Star Equity Holdings, Inc. (STRR) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Digirad Corp. 2013 Third Quarter and 9 months Results Conference Call. [Operator Instructions] I would now like to turn the call over to Risa [ph] Lisbey [ph]. Please go ahead.

Thank you, Marisa, and thank you all very much for joining us this morning. If you didn't receive a copy of today's release and would like one, please contact our office at (858) 726 1600 after the call, and we would be happy to get you one. Also, this call is being broadcast live over the web and may be accessed at Digirad's website at www.digirad.com. Shortly after the call, a replay will also be available on the company's website. I'd like to remind everyone that certain statements made during this conference call, including the question-and-answer period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements include statements about the company’s revenues, costs and expenses, margin, operations, financial results, restructuring efforts and other topics related to Digirad’s business strategy and outlook. These forward-looking statements are based on current assumptions and expectations and involve risks and uncertainties that could cause actual events and financial performance to differ materially. Risks and uncertainties include, but are not limited to, business and economic conditions, technological change, industry trends, changes in the company’s market and competition. More information about the risks and uncertainties is available in the company’s filings with the U.S. Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as this morning’s press release. The information discussed on this morning’s conference call should be used in conjunction with the consolidated financial statements and notes included in those reports and speak only as of the date of this call. The company undertakes no obligation to update these forward-looking statements. Hosting the call today from Digirad is President and CEO, Matt Molchan. Joining Matt this morning is Jeff Keyes, Digirad's CFO. Matt and Jeff will discuss the 2013 third quarter results, update us on the company's strategy and comment on the company's outlook. A question-and-answer period will then follow. With that, I'd like to turn the call over to Matt Molchan. Good morning, Matt.

Thank you, Risa [ph]. Good morning, everyone. And thank you, all, for joining us today for our third quarter 2013 results conference call. I'm very pleased to report that we had another solid quarter, both financially and operationally. The second quarter in a row in which we hit or exceeded our overall plan in terms of revenues and expense control, leading to a return to profit. Total revenue for the quarter was $12.4 million, and we achieved earnings in the quarter of $2.5 million or $0.14 per diluted share, which included both normal operations and the gains from the sale of our surgical imaging technology to Novadaq Technologies in July. Our CFO, Jeff Keyes will go into the financial results more thoroughly in a few moments. But I'm happy to say that even when you pull out the gain from the Novadaq transaction, the third quarter was the most profitable quarter for Digirad since our IPO in 2004. The third quarter was also our second full quarter under the new operational and strategic framework, we installed in early 2013. To recap briefly, after a thorough assessment in consultation with our reconstituted Board of Directors throughout the early part of this year, we installed a new strategy for Digirad that has increased focus on our outsourced services business that we call, Digirad Imaging Solutions, or DIS. We believe DIS is scalable and offers us the best opportunity for income, cash flow generation, and growth, particularly in the current health care environment. We're still in the midst of implementing this new strategy, and will be through the course of this year and 2014, but so far, we like what we're seeing. These very positive results seem to confirm that we made a smart choice and that we are headed in the right direction. I say this is the right strategy for the current health care environment because our customers are looking for ways to be more cost efficient and cost effective, given the uncertainties they're facing. DIS, an outsourcing model that allows our customers to limit their upfront capital expense cost, fits this cost efficiency scenario, very well. We can provide our services on as-needed, where-needed, and when-needed basis, which is just what our customers are asking for. In addition, we closed a lot of new business in the third quarter, which is typically a slower quarter for us because of summer vacations and other similar interruptions. This year, however, we had growth in new contract activity and we are reasonably confident it will continue into the fourth quarter. This focus on DIS is not to say we de-emphasize our camera side of the business, which we call our Diagnostic Imaging business. Quite the contrary. The same health care dynamic is driving this business as well. The health care industry is looking for ways to be more cost-efficient and has seen that kind of potential in our cameras. Particularly, our portable and versatile ergo camera, which offers more convenience and more potential for diverse activity in a variety of hospital settings. It's a unique camera product, and we are seeing genuine enthusiasm for it in the field. We firmly believe that every hospital in America needs an ergo. Also, we continue to see other opportunities going forward, such as the international marketplace. In August, we announced our international distribution agreement with Dilon Diagnostics who's familiar with the nuclear imaging environment, especially outside the United States. We believe, in time, this partnership can develop into a win for both companies, with placements of our cameras outside the United States. Ultimately, one of the key elements of our restructuring plan was to rightsize the business, and align costs, especially on the Diagnostic Imaging side of the business, to drive profit, cash flow and shareholder value. Again, to this end, we announced in September, an agreement to outsource the majority of the manufacturing of our nuclear imaging cameras, allowing us, over time, to reduce costs and increase margins, as well as be more flexible with our manufacturing process and inventory that we carry. Also, as a part of our new strategic framework, we continue to pursue suitable, accretive, disciplined candidates for acquisition. These are acquisitions that are located in key DIS regions that will allow us to continue to build out the DIS networks, and more fully utilize the work force that is already in place. At this time, I can say we're pleased with the number and quality of opportunities we're seeing in the marketplace. While I can't say exactly when we might conclusively act on these opportunities, I will say that, if they are prudent investments, ones that work strategically within our system and footprint, and adhere to the financial disciplines we are committed to, we will move forward decisively. Please stay tuned on this. Before I turn the call over to Jeff, I'd like to comment on one more bit of news announced this morning. As we continue to look for ways to return value to our shareholders, and because we have returned the company to profitability, we will be providing a cash dividend of $0.05 per share to shareholders of record as of November 12, 2013. Our goal is to maintain a healthy cash balance in order to execute our acquisition strategy, but also to make measured dividend payment sustainable as we move forward. Now, I'd like to turn the call over to Jeff, who will provide the financial results for the quarter. Jeff?

Thanks, Matt, and good morning, everyone. In the release today and my prepared comments, I will make references to both GAAP results as well as adjusted results, for which the adjusted results do not include nonrecurring charges associated with restructuring activities, and the gain on the sale of assets and license agreement associated with our surgical imaging sale. We believe the presentation of these non-GAAP measures, along with our GAAP financial statements, provide a more thorough analysis of our ongoing financial performance. You can find a reconciliation of our earnings on a GAAP versus non-GAAP basis in today's earnings press release. As Matt noted, we have been restructuring the company this year and have incurred some substantial costs associated with the restructuring in recent quarters. Though there are still some minor activities to occur, at this point, the major planned restructuring activities have been completed. We will continue to have lingering costs associated with the restructuring during the next few quarters into 2014, but overall, do not expect these costs to be significant. Now for a brief summary of this quarter's activity. As Matt said, total revenue for the third quarter of 2013 was $12.4 million compared to $11.8 million for the same period last year. DIS revenue for the third quarter of 2013 was $9.5 million compared to $8.9 million in the same period last year. Diagnostic Imaging revenue, which includes our camera sales and related customer service business for the third quarter of 2013 was $2.9 million compared to $3.0 million for the same period last year. Gross profit for the third quarter of 2013 was $3.8 million or 30.8% of revenue, compared to $3.1 million or 26.5% of revenue in the same period of the prior year. Operating expenses, which include the gain on the sale of assets and license agreement with Novadaq for the 2013 third quarter was $1.4 million compared to $4.2 million in the prior year. Total adjusted operating expenses, excluding expenses incurred for nonrecurring items related to restructuring activities and the gain on sale of assets and license agreement for the third quarter of 2013 was $2.9 million, compared to $4.2 million in the same period in the prior year. As Matt noted earlier, net income for the third quarter of 2013 was $2.5 million or $0.14 per diluted share, compared to a net loss of $0.9 million or $0.05 loss per diluted share in the same period of the prior year. Net income, of course, includes the $1.6 million gain for the Novadaq transaction, a sale that includes up to $1 million in deferred payments based on meeting certain milestones as well as potential of product royalties for 5 years. Adjusted net income for 2013 third quarter, excluding expenses incurred for nonrecurring items related to the restructuring activities and the gain on sales of assets and license agreement was $1 million or $0.06 per diluted share, compared to an adjusted net loss of $0.9 million or $0.05 adjusted loss per diluted share in the same period of last year. Cash and cash equivalents and available-for-sale securities totaled $25.9 million as of September 30, 2013, an increase from our June 30, 2013 balance of $22.2 million. Cash and cash equivalents and available-for-sale securities was $27.2 million at December 31, 2012. During the third quarter, we purchased approximately 250,000 shares under our $12 million stock repurchase program at an average price of approximately $2.47 per share. Overall, we continue to believe our share price has an outstanding value, and we'll continue to look at all opportunities within our means to create and return value for our shareholders. As of September 30, we had approximately $6.3 million remaining under our $12 million share repurchase program. Total revenues for the first 9 months of 2013 was $36.8 million compared to $37.5 million for the same period in the prior year. DIS revenues for the first 9 months of 2013 was $27.9 million, compared to $27.5 million of the prior year. Diagnostic Imaging product revenue for the first 9 months was $8.9 million, compared to $10 million for the same period in the prior year. Gross profits for the first 9 months of 2013 was $10.4 million or 28.3% of revenue, compared to $10.5 million or 28% of revenue for the prior year. Gross margin was essentially flat year-over-year, reflecting some of the disruptions we had in the first and second quarters of 2013 related to our restructuring program. Our net loss for the first 9 months of 2013 was $0.5 million or $0.03 loss per diluted share compared to net loss of $3.1 million or $0.16 loss per diluted share in the same period of the prior year. On an adjusted basis, our net loss for the first 9 months of 2013, excluding expenses incurred for nonrecurring items and related to our restructuring activities and a gain on sale of assets and license agreement was $0.4 million or $0.03 loss per diluted share, compared to an adjusted net loss of $3.1 million or $0.16 adjusted net loss per diluted share for the same period last year. Now, I'd like to turn the call back over to Matt. Matt?

Thanks, Jeff. I'd like to close by saying we are very excited and enthusiastic about the progress we're making. We have just had 2 very positive quarters in a row and the future looks bright. The health care market, while still uncertain in many ways, seems to be turning in our direction. Now, I'd like to turn the call back over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Edward Schwartz with Schwartz Investments. Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: A question on the Dilon deal, when do you expect to see appreciable revenues in the foreign operations?

Well, we're just now getting together with Dilon. We've put the agreement together. We've had a couple training sessions with the Dilon team. We have created some strategies of markets that we want to attack, but we're very cautious in trying to put forward an exact timeframe around when those strategies can be executed and actually turn into appreciable sales. However, we feel like within the next 20 -- by the midpart, end of 2014 and into 2015, we should start seeing some cameras sold through that distribution agreement. Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Okay. And, in the third quarter, how much legal expense did you have in reference to the Red Oak battle or whatever you want to call it?

I don't know the exact number. Let me ask Jeff, Jeff if you have some comments on the exact numbers there.

Yes, Ed. Actually, in the third quarter, we didn't have any costs because all the litigation-related expenses were covered by our insurance policy. Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Okay. So you're going to get reimbursed for all your legal expenses?

That's correct. We did have a deductible under the policy, but in the third quarter we -- before we hit the third quarter, we achieved that deductible. So all the expenses were covered and all future expenses -- remaining expenses will be covered under that policy. Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Okay. And I guess, next question is, could be termed pedestrian, but is Red Oak happy now?

You know what, I do not know. I mean... Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Okay. Well, maybe they're on the call and maybe they'll chime in. It would be nice to hear from them.

[Operator Instructions] And our next question comes from the line of Adam Peck with Heartland Funds.

The gross profit margin on the DIS business, was fantastic to see that jump on pretty much a flat sales line. If you look over the last 4 to 6 quarters, is that margin level sustainable, up at 27%?

Well, we've been working hard, Adam, at really improving the density, that's what drives the gross margin in our markets that we're in. So, our teams have been working hard, in really managing the labor lines and really going out and finding more customers, and as that bolus of customers continues to come on, through the sales efforts, in the areas that we're in, it only improves our density. So, we feel very good and very confident about the markets that we're currently in. And we feel like that is something that we can continue to sustain. I will tell you though, there is seasonality in gross margin. Obviously, due to weather, due to vacations and other things like that, that we have to overcome, there is definitely seasonality in our gross margin. But overall, we feel very confident about the strength of DIS and its gross margins.

And then, on the product side, I would assume that, as we outsource the manufacturing, those margins would tick up?

We still have -- obviously, we still have inventory and whatnot and cameras that we have already built and put into finished good inventory, that we still need to continue to work through. We also have inventory that we will be working with our outsource manufacturer, that they will use, as they build our cameras, help us build our cameras, but eventually, the goal of the outsourcing would be that we would have better margins overall than we had in the past.

And I would just add in a little bit on that, Matt, that as you pointed out, we have finished good inventory plus we have parts that we've built up, and the outsourcer will draw off those parts until they exhaust all the built parts and then they'll start pulling them themselves. So over time, the goal is twofold, to reduce cost, as well as, reduce overall inventory balances. But it will take time to go pull through those parts, but slowly, we will accrete up and get better margins on our products as we work through that.

Is there any way that you can size the amount of working capital that could come out of the business?

It's probably a little too early to say because we've just announced the agreement and we're still working through the timeline of them pulling through the parts and how quickly we would do it and where we would eventually land. So we'll have better information as we move forward the next couple of quarters and get deeper into the outsourcing arrangement.

Okay. And how large is the sales force for the ergo?

Well, the way we look at it at Digirad, we're all salesmen of the ergo. So, we're all trying to push through all of our relationships that we have, with the changing environment that we're running into, we have -- our DIS people, as well as our Diagnostic Imaging people, all looking for ergo opportunities. So -- like I said on the call, I believe every hospital in America needs an ergo. So we are using every effort that we can, in incenting our salespeople to get the word out. And people are starting to listen. People are starting to understand the value and the convenience and the versatility of the ergo camera. So we're very confident that we'll have some continued success with that product line.

Is it possible to throw a number on how the pipeline looks?

We don't really talk about pipeline. So, we don't really have -- can't really give you guidance on that pipeline number.

Okay. And then, last question. Are there any other opportunities for sale or partnership of a non-core business?

Right now, they're all core. Right now, we're pushing forward on all cylinders, in our DIS business and our Diagnostic Imaging business. We feel very -- we feel like those businesses continue to be undervalued. And we continue to -- we feel like we can continue to use those businesses to create more and more value for our shareholders. So we're marching forward, very fast and very efficiently, into growing the business.

And our next question comes from the line of Aaron Kennon with Clear Harbor.

Just a quick question on your dividend announcement. It's not clear, both in you stated remarks as well as the release, whether or not you anticipate this dividend to ebb and flow over time, to serve as a onetime, could you perhaps talk a bit about your dividend philosophy going forward?

Yes. Well, this is certainly not a special dividend. This is a first dividend and our goal, as a company, is going to be to use this dividend as a means to return value to our shareholders. So, we intend this to be very continual process. We will, of course, assess every quarter, what our dividend looks like. But for the foreseeable future, we feel like the $0.05 a quarter is definitely within our means and our abilities, given the size and scope of our business and our operation. So, $0.20 a year is definitely our goal at this point. And we will obviously allow our -- especially, right now, given the past history of our business, by doing this first dividend in 2013, we feel like it will also offer some special tax benefits to our current shareholders, as of November 12, and so we are very excited by that. But no, this is not a special dividend, this will be a continued process, and at this point, we're targeting $0.20 a year, in the terms of our amount per shareholder.

And at this time, I'm not showing any additional questions. I would now like to turn the call back over to management for any closing remarks.

Okay. Thank you, once again. We are so excited about Digirad. And it's great day to be a part of Digirad, at this point. We're exited about announcing these results, we're excited about the run up in our stock that's occurred today. But we're not anywhere near a finish line. We are at a starting line. We believe this company has tremendous potential in this market. We are excited to be given the opportunity to lead this business into the future, and this will be the first of the many very positive calls, as we continue to talk to you guys about the success at Digirad. So, thank you, once again, and we look forward to talking to you, next quarter.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thanks for your participation. You may now disconnect.