Q2 2021 Star Equity Holdings Inc Earnings Call
[music].
Greetings, ladies and gentlemen, and welcome to the Star Equity Holdings incorporated second quarter 2021 results Conference call.
Some discussions made today include forward looking statements.
Actual results could differ materially from the statements made today.
Please refer to Star is 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 obligations to update forward looking statements as a result of new information future events or otherwise.
Please also note that on this call management may reference to non-GAAP financial measures, including EBITDA adjusted EBITDA adjusted net income or 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 released the smart issued this morning.
If you didn't receive a copy of the press release and would like 1 please contact star at 203.
4899500, after the call or its Investor Relations representative Lena fatty of the equity group at 2128.
8369611.
Also this call is being broadcast live on the Internet and maybe accessed at Staar's website at Www Dot star equity Dot com.
Shortly after the call a replay will also be available on the company's website.
It is now my pleasure to introduce Jeff Eberwein Executive Chairman of Star equity.
Thank you operator, good morning, and thank you all for joining us today for our second quarter 2021 results conference call.
On the call with me today are Matt Molchan CEO of Digirad Ho.
Chief financial and Chief operating Officer, David Noble and various executives in our construction book.
The second quarter of 2021 business activity return to more normal levels or health care rebounded.
The division rebounded versus the second quarter of last year with revenue, increasing 57% versus the prior year quarter.
Our construction division grew revenue of 117% with much of this growth attributable to significantly increase output.
At our KBS business in new England, coupled with increased activity levels at edge filter in the Midwest.
Gross margin percentage in our construction division declined significantly in Q2.2021 versus the prior year's quarter.
Sequence of an unprecedented rise in raw material input costs.
So as expected to book began to return to normal levels.
Second half of this year due to steps, we've taken to increase our product pricing.
And improve operations as well as the expectation that raw material input costs.
We'll continue to normalize later this year.
With the asset sales completed at the end of the first quarter of 2021, we substantially improved our balance sheet and liquidity position, resulting in net debt declining from $14.3 million a year ago to $6.8 million at the end of the second quarter 2021.
We are now much better positioned to fund high return internal growth investments and pursue acquisitions, which as we have previously discussed could be bolt ons, and our health care or construction businesses or entry into an entirely new business sector.
With that I'll turn it over to our health care CEO, Matt Molchan, Matt. Please go ahead.
Thanks, Jeff revenue from our Health care Division in Q2, 2021 increased by 57% to $14.9 million over the same period in the prior year. This division has largely recovered from the COVID-19 pandemic related downturn and is now performing at pre pandemic levels.
Actors offices have reopened and we are operating at full capacity gross profit for the Q2.2021 reporting period increased by 56% and gross margin remained fairly consistent decreasing slightly by 0.2% over the same period last year.
In diagnostic services revenue and gross margin percentage for the second quarter of 2021 were 11.7 million and 24 per cent compared to $7.1 million and $13.3 per cent and last year's second quarter. The increase in diagnostic services revenue and <unk>.
Gross margin percentage compared to the prior year was primarily due to increasing scan volumes.
In our diagnostic imaging business. We also saw improvement in the top line results revenue and gross margin percentage for the second quarter of 2021 was $3.1 million and 32, 5%, respectively compared to $2.3 million and 52, 8% respectively.
In the prior year second quarter the increase in diagnostic imaging revenue is related to increased camera sales, which is a good indication that hospitals and physician practices are recovering from the impact due to COVID-19.
Now I'm going to turn the call over to Dave Noble, our CFO and C. O O who will provide additional financial highlights for the second quarter day. Please go ahead.
Thank you, Matt and good morning, I'll start by summarizing the construction Division results second quarter 2021, construction Division revenue was $10.9 million compared to 5.0 a million in the prior year second quarter.
Gross margin on the construction side was a negative 16, 9% compared to a positive 29% in the prior year second quarter. The significant increase in revenue for the construction division was due to higher production levels driven by strong demand of KBS and some large commercial jobs that edge builder.
Negative gross margin percentage was due to the adverse effects of a rapid rise in raw material prices, which had historic levels during the second quarter.
Moving onto consolidated results for the second quarter of 2021 company wide SG&A increased by $1.9 million compared to second quarter 2020.
This was due in part to a $4 million increase at the construction business as a result of increased commissions and head count also we experienced a <unk> 2 million increase at the health care business as a result of increased commissions.
<unk> 4 million increase in audit fees as well as a <unk> 4 million increase in <unk> and outside service costs.
Moving onto consolidated bottom line results for the second quarter of 2021, we had a net loss from continuing operations of $1.8 million compared to a net loss from continuing operations of <unk> 8 million in the same period in 2020.
Non-GAAP adjusted net loss from continuing operations in the second quarter of 2021 was $3.7 million or 74 per share compared to an adjusted net income of <unk> 2 million or 6 cents a share in the second quarter of last year.
Non-GAAP adjusted EBITDA was negative $2.9 million for the second quarter of 2021 compared to a positive $8 million in the second quarter of last year.
The change this quarter was largely driven by the rapid rise in lumber prices, which significantly impacted our cogs on the construction side of the business.
For the second quarter of 2021, we registered an operating cash outflow of $5.4 million compared to an operating cash outflow of <unk> 6 million in the second quarter of last year.
As of June 32021, the outstanding balance on our credit facilities was $13.1 million.
Our overall net debt position taking into account the $6.3 million, we hold in cash and cash equivalents was just $6.8 million. This.
This compares to $16.5 million at June 32020.
Now I'd like to turn the call over to the operator for questions.
Operator.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.
Total indicate your line is in the question queue.
You May press star 2 if you'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Please open call for questions.
Our first question comes from the line of Theodore O'neill with Litchfield Research. Please proceed with your question.
Good morning, Thank you very much so the construction business.
We've all seen that prices rising on lumber and all of the companies that supply it or adding significantly to capex for this year.
And planning for next year as well.
Which you know could a lot of people were thinking it could result in a decline in prices lumber prices and I'm trying to get an idea of how that would impact.
Star.
If if lumber prices started falling today, how long would it take before you.
You were able to benefit from that I'm, assuming you would have to place orders well in advance.
Yeah, Yeah. Thanks for the question and we had a lot of things that plagued our second quarter results, but that was <unk>.
The biggest 1 if you think about our business on average having roughly a 6 month backlog. It does take a while for things to run through the system.
So we've increased prices by about 20% year to date, particularly on the KBS side of the business.
And if.
If we have a 6 month backlog it takes a couple of quarters before that starts to show up in our.
Our revenue you get some of it.
Sooner than that on the residential side, but the commercial projects.
We might book those 6 months in advance.
And lumber historically lumber and all the other input.
Costs.
We've had a little bit of a just in time inventory approach, where we order them.
So that they get there in time to start being constructed but as you point out and lumber has already declined.
Quite a bit I think it peaked in may.
So our average input.
Cost will decline significantly in the second half of the year.
Versus the first half of the year and our average price will be much better in the second half of the year versus the first half of the year.
Longer term for this business, there's always moving parts in any given quarter, but our goal is to have a gross margin above 20%.
You know, even even higher than that but let's say, 20% to 25 per cent range.
And to not.
Suffer from these wild swings in commodity prices until we've done a lot of things to change our contract terms.
Even begun to hedge a little bit here and there on a project specific basis.
I mean, the volatility we've had is is unprecedented and we want to be.
Better prepared for it.
In the future, but this is the strongest thing I would say is that.
Despite all the volatility and ups and downs of the construction business we.
We do like this business and do you see it.
Cheating.
20% gross margin or better over the long term.
Okay. Thanks very much.
Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Okay.
Thank you for those comments on lumber and day shifting to health.
Health care for a bit better in margin as you commented earlier on some day.
Operating at full capacity in our margin.
Good rebound in the margin there from the prior quarter to about 23 per cent is that a sustainable level or what what does a normal capacity operating level.
Are you talking about on the you talked about on the health care, the health care side healthcare I'll, let Matt correct, Yeah, I'll, let Matt Molchan, who will answer that.
Yes.
Yeah, I think that you're correct I mean, there's 2 portions of the business right..1 1 is the diagnostic services business and the diagnostic imaging together as diagnostic imaging were selling the cameras. So you know obviously the gross margin.
For our diagnostic imaging business can swing based on the mix of our cameras.
So the different cameras that we sell can be more profitable and that could have an impact on gross margin, but on diagnostic services that that comment was more was worse.
More based on the diagnostic services business, where we are operating at full capacity or back to pre pandemic levels of capacity.
And so we would we would foresee that that type of gross margin in that business is pretty steady to you know to continue that type of margin per diagnostic services, but based on the mix you could see improvements with diagnostic imaging based on the cameras that we would sell them in any given quarter.
It is can you refresh me admit they kept for David you mentioned gross profit margin target of greater than 20% and construction do you have a similar goal for the health care business.
Yeah, I think that that type of goal between 20 and 25% within health care is where we would we would see that business.
<unk> 25 per cent been.
Overall goal for the business, but as we work as we work towards that depending on the mix of the cameras as I said.
And then the steady state.
The state bids.
Nature of our diagnostic services business, where we're going out to physician offices and providing the service on a lease basis.
Great. Thank you and then with peak you you commented on the nature of possibly changing some of the contract terms and previous backlog shifting to construction excuse me.
Can you comment on the demand side for your construction book modular construction business day.
The raw material cost swings scare op delayed some orders or how are you how are your customers reacted to this unprecedented situation.
Backlog is still increasing in that business, yeah, I know that's a that's a good question Tate.
The answer is kind of a D. All the above so demand is really really strong.
Our our sales pipeline.
Is the strongest I've ever seen our backlog is the strongest I've ever seen and that's despite us increasing our prices on average 20% year to date and we also have better contracts.
That spell out more what risks, we're going to take on and what risks, where we're not going to take on.
So we feel much better about our our contracts and our pricing.
Today than we did at the beginning of the year.
All that said there has certainly been projects that have been.
That's true that right or delayed.
Especially the kind of bigger commercial projects, because there's typically a series of price points.
And it's commonly get an initial estimate for a construction project and then as you get closer and if raw materials are changing you might get a refresh update and.
Refreshed updates have been shocking to some clients and so there have been projects.
Put on hold so.
You know this business can can be a cyclical business, but we see a lot of demand out there are a lot of projects to do we see modular increasing its market share over time, and we are doing many things to diversify our business.
We're continually adding more clients, adding more end markets.
The things 1 can do with modular is growing over time, so despite the second quarter results.
We're very excited about this business and now that raw materials have declined.
Our hope is orders just continue in anything that was on hold goes awful.
Great Great. Thank you for the comments on the longer term targets to go and passes these wild swings in the short term and then just.
Just for the setup for the next quarter I noticed that inventory build and maybe its normal between <unk> is that from about 10 to 12 is that related more on the medical side or construction or is it both.
Can you just comment on that Matt is that mostly raw materials, and therefore could share loss.
Largely largely construction, Dave do you want to.
Talk about that yeah sure I mean.
More of that is really related to the edge builder business, where we do the wall panels, we've been accumulating some inventory for some large commercial projects that kicked off in the next month, so that that would be what a lot of that is we also are building some inventory on the KBS side, that's a little more just in time as Jeff said in.
And the only other thing I'd want to point out about how we feel about.
Margins going forward as you know, there's not a lot of spare capacity in the industry right now so even though commodity prices are coming down which is great.
Our pricing power it seems pretty strong right now we've got a little bit of capacity for the end of the year.
And we're not finding a lot of pressure there and the demand.
<unk> very very strong and has throughout the volatility that we've seen this year.
Just a last 1 from me just thinking.
Can you refresh me Dave on the expansion plans for modular construction can you open up the second facility in New England.
An update on the current footprint of module in new England and I'm pleased we have not we have a second Idaho facility that we would like to open at the appropriate time and we fully intend to do that we just havent. We havent found that time just yet.
Okay.
Okay. Thank you. Thank you for all day uptick.
Okay.
Thank you. Our next question comes from the line of.
Adam Waldo with Lismore partners. Please proceed with your question.
Hi, Good day, thanks, very much for taking my questions a few areas I'd like to explore if you can hear me okay.
We can hear you.
Okay, great. So first.
Resumed paying the preferred stock dividend.
They're in June with the declaration in late May and as you sort of look out into the second half of this year and maybe into the early part of 2022 should should we expect that Youll start are.
That youll continue opinion on a quarterly basis.
But not seek to pay.
Pay down the arrears or kind of what's the current thinking on the preferred stock dividend.
Yeah no that's.
Good question. This is Jeff I'll take that 1.
So I would just say a few things that might be helpful. Its first off it's a board level decision not a.
Management decision.
We do.
Do you have a much cleaner balance sheet than we had before we did do a.
A series of asset sales in the second sorry in the first quarter that allowed us to pay down a lot of debt and did allow us to start making dividends on our preferred stock. So.
<unk>.
I think the board will make a determination.
About the third quarter dividend of <unk> will make an announcement about that.
The record dates for the preferred stock per its charter our September 1st then I believe that December 1 March 1 and June 1 so I would expect the board to make a determination before that September 1st Rep.
Record date.
And.
All of those issues you raised are top of mind, we do talk about them.
Or does the.
Debate them.
We didn't start paying dividends.
Lightly and.
I'd, just say stay tuned.
On that front and the board will make an announcement when it's in.
In a very soon.
Afterwards made this determination.
Fair enough. Thank you.
As we think about the construction gross margin progression.
As you sit there today and see kind of what your lumber cost structure looks like and what your pricing structure looks like can you give any sort of guidance range on third quarter gross margin that you would expect the business and any outlook as to the progression into the fourth quarter.
Yeah.
Dave do you want to take a stab at that I mean, we're not we're not giving specific guidance but.
I think directionally.
We see second half being much much better but Dave go ahead on that specifics yeah. I mean were still shipping a couple of projects invoicing and shipping a couple of projects.
From the first half and so those would reflect.
Some of the higher priced input costs, but our current backlog as Jeff mentioned is significantly higher in price than what we had in the first half year over year around that 20% increase mark.
So I mean, we definitely should be approaching if not achieving.
That 20% plus in the second half I mean, we've got 3 businesses right in the construction arena too.
In the Midwest, we've got wall panels, which.
Slightly below that 20, then they have the retail business, which is above well above that 20% margin. Then you have the KBS business, which is our modular which as Jeff said, we're trying to price things in the 20% to 25% range. So we should be there by the end of the year and hopefully a lot sooner than that but there's a couple of projects that we're finishing up that we're at.
Margins that were reflective of much higher commodity input prices, but we're buying materials.
Quite a bit lower now I mean, I think since June.
Wood based commodities are down about 20%.
And again, we're achieving price levels that are much higher and we think that is sustainable on the KBS side, particularly.
Given the capacity utilization is pretty high throughout the industry, we feel like we have good pricing power as we are.
Go through the second half of the year.
So that's incorrect I would.
Sorry, yeah.
Yes. This is Jeff I was just going to add a little bit to that.
We would've had a difficult quarter in the second quarter.
Regardless of the unusual items, just because of the unprecedented rise in raw material costs and the delay.
And.
Increasing our pricing.
You increased price on January 1st and we don't really see the impact for many months and really not the full impact until maybe the third quarter, but.
I'm just going to point out in the second quarter, we probably had about $1 million of costs that were a collection of different things, we're putting in a new it.
System, and we wrote down a variety of things really cleaned up a lot of accounting areas.
Like 1 example, as we were.
Renting out our smallest plant and the KBS business.
And the.
Subtenant was hadn't paid rent in a long time, partly due to COVID-19.
Going under so we just we wrote off all of the rent that we were supposed to receive and now we have a new tenant there who is paying rent.
Rent and have an agreement with them to sell to sell that plant, which will probably happen before the end of the year.
So I think we will have about $2 million of proceeds.
Second half of this year coming in from from that asset sale and various other assets sales and then in addition to the million or so of costs that we recognized in Q2, but it didn't really pertain to Q2, we had a very large project we're.
Just the cash.
Technical accounting issue these days.
The rent, even though we finished it and the client took title to it.
Just based on the shipping date, that's revenue that got pushed from Q2 to Q3 and that was over $1 billion.
And of course, the variable costs get recognized when the revenue gets recognized but it's not great for profitability to have our factory work on a project for a whole month and not recognize any of that revenue. We have all the fixed costs and things like that of running the construction business and.
Is it really revenue $1.1 million net.
Was for work worked on in Q2, but it won't show up in our numbers until Q3.
Well that's very helpful. Thank you.
I guess.
I'm going to do some quick back download math I'm sure them up a little bit I Hope you can help me on this is that sort of think about the.
Intermediate term to longer term guidance.
Think of each of the 2 segments post the divestitures, we kind of have.
Our gross margin guidance in the 20 to 25 per cent range for each.
And we have sort of a run rate revenue looking pretty good again per each and.
When you sort of you know per.
All that out we're at maybe.
$5 million to $6 million of gross profit and SG&A of about the same right based on what you showed in the second quarter.
So.
Am I right to say that that sort of to get above breakeven here.
Book accounting basis, and maybe in the same percentage on a cash flow basis.
We need to pursue some opportunities on the SG&A side or.
What are some steps that we can pursue too.
To get to a sustainably higher level of.
EBITDA and cash flow.
We're working on all the things I mean, we're increasing our pricing.
We're working to lower our cost structure, we're working to lower our overhead structure.
But in general just raising our prices and having good volumes will be.
Extremely helpful and you've seen the revenue growth.
Health care I think it's rebounding to.
Pre COVID-19 levels.
Long term, we think that business does have some growth and.
Normal level of revenue is something in the $15 million per quarter range $60 million a year.
With some growth to it and the construction business really has a lot of.
Revenue upside and the more units we produce in general the higher our gross margin is and the lower our per unit costs are so.
When you think about breakeven as we do work on that.
And but.
Getting the revenue right and getting day.
Cost of goods sold right are really important first step and the goal for we've already talked about the goals for both businesses, having gross margin in the 2025 per cent range and for construction I know there is a tremendous amount of volatility, we're not giving specific guidance, but our our goal is that.
Towards the end of this year or everything has been.
I want to say flushed through the system, but our price increases.
Showing up in revenue input costs are more normalized and our hope would be that the gross margin would therefore be back to more normal levels. While we continue to have really strong revenue growth.
And can you be.
More specific in terms of bracketing of range per quarterly SG&A kind of a $25 million to $30 million.
In quarterly revenue.
More normalized environment.
Dave do you mind.
Cause I mean, we can come back to you on that there are a couple of 1 offs in there Jeff mentioned the rent write off so.
It's hard to do that off the cuff, but I'm happy to try and run that math, but I guess, the only thing I would add to what Jeff said is I do think it's a scale issue in trying to grow revenues and spread out our overhead, but we're always looking for ways to cut.
SG&A and we've done that in the past week.
Eliminated credit card fees on the health care side, we've reduced our contract for example, with Microsoft where we had some extra seats that werent utilized.
We've done a number of things when we when we find that we can really reduce costs in 1 area or another we do attack that so we're always looking as Jeff said to kind of take out costs.
When it makes sense, but.
I think on the construction side KBS is built for a larger unit volume and.
We're focused on getting to that larger unit volume, which will.
Obviously improve our net net margin.
Okay. Thanks, very much very helpful insights and good luck in continuing their recovery.
Thank you.
Thank you as a reminder, ladies and gentlemen, please press star 1 if you'd like to ask a question.
It appears there are no further questions at this time I would like to turn it back to management for closing comments.
Yeah.
Well I'd like to thank our.
Dave Matt and the management team.
For being on the call with me in answering questions and just wanted to say that were always available to take your call will take your questions.
Our contact information is at the end of every press release and at the end of our Investor deck. So please don't hesitate to contact us and we appreciate all of our shareholders and people who follow us.
Thank you for your feedback and support and we look forward to next quarter's call. Thanks for your time and attention today.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
[music].
[music].
[music].
Greetings, ladies and gentlemen, and welcome to the Star equity Holdings incorporated second quarter 2021 results conference call.
Some discussions made today include forward looking statements.
Actual results could differ materially from the statements made today.
Please refer to Star is 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 obligations to update forward looking statements as a result of new information future events or otherwise.
Please also note that on this call management may reference to non-GAAP financial measures, including EBITDA adjusted EBITDA adjusted net income or 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 released their smart issued this morning.
If you didn't receive a copy of the press release and would like 1 please contact star at 2034899500 after the call or its Investor Relations Representative Lena <unk> of the equity group at 2128.
8369611.
Also this call is being broadcast live on the Internet and maybe accessed at Staar's website at Www Dot star equity Dot com.
Shortly after the call a replay will also be available on the company's website.
It is now my pleasure to introduce Jeff Eberwein Executive Chairman of Star equity.
Thank you operator, good morning, and thank you all for joining us today for our second quarter 2021 results conference call.
On the call with me today are Matt Molchan CEO of Digirad Hill.
Our chief financial and Chief operating Officer, David Noble and various executives in our construction business.
Second quarter 2021 business activity return to more normal levels or health care rebounded.
The division rebounded versus the second quarter of last year with revenue, increasing 57% versus the prior year quarter.
Our construction division grew revenue of 117% with much of this growth attributable to significantly increase output.
At our KBS business in new England, coupled with increased activity levels and edge filter in the Midwest.
Gross margin percentage in our construction division declined significantly in Q2.2021 versus the prior year's quarter.
Subsequent 7 unprecedented rise in raw material input costs.
So as expected to book began to return to normal levels.
Second half of this year due to steps, we've taken to increase our product pricing and.
And improve operations as well as the expectation that raw material input costs.
We'll continue to normalize later this year.
With the asset sales completed at the end of the first quarter of 2021, we substantially improved our balance sheet and liquidity position.
<unk> and net debt declining from $14.3 million a year ago to $6.8 million at the end of the second quarter 2021.
We are now much better positioned to fund high return internal growth investments and pursue acquisitions, which as we have previously discussed could be bolt ons, and our health care or construction businesses or entry into an entirely new business sector.
With that I'll turn it over to our healthcare CEO, Matt Molchan, Matt. Please go ahead.
Thanks, Jeff revenue from our Health care Division in Q2, 2021 increased by 57% to $14.9 million over the same period in the prior year. This division has largely recovered from the COVID-19 pandemic related downturn and is now performing at pre pandemic levels.
<unk> offices have reopened and we are operating at full capacity gross profit for the Q2.2021 reporting period increased by 56% and gross margin remained fairly consistent decreasing slightly by 0.2% over the same period last year.
In diagnostic services revenue and gross margin percentage for the second quarter of 2021 were $11.7 million and 24 per cent compared to $7.1 million and 13, 3% in last year's second quarter, the increase in diagnostic services revenue and <unk>.
Gross margin percentage compared to the prior year was primarily due to increasing scan volumes and.
In our diagnostic imaging business. We also saw improvement in the top line results revenue and gross margin percentage for the second quarter of 2021 was $3.1 million and 32, 5%, respectively compared to $2.3 million and 52, 8% respectively.
In the prior year second quarter the increase in diagnostic imaging revenue is related to increased camera sales, which is a good indication that hospitals and physician practices are recovering from the impact due to COVID-19 net.
I'm going to turn the call over to Dave Noble, our CFO and COO, who will provide additional financial highlights for the second quarter date. Please go ahead.
Thank you, Matt and good morning, I'll start by summarizing the construction Division results second quarter 2021, construction Division revenue was $10.9 million compared to 5.0 a million in the prior year second quarter gross.
Gross margin on the construction side was a negative 16, 9% compared to a positive 29% in the prior year second quarter. The significant increase in revenue for the construction division was due to higher production levels driven by strong demand of KBS and some large commercial jobs that edge builder.
Negative gross margin percentage was due to the adverse effects of a rapid rise in raw material prices, which had historic levels during the second quarter.
Moving on to consolidated results for the second quarter of 2021, companywide SG&A increased by $1.9 million compared to second quarter 2020. This was due in part to a $4 million increase at the construction business as a result of increased commissions and head count also we experienced a $2 million.
At the health care business as a result of increased commissions and a <unk> 4 million increase in audit fees as well as a <unk> 4 million increase in it and outside service costs.
Moving onto consolidated bottom line results for the second quarter of 2021, we had a net loss from continuing operations of $1.8 million compared to a net loss from continuing operations of <unk> 8 million in the same period in 2020.
Non-GAAP adjusted net loss from continuing operations in the second quarter of 2021 was $3.7 million or <unk> 74 per share compared to an adjusted net income of <unk> 2 million or 6 cents a share in the second quarter of last year.
Non-GAAP adjusted EBITDA was negative $2.9 million for the second quarter of 2021 compared to a positive $8 million in the second quarter of last year.
The change this quarter was largely driven by the rapid rise in lumber prices, which significantly impacted our cogs on the construction side of the business.
For the second quarter of 2021, we registered an operating cash outflow of $5.4 million compared to an operating cash outflow of <unk> 6 million in the second quarter of last year.
As of June 32021, the outstanding balance on our credit facilities was $13.1 million. Our overall net debt position taking into account the $6.3 million, we hold in cash and cash equivalents was just $6.8 million.
This compares to $16.5 million at June 32020.
Now I'd like to turn the call over to the operator for questions.
Operator.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad a confirmation total indicate your line is in the question queue.
May press star 2 if you'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Please poll for questions.
Our first question comes from the line of Theodore O'neill with Litchfield Research. Please proceed with your question.
Good morning, Thank you very much so either construction business.
The prices rising on lumber and all of the companies that supply it or adding significantly to capex for this year.
And planning for next year, as well, which you know could a lot of people were thinking it could result in a decline in prices lumber prices and I'm trying to get an idea of how that would impact.
Star.
If if lumber prices started falling today, how long would it take before you.
You were able to benefit from that I'm, assuming you would have to place orders well in advance.
Yeah, Yeah. Thanks for the question and we had a lot of things that plagued our second quarter results, but that was by far the biggest 1 and if you think about our business on average having roughly a 6 month backlog. It does take a while for things to.
Run through the system.
So we've increased prices are about 20% year to date, particularly on the KBS side of the business.
And if.
If we have a 6 month backlog. It takes a couple of quarters before that starts to show up in our revenue you get some of it.
Sooner than that on the residential side, but.
Commercial projects.
You know we might book 6 months in advance.
Lumber historically lumber and all the other input.
Costs.
We've had a little bit of a just in time inventory approach, where we order them.
So that they get there in time to start being constructed but as you point out and lumber has already declined.
Quite a bit I think it peaked in may.
So our average input.
Cost will decline significantly in the second half of the year versus the first half of the year and our average price will be much better in the second half of the year versus the first half of the year.
Longer term for this business, there's always moving parts in any given quarter, but our goal is to have a gross margin above 20%.
You know, even even higher than that let's say $20 to 25% range.
And to not.
Suffer from these wild swings in commodity prices until we've done a lot of things do change our contract terms.
Even begun to hedge a little bit here and there on a project specific basis.
I mean, the volatility we've had is is unprecedented and we wanted to be.
Better prepared for it.
In the future, but this is the strongest thing I would say is that.
Despite all the volatility and ups and downs of the construction business.
We do like this business and do you see it.
Achieving a 2.
20% gross margin or better over the long term.
Okay. Thanks very much.
Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Okay.
Thank you for those comments on lumber and day shifting to health.
Health care for a bit.
And as you commented earlier on some.
Operating at full capacity in that margin.
Good rebound in the margin there from the prior quarter to about 23% is that a sustainable level or what what is it normal capacity operating level.
Are you talking about on that you're talking about on the health care health on the healthcare side helped you I'll, let Matt wreck, Yeah, I'll, let Matt Molchan will answer that 1.
Yes. Thank you, yes, I think that you're correct I mean, there's 2 portions of the business right..1 1 is the diagnostic services business and the diagnostic imaging together as diagnostic imaging were selling the cameras. So you know obviously the gross margin.
For our diagnostic imaging business can swing based on the mix of our cameras.
So the different cameras that we sell can be more profitable and that could have an impact on gross margin, but on diagnostic services that that comment was more was more based on the diagnostic services business, where we are operating at full capacity or back to pre pandemic levels of capacity.
And so we would we would foresee that that type of gross.
And that business is pretty steady to continue that type of margin per diagnostic services, but based on the mix you could see improvements with diagnostic imaging based on the cameras that we would sell in any given quarter.
It is can you refresh me and maybe for David You mentioned gross profit margin target of greater than 20% and construction do you have a similar goal for the health care business.
Yeah, I think that that type of goal between 20 and 25% within health care is where we would see that business.
25% being.
The overall goal for the business, but as we work as we work towards that depending on the mix of the cameras as I said.
And then the steady.
State.
Nature of our diagnostic services business, where we.
Going out to physician offices and providing.
The service on a lease basis.
Great. Thank you and then with peak you you commented on the nature of possibly changing some of the contract terms and previous backlog shifting to construction excuse me can you comment on the demand side for your construction book the modular construction business.
Raw material cost swing scare off delayed some orders or how are you how are your customers reacted to this unprecedented situation.
Does your backlog still increasing in that business, Yeah, I know that's a that's a good question take.
The answer is kind of a D. All the above so demand is really really strong.
Our our sales pipeline.
Is are the strongest they've ever seen our backlog is the strongest I've ever seen and that's despite us increasing our prices on average 20% year to date and we also have better contracts.
Spell out more what risks, we're going to take on and what risks, where we're not going to take on.
So we feel much better about our contracts and our pricing.
Today than we did at the beginning of the year.
All that said there has certainly been projects that have been.
Pushed to the right or delayed.
Especially the kind of bigger commercial projects, because there's typically a series of price points. So okay. There and it's commonly get an initial estimate for a construction project and then as you get closer and if raw materials are changing you might get a refresh update and it was refreshed updates have been.
Shopping to some clients into there have been projects.
Put on hold so.
You know this business can can be a cyclical business, but we see a lot of demand out there a lot of projects to do we see modular increasing its market share over time, and we are doing many things to diversify our business.
We're continually adding more clients, adding more end markets.
The things 1 can do with modular is growing over time, so despite the second quarter results.
We're very excited about this business and now that raw materials have declined our hope is orders just.
Continue in anything that was on hold goes awful.
Great Great. Thank you for the comments on the longer term targets to going past the piece from wild swings in the short term and then just.
Just for the setup for the next quarter I noticed that inventory build and maybe its normal between <unk> and <unk> is that from about 10 to 12 is that related more on the medical side or construction or is it both.
Can you just comment on that is that mostly raw materials in there for.
Largely largely construction, Dave do you want to talk about that yeah sure I mean, probably more of that is really related to the edge builder business, where we do the wall panels, we've been accumulating some inventory for some large commercial projects that kicked off in the next month, so that that would be what a lot of that is we.
Also our building some inventory on the KBS side, that's a little more just in time as Jeff said.
The only other thing I'd want to point out about how we feel about maher.
Margins going forward as you know, there's not a lot of spare capacity in the industry right now so even though commodity prices are coming down which is great.
Our pricing power it seems pretty strong right now we've got a little bit of capacity for the end of the year.
And we're not finding a lot of pressure there and the demand remains very very strong and has throughout the volatility that we've seen this year.
Just the last 1 from me just can.
Can you can you refresh me Dave on the expansion plans for modular construction moving up the second facility in New England.
On the current footprint the module in new England and I'm pleased we have not we have a second idle facility that we would like to open at the appropriate time and we fully intend to do that we just havent. We havent found that time just yet.
Okay.
Thank you. Thank you for all day uptake.
Thank you. Our next question comes from the line of.
Adam Waldo with Lismore partners. Please proceed with your question.
Good day, thanks, very much for taking my questions a few areas I'd like to explore if you can hear me okay.
We can hear you.
Okay, great. So first.
Resumed paying the preferred stock dividend.
In June with the declaration in late May and as you sort of look out into the second half of this year and maybe into the early part of 2022 should should we expect that youll start.
Our that Youll continue paying it on a quarterly basis.
But not seek to pay.
Pay down the arrears or kind of what's the current thinking on the preferred stock dividend.
Yeah no that's.
Good question. This is Jeff I'll take that 1.
So I would just say if you things that might be helpful. Its first off it's a board level decision not a.
Management decision.
We do.
Do have a much cleaner balance sheet than we had before we did do a series of asset sales and a second sorry that day in and a first quarter that allowed us to pay down a lot of debt and did allow us to start making dividends on our preferred stock. So.
I think the board will make a determination.
About the third quarter dividend at all we'll make an announcement about that.
The.
Record dates for the preferred stock per its charter our September 1st then I believe that December 1 March 1 and June 1 so I would expect the board to make a determination before that September 1st Recker.
The record date.
And.
All of those issues you raised are top of mind, we do talk about them.
Or does debate them.
We didn't start paying dividends.
Lightly and.
I'd, just say stay tuned.
On that front.
And the board will make an announcement when it's.
Soon.
Afterwards made us the termination.
Fair enough. Thank you.
As we think about the construction gross margin progression.
As you sit there today and see kind of what your lumber cost structure looks like and what your pricing structure looks like.
Can you give any sort of guidance range on third quarter gross margin that you would expect that business and any outlook as to the progression into the fourth quarter.
Dave do you want to take a stab at that I mean, we're not we're not giving specific guidance, but I think directionally.
We see second half being much much better but Dave go ahead on that specifics yeah. I mean were still shipping a couple of projects invoicing and shipping a couple of projects.
From the first half and so those would reflect.
Some of the higher priced input costs, but our current backlog as Jeff mentioned is significantly higher in price than what we had in the first half.
Year over year around that 20% increase mark So I mean, we definitely should be approaching if not achieving.
<unk>.
That 20% plus in the second half I mean, we've got 3 businesses right in the construction arena too.
In the Midwest, we've got wall panels, which slot.
Slightly below that 20, then they have the retail business, which is above well above that 20% margin. Then you have the KBS business, which is our modular.
Which as Jeff said, we're trying to price things in the 20% to 25% range. So we should be there by the end of the year and hopefully a lot sooner than that but there's a couple of projects that we're finishing up that were at.
Margins that were reflective of much higher commodity input prices, but we're buying materials quite.
Quite a bit lower now I mean, I think since June.
Wood based commodities are down about 20%.
And again, we're achieving price levels that are much higher and we think that is sustainable on the KBS side, particularly.
Given the capacity utilization is pretty high throughout the industry, we feel like we have good pricing power as we are.
Go through the second half of the year.
So that's incorrect I would oh I'm sorry, Yeah. I was just kind of this is Jeff I was just going to add a little bit to that.
We would've had a difficult quarter in the second quarter.
Regardless of the unusual items, just because of the unprecedented rise in raw material costs and the delay in <unk>.
Creasing, our pricing I, just you increased price on January 1st and you don't really see the impact for many months and are really not the full impact until maybe the third quarter, but this is going to point out in the second quarter, we probably had about a $1 million of costs that were a collection of different things we're putting in.
I knew it.
It system.
We wrote down a variety of things really cleaned up.
A lot of accounting areas.
1 example is we were.
Renting out our smallest plant and the KBS business and the.
So sub tenant was hadn't paid rested a longtime partly due to COVID-19 and ended up going under so we just we wrote off.
All of the rent that we were supposed to receive and that we have a new tenant there who is paying rent and have an agreement with them to sell to sell that plant, which will probably happen before the end of the year.
So I think we will have about 2 million net proceeds from the second half of this year coming in from from that asset sale and various other asset sales and then in addition to the million or so of cost that we recognized in Q2, but didn't really pertain to Q2, we had.
A very large project we're.
Just a.
Technical accounting issue these days.
The rent, even though we finished it and the client took title to it.
Based on the shipping date, that's revenue that got pushed from Q2 to Q3 and that was over $1 billion.
And of course, the variable costs get recognized when the revenue gets recognized.
But it's not great for profitability to have.
Our factory work on a project for a whole month and not recognizing any revenue we have all the fixed costs and things like that of running the construction business and.
It was really revenue $1.1 million net was.
It was for work worked on in Q2, but it won't show up in our numbers until Q3.
No that's very helpful. Thank you.
And I guess.
I'm going to do some quick back download math I'm sure I'm off a little bit I Hope you can help me on this is that sort of think about that.
Intermediate term to longer term guidance.
Sort of think of each of the 2 segments post the divestitures, we kind of have.
Our gross margin guidance in the 20 to 25 per cent range for each.
And we have sort of a run rate revenue looking pretty good again per each and.
When you sort of you know.
Pencil that out we're at maybe.
$5 million to $6 million of gross profit and SG&A of about the same right based on what you showed in the second quarter.
So.
Am I right to say that that sort of to get above breakeven here.
The book accounting basis, and maybe in the same percentage on a cash flow basis.
We need to pursue some opportunities on the SG&A side or.
What are some steps that we can pursue too.
To get to a sustainably higher level of.
EBITDA and cash flow.
Yeah, we're working on all of the things I mean, we're increasing our pricing.
We're working to lower our cost structure, we're working to lower our overhead structure.
But in general just raising our prices and having good volumes will be.
Extremely helpful and you've seen the revenue growth and health care I think it's rebounding to.
Pre COVID-19 levels.
And.
Long term, we think that business does have some growth and a.
Normal level of revenue is something in the $15 million per quarter range $60 million a year.
With some growth to it and the construction business really has a lot of.
Revenue upside and the more units we produce in general the higher our gross margin is and the lower our unit costs are so.
When you think about breakeven as we do.
Work on that.
And but.
Kind of getting the revenue right and getting day.
Cost of goods sold right are really important first step and the goal for we've already talked about the goals for both businesses, having gross margin in the 2025 per cent range and for construction I know there is a tremendous amount of volatility, we're not giving specific guidance, but our our goal is that.
Towards the end of this year, where everything has been.
I want to say flushed through the system, but our price increases are showing up in revenue input costs are more normalized and our.
Our hope would be that the gross margin would therefore be back to more normal levels. While we continue to have really strong revenue growth.
And can you be.
More specific in terms of bracketing of range for quarterly SG&A kind of a $25 million to $30 million.
Quarterly revenue.
More normalized environment.
Daisy mind.
Cause I mean, we can come back to you on that there are a couple of 1 offs in there Jeff mentioned, the the rent write off so.
It's hard to do that off the cuff, but I'm happy to try and run that math, but I guess, the only thing I would add to what Jeff said is I do think it's it's a scale issue in trying to grow revenues and spread out our overhead, but we're always looking for ways to cut.
SG&A and we've done that in the past week.
Eliminated credit card fees on the health care side, we've reduced our contract for example, with Microsoft where we had some extra seats that werent utilized.
We've done a number of things when we when we find that we can really reduce costs in 1 area or another we do attack that so we're always looking as Jeff said to kind of take out costs.
When it makes sense, but.
On the construction side KBS is built for a larger unit volume and you know.
We're focused on getting to that larger unit volume, which will.
Obviously improve our net net margin.
Okay. Thanks, very much very helpful insights and good luck in continuing the recovery.
Thank you.
Thank you as a reminder, ladies and gentlemen, please press star 1 if you'd like to ask a question.
It appears there are no further questions at this time I would like to turn it back to management for closing comments.
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