Star Equity Holdings, Inc. (NASDAQ:STRR) Q1 2023 Earnings Call Transcript May 15, 2023

Operator: Greetings, ladies and gentlemen, and welcome to Star Equity Holdings, Inc. First Quarter 2023 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 and 10-Q 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. 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 their 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 Cati 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’s website via www.starequity.com. Please note, this event is being recorded. 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. Please go ahead.

Richard Coleman: Thank you, Gary. Good morning, everyone. We appreciate you joining us for our first quarter 2023 conference call. On the call with me today are Executive Chairman, Jeff Eberwein; and Chief Financial Officer, Dave Noble. It’s a pleasure to update you on our first quarter results and to report strong overall performance. In our Healthcare division, I’m especially proud of the team effort that began with the reinvigoration of our business in early 2022 and culminated in the sale we completed on May 4. This has been a transformational quarter and has positioned us well for the future. Our operating plan assumed a strong start to 2023, and I’m pleased to report that our teams exceeded those expectations. We achieved first quarter adjusted EBITDA of $1.7 million versus $0.1 million in the first quarter of last year, primarily due to continued strong top and bottom line growth at our Construction division.

This exceptional improvement was driven by better operational efficiency as well as disciplined pricing and expense control. Although Healthcare division revenue was roughly flat versus the prior year quarter, gross margin improved by 1.2 percentage points to 24.9%, again reflecting our focus on higher-margin products and services stemming from our 2022 reorganization. With the sale of Digirad Health, we’ve significantly strengthened our balance sheet and are well positioned to pursue accretive acquisitions as well as other strategic opportunities. I’ll first focus on our Healthcare division. In the first quarter, our Healthcare division revenue decreased by 0.4% versus the prior year quarter. Discontinuing unprofitable services and initiatives and focusing on higher profitability business helped drive 4.8% higher gross profit.

Our Healthcare division was able to deliver these strong results despite the continuing labor market headwinds. On behalf of the Star Equity management team, I thank all Digirad employees for their contributions over the years and wish them the best under TTG’s leadership. We believe the scale and synergies created from this partnership will result in a stronger, more valuable business, and we’re excited to continue as equity partners. Let me next touch on the results of our Construction division. Q1 Construction revenue increased 6.1% to $12.3 million versus $11.6 million in Q1 of 2022, and gross margin percentage was 35.1% versus 13.6% in the same period last year. Increased output was the primary driver for the revenue improvements at both our EdgeBuilder and KBS businesses.

The increase in gross margin percentage was due to better pricing management relative to changing input costs as well as better risk management around building materials price volatility. Despite macroeconomic uncertainty across the construction space at large, we’re a relatively small specialized player with a unique position in the markets we serve. KBS in particular is experiencing continued growth in the areas of workforce and affordable housing, educational dormitories and school buildings and environmentally sustainable housing. Both of our Construction businesses have a robust pipeline heading into the summer, and we’re working on some exciting new business initiatives that we expect will continue to fuel our future growth. Now I’ll turn the call over to Dave Noble, our CFO, to provide additional first quarter consolidated financial highlights.

Dave, go ahead.

David Noble: Thank you, Rick, and good morning. Let’s now turn to Star Equity’s consolidated financial results. In Q1 of 2023, SG&A decreased by 5% versus Q1 of 2022. SG&A as a percentage of revenue decreased meaningfully in Q1 to 25.0% versus 27.1% in Q1 of 2022. This demonstrates both effective cost control and good operating leverage embedded in our businesses, particularly on the Construction side. Moving on to the bottom line results for Star Equity. We generated a positive net income of $0.4 million in Q1 compared to a net loss of $3.7 million in Q1 of 2022. Non-GAAP adjusted net income from continuing operations in Q1 was a positive $0.9 million. This also compares favorably to an adjusted net loss of $0.7 million in Q1 of 2022.

Non-GAAP adjusted EBITDA increased to $1.7 million in Q1 from just $0.1 million in Q1 of 2022. The substantial improvement in consolidated adjusted EBITDA was driven primarily by our continued bottom line focused turnaround at our Construction division, particularly at KBS, where it began to materialize in mid-2022. Construction non-GAAP adjusted EBITDA extended its upward trend, generating $2.2 million in Q1 this year, up from $0.4 million in Q1 of 2022. Consolidating operating cash flow for Q1 was a positive $5.1 million versus a negative $0.6 million in Q1 of 2022. Q1’s strong positive operating cash flow was driven by both a strong performance and also monetization of the AR buildup we experienced in Q4 of 2022 at our Construction division.

As of March 31, 2023, our consolidated balance sheet and liquidity were strong. The outstanding balance in our interest-bearing credit facilities was $8.4 million, while our cash balance stood at $5.7 million, leaving us with an overall net debt position of just $2.7 million. Along with the filing of our 10-Q this morning, we also disclosed that following the sale of our Healthcare division on May 4, we have paid off the entirety of our outstanding interest-bearing debt. This debt was in the form of a revolver with Webster Bank and 2 revolvers and a term loan with eCapital. We are now 100% debt-free. Our pro forma financial statements filed via 8-K/A last week disclosed our pro forma cash balance at $23.1 million. I would also like to note that the company was able to use its accumulated net operating losses to completely offset federal gains associated with the substantial gain on sale that we realized with the sale of Digirad Health on May 4.

Now I’d like to turn the call back over to Rick for some additional remarks.

Richard Coleman: Thanks, Dave. The Digirad sale was certainly a major change to our business. Our team had been working diligently towards closing this deal for several months, but I don’t want to overlook the exceptional work that’s been done in both our Construction businesses. Strong leadership, along with disciplined planning and execution, give us confidence in the potential for continued strong performance and growth. In the coming weeks, the Star Equity Board and management team will continue to assess and prioritize the elements of our growth strategy. These could be acquisitions, including Construction bolt-ons or entries into new business sectors as well as thoughtfully expanding activity at our Investments division. We plan to provide shareholders updates on these and other initiatives as they occur. I’ll now turn the call over to the operator for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question is from Theodore O’Neill with Litchfield Hills Research.

Operator: [Operator Instructions]. The next question is from Tate Sullivan with the Maxim Group.

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: Thanks, Gary. Before concluding the call, I just want to note that we’re always available to take your call and to discuss any questions you might have. 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. And as always, we appreciate all of our shareholders and your continued feedback and support. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.