DLH Holdings Corp (DLHC) 2009 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the TeamStaff second-quarter and six-month conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Adam Lowensteiner of Wolfe Axelrod Weinberger Associates. Thank you Mr. Lowensteiner, you may begin.

Thank you, Melissa. Before we begin, I would also like to mention our policy regarding forward-looking statements. As we conduct this call, various remarks that we make about future expectations, plans and prospects can constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934.

Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, may and other similar expressions. Any statements that refer to expectations, projections or other characterizations of further events or circumstances are forward-looking statements.

It is possible that our actual results and financial performance may differ materially from those indicated by these forward-looking statements as the result of various important risks and uncertainties, including those identified in the Company's annual report on Form 10-K for the year ended September 30, 2008 and other reports that the Company files with the Securities and Exchange Commission. These reports are publicly available from the SEC.

The results reported on this call may not be indicative of results for future quarters. These statements reflect the Company's current beliefs and are based upon information currently available to it. Developments subsequent to this call may cause these statements to become outdated.

In addition, in this conference call, we will provide non-GAAP financial results. The reconciliation of these measures to GAAP measures is set forth in tables located on the Company's website located at http://teamstaff.com/presentations/. With that out of the way, I would like to introduce the call now to Mr. Rick Filippelli.

Thank you, Adam and good morning. I would like to welcome everyone to TeamStaff's second-quarter earnings conference call. With me today is Cheryl Presuto, our Chief Financial Officer.

As reported in our earnings release for the second quarter, the Company reported a net loss of $559,000, or $0.11 per share. This compares to net income of $64,000 a year ago. Adjusted for nonrecurring retroactive government buildings, the net loss in the second quarter of last year was $185,000, or $0.04 per share. Cheryl will provide more details in a moment.

TeamStaff operates under two brands -- TeamStaff Government Solutions, known as TeamStaff GS, which supplies staffing to federal agencies like the VA and the Department of Defense, and TeamStaff Rx, which supplies medical staffing to private and public healthcare facilities.

TeamStaff GS, which accounts for approximately 80% of our revenues, experienced a lower volume of government-issued contracts during the second quarter. We believe certain agencies reallocated budgeted dollars for non-personnel-related projects and deferred personnel spending until receipt of the stimulus funds as part of the American Recovery and Reinvestment Act of 2009.

This coupled with reduced overtime and personnel demands at certain facilities contributed to a 9% decrease in GS operating revenues as compared to the second quarter of fiscal 2008. For the six months ended March 31, 2009, GS operating revenues were up 1% from a year ago.

We are encouraged by the increase in government contracting activity we saw late in the quarter, which has carried over into our third fiscal quarter. In the latter part of the second fiscal quarter, the Company won approximately $400,000 in DoD contracts. This provides us with a footprint into DoD and helps us complement our VA business. We expect strong demand during the second half of the year as the government funds programs in support of active and retired military personnel. This coupled with the long-term nature of government contracts supports management's belief that government contract spending is insulated from the weak economy we are experiencing.

It is important to note that the Company received its information technology schedule, which allows us to bid on IT government contracts. This was effective early in our third fiscal quarter. We believe this midtier market approximates about $2 billion. Additionally, as part of the stimulus package, the government has allocated $19 billion toward health information technology. This week, we hired a seasoned business manager to lead our government IT staffing efforts and we expect this to be a high-growth area for us.

Overall, despite the soft second quarter we experienced in the government demand for contracted personnel, we expect stronger demand in the second half as stimulus funds are spent. We remain very bullish on the government staffing market both in the short term and long term.

Turning to TeamStaff RX, our nongovernment medical staffing subsidiary, which accounts for approximately 20% of our revenues. While the long-term drivers remain well intact, the current operating environment continued to decline as weak hospital admissions, contraction in hospital spending, low staff turnover and permanent staff willing to work more overtime resulted in reduced hospital reliance on outsourced labor.

As a result of these factors, we find ourselves in a very weak demand environment. For the second quarter of fiscal 2009, average hours billed were down 34% from a year ago. Correspondingly, this led to a 35% reduction in revenue as compared to the second quarter of fiscal 2008.

To address the unfavorable trends in the nongovernment medical staffing market, we have taken several steps. We have extended loyalty programs to clients who renew extensions. We have trimmed headcount and modified our advertising spend. As a management team, we are reluctant to substantially cut advertising since we believe it is a prudent investment of our capital to continue to market the TeamStaff brand while competitors are reducing their advertising. We are obtaining prime advertising spots at reasonable rates. We believe this has helped contribute to an increase in traveler applicant activity of 51% over the last three months.

The Company has also increased its focus on oncology, which we believe will see a quicker pickup in demand. We recently signed an agreement with a major oncology center network to provide healthcare professionals. TeamStaff was one of three preferred vendors chosen. This provides us with a competitive advantage and additional revenue opportunity in subsequent quarters. We believe our Rx subsidiary is well-positioned to increase marketshare once the economy starts to improve.

Turning to the guidance we provided last quarter, over these past several months, there has been turnover in key government contracting positions and agencies waiting for the receipt of stimulus funds before committing to certain projects. This has translated into a longer government sales cycle. The timing and start dates of contract awards has become extremely difficult to project.

Therefore, the Company has withdrawn its previous operating revenue growth estimates of 8% to 10% for the fiscal year ending September 30, 2009. The Company does anticipate strong government demand in the second half of its fiscal year and presently has an active pipeline of new business opportunities with the federal government.

Despite the loss for the quarter, the Company remains on sound financial footing. The Company has approximately $3 million in cash on hand plus a revolving line of credit. In addition, during the third quarter, we expect a return of insurance premiums of approximately $400,000. The final settlement of government retroactive billings anticipated prior to our fiscal year-end could net the Company an additional $1.1 million to $1.4 million in cash. Our strong liquidity position enables us to continue to reinvest in the business in these uncertain economic times.

With that, I would like to turn the call over to Cheryl who will update you in more detail on our second-quarter performance. Cheryl?

Thank you, Rick and good morning, everyone. First, I would like to go over the results of the second quarter of 2009. Operating revenue defined as total revenue minus nonrecurring retroactive revenue in the quarter was $13.7 million, down 15% as compared to the second quarter of fiscal 2008 and down 7% sequentially. The year-over-year decline was driven by the impact of the current economic downturn on our non-government staffing business, net reductions in headcount at certain government facilities and reduced overtime beginning in January 2009 at these same facilities. The sequential decrease in revenues was also driven mainly by the continued weak operating environment for our nongovernment business and a net reduction in headcount and overtime at certain government facilities.

Operating gross margin was 16.1%, down 60 basis points as compared to the second quarter of fiscal 2008 and down 250 basis points sequentially. The key driver for the year-over-year decrease was an unfavorable health insurance adjustment with a net effect year over year of 40 basis points booked during the second quarter of fiscal 2009. The main reason for the sequential decrease was the seasonality of employer-paid payroll taxes, which we start every January 1 coupled with the previously mentioned insurance-related items.

SG&A was up 1% compared to the second quarter of fiscal 2008 and up 4% sequentially. The sequential increase was the result of additional headcount and marketing expenses related to our government sales effort. Depreciation and amortization was $61,000 for the quarter ended March 31, 2009 compared to $89,000 a year ago. Other income and expense net was income of $15,000 in the second fiscal quarter of 2009 compared to a net expense of $71,000 in the second quarter of fiscal 2008. The difference is attributable to lower preacquisition legal expenses related to our government subsidiary, which is categorized as other expense.

Net loss was $559,000 in the second quarter of fiscal 2009. The loss included $82,000 related to non-cash stock compensation expense. This compares to net income of $64,000 in the second fiscal quarter of 2008. Adjusted for the impact of retroactive government billing, the second quarter of fiscal 2008 posted a loss of $185,000.

Fully diluted earnings per share was a loss of $0.11 per share for the quarter compared to earnings of $0.01 per share in 2008. Adjusted for the impact of government retroactive billing, EPS was a loss of $0.04 in the second quarter a year ago.

Adjusted EBITDA for the quarter ended March 31, 2009 was a loss of $396,000 compared to breakeven a year ago. DSOs were 19 days in the second quarter compared to 39 days a year ago. We believe this to be the best in the industry.

Net cash used in operating activities for the three months ended March 31, 2009 was $0.3 million as compared to $0.2 million for the three months ended March 31, 2008. This use of cash for the quarter was primarily driven by a net loss of $0.5 million offset by increased collections for the quarter.

We continue to have relatively low capital expenditures. The Company spent $5,000 for the purchase of equipment during the second quarter of 2009 and $62,000 for the purchase of technology equipment and software during the second quarter of 2008. Cash on hand at March 31, 2009 was $3.1 million compared to $1.1 million a year ago.

As of March 31, 2009, there was no debt outstanding under the Company's revolving credit facility and availability under the line totaled $1.6 million net of required collateral reserves. The Company's revolving credit facility requires a fixed charge cover ratio of 105 on adjusted EBITDA, divided by interest expense and certain other cash payments. The Company was in compliance for the quarter ended March 31, 2009.

I will now review the first six months of fiscal 2009. Operating revenue was $28.4 million, down 9% from a year ago. The decrease in revenues from operations is primarily related to the impact of the current economic downturn on the results of TeamStaff Rx.

Operating gross profit was 17.4%, the same as in fiscal 2008. SG&A expenses were $5.3 million, up 1% from a year ago. This includes a 26% increase to new business expense related to additional headcount and print advertising expense, offset by the continued elimination of overhead costs deemed to be nonessential to growth or infrastructure.

The Company posted a net loss of $511,000 for the first six months of fiscal 2009 compared to net income of $99,000 for the first six months of fiscal 2008. Adjusted for the impact of retroactive government billing, the results for the six months of fiscal 2008 was a loss of $181,000.

Fully diluted earnings per share was a loss of $0.10 per share for the six months of fiscal 2009 compared to earnings of $0.02 per share for the comparable period last year. Adjusted for the impact of retroactive government billing, the results of the six months of fiscal 2008 was a loss of $0.04 per share. Adjusted EBITDA for the six months ended March 31, 2009 was a loss of $243,000 compared to income of $256,000 a year ago.

Let me now drill down into each subsidiary, starting with TeamStaff Government Solutions. TeamStaff GS total revenues for the three months ended March 31, 2009 were $11.5 million compared to $13.8 million in the prior year. Included in last year's results was $1.3 million in nonrecurring retroactive billings. Adjusted for this, GS' operating revenues for the quarter were $11.5 million compared to $12.6 million, down 9%.

The primary contributor to this decline was the net reduction in headcount and reduction in overtime at certain government facilities. GS has also seen a delay in the start of several contracts awarded during the fiscal year as certain government agencies had placed personnel actions on hold pending receipt of budget funds. However, the majority of these contracts have since been activated in the current quarter with GS personnel now in place. We expect the remainder of these contracts to begin in the second half of the fiscal year.

GS total revenues for the six months ended March 31, 2009 were $23.5 million compared to $24.8 million in the prior year. Included in last year's results were $1.5 million in nonrecurring retroactive billing. Adjusted for this, GS' operating revenues for the first half of the fiscal year were $23.5 million compared to $23.3 million, up 1%.

GS' contribution to income for the three months ended March 31, 2009 was $0.8 million compared to $1.5 million in the prior year. Adjusted for the profit earned in last year's second quarter from the nonrecurring retroactive billing, GS' contribution to income was $800,000 this year compared to $1.2 million last year. The decline year-over-year is primarily a result of lower revenue, an unfavorable health insurance adjustment and additional sales-related headcount and higher marketing expense.

GS' contribution to income for the six months ended March 31, 2009 was $2 million compared to $2.6 million last year. Adjusted for the profit earned in the first six months of last year from the nonrecurring retroactive billing, GS' contribution to income was $2 million this year compared to $2.3 million last year.

The GS subsidiary's contribution margin defined as GS net income divided by GS revenues was 6.8% in the second quarter of 2009 compared to 10.6% last year. The explanations for the decline are the same as I previously mentioned when I discussed GS contribution to income. The GS subsidiary's contribution margin was 8.4% in the first half of fiscal 2009 compared to 10.5% last year for the same reasons just discussed.

Now I will turn to TeamStaff Rx. TeamStaff Rx revenues for the three months ended March 31, 2009 were $2.3 million compared to $3.5 million in the prior year, down 35%. Rx revenues for the six months ended March 31, 2009 were $4.9 million compared to $8 million in the prior year, down 38%. The primary contributor to this decline was the impact of the current economic downturn.

Gross margins at Rx were 21.7% for the second quarter of 2009 compared to 20.3% for the second quarter of 2008. This 140 basis point increase is attributable to higher permanent placement revenue in the second quarter of 2009, which carries a higher gross margin percentage. Gross margins at Rx were 22.2% for the first six months of 2009 compared to 21.2% for the comparable period last year. RX's contribution to income for both of the three months ended March 31, 2009 and 2008 was a loss of $400,000. A reduction in SG&A expense of $200,000 helped to offset the revenue decline. RX's contribution to income for the six months ended March 31, 2009 was a loss of $0.7 million compared to $0.6 million last year. A reduction in SG&A expense of $400,000 helped to offset the revenue decline.

Turning to corporate expenses. These expenses are unallocated to our subsidiary and include infrastructure costs such as executive, legal, IT and the cost of being a public company. For the second quarter, these expenses were $0.9 million, an 8% decrease from the comparable period a year ago. For the six months ended March 31, 2009 and 2008, corporate expenses were $1.7 million and $1.9 million respectively, representing a decrease of 10% year over year. The Company is committed to eliminating infrastructure costs being nonessential to growth.

Before we open it up for questions, I would like to provide some background and update on the government retroactive billing. During the fiscal year ended September 30, 2008, TeamStaff GS recognized nonrecurring revenues of $10.8 million and direct costs of $10.1 million based on amounts that are contractually due under its arrangements with the Department of Veterans Affairs. These amounts are due to increase in the wage-determination rates for its contract employees.

A wage determination is similar to a minimum wage required by the US Department of Labor. Contractors performing services for the federal government under certain contracts are required to pay service employees according to these prevailing wages. An audit by the Department of Labor at one of the facilities revealed that notification, as required by contract, was not provided to TeamStaff by the government in order to effectuate the wage increases in a timely manner.

Wages for contract employees currently on assignment have been adjusted prospectively to the prevailing rate and hourly billing rates for the Department of Veterans Affairs have been increased accordingly. Once the retroactive portion is approved and paid by the Department of Veterans Affairs, TeamStaff GS will provide paychecks to the affected employees for their retroactive wages due to them.

At March 31, 2009, the amount of the remaining accounts receivable related to the retroactive billings to the Department of Veterans Affairs approximates $9.3 million. TeamStaff GS is currently in the process of negotiating a final amount related to gross profit on these adjustments. As such, there may be additional revenues recognized in future periods once the approval of such additional amounts is obtained. The ranges of revenue and gross profit are estimated to be between $0.4 million and $0.7 million with no additional payroll or tax expense incurred.

The negotiations are active at this time and at present, the Company expects to collect such amounts by its fiscal year-end, September 30, 2009. Because these amounts are subject to government review, no assurances can be given that we will receive any additional billings from our government contracts or that if additional amounts are received, that the amount will be within this range.

This concludes our formal comments. Thank you for your attention and at this time, we will open the lines to answer any questions that you may have.

(Operator Instructions). Mike Breard, Hodges Capital Management.

Are you seeing the opportunity to merge with or to acquire similar companies that are in the government area of operation?

I am sorry, Mike. Are we looking at potentially acquiring, was that the question?

Are you looking at possibly merging with some of the other companies that provide services to the government?

We potentially would be looking to acquire. I don't know at this particular point if we are looking to merge with anyone, but we clearly would be looking to acquire a good complement to our existing business.

Okay. Are you seeing -- with the changes in the economy in the last six months or so, you seem to indicate that some of your competitors have maybe cut back on advertising. Are you seeing possibly a little less competition for the contract bids that are out there?

On the government side?

Yes.

Well, there is still competition clearly on the government side. I think what we really saw was the government pulling back, particularly in the second quarter we saw a lot of it. Maybe it had to do with the new administration, but we saw a lot of key positions within the contracting ranks being vacant for a period of time being filled and then once they are filled, I guess there was a learning curve. So we did not see a lot of activity and plus, we saw budgeted dollars being spent on things like facility upgrades versus personnel spending. And we believe now that a lot of the stimulus money has been released that the government will be spending a lot more contracted dollars on personnel costs. And we could just see the improvement in our pipeline that leads is to that conclusion.

Okay. And then one other question, maybe a little longer term, but there seems to be a move by the administration to go towards the area of single pay healthcare. Would that help or hurt your business? Or does it --?

I think by providing healthcare to a lot of people who are currently uninsured, I would basically believe that would help our business. It would make some the emergency rooms a lot more crowded, but nonetheless, I would believe at that point that the demand for our services would have to go up.

Okay. (inaudible). Thank you.

There are no further questions at this time. I like to turn the floor back over to management for any closing comments.

We appreciate everyone's participation in this call and we look forward to updating you in August on our third-quarter results. Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.