DLH Holdings Corp (DLHC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DLH fiscal fourth-quarter conference call. (Operator Instructions). As a reminder, this conference is being recorded today, December 8, 2016. I would now like to turn the conference over to the moderator, Chris Witty.

Thank you and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer, and Kathryn JohnBull, Chief Financial Officer. The Company's fourth-quarter press release and PowerPoint presentation are available on our website under the Investors page.

I would now like to provide a brief Safe Harbor statement which is also shown on slide 2 of the presentation. This call may include forward-looking statements that relate to the Company's outlook for 2017 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 for the fiscal year ended September 30, 2016, 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 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. All comparisons throughout this call will be on a year-over-year basis unless otherwise stated.

As shown on slide 3, President and CEO, Zach Parker, will speak next followed by CFO Kathryn JohnBull. With that I would now like to turn the call over to Zach. Please go ahead, Zach.

Thank you, Chris, and good morning to everyone. Welcome to the fiscal fourth-quarter conference call of 2016. Our fourth-quarter results reflect major accomplishments during the fiscal year. First and foremost is the high degree of customer satisfaction on all of our major programs. This we attribute to the strong caliber of our employees throughout the country, now in excess of 1,400, and our management team.

We have also have had positive effects of how well our integration has gone for 5 of the 12 months. We have retained 100% of all of our key managers during this transition period. And this is critical to the further transformation of DLH. Our employees across both of our operating units have kept their focus on delivering performance excellence to our customers. This will always yield better results for our stakeholders.

Starting with slide 4, let me review some of our major highlights of the past quarter. Bolstered by our acquisition of Danya in May, Q4 revenue rose 60% year-over-year to just over $27 million. This includes organic growth of 4.4% across our legacy business within DLH, which is indicative of steady inroads we have made across a number of key government agencies where we see many opportunities for even further expansion.

Our gross margin rose 310 basis points to 23%, which was also an increase sequentially from the third-quarter's 21.8%. We believe that our improved mix of business and value-added services should support similar gross margins going forward in tandem with the higher percentage of our overall business that comes from the more complex, technical and unique skill sets that come with our acquisition.

We posted EPS of $0.20 for the quarter and at the same time further reduced the Company's debt to strengthen our balance sheet. This includes completing a small equity offering which was oversubscribed to eliminate the outstanding bridge loan from our acquisition.

We ended the quarter and our fiscal year well-positioned for higher growth and improved returns going forward with $233 million in our contract backlog and an active pipeline of bid opportunities worth some $510 million, a testimony to our focus on new business development.

Now turning to slide 5, I want to take a moment to just reflect on what we have accomplish this year. Not only have we bolstered the Company's position covering a core set of healthcare-related consulting, management and technology services across what we consider solid federal agencies, but we have enhanced our growth trajectory within the Company.

As we continue to transform the Company we have increased revenue by more than 50%, expanded our knowledge-based business and its associated margins, and improved the outlook with the bottom-line financial performance of the Company.

Our portfolio is now more broadly diversified. It includes new customer agencies, workforce credentials, which include strengthening our trades and skill-based augmented talent with high-end academic and professional credentials. This is critical to providing the next generation of telehealth and other IT enhanced services for the government, its employees and our veterans.

As I mentioned earlier, I am pleased with the integration efforts underway. We see this not only as a means to affect a smooth transition of our new workforce, but rather an opportunity to transform the Company and to take us to new levels on every front.

Accordingly we have positioned one of our senior executives, Mr. Fred Vago, currently the President of Danya, to lead our integration and transformation efforts. This was effective October 1. Fred is overseeing major infrastructure initiatives including our ERP, or enterprise resource planning systems, our IT systems migration and management governance, policies and procedures efforts. These will be completed during calendar 2017 and are expected to deliver further infrastructure synergies to the business.

In addition, while we paid for the acquisition with debt, we are well on our way to reducing the Company's leverage through robust cash generation and efficiently managing our operations even as we invest for the future. We have strengthened our array of capabilities that are suitable for numerous contract opportunities and we are actively seeking and bidding on such vehicles to grow our business within key agencies.

We're also leveraging our deep domain experience to expand in areas that complement our current business. We know our track record is excellent, but we cannot rest on our laurels. To grow we must always be looking for new opportunities, which is exactly what we are doing.

Turning to slide 6, I want to speak for a moment about the market and the overall outlook for government services. We ended the year with a record revenue of $85.6 million and a gross margin of 20.8%, but we believe the future looks even more promising for DLH.

We will continue to be focused on organic growth driven by our talented workforce, strong management and existing agency relationships while at the same time occasionally looking at bolt-on acquisitions to further strengthen and enhance our business and improve our Company's outlook.

In the near-term we fully expect to see a continuing resolution from Congress until the new administration gets up to speed. But the Department of Veteran Affairs already has its appropriations approved for fiscal 2017. And the National Defense Authorization Act, or NDAA, recently passed the House and is awaiting action from the Senate.

In any event we believe the net effect of the transition to a new administration, while it could slow some new contract awards in the coming year, we expect these trends to be very favorable for the government services market.

In fact, we believe it is possible that the next administration may bring new opportunities for companies such as DLH, the demand for veterans and military healthcare services will continue to remain strong, and many analysts also anticipate more moving towards higher outsourcing of certain government work.

Given the ongoing need for health IT services, the possible demand for increased consulting and the likely focus on improved government efficiency, we'll be active and in this challenging and changing budget environment as well. Whatever the case, we are prepared to serve the administration's agencies and their beneficiaries in same professional manner of achieving performance excellence as we have always done. So I am optimistic about the overall demand environment for DLH going forward.

Lastly, before turning the call over to Kathryn, let me just thank our employees, our customers and our investors for a great fiscal 2016. I have spent a good deal of time meeting with our customers, talking with our employees and listening to our investor community in terms of how we make DLH a better Company for everyone.

From our investors we have heard that people are pleased with the higher operating results and growth outlook, as evidenced by the fact that our recent small offering was well oversubscribed. I think most shareholders also want us to remain focused on the core markets we serve and deploy cash to de-lever the Company as expeditiously as possible.

We now stand as a unique provider of technology enabled solutions to manage, monitor and to support large-scale healthcare and human services programs across the federal government. Our customer base has four of the largest federal health agencies, including the VA and Health & Human Services. Our new business pipeline again now exceeds 500 million, leveraging our expanded capabilities and core competencies across the enterprise. I've never felt more confident about the Company's future.

With that I would like to turn the call over to Kathryn -- to our Chief Financial Officer, Kathryn, who will be providing a more detailed discussion of our financial results. Thank you, Kathryn.

Thanks, Zach, and good morning, everyone. We are pleased to report another quarter of improved financial results as we turn the corner on fiscal 2016.

Turning to slide 7, revenue for the three months ended September 30, 2016 was $27.1 million, representing an increase of $10.1 million or 60% over the prior year's fourth quarter. Higher revenue was primarily due to the inclusion of Danya as well as from additional growth across our existing contract vehicle. Revenue expanded 4.4% organically over 2015 and we believe there is plenty of room for further expansion going forward.

Given our strong position at HHS, DOD, VA and the CDC, along with potential new opportunities for outsourcing across the federal government, we feel optimistic about the outlook for fiscal 2017, as Zach mentioned.

Now moving to gross profit on slide 8, this quarter the Company posted total gross profit of approximately $6.2 million, an increase of $2.8 million or 84% versus 2015. This was driven by our higher overall revenue as well as improved contract performance. As a percent of sales, third-quarter gross margin -- sorry, pardon me, fourth-quarter gross margin was 23%, an increase of 310 basis points over the comparable period last year.

As we said last quarter, such margin expansion is due to the contribution from Danya along with an improved mix of more complex, higher value contracts combined with expected cost management on our legacy business base. The Company remains dedicated to managing expenses and continuing to post solid gross margins.

Turning to slide 9, income from operations was $1.3 million for the fiscal 2016 fourth quarter, an increase of approximately 38% over the prior year period. Within operating income our G&A expenses were approximately $4.1 million this quarter versus $2.4 million a year ago.

This increase was primarily due to the addition of Danya combined with incremental costs tied to program management, integration advisory services and new business development. G&A as a percent of revenue was approximately 15.2% this year compared with 14.2% last year. We also had higher depreciation and amortization due to $0.7 million of intangible amortization tied to the Danya acquisition.

Below operating income we had net other expenses which totaled $0.5 million this quarter versus a positive other income of $1.5 million last year, which primarily derived from the favorable closure of a legacy payroll tax issue. Generally speaking other income and expenses include nonoperational acquisition expenses, interest expense, amortization of deferred debt costs and other miscellaneous nonoperational items.

We reported net income for the three months ended September 30, 2016 of approximately $2.4 million or $0.20 per diluted share versus $8.2 million or $0.82 per share in the prior year period. The decrease was primarily attributable to nonoperational items including principally the decrease in the amount of tax benefit reflected from our net operating loss carry forwards and last year's favorable impact from the closure of that legacy payroll tax issue, as I just mentioned.

Slide 10 shows the change in adjusted EBITDA. On a non-GAAP basis adjusted EBITDA for the three months ended September 30, 2016 was approximately $2.2 million, an improvement of $1.2 million or 114% over the prior year period. In addition, adjusted EBITDA as a percent of revenue was 8.1% compared to 6.1% in the fourth quarter of fiscal 2015, reflecting the stronger returns from our revenue as discussed previously.

Our definition of adjusted EBITDA, along with descriptions regarding its use and rationale, is in our earnings statement. We certainly understand that the substantial non-operating items on our financials for the quarter and for the year make it challenging to compare EPS period to period.

In addition to the major tax adjustments related to recognizing the value of our tax net operating losses there was the onetime benefit from resolution of the payroll tax issue in 2015, there were also acquisition expenses in FY16. And of course there is the non-cash amortization of the intangibles from the Danya acquisition.

So to assist in comparing operating results for period to period we have included income from operations per share in our earnings release. The main message we offer you is that FY16 represents what we believe to be the new normal for DLH following our transformational acquisition. And these results are indicative of what should be expected going forward.

Turning to slide 11, here is a high-level overview of changes in our cash position for the fiscal year. We began 2016 with roughly $5.6 million in cash and during the year generated $6 million from operations. Through debt and equity we raised approximately $24.6 million of funds net of repayments. And during the year of course paid out $32.7 million primarily for the Danya acquisition, leaving us with $3.4 million as we start fiscal 2017.

We remain dedicated to reducing debt going forward and delevering the Company. Our senior debt has already been brought down to $23.4 million from the $30 million at closing of Danya in early May. And we have approximately $5 million available under our $10 million revolving credit facility.

I'm also pleased that during the quarter we successfully raised $2.65 million to repay the subordinated debt held by Wynnefield Capital. DLH now has 11.1 million shares outstanding and the rights offering demonstrated a high level of interest in the Company and its future given the strong level of oversubscription requests.

Additionally, given our substantial net operating losses that we discussed previously that reflected through the tax benefit line, we do not anticipate being required to outlay significant cash for tax payments in the near future, which allows us to maintain our cash to support the working capital needs of the Company, for growth and to continue to service the outstanding debt.

Before handing the call over for questions I wanted to alert our listeners to some upcoming investor events as shown on slide 12. We will be presenting at the Noble Financial Growth Conference at the end of January after which we will report FY17's Q1 results on February 8. We'll then host our annual shareholders meeting on February 9. We encourage our investors to participate in these activities to the extent possible.

Now let me just summarize where we stand heading into 2017 as shown on slide 13. We believe, as Zach indicated earlier, that DLH is in the best shape ever in terms of its capabilities and outlook. With Danya integrated and performing as planned we have strengthened our core competencies and brought some excellent employees into our organization, which we can leverage to win new business across the various agencies we serve.

We believe that demand for innovative healthcare services and solutions will continue to grow across the federal sector no matter what happens with the new administration, given the ongoing demographic trends and requirements for health IT services and (inaudible) VA support.

At the same time we've paid down debt and provided improved financial flexibility to support our growth going forward and we will continue to be disciplined when it comes to delevering the Company.

Given our existing agency contract vehicles and the solid relationships we have built over time, DLH is extremely well-positioned for the opportunities of tomorrow. And we are pleased by the support shown by our employees and our investors as we enter this next phase of growth.

That concludes my discussion of the financial statements and with that I would now like to turn the call over to our operator to open for questions.

(Operator Instructions). Mark Jordan, Noble Financial.

Good morning. Kathryn, a question relative to future tax payments. Was the tax benefits you realized here in the fourth quarter the final release of the valuation reserve? And if that is the case therefore you will be showing a standard say 38% tax rate moving forward but not paying any taxes, just accreting down the tax benefits on your balance sheet?

Exactly right, Mark. Exactly right. We fully realize the benefit of those NOL and going forward our tax provision will look very standard at the standard high 38%, 39%.

Okay. Could you talk about what your re-compete events were this past year and what re-competes are scheduled for this upcoming year?

Sure. By this year, with regard to FY16, we had really -- it was really a re-compete free year with one small exception. We had some small amount of work at CDC with our new business that was successfully re-competed, not at a material level though for our financials.

With regard to FY17, we anticipate that before the end of the year we may be in a re-compete with one of our two large VA CMOP contracts. At the current time we would forecast that to start the solicitation process somewhere midyear. So we would not expect to see very much impact from re-competes during the fiscal 2017 period.

Okay. The pipeline that you characterize of $510 million, I assume that is the aggregate value of multiyear opportunities. If you were to look at it on average, what would that $510 million be with regards to an annual revenue potential and when will those bids be adjudicated?

Mark, that is a very good question. Right now we believe it is pretty heavy I want to say frontloaded with deals that would drive the revenue largely in 2018 more so than 2017, even though we have got a significant amount pending that was bid in the middle of this year -- right around the time, shortly after we completed the acquisition.

I have got to tell you though that there is really kind of a bimodal view as I look at our pipeline. We have a few very major opportunities, those that would be transformational on individual award merit. And then a large number that are good, steady growth opportunities for the Company.

So the average, quite frankly, is really not terribly indicative. In fact I use more of the median because of that. As we look at the average it just is not very reflective of anywhere near 30% to 40% of the potential revenue stream.

So we are going to give more color, as Kathryn indicated, on our annual shareholders meeting in February, a lot deeper dive into the characteristics of that pipeline. We would expect -- despite a continuing resolution we would expect that some degree of those will have already been decided by the government.

Okay. Final question for me. Could you talk a little bit about the integration expenses that were reported in the fourth quarter? And when do you expect the combined companies to be running on a normal efficient basis?

So the acquisition -- or the integration expenses in the fourth quarter were largely around -- we did engage a third-party advisor that was really -- gave us what we viewed as a very healthy quick start on pulling people together, getting organized and really driving the mindset of moving towards what we call DLH 3.0.

So let's not necessarily run to any -- either of the existing approaches that either of the two sides of the business were using, but rather let's explore what is best for the consolidated business and drive towards that. So that was a pretty intense exercise through late July and the better part of August and early September.

We have now transitioned that, as Zach mentioned earlier in his comments, to an internal resource. So we got a quick injection of focus, if you will, and now we are driving to implementation. So many of those things have some time dependencies that are a function of, for example, some things around benefits plans and payroll tax reporting and all of that that drives around calendar years or plan years and all that.

But however they are faced, the identification and the planning for the integration exercises has occurred, they will cycle through according to that schedule that applies depending on if there are some external constraints. But the key punch line to that is we expect those integration changes to be implemented fully as we wrap up FY17. And in fact we are from our own planning well ahead of what we expected in terms of the amount of those integration activities that we have already accomplished.

Okay. Thank you very much.

(Operator Instructions). [Matt Cheney], private investor.

Thanks for taking my question. So, in your previous conference calls you gave guidance for next year for about $120 million in revenue, 23% to 24% gross margins, 13.5% of that for G&A and about a 10% operating margin. Have those forecasts changed or is that still roughly what you guys expect?

Actually, Matt -- this is Zach; I appreciate the question. We actually do not give guidance. I think what you may be referring to is doing a couple of investor conferences and, quite frankly, Kathryn and I are updating that now.

We do give -- it is not even a pro forma, but we do give an indication of what we think the major financials and the Company value would look like as we continue down our long range strategic plan. That strategic plan does include, as Kathryn indicated earlier, a substantial component of organic growth. But what is more important or just as important is the nature and the caliber of that growth in terms of the type of margin delivery it will have on the business.

We do that looking at not necessarily annual milestones but size milestone. So we would take a look at what does the Company's profile look like at [$]100 million, [$]120 million and then [$]300 million as an example. So we do that at the ideals conference, posted that and we had a couple of things in that regard.

So, we are going to have an update on that as we go to the Noble conference at the end of January as well as our annual shareholder meeting in February. But I do want to be clear that we do not give guidance and we will continue that practice.

Let me ask a different question then. So this quarter the other income was about $2 million in annualized run rate. Can you give us any information on how much of that was interest expense versus how much of that was fuel expense? And sort of correspondingly where you would expect those numbers to come out next year?

Yes, so within the current quarter there were no deal expenses included because -- as the deal closed in Q3. So the current quarter activity is a pretty good indication of the annual -- on an annualized basis. It includes both interest as well as amortization of the deferred debt cost. So it is -- effectively all of that is different flavors of interest. And of course that is going to vary depending on the level of debt.

Okay. And one last question. What do you expect your tax rate to be once you burn the NOLs? And also, what is the delta on that from any kind of recent election results?

Big plans for cutting that tax rate, right. So assuming that can get through I think everybody would benefit from that. So the tax rate disclosed in our current financials we think is the effective rate that we expect going forward. So it is in the 39%-ish range.

Okay. Thank you guys for taking my questions.

(Operator Instructions). I'm showing no further questions at this time. I would like to turn the conference back over to management for closing remarks.

We want to thank you all again for your interest and participation in DLH. We do plan, in closing, to continue to invest in not only the growth of the business but our operational excellence. We are going to continue to enhance the posture of our leadership team. And we think all of these investments as a result of the transformation to DLH 3.0 will certainly yield more positive results and position us even more favorably with new clients and our future shareholders.

With that, on behalf of the DLH leadership team, Kathryn and I would like to wish you all a Merry Christmas, a Happy Hanukkah and Kwanzaa and a bright and prosperous new year. Have a blessed day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day, everyone.