DLH Holdings Corp.

Good day and welcome to the DLH Holdings Corporation third quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Witte, the Investor Relations Advisor. Please go ahead.

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer, and Catherine Jambol, 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 two of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2021 and beyond. 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-K 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 the earnings release and in the investor presentation on DLH's website. President and CEO Zach Parker will speak next, followed by CFO Catherine Johnball, 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.

Thank you, Chris, and good morning, everyone. Welcome to our third quarter conference call. I couldn't be more pleased with our performance And we're on track with our best year ever with even greater plans in place for fiscal 22. I will remain very proud of our tremendous employees across the globe who continue to deliver top quality services and solutions to our clients despite very challenging times. Starting with slide three, I'll first provide a high level overview of the quarter and some color on the outlook for the rest of 2021. Revenue rose nearly 20% year-over-year to $61.6 million as we benefited from the acquisition of IBA along with organic growth across the enterprise. We posted operating margins of 8% reflecting a strong mix of programs and earnings of $2.9 million or 21 cents per share. We also generated some $9.3 million of cash from operations and used this to pay down approximately $9 million of debt during the quarter. Near the date, we paid down roughly $16.2 million of debt due to the company's strong cash-generating ability. We continue to delever and improve our overall financial flexibility, as Catherine will discuss more in a moment. We previously announced that we had won the VA's CMOP Medical Logistics Award in the third quarter, which was expected to add over $200 million in contracted value over a five-year period to our backlog. During the quarter, this contract was protested by a small business bidder, and the government continues to work through their standard process, addressing the concerns, and proceed to a resolution and award. In the meantime, the company's medical logistics CMOP contract was extended through November of 2021, and our backlog remains robust even as we await resolution on this contract, for which, of course, we expect a favorable outcome. Now, turning to slide four, I'd like to update our investors on our long-term strategy of success, which includes and continues to evolve as we grow the company. Given our track record of successfully integrating acquisitions, delivering excellent performance on large nationally dispersed programs, and expanding our healthcare technology capabilities, we believe that DLH has enhanced its position for growth within the markets that we serve. While several long-term anchor contracts give us visibility and stability regarding a portion of our revenue base, our diversification strategy has given us a presence across all across the full range of federal health and military health systems and services with key programs and agencies in our sites. We continue to serve the citizens, the soldiers, the service members, and our veterans. However, even as we've expanded, we've remained focused on our formula for success, serving clients where they can truly bring value-added, real-world solutions to address the healthcare needs of today and tomorrow. Our services are leveraging an expanded set of technology solutions, but our targeted agencies are largely the same, as this is our dedication to our strategy and to the utmost in customer service. We continue to hire the best and the brightest leveraging talent that we bring from a variety of healthcare-related industries and companies. We've built a foundation for strong long-term growth with a professional, highly credentialed workforce that can compete and win against the most respected names in the industry. Therefore, we've been able to see revenue rise to a level of nearly $250 million annually and we are confident that we're well positioned to grow to our next revenue target of $500 million based on our existing platform, including research, technology, healthcare delivery, and performance management. The past year during a pandemic has shown that our services are more valuable than ever and that our workforce is flexible, committed, and can adapt to rapidly changing requirements in terms of working remotely, interacting with customers in new ways, and winning business that leverages our expertise in digital transformation, artificial intelligence, advanced analytics, cloud-based applications, modeling and simulation, telehealth systems, and more. And we've accomplished all this in a sensible way in terms of capital deployment. By accessing our credit lines to make acquisitions and invest in the business, We prevent frequent equity dilution of our existing shareholders. We then use our prodigious cash flow generation to pay down debt and strengthen our balance sheet, which enables us to replicate this process. We've used this strategy consistently, leading to a refined acquisition process that maximizes shareholder returns and growth on the capital deployed. We remain well positioned to take advantage of the opportunities ahead and are confident that as we near fiscal 2022, the company will continue posting solid financial results. Our backlog remains strong and we will capitalize on the increasing need for technology enabled healthcare solutions for which we are so well known and respected. I feel confident in our ability to provide the returns our shareholders have come to expect, just as I am proud of our staff and partners in performing so well during such unusual times. With that, I'd like to turn the call over to our Chief Financial Officer, Catherine Joplin. Catherine?

Thank you, Zach, and good morning, everyone. We're pleased to have once again posted followed results this quarter. Turning to slide six in the presentation, we posted revenue of $61.6 million for the three months ended June 30, 2021, versus $51.5 million in the prior year's third quarter. The variance reflects the impact of roughly $7.3 million in revenues tied to the acquisition of IBA, along with organic growth across a variety of existing programs that saw increased activity this year. We anticipate such trends to continue in the fourth quarter and into fiscal 2022. As Zach mentioned, our CMOT Logistics Award is being protested, so we're operating under an extension of the prior award through at least November. We remain optimistic about favorable outcome of the award. Turning to slide seven, income from operations was $4.9 million for the fiscal 2021 third quarter. versus $3.8 million last year. Operating margins improved to 8% from 7.4% in fiscal 2020, reflecting favorable program mix and greater operating leverage. We reported net income of approximately $2.9 million or $0.21 per deleted share versus $2.1 million or $0.16 a share last year. DLH recorded a provision of $1.2 million and $0.9 million for tax expense during the fiscal 2021 third quarter and fiscal 2020 third quarter, respectively. Interest expense in the current year quarter increased to 0.9 million versus 0.8 million for the three months ended June 30th, 2020, due to higher outstanding debt levels reflecting the acquisition of IBA. Turning to slide A, slide H, EBITDA for the third quarter of fiscal 2021 was $7 million. versus 5.5 million in the prior year period. As a percent of sales, EBITDA rose to 11.3 this quarter versus 10.7 last year. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and in the back of this presentation. Slide 9 gives an updated snapshot of our debt position at the end of the third quarter. As of June 30th, we had 53.8 million of debt outstanding under our credit facilities versus 62.8 at the end of last quarter. We generated approximately 9.3 million of operating cash flow during the quarter and paid down roughly $9 million of debt. We estimate debt below 50 million at the end of fiscal 21, reflecting a stronger balance sheet and much lower leverage ratio than at the beginning of the year. This concludes my discussion of financial statements. With that, I would now like to turn the call over to the operator to open for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question will be from Joe Gomez of Noble Capital. Please go ahead.

Good morning. Good morning. Thank you for taking my questions. Yes. How have you been, Joe? Doing well here. We're doing well. Hopefully the same for you guys this summer. Absolutely. First question, you know, saw some organic growth in the quarter. You know, the last quarter, year or so, you pointed out the absence of travel-related pass-through revenues. I was just wondering, have they returned? Did that help pump up the organic growth? Are we still waiting for those types of revenues to come back?

Yeah, those are still slow to come back. We are starting to see some plans that... that, of course, were predetermined before the Delta variant started to come into place, where we started to see plans where later this year we'll start to do more of that travel. Even though mobility has substantially increased, of course, in our country, we're still looking at, since ours involves inspections and being around some of our clients and ultimately some of our team members, We're still proceeding very cautiously that way. So the majority of the organic growth has been with delivery of key talent for our customers, and we're pleased to see that.

Great. Thanks for that. And on the logistics contract, maybe give a little more color as to, you know, what exactly caused the VA to change to cancel that, um, contract? I know you had some verbiage in there, um, in the, in the press release, but maybe we get a little more color there. Uh, you know, when do you think timing and, and, you know, why, why are you confident that, um, you know, you, you will ultimately be successful in getting this award?

You bet.

Now, thank you, Joe, for the question.

Yeah, it is, um, pretty common unfortunately pretty common course now that when there's some large contracts such as this one for the VA that the government will frequently see in common a protest when you have a large number of potential bidders as well that have made the investment to pursue work of this magnitude They're very focused on seeing if there's an opportunity for them to have a shot at it. It is pretty normal course of action nowadays to see a protest arise on contracts of this magnitude. Regarding the process, the VA is consistent with all of the federal agencies that they've got to run through the due course. to evaluate, to treat seriously any protests. This particular one happened to be from a small business, a service-disabled veteran owned small business. And so they're going through their normal course of action to adjudicate and to ultimately make sure that they can make an award that's consistent with the requirements. We, however, remain pretty optimistic that that our proposal and our commitments in that effort will prevail. But it is going to have to run its usual course, and we're into it now a couple of months.

And really the basis of our confidence is a couple-fold. It's firstly that the nature of the procurement is a best value procurement. So in the best interest of the government, from our perspective, our strong cash performance and the quality and, cost-effectiveness that we've introduced over many years of working in support of the VA, from our perspective, represents the best interest of the government. So that's really the basis of our confidence in a successful outcome.

Great. Thanks for that update. And last quarter, you talked about some of the opportunity set that you're seeing over the next couple of years. I was wondering if you might be able to give us a little more update as to, you know, what are you seeing in the near term that could be coming up for award that you're pretty confident or hope to see winning those awards?

Yeah, no, great recall there. We still remain optimistic that the – You know, the bids coming out of our pipeline will mature. This has been a very heavy proposal development quarter for us, one of the largest we've seen in a while. A couple of our very strategic opportunities that really positioned were great examples of positioning DLH as a result of the capabilities we acquired over the last few years have just now hit. So there's There are a couple of large-scale, indefinite quantity, IDIQ, multiple award contracts that will determine the opportunities over the next two years that are reaching out. One for the Defense Health Agency, which involves military health research. Obviously, the capabilities that were derived from IBA and S3. We're pretty critical towards raising our profile and our win probability. That has gone in as an IDIQ this quarter. We're also in the throes, as we speak, of one of the large IDIQs for the National Institute of Health associated with biomedical research and IT systems, referred to as CIRSP4. It now is on the street. and anticipating having proposals delivered and completed this month. So those are two large government-wide type access contracts that we think are representative now of the current state as a company, being able to have a high degree of success for those. Those again are the hunting license type vehicles, if you will. We have identified a large number of task orders that we think are very addressable by us coming down the pipe. In addition to that, you know, the normal course of regular opportunities, we continue to see some of our major ones slip to the right. However, we're still optimistic that we'll see even more this remaining fiscal year. And we do expect a continuing resolution and all indications, you know, The budget process, while moving along, the CIM is still very active in doing their write-ups and just not optimistic that with the infrastructure bill that everything will be resolved by 30 September. Having said that, we do think that there's still a good number of opportunities for us to have some continued organic wins and that will lead to a good launch point in FY22.

Thank you for that. Let me ask one more and I'll jump back into queue. In your queue, you kind of mentioned here we're leaning right into about the continuing potential for continuing resolution for the budget. And in the queue, you talk about some of the budgeting proposals being made for some of the various, you know, for the VA and Health and Human Services. Looking at the potential budget proposals there, You know, anything that jumps out as a huge positive in your guys' view or anything that would be on the flip side, you know, kind of disappointing from your viewpoint looking at the proposed budget for today?

Yeah, our general assessment of the budget proposals is that they are not surprisingly extremely favorable to the agencies that really does support health and human services initiatives. So from our perspective, we think that while we understand there's quite a bit of the process to still play out to get to the final number, we think the general sentiment is that those programs are highly, highly supported from a bipartisan perspective. And of course, the veterans always enjoy strong support from both sides of the aisle, and they did get a very nice proposal for an estimated increase in their budget. But in addition to that, not surprisingly, there's a substantial increase in the NIH funding, of course, in the ongoing, as we've said consistently for the last several months. You know, we are just exiting phase one, triage, critical response, and sadly we may end up having to go back there a little bit, just given what's going on with the variants, but naturally we expect that there will be a long tail for scientific analysis and study of the impact of the coronavirus, COVID-19, both independently and its effect on comorbidities for the public health populations that we study. So we're not surprised to see the increase, but we do think it validates that the country is positioned to really focus on those sustaining health issues that really affect so many people. We are extremely well positioned with the skills required to respond to those opportunities. Just going back and doubling back a little bit on those IDIQs that Zach mentioned, really very gratifying. It was the intent of our first phase acquisition program to build a full set of capabilities to be prepared to fully respond, even without reliance on teammates, though of course we'll team where appropriate. But having our own independent capability to fully respond to those very large IDIQ vehicles and be positioned to have the hunting license as the task orders mature is a key part of our fundamental strategy over the last few years. And it's validated by now our response to those large RFPs. So, you know, we're certainly bullish on the opportunities we enjoy both organically and those things that will evolve out of the budget plus ups that we see evolving.

Great. Thank you for answering my questions. I'll jump back in queue. Always great to hear from you, Joe. Thank you, Joe.

Thank you.

The next question will be from Brian Kinslinger of Alliance Global Partners. Hey, Brian.

Hey, guys. Thanks for taking my questions. How are you? Good.

And yourself?

Doing great. You know, one of the questions I had, maybe I missed it, is can you provide the basis for the small business that protested? Was it not enough small businesses being evaluated? Was it they thought they had the best value? What was the basis that was upheld?

Yeah, there's a little bit of information that's publicly available on the basis of the protest. You can usually find those at gao.gov. And so we really just don't get into specifics. We know nothing more than what's publicly available in that regard. But we do know that the VA has started to operate in its due course to win their opinion. And, you know, we've With each one of our previous proposals on these CMOP contracts, they've always sustained a protest. The VA has gone through this process and ultimately prevailed and we're optimistic that the same will occur here.

Okay. But just so I'm clear, the protest was upheld and so it's going through a new

uh a new proposal or they're still evaluating that no yeah they what they do they always find some way to suspend the award so that we're not starting on until such time that they uh go through what's usually 120 or 180 day process depending upon the nature of it yeah sorry when you said cancel the contract i i i get it that was the wording that confused me of whether

whether it was upheld or being re-proposed. And so the answer is no, it's not being re-proposed, yet they're evaluating the protest.

That's correct.

Is that right? Okay, good. And then my second question for Judy, you know, as you pay down debt with cash flow, you know, at what point, again, do you get comfortable in evaluating M&A opportunities? Thanks.

We remain active in that space regardless of transactions that we've just closed, so we never really stop looking. But certainly once we flip below three times levered, which we're well, well below right now, we would expect that we've got capacity to execute on a deal. Having said that, even if we were over three times, we have an extremely supportive lending group that is responsive to opportunities as they come up for us. Great. Okay, thanks so much. Thanks for joining us, Brian.

Again, if you have a question, please press star, then 1. At this time, there appears to be no further questions in the queue. I would like to turn the conference back over to Zach Parker for any closing remarks.

Thank you, Carrie. And once again, thank you all for your attention and interest and continued support of DLH. We look forward to following up with you as we approach our year end and to give you some color not only around the results for FY21, but our future forecast and our vision for what's yet to come. Thank you again. Have a blessed day. Bye for now.

Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.