DLH Holdings Corp.

was a symbol to compete for. Our differentiated suite of data science and AIML technology applications, our outstanding capabilities, and workforce alignment aligns exceptionally well to position us for work within our three strategic pillars, science, research, and development, digital transformation and cybersecurity, and systems engineering and integrations. As government acquisition strategies evolve, we remain prepared and proactive, leveraging speed, innovation, and agility to compete on multiple fronts in an accelerated acquisition landscape. With that, I'd now like to turn the call over to our Chief Financial Officer, Katherine Johnbaugh. Katherine?

Thank you, Zach, and good morning, everyone. Thanks for joining our reporting on our second quarter results for fiscal 2026. Turning to slide six, I'd like to first provide a high-level overview of some key financial metrics for the three months ended March 31st, 2026. We reported revenue at 59.3 million in the second quarter versus 89.2 million in the prior year period, reflecting contributions from expansion on existing contracts offset by the impact of conversion of certain programs to small business set-aside contracts, as discussed in the past, and certain government efficiency initiatives. In total, the revenue contraction was mostly due to small business set-aside initiatives, primarily from CMOP and Head Start with approximately a $24 million increase in the quarter-over-quarter results. The remaining change was due to year-over-year contract completions and government efficiency initiatives. We reported adjusted EBITDA of 5.3 million for the quarter compared to 9.4 million in the prior year period, with the decrease primarily driven by the changing revenue volumes. Adjusted EBITDA margin was 9% for the quarter, adjusting for the timing and incremental cost impact of our cost scaling initiatives implemented in the second quarter. From a free cash flow standpoint, we generated approximately 3.8 million during the quarter. In comparison to the prior year period, the prior year reflects the results of significant working capital builds stemming from the transition of a CMOP location that restricted cash collections early in fiscal 25. Now turning to slide seven, I'll wrap up with a summary of our debt reduction efforts, which remain a key focus area for DLH. Debt reduced during the quarter to 132.7 million, a reduction from 136.6 million at the end of the previous quarter. This marks the resumption of our deleveraging trend after the typical seasonal uptick we experienced in the first quarter. We expect to convert approximately 50 to 55% of EBITDA generated during fiscal 2026 to reduce debt by year end. We remain well ahead of our mandatory repayment schedule and in full compliance with all financial covenants. With that, I would now like to turn the call over to our operator to open up for questions.

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. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Joe Gomes with Noble Capital.

Good morning.

Good morning, Joe. Hey, good morning, Joe.

I just want to start out on the VAC mop. Do we have anything left there? How much longer do you think that's going to run through? I know we were hoping it would end, I think, in the fiscal third quarter of this year, but maybe a little just update on where we stand on that.

Yeah, I think we're still on plan with regard to that reduction. You know, the VA and our team have been working collaboratively towards standing down the final couple operations. Catherine, do you have any greater specificity for that?

Sure, yes. Our expectation is that we will wrap up the transition of those contracts just before Memorial Day.

Okay. Keep that behind us.

Yes, sir. Obviously, it served us well. We remain committed, Joe, to supporting our nation's veterans. We've still got irons in the fire for transitioning to different types of work for the VA. Once again, once the VA changed that acquisition process, not only to small business set-aside, but changed it from being a solutions and tech-derived execution to just butchering seats. We withdrew all of our joint venture bids and approached it accordingly. So it's bittersweet. As you know, we had a couple of decades of support in that arena, but we wish the small business community well.

Right. Exactly. Agreed. And then, you know, Zach, you talked about, you know, how, you know, there's been multiple delayed procurements. You know, there's some going through the pipeline now, just now coming up for bids. You're hoping, you know, here's something here in, you know, the next couple of months. I guess kind of the concern here is, you know, obviously every September, 30th we go into a threatened government shutdown, a contingency budget, all that, which then seems to always delay contracts. What's your comfort level of actually seeing some of these contracts be awarded in a timely manner versus getting caught back up in the whole contingency budget issue? And then if you might be able to provide us a little more color on that, the nice late breaking news of the new award that you received.

You bet, Joe. First of all, I'll cover the market, what we see in the market, and I'll ask Catherine to address the extensions. Yeah, we, you know, we're always very mindful of what the headwinds could be as we have, you know, we've come to know continuing resolutions and shutdown risk quite well over the years, recent years, and certainly with this administration. We're also encouraged by some multi-year funding initiatives that have gone forward that have already been approved that we anticipate continue to move forward in selected agencies. Particularly, we still find good strength and support on both sides for defense and intelligence budgets, as well as critical healthcare programs. we're really pretty comfortable in that arena. More importantly, Joe, in the last quarter, we have seen actually multiple RFPs that we have been signaling were coming. And so fortunately, these have gotten under the wire before the September crisis, the usual September crisis. And I think that was also attributed to some of the budget visibility. Once they got the budget passed, customers have had some pent-up demands for moving along on some of these procurements. We think that the fact that we've had three or four of the more material ones come through already, we have submitted bids. We're hopeful that the decision process will also move forward in the coming quarter. Often for very material bids, it is often they see a protest or something of that nature that might delay the actual award and start of work. But we believe that we've got some that are very well positioned that we should have decisions by this fiscal year. With regard to the contract extensions, Catherine,

Sure, yes. It is, as we mentioned, it's the continuation of a key contract we've been working in support of the NIH for a number of decades. It would have gone through a normal re-compete cycle at the completion of its 10-year period of performance here shortly, but the NIH has decided to or made the case to extend it for under a sole source bridge for two years. So anytime, of course, an important part of your portfolio gets an extension and gives you additional revenue visibility, that's always very welcomed. And that's work that really reflects, as Zach mentioned earlier, just as we value a strong presence and continue to have interest in veterans health, of course, public health is a key dimension of our portfolio, market-facing strategy for addressing every aspect of federal healthcare delivery. And so this part of our portfolio of contracts in that public health sector is very critical to us. So we're pleased and honored to be able to continue to provide that support and to get the additional revenue visibility in the short run.

Okay. Thank you for that, Collar. And then On the cost scaling or the right sizing, where do we need to be for the current or the expected near-term revenue production, or do you think there might even be more cost scaling that needs to occur here?

I think we've done the significant actions. We always have some strategies we're working through, and those would continue to be as leases come due, for example, continuing to evaluate our footprint in our real estate, those kind of activities. So we continue to evaluate and assure that our cost structure remains competitive and allows our rates to stay competitive for for bidding on new work, but we think that we've accomplished some material reductions that are necessary to right-size the business.

Okay, great. Thanks. I'll get back in queue.

You bet. Thank you, Joe. Thanks, Joe.

Again, if you have a question, please press star, then 1.

Hearing none, do we want to reopen it for Joe? Operator?

He is not back in the queue. Joe, if you need to re-queue.

OK. Just give Joe just a second as he did put himself back in the queue and Matt will move forward. All righty. Well, with that, I'd like to thank everyone for your participation throughout this call today.

Joe Gomes is on the call.

Okay. Joe, anything else?

Yeah, maybe a little more, you know, Zach, you talked about, you know, some of the potential of, wow, reprioritizing federal health spending, you know, given what we've seen here in the past couple of years, you know, it's just, it's been a challenging time for DLH and losing, you know, obviously the CMOP business and the Head Start and, you know, to potentially see reprioritizing federal health spending, you know, it just throws up you know, additional challenges for the company. Maybe give us a little more your thoughts and color and how you're going to go about this, you know, addressing this.

You bet. No, great question again, Joe. Yeah, I think, you know, the best way we characterize it is, as you well know, we advertise, communicate it, try to be very transparent with regard to what largely was fueled by the Biden administration's commitment to move not only the VA, but a number of other agencies' contracts to small business. We anticipated that erosion started in 24 and certainly matured in 25. And as you indicated earlier, we expect to have the final pieces of the headline set aside for us, which was VA SEMA finally running out this year. But having said that, we're also well positioned and we're very optimistic that The RFPs and solicitations that had been earmarked for FY24 aligned with our establishment of our differentiators in data science and data analytics. We're going to be fueled by RFPs in FY25. Unfortunately, as we indicated earlier, it was all of those basically stalled. Not all of them, but the overwhelming majority of those basically stalled. And so we had a relatively flat bid cycle for the major new business deals. that are just now coming around. A few of those evolved, and a few of those have evolved from the government deciding to move towards some grants. The Doge effect certainly impacted a lot of our clients where they did not have the acquisition officials to issue those RFPs. They've begun to stabilize that over the course of the last six months. And again, we're starting to see both in the defense and intel side and in the public health arena those solicitations come back. So we've got a few we're anticipating in the next few months. We've got a pretty healthy revenue potential for some that are recently submitted. So we're just optimistic that that trend will continue. We're not expecting to have a series of the major DOGE government cuts, major DOGE program cuts, budget cuts, followed by you know, historical shutdowns in the coming months. And the global challenges, both including the war in the Gulf, are going to certainly keep a strong commitment of funding and rapid development initiatives for the defense and defense health arena as well. So we right now do see good optimism. You know, the flatness in terms of opportunities for us to compete in 25 is starting to break, and that's good for us. What we thought was going to be a pretty quick V curve turned out to become a little more bathtub, but we are starting to see the opportunities hit now and certainly feel that we'll be able to compete favorably for our share.

Thanks for that caller, Zach. Much appreciated. And I'm looking forward to starting to see some wins be put up on the board here after, as you said, a challenging period here. Nothing really to do with you guys. It's the government itself. But it would be nice to start to see the engine start back up again and be moving strongly going forward.

We absolutely can't wait. 100%. Yes.

This concludes our question and answer session. I would like to turn the conference back over to Zach Parker for any closing remarks.

Well, again, I want to thank you all for, again, your participation, your interest in DLH. We remain committed to driving that shareholder value. We are looking forward to chatting with you in the coming quarters. And we ask that everyone have a blessed day. And we'll talk again soon. Bye for now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.