DLH Q4 2023 Earnings Call Transcript

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December 7, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to the DLH Holdings Corp. Fiscal 2023 4th Quarter Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer and Catherine JohnBull, Chief Financial Officer. The company's earnings release and presentation are available on our website under the Investor page. I would now like to provide a brief Safe Harbor statement, which is also shown on Slide 3 of the presentation. This call may include forward looking statements that relate to the company's outlook for fiscal 2024 and beyond.

Speaker 1

These forward looking statements are subject to various risks and uncertainties We do not undertake any duty to update any forward looking statements. On today's call, we will be referencing both GAAP and non GAAP Financial Measures. A reconciliation of our non GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH's website. President and CEO, Zach Parker will speak next, followed by CFO, Catherine JohnBull, after which we'll open it up for questions. With that, I'd now like to turn the call over to Zach.

Speaker 1

Please go ahead, Zach.

Speaker 2

Thank you, Chris, and good morning, everyone. Welcome to our 2023 4th quarter conference call. I am very pleased With the way that we have finished the year and with our strong position heading into fiscal 2024. But first, let me take a minute To once again thank our dedicated employees for the passion, the commitment and the performance excellence That they have delivered in support of all of our customers' missions and to our corporation. This has been a transformative year for our company And without the steadfast contribution of our team members at every level, DLH would not be the leading technology And services provider that it is today.

Speaker 2

In all three channels, our digital transformation and cybersecurity, Our Science and Research and Development and our Systems Engineering and Integration, all of our members have really shined. So thank you. Now turning to Slide 4. I'll first provide a high level overview of the financial highlights for the quarter and the fiscal 2023. 4th quarter revenue was $101,500,000 reflecting the impact of our acquisition as well as organic growth across for our existing business.

Speaker 2

For the full year, revenue rose nearly $376,000,000 From an adjusted $269,000,000 in fiscal 2022, which of course The short term turnkey contract with FEMA to support Alaska's response to COVID-nineteen. Given our sizable backlog, increased addressable market and access to bid on various task orders Through our several large contracts, we believe that the future continues to look bright for DLH. Adjusted operating income was $7,800,000 for the quarter $26,500,000 for the fiscal 2023, While adjusted EBITDA rose to $12,100,000 for Q4 $42,100,000 for the year. In addition, we generated $31,000,000 in cash from operations over the past 12 months and exited the quarter with an approximate $179,400,000 in debt. That is down $207,600,000 after or December 22 acquisition.

Speaker 2

As Catherine will discuss further in a moment, We plan to continue using our company's strong cash flow generation to reduce debt in the coming year as we work towards further delevering our balance sheet. Our adjusted EPS was $0.16 per diluted share for the quarter and $0.55 for the full year. And our backlog As of September 30, 2023, was just under 705,000,000 We continue to operate in an active bid environment even as the government still works through its way works its way through the current Continuing resolution circumstance. We remain very upbeat about the opportunities ahead And the path to accelerate top line growth forward organically. On that point, Slide 5 provides an update on certain key market conditions and metrics that have the potential for to impact the company in the quarters to come.

Speaker 2

First, the company has worked diligently to align our business structure with our expanded capabilities and technology based go to market strategy. Our highly credentialed staff are dedicated to providing the most advanced solutions that address the needs of each of our clients, Positioning us to compete for more higher value opportunities going forward. As customers continue to utilizing the professional services contractors, we can leverage our expertise, our experience and applications to further penetrate agencies and to add to our book of business and accelerated growth. 2nd, the federal government remains committed to expanding the role of cybersecurity, given the crucial ongoing need to protect sensitive information Networks as well as the personal records of millions of Americans. The use of cloud based computing Only increases cybersecurity's criticality and importance to protecting sensitive government systems and data.

Speaker 2

This aligns well with our intellectual property, our secure data platforms and technology driven solutions. 3rd, as I mentioned a moment ago, the federal government continues to operate under a continuing resolution with certain agencies funded through January 19 and others through February 2. While this does at times restrict and hamper certain decision making across some of the federal agencies, particularly with regard to Awarding of new contracts. It is not expected to materially impact DLH's current book of business Newer than near term outlook. Our wide array of programs and services provide a solid bedrock for the company's top line over the coming months.

Speaker 2

In addition, the core agencies which we support, those include, of course, the Department of Defense, Including its DHA, Defense Health Agency, Veteran Affairs and Health and Human Services Organizations, We typically receive broad bipartisan support, which we anticipate will continue. The White House and its fiscal 2024 preliminary budget called for historic investments in research, Artificial intelligence, machine language and digital transformation, which would all play very well to our Growing in somewhat unique capabilities and increase the opportunity for further top line expansion along strong underlying performance. And lastly, our expanded capabilities and expertise Provide the opportunity for us to bid on task orders from several new large IDIQ contracts And remain and those that remain on the horizon. There is every indication that the government will continue to award a growing volume of work Through these prescreened arrangements, strategic contracts that are under consideration applicable to us include Our CBIITs contract relatively recently announced. The major CIO SP4 Supporting Biomedical Research coming out of National Institute of Health, Oasis and several other highly very large Sealing multiyear contract vehicles.

Speaker 2

These multiple award IDIQ contracts Offer numerous opportunities for high value work over the coming years that can substantially raise the revenue base of the company and task orders as they are awarded. We are confident in our ability to win task orders on these vehicles, which we expect to impact the company's growth trajectory for years to come. Given our advanced solutions, highly engaged customer relationships and the unparalleled expertise of our amazing staff, We are very optimistic for FY 'twenty four and beyond. With that, I'd now like to turn the call over to Our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Speaker 3

Thank you, Zach, and good morning, everyone. We're pleased to report our fiscal final results for fiscal 2023, and we believe these results demonstrate how our broad capabilities, Employee expertise and delivery execution produced consistently strong financial performance. Starting with Slide 7, we provide a high level overview of our results for Q4 of FY 'twenty three compared to the same quarter of FY 2022 on both a GAAP and adjusted basis. The fiscal 2023 adjusted EBITDA and Operating income figures exclude the previously announced $7,700,000 impairment charge related to real estate assets as we consolidated underutilized premises as part of an ongoing facility rationalization effort. Walking from operating to net income, interest expense was $4,800,000 in the fiscal Q4 of 'twenty 3, reflecting higher debt outstanding due to the acquisition and increased interest rates.

Speaker 3

DLH recorded a tax benefit $2,000,000 during the Q4 of fiscal 'twenty three versus an expense of $800,000 last year. As a result, we reported a net loss in the 4th quarter of approximately $2,600,000 or $0.18 per diluted share. By comparison, the prior year 4th quarter adjusted results exclude $400,000 of corporate development costs related to December 22 acquisition from operating income. Interest expense was $500,000 in the period And we reported net income of $3,400,000 or $0.24 a share. A full reconciliation This information is also included in the back of the presentation as well as in our press release and associated filings.

Speaker 3

Slide 8 shows these details in graphic form. Adjusted revenue rose 51% to roughly $102,000,000 this quarter from $67,000,000 last year, reflecting both organic and acquisition related growth. Adjusted EBITDA For the 3 months ended September 30, 23, was approximately $12,100,000 versus $7,000,000 in the prior year period, an increase of 73%. As a percentage of sales, adjusted EBITDA margin was 11.9% versus 10.4% in the prior year period, reflecting higher value capabilities across a larger base of business. While our fiscal 'twenty three Q4 results are particularly strong due to the timing of certain expenses, We expect our EBITDA margin to remain at approximately 11% prospectively.

Speaker 3

After reducing adjusted EBITDA by depreciation and amortization expense of $4,300,000 $1,900,000 for the respective quarters, Adjusted income from operations was $7,800,000 for the quarter 'twenty three versus $5,100,000 in the prior year period, An increase of approximately 53%. As a percent of revenue, the company reported adjusted operating margin of 7 point 7% in fiscal 'twenty three versus 7.5% in fiscal 'twenty two, with a richer mix of business offsetting the impact from higher noncash depreciation and amortization expense. The company generated $31,000,000 in operating cash for the full fiscal year versus $14,300,000 on an adjusted basis in fiscal 'twenty 2. As Zach mentioned, we anticipate continued strong cash flow Going forward, allowing us to further delever the company in the quarters to come. Turning to Slide 9, We give an overview of key metrics on a year over year basis, highlighting the significant improvement in adjusted EBITDA.

Speaker 3

While interest expense rose considerably due to the higher debt balance and elevated interest rates, our delevering strategy is clearly focused on eliminating debt, Utilizing both mandatory and voluntary repayments as rapidly as possible, thus reducing our interest expense exposure. Note that approximately $600,000 of quarterly interest expense is non cash amortization of financing arrangement fees. I'd like to emphasize that our adjusted operating income performance improved substantially, reflecting favorable contract margins on our current mix of programs and the impact of increased operating leverage, although these results were offset by non cash depreciation and amortization expense. Slide 10 illustrates the successful deployment of our sizable cash flow generation to pay down debt and strengthened the company's balance sheet over the past 4 quarters, along with an initial estimate for the year ahead. We paid off approximately $16,400,000 of debt in Q4, ending the fiscal year with $179,400,000 outstanding.

Speaker 3

This means in total, we've eliminated $28,200,000 of debt since December 'twenty 2, Doing so by satisfying our mandatory payments of $14,300,000 and making voluntary prepayments of 13,900,000 Approximately 60% of our debt carries a fixed interest rate, so all payments we make are against higher interest Floating rate debt. Notably, the company's interest expense interest rate swaps maintained a relative fifty-fifty split between fixed and floating debt between fiscal 'twenty three limiting our interest rate risk. As a result of our effective implementation of swap Arrangements are effective interest rates since the December 22 acquisition was approximately 8.7%. We continue to actively manage our working capital and cash flow requirements, while simultaneously investing in the business and utilizing the favorable tax Our delevering strategy will leave us somewhere between $157,000,000 or as low as $153,000,000 of debt by the end of fiscal 'twenty four. Turning to Slide 11.

Speaker 3

We're poised for a new stage in our growth Our focus remains on expanding top line volume through high quality franchise programs, While continuing our delivery of strong margins, the transformation of DLH into a world class technology provider illustrates the successful execution of our acquisitive and organic growth strategies and our commitment to generating long term value for our shareholders. We stand ready to take DLH to the next level, delivering unique, innovative solutions across the federal health and cyber defense markets. This concludes my discussion of the financial statements. And with that, I would now like to turn the call over to our operator for questions.

Operator

And our first question will come from Joe Gomes of NOBLE Capital Markets. Please go ahead.

Speaker 4

Good morning. This is Joshua Gopel filling up for Joe.

Speaker 2

Hey, Justin. Hey, Justin. How are you?

Speaker 4

Good. So I just wanted to start off with just looking at the IDIQ contracts, obviously, in the presentation, You guys have some priority IDIQs remain pending. I just want to ask, like, is the company starting to see these opportunities and start bidding on new awards? Like, The environment has gotten better from what it was the previous quarter.

Speaker 2

I missed you were breaking up on the last part there with Before the environment, what was that Justin?

Speaker 4

I was saying, has the environment gotten better from the previous quarter?

Speaker 2

Yes, a little bit. We're seeing signs that our biggest one that's pending for us is one we refer to as CIO SP4. We've had probably 8 or 9 opportunities over the last year and a half that we've been looking at That we had earmarked for post COS award. And so time has not been helping, but we are seeing some indications that the government is working their way through all of the protest information. We're hearing good signs just as recently as the last week and a half that they may finally get off top dead center and give an award in In the near term.

Speaker 2

So that will bode well. We obviously had missed some opportunities, but we also have been looking strategically ahead and we think there are still several opportunities That could be early part of this fiscal in 'twenty four. They could still yield some bookings during this fiscal. So yes, that big one It's really looking like we're expecting to see and what you know, we currently do not have a prime seat in the unrestricted CRSP III. Right.

Speaker 3

This

Speaker 2

bid went in over a year ago and government was really Conveying that they were going to have an award quite some time ago, so we would have those task orders be able to bid again. It's taking a while, but the tea leaves are looking better this quarter than last quarter.

Speaker 4

Yes, great. Thanks. Can you just provide us a little update just on the VI contract side? I know last quarter, You guys, nothing really seems to change, but you guys were a little optimistic. Any update, any color on that would be great.

Speaker 2

Which contract was that for? Was it your time on our

Speaker 4

VA contract? The VA side.

Speaker 2

Yes, there's been very little activity still. We continue to be the incumbent. We continue to be very excited around the opportunity to work and to continue doing This period while they're still making acquisition decisions, our best estimate is that we do not See a material effect even if they progress with their decisions. We do not see a material effect this fiscal, It could be subject to change, but we've continued to really work very closely, continue to deliver the results and Our workforce is doing a tremendous job in not getting too distracted with the acquisition side.

Speaker 4

Great. And then last one, if I may. Last quarter, in regards to the BIN proposal backlog, you guys mentioned That the IDIQ area was kind of trending positively. Can you kind of see that going into the New Year?

Speaker 2

Yes. We do. The biggest wildcard on that from is really How agencies respond to that CR decision, the last one of course being February 1. There are some agencies that have been reluctant to put New contracts in place largely because of uncertainty about their full year budget impact. But Our leadership team has been really working very hard to work with those customers, encourage them to issue those task orders on The National Cancer Institute, we're starting to see some signs that they They may start to leverage the multiple award IDIQ we have there.

Speaker 2

We're starting to see signs that the Defense Health Agency also Moving forward, they've got in our minds, they've got a lot more budget certainty than some of the other agencies as it relates to The non weapons and systems. So we're really optimistic that we'll see Some more bid flow come through over the next quarter and we'll get our share.

Speaker 4

Great. Yes, thank you for taking my questions and congratulations on the quarter in

Speaker 2

here. Thank you.

Operator

Seeing no further questions at this time, this concludes our and Answer Session. I would like to turn the conference back over to Mr. Zach Parker for any closing remarks.

Speaker 2

Thank you, Andrea, and thank you all for your participation and steadfast support of DLH. We're Really, really pleased as we close the year that we are so well positioned to now execute that next leg of our strategy with respect to both organic growth and performance excellence. So thank you for your participation. Of course, next Calendar new quarter, we will be having our annual meeting with shareholders. So we'll look forward to having a little deeper dive and some Further engagement with you all.

Speaker 2

So, thank you. Have a blessed day and we'll chat with you soon. Bye for now.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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