DLH Q3 2023 Earnings Call Transcript

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August 3, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to the DLH Holdings Fiscal 2023 Third Quarter Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Chris Witty, the Investor Relations advisor.

Operator

Please go ahead, sir.

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 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 1

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 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. Please go ahead, Zach.

Speaker 2

Thank you, Chris, And good morning, everyone. Welcome to our 2023 Third Quarter Conference Call. We continue to make good progress and remain on track for a strong end to fiscal 2023. These accomplishments are attributed To the great commitment and talent of our accomplished and distinguished employee base, they have weathered the pandemic storm and continued to deliver high caliber solutions and services to our clients. Let's dive into the financial highlights on Slide 4.

Speaker 2

I'll first provide a high level overview of the quarter's financial highlights. I'm pleased to announce that the 3rd quarter revenue surpassed the $100,000,000 mark, setting a new milestone for our ongoing operations that reflects our Success acquiring and integrating growing organizations as well as the importance of key programs and agencies that we serve. We anticipate being at or better than this run rate going forward, testimony of our new phase of growth of our next phase of growth, Which is built upon organic strength, a broad array of technology enabled solutions and reflect strong demand for the company's extensive capabilities by the federal government. During this quarter, Our reported operating income was $7,100,000 and EBITDA rose to 11,400,000 We also managed to reduce our debt by over $8,000,000 since the end of quarter 2, utilizing our strong cash flow to delever the balance sheet efficiently. Our reported EPS was $0.12 per diluted share And our backlog at quarter end was approximately 817,800,000 supporting the accelerated growth going forward.

Speaker 2

Turning to Slide 5. I want to give an update On some key developments for the company and its outlook, we recently announced that DLH had been awarded a contract To compete for expanded digital transformation, systems engineering and cybersecurity services For the National Heart, Lung and Blood Institute, NHLBI. As part of this program, We will continue to provide advanced solutions and technology services to support this customer as a global leader in heart, lung and blood research And training and education as well. This multiple award contract, indefinite delivery, indefinite quantity contract, Has an award ceiling of $85,000,000 in a 5 year contract term. Our integration of GRSI is also on track, and we are continuing to achieve the anticipated enterprise results since the deal's announcement.

Speaker 2

The transition of GRSI to key DLH business systems, such as our enterprise resource planning, ERP, and our human resource information systems human resource information systems is complete, leading to greater operational efficiencies across the board. Our expanded go to market strategy is evolving As the teams pull together and demonstrate the full range of the DLH enterprise capabilities to our customers. And lastly, as you may recall, the Fiscal Responsibility Act of 2023 was enacted early in 2023. This has increased the debt ceiling and allowed budget negotiations to begin for the next fiscal year. This includes providing initial funding targets for defense and non defense agencies alike.

Speaker 2

Of course, there's always The strong buyback partnership is important. We believe the outlook is positive for fiscal 2024 And numerous opportunities to grow our top line and continue to improve the company's underlying results. As a reminder, DLH has access to many $1,000,000,000 plus IDIQ contract vehicles that allow us to compete More value added agency work than ever before. Also, the White House fiscal 2024 preliminary budget Call for historic investments in research, artificial intelligence and machine learning and digital transformation areas, which would also bolster our growth trajectory and bottom line performance. Our highly differentiated capabilities, Broad area a broad array of contracts and diversified suite of technology solutions make us a one stop for advancing the government's goals of tomorrow, and we look forward to what fiscal 2024 will bring.

Speaker 2

With that, I'd like to turn the call over to our Chief Financial Officer, Catherine Jarmo. Catherine?

Speaker 3

Thank you, Zach, and good morning, everyone. We're pleased to report our Q3 results for fiscal 2023. Turning to Slide 7, I wanted to once again begin by showing the adjusted results I'll be speaking about today. While current year metrics require no adjustment, we are providing financial data for fiscal 2022 with and without the short term FEMA contracts in Alaska that we've discussed in the past. A full reconciliation of 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 43 percent to just over $102,000,000 this quarter from $71,500,000 last year. We're obviously very pleased to have officially crossed the $100,000,000 quarterly revenue threshold for the first time, excluding our prior FEMA related work. Adjusted income from operations was $7,100,000 for the quarter versus $6,500,000 in the prior year period, an increase of 9%. As a percent of revenue, the company reported an operating margin of 7% in fiscal 'twenty 3 versus 10.7% in fiscal 'twenty 2, reflecting higher noncash depreciation and amortization expense as a result of the GRSI acquisition.

Speaker 3

Interest expense was $4,900,000 in the fiscal Q3 of 2023 versus $500,000 in the prior year period, reflecting higher debt outstanding due to the transaction of acquisition of JRSI. The effective interest rate for Cash interest paid in the Q3 of 2023 was 8.64%. DLH recorded a provision of $500,000 $1,700,000 respectively for tax expense during the 3rd quarters of fiscal 'twenty three and 'twenty two. We reported net income in the 3rd quarter of approximately $1,700,000 or $0.12 per diluted share $11,400,000 versus $8,400,000 in the prior year period, an increase of 36%. As a percentage of sales, adjusted EBITDA margin was 11.1% versus 11.7% in the prior year period, reflecting the contribution of more broadly differentiated capabilities through which we expect to earn better returns over time.

Speaker 3

The company generated $15,000,000 in operating cash year to date versus $8,300,000 on an adjusted basis in the prior year period. As we will discuss on Slide 10, we believe our ability to produce strong cash flow from operations We'll allow the company to reduce our debt, thereby reducing interest expense and providing meaningful earnings growth to our shareholders. Slide 9 gives an overview of key metrics for the company in terms of year over year improvement. The acquisition of GRSI has bolstered our line and EBITDA performance, although the impact of noncash depreciation and amortization largely related to acquired intangibles, Offset some of that progress from a GAAP earnings perspective. Importantly, the company showed progress sequentially from the 2nd quarter, And we remain on track for additional underlying improvement going forward.

Speaker 3

While noncash depreciation and amortization expense will continue to be high, We are working hard to delever the balance sheet and reduce interest expense in tandem. Interest will be reduced through both mandatory and voluntary repayments, and we are actively managing our pay down strategy. With approximately percent of debt carrying a fixed interest rate, near term payments are all applied to our higher interest Note that approximately $600,000 of quarterly interest expense is noncash Slide 10 provides an update regarding our deployment of the company's ongoing cash flow generation to pay down debt and strengthen the balance sheet, reducing interest expense, as I mentioned. We paid off approximately $8,500,000 of floating rate debt in fiscal Quarter 3, ending the period with $195,800,000 outstanding. This puts us squarely on track to meet our quarterly pay down targets and reduce debt by approximately $22,000,000 this fiscal year from a level of almost $208,000,000 following the acquisition of DRSI.

Speaker 3

We are actively managing our working capital needs and utilizing the favorable tax attributes of our acquisitions along with stock comp plans to minimize income tax payments. We continue to anticipate That our delevering strategy will leave us with between $185,000,000 $187,000,000 of debt at fiscal year end, And we expect to pay down even greater amounts in fiscal 'twenty four. This concludes my discussion of the financial statements. With that, I would now like to turn the call over to our operator for questions.

Operator

We will now begin the question and answer session. At this time, we will take our first question, which will come from Joe Gomes with Noble Capital. Please go ahead.

Speaker 4

Good morning and congrats on the earnings.

Speaker 2

Good morning, Joe.

Speaker 4

So wanted to just start off, Zach, you mentioned about the IDIQs that you guys have won recently. And it looks in some of your prepared remarks and in the earnings release, you talked about some of the Difficult environment. Just trying to get a better idea of how you see some of those bigger IDIQs, when are they really going to start putting out opportunities for you to bid on new awards?

Speaker 2

Great question, Joe. Those are always very material to our ability to drive that organic growth, as you well I'm actually pretty encouraged about most in particular, our most recent ones. The NHLBI Contract is one in which it's bringing new opportunities for new workforce, but we're in a position of really leveraging A real strong track record that we've had with that particular customer, particularly within the in this community. So we're hoping that with our valued enterprise capabilities that, that will continue. We have been disappointed as you well know with the government's slowdown up until relatively recently As it relates to issuing new work on our previous IDIQs, I think I mentioned to you before last time that our Defense Health Agency Omnovis 4 IDIQ still has yet to issue the first request for a proposal.

Speaker 2

We have been on standby with a real strong team for quite some time. That still continues to be the case, But we are starting to hear some we're being very proactive on that and we're starting to hear that they're prepared they're getting closer and closer We have to issue a few of those. Similarly, we've had just slower than anticipated than government announced work On our some of our other ones within NIH. And then lastly, as you know, many of us across the industry We're anxiously looking for the government to resolve their protests on the large the largest of the IDIQs, The CIO SP4 is where the biomedical research technology Work is for largely Health and Human Services Agency is to be conducted, one that has been Very strategic for DLH. We're fortunate that in the heritage contract, the RGRSI has Some presence and some opportunities to pursue, but those will expand once the ILF-four It's resolved.

Speaker 2

It has been delayed by, I think, over 100 protests, largely by some of the small business partners, And that has slipped any opportunities for us to prime any of the unrestricted work that we've had our eyes on for a better part of the year. But the upside of that is we do think that, like I said, that with the approval getting beyond the Budget Control Act, That should give some of our agencies greater clarity of budget and ability to issue some of the recurring work.

Speaker 4

Okay, great. Thanks for that update. And then on the VA, obviously, We've talked about this in the past. You're on continuing work there, I think, through October on one of the contracts in November on the other on the bridge contracts. Just wondering kind of an update, if any, on the VA process there?

Speaker 2

Yes, still no definitive actions. As you know, and for the benefit of the audience, we have been on We'll effectively bridge contracts since November of 2016 for the VA. They have applied 2 strategies Relative to the acquisition approach to date since 2016, and They have based upon market conditions and other factors, they have continued to reevaluate that acquisition strategy. Proposals have been in since the beginning of the year, largely through service disabled veteran owned small businesses. And we are continuing to participate there in a very meaningful way as well as we're on standby should they elect to Once again, revisit that acquisition strategy and to reissue those in an Unrestricted environment.

Speaker 2

So we are very committed to continuing to support our veterans in a distinguished way, Delivering high degree of customer satisfaction as we have for over a decade now, represented by, of course, the J. D. Power awards and other indicators of high degree of customer satisfaction. So no new news there yet, Joe, but we remain optimistic That we're going to have an opportunity to continue to impress the agency as we go forward.

Speaker 4

Great. Thanks for that. And I will get back in queue.

Speaker 2

You bet. Thank you, Joe.

Operator

Our next question will come from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Speaker 5

Great, thanks. Only one question. With the challenges, at least in the short term you've talked about In the government with awards and I don't know if you call them delays. Can you talk on the other side of the bid and proposal equation? Are bid submissions as many as last year?

Speaker 5

Are you bidding on a lot more work? Just maybe talk about the proposal activity

Speaker 2

Yes, great question, Brian. Yes, outside of the IDIQs, we have Really targeted, as we've described before, a pretty healthy bidding proposal backlog. A number of those have started to come forward. Of course, early in the year, as you heard us describe, the end of December timeframe in January, Quite a bit on the recompete activity associated with the VA work, but subsequent to there, we've seen in the last several months Really pick up with regard to some of a couple of our major bids. So we will be finding you will be seeing that Our B and P activity, which really goes to our G and A, will be pretty heavy during Q3.

Speaker 2

And certainly, as we move into the final stages of the fiscal year. So yes, we're starting to see some of that in the non IDIQ arena, which we're hopeful is going to be more of a trend over the course of The rest of this fiscal year, it would not be uncommon for a number of these agencies to feel the pressure at the end of this fiscal year. They have been very restrained and particularly in our areas within Health and Human Services, very restrained in many cases issuing Contracts where they do have funding, right? A lot of that again was due to the uncertainty prior to the Fiscal act being deployed. Catherine, anything to add there?

Speaker 3

No, I think that's right. Slow start to the fiscal year, but encouraging Recent trends.

Speaker 5

Great. Thanks so much.

Operator

And our next question will be a follow-up from Joe Gomes of NOBLE Capital. Please go ahead.

Speaker 4

Thanks. Just on The HSS or HSS Head Start Program, You had a great start to the year when you look year over year. And it looks, if I'm running the numbers correctly, The last couple of quarters, you've been below what you did the prior year. Is there anything specific going on with that program? Or is it just normal ebb and flow?

Speaker 3

I would think of this year as the more indicative. It's the program from a good news perspective has returned to its normal Cadence of being pretty front loaded in our fiscal year Q1 and Q2 because that aligns to Many of the grantees who are, if not sponsored by us inside a school, are certainly affiliated in trying to align around school system cycle. So, 'twenty two definitely was extremely back loaded because remember, we were all still working our way through Omicron In Q1 and Q2 of our fiscal 2022. And so things got pretty back loaded. That's what makes the comparison of organic revenue Year on year for Q3 this year look a little lumpy because of some of the back end lift we got from Head Start this year As opposed to this year last year, pardon me, as opposed to this year returning to the normal layout of the contract performance.

Speaker 4

Okay. Thanks for that, Catherine. Appreciate it.

Speaker 5

No problem.

Operator

At this time, there are no further questions in the queue. So I'll hand it back over to Mr. Zack Parker for any closing remarks.

Speaker 2

Well, thank you all for your continued interest and support in DLH. As you probably have heard, we're really pretty excited about the company that we have become. As we I can assure you, they still have our human capital assets, and we really, really are looking forward to Closing strong and really entering FY 'twenty four with the type of trends and expectations that We shared before. I might add that we are also going to be attending, if you Look at our investor websites, attending a couple of investor conferences, and provide some additional color around the business over the coming months. We look forward to engaging with you more in the near term and certainly look forward to closing out Q4 With you as we enter the latter part of the year.

Speaker 2

Thank you all for your time. Have a blessed and productive day.

Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
DLH Q3 2023
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