Star Equity Holdings 2026 Q3 Earnings Call

Operator greetings, and welcome to the Star Equity Holdings Third Quarter 2026 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's most recent 10-K, 10-Q, and other 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 yesterday.

If you do not receive a copy of the earnings release and would like one after the call, please contact Star 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's website via www.starequity.com. Shortly after the call, a replay will be also available on the company's website. It is now my pleasure to introduce Star's Chief Executive Officer, Jeff Eberwein. Please go ahead, sir. Thank you, operator, and good morning, everyone.

We greatly appreciate your interest in Star Equity, and we thank you for joining us today. I will begin by reviewing our third quarter 2026 results at the holding company level. After that, Jake Zabkowicz, CEO of Hudson Talent Solutions, will give us an update on the performance of that business, and Rick Coleman, our COO, will provide additional insights into the performance of our Building Solutions and Energy Services divisions. Our third quarter results continue to reflect last year's merger between Hudson and Star. On an as-reported basis, revenue, gross profit, and adjusted EBITDA were all up year-over-year, driven by the full quarter inclusion of the Building Solutions and Energy Services divisions. Following the August 2025 merger between Hudson and Star, those divisions were included in our consolidated results, but they were only included for a part of the third quarter 2025.

On slide three of our earnings presentation, you can see that revenue was $53.9 million, gross profit was $23.2 million, and adjusted EBITDA was $1.5 million. On the merger synergies, to date, we have realized $3.1 million on an annualized basis, and that exceeds our initial expectation of $2 million of merger synergies. On slide five of the earnings deck, you can see that our corporate costs were $5.4 million on the first nine months of the year, and that compares to $7.7 million on a pro forma basis, and that is how we calculate the annualized synergy number. When we are talking about corporate costs, just want to make sure that you know we are talking about the numbers that can be found in the adjusted EBITDA reconciliation tables that are on pages 18 and 21 of the earnings presentation. At the division level, our third quarter results were mixed.

There's continuing to be pressure in the professional talent market in our Business Services division. In Building Solutions, we continue to experience soft residential and multifamily construction markets. Going back to Business Services, gross profit declined 2% year-over-year due to those pressures in the professional talent market, and we're continuing to invest for growth. We invested $1.4 million in the third quarter. Building Solutions were also below the prior year quarter on a pro forma basis due to the market softness. In addition, one of our units, KBS Builders, had a project shift from 2026 to 2027. Notably, we did receive a non-refundable deposit on this project, and so we do think it's going to happen. In our Energy Services business, we did have a strong gross profit and adjusted EBITDA, and the results were up on a pro forma basis.

In October, we expanded this division by acquiring a machine shop in Vernal, Utah. On slides six and seven, you can see that we ended the third quarter with $7.8 million in total cash, and that includes $1.6 million of restricted cash. During Q3, we generated $0.9 million of cash from operating activities, compared with using $2.7 million of cash in the third quarter of 2025. Third quarter this year, we had net CapEx of $0.3 million, so we did generate positive free cash flow. Working capital, excluding cash, was $19.9 million at the end of the quarter, compared to $22.4 million at the end of the year. So we have made strides improving our working capital management. Stockholders' equity was $58.1 million.

We repurchased almost 29,000 shares in the third quarter for $0.3 million under our share repurchase program, and we have $1.3 million remaining on this $3 million authorization that was approved last year. We continue to believe our stock is undervalued, so we view share repurchases as a very attractive allocation of capital. Before I turn the call over to Jake, just a word on corporate costs. Again, when we talk about corporate costs, we're talking about the column in the adjusted EBITDA reconciliation table. In the third quarter, corporate costs were $1.8 million, and that compares with $1.2 million a year ago. But the $1.2 million is not a pro forma number, and so it only includes the Star operating businesses for part of the quarter.

On a pro forma basis, corporate costs a year ago were $2.6 million, and so we did reduce corporate costs by $0.8 million year-over-year, which reflects the elimination of duplicative public company and corporate overhead following the Hudson Star merger. These corporate costs do exclude non-recurring expenses, which were $0.7 million in this year's third quarter and $1.3 million in last year's third quarter. Across the company, we remain focused on operational excellence, cost management, and investing in growth initiatives, and we think this will enhance our competitive position and drive improved operating and financial performance going forward. I'll now turn the call over to Jake to discuss our Business Services division.

Thank you, Jeff, and good morning. Our Business Services division is building momentum through strong performance in the Americas, expanding our digital capabilities, and increased engagement with prospective clients. While the professional talent market remains challenging, we are investing selectively to strengthen our competitive position and support for future growth. Starting on slide 11, third quarter revenue was $33.8 million, compared with $37 million in the prior year quarter, a decline of 9%. Gross profit was more resilient, declining just 2% to $18.2 million versus $18.6 million. Adjusted EBITDA was $1 million compared with $1.7 million a year ago. The decline largely reflects deliberate investments in our digital solutions, Hudson Fusion, and expanding into new geographies and related growth initiatives. These investments totaled $1.4 million in the quarter, compared with $1 million in the third quarter of 2025.

Turning to slide 12 now, our rolling fourth quarter RPO new business total contract value was $121.3 million, including $12.9 million in new logo wins and $108.4 million in renewals and expansions with existing clients. The trailing 12-month gross profit of $71.5 million has remained relatively stable over the past four quarters. Our trailing 12-month adjusted EBITDA margin was 4.4% compared with 7.9% a year ago, reflecting the growth in investments discussed earlier. On a regional basis, we continue to grow the Americas, where the gross profit increased approximately 4%. Conditions remain more challenging in EMEA and Asia Pacific, where the gross profits declined 9% and 5% respectively. As shown in slide 13, Asia-Pac remained our largest region, accounting for 62% of the divisional revenue and 45% of the gross profit. The Americas contributed 40% of the gross profit, and EMEA contributed 15%.

Across the business, we are combining growth investments as well as focus on operational efficiencies. We are expanding our use of agentic AI and automation to help recruiters work more productively, improve our candidate matching, and deliver greater value to our clients. These initiatives help us sustain gross profit despite a mixed regional environment and are essential to our technology-enabled delivery strategy. We are encouraged by our uptick in new customer conversation and new logo wins in recent months, supported by our broader geographical reach and enhanced digital offerings. In November, we added those capabilities with the acquisition of Cornerstone RPO, strengthening our U.S. presence and bringing established enterprise client relationships and experienced U.S. sales leadership to our platform. We have also advanced to number three globally in HRO Today's 2026 Global RPO Baker's Dozen Customer Satisfaction Rankings, a significant improvement versus history.

We believe this recognition reaffirms our continued commitments to our clients and strengthens our position as we compete for new enterprise RPO relationships. Our focus now is converting that interest into new business and expanding existing client relationships. We continue to execute our land and expand strategy, including leveraging our presence in Japan and Latin America, while we maintain discipline on how we invest and operate. With our expanded capabilities, stronger customer recognition, and growing geographical footprint, we believe we are positioning our Business Services to capture opportunities as market conditions improve. Now I will turn it over to Rick to discuss our financial and operational performance of our Building Solutions and Energy Services divisions.

Thank you, Jake, and good morning, everyone. Starting on slide 10, our focus in Building Solutions is on growing orders and backlog and positioning the business for improved performance. Despite continued softness in both residential and commercial construction, we made progress during the quarter with sequential increases in both our backlog and our trailing 12-month book-to-bill ratio. Third quarter revenue was $16.3 million, gross profit was $3.3 million, and adjusted EBITDA was $0.7 million. These results compare with pro forma revenue of $21.4 million, gross profit of $5.3 million, and adjusted EBITDA of $2.6 million in the third quarter of 2025. In addition to challenging market conditions, the year-over-year comparison reflects the shift of a large KBS project from 2026 to 2027. As Jeff mentioned earlier, we received a non-refundable deposit for that project. Quarter-end backlog increased to $11.4 million from $10.6 million at the end of the second quarter.

Our trailing 12-month book-to-bill ratio also improved, reaching 0.86 compared with 0.77 last quarter. New orders totaled $17.1 million, our second consecutive quarter with more than $17 million in new orders. While overall demand remains soft, we continue to add attractive projects and gain traction in workforce and affordable housing, assisted living, and senior housing. We expect these markets to become even more significant business drivers as conditions improve. In the meantime, we are maintaining discipline in project selection, execution, and margin management to strengthen the foundation for future growth. Turning to Energy Services on slide 14. The division delivered higher gross profit and adjusted EBITDA on stable revenue, demonstrating improved profitability on a pro forma basis year over year. Third quarter revenue was $3.7 million, up 1% from prior year quarter on a pro forma basis.