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Operator
Good morning and welcome to the DLH Holdings Fiscal 2021 Fourth Quarter Earnings 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded I'd like to turn the conference over to Chris Witte, Investor Relations Advisor. Please go ahead.
spk02
Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer, and Catherine Johnball, 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 2022 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 of 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. 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.
Zach Parker
Excuse me. Thank you, Chris, and good morning, everyone. Welcome to our fourth quarter conference calls. I am pleased with how we finished out the year and I'm excited to tell you about Fiscal 2022. Let me begin by sharing with all of you how proud I am of the extremely talented and committed DLH workforce who are responsible for generating our results. None of us knew that Fiscal 21 would impose such unique challenges, including the pandemic. Yet through it all, our diverse work team remain focused on performance excellence, and for that, we are truly indebted. Starting with slide three, I'll provide a high-level overview of the quarter and the year, which reflects exceptional results. We reported sales of $65.2 million in the fourth quarter and closed out fiscal 21 with revenue of $246.1 million. up nearly 18 percent from last year's 209.2 million. This underscores both the strength of our existing operations, which grew organically, as well as contributions from our IBA acquisition last year. We believe our focus on core health markets and high technology applications has proven a valuable one over the long term even during times of pandemic-related constraints, political paralysis, and economic uncertainty. We posted operating income of $4.0 million for the fourth quarter and $17.2 million for the full year, leading to diluted EPS of $0.21 for Q4 and $0.75 for fiscal 2021 as a whole. These results highlight the impact of our business development initiatives, solid margins, and focus on the fundamentals, including controlling our costs. At the same time, we're able to use our cash-generating ability to pay down roughly $23 million of debt. This really strengthens the company's balance sheet and leaves us in great shape to execute our growth strategy growing forward. We ended the year with a backlog of 651.5 million near record levels, which included some recent FEMA awards serving clients in Alaska, which I will touch on in a moment. Turning to slide four, I'd like to update our investors on our current market positioning and the outlook for FY22. Just last week, Congress approved another continuing resolution that funds the government through mid-February. In such an environment, it is common for projects and programs to face delays based on a general lack of clarity with regard to spending priorities and ultimately their budgets. Decision-making is thus slowed, given the reduced visibility over their budgets, impacting federal contractors across the board. However, even with this uncertainty, we believe that our services and our agencies will remain in high demand going forward. Our primary customers, which of course include the VA, Health and Human Services, Department of Defense, really enjoy widespread bipartisan support, which gives us confidence and continued emphasis on the critical health-related services we provide. In addition, our advanced capabilities in data analytics and cloud computing are allowing DLH to win and pursue new markets, leveraging our cybersecurity and digital transformations across our clients. As evidenced this past year, there's great focus on utilizing telehealth applications, infectious disease research, and big data to find solutions that can benefit millions of people here and abroad. Not only is DLH at the center of many of these initiatives, We've grown during an otherwise uncertain economic environment. Even with the possible implementation of pandemic-related vaccine requirements for government contractors, we do not anticipate any material negative impact to the company. Our employees are ready for 2022 and beyond. With regard to the pandemic, Since the pandemic began, we have had approximately 200 scientists, researchers, and engineers gain intimate knowledge and expertise in support of nationally recognized programs to develop countermeasures to COVID-19. In addition, we have leveraged our contingency and emergency response capabilities to deploy over 500 healthcare practitioners and medical logistics personnel to attack the spread of COVID-19, particularly in rural areas in the country. To make sure we stay on top of our game, of course, we'll need to continue investing in human resources and recruiting top talent. In that vein, as shown on slide five, we recently hired Malik Farabi as our Chief Human Resources Officer. Malik has over 15 years of human capital leadership in positions within the federal government contracting space. He brings a unique set of competencies and strategies to help me and our executive leadership team tackle the challenges not only of today, but what we foresee tomorrow. He is a forward-thinking executive adept at translating business vision into actions that improve performance, employee engagements, profitability, and growth. Our number one asset is our credentialed top tier workforce, which requires both company-wide commitment and strong leadership. So we are really excited to have Malik on board to help us to build the next generation of thought leaders at DLH. Slide six shows some of our recent organic wins, which will of course contribute to a great start to fiscal 2022. We believe This represents a vote of confidence in our strategy, our people, our technology, and our ability to be a trusted supplier of technical solutions and services, as well as unique capabilities across these agencies. Before turning the call over to Catherine, let me summarize where we stand heading into fiscal 2022, as shown on slide seven. This year, while challenging and certainly unique in many ways, has illustrated how adept DLH is in providing steady, solid results and leveraging our new opportunities in our target markets. We've embraced a leadership role in helping the federal government understand and respond to a pandemic, and in doing so, have racked up some impressive awards that have increased our role across the agencies we serve. We've been identifying and penetrating new avenues of expansion as well. In addition, while proving our ability to win new business organically, we have a strong track record of finding and integrating select, attractive acquisitions that improve our technology credentials, our value proposition, and bolster our growth profile. We're confident that we have the leadership team in place to execute the next phase of our strategic vision, building on a history of success while laying out a roadmap for even greater days ahead. In closing, I believe DLH is very well positioned for the year to come due to our strong backlog, including new wins with FEMA and the enduring demand for our services from a broad array of federal agencies. Having closed out a successful year for the company in the midst of a pandemic and lingering issues impacting the economy, from supply chain constraints to elevated costs and a tightening labor profile market, we have proven that we are able to deploy our technology-enabled health solutions to serve the evolving needs of our customers. We're helping people across America to get the healthcare they need, analyze data for clinical research, optimize government-delivered services, and in doing so, improving the lives of millions. It is with this underlying mission to serve others and our passionate, dedicated staff that I remain upbeat about fiscal 22 and beyond. With that, I'd like to turn the call over to our Chief Financial Officer, Katherine Joplin. Katherine?
Chris
Thank you, Zach, and good morning, everyone. We're pleased to report such a strong finish to fiscal 2021. Turning to slide nine, we posted revenue of $65.2 million for the three months ended September 30, 2021, versus $50.7 million in the prior year's fourth quarter. The growth reflects the impact of roughly $8.5 million in revenue tied to the acquisition of IBA, along with new business awards in the quarter and increased volume across our legacy programs. In addition, as Zach mentioned, we expect the first quarter fiscal 2022 currently underway to greatly benefit from the previously announced FEMA awards in Alaska. Such contracts in aggregate had a value over 107 million for their base periods, and we believe the current run rate puts these in a range of adding between 95 to 100 million in our fiscal 2022 Q1 revenue. After that, The impact will depend on demand in Alaska for ongoing COVID-related services as the customer evaluates whether option exercises are appropriate. To date, the customer has exercised the first of three one-month options on the emergency medical staffing contract, valued at approximately $35 million, which will largely be reflected in our fiscal 2022 Q2. Turning to slide 10, Income from operations was $4 million for the fiscal 2021 fourth quarter versus $2.7 million last year. Operating margins improved to 6.2% from 5.3% in fiscal 2020, reflecting favorable program mix and greater operating leverage. The 2021 results had a large contribution of time and materials programs, which generally yield stronger results than cost reimbursable contracts. Note that, in line with my prior comments regarding the revenue impact expected in Q1, fiscal 2022 Q1, due to the Alaska-related FEMA work, we expect that margins from those task orders will be approximately 5% of revenue, reflecting the significantly subcontracted nature of those services. We reported net income in the fourth quarter of approximately 2.9 million or 21 cents per diluted share versus 1.4 million or 10 cents a share last year. DLH recorded a provision of 0.3 million and 0.6 million for tax expense during the fourth quarters of fiscal 2021 and fiscal 2020, respectively. Interest expense was essentially flat at 0.8 million in both years. Turning to slide 11, EBITDA for the fourth quarter of fiscal 2021 was $6 million versus $4.4 million in the prior year period. As a percent of sales, EBITDA rose to $9.3 million this quarter versus $8.6 million last year. Q4 results in fiscal 21 absorb the impact of $1.1 million in corporate development for transaction evaluated, which was not ultimately closed. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and at the back of this presentation. On slide 12, we wanted our investors to visualize our record of achievement over the past decade. As you can see, we've shown steady top line growth as well as expanding EBITDA and improving EBITDA rates, reflecting our progression up the value chain and our effective leverage of our corporate infrastructure as we achieve scaled through growth. This perspective illustrates our commitment to steadily improving the company's performance and increasing returns to our shareholders. We're really proud of what we've accomplished so far, but think this is just the beginning of maximizing our potential. Slide 13 is an updated snapshot of our debt position at the end of the fourth quarter. As of September 30, we had approximately $46.8 million of debt outstanding under our credit facility versus $70 million at the end of fiscal 2020, including a $21.1 million advance payment related to the first FEMA contract awarded in September. We generated approximately $45.7 million of operating cash flow during the year, allowing us to pay down approximately $23.3 million of debt. We have satisfied all mandatory principal payments on the loan facility through December 31, 2023, but will continue to reduce debt when feasible to strengthen the balance sheet even more going forward. This concludes my discussion of the financial statements. With that, I would now like to turn the call over to our operator to open for questions.
Operator
We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're 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'll pause momentarily to assemble our roster.
Zach Parker
Thank you, Anthony.
Operator
Our first question comes from Joe Gomes with Noble Capital. You may go ahead.
Joe Gomes
Thanks. Good morning, everyone. Congrats on the quarter and year results.
Chris
Good morning, Joe. Thank you. Thanks for joining us.
Joe Gomes
So I want to start with the FEMA award in Alaska. Again, congratulations on getting the first exercise there also. Just maybe give us a little detail of how that's progressing. And, you know, are there other additional state opportunities out there that you may be bidding on or what you think you could bid on?
Zach Parker
Yes, thank you very much, Joe. I appreciate that and appreciate your continued support for the business. Yeah, so Alaska was competitively awarded. Both of our Alaska awards were both competitively awarded from FEMA. And FEMA has a charter across the nation. As you may recall, earlier in the year, shortly after the pandemic began, they issued a, we were awarded a basic ordering agreement, a BPA, which covered largely the Pacific Northwest area. And that's where these awards, these two awards were competed and were successfully won. That same community across the government is looking to expand that that this type of disaster response capability across the nation. And we're kind of in the forefront of working with them to see how broadly that may expand. So we do think and anticipate that the potential exists for other states to leverage the federal government's commitment to support common measures against COVID-19 much like this. So we'll stay tuned on that.
Joe Gomes
Great. Thank you for that. On the continuing resolution, you touched briefly on it. You know, maybe you could, again, give a little more color. You know, I know I think last quarter you talked about the InfiniBite cloud, and there's a lot of major health IT, IDIQs that were expected to be rolling forward here. You know, where do we stand on those now? They've been pushed further to the right. You know, maybe a little more color on the continuing resolution impact would be appreciated.
Zach Parker
Yeah, as you know, as you probably know, the continuing resolution which kind of kicked the can to the right, you know, eight weeks or so into mid-February did require a great deal of of concessions and tradeoffs as it moved from the House to the Senate. We're continuing to stay real pulsed on what we think is going to come out of it that way, but all indications are that for us in particular, the agencies associated with the work that we have in hand today and that we have in our near-term portions of the pipeline continue to look strong. You know, the Department of Defense probably has more pressure in the CR environment than the civilian agencies, largely because over the last year or two, with the exception of COVID money, the civilian agencies are still underspending the funds in which they have been obligated. That is not necessarily the case for DOD, since a number of the threats are still continuing to emerge, and the budget uncertainty creates some challenges within DOD. But we still feel really pretty comfortable with what we are seeing and hearing as things move through the Congress, that the things in our pipeline are very solid. The biggest impact is, as we indicated before, Some of these programs that are new programs that don't get exemptions or pandemic-type exemptions are continuing to see extensions, you know, to the current work as opposed to new money and new contracts. So we'll continue to monitor that, but we think that the effect of the CR will be neutral to potentially neutral to our new business pipeline that still has some risk baked in with regard to organic work.
Joe Gomes
Okay, thanks for that, Zach. And maybe, you know, one here, kind of a look back here, you know, you made the S3 and the IBA acquisitions. You mentioned how they're now fully integrated. Just, A, you know, how are they performing versus your pre-acquisition plans? You know, you mentioned in the past about one of the, the positives of these acquisitions was the ability to bid on more opportunities. Are you seeing that come to fruition today?
Chris
Most definitely. Both of those acquisitions were part of our overall strategy to have full market presence in those three key markets in health and human services, the defense VA, human services and solutions, and the public health and life sciences sectors. And so we fulfilled that with the completion of that phase one acquisition program. But of course, who could have guessed how timely and relevant an acquisition of a public health company would turn out to be, right? None of us saw COVID coming at the time. We just knew that, of course, there's a primary role for the government in analyzing healthcare and disease issues and long-term, particularly long-term or pervasive pandemic issues. So certainly, extremely proud and we see a lot of value in that addition of S3 to our portfolio. Likewise, the IBA team has fulfilled in every way what we expected in terms of getting a beachhead in DHA and really leveraging their capabilities with a couple of key agencies inside DHA. We obviously see that as a market for continued growth and expansion and having their skills on our team has really upped our position in that competitive market. So we're quite pleased with that. I think as we've discussed on prior calls, our emphasis or our lens for acquisitions will move away from being particularly market focused and just trying to get a footprint in each of those key markets, more to capabilities that augment our position in those markets now that we've rounded out and have at least a foothold in each of those markets. So we're looking to add capabilities and continue to leverage some visibility we're getting with those key clients. And as you know, it's a very active M&A market. So we expect to be able to successfully execute some additional plus ups to the portfolio in fiscal 22.
Joe Gomes
Great. And one more, if I may sneak one in. Earlier in the year, Catherine, you had some, let's call it, slower-paying clients, but you did a great job in managing through that and everything. With the continuing resolution, are you starting to see any of that creep into the system again, or is that thing still running where you would like them on the accounts receivable side?
Chris
So far, our early returns in Q1 are favorable. And, you know, Q1 traditionally is our softest cash flow generating month just because of, you know, as we often joke, there's a big press to get everything processed for September 30. And then, of course, the government's got quite a bit to do to kind of return to their normal business after their fiscal year end at September 30 as well as ours. But early returns on Q1 are looking favorable. I certainly don't expect anywhere near the challenges we had last year where we were not only navigating the CR, but also, of course, integrating an acquisition that closed on the very last day of the prior fiscal year. So we have a lot of factors. colliding in Q1 last year. I definitely don't look forward to repeating that. So I expect this current year fiscal Q1 to be much more favorable in terms of and much more normal in terms of cash flow collection. But honestly, my expectation is that we just hold our position for Q1 just given our traditional Q1 cash flow requirements, I think I would consider that a success. And of course, if we managed to pay down some debt in the meantime, that would be a nice icing on the cake. But quite right, as you said, thanks for the observation that the team worked extremely hard to turn that around and highly successful, exited the year with DSOs at 46. So that's going to be a tough achievement to top.
Joe Gomes
Well, congratulations again on this. of an excellent quarter and year. Looking forward to 2022. Thank you. Thank you, Joe.
Zach Parker
Thank you, Joe.
Operator
Again, if you have a question, please press star then 1. Our next question comes from Brian Kinslinger with Alliance Global Partners. You may go ahead.
Brian Kinslinger
Hi, guys. Thanks for taking my questions and great results.
Chris
Thanks for joining us, Brian.
Brian Kinslinger
Yeah, of course. So on Alaska, and hopefully I'm understanding it right, after the three short-term options, what then with these short-term programs? Do you see the potential for follow-on work to compete for? Do you plan for a wind-down, which of course would be easier given it's subcontractor heavy? Just trying to understand how this plays out for the year.
Operator
The main speaker line has been reconnected. Brian, you could restate your question, please.
Brian Kinslinger
Yeah, great. Maybe it was something I said. Just kidding. I just was trying to get an understanding after the short-term options, assuming they are or are not executed on the Alaska contract, what happens after? Is there follow-on work you think there's something to compete for or do you expect and plan for a wind down, which, of course, with subcontractors would be easier than typical?
Zach Parker
Yes, no, great question, Brian. Those are currently set as turnkey projects, contracts for us, which means they have a ramp up and then a ramp down. We call it mobilize and demobilization. They're going to range. They also have in them some options that can be exercised to extend it. And so, you know, depending upon the situation on the ground. But for each of those, we do expect that there will – that we will, A, be successful, and then Alaska will start to get a hold of – in front of it. Now, obviously, variants could change that, right? And so, we're going to continue to monitor that. With regard to could there be other opportunities, We hope so. At present, we know that FEMA, as I indicated to Joe's question, FEMA is looking to expand the scope to cover additional states throughout the U.S. That has not occurred as of yet, but they are working feverishly, we know, to provide contract coverage elsewhere. And Jackie Everett, our chief growth officer, is working with GSA and FEMA And so we hope to know more within the coming weeks as to whether or not that's going to occur. But as of right now, our backlog with regard to Alaska, we do expect to get through Q1 and into Q2. But if we're all successful as a nation, we hope that that will slow down.
Brian Kinslinger
But we'll keep you posted on that. Great. And then a follow-up. Can you quantify what percentage of your revenue will come up for renewal in fiscal 22 and whether that is front-end loaded or back-end loaded?
Zach Parker
Yeah, well, excluding, of course, Alaska, you know, our continuing operations, the largest recompete that we have still continue to be the VAC MOPS. And, of course, that's been well-documented. We've discussed quite a bit of that over the recent years. We have just recently received an extension for one year, for a full year, on one of our CMOP contracts. And so we're going to continue. We expect that the government will reevaluate again their position on the re-competitions. Besides that, we have no material contracts that are up for renewal in FY22.
Brian Kinslinger
Great. And then, obviously, we talked about the CR environment. and how it has less impact on civilian agencies you mentioned can you talk about what this means for your bid and proposal submissions for new business over the last six months and you're bidding on less work than a year ago more work and then talk about the submission pipeline that you see planned for fiscal 22 and how it you know appears to be trending up or down or flat
Zach Parker
Yeah, and of course, we do not have the crystal ball as to what we'll get through, but we do have a good understanding. We work very closely with our agencies, and we're looking at what they still make issue for requests for proposals over the next year. We do expect that four to five of our civilian agencies will have solicitations out within the next several months. As you saw, the Center for Disease Control was able to issue a relatively modest size, less than $40 million contract that we were awarded just as we ended the fiscal year. And we think that they're going to continue for some of those recurring contracts that do not have a new scope added to them, that they'll still continue to be able to get those released. We're seeing the same activity on the behavioral health side within HHS for organizations such as SAMHSA, And we also found that some of the multiple award IDIQ contracts are still moving forward with some solicitations as well. So we expect that we have, first of all, had a very heavy bid activity for the multi-award IDIQ contracts over this last year. We're hopeful that that will translate into the actual funded contract bids within FY22. We'll have greater color on that as we look at coming out of the CR, and we'll provide an update on that certainly early part of next year.
Chris
And I would just add to that, Brian, that, of course, it's never a welcome thing to be operating in a CR environment, and there's no question that there will be some of our target pursuits that will be delayed as a result. However, as we've shared, given the way that we've expanded our ability to address the market and really leverage capabilities across the strategic acquisitions that we've integrated and with the growth of our chief growth officer, the addition of our chief growth officer and really the cadence and the tempo of our business development efforts is definitely up. And so we think that's mitigating or offsetting against the impact of sort of the slowdown from the CR.
Brian Kinslinger
Great. Last question I have. I realize in this call you mentioned the key new hire here, but as you win new programs, talk about your ability and or challenges to attract and retain personnel given the well-documented labor shortage. Thanks.
Zach Parker
Yeah. Yeah, Rick, I couldn't agree with you more there. It's well-documented, the whole great resignations. It's causing challenges not only across the nation. It's particularly acute to our federal government agencies. You know, we're faced in the federal government agencies dealing with, you know, added things such as, you know, vaccine mandates, you know, volatility with regard to commitments to ESG and DE&I and just a number of things that affect, you know, our ability to attract, retain some of the best talent. That's why it was so critical for us to treat that as an asset that is truly important for us to have on board in the company, and why we leaned in with a very high-level nationwide executive search to really find the best of the best. And we're excited about having been able to get and attract someone of the caliber of Malik Farabee, whose most recent assignment was with Allen Sciences. We think that the challenges that you address, I mean, you know, when the notice came out from the executive order, we had 603 individuals unvaccinated, right? And as you well know, if you're unvaccinated, you know, in September, it's probably not due to your inability to find a vaccination, right? So we've had to wrestle with, you know, a workforce that had a degree of hesitant folks while also trying to navigate ourselves through the the varying regulations associated with how companies, how we're going to have to address our response there. So there's just a variety of things associated with the talent and workforce and talent management that we have not seen at this magnitude for decades. But we feel really, really good having spent, having had our executive leadership team spend quite a bit of time on the slate of candidates we have and having heard division laid out by Malik, and we're well underway. Malik is here with Catherine and I at our headquarters today in Atlanta, and we're starting to lay some groundwork for how we're going to become the best in our industry at that aspect of the business.
Brian Kinslinger
Great. Thanks for taking my questions, guys.
Chris
You bet. Thank you. Take care, Brian.
Operator
Again, if you have a question, please press star then 1. At this time, there appear to be no further callers in the queue, so I'll turn it back over to Mr. Parker for any closing remarks.
Zach Parker
Thank you, Anthony, and more importantly, thank you to each of you for participating on today's call. As I indicated, we're really pleased with the results of our fourth quarter of FY21. Particularly excited about how that leverages a real strong entry into FY22. Our upcoming activities will include, of course, the annual meeting of the shareholders as we also evolve to develop the posture around the Q1 results. So please stay tuned and look forward to greater clarity. We hope to have greater clarity from the CR in its transition by then as well. And thank you all. Have a blessed day. Bye for now.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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