DLH Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to the DLH Holdings Corp. Fiscal 2023 Second Quarter Earnings Conference Call. All participants will be in listen only mode. I have today's event is being recorded.

Speaker 1

I would now like to turn

Operator

the call over to Chris Witty, Investor Relations Advisor. Please go ahead.

Speaker 2

Thank you and good morning everyone. On the call with me today is Zack Parker, President and Chief Executive Officer and Kathryn JohnBull, Chief Financial Officer. The company's earnings release and PowerPoint 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 2023 and beyond.

Speaker 2

These forward looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the company's annual report on Form 10 ks and in our other filings with the Securities and Exchange Commission. 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.

Speaker 2

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 Zack. Please go ahead, Zack.

Speaker 3

Thank you, Chris, and good morning to everyone. Welcome to our 2023 Second Quarter Conference Call. We continue to make good progress since last quarter and We are also remaining on track for a strong fiscal year despite the macroeconomic headwinds in the business. We have a debt of gratitude for the outstanding performance by our workforce that remains committed to our clients' missions and delivering differentiated value on our programs. Beginning with Slide 4, I'll first provide a high level overview of our quarter's Financial highlights.

Speaker 3

With GRSI, our most recent acquisition under our belt, the 2nd quarter revenue essentially reached $100,000,000 reflecting our 1st full quarter of operations post closing. Of course, We have surpassed the $100,000,000 mark before during the 1st 2 quarters of last year due to the large Short term COVID related FEMA contracts that we had, including Alaska. But this year's milestone reflects the ongoing business space and we expect to build upon them going forward. The company has substantially expanded our technology enabled solutions profile, particularly in the areas of Health IT, digital transformation and cyber. This is, of course, consistent with our growth Our recent couple of quarters have been very active with regard to the proposal development and program shaping for future organic growth, leveraging these competencies.

Speaker 3

Our reported operating income Our business through highly differentiated services. We ended the quarter with roughly $204,000,000 in debt, but After the end of the quarter, paid down an additional $8,000,000 Katherine will review that in greater detail in a few moments. And we will continue to use the company's operating cash flow to delever the balance sheet as quickly as possible consistent with our history. Our reported EPS was $0.06 per diluted share, and our backlog at quarter end was nearly 941,000,000 Turning to Slide 5. I wanted to briefly provide an overview of some recent developments, including 2 Important contract awards.

Speaker 3

The first game has received a highly coveted contract vehicle to provide technical solutions and support to the National Cancer Institute Center For Biomedical Informatics and Information Technology. This program will allow DLH to continue to build its expertise To the national imperative of scientific research for cancer causes and treatments. It's a great opportunity to apply our advanced IT solutions And expand our business base with the National continue to expand our business base with the National Cancer Institute. The estimated aggregate ceiling value of this multi vendor blanket purchase agreement is 1,700,000,000 And we hope to see competing to see the opportunity to compete on multiple task orders in the not too distant future. Also, after the end of the quarter, we won a contract to expand our National Information Warfare Business Naval Information Warfare Business.

Speaker 3

Through this award, valued at roughly $15,000,000 we will continue to provide turnkey management solutions for information systems And cybersecurity, leveraging advanced logistics and artificial intelligence to assist in capacity planning and architecture modernization. Such wins and our significant pipeline of future opportunities underscore the strength of our advanced innovative offerings And the value that we have built through our long term growth strategy, including the acquisition of GRSI. In addition, We continue to strengthen our governance and Board of Directors, recently adding Judy Voorhees, former Chief Financial Officer for ManTech, to The company's Board of Directors at our annual meeting in March. Given her nearly unmatched expertise and experience and strong track record within our industry, we are truly delighted to have her on board. She has already made a positive impact on our organization, and We look forward to her playing a key role in our continued success.

Speaker 3

DLH is built to compete favorably in the government services market As a technology provider underscored by our advanced capabilities, bolstered again through our most recent couple of acquisitions and the demand for services that we provide. Our highly credentialed staff and innovative offerings are in line with the major government priorities for fiscal 'twenty three and beyond. In fact, the White House's fiscal 2024 preliminary budget calls for historic investments in research, artificial intelligence, machine learning and digital transformation, which are all in our wheelhouse and bode well for future top line performance. We believe we're at the beginning of an exciting new chapter In DLH's evolution, we're combining technology leadership with our long standing mission support and scientific research credentials. We have strengthened our position across many of these areas, building our existing track record of innovation, cloud computing, Enterprise IT, Systems Engineering and Integration, Cyber and Secure Data Analytics across a host of government agencies and programs.

Speaker 3

Now more than ever, our highly differentiated capabilities and strong customer relationships are paving the way for greater overlap between The government's needs and that which we can provide. Once again, we owe this success to our dedicated professional workforce Who rise to the challenge every day of delivering on our clients' expectations and in doing so, accelerating the company's organic growth trajectory. With that, I'd like to turn the call over to our Chief Financial Officer, Kathryn Jung. Catherine?

Speaker 4

Thank you, Zach, and good morning, everyone. We're pleased to report our 2nd quarter results fiscal 2023, which includes a full period of our latest acquisition, GRSI. As a reminder, we closed this transaction on December 8, 2022. Turning to Slide 7, I wanted to begin by showing the adjusted results I'll be speaking about today. While the GAAP 2023 numbers, including revenue, operating income and cash from operations, require no adjustments, The remaining operating measures presented show adjusted results for fiscal 2022, adjusted to exclude The short term FEMA contracts in Alaska, which as we've discussed in the past, were a one off in nature, covering specific COVID related services last year.

Speaker 4

A full reconciliation for this information is included in the back of this presentation as well as in our press release and associated filings. Slide 8 shows these details in graphic form. Adjusted revenue rose 44% to just over 99,000,000 from $69,000,000 last year as the impact of our acquisition of GRSI largely offset a slight decline in our legacy programs in the quarter, reflecting contract timing. GRSI added approximately $32,600,000 of revenue during the quarter. We anticipate organic growth across our business for fiscal 2023 and are happy to have essentially met the was $6,000,000 for the quarter versus $4,700,000 in the prior year period, an increase of 27%.

Speaker 4

As a percent of revenue, the company reported an operating margin of 5.9% in fiscal 2023 versus 9.4 percent in fiscal 2022, reflecting higher non cash depreciation and amortization expense as a result of the GRSI acquisition. Interest expense was $4,800,000 in the fiscal Q2 of 2023 versus $600,000 in the prior year period, reflecting higher debt outstanding due to the GRSI transaction. DLH recorded a provision of $400,000 $2,500,000 respectively, for tax expense during the 2nd quarters of fiscal 2023 and fiscal 2022. We reported net income in the 2nd quarter of $800,000 or $0.06 per diluted share versus $7,200,000 or $0.50 a share last year. Adjusted EBITDA for the 3 months ended March 31, 2023, was approximately 10,500,000 versus $6,600,000 in the prior year period, an increase of 59%.

Speaker 4

Improving Adjusted EBITDA margins of 10.5% versus 9.6% in the prior year period reflect The company generated $6,900,000 in operating cash year to date versus $5,800,000 on an adjusted basis in the prior year period. Slide 9 provides an update regarding our plan to use the company's Substantial cash flow generation to pay down debt and strengthen the balance sheet, reducing interest expense in tandem. While timing on certain receivables did not grant us the opportunity to extinguish debt during the quarter, we did so soon thereafter. And as of the date of this call have $196,500,000 of debt outstanding. This puts us squarely on track to meet our quarterly debt pay down targets and to reduce debt by approximately $20,000,000 in this fiscal year.

Speaker 4

As a reminder, when we closed the GRSI transaction, the company had almost $208,000,000 of debt outstanding. We've built a strong track record and a reputation for being able to rapidly turn cash generation into debt reduction, delevering the balance sheet, And that is not expected to change this year. We continue to anticipate that our debt will be between $180,000,000 190,000,000 at fiscal year end. This concludes my discussion of the financial statements. With that, I would like to turn the call over to our operator to open for questions.

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. Our first question will come from Joe Gomes with NOBLE Capital. You may now go ahead.

Speaker 1

Good morning. Thanks for taking my questions.

Speaker 4

Hey, Joe. Good morning, Joe.

Speaker 1

I want to start off with the top line was a little light versus our expectations. And Todd, maybe we could Just drill down a little bit more to that. You mentioned the legacy business was down, I think, about $2,000,000 in the quarter. Some business gets moved to the right or just some things didn't come in that you thought might have come in? Just trying to get a little better handle on that top line.

Speaker 3

Yes. Great question there, Joe. And you actually hit it Spot on both our on contract, existing contract growth as well as new business opportunities have continued to slip to the right. You may recall some of our on contract growth, of course, were some of our existing task order IDIQ contracts required the government to get those programs Through the acquisition process, we've seen that, that has continued to slip to the right, a little more so than we expected and Seems to be largely attributed to internal government delays, but we see no long term impact to that just being slipping to the right. The same for our new business pipeline, even some of our acquisitions or contract awards that we had Later part of last year, we're still just now starting to have a pretty heavy load of bidding activity.

Speaker 3

And for those that turn into proposal or to actual contract awards, it just, again, running through that same cycle, Slipping what we think will be more Q3, Q4 prospects.

Speaker 1

Okay. Thank you on that. I did notice a nice increase in VA pharmacy revenues Year over year, I think they increased by about $3,000,000 Was there anything behind that Just doing more business with them? Or was it some onetime items in that, that drove that revenue increase on the pharmacy side?

Speaker 3

Yes, Joe. Coming out of COVID, we've learned a lot about our veterans and their readiness to deal with Some of the challenges that were imposed by COVID, quite frankly, the VA put into effect a Fair enough, more regulations that will drive more traffic to the mail order pharmacy as opposed to Allowing veterans to come in and pick up their meds at local VA hospitals. So we're going to continue to we think that trend is Which has increased. It's probably leveled off now. It will probably remain stable as we go forward.

Speaker 3

But you have seen a lift That was kind of a post COVID regulatory environment change for our veterans.

Speaker 1

Okay. And thinking about the VA for a second, Can you provide us with any update on the contracts there and the VA potentially looking to rebid out those contracts?

Speaker 3

Yes. Nothing has really changed since our last report. We as you know, we have submitted the government did require The submission of SBVOSB proposals, service disabled veteran owned small businesses, and we are continuing to participate in that We also remain as before, we remain ready and available that should they Determine that, that is not in the best interest of government, that we'll be able to continue to provide those services Through extensions of our current contract, which currently run out through the Q4 calendar year. And then we'll Evaluate what their next acquisition strategy is, if it's subject to change. But no awards since we last spoke All of those proposals went in during the Q1 calendar.

Speaker 1

Okay. And, Catherine, maybe you could talk a little bit, if I look at the adjusted operating margin This quarter was up 6% from last year, about 6.8%. Just wondering what happened there. GRSI was expected to help drive operating margins up Higher and we kind of took a little bit step backward in this quarter.

Speaker 4

Yes. A key contributor to that is, of course, the non cash D and A, which is putting about puts about half a point of pressure on that. Otherwise, it's really just a function of The relative revenue contribution from the various streams of revenue that we have, just the blend of the revenue. So nothing I would say that indicates that we wouldn't expect to get the relative contribution from the acquisition that we Expected, more so just the particular mix that we had in the quarter.

Speaker 1

Okay. Fair enough. And then one more for me and I'll let someone else ask a couple of questions. Zach, you talked about the significant pipeline of opportunities. I was wondering if you might kind of point out 1 or 2, some of the major ones that you're looking at and give us a little bit more color or detail around that.

Speaker 3

Sure. As you know, we don't get into too much on the competition sensitive side, but we did mention a year or so ago that There was a major acquisition that would open up a lot of bids within also NIH, National Institute of Health Customer. And we refer to that contract as CIO SP4. And while it has taken a while, it was Really delayed a lot due to a large number of protests, very often due to smaller businesses, but to some extent, large businesses as well. That acquisition has moved really pretty close to having been finalized, but the government has continued to have delays In the final award, the best one that, of course, we had felt that there's a fair amount of pent up opportunities for us to be able To bid.

Speaker 3

Beyond that, we also announced 2 other awards that we had that were launched forward IDIQs. And one of those, again, with our strategic interest in National Cancer Institute. And those procurements, those Task orders are just now starting to break. We've actually bid 1 or 2, and we expect another 4 or 5 before the end of this fiscal year. And the other opportunity, which we also announced, the Defense Health Agency's, we call it Omnibus 4, but it's for medical research for military Health.

Speaker 3

And that one also, it has been awarded. The government has yet to release any request for Task order proposals. We do still remain hopeful that we'll see some this fiscal year in time to at least be booked perhaps By this year, that revenue given that we're already in May, that revenue now looks like it'll probably be more likely FY 'twenty four

Speaker 4

No, no. Coming back around here.

Speaker 1

Yes. If no one else is going to ask them, I'll ask them more. One of the key items with the GRSI acquisition was cross selling And Zach, I wonder if

Operator

you could

Speaker 1

speak about some of those.

Speaker 3

Yes. Those are the areas that David and I, David, half of them are really, really most excited about. And there's some major programs Some of our existing but major targeted agencies, including the National Institute of Health, The Center For Disease Control, programs and agencies where we currently have a business base, but there's some adjacencies in the nature The work that's in the future. But things like precision medicine that depends very heavily on not only the computing power, but Cure data environments as well as extensive support from biomedical research talent that really combines The benefits of what we have been building both in our heritage business and the tremendous bolstering that we've gotten from the addition of GSI. These are key programs that the future that our nation is really heavily focused on advancing the state of that business.

Speaker 3

And We think we're really, really uniquely positioned for some of those. The majority of those cross selling opportunities we think are within The HHS arena. We also have some opportunities that were would not have been in We would not have been in a position to prime that supports the readiness posture of largely our fleet and the Defense Health Agency. And we think the combinations of cross selling With some of the engineering and technical capabilities from GRSI, Along with the health technology related business that came with the IPA acquisition really position us in a differentiating way for Several opportunities going forward. So I think what you'll see continued expansion of our support for military veterans in that regard, As well as on the public health side of the house for research with heavy dependence upon technology and innovation for the future.

Speaker 1

Okay. Great. And then switching back to GRSI for a moment. They did $32,600,000 of revenue in the quarter. Viewing implies that it comes out about $130,000,000 And on your initial projections, you were talking about $140,000,000 at GRSI.

Speaker 1

Should we expect To see maybe that increase on a quarterly basis to get back to get closer to that 140 run rate?

Speaker 4

Yes, definitely. As we've discussed, GRSI has a strong track record of growth and We've set that expectation of low double digits. So we do think that they are moving upward and just the volume of activity that Zach's Talked about in the presence of with those key public health and national security NIWC customers, we believe provides that channel to continue to support that level of growth.

Speaker 1

Great. And one last one for me. I think to you, Catherine, again, interest expense was 4.9 Again, you have projected, I think, about a $14,000,000 increase with GRSI debt. Are you still comfortable with that number? Do you think maybe some of these higher rates out there will increase that Number a little bit above the 14 for this year.

Speaker 4

Yes, I do think there's certainly going to be pressure on it as a result of Continuing to interest rates continuing to grow, including the increase yesterday. We've obviously hedged a major portion of that with our The swap contract we put in place in January, but still we do have some floating rate debt and that's going to be subject to impact from that. As well as In the quarter, in particular, as we mentioned, we had some we were disappointed in the way that the contract payments laid out. We're happy to report we cleared that congestion by this call, but obviously, we're happy with where we ended up on March 31. It's a multi it's multi pronged, of course, pressure on the interest rates is going to result in higher interest expense.

Speaker 4

And there's a non cash component of that That we might want to put a finer point on in terms of from an EBITDA perspective, the amortization of deferred financing costs is a non cash But nonetheless, as you suggest, the cash component of interest expense, I think, is going to be a bit stouter than 14,000,000

Speaker 1

Okay, great. That's it for me. Thank you.

Speaker 3

Thank you, Joe. Anthony, back over to you.

Operator

Okay. It appears there are no further questions. I'd like to turn it back over to Mr. Parker for any closing remarks.

Speaker 3

All right. Well, thank you again. Thanks everyone for joining us and your continued interest in DLH. As As Catherine and I have conveyed earlier, we remain very, very excited about this new chapter and we feel very, very well Positioned to continue to execute our strategy for both organic growth and Building the value proposition as we go forward. So thank you all and we look forward to chatting with you next quarter.

Speaker 3

Bye for now.

Powered by Quartr
Earnings Conference Call
DLH Q2 2023
00:00 / 00:00