Star Equity Holdings, Inc. (STRR) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Digirad Corporation 2013 First Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded, May 6, 2013. I would now like to turn the conference over to Matt Clawson of Allen & Caron. Please go ahead.

Thank you, Alicia, and thank you all very much for joining us this morning. If you didn't receive a copy of today's press release and would like one, please contact our office at (949) 474-4300 after the call, and we'd be happy to get one to you. 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, operation, portable imaging services, product division, financial results, estimated market share 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 or 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 CEO, Todd Clyde. Joining Todd this morning are Jeff Keyes, Digirad's CFO; and Matt Molchan, President of the DIS Division and incoming President of Digirad. Todd, Matt and Jeff will discuss the 2013 first 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 Todd Clyde. Good morning, Todd.

Thank you, Matt, and I appreciate everyone joining us today for our first quarter 2013 results conference call. At our last results call in February, we announced the framework for a new strategic direction at Digirad. The new strategy was the result of literally months of market research, discussions among our Board of Directors and our shareholders and consultation from leading experts in today's healthcare marketplace. To recap briefly, we decided Digirad needed an operational and strategic restructuring. We need to be a leaner, more nimble but ultimately stronger company, more focused on generating cash flow, expanding EBITDA, with the goal of creating shareholder value. Going forward, we will drive our Diagnostic Imaging business in a more focused and operating efficient manner, selling cameras and maximizing the value of our excellent customer service and maintenance business; our Digirad Imaging Services or DIS business, which we believe is scalable with growth and expansion in acquisition opportunities and is well suited for success in what we all know as a volatile healthcare market. We also announced that Matt Molchan, who has been successfully running our DIS business, had been promoted to President of Digirad. Matt is here with us today and will talk more about DIS in a few minutes. Matt and I are currently working side-by-side during this restructuring and transition time for the next few months. At that time, Matt will take over as President and CEO of Digirad. Our headquarters will also move to Atlanta to further reduce costs and overhead, and I will step down from my current role as CEO. We will continue to sell our cameras in the marketplace, but our goal now is to no longer burn cash in this business, a goal we are attaining by eliminating many of its associated costs. And we will continue our customer service organization and selling focus, which is now being run by Virgil Lott, who we promoted to President of Diagnostic Imaging a few months ago. Again, the goal of this restructuring process is to maximize cash flow from operations and return value directly to our shareholders. Based on our analysis, we believe we'll be able to generate annualized free cash flow in the range of approximately $3 million to $4 million. At the same time, in line with our goal of returning value directly to our shareholders, we've launched a more aggressive stock repurchase program. Our board has voted to increase the allocation to our stock repurchase program to $12 million. So today, about 2 months into this transition period, we are making great strides. We're well into our restructuring and have eliminated a lot of the investments costs we have committed to take out of the business. The cost-cutting we have done has already gotten us an annual savings, and at the end of the quarter, we have implemented approximately 35% of our total headcount reductions with further progress as of today and all planned reductions in force being completed by the end of Q4. Today, our management team has been rightsized and flattened, based on our new healthcare services focus. Our CFO, Jeff Keyes, will get into financial details in a moment. At this time, I'd like to turn the call over to Matt Molchan. As you remember, Matt came to us in 2007 when we acquired Ultrascan, the Southeast's largest mobile ultrasound business, and during the past year has served as the President of DIS. Matt has been heavily involved in the restructuring process. Matt?

Thanks, Todd. I speak for everyone on our team at Digirad when I say we are incredibly energized by this process and the new direction we are taking. We see DIS as a great growth and expansion opportunity. We are not only building the business among the customers we already have, but we are aggressively seeking out appropriate acquisitions that align to our current business in key regions, increase our cash flow and are accretive almost immediately. That was the model we followed recently when we identified and acquired a leading provider of imaging services in the Southeast. The acquisition gave us a stronger presence in the key southern region, allow us to take advantage of the local operational leadership and infrastructure. The acquisition was made based on a very disciplined approach, so it is expected to pay for itself rapidly. I'm happy to say we've already, in only a few weeks time, fully integrated our new acquisition and have begun recognizing revenue. I believe our ability to successfully integrate an acquisition in our DIS business bodes well for the execution of our operations team and the value of our business model going forward. If we can continue to build our business with acquisitions like this, not huge acquisitions that take years to pay off but disciplined acquisitions with a short payback period, we'll be successful in maximizing and expanding our cash flow and generating returns for our shareholders. Todd and I are working closely together on the restructuring in all aspects of the transitioning in the role of CEO. I am looking forward to our future success, and I think we are well positioned to take advantage of some of the positive opportunities in the marketplace. Now I'd like to turn the call over to our CFO, Jeff Keyes. Jeff?

Thanks, Matt, and good morning, everyone. I'd like to begin by reiterating what I said on our last call. As a company and a management team, we have a high sense of urgency on getting all of our cost-cutting measures implemented and completed and setting up our business for success in the future. In the release today and in my prepared comments, I will make references to both GAAP results, as well as adjusted results, that do not included the nonrecurring charges associated with the restructuring, which are considered a non-GAAP financial measure. As Todd mentioned, since there are significant restructuring activities going on now, we did see a significant -- we did see significant charges during Q1. While we will continue to see restructuring activities and lingering charges throughout the year, the biggest hits, expense-wise, are occurring in Q1 and Q2. Having said that, we anticipate the company will move into profitability, notwithstanding restructuring charges in the second half of 2013 and from that point moving forward. In Q1, we had approximately $1 million in expenses that's related to restructuring. Those expenses were primarily related to severance-related costs. I would like to note further as a result of our structuring efforts, we were required to take charges related to the surplus inventory and other manufacturing-related charges during the quarter, all flowing primarily through gross margin. Though these activities are primarily related to our restructuring efforts, they are not allowed to be treated as restructuring for GAAP purposes, nor have we backed them out of our earnings in this earnings release as part of the adjusted results. These inventory charges totaled about $350,000 during the period. Although there is the possibility that we might have similar charges as we move forward, it is not anticipated that they will be at this level. Further, our ongoing expenses currently include our facility costs located here at Poway, California. We are actively looking to exit this facility and downsize our footprint. However, based on the market conditions, we cannot reasonably estimate the timing of that event. Therefore, those costs will continue to be part of our P&L as we move forward. Now for a brief summary of this quarter's activity. Total revenue for the first quarter 2013 was $11.5 million compared to $13 million for the same period in the prior year. DIS revenue for the first quarter of 2013 was $8.9 million compared to $9.3 million in the same period of the prior year. Diagnostic Imaging revenue, which includes our camera sales and customer service business, for the first quarter of 2013 was $2.6 million compared to $3.7 million for the same period in the prior year. As was anticipated, there was some level of disruption in our camera sales that occurred due to layoffs and restructuring activity that occurred during the end of the period. The DIS side of the business was relatively stable on a business-per-day basis, though we did experience some pricing pressure during the first quarter. Gross profit for the first quarter of 2012 was $2.8 million or 24% of revenue compared to 3.7 -- I'm sorry, gross profit for the first quarter of 2013 was $2.8 million or 24% of revenue compared to $3.7 million or 28% of revenue in the prior year quarter. Gross profits were impacted by fewer number of cameras sold, as I've previously mentioned, as well as a favorable workers' comp settlement in Q1 2012 that positively impacted the margin for that period. GAAP operating expenses for 2013 first quarter was $5.2 million. Total adjusted operating expenses, which backs out the nonrecurring restructuring expenses, was $4.2 million. GAAP net loss for the first quarter of 2013 was $2.4 million or $0.13 per share compared to a net loss of $1.3 million or $0.07 per share in the same period of the prior year. Adjusted net loss was $1.4 million, about flat with the prior year period. Cash and cash equivalents and available-for-sale securities totaled $25.8 million as of March 31, 2013. Cash and cash equivalents and available-for-sale securities totaled $27.2 million as of December 31, 2012. During the quarter, we only purchased a small number of shares under our $12 million stock repurchase program, primarily as a result of the fact that the program was implemented late in the quarter in accordance with SEC rules related to a company being able to implement 10b5-1 programs during the blackout. As we move forward, our shareholders can expect a higher amount of repurchases. Now I'd like to turn the call back over to Todd.

Thanks, Jeff. To summarize, we spent many months studying our Digirad business model and how it fits into the modern healthcare marketplace. As a result, we have made some very important decisions about the future of Digirad, and we have immediately put those decisions into action. We are a leaner, more cash flow-oriented business today, focused on our DIS model as the primary growth driver in the future. And as Matt said, we have already completed and integrated our first acquisition. By the end of 2013 and early 2014, once the restructuring is completed and the expenses and transitional shifts have been made, the new look for Digirad, both financially and operationally, will be very clear to our investors. At the point of transition process, we, along with the Board of Directors, have taken steps to strengthen our corporate governance efforts. We have established a CEO Stock Ownership Policy, amended our nonmanagement directors' Stock Ownership Policy, adopted a board term limit policy of no more than 10 years and put an annual cap on stock equity awards. All of these steps were made as part of the board's commitment to best practices and ensuring accountability to our shareholders, first and foremost, and based on listening to our shareholders and the feedback rendered by them. Digirad is certainly in a state of transition, but we believe we are headed in the right direction, particularly in terms of the transitional nature of the healthcare marketplace today. You should see improved results in the second half of 2013. With that, we'll turn the call over -- open for questions.

[Operator Instructions] And our first question comes from the line of Ed Schwartz with Schwartz Investment. Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: I have a couple of questions for you. How many shares have you repurchased already?

We --Ed, this is Jeff Keyes. Are you talking about for the quarter or are you talking cumulatively? Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Both, if you have the numbers.

So for the quarter, there is just a minimal amount of shares repurchased. It'll be displayed in our 10-Q that we'll file later today. But for -- cumulatively, we've bought back about -- I think it's 1,080,000 shares, give or take, under our buyback program. As I mentioned, the announcement in an increase to our buyback program incurred late in the quarter, and we only had a short window to implement the plan, as well as wait for a small cooling-off period before they start being -- we start -- able to be bought back during Q1. Therefore, there is just minimal activity because there is only a few open trading days to buy back shares before we cut off at March 31. Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Okay. And this morning, in your press release, you mentioned something about acquiring other companies to complement your business. Acquiring -- doing that with the share buyback program, don't you think you'll be spreading yourself thin?

When you say thin, are you talking in terms of cash flow or -- describe what you mean by that? Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Yes, in terms of cash and cash flow.

Yes, our intention, if you kind of think about it philosophically, we certainly have cash on the balance sheet. We'll use some of that cash. We expect most of these acquisitions to be a little bit smaller in nature. And ultimately, what our goal is, is to build the cash generation of the business and use some of that cash for acquisitions and return some of that cash to the shareholders through the repurchase program. So we don't see ourselves kind of spreading ourselves thin in the process. Edward Augustine Schwartz - Gregory J. Schwartz & Co., Inc.: Okay. And one other quick question. I think your annual meeting was last Friday. Do you have the results of the proxy vote?

Yes, it's a good question. I know -- I'm sure many people on the call are asking that exact question. The process is that the inspector of elections is tallying all of the votes, putting all that information together, then they have to provide that information to the dissidents and allow them to review the information, and that will be reported. We'd expect that to happen sometime later this week. We're anxious to be able to get those things out into the marketplace as well. Obviously, we've put out a press release today that kind of talks about us continuing down the path of the strategy that we're on. But outside of that, we've made a decision to allow the results to come out after we've gone through the right process.

I'm showing no further questions in the queue. At this time, I'd like to turn the conference back to management for any final remarks.

Great, thank you. This is Todd again. We appreciate all of the feedback that we've received from shareholders over the last handful of months. We continue to be very dedicated to listening to our shareholders and responding accordingly. We also appreciate that there've been lots of discussions recently based on the contested proxy process, and we will certainly get the results of that out to you as soon as we can. We're excited about the direction of Digirad. We are very encouraged by the potential to grow the DIS business through acquisition, as well as through new service offerings. We are well on our way in terms of restructuring and pulling costs out of the business, and we believe that, that number will come in very well with what we've expected, and you'll start to see improvements in the second half of the year. So we appreciate your patience. We know there's lots of restructuring activity going on right now. But you will definitely see improvement as the months go forward. Thank you, again, for joining us on our conference call this morning.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.