Business Overview and History
Star Equity Holdings, Inc. (NASDAQ:STRR) is a multi-industry diversified holding company with two primary divisions - Building Solutions and Investments. The company's history can be traced back to its origins as a provider of modular building solutions and engineered wood products, but in recent years, it has strategically expanded its reach to capitalize on emerging growth opportunities.
Star Equity Holdings, Inc. was originally founded as a diversified multi-industry holding company. The company was initially organized into three divisions - Building Solutions (formerly known as Construction), Healthcare, and Investments. Over the years, Star Equity has undergone significant changes in its organizational structure and business focus.
In May 2023, the company completed a major strategic shift by selling its Healthcare division, Digirad Health, Inc. This divestiture had a substantial impact on Star Equity's operations and financial results, leaving the company with two remaining divisions - Building Solutions and Investments.
The Building Solutions division operates in the construction industry, manufacturing modular buildings, structural wall panels, permanent wood foundation systems, and other engineered wood products. This division encompasses several businesses, including KBS, EdgeBuilder, Glenbrook, and Timber Technologies.
The Investments division plays a crucial role in managing the company's corporate-owned real estate, including manufacturing facilities leased to the Building Solutions businesses. Additionally, this division oversees internally-funded, concentrated minority investments in public companies, as well as notes receivable and equity investments related to the sale of Digirad Health.
Throughout its history, Star Equity has faced various challenges, including economic headwinds, higher interest rates, and project delays that have impacted its Building Solutions division. The company has also dealt with a material weakness in its internal control over financial reporting. To address this issue, Star Equity has taken proactive steps to enhance the skills and experience of its accounting and financial reporting staff.
The acquisition of Timber Technologies, LLC in 2024 marked a crucial milestone in Star Equity's evolution. This $23 million cash-free, debt-free transaction expanded the company's footprint in the engineered wood products market, diversifying its revenue streams and improving its overall cash flow and profitability. Timber Technologies, based in Wisconsin, manufactures glue-laminated timber (glulam) products for various end markets, including agriculture, industrial, infrastructure, and building construction.
In the third quarter of 2024, Star Equity further diversified its portfolio by investing $2.5 million in Enservco Corporation (NYSE American: ENSV), a Colorado-based energy services company that recently expanded into the transportation and logistics sector. This investment represents Star Equity's initial entrance into the energy services and transportation & logistics industries, positioning the company to capitalize on emerging growth opportunities in these sectors.
Financial Performance and Outlook
Star Equity's financial performance has been mixed in recent years. In fiscal year 2023, the company reported revenue of $45.78 million and a net loss of $1.907 million. Operating cash flow for 2023 was $2.7 million, with free cash flow of $2 million.
In the third quarter of 2024, Star Equity reported revenue of $13.663 million, representing a 30.9% increase compared to the same period in 2023. This growth was primarily driven by the inclusion of Timber Technologies' revenue and the contribution from the Big Lake Lumber acquisition completed in the fourth quarter of 2023. However, the company reported a net loss of $2.511 million for the quarter. Operating cash flow for Q3 2024 was $569,000, with free cash flow of $420,000.
Gross profit for the third quarter of 2024 was $2.8 million, up 27.9% year-over-year, despite a slight decline in gross margins. The company's selling, general, and administrative (SG&A) expenses increased by $4 million, or 53.7%, largely due to a $2.8 million impairment related to the company's equity investment in TTG, the parent entity of TTG Imaging Solutions, LLC, which Star Equity acquired in 2023 as part of the Digirad Health sale.
In the first nine months of 2024, Star Equity reported a net loss from continuing operations of $7.9 million, compared to a net loss of $3.7 million in the same period of 2023. The company's cash flow from continuing operations was an outflow of $3.7 million, compared to an inflow of $2.7 million in the first nine months of 2023, reflecting the lower levels of business activity in the Building Solutions division during the early part of 2024 due to macroeconomic uncertainty and higher interest rates.
However, the company is optimistic about its future prospects, as it is seeing increased activity and interest from customers in the fourth quarter of 2024. Star Equity's construction backlog and sales pipeline remain strong, and the recent interest rate cuts, coupled with high demand for housing, give the company confidence in its ability to convert additional pipeline opportunities into signed contracts in the near future.
The company expects significantly improved financial results for both the current quarter and fiscal year 2025 due to the momentum shift and return of demand in their Building Solutions division. Star Equity is confident in their ability to convert additional pipeline opportunities into signed contracts in the near future, driven by recent interest rate cuts and high demand for housing.
Liquidity
As of September 30, 2024, Star Equity reported cash and cash equivalents of $5.49 million. The company's debt-to-equity ratio stood at 0.16, indicating a relatively low level of leverage. Star Equity's current ratio was 2.05, and its quick ratio was 1.60, suggesting a healthy short-term liquidity position.
The company has access to two revolving credit facilities. A $6 million facility with Premier Bank for EBGL had $3.3 million outstanding as of September 30, 2024. Additionally, a $4 million facility with KeyBank for KBS had $0.1 million outstanding as of the same date.
Building Solutions Segment
The Building Solutions segment is Star Equity's largest division, operating in the construction industry. It consists of several businesses:
1. KBS Builders, Inc. (KBS): A Maine-based modular builder that has been in operation since 2001, manufacturing fully custom modular homes for both multi-family and single-family residential buildings.
2. EdgeBuilder, Inc. (EdgeBuilder): A manufacturer of structural wall panels, permanent wood foundation systems, and other engineered wood products, based in Prescott, Wisconsin.
3. Glenbrook Building Supply, Inc. (Glenbrook): A supplier of lumber, windows, doors, cabinets, and other building materials to professional builders, operating in Oakdale and Big Lake, Minnesota, and Hudson, Wisconsin.
4. Timber Technologies Solutions, Inc. (TT): Acquired in May 2024 for $23.1 million, TT manufactures glue-laminated timber (glulam) products for various end markets.
In Q3 2024, the Building Solutions segment generated revenues of $13.66 million, up 30.9% from the prior year period. Gross profit increased to $2.85 million, with a gross margin of 20.8%. However, operating expenses rose substantially, up 110.6% to $8.14 million, primarily due to the inclusion of TT's operations and a $2.8 million impairment charge related to Star Equity's investment in TTG Parent LLC.
For the first nine months of 2024, the segment reported revenues of $36.26 million, a 14.5% increase year-over-year. Gross profit decreased to $6.75 million, with a gross margin of 18.6%, as fixed costs remained constant despite revenue declines at KBS and EBGL.
Investments Segment
The Investments segment manages Star Equity's corporate-owned real estate assets and minority investments in public and private companies. As of September 30, 2024, the segment's real estate holdings included manufacturing facilities in Maine and Wisconsin, leased to KBS and TT, respectively.
The segment reported gross losses of $29,000 and $146,000 for the three and nine months ended September 30, 2024, primarily related to depreciation expenses on these properties. The Investments segment also holds a $7.0 million promissory note from the sale of Digirad Health and a $1.9 million private equity stake in TTG Parent LLC.
In Q3 2024, the segment recorded a $621,000 unrealized loss related to Star Equity's $2.0 million investment in Enservco Corporation, acquired in August 2024 through a share exchange agreement.
Risks and Challenges
As a diversified holding company, Star Equity faces several risks and challenges that could impact its future performance. The cyclical nature of the construction industry, which is a significant driver of the company's Building Solutions division, exposes Star Equity to market fluctuations and economic downturns. Additionally, the company's expansion into the energy services and transportation & logistics sectors through its investment in Enservco introduces new industry-specific risks and uncertainties.
The company's recent impairment charge related to its TTG investment highlights the potential volatility of its Investments division and the need for prudent capital allocation. Star Equity's ability to successfully integrate and extract synergies from its acquisitions, such as Timber Technologies and Big Lake Lumber, will also be a critical factor in its long-term success.
Industry Trends and Outlook
The modular construction industry has been experiencing growth in recent years. According to the Modular Building Institute, permanent modular construction increased from 2.1% of the construction industry in 2015 to 6.6% as of the end of 2023, indicating growing demand for offsite and prefabricated construction solutions. This trend bodes well for Star Equity's Building Solutions division, which specializes in modular and engineered wood products.
Star Equity's management is optimistic about the company's future prospects. They expect significantly improved financial results for both the current quarter and fiscal year 2025, driven by the momentum shift and return of demand in the Building Solutions division. The company's strong construction backlog and sales pipeline, coupled with recent interest rate cuts and high demand for housing, support this positive outlook.
Furthermore, the company believes that its recent acquisitions of Big Lake Lumber and Timber Technologies are performing as expected, giving management confidence in their ability to identify, evaluate, and close accretive acquisitions in the future.
Conclusion
Star Equity Holdings, Inc. has taken significant strides to diversify its business beyond its traditional construction roots, positioning the company to capitalize on emerging growth opportunities. The acquisition of Timber Technologies and the investment in Enservco represent strategic moves that could unlock new avenues for revenue and profitability. While the company's recent financial performance has been mixed, the strong backlog and sales pipeline in its Building Solutions division, coupled with the potential upside of its diversification efforts, suggest that Star Equity may be well-positioned to navigate the evolving market landscape and deliver value for its shareholders in the long run.
As the company continues to focus on profitable growth opportunities in both its Building Solutions and Investments divisions, including organic growth, strategic acquisitions, and exploring new investment opportunities, investors should closely monitor Star Equity's ability to execute on its growth strategy and improve its financial performance in the coming quarters.