Q3 2022 Star Equity Holdings Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to Star equity Holdings third quarter 2022 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.
Some statements.
Please refer to start these most recent 10-K and 10-Q filings and also third quarter 10-Q, which we expect to file on Monday November 14th 2022, or a more complete description of risk factors that could affect these protections and assumptions.
He assumes no obligation to update forward looking statements as a result of new information future events or otherwise.
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 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 our equity at QVC around 3489, 90, 500 or Investor Relations Representative Lena Ekati of the equity group at eight.
<unk> 369611 also this call is being broadcast live over the Internet and maybe accessed that start equities website www dot our 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 Rick Coleman, Chief Executive Officer start equity. Please go ahead Sir.
Thank you Maria.
Good morning, and thanks for joining us today for our third quarter 2022 results conference call on.
On the call with me today are executive Chairman, Jeff Eberwein, and Chief Financial Officer, Dave Noble.
I'm pleased to report significant progress at both our construction and health care businesses this quarter.
On a consolidated basis, despite an overall, 16% decrease in revenue.
We grew gross profit by 54, 8% versus the third quarter of last year.
Gross profit was driven predominantly by substantially increased profitability at our construction division and strong operating discipline and our health care Division.
Our health care Division revenue decreased by 11, 3% compared to the third quarter of last year and gross margin decreased by one percentage point to 27%.
Both results were primarily impacted by the continued effect of labor market tightness on our scanning service utilization.
Late in the quarter, we began to see modest improvement in the availability of nuclear medicine technologist applicants, which we're hopeful we will continue to provide staffing relief and allow more patients study hours.
Despite the labor driven reduction in activity, our health care Division delivered $1 million of adjusted EBITDA in the quarter due to strong cost controls and organizational improvements from our second quarter restructuring.
Our construction division revenue decreased by 21% due primarily to the timing of revenue recognition on certain projects, which had a positive impact in the prior quarter.
Specifically contract terms and accelerated performance allowed a higher percentage of revenue for a large new England call. It project to be recognized in the second quarter for a project that was successfully completed in August .
Similar to last quarter gross margin improved substantially to 28, 2% due to increased pricing improved operations and commodity price risk mitigation.
Despite quarterly variations due to the timing of profit recognition, particularly on large projects. We expect our construction division to continue performing over time against our 20% gross margin target.
Our Q3 results indicate that our geographic and industrial diversification strategy is playing out as expected and showing balanced results.
In Q3, our construction segment accounted for 45, 8% of Star equities consolidated revenue and for the first nine months of 2020 to our construction segment accounted for 49, 4% of total revenue.
Finally, we continue to be optimistic about the overall performance of our operating portfolio and about our ability to identify and integrate future acquisitions, either as bolt ons for our existing divisions or entry into a new business sector.
Now I'll turn the call over to our CFO , Dave noble to provide more.
More detail on our operating results and provide additional third quarter financial highlights.
Please go ahead.
Thank you Rick and good morning.
Let me first address the strong underlying performance of the health care Division.
As Rick mentioned revenue was a bit softer due to external conditions in the labor market. While gross margin was 27% in Q3 versus 22.0% in Q3 of 2021 year to date gross margin is higher than the prior nine month period at 23, 7%.
Excluding the legal costs, mostly for a single large case non-GAAP adjusted EBITDA for health care was $1.0 million in Q3 versus $1 3 million in Q3 of 2021.
For the first nine months of 2022, non-GAAP adjusted EBITDA for health care was $3 9 million versus $3.0 million in the first nine months of 2021.
These numbers are segment level numbers before allocating any public company expenses.
Let me next touch on the strong turnaround performance of our construction Division Q3, construction revenue was $11 1 million versus $14 1 million in Q3 of 2021, the 21% year over year quarterly decrease relates to the timing of revenue recognition for a large KBS project as Rick mentioned Additionally, we experienced.
Some project delays at our edge builder business, but fully expect those projects to have a positive fourth quarter impact our year to date results and Q4 outlook remained quite strong for the first nine months of 2022 construction revenues were $39 5 million versus 34.0 million in the first nine months of 2021.
This represents a 16, 2% growth in revenues year to date.
Construction gross margin was 28, 2% for a gross profit of $3 1 million in Q3 versus just three 8% point $5 million in the prior year Q3.
For the first nine months of 2022 construction gross margin was 18, 2% or $7 2 million versus a negative two 2% or negative point $8 million in the first nine months of 2021.
The significant increases in gross margin percentages were due to the increased pricing levels on both residential and commercial projects as well as a better risk management around building materials price volatility our construction backlog and sales pipeline remains strong.
Let us now turn to Star equities consolidated results in Q3, 2022, SG&A increased by 31, 9% versus Q3 2021. The increase was driven primarily by the $1 $2 million in one time litigation costs and secondarily by <unk> 3 million in severance and retention related expenses.
Associated with restructuring of Digirad helps.
At the bottom line Star equity had a net loss from continuing operations of $1 9 million in Q3 compared to a net loss from continuing operations of $2 1 million in Q3 of 2021.
non-GAAP adjusted net income from continuing operations was a positive $8 million in Q3. This compares very favorably to the adjusted net loss of $1 5 million in Q3 of 2021.
non-GAAP adjusted EBITDA was $1 5 million in Q3 compared to a negative <unk> 6 million in Q3 2021 for.
For the first nine months of 2022, adjusted EBITDA was $2 9 million versus a negative $4 5 million in the first nine months of 2021.
This substantial improvement in non-GAAP adjusted EBITDA was driven by a successful operational turnaround and our construction division where segment non-GAAP adjusted EBITDA swung from a negative $3 9 million in the first months of 2000 versus nine months of 2021 to a positive $3 5 million in the first nine months of 2022.
These numbers are before allocating any public company expenses.
At a consolidated level net cash used by operating activities in the first nine months of 2022 was <unk> 2 million versus net cash used of $8 2 million in the first nine months of 2021.
As of September 32022, our balance sheet and liquidity remains strong the combined outstanding balances on our interest bearing credit facilities was $11 9 million, while cash and cash equivalents on our balance sheet stood at $8 5 million now I will turn the call back to Rick for some additional comments.
Thanks, Dave.
Without going into detail I want to comment on the litigation Dave mentioned earlier.
We strongly believe the litigation was completely without merit.
Our defense against the action contributed over $1 billion to this quarter's expenses, including settlement payment.
I'm happy to report that the litigation was dismissed by agreement on the first day of the trial.
Oh settlement documents are well underway and should be completed in the fourth quarter.
The expected settlement cost was less than the anticipated cost of continuing litigation and we expect any fourth quarter costs associated with the trial to be relatively insignificant.
Now I will turn the call back to the operator for any questions.
Okay.
Yeah.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please poll for questions.
Our first question comes from Theodore O'neill with Litchfield Hills Research. Please proceed with your question.
Oh, thanks very much.
My My question. My first question is about.
I understand you had some project delays that are probably going to help out I guess, a construction in Q4, but could you give us an idea about the pipeline for for construction projects.
Sure do you mean, the pipeline for the rest of this year or next year for both like for the next next 12 months.
Yeah.
That's quite a ways out, but obviously, there's some headwinds in the economy.
With respect to interest rates and housing demand.
I would say is that you know.
The northeast has held up relatively better.
And secondarily.
The market for multifamily new multifamily is probably held up has held up better than single family and.
So we are seeing some headwinds, but we're really focusing where we're strong and where we think.
There'll be less of impact in the market. So you know our production schedules all through this year and into early next year.
And we continue to see good demand, but you know we would expect there could be some some softness but I think we're well positioned this year relative to any prior year to weather that.
Okay and you did mentioned in your remarks that the litigation costs.
If there's more in the fourth quarter it won't be it won't be anything like this quarter does that also include the severance and retention or will we see that also in the fourth quarter.
No we don't anticipate any significant severance retention, there, maybe one or two people here and there but nothing significant.
Thank you very much.
Okay.
Okay.
Okay.
Our next question comes from Tate Sullivan with Maxim Group. Please proceed with your question.
Thank you and on the construction revenue and you gave details on the project. The project timing recognition did you just to review did you say.
Project that you finished in <unk> you'd previously recognized the revenue for that completion in two Q and going back to Peter's question too I mean, the backlog happened to increase in the quarter in construction versus that declined quarter over quarter decline in revenue. Please.
Yeah. Thanks.
There were some unique aspects of that project. It was an incredibly large project on an accelerated schedule that then that the contract terms were different than normal allowed us to recognize some revenue earlier than we otherwise would have.
Okay.
Okay.
Thank you and then you also mentioned the restructuring and <unk> 22 was that in just one part of the health care business.
What was that specific yes, yes that was a restructuring in the health care Division.
Associated with the departure of the previous CEO of that group.
Subsequent to that we had some realignment.
Some personnel.
Reduction costs associated with it.
That's all settled out at this point and the team is operating very effectively.
Okay, Great and then can you remind for comes after after that.
Strategic events in two Q, the the margin profile for health care moving forward do you think it can still in it.
Still above 20% will it still probably be a low 20% gross profit margin business or maybe some changes there. Please.
I think.
I mentioned in the call.
Paul I think we're still on target to remain above 20%, but there may be some ups and downs quarter to quarter.
Okay. Thank you and then what is the.
Litigation that you mentioned also related to health care versus or was it in construction.
That was health care related.
Okay, and then lastly, David if you could comment on working capital management to I mean, I noticed that the inventory has increased for 1233 or four quarters in a row is that mostly related to the construction.
<unk> segment or is it cameras or both.
Okay.
Yes, I mean, a little bit of that is just for some camera builds in the fourth quarter, but yeah, it's really driven by the construction backlog.
We have a lot of projects as we mentioned, especially on the edge builder side that had been pushed into the fourth quarter. So it's really an accumulation of inventory to satisfy that pipeline.
Okay Alright, thank you both.
Yeah.
It appears that there are no further questions at this time I would now like to turn the floor back over to Rick Coleman for closing comments.
Thank you operator before concluding this call I just want to thank all of our employees for their strong performance and dedication and our shareholders for your continuing support we're always available to take your call and discuss any additional questions. You might have so please don't hesitate to contact US we will continue to share our story with existing and.
<unk> investors in the coming weeks and months and as always we appreciate your continued feedback and support thank you.
This.
Todays teleconference. You may disconnect your lines at this time, thank you for your participation.
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