Star Equity Q4 2024 Earnings Report

Star Equity EPS Results

• Actual EPS: $0.15
• Consensus EPS: -$0.17
• Beat/Miss: Beat by +$0.32
• One Year Ago EPS: N/A

Star Equity Revenue Results

• Actual Revenue: $17.10 million
• Expected Revenue: $14.00 million
• Beat/Miss: Beat by +$3.10 million
• YoY Revenue Growth: N/A

Star Equity Announcement Details

• Quarter: Q4 2024
• Date: 3/20/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, March 20, 2025
• Conference Call Time: 10:00AM ET

Star Equity (NASDAQ:STRR), Inc. (NASDAQ:STRR) is a special purpose acquisition company established in 2021 and incorporated in Delaware. Sponsored by Star Equity Partners, the firm was formed to raise capital through an initial public offering with the objective of identifying and acquiring one or more businesses in the lower middle market. Since its inception, Star Equity has leveraged its sponsors’ extensive investment expertise and industry networks to source potential targets that exhibit strong growth potential and operational upside.

The company’s acquisition strategy focuses on established enterprises across a range of sectors, including manufacturing, distribution, business services and niche consumer products. Upon completing a business combination, Star Equity partners closely with management teams to implement strategic initiatives designed to enhance operational efficiencies, drive revenue growth and explore add-on acquisition opportunities. This hands-on approach aims to create sustainable value and position the combined entity for long-term success.

Historically, Star Equity has concentrated its search on lower middle market companies within the southeastern United States, tapping into a region characterized by robust economic expansion and a deep pool of family- and founder-owned businesses. While the firm’s primary emphasis remains on this geography, it maintains the flexibility to pursue compelling opportunities across other U.S. regions and industry verticals. The blank-check structure allows Star Equity to move quickly on transactions that meet its investment criteria.

Star Equity’s leadership team brings decades of private equity and corporate finance experience to bear on every potential transaction. The company is managed by a seasoned group of investment professionals from Star Equity Partners, led by its founder and managing partner, and supported by a board of directors comprised of industry veterans. Together, they oversee the due diligence process, shape post-combination value-creation plans and guide overall corporate governance to deliver shareholder value.

Star Equity Q4 2024 Earnings Call Transcript

Key Takeaways

• In Q4 2024, revenue grew 21.1% YoY to $17.1 billion and full-year revenue rose 16.5% to $53.4 billion, primarily driven by the acquisitions of Timber Technologies and Big Lake Lumber.
• Fourth-quarter gross profit surged 55.3% to $4.5 million thanks to Timber Technologies’ high margins, while full-year gross profit fell 7.2% due to a one-time $574 thousand purchase price adjustment and weaker demand at KBS and Edge Builder.
• The Building Solutions division saw demand recover in H2 2024 with signed backlog reaching $17.2 million at year-end and momentum carrying into Q1 2025 amid structural tailwinds for factory-built construction.
• The newly formed Energy Services division from the acquisition of Alliance Drilling Tools adds 48% gross margins and $2.4 million adjusted EBITDA, diversifying the company’s operating portfolio.
• Operating cash flow swung to an outflow of $1.5 million in Q4, cash balances fell to $5.6 million from $18.9 million, and interest-bearing debt climbed to $11.3 million following Timber Technologies financing.

Presentation

[Operator]

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings Fourth Quarter twenty twenty four Results Conference Call. Please be advised that the 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.

[Operator]

Please also note that on this call, management will reference 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 financial measures are reconciled to the most 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 one after the call, please contact Star Equity at (203) 489-9500 or its Investor Relations representative, Lena Tati, of The Equity Group at (212) 836-9611.

[Operator]

Also, this call is being broadcast live over the Internet and may be accessed at 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.

[Richard Coleman, Chief Executive Officer at Star Equity]

Thank you, operator. Good morning and thank you for joining us today for our fourth quarter twenty twenty four results conference call. On the call with me today are Executive Chairman, Jeff Eberwein and Chief Financial Officer, Dave Noble. 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. In the fourth quarter of twenty twenty four, revenue increased by 21.1% to $17,100,000,000 versus $14,100,000 in the fourth quarter of twenty twenty three.

[Richard Coleman, Chief Executive Officer at Star Equity]

For the full year 2024, revenue increased 16.5% to $53,400,000 from $45,800,000 in 2023. The revenue increases in both periods are largely attributable to M and A activity, particularly the acquisition of Timber Technologies, which we completed in the second quarter of twenty twenty four and the full year revenue impact of our Big Lake Lumber acquisition, which we completed in the fourth quarter of twenty twenty three. Fourth quarter '20 '20 '4 gross profit increased 55.3% to $4,500,000 versus $2,900,000 in Q4 twenty twenty three, due primarily to the inclusion of gross profit from Timber Technologies, which generates the highest gross margin of Starz Business Solutions businesses. Full year 2024 gross profit declined 7.2% due to a one time $574,000 purchase price accounting adjustment related to the Timber Technologies acquisition, as well as lower revenues and utilization at our KBS and E BGL businesses. Our Building Solutions division was negatively impacted by demand softness during the first half of twenty twenty four, as project starts were delayed primarily due to interest rate sensitivity and credit availability.

[Richard Coleman, Chief Executive Officer at Star Equity]

However, during the second half of twenty twenty four and especially in Q4, momentum shifted as several large projects placed on hold earlier in the year received final approvals and began production. This positive momentum has continued into the first quarter of twenty twenty five as evidenced by our recent announcements of multiple large project signings. Our signed backlog representing committed projects and orders stood at $17,200,000 at year end and has increased year to date as demand continues to build. Over the long term, we have conviction in the structural tailwinds for our Building Solutions division as factory built construction continues to gain market share versus traditional building methods. While we are well positioned for a strong 2025, we are continuing to monitor the potential impact of the current administration's fiscal policy on our operating businesses.

[Richard Coleman, Chief Executive Officer at Star Equity]

The application of tariffs is one example and we have taken preemptive action to reduce our businesses exposure to Canadian lumber in favor of domestic lumber. In addition, we have implemented strategies and enhanced our contract language to further reduce the risks associated with changes in input costs. Although we can pass some price increases through to the customer, drastic or rapid price increases risk impacting overall demand for wood based construction. Lastly, I want to highlight our recently announced acquisition of Alliance Drilling Tools, which established our Energy Services division, diversifying our operating business portfolio and providing a new platform for growth. We are excited to partner with the business of ADT's caliber and growth potential and expect them to contribute significantly to Star's consolidated results going forward.

[Richard Coleman, Chief Executive Officer at Star Equity]

Since its founding, ADT has exhibited strong revenue and profitability growth with consistent cash generation. As previously announced, for full year 2024, ADT generated revenue of approximately $10,500,000 gross margin of 48% and adjusted EBITDA of $2,400,000 Its business model allows for the majority of costs including freight, repairs and damages to be passed directly to customers, which minimizes ADT's operational expenses, CapEx and risk exposure. We believe all of our operating companies operate in industries that support further expansion and will continue to evaluate opportunities for organic growth as well as additional acquisitions. Now, I'll turn the call over to Dave Noble, our CFO, who will provide additional fourth quarter consolidated financial highlights. Dave, go ahead.

[David Noble, Chief Financial Officer at Star Equity]

Thank you, Rick, and good morning. Let's move on to Star Equity's consolidated financial results, which for the fourth quarter and full year of 2024 are represented by our two operating divisions, Building Solutions and Investments. In Q4 twenty twenty four, consolidated gross profit was $4,400,000 up 55.9% versus Q4 of twenty twenty three, driven by increased revenues and higher gross margins in our Building Solutions division. However, for the full year, gross profit decreased by 7.3% to $11,100,000 from $11,900,000 in 2023, driven primarily by lower gross margin percentages in our Building Solutions division during the first half of the year. SG and A increased by $1,000,000 or 31.7% versus Q4 of twenty twenty three.

[David Noble, Chief Financial Officer at Star Equity]

As a percentage of revenue, SG and A increased in Q4 twenty twenty four to 24.7% versus 22.8% in Q4 of twenty twenty three. For fiscal year 2024, SG and A was $17,000,000 versus $14,500,000 in 2023. The main driver of the increase in SG and A are the full year impacts of the Timber Technologies and the Big Lake Lumber acquisitions. In the fourth quarter of twenty twenty four, we reclassified the twenty twenty four impairments of our cost method investment from SG and A to other income and expense to align this with the gains and losses of our investments division. For reference, these impairments follow the mark to market valuations done by Catalyst, formerly TTG, their largest shareholder, the Private Equity Fund.

[David Noble, Chief Financial Officer at Star Equity]

Moving to the bottom line. In Q4, our net loss from continuing operations was $2,500,000 versus net income from continuing operations of $1,800,000 in Q4 of twenty twenty three. Non GAAP adjusted net income from continuing operations in Q4 was $500,000 or income of $0.15 per diluted share. This compares to adjusted net loss of $300,000 in Q4 of twenty twenty three or a loss of $0.1 per diluted share. Non GAAP adjusted EBITDA from continuing operations increased to $1,100,000 in Q4 from a negative 100,000 in Q4 of twenty twenty three.

[David Noble, Chief Financial Officer at Star Equity]

Segment non GAAP adjusted EBITDA at our Business Solutions division increased to $2,300,000 in Q4 this year, up from $700,000 in Q4 of twenty twenty three. Q4 '20 '20 '4 cash flow from consolidated operations was an outflow of $1,500,000 compared to an inflow of $28,000 for the same period in the prior year. The decrease in operating cash flow was primarily due to increases in working capital associated with the increased business activity in Q4 of twenty twenty four. As of 12/31/2024, the outstanding balance in our interest bearing debt was $11,300,000 versus $2,000,000 at the December 2023. Our cash balance, including restricted cash, stood at 5,600,000 down from $18,900,000 at the end of twenty twenty three.

[David Noble, Chief Financial Officer at Star Equity]

The changes in both debt and cash balances can largely be explained by the Timber Technologies acquisition and its related financing, both of which closed in May of twenty twenty four. Turning to our Investments division, our holdings and public equity securities at the end of the year amounted to $3,400,000 versus $4,800,000 a year ago as we substantially exited one of our public equity positions following its acquisition. Our rollover equity investment and seller note receivable from the sale of Digirat Health to Catalyst, formerly TTG, in May of twenty twenty three were valued at $1,400,000 and $8,200,000 respectively. As disclosed in ENSERVCO's public filings in the fourth quarter of twenty twenty four, we provided ENSERVCO a notice of default regarding the $1,000,000 promissory note issued to Star related to our initial investment. As a result of this default, we canceled the issuance of 250,000 Star preferred shares, which collateralized that note.

[David Noble, Chief Financial Officer at Star Equity]

We continue to hold approximately 12,500,000 of common shares on Emservco, and we remain in contact with ENSERVCO regarding potential opportunities to collaborate on business opportunities. Now, I'd like to turn the call back over to Rick for some additional remarks.

[Richard Coleman, Chief Executive Officer at Star Equity]

Thank you, Dave. We ended 2024 with strong activity across our business solutions division and that momentum is carried forward into the first quarter of twenty twenty five. We're encouraged by the recent performance at all of our businesses, our growing sales pipeline and backlog and the opportunities presented by our establishment of our Energy Services division. In short, we're excited for the year ahead. Now I'd like to turn the call over to the operator for questions.

[Operator]

Thank you. We will now begin the question and answer session. Our first question today will come from Theodora Neill of Litchfield Hills Research. Please go ahead.

[Theodore O'Neill, CEO at Litchfield Hills Research]

Thank you very much and congratulations for meeting the revenue and the non GAAP EPS numbers. I'd like to ask about building side of the business. The building solutions, so two questions. One is, you announced two big wins in March and I think you disclosed how those are going to flow through 2025. Can we read anything into that in terms of additional business?

[Theodore O'Neill, CEO at Litchfield Hills Research]

And I'd like to know what accounts for the margin improvement in Building Solutions?

[Richard Coleman, Chief Executive Officer at Star Equity]

Thanks, Theo. I appreciate the question. This is Rick. One of the things that definitely impacts the margin improvements in the Building Solutions division is increased revenues. We do have a platform in place that's necessary to operate the business and those fixed costs are now being spread across a number of different projects and a broader revenue base.

[Richard Coleman, Chief Executive Officer at Star Equity]

So that's a big piece of it. What we're looking for in the future is really indicated by what our sales pipeline looks like. The new opportunities that come into the pipeline are evaluated every week. We negotiate those deals and hopefully when we win them, we add them to our backlog. And what we see in the pipeline and the backlog is fairly substantial growth beginning in the fourth quarter of twenty twenty four and carrying forward into 2025.

[Theodore O'Neill, CEO at Litchfield Hills Research]

Okay. And can you break out what's in the $1,700,000 of other expense in the quarter?

[Richard Coleman, Chief Executive Officer at Star Equity]

Dave, do you want to take that one?

[David Noble, Chief Financial Officer at Star Equity]

Sure. I can take that. Yes, the big thing we mentioned this in the commentary, we had to take a bit of a write down on our investment in the equity of a former Digirad, which we sold to TTG, now Catalyst. And we pretty much have stayed in sync with the private equity firm that put that company together. And given that they're in the midst of a turnaround, they've had some write down of that equity.

[David Noble, Chief Financial Officer at Star Equity]

We've had that in three of the four quarters of last year, and so the final quarter was around that 1.7 number. Furthermore, we recharacterize that. We had been showing that in SG and A, but we've reclassified that into other income because it better aligns with our other investments related activity.

[Theodore O'Neill, CEO at Litchfield Hills Research]

Okay. All right. And that's pretty much all of it now. Is it you've written that down to close to zero?

[David Noble, Chief Financial Officer at Star Equity]

The equity portion is down. Again, they're in the midst of a turnaround and this is a long term hold. So from an accounting perspective, we can never write it back up. But I think all of the senior management are super hopeful that this is going to be a win over the long term. We believe Sentinel is the prime firm is going to turn this thing around and make a good investment. So we're happy to be part of it.

[Theodore O'Neill, CEO at Litchfield Hills Research]

Okay. So there's nothing from go ahead, sorry.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

Yes, this is Jeff. We also have a debt investment with so we own equity and we own debt in catalyst. And unfortunately the way GAAP accounting works is we have to write it down if there's a possibility of it being impaired and our as Dave said, our methodology is just to follow the mark to market that the PE firm does. And if it does turn around the way we think it will, unfortunately we don't get to write that back up under the GAAP accounting rules. The more important thing is that the PE firm will sell this business at some point.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

It's in a fund that ends in a few years. And so what we really care about is that exit a few years from now and our hope is that both the note and the equity or original equity of $6,000,000 are fully recouped and there's even upside to that. So the mark to market is just a non cash item on paper until the business gets sold.

[Theodore O'Neill, CEO at Litchfield Hills Research]

Right, right. Okay. And I asked about it because I thought there are going to be something from the Inservco issue, but will that appear in next quarter?

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

Bill, do you want to handle that? Write down of the Inservco note.

[Executive]

The write down of the ENSERVCO note actually ends up hitting our stockholders' equity because it was over collateralized. So it never hit the P and L.

[Theodore O'Neill, CEO at Litchfield Hills Research]

Okay. And my last question is, what's going on in ENSERVCO have any impact on Alliance Drilling?

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

No.

[Theodore O'Neill, CEO at Litchfield Hills Research]

Great. Thanks very much.

[Operator]

Our next question today will come from Tate Sullivan of the Maxim Group. Please go ahead.

[Tate Sullivan, Senior Research Analyst at Maxim Group]

Thank you. You covered this on the acquisition call and Alliance Drilling, but what specifically did you like about their business even after your investment or during your investment in Servco? And can you comment on Alliance Drilling's customer mix? Is it smaller operators, larger operators or a mix thereof, please?

[David Noble, Chief Financial Officer at Star Equity]

Rick, why don't you handle that? Rick? Are you there, Rick?

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

This is Jeff.

[Richard Coleman, Chief Executive Officer at Star Equity]

Sorry, I'm sorry, I was on mute. I appreciate the question, Tate. I apologize for that. Yes, one of the things we liked about Alliance Drilling obviously was the fact that they operate in multiple sectors of the drilling stream. Their experience is pretty substantial.

[Richard Coleman, Chief Executive Officer at Star Equity]

The founders are still part of the company and are planning to stay for a while, while we transition. There's a strong management team beneath them. And all of them, when we've talked to them about their growth opportunities, have noted that they think that the company has a great upside potential with additional customers, but also tapping into additional revenue from their current customer base. So we believe that a minimal investment in additional tools and some geographic expansion will really help grow that business over time.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

And do you have to put out Yes, there are two biggest customers are household names in the energy sector. So great counterparties, I think they have no credit risk with their customers, no history of bad debt expense. So it's a mix of public companies and some private companies. And we think it's a healthy mix. And as Rick mentioned, it's about two thirds traditional energy, but they've been very successful in growing other sectors, geothermal, water wells, a little bit of minerals and mining, mainly in The U.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

S, but there's some occasional activity elsewhere in The Americas.

[Tate Sullivan, Senior Research Analyst at Maxim Group]

Thank you. And then not to overlook the tariff issue, which I tend to, but I mean you commented on the timber from Canada for your modular construction business. And is that mostly the New England KBS operation? Does KBS mostly get timber from Canada?

[Tate Sullivan, Senior Research Analyst at Maxim Group]

Are there substitutes on The U. S. Side? Can you just talk about where the current sourcing is for KBS? Yes.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

Rick will talk about the sourcing, but I'd say lumber, it's not quite a global commodity, but The U. S. And Canada are very closely linked markets. So regardless of where one sources if lumber prices go up in Canada, they go up in The U. S.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

And vice versa. But Rick, why don't you talk about the sourcing issue?

[Richard Coleman, Chief Executive Officer at Star Equity]

Sure. Regarding KBS, which you specifically asked about, KBS sources mostly domestic lumber. There are some inputs, windows, trusses, things like that that come from other suppliers that may contain Canadian lumber. So we do expect there could be some price impact. And as Jeff mentioned, if prices go up for Canadian lumber, prices are likely to go up for domestic lumber as well.

[Richard Coleman, Chief Executive Officer at Star Equity]

As long as those price increases are not overly sudden or large, then we can address them. We can adjust our pricing and pass along some of that to our customers. But any large or dramatic increase is going to be it's going to impact construction across the country. So we'll have to keep an eye on that. We do have a hedging strategy.

[Richard Coleman, Chief Executive Officer at Star Equity]

We have other strategies in our customer contracts that protect us. TempurTech uses very little. Canadian lumber, they outsource almost exclusively domestic lumber. Southern yellow pine from Southern states. And Edge Builder is probably where we have the most concentration of Canadian lumber, but they also have they're watching it very carefully and they use a hedging strategy to protect us there.

[Tate Sullivan, Senior Research Analyst at Maxim Group]

Thank you all.

[Operator]

Our next question today will come from Al Hill, a Private Investor. Please go ahead.

[Analyst]

Hey, good morning guys. Hey, I'm looking at your balance sheet and it looks like your book value is about $11,400,000 and there's obviously per share and your stock price is about $222 that's five times book. Have you ever thought about just selling the company or some of the parts of it and return all the equity to shareholders? It just seems like we're kicking a dead horse and I just don't see any positivity. I hear what you're saying, but I'm very, very disappointed in the results.

[Analyst]

You're given preferred dividends out when you're not making money. I'd just like to the Board considers selling the company.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

This is Jeff and I'm Executive Chairman of the Board and the company's biggest shareholder. And I would say all options are on the table to maximize value for shareholders. And we agree the stock is really cheap ridiculously cheap. And with respect to the preferred stock by paying a dividend it causes the preferred stock to trade pretty close to par and we have been able to use it as an acquisition currency. So if you look at the ADT acquisition, most of that purchase price was paid in preferred stock.

[Jeffrey Eberwein, Executive Chairman of the Board at Star Equity]

And yes, a 10% dividend yield is a healthy yield. But if we can buy businesses at three and four times EBITDA and use our preferred stock, it's very, very accretive to the common stock. So the situation between our stock price and the intrinsic value isn't sustainable over the long term. We share your frustration and all I can say is all options are on the table to maximize value for shareholders including the one you mentioned.

[Operator]

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

[Richard Coleman, Chief Executive Officer at Star Equity]

Thank you, operator. Before concluding, I just want to note that we're always available to take your call and discuss any additional questions you might have. So please don't hesitate to contact us. We'll continue to share our story with existing and potential investors in the coming weeks and months. As always, we appreciate all of our shareholders and your continued feedback and support. Thank you.

[Operator]

Thank you for joining the Star Equity Holdings fourth quarter conference call. Today's call has been recorded and will be available on the Investors section of our website, www.saarequity.com. The conference is now concluded. Thank you for attending today's presentation and you may now

Participants

Executives

• Richard Coleman, Chief Executive Officer
• David Noble, Chief Financial Officer
• Jeffrey Eberwein, Executive Chairman of the Board

Analysts

• Theodore O'Neill, CEO at Litchfield Hills Research
• Executive
• Tate Sullivan, Senior Research Analyst at Maxim Group
• Analyst