Prepared remarks
Thank you. Greetings, ladies and gentlemen, and welcome to Star Equity Holdings Second Quarter 2026 Financial 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, 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 afternoon. 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. Shortly after the call, this call is being recorded for a replay that will be available on the company's website. It is now my pleasure to introduce Jeff Eberwein, Chief Executive Officer of Star Equity. Please go ahead.
Thank you, operator, and welcome, everyone. We greatly appreciate your interest in Star Equity Holdings, and thank you for joining us today. I'll begin by reviewing some highlights from our second quarter 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, which is inside our Business Services division. Rick Coleman, our COO, will provide some insights into the performance of our Building Solutions and Energy Services divisions. And I'll discuss some of the key points in the merger with Harte Hanks that we announced this morning. One item I'd like to point out just to get started is Slide 5 from our earnings deck where you can see the progress we've made on the cost synergies. You may recall that a year ago when we announced the merger with Hudson, we projected approximately $2 million of merger synergies, and we believe we've achieved approximately $3 million of merger synergies at this point in time. And we measure that from the adjusted EBITDA table, which you can find on Pages 10 and 12 of our earnings release. In that table, you'll see that for the first half of the year, our corporate costs, if you look at the corporate column, were $3.6 million. That's down from $5.1 million on a pro forma basis. So that's savings year-over-year of $1.5 million for 6 months, and that's how we get to the $3 million merger synergy number. When we look at the division results for Q2, Business Services had modest revenue growth. Gross profit was down slightly year-over-year, reflecting some pressure in the professional talent market. And we did have growth investments of $1.5 million, and just a reminder that rolls through our income statement, so that shows up as an expense and the benefit will come in future periods. Our Building Solutions division had results below our expectations. That's due to market softness and the timing of some contracts when the project started, and in particular when the revenue gets recognized, we'll come back to this issue, but we had a large project that was mainly completed in Q2, but most of the revenue for that project will be recognized in Q3. Energy Services posted very strong year-over-year gains in revenue, gross profit, and adjusted EBITDA, and that's due to higher utilization of our tools and some new client wins in the geothermal and mining industries. Turning to the balance sheet, we ended the second quarter with $8.9 million in cash that does include $2.1 million of restricted cash. And our working capital, excluding cash, was $21.5 million, which compares to $22.4 million at the end of the year. So we've made a little bit of progress on more efficient working capital management. We have continued to repurchase shares. We repurchased about $0.2 million in Q2 and we have $1.6 million remaining on our authorization of $3 million, which the board approved last September. We continue to believe our stock is undervalued, and we view share repurchases as a very attractive allocation of capital. Across the company, we remain focused on disciplined execution, cost management, and we are continuing to invest in growth initiatives that we believe will enhance our competitive position and drive improved financial performance over time. Now I'd like to turn it over to Jake to discuss our Business Services division.
Thank you, Jeff, and good morning. As Jeff mentioned, our Business Services division delivered solid performance in the second quarter with revenue up modestly year-over-year despite continued macroeconomic uncertainty and sustained pressure in the professional talent market. As shown on Slide 11, second quarter 2026 Business Services revenue was $36.4 million, up 2% from $35.5 million in the prior year quarter. Our gross profit was $17.8 million, down 4% from $18.6 million a year ago. Adjusted EBITDA for the division was $1.6 million compared to $2.2 million in the prior year quarter. That decline largely reflects deliberate growth investments in the second quarter, as we invested $1.5 million within our digital solution, Hudson Fusion, entering into new geographies and also related initiatives compared to $0.8 million in the second quarter of 2025. Regionally, as shown in Slide 13, the Americas performed well with gross profit growth of approximately 10%, while the EMEA and the Asia-Pac regions gross profit declined 10% and 13%, respectively, reflecting more challenging conditions in those markets. Asia Pacific remains our largest region at 62% of the divisional revenue and 43% of the gross profit in the quarter, with the Americas contributing 39% of the gross profit and EMEA at 18%. We have maintained a strong focus on innovation and operational efficiencies, including the expanded development of our agentic AI and automation tools to enhance recruiter productivity, improve our candidate matching, and deliver greater value to our clients. These initiatives helped limit the year-over-year gross profit decline to less than 5% despite a mixed regional backdrop. We believe our continued focus on technology-enabled delivery and deep client relationships position us to capitalize on the improving market conditions over time. Turning to Slide 12, on a rolling fourth quarter basis, RPO new business total contract value was $122.5 million, comprised of $8.3 million in new logo wins and $114.2 million in renewals and expansions with our existing clients. The trailing 12-month gross profit of $72 million has been relatively stable over the past 4 quarters, while our trailing 12-month adjusted EBITDA margin was 5.4%, down from 7.9% a year ago, again, reflecting the growth investments I mentioned earlier. Importantly, we've seen an uptick in new customer conversations and robust new logo interest in recent months, supported by enhancements in our geographical footprint and digital offerings. We continue to execute on our land-and-expand playbooks, including leveraging our recent acquisition with ACG in the Japanese market. Looking ahead, we continue to take a disciplined approach and execute our playbook for the remainder of the year with a focus on creating a more resilient, agile, and growth-oriented business over the longer term. Now I'll turn the call over to Rick, who will discuss the financial and operational performance of our Building Solutions and our Energy Services division. Rick?
Thank you, Jake, and good morning, everyone. I'll start with an overview of our Building Solutions division highlighted on Slide 9. As Jeff mentioned earlier, second quarter performance was below our expectations as both residential and commercial construction markets remain challenging. Our results were further impacted by project timing and revenue recognition as one large project that was largely constructed in the second quarter will be completed and recognized in the third quarter. Second quarter Building Solutions revenue was $14.6 million, gross profit was $3.2 million, and adjusted EBITDA was $0.5 million. On a pro forma basis for the second quarter of 2025, Building Solutions revenue was $20.4 million, gross profit was $5.2 million, and adjusted EBITDA was $2.3 million. As shown on Slide 10, quarter end backlog for Building Solutions was $10.6 million, up from $8 million at the end of the first quarter. And our trailing 12-month book-to-bill ratio was 0.77, up from 0.72 last quarter. New orders in the quarter were $17.3 million, our highest quarterly order intake since the second quarter of 2025. While these metrics still reflect market softness, we continued to add attractive work to the backlog, including the previously announced $4.2 million multifamily housing project in New Hampshire, serving the senior community. We've also gained traction in the workforce, affordable and assisted living and senior housing markets and expect these sectors to be significant business drivers as market conditions improve. Consistent with the strategy we've outlined previously, we remain focused on disciplined project selection, operational execution, and margin management, which we believe will position the business for stronger performance as market conditions improve. Turning to Slide 14, the Energy Services division delivered another strong quarter, continuing the momentum we highlighted earlier this year. Second quarter 2026 Energy Services revenue was $3.9 million, up 19%. Gross profit was $1.9 million, up 75% and adjusted EBITDA was $1.2 million, up 126%. On a pro forma basis, second quarter 2025 Energy Services revenue was $3.3 million, gross profit was $1.1 million, and adjusted EBITDA was $0.5 million. The business continues to gain share in core markets with especially strong performance in mining and geothermal applications. These results reflect disciplined execution and the benefits of our diversified exposure across drilling applications, which continues to differentiate the platform and support consistent growth. We continue to invest in new tools to support this growth while working closely with our largest customers to align our investment decisions with their specific needs. We see significant opportunities to continue expanding our presence and capabilities in the geographies and markets we serve. I'll turn the call back over to Jeff now for closing remarks.
Thank you, Rick. I'd like to transition now and talk a little bit about the merger with Harte Hanks that we announced this morning. Late last night, we signed a merger agreement to merge with Harte Hanks. The acquisition will be for $5 per share. On a fully diluted share count, that implies the acquisition will be about $38 million, and we will pay for it half in cash and half in preferred stock. One way to think about it is that of the $5 in consideration, $2.50 will be in cash and $2.50 will be in Star's preferred stock, so 0.25 shares of our preferred for every one share of Harte Hanks. Regarding where the cash will come from, it will come from the cash on our balance sheet, the cash on Harte Hanks' balance sheet, and, importantly, Harte Hanks has a $25 million revolver with a well-known financial institution with which we also have a relationship. Those three sources will fund the acquisition. We do not believe we will need to raise any external capital to close this deal. Also importantly, consistent with our view that our stock is undervalued, we're not using any common shares as part of this transaction, and we plan to continue buying back shares. Regarding the merger structure, Harte Hanks shareholders will have a right of election. Shareholders who choose all preferred stock can elect that; shareholders who choose all cash would receive $5 in cash. That is subject to proration and is capped so that 50% of the consideration is cash, capped at $19.2 million. So that's the maximum cash outlay, while the preferred is uncapped. In other words, if 60% of shareholders wanted preferred stock, they would receive preferred stock and the cash percentage of the total would drop to 40%. Any questions, feel free to give us a call. Both boards have approved the transaction. It includes a 30-day go-shop period during which Harte Hanks can receive other offers. After that period ends, we'll file an S-4, which must be approved by the SEC. Once approved, we will start soliciting votes from Harte Hanks shareholders. We do not need any vote from Star; no vote is required by our common shareholders or our preferred stockholders. Those are the hurdles we need to clear to close the deal. Our best estimate is the deal will close in the fourth quarter. We think we'll have a closed deal by year-end, and it would be great if it closes earlier; it's possible it could be later, but our best guess is before the end of the year. On a combined basis, Harte Hanks' businesses are in business process outsourcing. Our Business Services division, which includes our Hudson business, is also in business process outsourcing. Our business focuses on Talent and HR segments, while theirs focuses on Customer Care, Revenue Solutions, and Fulfillment Logistics. Importantly, we both serve Fortune 500 clients, so we think the business fits well within Star. We expect cost synergies and estimate initial cost savings of $10 million. Combining the companies, we estimate revenue around $400 million and adjusted EBITDA, a pro forma number that includes $10 million of cost synergies, of approximately $30 million once those synergies are achieved. We're very excited; we think this is accretive on any metric, accretive to our shareholders, and we look forward to closing the deal and becoming one company. With that, operator, let's open it up for questions.
Questions and answers
Our first question today is from Joseph Gomes with NOBLE Capital.
So Jeff, I wanted to start off. You talked about the Business Solutions. It was kind of a disappointing quarter. It was below your expectations. What were your expectations for that business for the quarter in terms of revenue and adjusted EBITDA?
Yes, what I would point you to, Joe, is Slide 12 of our earnings deck. We've done a very good job maintaining what we have. We had quite a few significant contracts come up for renewal in the last 12 months, and we've done a good job getting those renewed and in some cases expanded. What has been disappointing, well below our expectations, is the new-logo side. If we look at year-to-date new logo, it's $2.1 million annual contract value. Our expectation for the year is much, much higher than that, and our expectation for the first half was higher as well. The best thing we can say is that it's not that there's a lot of new business we're losing to competitors. It's really a symptom of continued low hire, low fire, and low attrition environment, particularly among professional, white-collar companies. They're very slow to make decisions. There's a tremendous amount of uncertainty with everything going on in the world, and then add on top of that AI. The number one thing our clients want to talk about is how AI will change their business, their talent management, and their talent acquisition. It's creating an environment where they're frozen. There's still new business to win, but it keeps getting pushed to the right. And when we do win something and it starts, it typically starts much slower than it otherwise would.
Okay. Actually, Jeff, my question is on Building Solutions, not the Business Services. I appreciate the insight into that also.
Oh, I'm sorry. I thought we were talking about Business Services. On Building Solutions, if you look at our backlog slide on Slide 10, we really want to see new orders of $20 million a quarter and revenue of $20 million a quarter, which is what we view as a normal, mid-cycle run rate. We have lower-than-normal capacity utilization at our factories. The best we can say is that new orders of $17 million in Q2 were the highest quarterly number we've seen in a year. But we went through four quarters where new orders were below $20 million and they continue to be below $20 million, so our backlog is low. Zooming out, the environment and real estate construction are very local markets. We're in two markets, the Northeast and the Upper Midwest, which are generally lower growth than other parts of the country. There's also less competition there; people aren't itching to enter those markets. Single-family is weak, and commercial multifamily is very weak. Where we have traction is in more specialty areas like workforce housing, affordable housing, healthcare- and education-oriented housing, assisted living and senior housing—there are projects to win. The biggest project we've won year-to-date was a senior living project in New Hampshire. The projects in our backlog are not with traditional commercial builders of multifamily and single-family; many are in the themes of affordable housing, workforce housing and senior housing. It's a weak environment and we're managing through it. But when you ask what we view as a normal run rate, I would say $20 million of revenue a quarter and a 25% gross profit margin. Over time we think an adjusted EBITDA margin should be 10% to 15%. That implies $8 million to $12 million of EBITDA for a year, which is a little more than $2 million per quarter, and we've been running below that.
Okay, one more for me, if I may. Congratulations on the announcement of the acquisition of Harte Hanks. Two things on that: I took a quick look at Harte Hanks and they have been losing revenue and adjusted EBITDA over the past five years; I think their trailing 12-month adjusted EBITDA is roughly $6 million. If I take your equity value and add their debt, the multiple is about 10x. So my main question is how do you see yourselves reversing that long-running decline in revenue and adjusted EBITDA at Harte Hanks? And secondly, what, if any, impact does this have on the GEE Group investment or the offer you had made for them?
Yes, a lot of questions in there, Joe. When we look at Harte Hanks, we strongly think the investment community should look at things on an apples-to-apples basis. Looking at their balance sheet, we don't see any debt. In Q1, for example, they had $4 million to $5 million of cash and nothing drawn on their revolver. Yes, they have some leases and some pension obligations, but the EBITDA number you cited is after lease expense and after pension expense, and that's how we view it. If you're looking at an EBITDA number that's after lease and after pension, you should take leases and pension out of the liability stack. When you do that and add $10 million to the EBITDA number you cited, I think you're getting into the mid-teens in terms of pro forma EBITDA, and we're buying it for less than $40 million. We think that's a pretty attractive multiple, less than 3x EV to EBITDA by our math. The first part of your question is the most important: what will we do with this business once it's inside of Star? For any acquisition, you have to buy it right. If you overpay, that consequence stays with you, so we have a lot of value discipline around that. We think we're getting Harte Hanks for an attractive multiple, but it only makes sense if we can do something with it after it's inside Star. Initially, our main focus will be on cost synergies, but we also aspire to invest in it and grow it. We see them making some progress on that front; for example, their October announcement about winning Samsung is a great logo and a significant new business win that is ramping up. Our goal will be to stem the declines, stabilize the business, and ultimately grow it. With respect to GEE Group, stay tuned. We did make them a proposal. They have hired an investment banking firm to explore strategic alternatives, that process is underway, and when there is something to announce, there will be something to announce.
Our next question is from Theodore O'Neill with Litchfield Hills Research.
I'm struck by how well Energy Services is doing. Rick, I wonder if you could talk about it; it's up year-over-year, but it's also up sequentially. Can you give us some more detail on what's going on there?
Go ahead, Rick. I may add to it after you're done.
All right. Thanks, Theo. Happy to address that question. We're very pleased with the way the business is going. One aspect of it is that historically, as the previous owners had approached retirement and had known they were going to sell the business, not surprisingly, they held back on capital investments. So with their retirement and a new younger group of leadership in the company, we saw what the opportunities could be for a relatively small company in the oil fields and elsewhere. And they were unable to fulfill customer requests simply because they didn't have the tools available in inventory to deliver for rental. So we've done a good deal this year in investing in those tools, and it's paid off. It's really helped us be able to deliver a full complement of what our customers require. So there have been a number of opportunities in some very, very large drillers that we've been able to satisfy, and that's showing up in the bottom line.
And does that show up in CapEx?
Yes, it shows up in CapEx. And so since we bought it a year ago, we have increased CapEx. That's a temporary increase. Interestingly, we're seeing the benefits of that. And what we see going forward is lower CapEx. Those were one-time in nature. So we'll go back down to more maintenance levels of CapEx, which I would estimate to be around $1 million a year. We've been spending probably twice that. And we'll see the growth. We're just starting to see the growth from those investments. And I think the team on the ground has done a really good job. If you think about Q2, that was way too early to see any benefit from increased activity in the traditional energy sector, which is the original part of the business. They have excellent traction in some of these other segments that they've branched out into. We highlighted geothermal, mining, but there's also improvement in water wells, and they've gotten involved with some drilling for things that are in the industrial gases category. So things like hydrogen, helium, carbon capture. And if there's one thing I would point the investment community to take a look at a company called Fervo. It went public earlier this year. They have a corporate presentation that's out there in the public domain. Just look at the projects that they're planning to do between now and the end of the decade. It's a lot of projects.
And that's your opportunity set as well.
Exactly.
The next question is from Michael Mathison with Sidoti & Company.
Good morning, and congratulations on the merger.
Thank you. It's not done yet. We've signed the agreement. We're a long way from getting to a closed deal, but our plan is to get there.
So, plunging into some of the details of the acquisition, how long of time do you think it would take for the $10 million in synergies to be realized? Is that 6 months or a year? What's your feeling about that?
That's a great question. It's hard to answer precisely until we get deeper into it and closer to closing, and hopefully we'll be able to give more color then. We're thinking about it in phases. Phase 1 is eliminating anything that's duplicative. This is true for any two public companies that merge: on day one you don't need two audits, two boards, two sets of D&O policies, and there are many fees and expenses associated with being a public company that can be removed. Those items should be eliminated quickly, likely in the first quarter. Phase 2, which will also be implemented fairly quickly, focuses on the corporate team. In areas like finance, accounting and IT, both companies have teams in place and you simply don't need two of everything. Over time there could be additional cost synergies from running the businesses more efficiently under the Star umbrella rather than maintaining the current separate structures. I would point you, Michael, to their financial statements; they include an adjusted EBITDA table that highlights the corporate costs, and that's where many of the merger synergies will be realized. I would hope that, similar to the Star and Hudson merger we completed about a year ago, we will have fully realized the $10 million within a year.
Okay, that seems like a reasonable timeframe. I just wanted to get your views on it. Second question: as was said earlier, this business, a set of businesses, has seen declining revenue. But when I took a look at it, I noticed that the revenue declines are quite concentrated in one of their segments, one called Revenue Solutions, down 30% year-over-year. Could you talk a little bit about what that segment does and how you would manage it differently to put it back on a revenue growth track?
Sure. So this business does a lot of marketing services. There's some data and analytics that they do. It's an outsourced service. So you can ask Harte Hanks questions about that. Our perception is that it's due to a variety of things, some clients deciding to in-source instead of outsource. And this is an area where things are changing really rapidly due to AI and kind of all things digital. And when I think about what we're doing on the Hudson side, we've launched a digital initiative. We brought in a very talented person, Steph Edwards, from a bigger company, and she is head of our Digital Division. And we're staying ahead of the curve, and there's a lot of businesses out there that are going to change because of everything going on in the world, and there's going to be winners and losers, and we are determined to be a winner. So we've already incorporated digital into our service offering. Clients on the Hudson side are adopting it at different speeds. And our plan is to look at all the Harte Hanks businesses and do something similar that's already underway at Harte Hanks. We're just going to work with them and enhance and accelerate what they're doing.
Great, thank you. I just had one more question, and it goes back to the Hudson side of the business. So maybe, Jake, it's a question for you. If you could just kind of give us some color on revenue trends going forward in each of the three regions, kind of strong or weak or flat?
Yes, thank you for that. I'd say a couple different things. As Jeff mentioned, if you look at our business and you look at the projection and the direction we're on, we've made a lot of significant strides, right? We've retooled our go-to-market strategy. We've invested heavily in our digital solutions. We've brought on additional geographies to better support our clients, which is all phenomenal. The renewals that we've been under and a lot of the renewals that we're seeing right now are non-competitive. So that just tells us in our business that we're servicing our clients. We're bringing new ideas. We're staying ahead of them both from a capability capacity, but also from all overall support model, right? What we're seeing now and what we look at with the businesses and we look at where we're going to go, there is something to say about the buying habits of some of our clients. We've added a lot of great new logos this last quarter and this year in and of itself, but some of that business, that revenue is being slower to come to fruition. And what I mean by that is clients are a little bit hesitant on the number of hires or the investments that they're making. And with the attrition still being relatively low, that's impacting some of the decisions. Specifically talking about your question, I do see the Americas being a significant growth opportunity for us. And when I say the Americas, I mean both North and South America. I think EMEA as a whole will be, with all of the geopolitical issues going on in the region, will still be, I would say, medium to soft. And in APAC, we'll see some spikes in certain countries, specifically, as I mentioned, in the earnings call on around our acquisition in Japan and growing that geography. We have strong hopes to be able to continue to land and expand in our clients there. But if I look at the back half of the year and thinking about the direction we're going to continue to focus on is, one, expanding out our footprint and land and expanding new geographies with our clients and our prospective clients to ensuring that those new logo clients that we have won and those clients that we are speaking with currently today, we're quicker to help them support and stand up that support model. So one, we can provide that service to our clients, but also drive revenue growth for Hudson Talent Solutions.
Well, great. That concludes my questions and good luck in the current quarter, and good luck in the rest of the year.
That concludes today's question and answer session. I will now turn the call over to Jeffrey Eberwein for closing remarks.
Well, thank you for the questions, and thank you for your interest, everybody. We are here and available. Our contact information is in the press release and in the earnings slide deck. We're excited about what we're doing. I would say morale and enthusiasm is really high at our company and at our operating subsidiaries, and we believe that will translate into improved financial performance over time, even though we have some areas of softness and some areas that are below our expectations. We're working through it and we're excited about the potential acquisition of Harte Hanks and some other opportunities that we're looking at. So look forward to showing you what we can do in the future.
Thank you for joining the Star Equity Holdings Second Quarter Conference Call. Today's call has been recorded and will be available on the investor section of our website, www.starequity.com. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.