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Operator
Good morning and welcome to the DLH Holdings Corp Fiscal 2023 Fourth 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 telephone keypad. 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, 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 Johnbull, Chief Financial Officer. The company's earnings release and 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 column may include forward-looking statements that relate to the company's outlook for fiscal 2024 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 SEC. 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 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 fourth quarter conference call. I am very pleased with the way that we have finished the year and with our strong position heading into fiscal 2024. But first, let me take a minute to once again thank our dedicated employees for the passion, the commitment, and the performance excellence that they have delivered in support of all of our customers' missions and to our corporation. This has been a transformative year for our company, and without the steadfast contribution of our team members at every level, DLH would not be the leading technology solutions and services provider that it is today. In all three channels, our digital transformation and cybersecurity, our science and research and development, and our systems engineering integration, all of our members have really shined, so thank you. Now turning to slide four, I'll first provide a high-level overview of the financial highlights for the quarter and the fiscal 2023. Fourth quarter revenue was $101.5 million, reflecting the impact of our acquisition as well as organic growth across our existing business. For the full year, revenue rose nearly $376 million from an adjusted $269 million in fiscal 2022, which of course excludes the short-term turnkey contract with FEMA to support Alaska's response to COVID-19. Given our sizable backlog, increased addressable market, and access to bid on various task orders, through our several large contracts, we believe that the future continues to look bright for DLH. Adjusted operating income was $7.8 million for the quarter and $26.5 million for the fiscal 2023, while adjusted EBITDA rose to $12.1 million for Q4 and $42.1 million for the year. In addition, we generated $31 million in cash from operations over the past 12 months and exited a quarter with an approximate $179.4 million in debt. That is down $207.6 million after our December 22 acquisition. As Catherine will discuss further in a moment, we plan to continue using our company's strong cash flow generation to reduce debt in the coming year as we work towards further delivering our balance sheet. Our adjusted EPS was 16 cents per diluted share for the quarter and 55 cents for the full year. And our backlog as of September 30th, 2023 was just under 705 million. We continue to operate in an active bid environment even as the government still works its way through the current continuing resolution circumstance. We remain very upbeat about the opportunities ahead and the path to accelerate top-line growth forward organically. On that point, slide five provides an update on certain key market conditions and metrics that have the potential to impact the company in the quarters to come. First, the company has worked diligently to align our business structure with our expanded capabilities and technology-based go-to-market strategy. Our highly credentialed staff are dedicated to providing the most advanced solutions that address the needs of each of our clients, positioning us to compete for more higher-value opportunities going forward. As customers continue utilizing the professional services contractors, we can leverage our expertise, our experience, and applications to further penetrate agencies and to add to our book of business and accelerated growth. Second, the federal government remains committed to expanding the role of cybersecurity, given the crucial ongoing need to protect sensitive information and big data networks as well as the personal records of millions of Americans. The use of cloud-based computing only increases cybersecurity's criticality and importance to protecting sensitive government systems and data. This aligns well with our intellectual property, our secure data platforms, and technology-driven solutions. Third, as I mentioned a moment ago, the federal government continues to operate under a continuing resolution, with certain agencies funded through January 19th and others through February 2nd. While this does at times restrict and hamper certain decision-making across some of the federal agencies, particularly with regard to awarding of new contracts, it is not expected to materially impact DLH's current book of business, nor the near-term outlook. Our wide array of programs and services provide a solid bedrock for the company's top line over the coming months. In addition, the core agencies which we support, those include, of course, the Department of Defense, including its DHA, Defense Health Agency, Veteran Affairs, and the Health and Human Services Organizations, they typically receive broad bipartisan support which we anticipate will continue. The White House, in its fiscal 2024 preliminary budget, called for historic investments in research, artificial intelligence, machine language, and digital transformation, which would all play very well to our, you know, growing and somewhat unique capabilities and increase the opportunity for further top-line expansion along strong underlying And lastly, our expanded capabilities and expertise provide the opportunity for us to bid on task orders from several new large IDIQ contracts and those that remain on the horizon. There's every indication that the government will continue to award a growing volume of work through these pre-screened arrangements. Strategic contracts that are under consideration applicable to us include our CBITS contract, relatively recently announced, the major CIO SB4, supporting biomedical research coming out of National Institute of Health, OASIS, and several other highly, very large ceiling multi-year contract vehicles. These multiple award IDIQ contracts offer numerous opportunities for high-value work over the coming years that can substantially raise the revenue base of the company and task orders as they are awarded. We're confident in our ability to win task orders on these vehicles, which we expect to impact the company's growth trajectory for years to come. Given our advanced solutions, highly engaged customer relationships, and the unparalleled expertise of our amazing staff, We're very optimistic for FY24 and beyond. With that, I'd now like to turn the call over to our Chief Financial Officer, Catherine Johnbo. Catherine.
Chris
Thank you, Zach, and good morning, everyone. We're pleased to report our fiscal final results for fiscal 2023, and we believe these results demonstrate how our broad capabilities, employee expertise, and delivery execution produce consistently strong financial performance. Starting with slide seven, we provide a high-level overview of our results for Q4 of FY23 compared to the same quarter of FY22 on both a GAAP and adjusted basis. The fiscal 23 adjusted EBITDA and adjusted operating income figures exclude the previously announced $7.7 million impairment charge related to real estate assets as we consolidated underutilized premises as part of an ongoing facility rationalization effort. Walking from operating to net income, interest expense was $4.8 million in the fiscal fourth quarter of 23, reflecting higher debt outstanding due to the acquisition and increased interest rates. DLH recorded a tax benefit of $2 million during the fourth quarter of fiscal 23 versus an expense of $0.8 million last year. As a result, we reported a net loss in the fourth quarter of approximately $2.6 million or $0.18 per diluted share. By comparison, the prior year fourth quarter adjusted results exclude $0.4 million of corporate development costs related to the December 22 acquisition, from operating income. Interest expense was 0.5 million in the period and we reported net income of 3.4 million or 24 cents a share. 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 51% to roughly $102 million this quarter, from $67 million last year, reflecting both organic and acquisition-related growth. Adjusted EBITDA for the three months ended September 30, 2023, was approximately $12.1 million versus $7 million in the prior year period, an increase of 73%. As a percentage of sales, adjusted EBITDA margin was 11.9%. versus 10.4 in the prior year period, reflecting higher value capabilities across a larger base of business. While our fiscal 23 fourth quarter results are particularly strong due to the timing of certain expenses, we expect our EBITDA margin to remain at approximately 11% prospectively. After reducing adjusted EBITDA by depreciation and amortization expense of $4.3 and $1.9 million for the respective quarters, adjusted income from operations was $7.8 million for the quarter 23 versus $5.1 million in the prior year period, an increase of approximately 53%. As a percent of revenue, the company reported adjusted operating margin of 7.7% in fiscal 23 versus 7.5% in fiscal 22, with a richer mix of business offsetting the impact from higher non-cash depreciation and amortization expense. The company generated $31 million in operating cash for the full fiscal year versus $14.3 million on an adjusted basis in fiscal 22. As Zach mentioned, we anticipate continued strong cash flow generation going forward, allowing us to further deliver the company in the quarters to come. Turning to slide nine, we give an overview of key metrics on a year-over-year basis, highlighting the significant improvement in adjusted EBITDA. While interest expense rose considerably due to the higher debt balance and elevated interest rates, our delevering strategy is clearly focused on eliminating debt. utilizing both mandatory and voluntary repayments as rapidly as possible, thus reducing our interest expense exposure. Note that approximately 0.6 million of quarterly interest expense is non-cash amortization of financing arrangement fees. I'd like to emphasize that our adjusted operating income performance improved substantially, reflecting favorable contract margins on our current mix of programs and the impact of increased operating leverage, although these results were offset by non-cash depreciation and amortization expense. The bottom line is that our acquisition significantly opened new doors for the company, elevated our presence in key agencies, and strengthened our margin profile over the long term. Slide 10 illustrates the successful deployment of our sizable cash flow generation to pay down debt and strengthen the company's balance sheet over the past four quarters, along with an initial estimate for the year ahead. We've paid off approximately $16.4 million of debt in Q4, ending the fiscal year with $179.4 million outstanding. This means in total we've eliminated $28.2 million of debt since December 22, doing so by satisfying our mandatory payments of $14.3 million and making voluntary prepayments of $13.9 million. Approximately 60% of our debt carries a fixed interest rate, so all payments we make are against higher interest floating rate debt. Notably, the company's interest rate swaps maintained a relative 50-50 split between fixed and floating debt between fiscal 23, limiting our interest rate risk. As a result of our effective implementation of swap arrangements, our effective interest rate since the December 22 acquisition was approximately 8.7%. We continue to actively manage our working capital and cash flow requirements while simultaneously investing in the business and utilizing the favorable tax attributes of our acquisitions and our stock compensation plans to minimize cash tax payments. Our strategy to effectively manage cash flow to pay down debt is designed to reduce future interest expense obligations. Looking forward, we anticipate that our delevering strategy will leave us somewhere between 157 or as low as 153 million of debt by the end of fiscal 24. Turning to slide 11. We're poised for a new stage in our growth trajectory and development as a company. Our focus remains on expanding top-line volume through high-quality franchise programs while continuing our delivery of strong margins. The transformation of DLH into a world-class technology provider illustrates the successful execution of our acquisitive and organic growth strategies and our commitment to generating long-term value for our shareholders. We stand ready to take DLH to the next level, delivering unique, innovative solutions across the federal health and cyber defense markets. This concludes my discussion of the financial statements, and 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 one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Store then 2. At this time, we will pause momentarily to assemble the roster. And our first question will come from Joe Gomes of Noble Capital Markets. Please go ahead.
Joe Gomes
Good morning. This is Justin Goldfield filling in for Joe.
Zach Parker
Hey, Justin. Hey, Justin. How are you? Good.
Joe Gomes
So I just wanted to, you know, just start off with just looking at the IDIQ contracts, obviously, and the presentation. You guys having, you know, some priority IDIQs which remain pending. You know, I just want to ask, like, is the company starting to see this opportunity to start bidding on new awards? Like, has the environment gotten better from what it was the previous quarter?
Zach Parker
You were breaking up on the last part there with regard to before the environment. What was that, Justin?
Joe Gomes
I was saying, has the environment gotten better from the previous quarter?
Zach Parker
Yeah, a little bit. We're seeing signs that, you know, our biggest one that's pending for us is one we refer to as CIO SP4. We've had, you know, probably eight or nine opportunities over the last year and a half that we've been looking at that we had earmarked for post-CIO SP4 award. And so time has not been helping, but we are seeing some indications that the government is working their way through all of the protest information. We're hearing good signs just as recently as the last week and a half that they may finally get off top dead center and get an award in. in the near term. So that'll bode well. We obviously have missed some opportunities, but we also have been looking strategically, you know, ahead, and we think there are still several opportunities that could be an early part of this fiscal in 2024 that could still yield some bookings during this fiscal. So, yeah, that big one is really looking like, you know, we're expecting to see an award. You know, we currently do not have a prime seat in the unrestricted, CISP3. This bid went in over a year ago, and the government was really conveying that they were going to have an award quite some time ago, so we would have those task orders be able to bid again. So it's taken a while, but the tea leaves are looking better this quarter than last quarter.
Joe Gomes
Yeah, great. Thank you. Yeah, I know. Can you just provide us a little update just on the VA contract side? I know last quarter, you know, nothing really seemed to have changed, but you guys were a little optimistic. You know, any update, any color on that would be great.
Zach Parker
Which contract was that? Was your time on our VA contract?
Joe Gomes
The VA side.
Zach Parker
Yeah, there's been very little activity still. You know, we continue to be the incumbent. We continue to be very excited around the opportunity to, to work and to continue doing this period while they're still making acquisition decisions. You know, our best estimate is that, you know, we do not see a material effect even if they progress with their decisions. We did not see a material effect this fiscal. It could be subject to change, but we've continued to really work very closely, continue to deliver the results, and our workforce is doing a tremendous job in not getting too distracted with the acquisition side.
Joe Gomes
Great. And then last one, if I may. You know, last quarter, in regards to the Ben's proposal backlog, you know, you guys mentioned that the 90 IDIQ area was kind of trending positively. You know, can you guys kind of see that going into the new year?
Zach Parker
Yeah, you know, we do. The biggest wild card on that is really how agencies respond to that CR decision, the last one, of course, being February 1st. You know, there are some agencies that have been reluctant to put new contracts in place, largely because of uncertainty about their full-year contract. Budget impact but you know our leadership team has been really working very hard to work with those customers Encourage them to issue those task orders on the current work. You know the National the Cancer Institute, you know, we're starting to see some signs that they may start to leverage the multiple award IDIQ we have there we're starting to see signs that the Defense Health Agency also is is moving forward. You know, they've got, in our minds, they've got a lot more budget certainty than some of the other agencies as it relates to, you know, the non, you know, weapons and systems. So we're really, you know, optimistic that, you know, we'll see some more bid flow come through over the next quarter, and we'll get our share.
Joe Gomes
Well, great. Yeah, thank you for taking my questions, and congratulations on the quarter in here.
Zach Parker
Thank you.
Operator
Once again, if you would like to ask a question, please press star, then one. Seeing no further questions at this time, this concludes our question and answer session. I would like to turn the conference back over to Mr. Zach Parker for any closing remarks.
Zach Parker
Thank you, Andrea. And thank you all for your participation and steadfast support of DLH. We're really, really pleased as we close the year that we're so well positioned to Now execute that next leg of our strategy with respect to both organic growth and performance excellence. So thank you for your participation. Of course, next calendar quarter we will be having our annual meeting with the shareholders, so we'll look forward to having a little deeper dive and some further engagement with you all. So thank you. Have a blessed day, and we'll chat with you soon. Bye for now.
Operator
The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.
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