutive and
therefore not included in the calculation of dilutive earnings per share. For
the three months ended March 31, 2010 and 2009, the effect of approximately
2,771,459, and 2,492,335, respectively, of outstanding stock options and other
common stock equivalents was excluded from the calculation of diluted loss per
share because the effect was anti-dilutive.
NOTE
5 – STOCK-BASED COMPENSATION
The
Company accounts for stock-based compensation in accordance with ASC
Topic 718 "Compensation
– Stock Compensation",
as interpreted by the Securities Exchange Commission (“SEC”) Staff Accounting
Bulletins No. 107 and No. 110. Under ASC Topic718, stock-based
compensation is based on the fair value of the award on the date of grant, which
is recognized over the related service period, net of estimated forfeitures. For
awards with graded vesting conditions, the values of the awards are determined
by valuing each tranche separately and expensing each tranche over the required
service period. The service period is the period over which the related service
is performed, which is generally the same as the vesting period. The Company
uses the Black-Scholes option-pricing model to determine the compensation
expense related to stock options.
Incentive
Compensation Plan
The
Company maintains the Hudson Highland Group, Inc. 2009 Incentive Stock
and Awards Plan (the “ISAP”) pursuant
to which it can issue equity-based compensation incentives to eligible
participants. The ISAP permits the granting of stock options and restricted
stock as well as other types of equity-based awards. The Compensation Committee
of the Company’s Board of Directors will establish such conditions as it deems
appropriate on the granting or vesting of stock options or restricted stock.
While the Company historically granted both stock options and restricted stock
to its employees, since 2008 the Company has primarily granted restricted stock
to its employees. Occasionally, the Company continues to grant stock options to
certain of its executive employees at the time of
hire.
The ISAP
provides that an aggregate of 1,600,000 shares of the Company’s common stock are
reserved for issuance to participants. The Compensation Committee of the
Company’s Board of Directors administers the ISAP and may designate any of the
following as a participant under the ISAP: any officer or other employee of the
Company or its affiliates or individuals engaged to become an officer or
employee, consultants or other independent contractors who provide services to
the Company or its affiliates and non-employee directors of the
Company.
Stock
Options
Stock
options granted under the ISAP generally expire ten years after the date of
grant. Stock options granted under the ISAP have an exercise price of at least
100% of the fair market value of the underlying stock on the date of grant and
generally vest ratably over a four year period.
For
the three months ended March 31, 2010 and 2009, the Company recognized
$52 and
$193, respectively, of stock-based compensation expense related to stock
options.
As
of March 31, 2010, the Company had
$117 of
total unrecognized stock-based compensation expense related to outstanding
non-vested stock options. The Company expects to recognize that cost over a
weighted average service period of approximately 1.3
years.
Changes
in the Company’s stock options for the three months ended March 31, 2010
were as follows:
|
Weighted
|
||||||||
|
Number of
|
Average
|
|||||||
|
Options
|
Exercise Price
|
|||||||
|
Outstanding
|
per Share
|
|||||||
|
Options
outstanding, beginning of year
|
1,763,250 | $ | 12.79 | |||||
|
Forfeited
|
(12,625 | ) | 15.59 | |||||
|
Expired
|
(950 | ) | 8.53 | |||||
|
Options
outstanding at March 31, 2010
|
1,749,675 | 12.78 | ||||||
|
Options
exercisable at March 31, 2010
|
1,661,175 | $ | 12.86 | |||||
Restricted
Stock
During
the three months ended March 31, 2010, the Company granted 524,332 shares
of restricted stock to various employees. Shares of restricted stock with only
service-based vesting conditions and
shares of restricted stock with performance
vesting conditions are
valued at the closing market value of the Company’s common stock on the date of
grant. The
Company recognizes compensation cost for the awards with performance conditions
if and when the Company concludes that it is probable that the performance
condition will be achieved. Of
the 524,332 shares granted, (i) 14,667 shares vested immediately,
(ii) 224,332 shares vest ratably over a three year period from the date of
grant with only service-based conditions, (iii) 240,333 shares vest ratably
over a three year period from the date of grant based on performance of the
Company’s Gross Margin and Earnings Before Interest, Income Taxes, Depreciation
and Amortization (“EBITDA”) and (iv) 45,000 shares vest in full on April 1,
2013.
For
the three months ended March 31, 2010 and 2009, the Company recognized $319
and $256, respectively, of stock-based compensation expense related to
restricted stock.
- 8
- -
As
of March 31, 2010, the Company had $2,883 of total unrecognized stock-based
compensation expense related to outstanding nonvested restricted stock. That
cost is expected to be recognized over a weighted average service period of 2.0
years.
Changes
in the Company’s restricted stock for the three months ended March 31, 2010
were as follows:
|
Number of
|
Weighted
|
|||||||
|
Shares of
|
Average
|
|||||||
|
Restricted
|
Grant-Date
|
|||||||
|
Stock
|
Fair Value
|
|||||||
|
Nonvested
restricted stock, beginning of year
|
531,083 | $ | 2.70 | |||||
|
Granted
|
524,332 | 4.55 | ||||||
|
Vested
|
(71,671 | ) | 2.57 | |||||
|
Forfeited
|
(18,000 | ) | 1.57 | |||||
|
Nonvested
restricted stock at March 31, 2010
|
965,744 | $ | 3.74 | |||||
Defined
Contribution Plans
The
Company maintains the Hudson Highland Group, Inc. 401(k) Savings Plan (the
“401(k) plan”). The 401(k) plan allows eligible employees to contribute up to
15% of their earnings to the 401(k) plan. The Company has the discretion to
match employees’ contributions up to 3% through a contribution of the Company’s
common stock. Vesting of the Company’s contribution occurs over a five-year
period. For the three months ended March 31, 2010 and 2009, the Company
recognized $233 and
$272, respectively, of expense for the 401(k) plan. In March 2010, the Company
issued 121,016 shares of its common stock with a value of
$541 plus cash
of $111 to
satisfy the 2009 contribution liability to the 401(k) plan. In March 2009, the
Company issued 1,318,161 shares of its common stock with a value of $1,226 to
satisfy the 2008 contribution liability to the 401(k)
plan.
NOTE 6
– DISCONTINUED OPERATIONS
In
the second and first quarter of 2009, the Company exited the markets in Italy
and Japan, respectively. In accordance with the provision of ASC
Topic 205-20-45 “Reporting Discontinued Operations” the assets, liabilities, and
results of operations of the Italy and Japan operations were reclassified as
discontinued operations.
In
the first quarter of 2008, the Company sold substantially all of the assets of
Hudson Americas’ energy, engineering and technical staffing division (“ETS”) to
System One Holdings LLC.
In
the third quarter of 2006, the Company sold its Highland Partners executive
search business (“Highland”) to Heidrick & Struggles International,
Inc. As a result of Highland achieving certain revenue metrics in 2008, the
Company received an additional and final earn-out payment of $11,625 on April 9,
2009, which was accrued in the three months ended March 31, 2009 and reflected
within discontinued operations as a gain from sale of discontinued
operations.
Italy
was part of the Hudson Europe reportable segment, Japan was part of the Hudson
Asia reportable segment, and ETS was part of the Hudson Americas reportable
segment. The Highland business was a separate reportable segment of the Company
at the time of its sale. The gain or loss on sale and results of operations of
the disposed businesses were reported in discontinued operations in the relevant
periods.
Reported
results for the discontinued operations were insignificant for the three months
ended March 31, 2010. The reported results for the discontinued operations for
the three months ended March 31, 2009 were as
follows:
|
For The Three Months Ended March 31, 2009
|
||||||||||||||||||||
|
Italy
|
Japan
|
ETS
|
Highland
|
Total
|
||||||||||||||||
|
Revenue
|
$ | 333 | $ | 743 | $ | - | $ | - | $ | 1,076 | ||||||||||
|
Gross
margin
|
$ | 309 | $ | 727 | $ | - | $ | - | $ | 1,036 | ||||||||||
|
Operating
income (loss)
|
$ | (390 | ) | $ | (1,650 | ) | $ | (62 | ) | $ | - | $ | (2,102 | ) | ||||||
|
Other
income (expense)
|
(3 | ) | (244 | ) | - | - | (247 | ) | ||||||||||||
|
Gain
(loss) from sale of discontinued
operations
|
- | - | - | 11,625 | 11,625 | |||||||||||||||
|
Provision
for (benefit from) income taxes
(a)
|
- | - | - | - | - | |||||||||||||||
|
Income
(loss) from discontinued
operations
|
$ | (393 | ) | $ | (1,894 | ) | $ | (62 | ) | $ | 11,625 | $ | 9,276 | |||||||
|
(a)
|
Income
tax expense is provided at the effective tax rate by taxing jurisdiction
and differs from the U.S. statutory tax rate of 35% due to differences in
the foreign statutory tax rates, as well as the ability to offset certain
net operating losses (“NOLs”) against taxable
profits.
|
- 9
- -
NOTE 7
– REVENUE, DIRECT COSTS AND GROSS MARGIN
The
Company’s revenue, direct costs and gross margin were as
follows:
|
For The Three Months Ended March 31, 2010
|
For The Three Months Ended March 31, 2009
(2)
|
|||||||||||||||||||||||
|
Temporary
|
Other
|
Total
|
Temporary
|
Other
|
Total
|
|||||||||||||||||||
|
Revenue
|
$ | 135,033 | $ | 45,085 | $ | 180,118 | $ | 125,261 | $ | 39,889 | $ | 165,150 | ||||||||||||
|
Direct
costs (1)
|
110,556 | 3,141 | 113,697 | 99,647 | 3,499 | 103,146 | ||||||||||||||||||
|
Gross
margin
|
$ | 24,477 | $ | 41,944 | $ | 66,421 | $ | 25,614 | $ | 36,390 | $ | 62,004 | ||||||||||||
|
(1)
|
Direct
costs include the direct staffing costs of salaries, payroll taxes,
employee benefits, travel expenses and insurance costs for the Company’s
contractors and reimbursed out-of-pocket expenses and other direct costs.
Other than reimbursed out-of-pocket expenses, there are no other direct
costs associated with the Other category, which includes the search,
permanent recruitment and other human resource solutions’ revenue. Gross
margin represents revenue less direct costs. The region where services are
provided, the mix of contracting and permanent recruitments, and the
functional nature of the staffing services provided can affect gross
margin. The salaries, commissions, payroll taxes and employee benefits
related to recruitment professionals are included in selling, general and
administrative
expenses.
|
|
(2)
|
For
the three months ended March 31, 2009, the Company reclassified $1,331 of
Temporary Revenue, $1,128 of Temporary Direct Costs and $203 of Temporary
Gross Margin from Other Revenue, Other Direct Costs and Other Gross
Margin, respectively. The Company reclassified these amounts to be
consistent with similar
arrangements.
|
NOTE
8 – PROPERTY AND EQUIPMENT, NET
As
of March 31, 2010 and December 31, 2009, property and equipment, net
consisted of the following:
|
March 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Computer
equipment
|
$ | 18,840 | $ | 19,095 | ||||
|
Furniture
and equipment
|
14,135 | 14,635 | ||||||
|
Capitalized
software costs
|
32,605 | 32,074 | ||||||
|
Leasehold
and building improvements
|
22,753 | 24,194 | ||||||
|
Transportation
equipment
|
22 | 22 | ||||||
| 88,355 | 90,020 | |||||||
|
Less:
accumulated depreciation and
amortization
|
70,481 | 70,587 | ||||||
|
Property
and equipment, net
|
$ | 17,874 | $ | 19,433 | ||||
- 10
- -
NOTE
9 – INCOME TAXES
The
provision for income taxes for the three months ended March 31, 2010 was
$252 on a pre-tax loss of $3,886, compared with a benefit from income taxes of
$4,060 on pre-tax loss of $18,895 for the same period of 2009. The effective tax
rate for the three months ended March 31, 2010 was negative 6.5% as
compared to 21.5% for the same period of 2009. In the current period, the
effective tax rate differs from the U.S. federal statutory rate of 35% primarily
due to the ability to benefit from losses incurred in foreign jurisdictions and
the inability to recognize tax benefits on net U.S. losses. The Company records
a valuation allowance against deferred tax assets to the extent that it is more
likely than not that some portion, or all of, the deferred tax assets will not
be realized.
Under
ASC Topic 270, “Interim Reporting”, and
ASC Topic 740-270,
“Income
Taxes –
Intra Tax Allocation”,
the Company is required to adjust its effective tax rate for each quarter to be
consistent with the estimated annual effective tax rate. Jurisdictions with a
projected loss for the full year where no tax benefit can be recognized are
excluded from the calculation of the estimated annual effective tax rate.
Applying the provision of ASC Topic 270 and 740 could result in a higher or
lower effective rate during a particular quarter, based upon the mix and timing
of actual earnings versus annual
projections.
As
of March 31, 2010 and December 31, 2009, the Company had $8,529 and
$8,528, respectively, of uncertain tax benefits, including interest and
penalties, which if recognized in the future, would affect the annual effective
income tax rate. Reductions to uncertain tax positions from the lapse of the
applicable statutes of limitations during the next twelve months are estimated
to be approximately
$1,000
to
$4,400,
not including
any potential new additions.
Estimated
interest costs and penalties are classified as part of the provision for income
taxes in the Company’s Condensed Consolidated Statements of Operations and
totaled ($18) and $81, respectively, for the three months ended March 31,
2010 and 2009. Accrued interest and penalties were $1,992
and
$2,014 as of March 31, 2010 and December 31, 2009, respectively. In
many cases, the Company’s uncertain tax positions are related to tax years that
remain subject to examination by the relevant tax authorities. Tax years that
had NOLs would remain open until the expiration of the statute of limitations of
the future tax years those NOLs would be utilized. Notwithstanding the above,
the open tax years are 2006 through 2009 for the U.S. Federal and 2005 through
2009 for most U.S. state and local jurisdictions, 2007 through 2009 for the
U.K., 2000 through 2003 and 2005 through 2009 for Australia and 2003 through
2009 for most other jurisdictions. The Company is currently under income
tax examination in China (2008), Switzerland (2008), France
(2006-2008), the State of Texas (2004 to 2006) and the State of
Pennsylvania (2004-2005).
NOTE
10 – BUSINESS REORGANIZATION EXPENSES
The
following table contains amounts for Changes in Estimate and Additional Charges
related to prior restructuring plans that were incurred or recovered in the
current period. These amounts are classified as business reorganization expenses
in the Company’s Condensed Consolidated Statements of Operations. Amounts in the
“Payments” column represent the cash payments associated with the reorganization
plans. Changes in the accrued business reorganization expenses for the three
months ended March 31, 2010 were as follows:
|
For The Three Months Ended March 31,
|
December 31,
|
Changes in
|
Additional
|
March 31,
|
||||||||||||||||
|
2010
|
2009
|
Estimate
|
Charges
|
Payments
|
2010
|
|||||||||||||||
|
Lease
termination payments
|
$ | 4,897 | $ | (45 | ) | $ | - | $ | (919 | ) | $ | 3,933 | ||||||||
|
Employee
termination benefits
|
4,100 | 146 | - | (2,613 | ) | 1,633 | ||||||||||||||
|
Contract
cancellation costs
|
134 | 12 | - | (28 | ) | 118 | ||||||||||||||
|
Total
|
$ | 9,131 | $ | 113 | $ | - | $ | (3,560 | ) | $ | 5,684 | |||||||||
NOTE
11 – COMMITMENTS AND CONTINGENCIES
The
Company has entered into various consulting, employment and non-compete
agreements with certain key management personnel, executive search consultants
and former owners of acquired businesses. Agreements with key members of
management are on an at will basis, provide for compensation and severance
payments under certain circumstances, and are automatically renewed annually
unless either party gives sufficient notice of termination. Agreements with
certain consultants and former owners of acquired businesses are generally two
to five years in length. The Company is subject, from time to time,
to disputes under these agreements, typically associated with
terminations. The Company routinely monitors claims such as these,
and records provisions for losses when the claims become probable and the
amounts due are estimable.
The
Company is subject to, from time to time, various claims, lawsuits, and other
complaints from, for example, clients, candidates, suppliers, landlords, and
taxing authorities in the ordinary course of business. The Company routinely
monitors claims such as these, and records provisions for losses when the claim
becomes probable and the amount due is estimable. Although the outcome of these
claims cannot be determined, the Company believes that the final resolution of
these matters will not have a material adverse effect on the Company’s financial
condition, results of operations or liquidity.
The
Company’s reserves were not significant as of March 31, 2010 and December 31,
2009.
On
May 13, 2009, the Company received a “Wells Notice” from the SEC. For further
information refer to Part II – Other Information, Item 1 Legal Proceedings of
this Form 10-Q.
The
Company has certain asset retirement obligations that are primarily the result
of legal obligations for the removal of leasehold improvements and restoration
of premises to their original condition upon termination of leases. As of
March 31, 2010 and December 31, 2009,
$2,340
and $2,935, respectively, of asset retirement obligations were included in the
Condensed Consolidated Balance Sheets under the caption “Other non-current
liabilities.”
NOTE
12 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the three months ended March 31, 2010, the Company issued 121,016 shares of
its common stock held in treasury with a value of $541 for
these shares at issuance, plus cash
of $111
to satisfy its 2009 contribution liability to its 401(k)
plan.
- 11
- -
NOTE
13 – FINANCIAL INSTRUMENTS
Credit
Agreements
The
Company has a primary credit facility (the
“Credit Agreement”) with Wells Fargo Foothill, Inc. and another lender that
provides the Company with the ability to borrow up to $75,000, including the
issuance of letters of credit. The Company’s available borrowings under the
Credit Agreement are based on an agreed percentage of eligible accounts
receivable less required reserves, principally related to the Company’s North
America, the U.K. and Australia operations, as defined in the Credit Agreement.
As of March
31, 2010, the
Company’s borrowing base was $49,938
and the
Company is required
to maintain a minimum borrowing base of $25,000. As of March
31, 2010,
the Company had $10,490 of
outstanding borrowings under the Credit Agreement and a total of $4,153 of
outstanding letters of credit issued under the Credit Agreement, resulting in
the Company being able to borrow up to an additional $10,295 after
deducting the minimum borrowing base.
The
maturity date of the Credit Agreement is July 31, 2012. Borrowings may be
made with an interest rate based on the prime rate plus a margin based on
borrowing availability or an interest rate based on the LIBOR rate plus a margin
based on borrowing availability. The interest rate on outstanding borrowings was
6.75% as of March 31, 2010. Borrowings under the Credit Agreement are
secured by substantially all of the assets of the
Company.
The
Credit Agreement contains various restrictions and covenants, including those
that (1) prohibit payments of dividends; (2) limit the Company’s
capital expenditures in each fiscal year to $11,000; (3) restrict the
ability of the Company to make additional borrowings, or to consolidate, merge
or otherwise fundamentally change the ownership of the Company; (4) limit
dispositions of assets to permitted dispositions in the aggregate not to exceed
$15,000 per year; (5) limit guarantees of indebtedness; (6) prohibit
the Company from making stock repurchases; and (7) limit the amount of
permitted acquisitions to $10,000 per year. The Company was in compliance with
all financial covenants under the Credit Agreement as of March 31,
2010.
The
Company has entered into lending arrangements with local banks
through
its subsidiaries in Belgium, the Netherlands, New Zealand, and China.
The
outstanding borrowings under these lending arrangements were
$890 and $0 as
of March
31, 2010 and December 31, 2009, respectively.
The
Belgium
and the Netherlands subsidiaries
can borrow up to $3,590
based
on an agreed percentage of accounts receivable related to their
operations. Borrowings
under the Belgium and the Netherlands credit
agreements may
be made with an interest rate based on the EURIBOR plus 2.5%, or about
2.9% on March
31, 2010. The
lending arrangements will expire in 2011. In
New Zealand, the Company’s subsidiary
can borrow up to NZD$1,500 (or approximately $1,065 as of March 31,
2010) for
working capital purposes. The
lending arrangement expires on
March 31, 2011. Interest
on borrowings under the New
Zealand facility
is based on a
three month cost of funds rate as determined by the bank, plus a 1.84% margin,
and was 6.1% on March
31, 2010.
In
China,
the
Company’s subsidiary
can borrow up to $1,000 for
working capital purposes. Interest
on borrowings under the overdraft facility is based on the People’s Republic of
China’s six month rate,
plus 200 basis points and
was
6.86% on
March 31, 2010.
The
lending arrangement expires annually each September but can be
renewed for one year periods at
that time.
The
Company expects to continue to use the aforementioned credit, if and when
required, to support its ongoing working capital requirements, capital
expenditures and other corporate purposes and to support letters of credit.
Letters of credit are used to support primarily office
leases.
Restricted
Cash
The
Company had approximately $3,329 and
$3,665 of
restricted cash included in the accompanying Condensed
Consolidated
Balance Sheets on March
31, 2010 and December 31, 2009, respectively. Included in these balances
was
$1,893 held
as collateral under a collateral trust agreement which supports the Company’s
workers’ compensation policy as of March
31, 2010 and December 31, 2009, respectively.
The Company had $154
and $159 deposits with a bank for a customer guarantee in Belgium and $273 and
$293 deposits with a bank in the
Netherlands
as guarantees for the rent on the Company’s offices as of March 31, 2010 and
December 31, 2009, respectively. These balances are included in the caption
“Prepaid and other” and “Other assets” in the accompanying Condensed
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009,
respectively.
The
Company maintained $860 and
$1,127 of
deposits with banks in the Netherlands as required by law as a reserve for
employee social tax payments, $134 and $179 of deposits with banks in Spain as
guarantees for the rent on the Company’s offices, and insignificant business
license deposits with a bank in Singapore as of March 31, 2010 and December 31,
2010, respectively. These deposits totaled to approximately $1,009, and $1,320
as of March 31, 2010 and December 31, 2009, respectively,
and were included in the caption “Cash and cash equivalents” in the accompanying
Condensed
Consolidated
Balance Sheets.
Acquisition
Shelf Registration Statement
The
Company has a shelf registration on file with the SEC to enable it to issue up
to 1,350,000 shares of its common stock from time to time in connection with
acquisitions of businesses, assets or securities of other companies, whether by
purchase, merger or any other form of acquisition or business combination. If
any shares are issued using this shelf registration, the Company will not
receive any proceeds from these offerings other than the assets, businesses or
securities acquired. As of March 31, 2010, all of the 1,350,000 shares were
available for issuance.
Shelf
Registration and Common Stock Offering
In
December 2009, the Company filed a shelf registration statement (the “2009 Shelf
Registration”) with the SEC to enable it to issue up to $30,000 equivalent of
securities or combinations of securities. The types of securities
permitted for issuance under the 2009 Shelf Registration are debt securities,
common stock, preferred stock, warrants, stock purchase contracts and stock
purchase units.
On
April 6, 2010, the Company issued in a registered public offering under
the 2009 Shelf Registration 4,830,000 shares (which share number includes the
exercise of the underwriter’s overallotment option of 630,000 shares) of common
stock at $4.35 per share. Total net proceeds to the Company after underwriting
discounts and expenses of the public offering were approximately
$19,186.
After
this offering, the Company may issue up to $8,990 equivalent of securities or
combinations of securities under the 2009 Shelf Registration.
- 12
- -
NOTE
14– COMPREHENSIVE INCOME
An
analysis of the Company’s comprehensive loss is as
follows:
|
Three Months Ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
loss
|
$ | (4,207 | ) | $ | (5,559 | ) | ||
|
Other
comprehensive loss—translation adjustments
|
(2,025 | ) | (773 | ) | ||||
|
Total
comprehensive loss
|
$ | (6,232 | ) | $ | (6,332 | ) | ||
NOTE
15 – SEGMENT AND GEOGRAPHIC DATA
The
Company operates in four reportable segments: the Hudson regional businesses of
Hudson Americas, Hudson Europe, Hudson ANZ, and Hudson Asia. Corporate expenses
are reported separately from the four reportable segments and pertain to certain
functions, such as executive management, corporate governance, human resources,
accounting, administration, tax and treasury which are not attributable to the
reportable segments.
Segment
information is presented in accordance with ASC
Topic
280, “Segments
Reporting”.
This
standard is based on a management approach that requires segmentation based upon
the Company’s internal organization and disclosure of revenue, certain expenses
and operating income based upon internal accounting methods. The
Company’s financial reporting systems present various data for management to run
the business, including internal profit and loss statements prepared on a basis
not consistent with generally accepted accounting principles. Accounts
receivable, net and long-lived assets are the only significant assets separated
by segment for internal reporting purposes.
In the
first quarter of 2010, the Company revised its reportable segments by
segregating the segments of Hudson ANZ and Hudson Asia (previously included in
the results for Hudson Asia Pacific). The Company has reclassified prior period
information to reflect this change to the segment reporting in accordance with
the requirement of ASC Topic 280-10-50-12 to 19, “Quantitative
Thresholds”.
|
Hudson
|
Hudson
|
Hudson
|
Hudson
|
|||||||||||||||||||||
|
Americas
|
Europe
|
ANZ
|
Asia
|
Corporate
|
Total
|
|||||||||||||||||||
|
For
The Three Months Ended March 31,
2010
|
||||||||||||||||||||||||
|
Revenue
|
$ | 39,507 | $ | 76,654 | $ | 56,822 | $ | 7,135 | $ | - | $ | 180,118 | ||||||||||||
|
Gross
margin
|
$ | 9,279 | $ | 32,530 | $ | 17,776 | $ | 6,836 | $ | - | $ | 66,421 | ||||||||||||
|
Business
reorganization and integration expenses (recovery)
|
$ | 142 | $ | 87 | $ | (116 | ) | $ | - | $ | - | $ | 113 | |||||||||||
|
EBITDA
(loss) (a)
|
$ | (241 | ) | $ | 436 | $ | 249 | $ | 597 | $ | (2,408 | ) | $ | (1,367 | ) | |||||||||
|
Depreciation
and amortization
|
884 | 629 | 557 | 172 | 45 | 2,287 | ||||||||||||||||||
|
Interest income
(expense), net
|
(3 | ) | (24 | ) | 28 | (1 | ) | (232 | ) | (232 | ) | |||||||||||||
|
(Loss)
income from continuing operations before income taxes
|
(1,128 | ) | (217 | ) | (280 | ) | 424 | (2,685 | ) | (3,886 | ) | |||||||||||||
|
As
of March 31, 2010
|
||||||||||||||||||||||||
|
Accounts
receivable, net
|
$ | 24,258 | $ | 51,811 | $ | 30,701 | $ | 6,443 | $ | - | $ | 113,213 | ||||||||||||
|
Long-lived
assets, net of accumulated depreciation and amortization
|
$ | 2,210 | $ | 5,990 | $ | 7,166 | $ | 413 | $ | 2,510 | $ | 18,289 | ||||||||||||
|
Total
assets
|
$ | 29,390 | $ | 79,787 | $ | 47,190 | $ | 11,853 | $ | 13,167 | $ | 181,387 | ||||||||||||
|
Hudson
|
Hudson
|
Hudson
|
Hudson
|
|||||||||||||||||||||
|
Americas
|
Europe
|
ANZ
|
Asia
|
Corporate
|
Total
|
|||||||||||||||||||
|
For
The Three Months Ended March 31,
2009
|
||||||||||||||||||||||||
|
Revenue
|
$ | 44,023 | $ | 66,387 | $ | 49,997 | $ | 4,743 | $ | - | $ | 165,150 | ||||||||||||
|
Gross
margin
|
$ | 10,962 | $ | 30,313 | $ | 16,303 | $ | 4,426 | $ | - | $ | 62,004 | ||||||||||||
|
Business
reorganization and integration expenses
(recovery)
|
$ | 1,624 | $ | 2,338 | $ | 1,884 | $ | (7 | ) | $ | - | $ | 5,839 | |||||||||||
|
EBITDA
(loss)
(a)
|
$ | (5,391 | ) | $ | (3,611 | ) | $ | (1,751 | ) | $ | (615 | ) | $ | (3,548 | ) | $ | (14,916 | ) | ||||||
|
Depreciation
and
amortization
|
1,005 | 1,803 | 661 | 257 | 62 | 3,788 | ||||||||||||||||||
|
Interest income
(expense),
net
|
- | 22 | 68 | 6 | (287 | ) | (191 | ) | ||||||||||||||||
|
(Loss)
income from continuing operations before income taxes
|
$ | (6,396 | ) | $ | (5,392 | ) | $ | (2,344 | ) | $ | (866 | ) | $ | (3,897 | ) | $ | (18,895 | ) | ||||||
|
As
of March 31,
2009
|
||||||||||||||||||||||||
|
Accounts
receivable,
net
|
$ | 24,927 | $ | 50,904 | $ | 23,068 | $ | 4,625 | $ | - | $ | 103,524 | ||||||||||||
|
Long-lived
assets, net of accumulated depreciation and
amortization
|
$ | 6,029 | $ | 7,964 | $ | 4,850 | $ | 859 | $ | 2,973 | $ | 22,675 | ||||||||||||
|
Total
assets
|
$ | 34,942 | $ | 82,930 | $ | 44,306 | $ | 12,704 | $ | 36,120 | $ | 211,002 | ||||||||||||
|
(a)
|
SEC
Regulation S-K 229.10(e)1(ii)(A) defines EBITDA as earnings before
interest, taxes, depreciation and amortization. EBITDA is presented to
provide additional information to investors about the Company’s operations
on a basis consistent with the measures which the Company uses to manage
its operations and evaluate its performance. Management also uses this
measurement to evaluate working capital requirements.
EBITDA should not be considered in isolation or as a substitute for
operating income and net income prepared in accordance with generally
accepted accounting principles or as a measure of the Company’s
profitability.
|
- 13
- -
|
United
|
United
|
Continental
|
Other
|
Other
|
||||||||||||||||||||||||
|
Information
by geographic
region
|
States
|
Australia
|
Kingdom
|
Europe
|
Asia
|
Americas
|
Total
|
|||||||||||||||||||||
|
For
The Three Months Ended March 31, 2010
|
||||||||||||||||||||||||||||
|
Revenue
(b)
|
$ | 39,326 | $ | 50,004 | $ | 49,605 | $ | 27,050 | $ | 13,952 | $ | 181 | $ | 180,118 | ||||||||||||||
|
For
The Three Months Ended March 31, 2009
|
||||||||||||||||||||||||||||
|
Revenue
(b)
|
$ | 43,565 | $ | 42,834 | $ | 38,389 | $ | 27,998 | $ | 11,906 | $ | 458 | $ | 165,150 | ||||||||||||||
|
As
of March 31, 2010
|
||||||||||||||||||||||||||||
|
Long-lived
assets, net of accumulated depreciation and amortization
(c)
|
$ | 4,721 | $ | 5,760 | $ | 3,630 | $ | 2,359 | $ | 1,819 | $ | - | $ | 18,289 | ||||||||||||||
|
Net
assets
|
$ | 7,567 | $ | 17,483 | $ | 25,176 | $ | 14,070 | $ | 6,290 | $ | 322 | $ | 70,908 | ||||||||||||||
|
As
of March 31, 2009
|
||||||||||||||||||||||||||||
|
Long-lived
assets, net of accumulated depreciation and amortization
(c)
|
$ | 8,969 | $ | 3,244 | $ | 4,437 | $ | 3,529 | $ | 2,464 | $ | 32 | $ | 22,675 | ||||||||||||||
|
Net
assets
|
$ | 33,707 | $ | 14,641 | $ | 25,720 | $ | 18,906 | $ | 9,589 | $ | (1 | ) | $ | 102,562 | |||||||||||||
|
(b)
|
Revenue
is generally recorded on a geographic basis according to the location of
the operating
subsidiary.
|
|
(c)
|
Comprised
of property and equipment and intangibles. Corporate assets are included
in the United
States.
|
- 14
- -
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) should be read in conjunction with the Condensed
Consolidated Financial Statements and the notes thereto, included in Item 1
of this Form 10-Q. This MD&A contains forward-looking statements. Please see
“FORWARD-LOOKING STATEMENTS” for a discussion of the uncertainties, risks and
assumptions associated with these statements. This MD&A also uses the
non-generally accepted accounting principles (“GAAP”) measure of earnings
before interest, taxes, depreciation and amortization (“EBITDA”).
See Note 15 to the Condensed Consolidated Financial Statements for EBITDA
segment reconciliation information.
Overview
Hudson
Highland Group, Inc. (the “Company” or “Hudson,” “we,” “us” and “our”) has
operated as an independent publicly traded company since April 1, 2003. Our
businesses are specialized professional staffing services for permanent and
contract and talent management services to businesses operating in many
industries and in 19 countries around the world. Our largest operations are
in the United States (“U.S.”), the United Kingdom (“U.K.”) and Australia. We are
organized into four reportable segments of Hudson Americas, Hudson Europe,
Hudson Australia and New Zealand (“ANZ”), and Hudson Asia. These segments
contributed approximately 14%,
49%, 27% and 10% of the Company’s
gross margin, respectively, for the three months ended March 31, 2010.
In the first quarter of 2010, the Company revised its reportable segments
by segregating the segments of Hudson ANZ and Hudson Asia (previously included
in the results for Hudson Asia Pacific). The Company has reclassified prior
period information to reflect this change to the segment reporting in accordance
with the requirement of Financial Accounting Standards Board (“FASB’) Accounting
Standards Codification (“ASC”) Topic 280-10-50-12 to 19, “Quantitative
Thresholds”.
Hudson
Americas operates from 28 offices in the U.S. and Canada, with
98% of
its gross margin generated in the U.S. during the three months ended
March 31, 2010. Hudson Europe operates from 38 offices in 13 countries,
with 45% of
its gross margin generated in the U.K. during the three months ended
March 31, 2010. Hudson ANZ operates from 12 offices in Australia and New
Zealand, with 89% of
its gross margin generated in Australia during the three months ended
March 31, 2010. Hudson Asia operates from 5 offices in China, Hong Kong and
Singapore, with
48% of
its gross margin generated in China during the three months ended March 31,
2010.
The
Hudson regional businesses provide professional contract consultants and
permanent recruitment services to a wide range of clients. With respect to
temporary and contract personnel, Hudson focuses on providing its clients with
candidates who have specialized functional skills and competencies, such as
accounting and finance, legal and information technology. The length of a
contract assignment can vary, but engagements at the professional level tend to
be longer than those in the general clerical or industrial sectors. With respect
to permanent recruitment, Hudson focuses on mid-level professionals typically
earning between $50,000 and $150,000 annually and possessing the professional
skills and/or profile required by clients. Hudson provides permanent recruitment
services on both a retained and contingent basis. In larger markets, Hudson’s
sales strategy focuses on both clients operating in particular industry sectors,
such as financial services or technology, and candidates possessing particular
professional skills, such as accounting and finance, information technology,
legal and human resources. Hudson uses both traditional and interactive methods
to select potential candidates for its clients, employing a suite of products
that assesses talent and helps predict whether a candidate will be successful in
a given role.
The Hudson regional
businesses also provide human capital services, the largest of which are
assessment and development services, through their Talent Management Solutions
units. These
services encompass candidate assessment, competency modeling, leadership
development, performance management, and career transition. These services
enable Hudson to offer clients a comprehensive set of management services across
the entire employment life-cycle from attracting, assessing and selecting
best-fit employees to engaging and developing those individuals to
help build a high-performance organization.
Recent
Economic Events
During the first quarter
of 2010, the Company experienced improving economic conditions in virtually all
of the key markets in which we operate, although the rate of improvement varied
from market to market. Macro
economic reports have indicated growth in gross domestic product (“GDP”) in all
of our key markets including Australia, China, Hong Kong, New Zealand,
Singapore,
U.S,
the U.K. and the 16-nation Euro zone. Reports are forecasting economic growth in
2010 in the range of 1% to 3% for the majority of the developed economies and
higher for some of the emerging markets. However, unemployment, traditionally a
lagging
economic indicator, remained
at high single digit levels in some markets at the end of the first quarter of
2010.
Although
economic conditions and the Company’s revenues have improved in the first
quarter of 2010 in several markets including the U.K., China, Hong Kong and
Singapore, revenues of
other markets like U.S., Australia and New Zealand, Belgium and Netherlands were
below the revenues for
the same period of 2009. A risk continues that unemployment could remain at
elevated levels well into the later part of 2010. These conditions could impact
the Company’s financial results for the rest of 2010 and, as a result, future
financial results may differ from historical performance. See “Liquidity
Outlook” for additional information.
- 15
- -
Financial
Performance
As
discussed in more detail in this MD&A, the following financial data present
an overview of our financial performance for the three months ended
March 31, 2010 and 2009:
|
Three Months Ended March 31,
|
Changes
|
|||||||||||
|
$ in thousands
|
2010
|
2009
|
Amount
|
|||||||||
|
Revenue
|
$ | 180,118 | $ | 165,150 | $ | 14,968 | ||||||
|
Gross
margin
|
66,421 | 62,004 | 4,417 | |||||||||
|
Selling,
general and administrative expenses
(a)
|
70,620 | 75,490 | (4,870 | ) | ||||||||
|
Business
reorganization and integration
expenses
|
113 | 5,839 | (5,726 | ) | ||||||||
|
Operating
loss
|
(4,312 | ) | (19,325 | ) | 15,013 | |||||||
|
Loss
from continuing operations
|
(4,138 | ) | (14,835 | ) | 10,697 | |||||||
|
Net
loss
|
$ | (4,207 | ) | $ | (5,559 | ) | $ | 1,352 | ||||
|
(a)
|
Selling,
general and administrative expenses include depreciation and amortization
expense of $2,287 and $3,788, respectively, for the three months ended
March 31, 2010 and
2009.
|
|
•
|
|
Revenue
was $180 million for the three months ended March 31,
2010, as
compared to $165 million for the same period of 2009, an increase of $15
million, or 9%. Of this increase, $9.8 million was in contracting services
and $5.8 million was in permanent recruitment services. These increases were
7.8% and 21.8%, respectively, for the three months ended March 31,
2010, compared to the same period of
2009.
|
|
•
|
|
Gross
margin was $66 million for the three months ended March 31, 2010, as
compared to $62 million for the same period of 2009,
an increase
of $4 million or 7%. Of
this increase,
$6
million
was in permanent
recruitment services, partially offset by $1 million
decline
in each of contracting
services and
talent management services.
The
increase in permanent recruitment services gross margin was 24% and
the declines
in
contracting services and talent management were
4%
and 5%,
respectively, for the three months ended March 31, 2010, compared to
the same period of
2009.
|
|
•
|
|
Selling,
general and administrative expenses were
$71 million for
the three months ended March 31, 2010, as compared to $76 million for
the same period of 2009, a decrease of $5 million, or 6%. Selling, general
and administrative expenses decreased primarily due to the reductions in
management, consultant and, support staff compensation and facilities
costs achieved through reorganization actions taken in
2009.
|
Strategic
Actions
Our management’s primary
focus has been to move the Company to profitability through a focus on
specialized professional recruitment through our staffing, project solutions and
talent management businesses. We have focused our strategy on higher-margin
specialized professional recruitment with a long-term financial goal of 7-10%
EBITDA margins, which we believe is the measure most within the control of our
operating leaders. We believe achievement of these long-term EBITDA margins will
generate long-term profitability. We continue to execute this strategy through a
combination of delivery of higher margin services, price
negotiations, efficient
delivery of services, investments, cost restructuring, acquisitions and
divestitures. In doing so, we continue to focus on retaining and maintaining key
clients, retaining high performing revenue earners, integrating businesses to
achieve synergies, discontinuing non-core businesses, streamlining support
operations and reducing costs to achieve the Company’s long-term profitability
goals. We
expect to continue our review of opportunities to expand our operations in
specialized professional recruitment.
Contingencies
From time
to time in the ordinary course of business, the Company is subject to compliance
audits by federal, state, local and foreign government regulatory, tax, and
other authorities relating to a variety of regulations, including wage and hour
laws, unemployment taxes, workers’ compensation, immigration, and income,
value-added and sales taxes. The Company is also subject to, from time to time
in the ordinary course of business, various claims, lawsuits, and other
complaints from, for example, clients, candidates, suppliers, and landlords for
both leased and subleased properties.
Periodic
events can also change the number and type of audits, claims, lawsuits or
complaints asserted against the Company. Events can also change the likelihood
of assertion and the behavior of third parties to reach resolution regarding
such matters. The present economic circumstances have given rise to many news
reports and bulletins from clients, tax authorities and other parties about
changes in their procedures for audits, payment, plans to challenge existing
contracts and other such matters aimed at being more aggressive in the
resolution of such matters in their own favor. The Company has appropriate
procedures in place for identifying and communicating any matters of this type,
whether asserted or likely to be asserted, and it evaluates its liabilities in
light of the prevailing circumstances. Changes in the behavior of third parties
could cause the Company to change its view of the likelihood of a claim and what
might constitute a trend. In the last twelve months, the Company has not seen a
marked difference in employee disputes or client disputes, though pressure on
fees continues. In the same period, the Company has seen an increase in audits
by tax authorities. We cannot determine if this is typical at this
point in the Company’s history or higher than typical, and in either event, we
cannot determine if this is an indication of a trend for our Company given our
operations in 19 countries and multiple municipalities. However,
we do not expect at this time that such matters will have a material adverse
effect on the Company’s results of operations, financial condition or
liquidity.
For
matters that have reached the threshold of probable and estimable, the Company
has established reserves for legal, regulatory and other contingent liabilities.
The Company’s reserves were not significant as of March 31, 2010 and December
31, 2009. Although the outcome of these matters cannot be determined, the
Company believes that none of the currently pending matters, individually or in
the aggregate, will have a material adverse effect on the Company’s financial
condition, results of operations or liquidity.
- 16
- -
Use
of EBITDA
Management
believes EBITDA is a meaningful indicator of the Company’s performance that
provides useful information to investors regarding the Company’s financial
condition and results of operations.
EBITDA is also considered by management as the best indicator of operating
performance and most comparable measure across our regions. Management also uses
this measurement to evaluate capital needs and working capital requirements.
EBITDA should not be considered in isolation or as a substitute for operating
income, or net income prepared in accordance with GAAP or as a measure of the
Company’s profitability.
EBITDA, as presented below, is derived from net income (loss) adjusted for
(benefit from) provision for income taxes, interest expense (income), and
depreciation and amortization. The reconciliation of EBITDA to the most directly
comparable GAAP financial measure is provided in the table
below:
|
Three Months Ended March 31,
|
||||||||
|
$ in thousands
|
2010
|
2009
|
||||||
|
Net
loss
|
$ | (4,207 | ) | $ | (5,559 | ) | ||
|
Adjusted
for (loss) income from discontinued opeartions, net of income
taxes
|
(69 | ) | 9,276 | |||||
|
Loss
from continuing operations
|
(4,138 | ) | (14,835 | ) | ||||
|
Adjustments
to loss from continuing
operations
|
||||||||
|
Provision
for (benefit from) income taxes
|
252 | (4,060 | ) | |||||
|
Interest
expense, net
|
232 | 191 | ||||||
|
Depreciation
and amortization
|
2,287 | 3,788 | ||||||
|
Total
adjustments from loss from continuing operations to EBITDA
loss
|
2,771 | (81 | ) | |||||
|
EBITDA
loss
|
$ | (1,367 | ) | $ | (14,916 | ) | ||
- 17
- -
Results
of Operations
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
The
following table sets forth the Company’s revenue, gross margin, operating (loss)
income, loss from continuing operations, net loss, temporary contracting
revenue, direct costs of temporary contracting, temporary contracting gross
margin and gross margin as a percent of revenue for the three months ended
March 31, 2010 and 2009 (dollars in thousands).
|
For The Three Months Ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenue:
|
||||||||
|
Hudson
Americas
|
$ | 39,507 | $ | 44,023 | ||||
|
Hudson
Europe
|
76,654 | 66,387 | ||||||
|
Hudson
ANZ
|
56,822 | 49,997 | ||||||
|
Hudson
Asia
|
7,135 | 4,743 | ||||||
|
Total
|
$ | 180,118 | $ | 165,150 | ||||
|
Gross
margin:
|
||||||||
|
Hudson
Americas
|
$ | 9,279 | $ | 10,962 | ||||
|
Hudson
Europe
|
32,530 | 30,313 | ||||||
|
Hudson
ANZ
|
17,776 | 16,303 | ||||||
|
Hudson
Asia
|
6,836 | 4,426 | ||||||
|
Total
|
$ | 66,421 | $ | 62,004 | ||||
|
Operating
(loss) income:
|
||||||||
|
Hudson
Americas
|
$ | (1,634 | ) | $ | (5,791 | ) | ||
|
Hudson
Europe
|
985 | (5,221 | ) | |||||
|
Hudson
ANZ
|
274 | (2,239 | ) | |||||
|
Hudson
Asia
|
613 | (1,261 | ) | |||||
|
Corporate
expenses
|
(4,550 | ) | (4,812 | ) | ||||
|
Total
|
$ | (4,312 | ) | $ | (19,324 | ) | ||
|
Loss
from continuing operations
|
$ | (4,138 | ) | $ | (14,835 | ) | ||
|
Net
loss
|
$ | (4,207 | ) | $ | (5,559 | ) | ||
|
TEMPORARY
CONTRACTING DATA (a):
|
||||||||
|
Temporary
contracting revenue:
|
||||||||
|
Hudson
Americas
|
$ | 38,151 | $ | 42,216 | ||||
|
Hudson
Europe
|
51,222 | 43,283 | ||||||
|
Hudson
ANZ
|
45,450 | 39,564 | ||||||
|
Hudson
Asia
|
210 | 198 | ||||||
|
Total
|
$ | 135,033 | $ | 125,261 | ||||
|
Direct
costs of temporary
contracting:
|
||||||||
|
Hudson
Americas
|
$ | 30,214 | $ | 33,046 | ||||
|
Hudson
Europe
|
42,110 | 33,515 | ||||||
|
Hudson
ANZ
|
38,105 | 32,939 | ||||||
|
Hudson
Asia
|
127 | 147 | ||||||
|
Total
|
$ | 110,556 | $ | 99,647 | ||||
|
Temporary
contracting gross margin:
|
||||||||
|
Hudson
Americas
|
$ | 7,937 | $ | 9,170 | ||||
|
Hudson
Europe
|
9,112 | 9,768 | ||||||
|
Hudson
ANZ
|
7,345 | 6,625 | ||||||
|
Hudson
Asia
|
83 | 51 | ||||||
|
Total
|
$ | 24,477 | $ | 25,614 | ||||
|
Temporary
contracting gross margin as a percent of
revenue:
|
||||||||
|
Hudson
Americas
|
20.8 | % | 21.7 | % | ||||
|
Hudson
Europe
|
17.8 | % | 22.6 | % | ||||
|
Hudson
ANZ
|
16.2 | % | 16.7 | % | ||||
|
Hudson
Asia
|
39.5 | % | 25.8 | % | ||||
|
(a)
|
Temporary
contracting revenue is a component of our revenue. Temporary contracting
gross margin and temporary contracting gross margin as a percent of
revenue are shown to provide additional information on the Company’s
ability to manage its cost structure and provide further comparability
relative to the Company’s peers. Temporary contracting gross margin is
derived by deducting the direct costs of temporary contracting from
temporary contracting revenue. The Company’s calculation of gross margin
may differ from those of other
companies.
|
- 18
- -
Constant
Currency
The
Company defines the term “constant currency” to mean that financial data for a
period are translated into U.S. dollars using the same foreign currency exchange
rates that were used to translate financial data for the previously reported
period. Changes in revenue, direct costs, gross margin, selling, general and
administrative expenses and operating (loss) income include the effect of
changes in foreign currency exchange rates. Variance analysis usually describes
period-to-period variances that are calculated using constant currency as a
percentage. The Company’s management reviews and analyzes business results in
constant currency and believes these results better represent the Company’s
underlying business trends.
The
Company believes that these calculations are a useful measure, indicating the
actual change in operations. Earnings from subsidiaries are, at times,
repatriated to the U.S., and there are no significant gains or losses on foreign
currency transactions between subsidiaries. Therefore, changes in foreign
currency exchange rates generally impact only reported earnings and not the
Company’s economic condition. The table below summarizes the impact of foreign
exchange adjustments on our operating results for the three months ended
March 31, 2010 (dollars in thousands).
|
For The Three Months Ended March 31,
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
Currency
|
Constant
|
|||||||||||||||
|
As reported
|
translation
|
currency
|
As reported
|
|||||||||||||
|
Revenue:
|
||||||||||||||||
|
Hudson
Americas
|
$ | 39,507 | $ | (30 | ) | $ | 39,477 | $ | 44,023 | |||||||
|
Hudson
Europe
|
76,654 | (5,352 | ) | 71,302 | 66,387 | |||||||||||
|
Hudson
ANZ
|
56,822 | (15,140 | ) | 41,682 | 49,997 | |||||||||||
|
Hudson
Asia
|
7,135 | (208 | ) | 6,927 | 4,743 | |||||||||||
|
Total
|
180,118 | (20,730 | ) | 159,388 | 165,150 | |||||||||||
|
Direct
costs:
|
||||||||||||||||
|
Hudson
Americas
|
30,228 | (14 | ) | 30,214 | 33,061 | |||||||||||
|
Hudson
Europe
|
44,124 | (3,205 | ) | 40,919 | 36,074 | |||||||||||
|
Hudson
ANZ
|
39,046 | (10,384 | ) | 28,662 | 33,694 | |||||||||||
|
Hudson
Asia
|
299 | (12 | ) | 287 | 317 | |||||||||||
|
Total
|
113,697 | (13,615 | ) | 100,082 | 103,146 | |||||||||||
|
Gross
margin:
|
||||||||||||||||
|
Hudson
Americas
|
9,279 | (16 | ) | 9,263 | 10,962 | |||||||||||
|
Hudson
Europe
|
32,530 | (2,147 | ) | 30,383 | 30,313 | |||||||||||
|
Hudson
ANZ
|
17,776 | (4,756 | ) | 13,020 | 16,303 | |||||||||||
|
Hudson
Asia
|
6,836 | (196 | ) | 6,640 | 4,426 | |||||||||||
|
Total
|
$ | 66,421 | $ | (7,115 | ) | $ | 59,306 | $ | 62,004 | |||||||
|
Selling,
general and administrative (a):
|
||||||||||||||||
|
Hudson
Americas
|
$ | 10,785 | $ | (49 | ) | $ | 10,736 | $ | 15,132 | |||||||
|
Hudson
Europe
|
31,453 | (2,135 | ) | 29,318 | 33,179 | |||||||||||
|
Hudson
ANZ
|
17,608 | (4,655 | ) | 12,953 | 16,658 | |||||||||||
|
Hudson
Asia
|
6,224 | (164 | ) | 6,060 | 5,695 | |||||||||||
|
Corporate
|
4,550 | (1 | ) | 4,549 | 4,812 | |||||||||||
|
Total
|
$ | 70,620 | $ | (7,004 | ) | $ | 63,616 | $ | 75,476 | |||||||
|
Operating
(loss) income:
|
||||||||||||||||
|
Hudson
Americas
|
$ | (1,634 | ) | $ | 20 | $ | (1,614 | ) | $ | (5,791 | ) | |||||
|
Hudson
Europe
|
985 | 13 | 998 | (5,221 | ) | |||||||||||
|
Hudson
ANZ
|
274 | (130 | ) | 144 | (2,239 | ) | ||||||||||
|
Hudson
Asia
|
613 | (33 | ) | 580 | (1,261 | ) | ||||||||||
|
Corporate
|
(4,550 | ) | 1 | (4,549 | ) | (4,812 | ) | |||||||||
|
Total
|
$ | (4,312 | ) | $ | (129 | ) | $ | (4,441 | ) | $ | (19,324 | ) | ||||
|
(a)
|
Selling,
general and administrative expenses include depreciation and amortization
expense of $2,287and $3,788, respectively, for the three months ended
March 31, 2010 and 2009.
|
- 19
- -
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
Hudson
Americas
Hudson
Americas’ revenue was $39.5 million for the three months ended March 31,
2010, as compared to $44 million for the same period of 2009, a decrease of $4.5
million or 10.3%. Of this decline, $4.1 million was in contracting and $0.5
million was in permanent recruitment revenues. The declines were 9.6% and 25.1%,
respectively, compared to the same period of 2009.
The
revenue decrease was primarily in contracting revenue, where other contracting
areas of IT and Financial Solutions, which declined $4.8 million or 28.3%. Legal
Services contracting revenue increased by $1 million or 4% for the three months
ended March 31, 2010, as compared to the same period of 2009. The decline in IT
and Financial Solutions contracting revenue was primarily due to continued weak
demand in the three months ended March 31, 2010 in the markets in which we
focus. The increase in Legal Services contracting revenue for the three months
ended March 31, 2010 was primarily due to a higher volume of projects by
clients, partially offset by lower average bill rates.
Hudson
Americas’ direct costs were $30.2 million for the three months ended
March 31, 2010, as compared to $33.1 million for the same period of 2009, a
decrease of $2.8 million or 8.6%. The decrease was primarily due to fewer
contractors on billing, lower average pay rates and was a direct result of the
factors affecting the contracting revenue as noted above.
Hudson
Americas’ gross margin was $9.3 million for the three months ended
March 31, 2010, as compared to $11 million for the same period of 2009, a
decrease of $1.7 million or 15.4%. Contracting gross margin declined $1.2
million or 13.5% for the three months ended March 31, 2010, as compared to
the same period of 2009. The majority of the decline in contracting gross margin
was in the other contracting areas of IT and Financial Solutions which declined
by $1.2 million or 26.4%. The decline in other contracting gross margin was
partially due to a reduction in billable hours, fewer contractors on billing and
approximately a 2% reduction in average bill rates. Legal Services contracting
gross margin increased by $0.5 million or 9.6% for the three months ended
March 31, 2010, compared to the same period of 2009. The higher gross
margin in Legal Services was due to a higher volume of work, increase in
contractors on billing, offset in part by approximately 9% reduction in average
bill rates.
Contracting
gross margin as a percentage of revenue was 20.8% for the three months ended
March 31, 2010, as compared to 21.7% for the same period of 2009. The decline
was primarily driven by lower overall average bill rates, which were down
approximately 10% and change in client mix toward high volume clients with lower
margins. Gross margin, as a percentage of revenue, was 23.5% for the three
months ended March 31, 2010, as compared to 24.9% for the same period of
2009. The steeper decline in total gross margin as a percentage of revenue was
primarily due to the decline in contracting gross margin as noted above and in
permanent recruitment revenue, which has a proportionately greater effect on
gross margin.
Hudson
Americas’ selling, general and administrative expenses were $10.8 million for
the three months ended March 31, 2010, as compared to $15.1 million for the
same period of 2009, a decrease of $4.3 million or 28.7%. The decrease in
selling, general and administrative expenses was partially due to head count
reductions largely from the restructuring program completed in 2009. Hudson
Americas’ selling, general and administrative expenses, as a percentage of
revenue, were 27.3% for the three months ended March 31, 2010, as compared
to 34.4% for the same period of 2009.
Hudson
Americas incurred $0.1 million in reorganization expenses during the three
months ended March 31, 2010, as compared to $1.6 million for the same
period of 2009, a decrease in reorganization expenses of $1.5 million.
Reorganization expenses incurred during the three months ended March 31,
2009 related primarily to the amounts provided for employee termination benefits
related to the 2009 restructuring plan.
Hudson
Americas’ net other non-operating income was $0.5 million for the three months
ended March 31, 2010, as compared to net other non-operating expense of $0.6
million for the same period of 2009, an increase in net other non-operating
income of $1.1 million. The increase was primarily related to the recovery of
a loan receivable of $0.9 million.
Hudson
Americas’ EBITDA loss was $0.2 million for the three months ended March 31,
2010, as compared to $5.4 million for the same period of 2009, a decrease in
EBITDA loss of $5.2 million. Hudson Americas’ EBITDA loss, as a percentage of
revenue, was 0.1% for the three months ended March 31, 2010, as compared to
12.3% for the same period of 2009. The decrease in EBITDA loss was primarily due
to the reductions in selling, general and administrative expenses of $4.3
million, non-recurrence of 2009 reorganization expenses of $1.5 million in 2010,
increase in net other non-operating income of $1.1 million, partially offset by
reduction in gross margin of $1.7 million.
Hudson
Americas’ operating loss was $1.6 million for the three months ended
March 31, 2010 as compared to $5.8 million for the same period of 2009, a
decrease in operating loss of $4.2 million. Operating loss, as a percentage of
revenue, was 4.1% for the three months ended March 31, 2010, as compared to
13.2% for the same period of 2009. The decrease in operating loss resulted
primarily from the same factors as discussed above with respect to
EBITDA.
- 20
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Hudson
Europe
Hudson
Europe’s revenue was $76.7 million for the three months ended March 31,
2010, as compared to $66.4 million for the same period of 2009, an increase of
$10.3 million or 15.5%. On a constant currency basis, Hudson Europe’s revenue
increased $4.9 million or 7.4% for the three months ended March 31, 2010,
as compared to the same period of 2009. The revenue increase was primarily due
to increases of $4.2 million or 9.7% in contracting and $1 million or 7.1% in
permanent recruitment revenues for the three months ended March 31, 2010,
as compared to the same period of 2009.
The
revenue increase in constant currency was primarily in the U.K., where revenue
increased $7.4 million or 19.3% for the three months ended March 31, 2010 as
compared to the same period of 2009. In the U.K. contracting and permanent
recruitment, revenues increased $5.7 million and $1.7 million, or 18.1% and
30.9%, respectively, compared to the same period of 2009. The increases in
contracting and permanent revenue were primarily due to the improvements in the
banking, sales and marketing, and IT sectors, partially offset by decreases in
the real estate and telecommunications sectors.
In
Continental Europe, revenue declined $2.5 million or 8.9% for the three months
ended March 31, 2010, as compared to the same period of 2009. Contracting,
permanent recruitment, and talent management revenues declined $1.5 million,
$0.7 million and $0.2 million or 13%, 8.2% or 3.2%, respectively, for the three
months ended March 31, 2010, as compared to the same period of 2009. In the
Netherlands, contracting revenue declined $1.3 million or 12% for the three
months ended March 31, 2010, as compared to the same period of 2009. The
revenue decline in the Netherlands was primarily due to reduced spending and
greater competition in the public sector. In Belgium, talent management and
permanent revenues declined $0.5 million or 10% and $0.3 million or 12.2%,
respectively, for the three months ended March 31, 2010, as compared to the same
period of 2009. The revenue decline in Belgium was primarily due to the decline
in the banking sector and the reductions in public sector spending. The decline
was also due to weak demand in the three months ended March 31, 2010 following
declines in businesses that occurred during the 2009 economic downturn. Revenue
in France remained unchanged due to improvements in consumer goods sector,
offset by weakness in financial services sector.
Hudson
Europe’s direct costs were $44.1 million for the three months ended
March 31, 2010, as compared to $36.1 million for the same period of 2009,
an increase of $8.1 million or 22.3%. On a constant currency basis, Hudson
Europe’s direct costs increased $4.8 million or 13.4% for the three months ended
March 31, 2010, as compared to the same period of 2009. The increase in
direct costs was due to more contractors on billing and was a direct result of
the factors affecting revenue as noted above.
Hudson
Europe’s gross margin was $32.5 million for the three months ended
March 31, 2010, as compared to $30.3 million for the same period of 2009,
an increase of $2.2 million or 7.3%. On a constant currency basis, gross margin
increased $0.1 million or 0.3% for the three months ended March 31, 2010,
as compared to the same period of 2009. The increase was driven by an increase
in permanent recruitment gross margin of $1.4 million or 10.4%, offset by lower
contracting gross margin of $1.3 million or 13.3%. Talent management gross
margin remained unchanged for the three months ended March 31, 2010, as
compared to the same period of 2009. Permanent recruitment gross margin
increased $2.2 million or 43.9% in the U.K, partially offset by a decrease of
$0.8 million, or 9% in Continental Europe. The increase in the U.K. was
primarily due to increased demand for permanent staff, and also from higher
average fees. The decrease in Continental Europe was primarily due to decreased
demand for permanent staff in Belgium. Contracting gross margin decreased $0.9
million in the Netherlands and $0.3 million in the U.K. The declines in the
Netherlands and the U.K. approximated 27% and 5%, respectively. The decline in
contracting gross margin was primarily driven by a reduction in billable hours
and a lower gross margin percentage compared to the same period of
2009.
Contracting
gross margin as a percentage of revenue was 17.8% for the three months ended
March 31, 2010, as compared to 22.6% for the same period of 2009. The
decline was partially driven by a change in client mix towards clients with high
volume and lower margins. Total gross margin, as a percentage of revenue, was
42.6% for the three months ended March 31, 2010, as compared to 45.6% for
the same period of 2009. The decline was primarily attributable to the factors
affecting the contracting revenue gross margin.
Hudson
Europe’s selling, general and administrative expenses were $31.5 million for the
three months ended March 31, 2010, as compared to $33.2 million for the
same period of 2009, a decrease of $1.7 million or 5.2%. On a constant currency
basis, selling, general and administrative expenses decreased $3.9 million or
11.7% for the three months ended March 31, 2010, as compared to the same
period of 2009. The decrease in selling, general and administrative expenses was
primarily due to reductions resulting largely from the restructuring program
completed in 2009 and substantially improved productivity in the U.K. Selling,
general and administrative expenses, as a percentage of revenue, were 41.1% for
the three months ended March 31, 2010, as compared to 50% for the same
period of 2009.
Hudson
Europe incurred $0.1 million in reorganization expenses for the three months
ended March 31, 2010, as compared to $2.3 million for the same period of
2009, a decrease of $2.2 million. On a constant currency basis, reorganization
expenses decreased $2.3 million for the three months ended March 31, 2010,
as compared to the same period of 2009. Reorganization expenses incurred for the
three months ended March 31, 2009 were related to the Company’s 2009
restructuring plan and included amounts provided for employee termination
benefits, contract cancellation costs and lease termination payments primarily
in Belgium and Ireland and costs related to the reorganization of certain
support functions.
Hudson
Europe’s net other non-operating expense was $1.2 million for the three months
ended March 31, 2010 , as compared to $0.2 million for the same period of 2009,
an increase of $1 million. On a constant currency basis, net other
non-operating expense increased $1 million for the three months ended
March 31, 2010, as compared to the same period of 2009. The increase was
primarily due to increased corporate cost allocations of $0.7
million.
Hudson
Europe’s EBITDA was $0.4 million for the three months ended March 31, 2010,
as compared to EBITDA loss of $3.6 million for 2009, an increase in EBITDA of $4
million. On a constant currency basis, EBITDA increased $4 million for the three
months ended March 31, 2010, as compared to the same period of 2009. Hudson
Europe’s EBITDA, as a percentage of revenue, was 0.6% for the three months ended
March 31, 2010, as compared to EBITDA loss of 5.4% for the same period of
2009. The increase in EBITDA was primarily due to reductions in selling, general
and administrative expenses of $3.9 million, a decrease in restructuring
expenses of $2.3 million, and partially offset by an increase in net other
non-operating expense of $1 million.
Hudson
Europe’s operating income was $1 million for the three months ended
March 31, 2010, as compared to operating loss of $5.2 million for the same
period of 2009, an increase in operating income of $6.2 million. On a constant
currency basis, operating income increased $6.2 million for the three months
ended March 31, 2010, as compared to the same period of 2009. Operating
income, as a percentage of revenue, was 1.4% for the three months ended
March 31, 2010, as compared to operating loss of 7.9% for the same period
of 2009. The increase in operating income resulted primarily from the same
factors as discussed above with respect to EBITDA.
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Hudson
Australia – New Zealand (“ANZ”)
Hudson
ANZ’s revenue was $56.8 million for the three months ended March 31, 2010,
as compared to $50 million for the same period of 2009, an increase of $6.8
million or 13.7%. On a constant currency basis, Hudson ANZ’s revenue decreased
$8.3 million or 16.6% for the three months ended March 31, 2010, as
compared to the same period of 2009. The revenue decrease was $6.2 million in
contracting services, $1.6 million in talent management services and $0.4
million in permanent recruitment or 15.7% 49.9% and 6.2%, respectively, compared
to the same period of 2009.
The
revenue decrease in constant currency was primarily in contracting revenue,
where the major practices of these markets including the accounting and
finance, sales and marketing and communications declined for the three months
March 31, 2010, as compared to the same period of 2009. The year-on-year rate of
decline in contracting revenue during the three months ended March 31, 2010 has
reduced compared to the year-on-year rate of decline in the three months ended
December 31, 2009, reflecting the current stronger economic and hiring
environment in ANZ. Talent management revenue decreased primarily due to
decreased demand for outplacement services as companies reduced the pace of work
force reductions as compared to the same period of 2009, without an offsetting
demand yet for talent assessment and development work. Permanent recruitment
revenue was not significantly impacted as demand for permanent recruitment
revenues remained stable for the three months ended March 31, 2010, as compared
to the same period of 2009.
Hudson
ANZ’s direct costs were $39 million for the three months ended March 31,
2010, as compared to $33.7 million for the same period of 2009, an increase of
$5.3 million or 15.9%. On a constant currency basis, Hudson ANZ’s direct costs
decreased $5 million or 14.9% for the three months ended March 31, 2010, as
compared to the same period of 2009. The decrease in direct costs was due to
fewer contractors on billing and was a direct result of the factors affecting
revenue as noted above.
Hudson
ANZ’s gross margin was $17.8 million for the three months ended March 31,
2010, as compared to $16.3 million for the same period of 2009, an increase of
$1.5 million or 9%. On a constant currency basis, gross margin decreased $3.3
million or 20.1% for the three months ended March 31, 2010, as compared to
the same period of 2009. Talent management services, contracting and permanent
recruitment gross margin decreased $1.5 million, $1.2 million and $0.5 million,
respectively, for the three months ended March 31, 2010, as compared to the
same period of 2009. The decline in talent management gross margin was driven by
the same factors affecting revenue as described above. The decline in
contracting gross margin was driven by a reduction in billable hours and fewer
contractors on billing. Permanent recruitment gross margin was not
significantly impacted for the three months ended March 31, 2010, as
compared to the same period of 2009.
Contracting
gross margin as a percentage of revenue was 16.2% for the three months ended
March 31, 2010, as compared to 16.7% for the same period of 2009. The
decline was partially driven by increased pricing pressure. Gross margin, as a
percentage of revenue, was 31.2% for the three months ended March 31, 2010,
as compared to 32.6% for the same period of 2009. The decline was due to the
lower contracting gross margin percentage and to the proportionately greater
decline in talent management revenue.
Hudson
ANZ’s selling, general and administrative expenses were $17.6 million for the
three months ended March 31, 2010, as compared to $16.7 million for the
same period of 2009, an increase of $1.0 million or 5.8%. On a constant currency
basis, selling, general and administrative expenses decreased $3.7 million or
22.2% for the three months ended March 31, 2010, as compared to the same
period of 2009. The decrease in selling, general and administrative
expenses was primarily due to the restructuring program completed in 2009.
Selling, general and administrative expenses, as a percentage of revenue, were
31.1% for the three months ended March 31, 2010, as compared to 33.3% for
the same period of 2009.
Hudson
ANZ recorded a reorganization benefit of $0.1 million for the three months ended
March 31, 2010, as compared to reorganization expenses of $1.9 million for
the same period of 2009, a decrease in reorganization expenses of $2 million. On
a constant currency basis, reorganization expenses decreased $2 million for the
three months ended March 31, 2010, as compared to the same period of 2009.
Reorganization expenses incurred for the three months ended March 31, 2009
included primarily payment of employee termination benefits and costs to
terminate a number of contracts, including exiting several leases related to the
Company’s 2008 and 2009 reorganization plans.
Hudson
ANZ’s net other non-operating expense was $0.6 million for the three
months ended March 31, 2010 , as compared to $0.2 million for the same period of
2009, an increase of $0.4 million. On a constant currency basis, net other
non-operating expense increased $0.4 million for the three months ended
March 31, 2010, as compared to the same period of 2009. The increase was
primarily due to increased corporate cost allocations of $0.4
million.
Hudson
ANZ’s EBITDA was $0.2 million for the three months ended March 31, 2010, as
compared to EBITDA loss of $1.8 million for the same period of 2009, an increase
in EBITDA of $2 million. On a constant currency basis, EBITDA increased $1.8
million for the three months ended March 31, 2010, as compared to the same
period of 2009. Hudson ANZ’s EBITDA, as a percentage of revenue, was 0.04% for
the three months ended March 31, 2010, as compared to EBITDA loss of 3.5%
for the same period of 2009. The increase in EBITDA was primarily due to
reductions in selling, general and administrative expenses of $3.7 million,
non-recurrence of 2009 reorganization costs of $1.9 million in 2010, partially
offset by reduction in gross margin of $3.3 million.
Hudson
ANZ’s operating income was $0.3 million for the three months ended
March 31, 2010, as compared to operating loss of $2.2 million for the same
period of 2009, an increase in operating income of $2.5 million. On a constant
currency basis, operating income increased $2.4 million for the three months
ended March 31, 2010, as compared to the same period of 2009. Operating
income, as a percentage of revenue, was 0.3% for the three months ended
March 31, 2010, as compared to operating loss of 4.5% for the same period
of 2009. The increase in operating income resulted primarily from the same
factors as discussed above with respect to EBITDA.
- 22
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Hudson
Asia
Hudson
Asia’s revenue was $7.1 million for the three months ended March 31, 2010,
as compared to $4.7 million for the same period of 2009, an increase of $2.4
million or 50.4%. On a constant currency basis, Hudson Asia’s revenue increased
$2.2 million or 46% for the three months ended March 31, 2010, as compared
to the same period of 2009. The majority of business in Hudson Asia is permanent
recruitment.
Revenue
increased in all of Hudson Asia’s markets for the three months ended
March 31, 2010, as compared to the same period of 2009, with the majority
of the revenue increase of $1.4 million or 67.9% in China. The majority of our
business in Asia is with subsidiaries of multi-national firms and many of these
clients have eased the hiring restrictions implemented in 2009in response to the
much improved economic environment. Business confidence and hiring activity has
improved significantly compared to the same period of 2009. Revenue increased in
most of Hudson Asia’s practice areas for the three months ended March 31, 2010,
as compared to the same period of 2009, with increases in the IT, banking and
finance and industrial sectors.
Hudson
Asia’s direct costs were unchanged at $0.3 million for the three months ended
March 31, 2010 compared to the same period of 2009, on both a reported and
constant currency basis.
Hudson
Asia’s gross margin was $6.8 million for the three months ended March 31,
2010, as compared to $4.4 million for the same period of 2009, an increase of
$2.4 million or 54.4%. On a constant currency basis, gross margin increased $2.2
million or 50% for the three months ended March 31, 2010, as compared to
the same period of 2009. The largest gross margin increase was in China, which
increased $1.4 million or 73.3% for the three months ended March 31, 2010,
as compared to the same period of 2009. Gross margin increased primarily for the
same reasons as the increase in revenue. Gross margin, as a percentage of
revenue, was 95.9% for the three months ended March 31, 2010, as compared
to 93.3% for the same period of 2009.
Hudson
Asia’s selling, general and administrative expenses were $6.2 million for the
three months ended March 31, 2010, as compared to $5.7 million for the same
period of 2009, an increase of $0.5 million or 9.3%. On a constant currency
basis, selling, general and administrative expenses increased $0.4 million or
6.4% for the three months ended March 31, 2010, as compared to the same
period of 2009. The increase in selling, general and administrative expenses
resulted primarily from increases in bad debt expenses, increased sales staff
compensation due to the higher gross margin and other administrative expenses.
Selling, general and administrative expenses, as a percentage of revenue, were
87.5% for the three months ended March 31, 2010, as compared to 120% for
the same period of 2009.
Hudson
Asia’s net other non-operating expense was $0.2 million for the three months
ended March 31, 2010, as compared to net other non-operating income
of $0.4 million for the same period of 2009, an increase in net other
non-operating expense of $0.6 million. On a constant currency basis, net other
non-operating expense increased $0.6 million for the three months ended
March 31, 2010, as compared to the same period of 2009. The increase
was primarily due to the non-reoccurrence of $0.4 million government assistance
(subsidy) in China during 2009.
Hudson
Asia’s EBITDA was $0.6 million for the three months ended March 31, 2010,
as compared to EBITDA loss of $0.6 million for the same period of 2009, an
increase in EBITDA of $1.2million. On a constant currency basis, EBITDA
increased $1.2 million for the three months ended March 31, 2010, as
compared to the same period of 2009. Hudson Asia’s EBITDA, as a percentage of
revenue, was 8.1% for the three months ended March 31, 2010, as compared to
EBITDA loss of 13% for the same period of 2009. The increase in EBITDA was
primarily due to an increase in gross margin of $2.2 million, partially offset
by an increase in net other non-operating expense of $0.6 million and selling,
general and administrative expenses of $0.4 million.
Hudson
Asia’s operating income was $0.6 million for the three months ended
March 31, 2010, as compared to operating loss of $1.3 million for the same
period of 2009, an increase in operating income of $1.9 million. On a constant
currency basis, operating income increased $1.8 million for the three months
ended March 31, 2010, as compared to the same period of 2009. Operating
income, as a percentage of revenue, was 8.4% for the three months ended
March 31, 2010, as compared to operating loss of 26.6% for the same period
of 2009. The increase in operating income resulted primarily from the same
factors as discussed above with respect to EBITDA.
- 23
- -
Corporate
and Other
Corporate
selling, general and administrative expenses were $4.5 million for the three
months ended March 31, 2010, as compared to $4.8 million for the same
period of 2009, a decrease of $0.3 million or 5.4%. The decrease in corporate
selling, general and administrative expenses resulted primarily from lower
support staff expenses as a result of our 2009 corporate reorganization
initiatives.
Corporate
net other non-operating income was $2.1 million for the three months ended March
31, 2010, as compared to $1.2 million for the same period of 2009, an increase
of $0.9 million. The increase was primarily due to increased corporate cost
allocations to the reportable segments.
Corporate
EBITDA loss was $2.4 million for the three months ended March 31, 2010, as
compared to $3.5 million for the same period of 2009, a decrease of $1.1 million
and was attributable to the same factors as discussed
above.
Interest
expense, net of interest income was $0.2 million for the three months ended
March 31, 2010 and 2009.
Provision
for (Benefits from) Income Taxes
The
provision for income taxes was $0.3 million on $3.9 million of pre-tax losses
from continuing operations for the three months ended March 31, 2010, as
compared to a benefit of $4.1 million on $18.9 million of pre-tax losses from
continuing operations for the same period of 2009. The effective tax rate for
the three months ended March 31, 2010 was negative 6.5%, as compared to
21.5% for the same period of 2009. The changes in the Company’s effective tax
rate for the three months ended March 31, 2010 as compared to the same
period of 2009 resulted primarily from a reduction in the Company’s pre-tax
losses and the inability to obtain benefits from losses incurred in certain
jurisdictions. The effective tax rate differs from the U.S. federal statutory
rate of 35% due to the inability to recognize tax benefits on net U.S. losses,
state taxes, non-deductible expenses such as certain acquisition-related
payments and variations from the U.S. tax rate in foreign
jurisdictions.
Net
Loss from Continuing Operations
Net loss
from continuing operations was $4.1 million for the three months ended
March 31, 2010, as compared to $14.8 million for the same period of 2009, a
decrease in net loss from continuing operations of $10.7 million. Basic and
diluted loss per share from continuing operations were $0.16 for the three
months ended March 31, 2010, as compared to $0.59 for the same period of
2009.
Net
(Loss) Income from Discontinued Operations
Net loss
from discontinued operations was $0.1 million for the three months ended
March 31, 2010, as compared to net income from discontinued operations of
$9.3 million for the same period of 2009, a decrease in net income from
discontinued operations of $9.4 million. The decrease was primarily due to the
non-recurrence of the final earn-out payment from the sale of our former
Highland reporting unit in 2009 of $11.6 million offset by the operating loss in
2009 in the exited markets of Italy and Japan of $2.3 million. Basic and diluted
loss per share from discontinued operations were $0 for the three months ended
March 31, 2010, as compared to basic and diluted earnings per share of
$0.37 for the same period of 2009.
Net
Loss
Net loss
was $4.2 million for the three months ended March 31, 2010, as compared to
$5.6 million for the same period of 2009, a decrease in net loss of $1.4
million. Basic and diluted loss per share were $0.16 for the three months ended
March 31, 2010, as compared to $0.22 for the same period of
2009.
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- -
Liquidity
and Capital Resources
Cash and
cash equivalents totaled $24.1 million and $36.1 million, respectively, as of
March 31, 2010 and December 31, 2009. The following table summarizes
the cash flow activities for the three months ended March 31, 2010 and
2009:
|
For The Three Months Ended March 31,
|
||||||||
|
(In millions)
|
2010
|
2009
|
||||||
|
Net
cash used in operating activities
|
$ | (14.8 | ) | $ | (7.5 | ) | ||
|
Net
cash provided by (used in) investing activities
|
2.4 | (0.5 | ) | |||||
|
Net
cash provided by financing activities
|
0.9 | 5.2 | ||||||
|
Effect
of exchange rates on cash and cash equivalents
|
(0.4 | ) | (0.1 | ) | ||||
|
Net
decrease in cash and cash equivalents
|
$ | (11.9 | ) | $ | (2.9 | ) | ||
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
Cash
Flows used in Operating Activities
For the
three months ended March 31, 2010, net cash used in operating activities
was $14.8 million, as compared to $7.5 million for the same period of 2009, an
increase of $7.3 millions. The increase in cash used in operating activities was
primarily due to an increase in working capital as a result of the revenue
growth in the current quarter.
Cash
Flows provided by (used in) Investing Activities
For the
three months ended March 31, 2010, net cash provided by investing
activities was $2.4 million, as compared to net cash used in investing
activities of $0.5 million for the same period of 2009, an increase in cash
provided by investing activities of $2.9 million. The increase in cash provided
by investing activities was primarily due to collection of a note receivable of
$3.5 million from the sale of the Hudson Americas’ ETS division. This increase
was partially offset by an increase in capital expenditures of $0.6 million
primarily for software costs related to the Hudson ANZ operations.
Cash
Flows provided by Financing Activities
For the
three months ended March 31, 2010, net cash provided by financing
activities was $0.9 million, as compared to cash provided by financing
activities of $5.2 million for the same period of 2009, a decrease in cash
provided by financing activities of $4.3 million. The decrease in cash provided
by financing activities was primarily due to a decrease in proceeds from net
borrowings under our credit facilities of $5 million, partially offset by the
cash used to repurchase the Company’s treasury stocks for the three months ended
March 31, 2009.
Credit
Agreements
The
Company has a primary credit facility (the “Credit Agreement”) with Wells Fargo
Foothill, Inc. and another lender that provides the Company with the ability to
borrow up to $75 million, including the issuance of letters of credit. The
Company’s available borrowings under the Credit Agreement are based on an agreed
percentage of eligible accounts receivable less required reserves, principally
related to the Company’s North America, the U.K. and Australia operations, as
defined in the Credit Agreement. As of March 31, 2010, the Company’s borrowing
base was $49.9 million and the Company is required to maintain a minimum
borrowing base of $25 million. As of March 31, 2010, the Company had
$10.5 million of outstanding borrowings under the Credit Agreement and a
total of $4.2 million of outstanding letters of credit issued under the
Credit Agreement, resulting in the Company being able to borrow up to an
additional $10.3 million after deducting the minimum borrowing
base.
The
maturity date of the Credit Agreement is July 31, 2012. Borrowings may be
made with an interest rate based on the prime rate plus a margin based on
borrowing availability or an interest rate based on the LIBOR rate plus a margin
based on borrowing availability. The interest rate on outstanding borrowings was
6.75% as of March 31, 2010. Borrowings under the Credit Agreement are
secured by substantially all of the assets of the Company.
The
Credit Agreement contains various restrictions and covenants, including those
that (1) prohibit payments of dividends; (2) limit the Company’s
capital expenditures in each fiscal year to $11 million; (3) restrict the
ability of the Company to make additional borrowings, or to consolidate, merge
or otherwise fundamentally change the ownership of the Company; (4) limit
dispositions of assets to permitted dispositions in the aggregate not to exceed
$15 million per year; (5) limit guarantees of indebtedness;
(6) prohibit the Company from making stock repurchases; and (7) limit
the amount of permitted acquisitions to $10 million per year. The Company was in
compliance with all covenants under the Credit Agreement as of March 31,
2010.
The
Company has entered into lending arrangements with local banks through its
subsidiaries in Belgium, the Netherlands, New Zealand, and China. The
outstanding borrowings under these lending arrangements were $0.9 million and $0
as of March 31, 2010 and December 31, 2009, respectively. The Belgium and the
Netherlands subsidiaries can borrow up to $3.6 million based on an agreed
percentage of accounts receivable related to their operations. Borrowings under
the Belgium and the Netherlands credit agreements may be made with an interest
rate based on the EURIBOR plus 2.5%, or about 2.9% on March 31, 2010.
The lending arrangements will expire in 2011. In New Zealand, our subsidiary can
borrow up to NZD$1.5 million (or approximately $1.1 million as of March 31,
2010) for working capital purposes. The lending arrangement expires on March 31,
2011. Interest on borrowings under the New Zealand facility is based
on a three month Cost of funds rate as determined by the bank, plus a 1.84%
margin, and was 6.1% on March 31, 2010. In China, the Company’s
subsidiary can borrow up to $1 million for working capital purposes. Interest on
borrowings under the overdraft facility is based on the People’s Republic of
China’s six month rate, plus 200 basis points and was 6.86% on March 31, 2010.
The lending arrangement expires annually each September but can be renewed for
one year period at that time. The Company expects to continue to use the
aforementioned credit, if and when required, to support its ongoing working
capital requirements, capital expenditures and other corporate purposes and to
support letters of credit. Letters of credit are primarily used to support
office leases.
- 25
- -
Shelf
Registration and Stock Issuance
In
December 2009, the Company filed a shelf registration statement (the “2009 Shelf
Registration”) with the SEC to enable it to issue up to $30.0 million equivalent
of securities or combinations of securities. The types of securities
permitted for issuance under the 2009 Shelf Registration are debt securities,
common stock, preferred stock, warrants, stock purchase contracts and stock
purchase units.
On April
6, 2010, the Company issued, in a registered public offering under
the 2009 Shelf Registration, 4,830,000 shares (which share number
includes the exercise of the underwriter’s overallotment option of
630,000 shares) of common stock at $4.35 per share. Total net proceeds to the
Company after underwriting discounts and expenses of the public offering were
approximately $19.2 million.
After
this offering, the Company may issue up to $9 million equivalent of securities
or combinations of securities under the 2009 Shelf Registration.
Liquidity
Outlook
The
Company believes that it has sufficient liquidity to satisfy its needs through
at least the next 12 months, based on cash and cash equivalents on hand at March
31, 2010, supplemented by availability of $10.3 million under the Credit
Agreement, $4.8 million under other lending arrangements in Belgium, the
Netherlands, New Zealand and China, and $19.2 million of proceeds from the
recent public offering of common stock. Cash and cash equivalents totaled $24.1
million as of March 31, 2010. The Company’s near-term cash requirements during
2010 are primarily related to funding operations, a portion of prior year
restructuring actions, capital expenditures and approximately $2 million of
contingent payment related to the final earn-out liabilities for the TKA
acquisition. The Company expects the restructuring actions taken in 2009 to
produce recurring cost savings for the rest of 2010 and beyond. The Company
expects to maintain a reduced level of capital expenditures in 2010 as it did in
2009, compared to prior years. In 2010, the Company expects to spend
approximately $3 million to $5 million, compared to approximately $4 million in
2009, after averaging approximately $11 million from 2006 through 2008. The
Company is closely managing its capital spending and will perform capital
additions where economically prudent, while continuing to invest strategically
for future growth.
The
Company believes, however, that current external market conditions remain
difficult particularly the limited access to credit, modest rates of near-term
projected economic growth and persistent levels of high unemployment. The
Company cannot provide assurance that actual cash requirements will not be
greater in the future than those currently expected, especially if market
conditions deteriorate substantially. If sources of liquidity are not available
or if the Company cannot generate sufficient cash flow from operations, the
Company might be required to obtain additional sources of funds through
additional operating improvements, capital market transactions, asset sales or
financing from third parties, or a combination thereof. The Company cannot
provide assurance that these additional sources of funds will be available or,
if available, would have reasonable terms.
Recent
Accounting Pronouncements
In
February 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Updates (“ASU”) 2010-09 “Amendments to Certain Recognition
and Disclosure Requirements” amending FASB Accounting Standards
Codification (“ASC”) Topic 855, “Subsequent Events.” The
amendment eliminates the requirement in ASC Topic 855 to disclose the date
through which subsequent events have been evaluated in the consolidated
financial statements of SEC filers and is effective for reports filed after
February 24, 2010. The Company evaluated all events and transactions through the
issuance date of our condensed consolidated financial statements. No recognized
or unrecognized subsequent events and transactions were noted.
In
January 2010, the FASB issued ASU 2010-6, “Improving Disclosures about Fair
Measurements." ASU 2010-6 provides amendments to ASC Topic 820 that
require separate disclosure of significant transfers in and out of Level 1 and
Level 2 fair value measurements and the presentation of separate information
regarding purchases, sales, issuances and settlements for Level 3 fair value
measurements. Additionally, ASU 2010-6 provides amendments to ASC Topic 820 that
clarifies existing disclosures about the level of disaggregation and inputs and
valuation techniques. The new disclosures and clarification of existing
disclosures of ASU 2010-6 are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosure about purchases,
sales, issuance, and settlements in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010 and for interim periods within those fiscal years. The
Company expects the adoption of ASU 2010-06 will not have a material impact on
the Company’s results of operations or financial position.
Critical
Accounting Policies
See
“Critical Accounting Policies” under Item 7 of the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2009 filed with the
Securities and Exchange Commission (“SEC”) on February 23, 2010 and incorporated
by reference herein. There were no changes to the Company’s critical accounting
policies during the three months ended March 31, 2010.
FORWARD-LOOKING
STATEMENTS
This Form
10-Q contains statements that the Company believes to be “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical fact included in
this Form 10-Q, including statements regarding the Company’s future financial
condition, results of operations, business operations and business prospects,
are forward-looking statements. Words such as “anticipate,” “estimate,”
“expect,” “project,” “intend,” “plan,” “predict,” “believe” and similar words,
expressions and variations of these words and expressions are intended to
identify forward-looking statements. All forward-looking statements are subject
to important factors, risks, uncertainties and assumptions, including industry
and economic conditions that could cause actual results to differ materially
from those described in the forward-looking statements. Such factors, risks,
uncertainties and assumptions include, but are not limited to, (1) global
economic fluctuations, (2) the ability of clients to terminate their
relationship with the Company at any time, (3) risks in collecting the Company’s
accounts receivable, (4) the Company’s history of negative cash flows and
operating losses may continue, (5) the Company’s limited borrowing availability
under its credit facility, which may negatively impact its liquidity, (6)
restrictions on the Company’s operating flexibility due to the terms of its
credit facility, (7) risks related to fluctuations in the Company’s operating
results from quarter to quarter, (8) risks related to international operations,
including foreign currency fluctuations, (9) risks associated with the Company’s
investment strategy, (10) risks and financial impact associated with
dispositions of underperforming assets, (11) implementation of the Company’s
cost reduction initiatives effectively, (12) the Company’s heavy reliance on
information systems and the impact of potentially losing or failing to develop
technology, (13) competition in the Company’s markets, (14) the Company’s
exposure to employment-related claims from both clients and employers and limits
on related insurance coverage, (15) the Company’s dependence on key management
personnel, (16) the Company’s ability to attract and retain highly skilled
professionals, (17) volatility of the Company’s stock price, (18) the impact of
government regulations, and (19) restrictions imposed by blocking
arrangements. These
forward-looking statements speak only as of the date of this Form 10-Q. The
Company assumes no obligation, and expressly disclaims any obligation, to update
any forward-looking statements, whether as a result of new information, future
events or otherwise.
- 26
- -
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
Company conducts operations in various countries and faces both translation and
transaction risks related to foreign currency exchange. For the three months
ended March 31, 2010, the Company earned approximately 86% of its gross
margin outside the United States (“U.S.”), and it collected payments in local
currency and related operating expenses were paid in such corresponding local
currency. Revenues and expenses in foreign currencies translate into higher or
lower revenues and expenses in U.S. dollars as the U.S. dollar weakens or
strengthens against other currencies. Therefore, changes in exchange rates may
affect our consolidated revenues and expenses (as expressed in U.S. dollars)
from foreign operations.
Amounts
invested in our foreign operations are translated into U.S. dollars at the
exchange rates in effect at the balance sheet date. The resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income in the stockholders’ equity section of the Condensed Consolidated Balance
Sheets. The translation of the foreign currency into the U.S. dollars is
reflected as a component of stockholders’ equity and it does not impact our
operating results.
The
Company has a Credit Agreement with Wells Fargo Foothill, Inc. and another
lender in the U.S. and other credit agreements with lenders in Belgium, the
Netherlands, New Zealand and China. The Company does not hedge the interest risk
on borrowings under any such the credit agreements, and accordingly, it is
exposed to interest rate risk on the borrowings under such credit agreements.
Based on our annual average borrowings, a 1% increase or decrease in interest
rates on our borrowings would not have a material impact on our
earnings.
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
The
Company’s management, with the participation of the Company’s Chairman and Chief
Executive Officer and its Executive Vice President and Chief Financial Officer,
has conducted an evaluation of the design and operation of the Company’s
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended. Based on this evaluation,
the Company’s Chairman and Chief Executive Officer and its Executive Vice
President and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective as of the end of the quarter ended
March 31, 2010.
Changes
in internal control over financial reporting
There
were no changes in the Company’s internal control over financial reporting that
occurred during the three months ended March 31, 2010 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
- 27
- -
PART II.
OTHER INFORMATION
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
Hudson
Highland Group, Inc. (the “Company”) has been responding to a previously
disclosed investigation by the staff of the Division of Enforcement (the
“Staff”) of the Securities and Exchange Commission (“SEC”) regarding disclosure
of the Company’s North American state sales tax charges and reserves. The total
amount of the Company’s past due sales tax liabilities for the seven-year period
from 2001 to 2007 was less than $3.9 million. Company clients reimbursed the
Company for approximately $450,000 of such liabilities. The Company has settled
all of such sales tax matters with, and paid all taxes due to, the respective
states. Under the direction of the Company’s Audit Committee, the Company has
fully and voluntarily cooperated with the Staff’s requests for information. In
May 2009, the Company learned that the Staff intends to recommend that the SEC
bring an enforcement action described below relating to an alleged lack of
disclosure concerning these sales tax matters in the Company’s Quarterly Reports
on Form 10-Q for the quarters ended June 30, 2006, September 30,
2006 and March 31, 2007 and the Annual Report on Form 10-K for the year
ended December 31, 2006. The Company believes that all such sales tax
charges and reserves have been reflected in the Company’s financial statements
that have been previously filed with the SEC. Furthermore, the Company has
already implemented a number of remedial actions and internal control
enhancements relating to sales tax matters, which have been operating
effectively for over two years. All quarterly and annual financial statements
for these periods were reviewed or audited by the Company’s independent auditor
at the time.
On
May 13, 2009, the Company received a “Wells Notice” from the SEC in
connection with the investigation by the Staff described above. According to the
Wells Notice, the Staff intends to recommend that the SEC bring a civil
injunctive action against the Company alleging that the Company violated
Section 13(a) of the Securities Exchange Act of 1934 and related Rules
13a-1 and 13a-13. The Company’s Chief Financial Officer also received a Wells
Notice that the Staff intends to recommend the SEC bring a civil injunctive
action against the Chief Financial Officer alleging that the Chief Financial
Officer aided and abetted such violations.
The
Company and its Chief Financial Officer disagree with the Staff with respect to
their proposed recommendations. Under the process established by the SEC, the
Company and its Chief Financial Officer have provided written submissions to the
Staff. The Staff continues to gather information and the Company and its Chief
Financial Officer continue to cooperate with the Staff’s
investigation.
In
addition to the matter mentioned above, the Company is involved in various legal
proceedings that are incidental to the conduct of its business. The Company is
not involved in any pending or threatened legal proceedings that it believes
could reasonably be expected to have a material adverse effect on its financial
condition, or results of operations.
|
ITEM 1A.
|
RISK
FACTORS
|
At
March 31, 2010, there had not been any material changes to the information
related to the Item 1A. “Risk Factors” disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2009.
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
The
following table summarizes purchases of common stock by the Company during the
quarter ended March 31, 2010.
|
Approximate Dollar
|
||||||||||
|
Total Number of
|
Value of Shares
|
|||||||||
|
Shares Purchased as
|
that May Yet Be
|
|||||||||
|
Part of Publicly
|
Purchased Under
|
|||||||||
|
Total Number of
|
Average Price
|
Announced Plans
|
the Plans or
|
|||||||
|
Period
|
Shares Purchased
|
Paid per Share
|
or Programs
|
Programs (a)
|
||||||
|
January
1, 2010 - January 31, 2010
|
-
|
|
$
|
-
|
|
-
|
$
|
6,792,000
|
||
|
February
1, 2010 - February 28, 2010 (a)
|
7,113
|
|
$
|
4.49
|
|
-
|
$
|
6,792,000
|
||
|
March
1, 2010 - March 31, 2010
|
-
|
|
$
|
-
|
|
-
|
$
|
6,792,000
|
||
|
Total
|
7,113
|
|
$
|
4.49
|
|
-
|
$
|
6,792,000
|
||
|
(a)
|
Consisted
of 7,113 shares of restricted stock withheld from employees upon the
vesting of such shares to satisfy employees’ income tax withholding
requirements.
|
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
ITEM 4.
|
REMOVED
AND RESERVED
|
|
ITEM 5.
|
OTHER
INFORMATION
|
None.
|
ITEM 6.
|
EXHIBITS
|
The
exhibits to this Report are listed in the Exhibit Index included elsewhere
herein.
- 28
- -
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
HUDSON
HIGHLAND GROUP, INC.
|
||
|
(Registrant)
|
||
|
By:
|
/s/
Jon F. Chait
|
|
|
Jon
F. Chait
|
||
|
Chairman
and Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
Dated:
April 28, 2010
|
||
|
By:
|
/s/
Mary Jane Raymond
|
|
|
Mary
Jane Raymond
|
||
|
Executive Vice President and Chief Financial Officer
|
||
|
(Principal
Financial Officer)
|
||
|
Dated:
April 28, 2010
|
||
- 29
- -
HUDSON
HIGHLAND GROUP, INC.
FORM
10-Q
EXHIBIT
INDEX
|
Exhibit No.
|
Description
|
|
|
31.1
|
Certification
by Chairman and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
31.2
|
Certification
by the Executive Vice President and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
|
|
|
32.1
|
Certification
of the Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
32.2
|
Certification
of the Executive Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350.
|
|
- 30
- -
Exhibit
31.1
CERTIFICATIONS
I, Jon F.
Chait, certify that:
|
1.
|
I
have reviewed this quarterly report on Form 10-Q of Hudson Highland Group,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
Dated:
April 28, 2010
|
/s/
Jon F. Chait
|
|
Jon
F. Chait
|
|
|
Chairman and Chief Executive Officer
|
Exhibit
31.2
CERTIFICATIONS
I, Mary
Jane Raymond, certify that:
|
1.
|
I
have reviewed this quarterly report on Form 10-Q of Hudson Highland Group,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
Dated:
April 28, 2010
|
/s/
Mary Jane Raymond
|
|
Mary
Jane Raymond
|
|
|
Executive
Vice President and Chief Financial
Officer
|
Exhibit
32.2
Written
Statement of the Executive Vice President and Chief Financial
Officer
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906
of the Sarbanes-Oxley Act of 2002
Solely
for the purposes of complying with 18 U.S.C. Section 1350, I, the
undersigned Executive Vice President and Chief Financial Officer of Hudson
Highland Group, Inc. (the “Company”), hereby certify, based on my knowledge,
that the Quarterly Report on Form 10-Q of the Company for the quarter ended
March 31, 2010 (the “Report”) fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
|
/s/
Mary Jane Raymond
|
|
Mary
Jane Raymond
|
|
April
28, 2010
|
Exhibit
32.1
Written
Statement of the Chairman and Chief Executive Officer
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906
of the Sarbanes-Oxley Act of 2002
Solely
for the purposes of complying with 18 U.S.C. Section 1350, I, the
undersigned Chairman of the Board and Chief Executive Officer of Hudson Highland
Group, Inc. (the “Company”), hereby certify, based on my knowledge, that the
Quarterly Report on Form 10-Q of the Company for the quarter ended
March 31, 2010 (the “Report”) fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
|
/s/
Jon F. Chait
|
|
Jon
F. Chait
|
|
April
28, 2010
|