Star Equity Holdings, Inc. (NASDAQ:STRR) is a diversified holding company with two primary divisions - Building Solutions and Investments. The company's history dates back to 2001 when it was founded as KBS Builders, a manufacturer of modular homes primarily serving the New England market. Over the years, Star Equity has grown through strategic acquisitions, expanding its capabilities and geographic reach.
Business Overview
Star Equity Holdings, Inc. has a rich history that spans over two decades. The company was originally established as KBS Builders in 2001, focusing on modular building manufacturing for residential and commercial construction markets in New England. As part of its growth strategy, Star Equity expanded its portfolio by adding EdgeBuilder, a manufacturer of structural wall panels and other engineered wood products, and Glenbrook Building Supply, a building materials distributor.
A significant turning point for the company came in 2019 when it made the strategic decision to divest its healthcare business unit, Digirad Health. This move allowed Star Equity to streamline its operations and concentrate on its core construction-related activities within the Building Solutions division.
The years 2021 and 2022 presented challenges for Star Equity as it navigated a difficult macroeconomic landscape characterized by supply chain disruptions, labor shortages, and fluctuating commodity prices. Despite these obstacles, the company remained resilient, focusing on optimizing its manufacturing processes, diversifying its customer base, and managing input costs while maintaining its commitment to delivering high-quality products and services.
In line with its growth strategy, Star Equity made two significant acquisitions to strengthen its market position. In 2023, the company acquired Big Lake Lumber to enhance its EdgeBuilder and Glenbrook operations in the Minneapolis-St. Paul area. Later that year, Star Equity further expanded its capabilities by acquiring Timber Technologies, a manufacturer of glue-laminated timber products serving various end markets.
Throughout its history, Star Equity has demonstrated its ability to adapt to changing market conditions and overcome challenges. The company's diversified business model, centered on serving the construction industry, has enabled it to navigate various economic cycles and establish itself as a respected player in the Building Solutions sector.
Financials
In the latest reported quarter (Q3 2024), Star Equity generated total revenue of $13.66 million, up 30.9% from the prior year period. This growth was driven by the inclusion of revenue from the company's recent acquisitions of Timber Technologies (TT) and Big Lake Lumber (BLL). Gross profit increased 27.9% to $2.82 million, with a gross margin of 20.6%. However, the company reported a net loss from continuing operations of $1.97 million, compared to a net loss of $2.37 million in Q3 2023. This decline was primarily due to a $2.8 million impairment charge related to the company's investment in TTG, which it acquired as part of the 2023 sale of its Digirad Health business.
For the first nine months of 2024, Star Equity reported total revenue of $36.26 million, up 14.5% year-over-year. Gross profit decreased 27.2% to $6.61 million, with a gross margin of 18.2%. The company recorded a net loss from continuing operations of $7.98 million, compared to a net loss of $3.71 million in the same period of 2023. The decline in profitability was largely attributed to the fixed costs in the company's Building Solutions division remaining constant despite the revenue declines at KBS and EBGL.
For the most recent fiscal year (2023), Star Equity reported revenue of $45.78 million, net income of $25.13 million, operating cash flow (OCF) of $2.70 million, and free cash flow (FCF) of $2.00 million. In the most recent quarter (Q3 2024), the company generated revenue of $13.66 million, a net loss of $2.51 million, OCF of $569,000, and FCF of $420,000.
Business Segment Performance
Building Solutions Division
The Building Solutions division, which includes the KBS, EdgeBuilder, Glenbrook, and Timber Technologies businesses, generated $36.26 million in revenue for the first nine months of 2024, a 14.5% increase compared to the prior-year period. This growth was driven by the inclusion of revenue from the TT acquisition and the full-year contribution of the BLL acquisition in Q4 2023. However, the division's gross margin declined from 29.2% in the first nine months of 2023 to 18.6% in the current period, primarily due to the fixed costs remaining constant despite the revenue declines at KBS and EBGL.
KBS Builders, Inc. (KBS) is a Maine-based modular home manufacturer that produces custom modular homes for both single-family and multi-family residential projects. KBS leverages an in-house engineering and design team to offer its products through a network of independent dealers, builders, and contractors, primarily serving the New England region. KBS's backlog and pipeline of commercial multi-family projects position it for continued growth in that market segment.
EdgeBuilder, Inc. (EdgeBuilder) and Glenbrook Building Supply, Inc. (Glenbrook) operate as one business unit under the EBGL brand, with a focus on manufacturing structural wall panels, permanent wood foundation systems, and other engineered wood products. Based in the Minneapolis-St. Paul area, EBGL markets its products directly to builders, contractors, and developers in the Upper Midwest region. The acquisition of Big Lake Lumber Inc. (BLL) in the fourth quarter of 2023 expanded EBGL's market share in the Greater Minneapolis area.
Timber Technologies Solutions, Inc. (TT), acquired in May 2024, manufactures glue-laminated timber (glulam) products for use in agricultural, industrial, infrastructure, and commercial and residential construction applications. TT's glulam products offer superior strength, durability, and environmental sustainability compared to traditional building materials, positioning the company to capitalize on growing demand for sustainable construction solutions.
Investments Division
The Investments division, which manages the company's real estate assets and investment portfolio, reported a gross loss of $146 thousand in the first nine months of 2024, compared to a gross loss of $169 thousand in the same period of 2023. The improvement was mainly due to the elimination of depreciation expense related to the sale of a manufacturing facility in Maine, partially offset by the additional depreciation related to the TT and BLL acquisitions.
The Investments segment manages the company's corporate-owned real estate assets, as well as its portfolio of minority investments in public and private companies. The real estate assets include manufacturing facilities leased to the Building Solutions businesses, while the investment portfolio holds positions in a number of public companies as well as a private equity stake in TTG Imaging Solutions, LLC and debt and equity investments in Enservco Corporation.
The Investments segment also generated $3.36 million in other income and $636,000 in interest income and expense, net, during the first nine months of 2024. This included a $3.8 million gain on the sale-leaseback transactions, offset by a $621,000 unrealized loss on the Enservco investment.
Strategic Initiatives and Outlook
In recent quarters, Star Equity has been actively pursuing strategic initiatives to drive growth and diversify its business. The company's acquisition of Timber Technologies in Q2 2024 and Big Lake Lumber in Q4 2023 have expanded its Building Solutions capabilities and market presence. Additionally, the company's $2.5 million investment in Enservco Corporation, a Colorado-based energy services and transportation company, marks its entry into new industries and is expected to generate long-term value for shareholders.
The company's management remains cautiously optimistic about the future, as it is seeing signs of a slow but steady return to normalcy in its Building Solutions division. The recent announcement of several large commercial contracts at KBS, totaling over $5 million, is an encouraging indicator of the division's recovery. Furthermore, the company's strong sales pipeline and the recent interest rate cuts provide confidence in its ability to convert additional opportunities into signed contracts in the near future.
While Star Equity did not provide explicit numerical guidance for the current or upcoming quarters, the company expressed confidence that the momentum shift they are seeing will translate into "significantly improved financial results for both the current quarter and fiscal year 2025." The company cited the recent interest rate cuts and high demand for housing as reasons for their confidence in converting additional pipeline opportunities into signed contracts in the near future. Star Equity also indicated they expect their fourth quarter 2023 and second quarter 2024 acquisitions to continue performing as expected.
Risks and Challenges
While Star Equity's diversified business model and strategic initiatives present growth opportunities, the company is not without its risks and challenges. The ongoing macroeconomic uncertainty, higher interest rates, and project delays in the construction industry have had a negative impact on the company's Building Solutions division. Additionally, the impairment charge related to the TTG investment highlights the potential volatility in the company's Investments division.
Liquidity
As of the most recent quarter, Star Equity reported a cash position of $5.49 million. The company's debt-to-equity ratio stood at 0.13, indicating a relatively low level of leverage. Star Equity maintains a $6 million revolving credit facility with Premier Bank, with $3.3 million outstanding as of Q3 2024, and a $4 million revolving credit facility with KeyBank, with $0.1 million outstanding as of Q3 2024. The company's current ratio of 2.05 and quick ratio of 1.60 suggest a healthy short-term liquidity position.
Industry Trends
The modular construction industry, in which Star Equity's Building Solutions division operates, has been experiencing significant growth. According to the Modular Building Institute, permanent modular construction increased as a percentage of the construction industry from 2.14% in 2015 to 6.64% as of the end of 2023. This trend indicates growing acceptance and adoption of modular construction methods, which could benefit companies like Star Equity in the long term.
Conclusion
Star Equity Holdings, Inc. is a diversified holding company with a promising growth outlook, driven by its strategic acquisitions and investments. The company's Building Solutions division, which includes its modular construction, wall panel, and engineered wood product businesses, has shown resilience despite the challenging macroeconomic environment. The Investments division, while currently reporting losses, provides diversification and the potential for long-term value creation. As Star Equity continues to navigate the evolving market conditions and execute on its strategic initiatives, the company's ability to capitalize on growth opportunities will be critical to its future success. With recent acquisitions, a strong pipeline of projects, and positive industry trends, Star Equity appears well-positioned to drive improved financial performance in the coming quarters and years.