Business Overview and History Star Equity Holdings, Inc. (STRR) is a diversified holding company with two primary operating divisions: Building Solutions and Investments. The company has undergone a strategic transformation in recent years, optimizing its portfolio and positioning itself for long-term growth.
Star Equity Holdings, Inc. was previously organized into three divisions: Building Solutions (formerly known as Construction), Healthcare, and Investments. The company's journey has been marked by significant strategic shifts and acquisitions that have shaped its current structure and focus.
The Building Solutions division, which is the company's largest, operates in the construction industry and consists of several key businesses. KBS Builders, Inc. (KBS) is a Maine-based modular builder that manufactures custom modular homes. EdgeBuilder, Inc. (EdgeBuilder) and Glenbrook Building Supply, Inc. (Glenbrook), collectively referred to as EBGL, manufacture and distribute structural wall panels, permanent wood foundation systems, and other engineered wood products in the Minneapolis-Saint Paul region.
In May 2024, Star Equity made a significant addition to its Building Solutions division with the acquisition of Timber Technologies, LLC, which now operates as Timber Technologies Solutions, Inc. (TT). This acquisition expanded the company's capabilities in the engineered wood products market, as TT specializes in manufacturing glue-laminated timber products.
The Investments division of Star Equity plays a crucial role in managing the company's diverse assets. It holds and manages corporate-owned real estate, including manufacturing facilities leased to the Building Solutions subsidiaries. Additionally, this division manages internally-funded, concentrated minority investments in several public companies. As a result of the sale of Digirad Health in May 2023, the Investments division also holds a $7 million promissory note and a $1.9 million private equity stake in TTG Parent LLC.
A pivotal moment in Star Equity's recent history occurred in May 2023 when the company completed the sale of its Healthcare division, Digirad Health, Inc. This strategic decision represented a significant shift in the company's focus and had a major impact on its operations and financial results. The divestiture allowed Star Equity to concentrate its resources and efforts on its Building Solutions and Investments operations, streamlining its business model and potentially improving its overall financial performance.
Financials and Performance In the third quarter of 2024, Star Equity reported revenue of $13.66 million, a 30.9% increase compared to the same period in 2023. This growth was primarily driven by the inclusion of TTS revenue following the acquisition, as well as the addition of Big Lake Lumber, which was acquired in the fourth quarter of 2023 and integrated into the EdgeBuilder/Glenbrook operations.
Gross profit for the quarter was $2.82 million, with a gross margin of 20.6%. While this represented a 27.9% increase in gross profit year-over-year, the gross margin declined slightly due to fixed costs remaining constant despite revenue declines at KBS and EdgeBuilder/Glenbrook.
The company reported a net loss from continuing operations of $2 million in the third quarter of 2024, compared to a net loss of $2.4 million in the same period of 2023. Non-GAAP adjusted net loss from continuing operations was $0.9 million, or $0.31 per share, compared to adjusted net income of $0.2 million, or $0.07 per share, in the prior-year quarter.
For the first nine months of 2024, the Building Solutions segment generated $36.26 million in revenue, up 14.5% year-over-year. However, gross profit margin declined to 18.6% from 29.2% in the prior year period, primarily due to fixed costs remaining constant as revenues declined at KBS and EBGL. The inclusion of TT's operations helped offset some of this revenue slowdown, but the segment still faced economic headwinds, higher interest rates, and project delays.
The company's net loss for the third quarter of 2024 was $2.51 million. Operating cash flow (OCF) for the quarter was $569,000, while free cash flow (FCF) was $420,000, both showing improvement compared to the prior year quarter.
Operational Highlights and Growth Initiatives Star Equity's management team has been focused on diversifying the company's revenue streams and improving its overall financial profile. The acquisition of TTS in 2024 was a significant milestone, as it expanded the company's capabilities in the engineered wood products market and improved its cash flow generation.
Additionally, the company has made strategic investments to bolster its Building Solutions division. In the third quarter of 2024, KBS Builders, the company's modular home manufacturing subsidiary, announced the signing of two large commercial contracts totaling $5.2 million for multifamily construction projects in Maine. These projects demonstrate KBS's strong market position and the robust demand for its services.
To further strengthen its liquidity position, Star Equity completed two sale-leaseback transactions in the third quarter of 2024, generating approximately $8.3 million in net proceeds. These transactions have provided the company with additional financial flexibility to pursue its growth initiatives, including potential acquisitions and organic expansion opportunities.
Diversification and Risk Mitigation In addition to its core Building Solutions operations, Star Equity has also been actively diversifying its investment portfolio through strategic initiatives. In the third quarter of 2024, the company announced an investment in Enservco Corporation, a Colorado-based energy services company that has recently expanded into the transportation and logistics sector.
This investment marks Star Equity's entrance into the energy services and transportation and logistics sectors, further diversifying its revenue streams and reducing its reliance on the construction industry. The company believes that Enservco's strong management team and ongoing reorganization position it well for long-term growth, and that this investment will generate long-term value for Star Equity's shareholders.
Risks and Challenges While Star Equity has demonstrated resilience and adaptability, the company is not without its risks and challenges. The construction industry, which is a significant driver of the company's Building Solutions division, can be cyclical and susceptible to economic fluctuations. The company's recent experiences with project delays and the impact of higher interest rates highlight the importance of diversification and risk mitigation strategies.
Additionally, the company's acquisition strategy carries inherent risks, including the integration of new businesses, potential cultural clashes, and the ability to realize expected synergies. Star Equity must carefully evaluate and manage these risks to ensure the successful execution of its growth plans.
Liquidity Star Equity's liquidity position has been bolstered by recent strategic actions. The sale-leaseback transactions completed in the third quarter of 2024 generated approximately $8.3 million in net proceeds, providing the company with additional financial flexibility. This improved liquidity allows Star Equity to pursue its growth initiatives, including potential acquisitions and organic expansion opportunities, while maintaining a solid financial foundation.
As of the most recent quarter, Star Equity reported cash and cash equivalents of $5.49 million. The company's debt-to-equity ratio stood at 0.3151, indicating a relatively low level of leverage. Star Equity maintains a $6 million revolving credit facility with Premier Bank for the EBGL subsidiaries and a $4 million revolving credit facility with KeyBank for KBS. Additionally, the company has a $3 million term loan secured by a mortgage on the Timber Technologies facility.
The company's current ratio of 2.05 and quick ratio of 1.60 suggest a healthy short-term liquidity position, with sufficient assets to cover its near-term liabilities.
Segment Performance Building Solutions Segment The Building Solutions division is Star Equity's largest segment, operating in the construction industry. This division comprises KBS Builders, EdgeBuilder, Glenbrook Building Supply, and Timber Technologies Solutions.
KBS Builders, based in Maine, primarily manufactures modular buildings for the single-family and multi-family residential segments, serving the New England market. EdgeBuilder, located in Prescott, Wisconsin, manufactures structural wall panels, permanent wood foundation systems, and other engineered wood products. EdgeBuilder and Glenbrook Building Supply operate as one business unit under the EBGL brand, serving the Minneapolis-St. Paul region.
Timber Technologies Solutions (TT), acquired in May 2024, manufactures glue-laminated timber (glulam) products for various end markets including agriculture, industrial, infrastructure, and building construction. TT's glulam products offer superior strength, durability, and environmental sustainability compared to traditional building materials.
Despite near-term profitability challenges, the Building Solutions businesses are well-positioned in attractive construction markets. KBS is focused on growth in the multi-family residential segment, while EBGL and TT benefit from increasing adoption of offsite/prefabricated construction techniques and demand for more sustainable building materials.
Investments Segment The Investments segment manages Star Equity's corporate-owned real estate assets and oversees the company's minority equity investments in public and private companies. As of September 30, 2024, the segment's real estate portfolio included one facility leased to KBS in Maine and one facility leased to TT in Wisconsin. The segment recorded $146,000 in gross profit, primarily from depreciation expense associated with these properties.
This segment also holds a $7 million promissory note from the sale of Digirad Health in 2023 and a $1.9 million private equity stake in TTG Parent LLC. In the third quarter of 2024, the Investments segment made a strategic investment in Enservco Corporation, acquiring shares and options for a total value of approximately $2 million. The segment recorded an unrealized loss of $621,000 on the Enservco position in the first nine months of 2024.
Industry Trends Star Equity is benefiting from positive trends in the modular construction industry. The company noted that modular construction has grown from 2.1% of the construction industry in 2015 to 6.6% as of the end of 2023. This increasing adoption of modular and prefabricated construction techniques is expected to drive growth for the company's Building Solutions division in the coming years.
Outlook and Conclusion Despite the challenges faced in the first half of 2024, Star Equity's management team remains cautiously optimistic about the company's future prospects. The recent large commercial contract wins at KBS Builders, the successful integration of Timber Technologies Solutions, and the strategic investment in Enservco all point to the company's ability to navigate the changing market environment and capitalize on growth opportunities.
The company is seeing improved momentum and financial results in the current quarter (Q4 2024) and expects this trend to continue into fiscal year 2025. Recent interest rate cuts and high demand for housing have given Star Equity confidence in its ability to convert additional pipeline opportunities into signed contracts in the near future. Management believes this momentum shift will translate into significantly improved financial results for both the current quarter and fiscal year 2025, although specific quantitative guidance has not been provided.
As Star Equity continues to execute its diversification strategy and optimize its operations, the company is well-positioned to deliver long-term value for its shareholders. The company's focus on disciplined capital allocation, strategic acquisitions, and the development of its core business segments suggest that Star Equity is poised to navigate the evolving landscape and emerge as a stronger, more resilient conglomerate.