DLH Holdings Corp (DLHC) 2009 Q3 法說會逐字稿

Greetings, and welcome to the TeamStaff Incorporated third-quarter and nine months 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, Adam Lowenstein of Wolfe Axelrod Weinberger and Associates. Thank you, Mr. Lowensteiner, you may begin.

Thank you, Rob. Good morning, everyone.

Before we begin, I would also like to mention the 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 27-A of the Securities Act of 1933, and Section 21-E 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 future 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 a result of various important risks and uncertainties, including those identified in our 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 in future quarters. These statements reflect the Company's current beliefs and are based upon information currently available to it. Development subsequent to this call may cause these statements to become outdated.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 our website at http://TeamStaff.com/presentations/.

That concludes the forward-looking statement. I would like to turn the call over to Mr. Rick Filippelli, CEO of the Company. Rick?

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

As reported in our earnings release, for the third quarter, the Company reported a net loss of $533,000, or $0.11 per share. This compares to net income of $541,000 or $0.11 per share, a year ago. Adjusted for nonrecurring retroactive government buildings, a legal settlement expense, and changes in tax estimates, net loss in the third fiscal quarter of 2009 was $509,000 or $0.10 per share, as compared to a net loss of $45,000 or $0.01 per share a year ago. Cheryl will provide more details in a moment.

TeamStaff operates under two brands -- TeamStaff Government Solutions, GS, which supplies staffing to federal agencies like the VA and Department of Defense, and TeamStaff Rx, which supplies medical staffing to private and public healthcare facilities. TeamStaff GS, which accounts for over 80% of our revenues, continued to experience delays in government contract awards despite an increase in contract solicitations. We believe the slowdown in government contract personnel spending relates directly to the slow pace which stimulus funds to date have flowed through the system. This, coupled with reduced overtime demands and lower production needs at certain facilities, contributed to a decrease in GS operating revenues of 10% as compared to the third quarter of fiscal 2008. On a sequential-quarter basis, GS operating revenues were down 1%.

We are encouraged by the number -- by the increased number of solicitations that came out in the third fiscal quarter and the number of solicitations expected out in the fourth quarter based on activity to date. Although our pipeline is not a guarantee of future success, new business opportunities consisting of contracts, pending award, and solicitations expected to hit the streets within the next two months has grown substantially over the past quarter. We believe the stimulus funds are released and committed to programs supporting active and retired military personnel. Over the next several quarters, there will be sustained to revenue opportunities for the Company.

On a year-to-date basis, GS has won approximately $2 million in annualized new contracts, of which half has been DOD contracts. Expansion into DOD has been part of our growth strategy, and these contract wins will open additional opportunities for us down the road.

In June, we hired an experienced DOD Sales Director to help lead these efforts.

Additionally, during the third fiscal quarter, the Company received its Information Technology schedule, which will allow us to bid on government IT contracts. We believe this mid-tier market approximates $2 billion.

Additionally, as the American Recovery and Reinvestment Act of 2009 -- the government has allocated $19 billion for health information technology. In May, we hired a seasoned director to lead our government IT staffing efforts, and we expect to be an aggressive player.

Overall, despite the longer government sales cycle we have experienced for contracted workers, we are seeing strong demand in the fourth quarter and beyond as stimulus funds work their way through the system. The Company continues to remain very bullish on the government staffing market, both in the short and long term.

Turning to TeamStaff Rx, our non-government medical staffing subsidiary which accounts for less than 20% of our revenues, while the long-term drivers remain well intact and nurses are returning to the workforce, the current operating environment continues to decline as weak hospital admissions, contraction in hospital spending, low staff turnover and permanent hospital staff willing to work more overtime has resulted in reduced hospital reliance on outsourced labor. As a result of these factors, during the quarter, we continued to operate in a weak demand environment. For the third quarter of fiscal 2009, average hours billed were down 40% from a year ago. Correspondingly this led to a 44% reduction in revenue as compared to the third quarter of fiscal 2008.

On a sequential-quarter basis, revenues were down 21%.

On our prior earnings call, we outlined the aggressive steps we were taking to address the trends in the travel nurse and allied segment. Although the market remains very challenging, as evidenced by our significant drop in comparative third-quarter revenues, we are starting to see signs that the pace of the decline has slowed as new orders have increased 60% over the past month and applications from travelers continues to grow.

The Company has increased its focus on oncology. In April, the Company signed an agreement with a major oncology network to serve as a preferred provider of medical healthcare professionals. TeamStaff was one of three vendors, preferred vendors chosen.

TeamStaff Rx is in the process of pursuing preferred vendor status with a second major oncology network. Although not a guarantee of future revenues, such agreements are expected to provide us with a competitive advantage and additional revenue opportunities in subsequent quarters. We anticipate that, with these action items, TeamStaff Rx has lowered its operating breakeven point and is anticipated to have improved financial performance in our fourth fiscal quarter. Given the decline in revenue and operating performance, the Company will monitor Rx in relation to the healthcare staffing market, the economy, and the Company's financial resources to determine the most prudent course of action.

Despite the loss for the quarter, the Company remains on solid financial footing. The Company has over $3.5 million in available cash, plus a revolving line of credit with nominal borrowings.

During the quarter, we received approximately $500,000 as a return of insurance premiums. In addition, final settlement of the government retroactive billings anticipated prior to our fiscal year-end could net the Company in excess of $1 million when paid. Our strong liquidity enables us to continue to reinvest in the business during 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 third-quarter performance. Cheryl?

Thank you, Rick, and good morning, everyone. First, I'd like to go over the results for the third quarter of 2009.

Consolidated operating revenue, defined as total revenue minus nonrecurring retroactive revenue, in the quarter was $13.1 million, down 17% as compared to the third quarter of fiscal 2008 and down 4% sequentially. The year-over-year decline was driven by the impact of the current economic downturn on our nongovernment 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 facilities.

Consolidated operating gross profit margin was 16%, down 320 basis points as compared to the third quarter of fiscal 2008, and down 10 basis points sequentially. The key drivers for the year-over-year decrease were a higher percentage of revenues from federal government facilities, which carry a lower gross profit than the public and private healthcare facilities; lower overtime demands at certain government facilities, which carry a higher gross profit rate; an unfavorable health insurance adjustment booked during the third quarter of fiscal 2009; and lower employee turnover at certain government facilities, resulting in higher vacation expense.

Effective July 1, 2009, billing increases to certain government facilities were granted that are expected to help offset these additional expenses going forward.

Consolidated SG&A was down 8%, compared to the third quarter of fiscal 2008, and up 1% sequentially. The key drivers for the year-over-year decrease were a reduction in the overall Company employee costs, partially offset by an increase in new business and marketing expense.

Depreciation and Amortization was $62,000 for the quarter ended June 30, 2009, compared to $70,000 a year ago. Other income and expense, net, was income of $133,000 in the third fiscal quarter of 2009, compared to income of $296,000 in the third quarter of fiscal 2008. The Company recorded income in each of the comparative quarters resulting from a change in estimate related to certain tax liabilities.

Net loss was $533,000 in the third quarter of fiscal 2009. The loss includes $175,000 of expense related to a settlement with a former employee and $151,000 of income for a change of estimate related to tax liabilities.

Net income was $541,000 in the third fiscal quarter of 2008, which includes $286,000 in income from the retroactive government billing and $300,000 of income for a change in estimate related to tax liabilities. Adjusted for these nonrecurring items, net loss for the third quarter of fiscal 2009 would have been $509,000, compared to a net loss of $45,000 for the third quarter of fiscal 2008.

Fully diluted EPS was a loss of $0.11 per share for the quarter, compared to earnings of $0.11 per share for 2008. Adjusted for the nonrecurring items I just mentioned, EPS was a loss of $0.10 per share for the quarter compared to a loss of $0.01 per share in the third quarter a year ago. A reconciliation of this is posted on our website.

DSOs were 19 days in the third quarter, compared to 35 days a year ago. We believe this to be the best in the industry.

Net cash provided by operating activities for the three months ended June 30, 2009 was $0.7 million compared to $0.9 million for the three months ended June 30, 2008. This quarterly result was primarily driven by insurance refunds received during the quarter and increased selections for the quarter, offset by a net loss of $0.5 million.

We continue to have relatively low Capital Expenditures. The Company spent $64,000 for network and infrastructure improvements during the third quarter of 2009, and $73,000 primarily for assets related to the relocation of the TeamStaff GS corporate offices during the third quarter of 2008.

As Rick previously mentioned, despite the loss, the Company continues to maintain adequate liquidity. At September 30, 2009, the Company had cash and cash equivalents of $3.7 million and no balance outstanding on its revolving credit facility.

During the quarter, the Company received approximately $0.5 million of insurance refunds. In addition, final settlement of the government retroactive billings anticipated prior to our September year-end could net the Company $1 million in cash.

For the quarter ended June 30, 2009, the Company was not in compliance with the debt service coverage ratio covenant required by the credit facility and has requested a waiver from Sovereign Bank. Sovereign is in the process of reviewing our request. The Company believes that it has adequate liquidity resources to fund operations over the next 12 months.

I will now review the first nine months of fiscal 2009. Consolidated operating revenue was $41.5 million, down 12% 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 and net reductions in headcount and overtime at certain government facilities.

Consolidated operating gross profit margin was 16.9%, down 110 basis points as compared to fiscal 2008. This is due primarily to unfavorable health insurance adjustments and lower employee turnover among the government contract employees, resulting in higher vacation expense.

Consolidated SG&A expenses were $8.1 million, down 2% from a year ago. This includes a 17% 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 $1 million for the first nine months of fiscal 2009, compared to net income of $640,000 for the first nine months of fiscal 2008. Adjusted for the impact of retroactive government billings, a legal settlement, and changes in tax estimates, net loss was $1 million in fiscal 2009 compared to a net loss of $226,000 in fiscal 2008.

Fully-diluted EPS was a loss of $0.21 per share for the nine months of fiscal 2009, compared to earnings-per-share of $0.13 for the comparable period last year. Adjusted for the impact of the previously mentioned items, EPS was a loss of $0.21 in fiscal 2009 compared to a loss of $0.05 in fiscal 2008. A reconciliation of this is posted on our website.

Now, let me drill down into each subsidiary, starting with TeamStaff GS. GS operating revenues for the three months ended June 30, 2009 were $11.3 million compared to $12.6 million in the prior year, down 10%. On a sequential-quarter basis, revenues were down 1%. The primary contributor to the year-over-year decline was the net reduction in headcount and reduction in overtime at certain government facilities.

GS has also seen a delay in the government contract cycle. We are, however, encouraged by the increased number of solicitations that came out in the third fiscal quarter and the number of solicitations expected out in the fourth quarter. We believe when stimulus funds are released and committed to programs supporting active and retired military personnel over the next several quarters, there will be substantial revenue opportunities for the Company.

GS operating revenues for the nine months ended June 30, 2009 were $34.8 million, compared to $35.9 million in the prior year, down 3%. Adjusted for the profit earned in last year's third quarter for the nonrecurring retroactive billing, GS' contribution to income was $0.8 million this year, compared to $1.5 million last year. The decline year-over-year is primarily a result of lower revenue an unfavorable health insurance adjustment, higher vacation expense for contract employees, and additional sales-related headcount and higher marketing expense.

Adjusted for the profit earned in the first nine months of last year for the nonrecurring retroactive billing, GS' contribution to income was $2.8 million this year compared to $3.9 million last year. Adjusted for revenue and profit earned in last year's third quarter from nonrecurring retroactive billing, the GS subsidiary's contribution margin, defined as GS net income divided by GS revenues, was 7.1% in the third quarter of 2009 compared to 12.2% last year. The explanations for the decline are the same as I previously mentioned when I discussed GS' contribution to income.

Adjusted for revenue and profit earned in the first nine months of last year from the nonrecurring retroactive billing, the GS subsidiary's contribution margin was 8% in the first nine months of fiscal 2009, compared to 10.7% last year, for the same reasons just discussed.

Now I will turn to TeamStaff Rx. Rx's revenues for the three months ended June 30, 2009 were $1.8 million compared to $3.2 million in the prior year, down 44%. Rx revenues for the nine months ended June 30, 2009 were $6.7 million compared to $11.8 million in the prior year, down 43%. The primary contributor to this decline was the impact of the current economic downturn.

Gross margins at Rx were 21.4% for the third quarter of 2009, compared to 21.2% for the third quarter of 2008. Gross margins at Rx were 22% for the first nine months of 2009, compared to 21% for the comparable period last year. This 100 basis point increase is attributable to higher permanent-placement revenues in fiscal 2009 year-to-date, which carries a higher gross margin percentage.

Rx's contribution to income for the three months ended June 30, 2009 was a loss of $0.5 million compared to contribution of income for the three months ended June 30, 2008 of a loss of $0.4 million. A reduction in SG&A expense of $275,000 helped to offset the revenue decline.

Rx's contribution to income for the nine months ended June 30, 2009 was a loss of $1.2 million compared to a loss of $1 million last year. A reduction in SG&A expense of $800,000 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 third quarter, these expenses were $0.9 million, a 6% increase from the comparable period a year ago. Adjusting for the change in estimate for tax liabilities in the third quarter of 2009 and 2008 and a legal settlement in the third quarter of 2009, corporate expenses decreased 25% year-over-year. For the nine months ended June 30, 2009 and 2008, corporate expenses were $2.6 million and $2.8 million respectively, representing a decrease of 5% year-over-year. The Company is committed to eliminating infrastructure costs deemed nonessential to growth.

Before we open it up for questions, I'd like to provide some background and update on the government retroactive billings. During the fiscal year ended September 30, 2008, TeamStaff recognized nonrecurring revenues of $10.8 million and direct costs of $10.1 million, based on amounts that are contractually due under its agreement -- arrangements with the Department of Veterans Affairs. These amounts are due to increases in the wage determined rates that are -- for 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 to the VA have been increased accordingly. Once the retroactive portion is approved and paid by the VA, TeamStaff GS will provide paychecks to the affected employees for the retroactive wages due to them.

At June 30, 2009, the amount of the remaining Accounts Receivable related to the retroactive billings to the VA approximated $9.3 million. The Company has been and continues to be in active discussions with representatives of the Department of Labor and the VA regarding this matter, and anticipates resolution by September 30, 2009. 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 for such additional amounts is obtained. The ranges of additional revenue and gross profit are estimated to be between $0.4 million and $0.7 million, with no additional payroll or tax expenses incurred. 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 amount would be within this range.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Bobby Melnick, Terrier Partners.

Your government business seems to be a nice, small, little profitable business, whereas we continue to flounder on the nursing side. Help me to understand, after years and years and years, why all the owners of this Company would be better off if you sold the government business for some reasonable multiple of the $3 million that it earns per year and you liquidated the nursing business and you shut down and eliminated the $3 million in corporate, and everybody else got fired.

Well, we believe -- management believes and the Board believes that there's a lot of opportunity available to us on the government side. As we talked about, our pipeline being very full at this point, we have a lot of revenue opportunities in the government space currently and in the foreseeable future. We think it's in our best interest and the shareholders' best interest for us to pursue that. So we remain very bullish on the government side.

Regarding the Rx side, we believe that the cuts we've made and the signs that the market decline is slowing, that we hopefully will be able to ride out the slump. As I mentioned in the call, we will look closely at Rx's operating performance in relation to the market, our liquidity and our banking relationship, and we will make the best-interest -- or decision in the best interest of the Company. So --.

(laughter) You've got a long, long way to go before you even get to the Rx side back to breakeven. I mean, you lost $1.2 million in nine months and --

Bobby, we did cut expenses fairly significantly in June, and again, our orders are up 60% -- our open orders are up 60% (multiple speakers).

What does that mean?

Orders that we are submitting resumes to, to facilities. So it is up 60% over the last month, meaning the month of July.

So an order, an open order would be like an RFP? It is not booked revenues?

It is not booked revenues; it is not guaranteed revenues. But these are hospitals that we have contracts with that are asking us for help in filling traveler positions. This is -- again, we have not seen this type of movement in many months.

It just seems to me, respectfully, that, again, you've got a nice little business that is doing $3 million a year that would be worth I would have to speculate at least three times, probably close to four or five times to a buyer, and we are spending $3 million a year at the corporate level just to sustain that business, so it is a total wash.

Well at the current levels, Bobby, you are correct in what you're saying. But again, I think we are looking down the road here, and we are looking at the potential of the government business and the nice little niche that you were talking about. So again, there's a lot of opportunity that we see out there and a lot of opportunity that we intend to go after.

Right. Although the results of this year are that it has gone backwards. It has gone from $3.9 million to $2.8 million so far.

Yes -- and for reasons that we mentioned, that the government has been actually very slow in their sales cycle. We have seen a lot of solicitations come out and then get pulled back, and we believe a lot of it is related to the stimulus funding that has been very slow in flowing through the system. Did I hopefully answer your question?

Not really. You would be better off liquidating the Company and selling the GS business for $2.00, $2.50 a share and liquidating this Company. That's my vote as an owner, as a significant owner. So now I'm on record.

Okay, well, we will take that under advisement, Bobby.

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

In the past, you have had some merger and acquisition operations. Have you seen any potential there? Is anybody looking at you, or are you looking at anyone?

We always have our eyes and ears open for a potential acquisition that would be a nice complement for our business. We have been looking in the marketplace, and there's a lot of companies actually that are out there for sale, but unfortunately a lot of them are what I would term to be toxic, that they are extremely overvalued. So I think a lot of the stronger companies have been pulled from the market, at the advice of their investment bankers, until the market improves and the economy improves, at which point they can get a higher multiple.

So to answer your question, Mike, we have been looking for a complementary acquisition. They are very tough to find out there, and we have not been approached on the other end.

Okay. One quick question here -- this noncompliance from the debt service coverage ratio covenant, that's no big deal, is it? I mean, you're not really borrowing any money from them right now.

No, we had basically nothing outstanding with the Bank, and if anything, if you look at our cash quarter-on-quarter, it actually went up. So we submitted the waiver. They are in the process of looking at it. At this point, I really don't have any -- I have received no indication from the Bank that they will not approve it but, regardless, we have enough cash and we feel very comfortable with our liquidity position for the foreseeable future.

Okay, thank you.

(Operator Instructions). [Martin Saltzman], Advance Financial.

(inaudible) investments, just for the record, but my question for Rick is, Rick, have we seen any new developments on possibly getting some capital back from the former Rx staffing principals? Where are we on that?

We are actually waiting on that, Martin. We actually can, at this point, take legal action against them, but we've been advised by our attorneys, as the investigation is still open, that it would be costly for us to do it at this point. We do expect the investigation to be wrapping up -- that is the government investigation -- at which point we have been advised by our attorneys it would be a lot cheaper for us to file the claims that we need to file at that point. So, we are actually waiting for the government to wrap up their investigation which, again, we've been told this in the near future -- at which point then, we will file the appropriate motions and not pay the money that is due.

What are we looking at possibly recouping? What is our possible upside on that? Because it would be helpful to gain that capital.

Right. Well, actually, it would just be a reversal of the note. We would not pay it, so technically our working capital would go up by $1.5 million, plus I guess whatever accrued interest.

$75,000 of accrued interest.

-- yes, that we have on it. So it actually is not money coming in the door, but would be money that would not go out the door.

I see. Just for the record, I mean I understand and see the tsunami that you folks have endured here and many businesses throughout our country have suffered. It is very easy to pack up and go away, given the backdrop of things. So, I just wanted to express my vote of confidence in your whole management team. Even though it is discouraging, seeing the commercial side, I certainly don't believe in selling at the bottom. There may even be some opportunities you could take advantage of.

Certainly, given the new administration and the flows that you're speaking of, I am hoping that the government side really starts picking up. I mean, for the most part, I represent about 90 different shareholders that own TeamStaff stock. I have had to come up with reasons why you should maintain that when other stocks have seen some recovery. But not all industries have recovered timely, and I think and I hope that, as we get through this fourth quarter, that pipeline you're speaking of will get bigger. Before you know it, we are going to be in the first quarter of a new year and I'm hoping that, when we start making these comparisons, we get back to a positive. That's what I'm hopeful of. Maybe it is wishful, hopeful thinking, but I just wanted to express my vote of confidence.

Thank you, Martin.

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

Okay, we appreciate everyone's participation in this call, and we look forward to updating you in December on our fourth-quarter results. Thank you.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.