DLH Holdings Corp.

Q2 2023 Earnings Conference Call


spk04: Good morning and welcome to the DLH Holdings Corpus Fiscal 2023 Second 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 stars and one on your telephone keypad. To withdraw your question, please press stars and two. Please note this event is being recorded. I would now like to turn the call over to Chris Witte, investor relations advisor. Please go ahead.
spk03: Thank you, and good morning, everyone. On the call with me today is Zach Parker, president and chief executive officer, and Catherine Johnville, 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 three of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2023 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'll be referencing both GAAP and non-GAAP financial measures. A reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH's website. President and CEO Zach Parker will speak next, followed by CFO Catherine Johnbull, after which we'll open it up for questions. With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.
spk01: 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 owe 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 four, I'll first provide a high-level overview of our quarter's financial highlights. With GRSI, our most recent acquisition under our belt, the second quarter revenue essentially reached 100 million, reflecting our first full quarter of operations post-closing. Of course, We have surpassed 100 million mark before during the first two 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 that we expect to build upon 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 strategy that we have articulated over the years. Our recent couple of quarters have been very active with regard to proposal development and program shaping for future organic growth leveraging these competencies. Our reported operating income of 6.0 million, while EBITDA rose to 10.5 million, Our improving EBITDA margins reflect a strategy of expanding our business through highly differentiated services. We ended the quarter with roughly $204 million in debt, but after the end of the quarter, paid down an additional $8 million. Catherine will review that in greater detail in a few moments. And we will continue to use the company's operating cash flow to deliver 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 million. Turning to slide five, I wanted to briefly provide an overview of some recent developments, including two important contract awards. The first gave us a seat on 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 Cancer Institute. The estimated aggregate ceiling value of this multi-vendor blanket purchase agreement is $1.7 billion. And we hope 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, our naval information warfare business. Through this award, valued at roughly $15 million, 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 Borlas, former chief financial officer for Mantec, to the company's board of directors at her 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. 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 23 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 where we're combining technology leadership with our longstanding 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. 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, Katherine Junk. Katherine?
spk02: Thank you, Zach, and good morning, everyone. We're pleased to report our second quarter results for 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 seven, 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. 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 eight shows these details in graphic form. Adjusted revenue rose 44% to just over 99 million from 69 million 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 $32.6 million of revenue during the quarter. We anticipate organic growth across our business for fiscal 2023 and are happy to have essentially met the $100 million quarterly revenue threshold, as Zach previously mentioned. Adjusted income from operations was $6 million for the quarter versus $4.7 million in the prior year period, an increase of 27%. As a percent of revenue, the company reported an operating margin of 5.9% in fiscal 2023 versus 9.4% in fiscal 2022, reflecting higher non-cash depreciation and amortization expense as a result of the GRSI acquisition. Interest expense was $4.8 million in the fiscal second quarter of 2023 versus $0.6 million in the prior year period, reflecting higher debt outstanding due to the GRSI transaction. DLH recorded a provision of $0.4 million and $2.5 million respectively for tax expense during the second quarters of fiscal 2023 and fiscal 22. We reported net income in the second quarter of $0.8 million or $0.06 per diluted share versus $7.2 million or $0.50 a share last year. Adjusted EBITDA for the three months ended March 31, 2023, was approximately $10.5 million versus $6.6 million in the prior year period, an increase of 59%. Improving adjusted EBITDA margins of 10.5% versus 9.6% in the prior year period reflect the contribution of more highly differentiated capabilities through which we expect to earn better returns. The company generated 6.9 million in operating cash year to date versus 5.8 million on an adjusted basis in the prior year period. Slide nine 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 $196.5 million of debt outstanding. This puts us squarely on track to meet our quarterly debt paydown targets and to reduce debt by approximately $20 million in this fiscal year. As a reminder, when we closed the GRSI transaction, the company had almost $208 million of debt outstanding. We've built a strong track record and a reputation for being able to rapidly turn cash generation into debt reduction, de-levering the balance sheet, and that is not expected to change this year. We continue to anticipate that our debt will be between 180 and 190 million 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.
spk04: We will now begin the question and answer session. To ask a question, you may press star then on your telephone keypad. If using the speaker phone, Please stick up your hands before pressing the keys. It was drawn from the question two. Please press star then two. 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.
spk05: Good morning. Thanks for taking my questions.
spk04: Hey, Joe.
spk01: Good morning, Joe.
spk05: So I wanted to start off with, you know, the top line was a little light versus our expectations and thought maybe we could just drill down a little bit more to that. You mentioned the legacy business was down, I think, about $2 million in the quarter. Did some business get 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?
spk01: Yeah, 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. As you may recall, some of our on-contract growth, of course, were some of our existing task order IDIQ contracts which 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 of that, just things slipping to the right. The same for our new business pipeline. Even some of our acquisitions or contract awards that we had the latter part of last year, we're still just now starting to have a pretty heavy load of bidding activity. And for those that turn into actual contract awards, it's just, again, running through that same cycle, slipping what we think will be more Q3, Q4 prospects.
spk05: 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 million. Was there anything behind that, just doing more business with them, or was there some one-time items in that that drove that revenue increase on the pharmacy side?
spk01: Yeah, Joe, you know, coming out of COVID, we've learned a lot about our veterans and their readiness to deal with some of the challenges that were posed by COVID. And quite frankly, the VA put into effect a fair amount 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 gonna continue to, we think that trend is, which has increased, it's probably leveled off now, it'll probably remain stable as we go forward, but you have seen a lift that was kind of a post-COVID regulatory environment change for our veterans.
spk05: Okay, and thinking with the VA for a second, can you provide us with any update on the contracts there and the VA potentially looking to re-bid out those contracts?
spk01: Yeah, nothing's really changed since our last report. As you know, we have submitted. The government did require the submission of SDVOSB proposals, service-disabled veteran-owned small businesses, and We are continuing to participate in that portion of the acquisition strategy. 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 fourth quarter 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 first quarter calendar.
spk05: Okay. And, Catherine, maybe you could talk a little bit, you know, if I look at the adjusted operating margin for this quarter, 6%. Last year, it was about 6.8%. Just wondering what happened there. GRSI was, you know, expected to help drive operating margins up higher, and we kind of took a little bit step backward in this quarter.
spk02: Yeah, a key contributor to that is, of course, the non-cash DNA, which puts about half the 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 a 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.
spk05: Okay, fair enough. And then one more for me, and I'll let someone else ask a couple questions. Zach, you talked about the significant pipeline of opportunities. I was wondering if you might kind of point out one or two, some of the major ones that you're looking at, and give us a little bit more color or detail around that.
spk01: Sure. You know, we don't get into too much on the competition-sensitive side, but, you know, 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. But that's one that, of course, we had felt that there's a fair amount of pent-up opportunities for us to be able to bid. Beyond that, we also announced two other awards that we had that were multiple award IDIQs. And one of those, again, with our strategic interest in the National Cancer Institute, And those procurements, those task force are just now starting to break. We've actually bid one or two, and we expect another four or five before the end of this fiscal year. And the other opportunity, which we also announced, the defense health agencies, we call it Omnibus IV, but it's for medical research or military health. And that one also, while it has been awarded, The government has yet to release any requests 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 FY24 early start. Mm-hmm.
spk05: Great, thanks for those updates. Really appreciate it and I'll get back to Q. You bet.
spk04: Again, if you have a question, please press star and one. Again, if you have a question, please press star and one. Our next question will be follow-ups from Joe Gomes with Noble Capital. You may now go ahead.
spk01: Joe, are you still there? I'm coming back around here.
spk05: If no one else is going to ask them, I'll ask them more. You know, one of the key items, you know, with the GRSI acquisition was cross-selling opportunities. And, Zach, I wonder if you could speak about some of those.
spk01: Yeah, those are the areas that David and I, David Appel and I, are really, really most excited about. There's some major programs that 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 of the work that's in the future. But things like precision medicine that depends very heavily on not only the computing power, but secure data environments, as well as extensive support from biomedical research talent, you know, 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 GRSI. These are key programs that the future that our nation is really heavily focused on advancing the state of that business. 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 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 IDA acquisition, really positioned 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 a heavy dependence upon technology and innovation for the future.
spk05: Okay, great. And then switching back to the GRSI for a moment, It did $32.6 million of revenue in the quarter. If you analyze that, it comes out to about $130 million. And on your initial projections, you were talking about $140 million at GRSI. Should we expect to see maybe that increase on a quarterly basis to get closer to that 140 run rate?
spk02: Yeah, 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 and the presence of it with those key public health And National Security, NIWIC customers, we believe provides that channel to continue to support that level of growth.
spk05: Great. And one last one for me. I think to you, Catherine, again, interest expense was, you know, 4.9. Again, you know, you projected, I think, about a $14 million 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?
spk02: Yeah, I do think there's certainly going to be pressure on it as a result of interest rates continuing to grow, including the increase yesterday. We've obviously hedged a major portion of that with 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 weren't happy with where we ended up on March 31st. It's multi-pronged, of course. Pressure on the interest rate is going to result in higher interest expense. And there's a non-cash component of that, too, that we might want to put a finer point on in terms of, you know, from an EBITDA perspective, the amortization of deferred financing costs is a non-cash component. But nonetheless, as you suggest, the cash component of interest expense, I think, is going to be a bit stouter than $14 million.
spk05: Okay, great. That's it for me. Thank you.
spk01: Thank you, Joe. Anthony, back over to you.
spk04: It appears there are no further questions. I'd like to turn it back over to Mr. Parker for any closing remarks.
spk01: All right. Well, thank you again. Thanks, everyone, for joining us and your continued interest in DLH. As Catherine and I 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'll look forward to chatting with you next quarter. Bye for now.
spk04: The conference is now concluded. Thanks for attending today's presentation. You may now disconnect.

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