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Operator
Pardon me, ladies and gentlemen. The DLH Holdings Earnings Call will begin in two minutes. Thank you for standing by. Thank you. Thank you. Good morning and welcome to the DLH Holdings Fiscal 2023 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. And should you need any assistance during the call, 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. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Chris Witte, the Investor Relations Advisor. Please go ahead, sir.
Chris Witte
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 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 will be referencing both GAAP and non-GAAP financial measures. For 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 John Bull, 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
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 continue to deliver high caliber solutions and services to our clients. Let's dive into the financial highlights on slide four. I'll first provide a high level overview of the quarter's financial highlights. I'm pleased to announce that third quarter revenue surpassed the 100 million mark, setting a new milestone for our ongoing operations that reflects our success acquiring and integrating growing organizations, as well as 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 reflects strong demand for the company's extensive capabilities by the federal government. During this quarter, our reported operating income was $7.1 million, and EBITDA rose to $11.4 million. We also managed to reduce our debt by over $8 million since the end of quarter two, utilizing our strong cash flow to de-lever the balance sheet efficiently. Our reported EPS was 12 cents per diluted share, and our backlog at quarter end was approximately $817.8 million. We're operating in a very active and attractive bid environment and anticipate winning our fair share of our new contracts in the coming quarters, supporting the accelerated growth going forward. Turning to slide five, 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 million and a five-year contract term. Our integration of GRSI is also on track, and we're continuing to achieve the anticipated enterprise results since the deals announcement. The transition of GRSI to key DLH business systems, such as our enterprise resource planning, ERP, and our 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 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. Of course, there's always the possibility that we'll face another year that begins with a continuing resolution, but in any case, our programs and capabilities remain in high demand with strong bipartisan support. 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 billion-dollar-plus IDIQ contract vehicles that allow us to compete on more value-added agency work than ever before. Also, the White House fiscal 2024 preliminary budget called 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 shop for advancing the government's goals of tomorrow. And we look forward to what fiscal 2024 will bring. With that, I'd like to turn the call over to our Chief Financial Officer, Catherine Charable. Catherine?
Chris
Thank you, Zach, and good morning, everyone. We're pleased to report our third quarter results for fiscal 2023. Turning to slide seven, 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. Slide 8 shows these details in graphic form. Adjusted revenue rose 43% to just over $102 million this quarter from $71.5 million last year. We're obviously very pleased to have officially crossed the $100 million quarterly revenue threshold for the first time, excluding our prior FEMA-related work. Adjusted income from operations was $7.1 million for the quarter versus $6.5 million in the prior year period, an increase of 9%. As a percent of revenue, the company reported an operating margin of 7% in fiscal 23 versus 10.7% in fiscal 22, reflecting higher non-cash depreciation and amortization expense as a result of the GRSI acquisition. Interest expense was 4.9 million in the fiscal third quarter of 2023 versus 0.5 million in the prior year period. reflecting higher debt outstanding due to the acquisition of GRSI. The effective interest rate for cash interest paid in the third quarter of 2023 was 8.64%. DLH recorded a provision of 0.5 million and 1.7 million respectively for tax expense during the third quarters of fiscal 23 and 22. We reported net income in the third quarter of approximately $1.7 million or $0.12 per diluted share versus $4.9 million or $0.34 a share last year. Adjusted EBITDA for the three months ended June 30, 2023 was approximately $11.4 million versus $8.4 million 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. The company generated $15 million in operating cash year to date versus $8.3 million 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 will allow the company to reduce our debt, thereby reducing interest expense and providing meaningful earnings growth to our shareholders. Slide nine gives an overview of key metrics for the company in terms of year-over-year improvement. The acquisition of GRSI has bolstered our top line in EBITDA performance, although the impact of non-cash 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 second quarter, and we remain on track for additional underlying improvement going forward. While non-cash depreciation and amortization expense will continue to be high, we are working hard to deliver 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 60% of debt carrying a fixed interest rate, near-term payments are all applied to our higher interest floating rate debt. Note that approximately $0.6 million of quarterly interest expense is non-cash, being the amortization of financing arrangement fees. 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 $8.5 million of floating rate debt in fiscal quarter three, ending the period with $195.8 million outstanding. This puts us squarely on track to meet our quarterly pay down target. and reduced debt by approximately $22 million this fiscal year from a level of almost $208 million following the acquisition of GRSI. 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 and $187 million of debt at fiscal year end and we expect to pay down even greater amounts in fiscal 24. 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. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then 2. We also ask that you please limit yourself to one question and one follow-up on today's call. At this time, we will take our first question, which will come from Joe Gomes with Noble Capital. Please go ahead.
Joe Gomes
Good morning and congrats on the earnings.
Zach Parker
Good morning, Joe.
Joe Gomes
So, I wanted to just start off, you know, Zach, you mentioned about the IDIQs that you guys have won recently. And, you know, looks in some of your prepared remarks in the earnings release, you talked about, you know, some of the difficult environments. Just trying to get a better idea of, you know, how you see some of those bigger IDIQs, you know, when are they really going to start putting out opportunities for you to bid on new awards?
Zach Parker
You know, great question, Joe. Those are always... very material to our ability to drive that organic growth, as you well know. I'm actually pretty encouraged by, 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 competitive environment. While it is a multiple award contract, we have over the last four to five years exhibited a real, real strong ability to have a high win rate 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 you know, 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 Omnibus IV IDIQ still has yet to issue the first request for a proposal. 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, you know, we're being very proactive on that, and we're starting to hear that they're getting closer and closer prepared to issue a few of those. Similarly, we've had just slower than anticipated government-announced work on some of our other ones within NIH. And then lastly, as you know, many of us across the industry are really anxiously looking for the government to resolve their protests on the largest of the IDIQs, the CIOSP4. It 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 GRSI has some presence and some opportunities to pursue, but those will expand once CIOSP4 gets resolved. 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 a year. But the upside of that is we do think that, like I said, with the approval getting beyond the Budget Control Act, that it should give some of our agencies greater clarity of budget and the ability to issue some of the recurring work.
Joe Gomes
Okay, great. Thanks for that update. And then on the VA, obviously, you know, we've talked about this in the past. You know, you're on continuing work there, I think, through October on one of the contracts and November on the other, on the bridge contracts. Just wondering kind of an update, if any, on the VA process there.
Zach Parker
Yeah, still no definitive actions, as you know, and for the benefit of the audience, we have been on what effectively bridge contracts since November of 2016 for the VA. They have applied two strategies relative to the acquisition approach to date since 2016. And, you know, they have, you know, based upon market conditions and other factors, they've continued to reevaluate that acquisition strategy. Proposals have been in since the beginning of the year, largely through service-disabled veteran-owned small businesses. 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 a unrestricted environment. 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 to impress the agency as we go forward.
Joe Gomes
Great. Thanks for that, and I will get back in queue.
Zach Parker
You bet. Thank you, Joe.
Operator
Again, if you have a question or a follow-up, you may press star then 1 to join the queue. Our next question will come from Brian Kinslinger with Alliance Global Partners. Please go ahead.
Brian Kinslinger
Great. Thanks. Only one question. 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? Are you bidding on a lot more work? Just maybe talk about the proposal activity from a quantitative perspective or qualitative perspective. Thanks.
Zach Parker
Yes, great question, Brian. Yes, outside of the IDIQs, we have really targeted, as we've described before, a pretty healthy bid and 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 and January, quite a bit on the re-compete activity associated with the VA work. But subsequent to there, we've seen the last several months really pick up with regard to a couple of our major bids. So we will be finding, we will be seeing that our BMP activity, which really goes to our GNA, will be pretty heavy during Q3 and certainly as we move into the final stages of of the fiscal year. So, yeah, we're starting to see some of that pick up 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 at 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?
Chris
Oh, I think that's right. Yeah, slow start to the fiscal year, but encouraging recent trends.
Operator
Great. Thanks, much. And our next question will be a follow-up from Joe Gomes of Noble Capital. Please go ahead.
Joe Gomes
Thanks. Just on the HSS Head Start program, you had a great start to the year when you look year over year. It looks, you know, 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?
Chris
I would think of this year as the more indicative. 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 inside a school, are certainly affiliated in trying to align around the school system cycle. So 22 definitely was extremely back-loaded, because remember, we were all still working our way through Omicron in Q1 and Q2 of our fiscal 22. 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, or last year, pardon me, as opposed to this year returning to the normal layout of the contract performance.
Chris Witte
Okay, thanks for that, Catherine. Appreciate it.
Operator
No problem. At this time, there are no further questions in the queue, so I'll hand it back over to Mr. Zach Parker for any closing remarks.
Zach Parker
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. I can assure you that so have our human capital assets, and we really, really are looking forward to Closing strong and really entering FY24 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 website, attending a couple of investor conferences. and to provide some additional color around the business over the coming months. We'll 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. Thank you all for your time. Have a blessed and productive day. Bye for now.
Chris
Thank you.
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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