Star Equity Holdings, Inc. (STRR) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to Digirad Corporation's Fourth Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Risa Lindsay. Thank you. You may begin.

Thank you, Rob, and thank you all for joining us this morning. If you didn’t receive a copy of our press release and would like one, please contact our office at 858-726-1600 after the call, and we'd be happy to get you one. Also, this call is being broadcast live over the Internet and may be accessed at Digirad's website via www.digirad.com. Shortly after the call, a replay will also be available on the company's website. I would 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, acquisitions 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 today'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 2015 fourth quarter and full year 2015 financial 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 would like to turn the call over to Matt Molchan. Good morning, Matt.

Thank you, Risa. Good morning, everyone and thank you all for joining us today for our fourth quarter and full year 2015 results conference call. I am very excited to be talking with your today about another tremendous year at Digirad which had many significant accomplishments including our fourth quarter in which we increased our consolidated quarterly revenues year-over-year by 10% and increased our adjusted EBITDA by 44%. Let’s now take a quick look back and reflect on our achievements over the past year. We increased revenue 9% year-over-year. We increased adjusted EBITDA by 31% year-over-year. We closed the MD Office Solutions acquisition adding to our footprint in Northern and Central California. We closed the DMS Health transaction on January 1st effectively doubling the size of our company. And 2015 ended as the most profitable year in Digirad’s history. We are very excited about these accomplishments and add them to the achievements we have made over the last few years since our restructuring in 2013 which essentially transform Digirad into a growing profitable cash flow generating healthcare services and equipment company with a consistent dividends for the last nine quarters. However, we cannot dwell in the past, we now aim our sides to the future for which we are very excited. For a near term efforts we focused on integrating DMS and running and growing our core businesses, we believe there are still many other opportunities out there and we’ll continue to look at those opportunities there are the right operational and financial fit for Digirad. Now for business by business update. Our Diagnostic Services business which includes our mobile diagnostic imaging activities, Digirad Imaging Solutions or DIS and our cardiac monitoring business, Telerhythmics both continue to perform well. DIS continues to keep up solid volume year-over-year and our recent MD Office acquisition is performing above our expectations. On a market by market basis, we continue to see some challenges with the market in general at DIS but we believe we are addressing those challenges which will continue to allow us to growth organically as we move forward into 2016. Our Telerhythmics business continues to ramp up generating increases in year-over-year revenue as we continue to add more volume. Our Diagnostic Imaging business performed well during the quarter, increasing its year-over-year revenue by 6% and ended the quarter with a good pipeline of business and forward outlook. As we move forward, we continue to put effort into international markets as well as participating in larger buying organization to gain customer reach for our cameras. As a reminder, our overall corporate strategy at Digirad is to focus on three main areas for growth. Area number one, acquisitions, our goal is to acquire companies that fit within our business model by providing diagnostic products and healthcare related services on an as needed, when needed and where needed basis in a very financially discipline manner. Area number two, adding new services to our portfolio that we can provide to our current distribution channels. And area number three, organic growth within our existing portfolio of services and channels. As we previously disclosed, we closed the DMS Health acquisition on January 1st. We continue to be very excited about this acquisition in the scale that brings to the new Digirad. DMS Health is an integrated healthcare services company that is headquartered in Fargo, North Dakota that operates in two primary segments; mobile healthcare, which includes mobile, fixed site and provisional diagnostic imaging and mobile healthcare solutions throughout the United States with their biggest concentration of customers in the upper Midwest; and medical equipment sales and service, which sells and services Philips Medical Equipment through their exclusive relationship with Philips, North America. To further my comment earlier about the potential further future acquisitions, Jeff and I continue to look at potential opportunities and there continues to be a number of interesting acquisition targets. As we have stated before, the timing and size of these deals vary but we believe there is still a lot of opportunity as long as we can secure these deals at the right financial metrics. In the near term, almost all of our effort is going to be focused on integrating DMS Health as that is our number one priority. However, once we get some of the major integration items with DMS Health completed, we’ll be able to focus more attention on further acquisitions. Now, I’d like to turn the call over to Jeff to give other comments and a more detailed financial update for the quarter and year. Jeff?

Thanks Matt. Good morning, everyone. In the earnings release today and in my comments, I make references to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include non-recurring charges such as those associated with acquisition integration charges and purchased intangible asset amortization. In addition, I will make reference to adjusted EBITDA which is also a non-GAAP major that further excludes stock based compensation. We believe the presentation at these non-GAAP measures along with our GAAP financial statements and reconciliations provide a more thorough analysis of our ongoing financial performance. You can find the reconciliation of our results on a GAAP versus non-GAAP basis in the earnings release today. I will start with the brief summary of the quarter’s activity. Total revenue for the fourth quarter of 2015 was 15.6 million compared to 14.1 million for the same period last year. Revenues for diagnostic services which include the acquisition of MD Office solutions in March of this year - March of 2015 were 11.7 million compared to 10.5 million for the fourth quarter of last year. Diagnostic Imaging revenue was 3.9 million for the fourth quarter of 2015 compared to 3.7 million in the fourth quarter last year. Our overall gross profit percentage in the fourth quarter of 2015 was 30.1% compared to 30.3% in last year’s fourth quarter. In Diagnostic Services, the gross profit percentage for the fourth quarter of 2015 was 22.6% compared to 24.2% in the fourth quarter of 2014. In our Diagnostic Imaging business, the gross profit percentage in the fourth quarter of 2015 was 52.8% compared to 47.4% in the fourth quarter of 2014. Overall, the gross profit percentage in Diagnostic Services businesses was impacted by decrease in the year-over-year pricing was underlying cost remaining relatively constant. Pricing has been impacted by macro market conditions as well as competition at a local level. Moving forward, as Matt mentioned, we believe there is opportunity to focus more on value added services to increase margins as well as the ability to reduce our overall cost structure. Some of these items were introduced in the fourth quarter of 2015 but we expect many more to be deployed in 2016. In Diagnostic Imaging, our gross margin was impacted based on the timing and mix of cameras sold as well as reduced manufacturing cost primarily from the benefit of some previously reserved inventory releases created from our restructuring effort in early 2013. As we stated last quarter, essentially of all this previously reserved inventory has been work through as of December 31st and these releases will not positively impact our margin as we move forward into 2016. As a reminder, we do experience some seasonality in our businesses and notwithstanding other factors the fourth and the first quarters are our slowest quarters but the second and third quarters being our highest revenue quarters. Of course, we also experience some volatility in revenues and earnings based on the timing of the sales by nuclear imaging cameras, notwithstanding acquisitions we would expect this trend to continue as we move forward. Further, we also expect this seasonality trend to be consistent with the inclusion of DMS Health as we move forward. The mobile healthcare business experiences some of the same seasonality concepts as Diagnostic Services. And the medical equipment sales and service business experiences timing as based on the timing of equipment sold similar to Diagnostic Imaging. At the end of December, cash and cash equivalents and available-for-sales securities totaled 19.1 million. During the quarter, the business did produce good cash flow which was offset by normal working capital changes in the payment of our regular cash dividend. Moving on the bottom line results for the fourth quarter, adjusted net income was 1.3 million or $0.07 per diluted share compared to 0.9 million or $0.05 per diluted share in the fourth quarter of 2014. Adjusted EBITDA was 2.1 million for the fourth quarter of 2015, an increase from the 1.5 million in the fourth quarter of 2014. Regarding our 2015 financial guidance, we achieved above the high end of our adjusted EPS and adjusted EBITDA levels at $0.23 per share and 7.2 million of adjusted EBITDA respectively. Our 2016 guidance, we released earlier today that we would achieve revenues of between 125 million and 130 million and adjusted EIBTDA of 17 million to 18 million. Of course, this includes the guidance for all of Digirad including DMS Health effective January 1st, 2016. We do expect to incur approximately 2 million in non-recurring deal closing and integration charges in 2016 for the integration in the closing of DMS Health. These costs will be segregated as we move forward, so we can focus on the core results. Next, following up some comments on Matt made on DMS Health earlier and integration activities. Beyond integrating some back office activities, we plan to run the business units of DMS Health as separate business unit of Digirad. Moving into 2016, we’ll be reporting the results via the following business segments; Diagnostic Services, which includes the traditional Digirad mobile healthcare; Diagnostic Imaging, which includes the traditional Digirad sales of our manufacturing nuclear imaging cameras and after warranty support of those cameras; Mobile Healthcare, which includes the DMS Health business and mobile diagnostic imaging and healthcare solutions; and Medical Equipment Sales and Services, which includes the DMS Health business of selling and services Philips equipment within the designated territories via the exclusive relationship with Philips. This reporting structure will be presented in our Q1 2016 financial statements and prior periods will reflect this reclassification of presentation. As you know, we closed on a financing facility with Wells Fargo on January 1st, 2016 to help fund the acquisition of DMS Health. This credit facility has three components; first, a line of credit, the line has a borrowing base about 12.5 million bares interest and LIBOR plus 2%. A tranche A, with a borrowing base up to 20 million and it bears interests at LIBOR plus 2.5%. And a tranche B, which has a borrowing base of 7.5 million and bears interest at LIBOR plus 5%. As a close, we drew 20 million on the tranche A and 7.5 million on the tranche B. The line of credit borrowing will of course change on a daily basis based on the business needs and cash flow requirements. I can say at the closing after the transaction, related cost and notwithstanding certain restricted cash requirements related to the facility, the company’s net debt position, net of cash outstanding was approximately $18 million. As we move forward, we’ll be carefully watching our capital and capital deployment to ensure we maximize values to our shareholders. And finally as a reminder, we announced on February 1st, 2016 our regular quarterly cash dividend of $0.05 per share that will be paid on February 29, 2016 to shareholders of record of February 16, 2016. Now I’d like to turn the call over to the operator for questions.

Thank you. At this time we’ll be conducting the question-and-answer session [Operator Instructions]. Our first question comes from Larry Haimovitch with HMTC. Please proceed with your question.

Good morning, Matt. Good morning, Jeff.

Hey, good morning, Larry.

Good morning.

So good year overall, I think you have lot of feel very, very pleased about. I just wanted to check in on the comments you made about some of the pricing issues you mentioned it. Could you elaborate on it, is it countrywide, is it just welfare in certain markets or just given me some little more flavor on that if you wouldn’t mind?

Yeah, it’s - you know for the most part what we are seeing it’s in certain areas where we do have competition with some of the smaller what we call mom pop type companies, that’s usually where we are fighting with some - with price battle. So that’s the areas that we are really experiencing I guess our biggest issues as it relates to price countrywide.

Yeah. And then how do you respond, is it you know the response based on the individual market, I mean there is probably not a one stop response right, it depends on the individual place where you are competing I am assuming?

Absolutely, you know it depends on a number of factors you know route utilization is normally the biggest factor, right. So we look at our routes across the board from a profitability standpoint and you know we made our decisions based on that. So you know we can - sometimes you know price negotiations could also make a changing days of service and what not in order to better utilize our routes, we would do that. But - that’s you know - so - but it is an area by area, it really location by location decision.

And then my follow-up question is on acquisitions, obviously you’ve just closed on a major deal double the size of the company and really a transformative deal for you. I would assume that integration keeps you pretty busy and if there are any acquisitions this year they probably be just very small little tuck-ins?

That’s correct. At this point you know obviously we are going to continue look for opportunities and as opportunity these arise, we will definitely spend our time and effort as necessary. But right now, our main - as we’ve stated, our main focus or number one priority is to integrate DMS, but we’ll continue to look at opportunities as they arise.

Great, thank you, Matt.

Thank you, Larry.

Our next question is from Alex Silverman with Special Situations Fund. Please proceed with your question.

Hey good morning.

Good morning.

You said you drew 20 billion tranche A, 7.5 tranche B, what was cash on a pro forma basis?

I mentioned from a net debt position, we’re at roughly $18 million at the close, of course our cash requirements will fluctuate based on timing of CapEx and dividends et cetera, but that was where we’re at roughly at the close.

Ah, I missed that. I thought you said 18 million of cash, my bet. Okay, so 18 million of net debt on a pro forma basis?

That’s correct.

Okay. Can you help us with the margin profile of the two new units if you want to call him that?

Yeah, I’d say that we’re going to give more information as we move forward on that. The one thing that we are still working through is where our guidance’s revenues in the EBIDA bases is that we are completing the purchase accounting for the businesses which could impact some of the margins. So we’ll give more color on that as we move forward. What I can say is the, the margin will be roughly in the same general ballpark as traditional Digirad business, but I can’t really give anymore color than that until we finalize the purchase accounting and push that information through.

So in theory, mobile would have something similar to your existing service and medical equipment and services would have something close to imaging?

Very, very roughly that …

Very roughly.

Yeah, the only comment I would say is that traditionally those businesses could be a little bit higher than our current businesses but again we’ll give more color on that once we finalize all the information.

And from a synergy standpoint, how should we think about it with your existing businesses?

You know we certainly feel there will be eventual synergies and right now we are just going to continue to run. I mean our goal is to continue to run the businesses as separate units in separate segments, but certainly there will be I foresee different synergies with the services that we’re providing such as our Telerhythmics business into some of the hospital business that DMS operates at this point and things like that. So we’re still uncovering that, that’s our part of the integration as we integrate not only back office operations but as we also integrate customer call points as well.

Okay. And my last question, what did MD Office contribute in the quarter, just so we can back out organic?

Sure. They contributed roughly 750,000 during the quarter of revenue.

Great, thank you so much guys.

Thank you, Alex.

Our next question is from Juan Molta with B. Riley & Company. Please proceed with your question.

Thanks for taking the question. First question is, in the 2016 guidance, you are introducing the range that implies a slightly better outlook, can you - is that something that you can attribute to something in particular?

So, Juan, we provided a range. I think we updated everybody before the close of the DMS Health on what we anticipated as a combined company. We stated that it would be over a 125 million of revenue and over 17 million of EBITDA. So the new range, the new guidance, now that we’ve closed the business and work through a budget plan for the year is a 125 million to 130 million and 17 million to 18 million of EBITDA. I would look at that as just refinement of what we had before the close. I don’t think we changed our outlook and thoughts on the business, we just had better information now that we have the business flows and we booked through more planned process.

Okay, very good. And regarding the DMS integration, do you anticipate any major changes in personal or property on equipment?

Now the integration is mainly back office integration. We are focusing on HIT Finance and really just getting nice process flow between the companies so we can jump start two tier the ability to get more synergies out of the company. So from a personal property location, we’re really immerging two companies with not much changes at all in those areas.

Okay, perfect. On the regulatory front, some insurance providers and UNH in particular have stopped providing affordable care coverage, is that going to affect DMS volumes given the part of the country where it’s located?

We are not anticipating that that will have a major impact on their volumes, based on their relationships on who they operate with their - the base service. We do not anticipate a weakening of demand or changes from that standpoint.

Okay that’s good. And then I don’t recall as this you’ve mentioned, is this DMS have any large agreements in place with healthcare systems in that part of the country?

They operated - none of them would quality above the 10% threshold, but they do have a number of very significant relationships through the Midwest with a number of larger hospital systems and also a number of smaller rural organization and critical assets hospitals as well.

And are there any in the words we can get another, I refine to the something similar to what you have with Emory and Georgia that could come view in the near future with DMS, or you in top …?

Yeah, I mean you know we definitely have a focus on the larger hospital systems that are in those areas and there are relationships that are going. Now there is deep and as wide as the Emory locations not this point but obviously that would part of our strategy as we continue to push our service and our solutions to the highest levels within the healthcare systems as they understand the value that Digirad can bring in terms of the efficiency of bringing healthcare services on as needed, when needed and where needed basis.

Okay, alright. And a final question and I’ll get back in the queue. The Diagnostic Imagining revenues were little lighter than we were forecasting here and that was off of the strong sales pipeline that you had mentioned with the Q3 release, so was that 3.9 million in revenue in line with your internal expectations or it was a little bit below and was that just - is that just a lumpiness in the business?

I mean there is some lumpiness. There was a little bit below where we anticipated, we did have some timing issues that affected us at the end of the year where we’re anticipating a couple more deals that were actually pushed out into January.

Okay, do you have the count is to how many unites you sold?

Yeah, we sold 31 cameras last year.

Okay. Alright and that’s all, thank you very much guys.

Thank you, Juan.

[Operator Instructions] Our next question is from Eric Gomberg with Dane Capital Management. Please proceed with your question.

Hey, guys, good morning.

Good morning, Eric.

Just a couple of quick questions, one, I just wanted to make sure I understood correctly and I think you said in the past, DMS, you are not assuming any cross selling or operational synergy in ‘16 to hit the EBITDA targets that you’ve had, correct?

That’s correct.

But longer term, that’s an opportunity for some upside.

That’s correct.

Okay, I just wanted to make sure I understood correctly. In terms of it sounds like, in the short term you are not looking at big deals, longer term I guess it’s - I’d like to hear how you’d characterize your relationship with Wells Forgo, obviously they gave you some fairly good churns, you think there would be borrowing capacity in place for another a large deal after you’ve integrated this one?

Yeah, I think we have a great relationship with Well Fargo, I mean there is premier lending institution out there where we’re really happy we completed this financing arrangement. They are committed to this rate and as we move forward as business operations and potential acquisitions come up, they are committed to working with us to make sure that we have the proper capital to get whatever deals done that we need to get done. So I think it’s a good relationship, they will be flexible as we move forward and I look at as a long term relationship.

Well that’s great. I mean our current prices using low cost debt and then equity. And just final question, do you have a preliminary CapEx number you’d anticipate for ‘16?

Yeah, right now from a CapEx standpoint, we are looking right in the range of 5.5 million or so, Eric, I mean obviously if we lane some big business, requires more CapEx then we’ll go above those numbers. If it’s going to be a good set financially for the company, but right now it’s roughly $5.5 million.

Sure, I mean just to do the math, if you’re going to 17-18 million in EBITDA and 5.5 million CapEx and interest expense like I said the rates were talking, it’s probably a million dollars or less. I know you have a $2 million I guess cash integration cost but that’s kind of a one time. So on a normalize basis we are looking at more than 10 million in free cash flow?

Yeah, I think you are in the ballpark of around $10 million , the other things would be just …

I mean notwithstanding working capital changes.

Yeah, notwithstanding working capital changes and don’t forget about that small amount of income tax so we’ll actually to have to pay. I mean we still expect to fully utilize our NOLs and that we have DMS rolled in, we’ll even further be able to utilize those NOLs, but we will have some cash tax expense which I estimate around 6% on an effective rate basis.

Okay, so I mean to talk something on the 10-ish million range is a reasonable number for free cash flow?

But that’s right again notwithstanding working capital changes.

Okay, terrific.

Our next question is from Alex Silverman with Special Situations Fund. Please proceed with your question.

My question was around the free cash flow calculation. Okay, thank you.

There are no further questions. At this time, I’d like to turn the call back over to Matt Molchan for closing remarks.

Thanks Rob. I’d like to close by saying we continue to be on the right track for growth in all of our core businesses. We have the right overall model for the healthcare industry today and where we see it moving in the future, has been proven by our excellent financial performance. Thank you to all of our stockholders and other interested parties who joined us this morning. We appreciate your interest in Digirad. Jeff and I look forward to discussing our results in business update with you next quarter. Thank you.

That concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.