Star Equity Holdings, Inc. Q1 FY2025 Earnings Call

Greetings ladies and gentlemen and welcome to Star Equity Holdings First Quarter 2025 Results Conference Call. Please be advised that discussions on today's call may include forward-looking statements. Such forward-looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Please refer to Star Equity's most recent 10-K, 10-Q and other filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events, or otherwise. Please also note that on this call management may reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP measures are reconciled to their most recent comparable GAAP financial measures in our earnings release issued this morning. If you did not receive a copy of the earnings release and would like to receive one after the call, please contact Star Equity at (203) 489-9500, or its Investor Relations representative, Lena Cati of the Equity Group at (212) 836-9611. Also, this call is being broadcast live over the Internet and may be accessed via Star Equity's website at www.starequity.com. Shortly after the call, a replay will also be available on the company's website. It is now my pleasure to introduce Rick Coleman, Chief Executive Officer of Star Equity.

Thank you, operator. Good morning everyone. We appreciate you joining us for our first quarter 2025 results conference call. On the call with me today are Jeff Eberwein, our Executive Chairman; and Dave Noble, our Chief Financial Officer. I'll start today by providing an overview of our recent business developments and financial highlights. Then Dave will provide additional details on our consolidated financial results. Our first quarter revenue increased 41.7% over the first quarter of 2024, driven primarily by the inclusion of revenues from Timber Technologies acquired in May 2024 and partially from Alliance Drilling Tools acquired in March 2025. Gross margin improved to 24.3% versus 17.3% in the same quarter last year, mainly due to higher revenues and the addition of Timber Technologies. Building Solutions segment revenues increased by 32.9% compared to the same quarter of 2024, or still somewhat below our internal expectations, mainly due to commercial projects pushing into the second quarter. Also, residential demand at our Glenbrook business picked up later in the quarter than we anticipated. The progress made at KBS was somewhat offset by slower business activity at EBGL, which we believe is temporary. Overall, we've seen a significant uptick in customer interest and activity over the past couple of quarters. We're excited to note that our Building Solutions division backlog representing orders under contract, stood at a record $27.9 million at quarter end compared to $14.8 million at the end of the first quarter of 2024. This gives us high confidence in the division's full-year 2025 outlook. Another highlight of the quarter was the establishment of our Energy Services division, marked by our March acquisition of Alliance Drilling Tools, or ADT. The audit of this business is complete and the integration into our holding company structure is proceeding smoothly. We're now focused on ADT's organic growth opportunities and on exploring opportunities to augment the division with additional acquisitions. Now, I'll turn the call over to Dave Noble, our CFO, to provide additional first-quarter consolidated financial highlights. Dave, please go ahead.

Thank you, Rick and good morning. Let's now turn to Star Equity's consolidated financial results, which are represented by our three operating divisions: Building Solutions, Energy Services, and Investments. In Q1 2025, gross profit was $3.1 million, up 99.2% versus Q1 of 2024. This was driven by increased revenue at KBS as well as the addition of TT and ADT to our portfolio of companies. SG&A increased by $1.2 million or 28.5% versus Q1 of 2024. This was driven largely by the inclusion of SG&A from TT and to a lesser extent, ADT as well as higher expenses related to M&A activity. SG&A as a percentage of revenue decreased to 40.7% compared to 44.9% in the first quarter of last year. SG&A excluding non-recurring items was 36% of revenue in Q1 compared to 37% in Q1 of 2024. Moving on to bottom-line results for Star Equity, we reported a net loss from continuing operations of $1.2 million in Q1 of 2025 compared to a net loss from continuing operations of $2.2 million in Q1 of 2024. Non-GAAP adjusted net loss from continuing operations in Q1 was $1.7 million or $0.52 per share compared to an adjusted net loss of $1.4 million or $0.44 a share in Q1 of 2024. Non-GAAP adjusted EBITDA from continuing operations was a loss of $0.8 million in the quarter versus an adjusted EBITDA loss of $1.1 million in the same period last year. Consolidated cash flow from operations for the first quarter of 2025 was an inflow of $0.6 million versus an outflow of $2.4 million in the first quarter of 2024. The positive cash flow from operating activities is attributable to favorable results in our Building Solutions division combined with strong accounts receivable collections. At the end of the third quarter, our consolidated unrestricted cash balance stood at $1.9 million compared to $4.0 million at the end of 2024. The difference is primarily driven by the upfront cash used to close the acquisition of ADT in March of 2025 plus associated transaction-related costs. Turning to our Investments division. Our holdings in public equity securities at the end of the quarter amounted to $3.1 million versus $3.4 million at year end 2024. Our rollover equity investment and seller note receivable from the 2023 sale of Digirad to TTG, now called Catalyst, were valued at $1.3 million and $8.4 million, respectively. Now, I'd like to turn the call back over to Rick for some additional comments.

Thank you, Dave. Thank you. As I previously mentioned, we're encouraged by the recent momentum we're experiencing at our Building Solutions division and by new growth opportunities in our Energy Services division as well as the progress we've been making on the M&A front. The Star Equity Board and Management Team are fully focused on creating shareholder value through our targeted business development initiatives, and we will continue to identify additional accretive opportunities at all our divisions. I'll now turn the call over to the operator for questions.

Yes, thank you. We will now begin the question-and-answer session. The first question comes from Theodore O'Neill with Litchfield Hills Research.

Thanks and congratulations on the backlog. Question for you. I would have expected with the tariff situation that we've got that a whole host of the business would have been experiencing delays. And so I was wondering if you could talk about sort of the dynamics of the business between EdgeBuilder and Building Solutions that would cause EdgeBuilder to have decided for these pushouts, but not the rest of your business?

Rick, do you want to take that?

Theo, this is Jeff in Connecticut. EdgeBuilder experienced a company-specific situation where a large project was paused for two months in the middle of Q1 for specific reasons. However, it is back on track now, and we expect to recognize the revenue from finishing that project in Q2. Additionally, considering the locations of our businesses, EdgeBuilder is based in Minneapolis and KBS is in Maine. We faced a particularly severe winter this year compared to previous ones. While we don’t like to use weather as an excuse, there were weather-related delays. Both businesses are highly project-oriented; nothing was canceled, but some projects shifted from Q1 to Q2. This resulted in a shift in one quarter.

Okay. And I understand because we talked about this in the last quarter that there are ways that you can mitigate tariff impact. But I'm just curious if you are seeing any other sort of early signs of any of the projects being sort of like put on hold while we wait and see what happens with pricing.

No, I will take that one, Jeff. We really aren't. Things are actually looking fairly positive for us. I think there's a significant backlog of construction demand that has built up over time while people were reacting to the interest rate environment and other economic factors, so those projects need to be built. As a result, those projects are now moving forward. Our backlog is strong, and we don't see any indications that this is a temporary situation.

Yes, we are closely monitoring inputs like lumber and OSB. Lumber prices have increased, but not to the extent seen in previous spring seasons. There has been some news about a slowdown in the construction of new homes, but our exposure to that market is limited. We are keeping an eye on these developments. As Rick mentioned, during the significant rise in interest rates in 2022 and 2023, along with tougher financing conditions, many projects were paused but not canceled. In a severe recession, projects typically get canceled, but we didn’t experience that. Instead, for about six quarters, projects were delayed and not initiated. However, it seems that in the fourth quarter of last year, many of these projects that had been on hold resumed, which is reflected in our backlog numbers. This gives us confidence for the upcoming quarters, as those projects have now converted into signed contracts on our production schedule.

Okay. Thanks very much.

Thank you. And the next question comes from Tate Sullivan with Maxim Group.

Thank you. I saw your Alliance Drilling financials in the 8-K yesterday and just noticed the gross profit margin in 2024 of around 56% versus, I mean, the first quarter closing a little above a third or about 35%. Is that just based on intra-quarter or is it a lower gross profit business or changes since 2024 in Alliance? Let's start there.

Noble, do you want to take that?

I believe it primarily reflects the circumstances during the quarter. I don't see it as a significant issue. Alliance operates with a high gross margin, and it really depends on the level of activity and how it contributes to our overall results.

Yes. In general, we seek out businesses that have high margins and low maintenance capital expenditures. What we appreciate about Alliance Drilling is that it possesses both of these attributes, and its costs as a percentage of a total project are very small, yet it is essential. This characteristic is quite favorable for a small business, and one of the main reasons we were attracted to it is the consistently high margins that the business offers.

And another thing that stood out to me was the equipment rental revenue as a percentage of total revenue. Are the rental terms in the businesses that Alliance has preferred to be monthly, two to three months, or can they extend longer? If you could discuss that.

Yes. No, it's more project-based. And this equipment, if you think about what they do, which is drilling oil and gas wells, but they also do geothermal, mining, water wells, the equipment gets chewed up, used up pretty quickly. So, they have a pretty high rental rate, and it usually is based on the project, it can be set amount per day or it can be an amount per foot drilled or even a set amount per hour. And the equipment after a project is done comes back to the shop and gets refurbished. And it can only be used, it depends on the piece of equipment, maybe 5 times to 10 times before it's at the end of its useful life. So, it's a little bit like a razor blade kind of business.

Thank you. And then, if I may, on the table that you showed your revolving credit facilities, including one Austin ADT, assume Alliance, is it a similar type of facility to the EdgeBuilder facility? Or can you just talk about that?

Dave, why don't you take that?

Yes. Yes, that's a similar facility. I mean, we did two facilities to support the acquisition of ADT. One is a small term loan on the fixed assets, and that was just $600,000. The second piece is a revolver that has a $3 million limit, but it's based on borrowing base certificates that are filed periodically, very similar to, like you said, EdgeBuilder. And we drew about half of that to finance the initial acquisition, but there's headroom still remaining on that facility.

Yes, okay. Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Rick Coleman for any closing comments.

Thank you, operator. Thanks, everyone, for your time today. We do appreciate your interest and your continued feedback and support. So, please don't hesitate to contact us. We're excited about the steps that we're taking on your behalf and look forward to updating you as our story develops.

Thank you for joining Star Equity Holdings' first quarter conference call. Today's call has been recorded and will be available on the Investors' section of our website, www.starequity.com.