Star Equity - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 was a step-change quarter: revenue grew 75.8% year over year to $23.7 million, gross margin expanded to 26.4%, and GAAP net income swung to $3.5 million; adjusted EBITDA rose to $7.0 million, aided by a $5.5 million realized gain in the Investments division.
• Building Solutions drove the quarter with $20.4 million revenue and 25.7% gross margin as large commercial projects ramped; backlog ended at $25.7 million, supporting a strong 2H and FY25 outlook.
• Energy Services (ADT) contributed $3.3 million of revenue and $0.53 million adjusted EBITDA despite macro headwinds; management noted selective pricing power on mission‑critical tools.
• Management does not provide formal guidance, but expects Building Solutions and Energy Services to be at least flat vs Q2 near‑term; longer‑term catalysts include merger with Hudson Global (shareholder vote Aug 21) and targeted removal of ~$2 million in redundant public company costs post‑closing.
• Cash from operations was an outflow of $1.7 million in Q2, with a $6.7 million broker receivable converted to cash in early July, expected to be reflected in Q3 CFFO; debt rose to $14.3 million with weighted average rates 7.7–9.3%.

What Went Well and What Went Wrong

What Went Well

• Significant operating leverage and mix: gross profit rose 182% to $6.3 million; Building Solutions margin expanded 910 bps YoY to 25.7% on higher volumes and TT/ADT inclusion.
• Investments division realized a $5.5 million gain (Servotronics → TransDigm), contributing $5.8 million adjusted EBITDA and marking a “watershed win.”
• Strong demand indicators: quarter‑end Building Solutions backlog at $25.7 million; management is “optimistic [the division] will show strong second half and full‑year 2025 performance.”

What Went Wrong

• Operating cash flow still negative in Q2: outflow of $1.7 million vs $1.9 million outflow in Q2 2024; working capital remained a drag though improved YoY.
• SG&A rose 20% YoY to $6.4 million on ADT/TT consolidation and higher M&A costs, limiting GAAP operating income (loss from operations of $(0.95) million).
• Non‑GAAP adjustments were material (e.g., intangible amortization, transaction costs, equity method impacts), highlighting reliance on realized investment gains and acquisitions to reach adjusted profitability.

Transcript

Speaker 4

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings' second quarter 2025 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 forward-looking statements. Please refer to Star Equity Holdings' 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 obligations to update forward-looking statements as a result of new information, future events, or otherwise. Please note that on this call, management will refer to non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net return, 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 month. If you do not receive a copy of the earnings release and would like one after the call, please contact Star Equity Holdings at 203-489-9500 or its Investor Relations Representative, Lina Khati, of the Equity Group at 212-836-9611. Also, this call is being broadcast live over the internet and may be accessed at Star Equity Holdings' website via 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 Richard Coleman, Chief Executive Officer of Star Equity Holdings. Please go ahead.

Speaker 2

Thank you, Operator. Good morning, everyone. We appreciate you joining us for our second quarter 2025 results conference call. On the call with me today are Jeffrey Eberwein, our Executive Chairman, and David Noble, our Chief Financial Officer. I'll start today by providing an overview of our recent business developments and financial highlights. David will provide additional details on our consolidated financial results. Before we open the floor to questions, Jeffrey will also discuss recent corporate milestones. Our second quarter revenue increased 76% over the second quarter of 2024, driven primarily by organic growth from our KBS business and the inclusion of Alliance Drilling Tools acquired in March this year. The inclusion of a full quarter of Timber Technologies revenue, which we acquired in May 2024, also contributed to the increase.

Gross margin improved to 26% versus 16% in the same quarter last year, mainly due to higher revenues as well as the inclusion of Alliance Drilling Tools and Timber Technologies, which are two of our higher margin businesses. Building Solutions division revenues increased by 51% to $20.4 million compared to $13.5 million in the same quarter last year, primarily driven by increased KBS revenues and the inclusion of a full quarter of Timber Technologies revenues. Overall, we've seen a significant uptick in customer interest in construction activity over the past few quarters. Our Building Solutions backlog, representing orders under contract, remains strong at $25.7 million at quarter end, compared to $14 million at the end of the second quarter of 2024. This gives us high confidence in the division's full-year 2025 outlook and positions us well for a strong start to 2026.

In our Energy Services division, the integration of Alliance Drilling Tools, or ADT, is continuing smoothly. Despite macroeconomic headwinds, including rig count declines, ADT generated $3.3 million in revenue and $0.5 million in non-GAAP adjusted EBITDA. We're pursuing ADT's organic growth opportunities and also studying potential high-quality acquisitions to strengthen the division. Now, I'll turn the call over to David Noble, our Chief Financial Officer, to provide additional second quarter consolidated financial highlights. David, please go ahead.

Speaker 1

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 Q2 2025, gross profit was $6.3 million, up 182% versus Q2 of 2024, driven by increased revenue at KBS as well as the addition of Timber Technologies and Alliance Drilling Tools to our portfolio of companies. SG&A increased by $1.1 million, or 20% versus Q2 of 2024, driven largely by the inclusion of SG&A from Alliance Drilling Tools and, to a lesser extent, the inclusion of a full quarter of Timber Technologies, as well as increased expenses related to M&A activity. SG&A, as a percentage of revenue, decreased to 27% compared to 40% in the second quarter of last year.

Moving on to bottom line results for Star Equity, we reported a positive net income from operations of $3.5 million in Q2 of 2025 compared to a net loss from operations of $3.8 million in Q2 of 2024. Non-GAAP adjusted net income from operations in Q2 was $6 million, or $1.87 per share, compared to an adjusted net loss of $0.9 million, or $0.29 a share in Q2 of 2024. Non-GAAP adjusted EBITDA from operations was a positive $7 million in Q2 versus an adjusted EBITDA loss of $0.5 million in the same period as last year, primarily driven by realized gains on securities at our Investments division. Consolidated cash flow from operations for the second quarter of 2025 was an outflow of $1.7 million versus an outflow of $1.9 million in the second quarter of 2024.

The six-month 2025 cash flow from operations was an outflow of $1.1 million compared to an outflow of $4.3 million for the first six months of 2024. The operating cash flow improvement is attributable to more favorable results from operations, particularly in our Building Solutions division, and also strong accounts receivable collections. It is also worth noting that subsequent to the quarter end in early July, our large $6.7 million receivable for brokers was converted to cash and will therefore be cash flow in the third quarter of 2025. At the end of the second quarter, our consolidated unrestricted cash balance stood at $1.9 million compared to $4.0 million at the end of 2024. This difference is primarily driven by the upfront cash used to close the acquisition of Alliance Drilling Tools 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 $1.8 million versus $3.4 million at the end of 2024. Our rollover equity investment and seller note receivable from the sale of DigiRad to Catalyst MedTech in May of 2023 were valued at $1 million and $8.6 million, respectively. Now I'd like to turn the call back over to Jeff for some additional remarks.

Speaker 3

Thank you, Dave. I'd like to expand on two major milestones that occurred during the quarter. First, in our Investments division, Star Equity's $5.8 million in adjusted EBITDA was driven by a $5.5 million realized gain from Star Equity Fund's investment in Servotronics, which was acquired by TransDigm at the close of Q2 at a 300% premium to where the stock was trading pre-announcement. This marks a significant milestone and watershed win for Star Equity Fund, the public investments arm of our Investments division. This outcome underscores our ability to identify and execute on high-value opportunities that generate meaningful returns to our stockholders. Second, in May 2025, Star Equity entered into a definitive merger agreement with Hudson Global.

While the transaction remains subject to shareholder approval, with shareholder meetings scheduled for August 21, the combined entity is expected to generate considerable value for stockholders due to increased scale, further diversification of revenue streams, and elimination of redundant public company costs. We urge our shareholders to vote for the merger on August 21. Our existing businesses are also performing well. We're encouraged by the recent momentum we're experiencing at our Building Solutions division, new growth opportunities at our Energy Services division, and the value we're creating in the Investments division, as well as the progress we're 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 will continue to identify additional accretive acquisition opportunities at all our divisions. Now I'd like to turn the call over to the operator for questions.

Speaker 4

Thank you. We will now begin the question and answer session. To ask a question, you may press *1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your questions, please press *2. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of Tate Sullivan with Maxim Group. Please go ahead.

Speaker 0

Hi, thank you. Good morning. Great results in the divisions. Can you talk about what the business division on the Star side has the best pricing power? If you can compare in that way, I know Alliance Drilling Tools, maybe it's a market share game versus Building Solutions. Can you single out a single business that has very good pricing power currently, please?

Speaker 1

Richard, why don't you take that?

Speaker 2

Yeah, I'll address that, Tate. Thank you for the question. What we found is that when there's volatility in the lumber market, our Building Solutions division has the opportunity to either maintain prices when lumber prices are declining or, to some extent, raise prices to keep up with lumber price increases. As you know, we've also talked about this in the past, we also have a number of different methodologies in place to ensure that we manage the price of a particular job with input from our customers as to how they want to control the purchase of materials and whether they want them purchased before the job is done at a predetermined price or at a later point in time. That's the general story for the Building Solutions division.

What we've seen so far is very little restriction on our ability to gently raise prices in the Energy Services division, and we've been doing that as we determine the relationship that we have with our customers and also increase our supply of more, I'll call them more in-demand tools that they need for their drilling operations. In general, as long as we don't get too carried away, I think we've got the opportunity to raise prices as the market for raw materials increases as well.

Speaker 0

Thank you, Rick. Regarding the planned merger, depending on the outcome and if by the positive shareholder vote outcome, will you plan to close the merger as soon after the vote, or are there some contingencies after the vote, please?

Speaker 3

That's the plan, Tate. It would be as quickly as we possibly can. The last hurdle at this point is getting the shareholder vote, which is both companies are meeting on the 21st.

Speaker 0

Thank you, Jeff. Thank you all.

Speaker 4

Thank you. Next question comes from the line of Michael Mathison with Sidoti & Company. Please go ahead.

Speaker 1

Congratulations on the quarter, you guys.

Speaker 3

Thanks, Michael.

Speaker 1

A couple of questions from me. Let's go back to Energy Services. It kind of caught my attention that you feel you're able to put through price increases in that division. Many energy servicing companies have been reporting declining revenue, pressure on pricing. Why do you think you're standing out in that way?

Speaker 3

Yeah, Michael.

Speaker 1

I think there are, Rick, let me start, Rick, and then you can follow up. ADT has a really high service level, and a lot of what they do, the tools that they rent are mission-critical, and they're a small piece of the total cost of drilling a well. There are a lot of different tools that are needed for what they do. We have been selectively replenishing some of their inventory of the most in-demand tools, and we've been able to increase utilization and gain share because of that. We have seen some pricing pressure in the marketplace on some of the more commodity, common tools where demand has declined, so supply exceeds demand. There are still a few tools out there that are in very high demand, and those are the ones that Rick was referring to earlier.

Speaker 2

That's exactly what I was going to say, Jeff. We've got two scenarios. One is when the only tools we have available for a particular customer are more commodity-based tools, then yes, there's pricing pressure. Part of our strategy is to increase the number of tools that we have that are more in demand and to some extent harder to come by so that when we get the call from a customer, we can meet their needs regardless of what they are.

Speaker 1

Okay, great. Makes sense. Let's turn to building products. To start with, let me just clarify, in your release, you mentioned that you had won several large commercial contracts. Are those commercial in the sense that they were multifamily, or is this actually away from the residential space?

Speaker 2

There's a mix of a little bit of everything in the backlog at this point, and you know it's encouraging to see that some of the pent-up demand that we expected to break loose has been over the last few quarters. That's what's got us excited about the backlog and the number of opportunities that we see. By the way, those are really solid opportunities where we have signed contracts and pretty substantial deposits.

Speaker 3

Michael, this is Jeff. I would just add at KBS, we have a policy of issuing a press release on any large projects, which we define as $2 million or greater. If you look back at all the press releases over the last year, you'll see that we started to get some of those projects unclogged, some of the projects that had been delayed, deferred that Rick was talking about. There were a series of press releases last fall and earlier this year on projects that we won. Step one is winning the project, getting the signed contract, then it goes into our backlog, then we start to produce it, then it starts showing up in revenue, and the final step is the profit recognition, which can sometimes be back and loaded.

Speaker 1

Okay, good. Thank you for the clarification. I'll go look up those releases. Again, though, big picture, it feels to me like you're kind of bucking the trend a little bit. A lot of headlines about pressure on home builders. Why do you feel you're standing out?

Speaker 2

I think to some extent, it's... Go ahead, Jeff.

Speaker 3

You go ahead, Rick.

Speaker 2

I was going to say, to some extent, it's a function of the territory we serve. We've got in the Northeast, in particular around Maine and the radius that we typically deliver to, there's still a significant shortage of affordable housing, of residential housing in general. We've been able to take advantage of that. We're also getting what we think is a larger share of market from traditional stick-built construction. We're working with some partners that we've had great success with. They and their customers are getting more comfortable with what we can do from KBS, and that's helping us generate opportunities and fill the backlog.

Speaker 1

Excellent news again. Looking forward, we have the shareholder vote coming up next week. Of course, we'll have to see how the shareholders vote, but assuming the merger goes forward, as an analyst, I'll want to be modeling the combined companies. Anything you can say in the way of guidance on Q3 and Q4 that will help me get off the ground there?

Speaker 3

Michael, this is Jeff. We stopped giving formal guidance. I think it was pre-COVID. We don't give formal guidance, but if you go kind of division by division, we are confident in the Building Solutions outlook for the next few quarters. It should be at least flat with what we did in Q2. I would say the same on Energy Services. On the new companies, the Hudson business, the new company we're going to call that Business Services, we think that business is past the trough and we've had three quarters of higher year-over-year revenue, higher year-over-year EBITDA, and we see that trend continuing. If you look at the corporate costs of the two companies, what we've guided to is that we believe we'll be able to remove $2 million of redundant public company costs, corporate overhead costs.

That doesn't happen on day one, but a few quarters, certainly a year in, we think those cost savings will be fully realized. Hope that helps.

Speaker 1

It does, very much so. Thank you for all of that information. Again, congratulations on the quarter.

Speaker 3

Thank you.

Speaker 4

Thank you. A reminder to all the participants that you may press *1 to ask a question. Next question comes from the line of Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Speaker 2

Thanks, and congratulations on a good quarter. I would like to know about the $4.9 million of other income in the quarter. Does that include the $5.5 million, Jeff, you talked about the realized gains?

Speaker 3

Yes, it does.

Speaker 2

Okay. I'm just curious about the dynamics. I'm following up on the previous question about stick-built versus prefab. I'm curious about the dynamics that are going on there that are making the prefab more popular. I mean, I'm looking at some of my own personal experiences in New England, and the prices we're getting for stick-built stuff is crazy. I'm just wondering if there's something going on here between what you guys can do in prefab versus stick-built that's probably maybe more than what's going on with tariffs that explains the success there.

Speaker 3

Rick, why don't you take that one?

Speaker 2

Yeah, certainly. I think it's worth remembering that when we're building a modular home or something larger in a factory, the quality is higher because we've got a controlled environment. Materials are less likely to be damaged by weather and other factors. We've got a dedicated crew that typically has much less turnover than what you would see on a stick-built site. There are quality advantages, timing advantages, and advantages to being able to construct in bad weather. All of those things have worked in our favor. It's probably more impacted, though, just by overall demand in the area and the need for additional housing and construction in general. We've got a very, very small percentage still of the overall construction in the Northeast. As more and more of our partners and builders in general get comfortable with modular construction, that creates additional opportunities for us.

Does it necessarily mean that you've got lower waste because instead of throwing stuff in the dumpster at the job site, you might save it and use it for some other job? Absolutely. I don't know how much of it gets used for other jobs exactly, but yes, you're right. There is much lower waste and in general, a higher quality construction process.

Speaker 3

One small example, Theo, that I would give you on that is our factory in Maine. You know, doing the prefab, of course, there's going to be small pieces of wood that are left over after we've finished constructing a module. We use those small pieces of wood to heat the factory.

Speaker 2

Okay, thanks very much.

Speaker 3

Thank you.

Speaker 4

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

Speaker 2

Thank you, Operator. Thanks for your time today. We appreciate your interest and always appreciate your feedback and support. Please do not hesitate to contact us at any time. We are excited about the business and we are excited about the steps we are taking on your behalf. We look forward to updating you as our story develops.

Speaker 4

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