DLH Holdings Corp (DLHC) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 TeamStaff Inc. earnings conference call. My name is Laura, and I will be your operator for today's call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Donald Weinberger of Wolfe Axelrod Weinberger Associates.

Thank you, Laura. Good morning and thank you for joining us for today's conference call. I am Donald Weinberger, Managing Member of Wolfe Axelrod Weinberger Associates, investor relations counsel on behalf of TeamStaff. On the call with me today is Mr. Zach Parker, President and Chief Executive Officer; and Mr. John Kahn, Chief Financial Officer.

Before I turn the call over to our hosts, let me take a moment to read the forward-looking statement. This conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this conference call regarding TeamStaff Inc.'s business which are not historical facts are forward-looking statements that involve risks and uncertainties. TeamStaff's actual results could differ materially from those described in such forward-looking statements as a result of certain risk factors and uncertainties, including but not limited to our ability to secure renewal for contracts under which we currently provide services, our ability to enter into contracts with United States government facilities and agencies on terms attractive to us and to secure orders related to those contracts, changes in the timing of orders and/or placement of professionals and administrative staff, the variation in pricing of the contracts under which we place professionals, the overall level of demand for our services, our ability to successfully implement our strategic growth, acquisition and integration strategies; the effect of existing or future government legislation and regulation; the loss of key officers and management personnel that could adversely affect our ability to remain competitive; other regulatory and tax developments and the effect of other events and important factors disclosed previously and from time to time in TeamStaff's filings with the US Securities and Exchange Commission. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see risk factors in the Company's filings with the SEC.

The information in this conference call should be considered accurate only as of the date of the call. TeamStaff expressly disclaims any current intention to update any forecast, estimates or other forward-looking statements contained in this call.

As part of today's call, we've created a slideshow presentation which can be accessed on our website at www.dlhcorp.com, under the investor relations tab towards the right side of the page and click into presentations under the drop-down menu.

With that out of the way, let me turn the discussion over to Zach Parker, President and CEO of TeamStaff. Zach, please proceed.

Thank you, Don, and good morning, everyone and thank you for joining us today for our quarterly report. I'd like to welcome shareholders, investors and interested parties to our quarterly conference call to discuss our midyear operational highlights and financial results for the second quarter and the first six months of fiscal 2012.

My plan is to summarize the key highlights of the second quarter, then hand the call over to John Kahn for a brief discussion of our financial results for the quarter and the fiscal year to date, after which we'll open the call for a question-and-answer session.

Overall, I'm quite pleased with our results reported for the second quarter ended March 31, 2012. The second quarter reflects significant improvement in the top line attributed to our new business wins as we exited fiscal 2011. As the graphs in the slide presentation indicate, we achieved significant revenue growth this quarter both when compared to the quarter of the prior fiscal year and sequentially when compared to Q1 of our current fiscal year.

The $12.6 million in Q2 sales is up by more than 20% over the second quarter of last year. And as the pie chart in the slide presentation indicates, our healthcare revenues exceed our logistics and technical services revenue. This, of course, is consistent with our strategic plan. While revenues advanced at a strong pace, we incurred losses due to increased direct labor expenses stemming in large part from workers compensation claims expenses related to prior years as well as historical effect in this quarter of higher payroll taxes. As a result, these additional expenses lowered our gross profit margin in the quarter and adversely impacted our ability to achieve better operating results.

Operationally, we continue to be very prudent in our spending but we've added certain operation overhead in the last quarter to prepare for some major bids and several contracts that are in our business development pipeline. In addition, we have also undertaken various steps to strengthen our capital structure, one in the form of a rights offering to be better positioned financially in order to win on some of these additional contracts. After thorough review, we determined that a rights offering is an effective and equitable means of securing additional capital to support our growth. Existing shareholders as of April 5, 2012 should have already received the rights offering materials. We are looking forward to closing the offering in the next few weeks.

At the same time, we continue to work to resolve open historical matters and were very pleased recently to have received, subsequent to the quarter's end, contract modifications which are a significant item in resolving the retroactive billing adjustments.

Moving on, I'd like to take a few minutes to share our view on contract activity coming out of Washington DC. The federal government, of course, continues to see delays in awarding new contracts and committing new funds while they debate the means to reduce the national debt and to stimulate the economy. The administration is attempting to balance decisions regarding defense, homeland security and other federal spending priorities in a greatly constrained fiscal environment imposed by the enactment of the Budget Control Act of 2011. This reduces defense spending by $487 billion over a 10-year period starting in fiscal year 2012.

From an overall budget perspective, it is likely that government discretionary spending will be constrained for several years to come. Though specific funding priorities are subject to change from year to year, our strategic businesses' alignment around DoD and Veterans Affairs, healthcare and logistics sustainment services remain very well placed to address what we believe are top national priority budget areas and to continue to build our strategic growth. Several government agencies within the Department of Defense are shifting from best value competitions to low-priced, technically acceptable competition. This shift will undoubtedly affect margins in a downward capacity, certainly in certain markets as companies remain committed to organic growth and increasing market share.

On the operations front, I'm also very proud of our performance excellence initiatives under Kevin Wilson, which include the deployment of our proprietary SPOT-m solution, which integrates people, processes and technology tools in a unique manner, resulting in enhanced productivity and customer cost savings. In part through its application, five of our regional distribution centers for the Department of Veterans Affairs have set new daily production records. We believe that our commitment to continuous improvement and per capita cost reduction continues to differentiate DLH from the competition while helping the government customers tackle these budgetary challenges.

In summary, the investments and adjustments that we've made in the last few years in order to continue building our business, particularly on the business development side, are beginning to pay off as seen with our contract wins and revenue improvements. These have positioned us well for the remainder of fiscal 2012 and, more importantly, beyond.

With that, I'll turn the call over to John Kahn for a more detailed discussion of our financial results for the second quarter and the first six months of fiscal 2012.

Thank you, Zach. Revenues from continuing operations for the three months ended March 31, 2012 and 2011 were $12.6 million and $10.4 million, respectively, which represents an increase of $2.2 million or 21.2% despite the extended government delays and major awards that Zach mentioned. Revenues from TeamStaff's operations for the six months ended March 31, 2012 and 2011 were $24.1 million and $21 million, respectively, which represents an increase of $3.1 million or 14.8% over the prior fiscal period. The increases in operating revenue are primarily due to new business awards.

Gross profit for the three months ended March 31, 2012 and 2011 was $1.3 million and $1.5 million, respectively, which represents a decrease of $0.2 million or 13.3% despite the revenue increase. Gross profit from continuing operations as a percentage of revenue was 10.3% and 14.4% for the three months ended March 31, 2012 and 2011, respectively.

Gross profit for the six months ended March 31, 2012 and 2011 was $2.9 million and $2.8 million, respectively, which represents an increase of $0.1 million or 3.6% over the prior fiscal year period. Gross profit from continuing operations as a percentage of revenue was 11.9% and 13.4% for the six months ended March 31, 2012 and 2011, respectively.

The key drivers for the period-over-period decrease in gross profit as a percentage of revenue were increased workers compensation claims expense related to previously incurred but not yet reported claims from 2009 through 2011 of approximately $0.2 million for the quarter and $0.4 million for the six months, and a reduction in the prior-year direct expenses of approximately $0.2 million related to obtaining an independent trustee consent to utilize surplus assets in the medical benefit plan.

General and administrative, or G&A, expenses for the three months ended March 31, 2012 and 2011 were $1.8 million and $1.6 million, respectively, which represented an increase of $0.2 million or 12.5%. G&A expenses for the six months ended March 31, 2012 and 2011 were $3.6 million and $3.1 million, respectively, which represent an increase of $0.5 million or 14.9%. The difference is related to new contract start-up and operational overhead as well as to expand in new business development activity.

Loss from operations for the three months ended March 31, 2012 was $0.6 million as compared to loss from operations for the three months ended March 31, 2011 of $0.1 million. Loss from operations for the six months ended March 31, 2012 was $0.8 million as compared to loss from operations for the six months ended March 31, 2011 of $0.4 million. The increase is primarily due to greater workers compensation claims expense related to previously incurred but not yet reported claims, the non-recurrence of a prior-year trustee consent, new contract start-up costs and expanded new business development efforts.

Loss from continuing operations for the three months ended March 31, 2012 was $0.7 million or $0.12 per basic and diluted share as compared to loss from continuing operations of $0.2 million or $0.04 per basic and diluted share for the three months ended March 31, 2011. Loss from continuing operations for the six months ended March 31, 2012 was $1.1 million or $0.18 per basic and diluted share as compared to loss from continuing operations of $0.5 million or $0.10 per basic and diluted share for the six months ended March 31, 2011.

As of March 31, 2012, the Company had $0.6 million in cash and $0.3 million in availability under its credit facility. The Company believes that it has adequate liquidity resources to fund operations over the next 12 months in view of its existing cash position, the availability under its credit facility as well as, among other factors, forecasted cash flow from operations and the effects of cost reduction programs and initiatives that continue to remain in place.

Looking forward, we are excited about the rights offering that is currently in process, which we are conducting in order to strengthen our balance sheet and compete for larger contract awards and provide for additional liquidity for working capital and general corporate purposes. As we noted in the prospectus that has recently been mailed to shareholders, the effect of the rights offering is expected to be an increase in our cash and cash equivalents for gross proceeds of $4.2 million with an increase in accrued expenses to the extent of $0.2 million of estimated expenses and an increase in shareholders' equity for the net proceeds.

That concludes my discussion of the financial results. I'll now turn it back over to Zach.

Thank you, John. In short, we believe that the turnaround is well underway and that our performance and results demonstrate that we remain on plan with regard to key strategic objectives of solidifying our base, growing and diversifying the business within the national priority markets and ultimately delivering enhanced customer and shareholder value.

That concludes my and our formal remarks. I would now like to open the call for any questions. Operator, please proceed.

(Operator instructions) Tom Weissenborn, Janney Montgomery Scott.

Good morning, Mr. Parker. I wondered if you could give me or give us the present headcount and what the headcount might have been six months ago and what you might anticipate it would be at the end of this fiscal year.

Okay, very good question. I'm sorry; I didn't capture your name. Was it Don?

No, the first name is Tom, T-O-M.

Thank you, Tom. Good question. Yes, we are very pleased about that. I think your question was approximately six months or so ago -- what was our headcount?

Right.

About six months ago, it was just north of 800, in the low 8s. We are really pleased that, today, we are in excess of about -- actually, we're in excess of 1100, I think 1124 or 1125. And, of course, as you know, we are a labor-driven, employee-driven type of business as opposed to capital. So it's a very important metric for us.

And what would you anticipate it might be the end of this fiscal year?

Well, of course you know, we don't give guidance, but I can say that we are still in a growth mode. Our current quarterly projections indicate that the customers are still interested in continuing to expand the business for us, so we do expect that number to increase throughout the remainder of this fiscal year. Part of the slope of that growth will be a function, of course, of government contract awards that have been awaiting decisions.

I see. Several months ago, maybe half -- six months to a year ago, you were the recipient of a rather large contract with the Department of Veterans Affairs, where I believe you were supplying medical or pharmaceutical drugs to the VA hospitals. And I wonder if you could give us some color as to where you are in that contract and what it's presently -- what kind of revenues it's presently producing and what you might expect those revenues to be when that contract is in full swing.

Well, we are -- that's a very good question as well. We were awarded seven components of that deal with the VA. We have yet to realize work in all seven of those sites. We are currently at what we consider pretty close to full-out tempo on the other six sites, and we think that this quarter, the quarter results you're seeing right now, reflects the majority of what we will level off from that client. Now, we are expecting some marginal increases in that capacity, but we do think that we are now -- this quarter probably reflects the first quarter where we are at pretty level set with that particular CMOPs pharmacy contract, is the one you're referring to.

Yes, so that the -- as far as -- and I know you've mentioned a seventh site, which you're not up to fully ramped up yet as far as revenues are concerned. How about the labor component of all of those seven sites? Have you reached what you feel are the optimum staff levels might be so that those training costs, etc., might be behind us?

Two parts -- two-part question, and a very good question. The first part of that, with regard to the ramp-up of employees -- we do expect it to grow marginally again in the near term. The interesting part of that is, however, we have really implemented a number of new efficiencies for the client. It was part of our proposal with a unique technical solution. That new initiative that we have put in place, and you heard me make reference to the SPOT-m, has actually saved them just under $1 million in cost and reduced additional labor for us. So it's kind of almost like we're working against ourselves, but the good news is they've continued to expand the business. It is a job which is supporting the needs of the veteran population today. And every forecast that we have showed that as troops are now coming back from the Gulf, both Afghanistan and Iraq, and recognizing that there will be some shift again over into the Pacific Rim, that we are expecting the veteran population and the demands on the nature of that particular work to increase fairly near-term, and certainly over the next several years. So we're going to expect that we will continue to grow in terms of the needs of the veteran population in the near-term.

Thank you, I'll jump back in queue.

Very good questions, Tom, thank you.

(Operator instructions) Richard Greulich, [Regular] Capital Advisors.

The $9.3 million account receivable -- so am I taking -- am I to understand that you'll be receiving that in the very near future, then?

Yes, that's our intent. That's correct.

And originally it seemed like there was about a $400,000 or $500,000 sort of profit that would be recognized. Is that still the case, or has that gone away?

We're still hopeful. We've got discussions to have with the customer to finalize things.

Okay, the workers comp $200,000 additional versus year-over-year last year -- I guess I'm a little confused. It seemed like, because you said in the 10-Q you had $200,000 additional this quarter and $400,000 additional for the six months, which would indicate, then, that last quarter had $200,000 additional as well -- now, is that an ongoing thing for the next couple of quarters, then?

Well, the interesting part about that -- and good question, Richard -- is these were spikes that were driven by what we call legacy claims. These were claims that originated and we thought were bound back in 2009, and some a little bit later. But they spiked as we moved from the tail end of last quarter, and they mostly hit this quarter as a net. In fact, I think the largest chunk -- correct me if I'm wrong, John -- pretty much hit us in March. So just before we were closing the books and ready to declare victory, we got hit with a substantial increase in a very, very old claim. So we -- but I can tell you that we manage -- as we monitor this on a monthly and quarterly basis, these were anomalies. The number that we hit for this quarter is the highest, certainly, in the year and a half or so since we exited the commercial business. So we do not expect this to continue at this level.

And in your presentation, the bullet point where it says awarded multiple new medical services ID/IQ contracts -- could you detail that a little bit more? I'm not sure -- in other words, were you awarded and you started receiving revenues with those?

No, you're a good straight man for me. We're kind of excited about that. We were awarded three medical services contracts over the last four to five months that were for the Air Force. They're medical services contracts. You can think of them more in the lines of kind of staff augmentation contracts where we'll be placing a variety of either clinicians or administrative, medical administrative personnel throughout military treatment facilities now. We've been doing that kind of business on a small scale for some time. Having been awarded those contracts, it gives us an opportunity to compete for task orders coming forward for new business.

So we're in the process now of submitting task orders and competing on some of those task orders. The ID/IQ, which stands for indefinite delivery/indefinite quantity, is one that says we have to compete now for those opportunities. So we are expecting to -- in fact, I can tell you that we have submitted some bids in that regard. We are awaiting decisions from the government in that regard. And it has an opportunity to create an opportunity for us for additional revenue that would not -- generally, if it doesn't hit near-term, the government's generally going to save those funds until next fiscal year, which will start in October. Generally, by June, these types of funds are already committed, otherwise the Controller is not going to let them release it or they will lose it to next year's budget. So most of them have been competing those. It would have been great to have had this announcement and made the decision in October, but unfortunately most of them came in the second quarter. So we are still hopeful and optimistic and our operations have bid a number of jobs because, as the big jobs are continuing to slip, our strategy is let's place more of a laser focus on these what were nonstrategic but very good opportunities for us to gain some business.

And kind of continuing on to the prior questioner's line, if the revenues this quarter pretty much reflect most of the bump up you got from the larger contract renewal, and let's say adding back the $200,000 workers comp spike, you're still at a point where your margins aren't high enough to be at breakeven level, so where does it go from here? In other words, like if you remain at these levels, you're not going to be breakeven.

Correct. No, you're absolutely on point with where the data is right now. As you've heard probably us say, getting our head above the water is extremely important for us as a business, and to hit that phase as early as we possibly can. So there's a combination of things, both the profitability that we're looking at on our existing contracts. We've been increasing those from new means of program management and we've implemented a number of things there. The other side is, of course, taking a proactive role on some of these task orders on these new contracts, new ID/IQs that we talked about, to ensure that we have the profitability and the type of margins in there to help offset that. And just as importantly is our commitment to cost containment. We have shifted the majority of our costs, as John kind of described, from structural items to more strategic and growth oriented. And while at the same time for those things that are steady-state, we are reducing those costs. The variables of taxes, of course, and workers comp notwithstanding, it is our objective and our plan to flip that over and keep our head over the water in the not-too-distant future.

Not to belabor it too much, but if you continue to add some more employee count, how are you going to get margin -- gross margins have to get over, let's say, the $13 million run rate level. Gross margins have to get to about 14% to break even.

That's correct.

How are you going to be able to do that if you're adding more employees at the same time?

We've got to drive costs out and drive higher margins on the business that we're bringing in.

One of the things, Richard, to bear in mind about this quarter and the year is this is the worst quarter from a profitability point of view, gross margin point of view, because of the impact of payroll taxes. Those reset January 1. And that has several percentage points, will be over 3 percentage points as a percentage of revenue impact on our margins for this quarter, for Q2 alone.

Okay, I appreciate that, thank you.

That turns around next quarter, giving us a lift also.

Right, okay, good. Thank you.

[Alvin Revkin].

I was looking at this rights offering. If I understand it correctly, to exercise the rights, it will cost more to buy the stock than in the open market right now. Does that make sense?

The stock has been trading right around the level -- it was trading higher before, when we announced it. It traded down somewhat.

Will there be any adjustment made there or extension?

No.

So the rights -- in other words, how can you sell the rights at current situations?

We have a backstop agreement with the largest shareholder, Winfield Capital, at the end of the day to submit all the closing conditions, to pick up the full amount that's not subscribed.

Whatever's not subscribed, correct.

Even though it's a higher price than (inaudible) in the open market?

Well, of course, it's open still for the next several weeks. But the deal is -- it will not change from what has been distributed, both advertised publicly and, of course, distributed to the shareholders.

At the moment I think the price is running in the 130's, so it's above the offering price. It has been a lot higher. We obviously hope it will go back to being a lot higher.

But the volatility, of course, is outside of our control.

I see. Okay. Now we'll have to wait and see, that's all we can do.

You betcha.

Thank you very much.

Sir, there are no further questions at this time.

Well, great. Well, thank you all for participating in today's conference call. As always, should you have any additional questions, please feel free to contact either myself or John Kahn or Donald Weinberger of Wolfe Axelrod Weinberger Associates. We again thank you for your interest and support and look forward to speaking with all of you again, in certainly a few months, to discuss our third quarter results of fiscal 2012. Have a great day.

Ladies and gentlemen, that concludes today's conference. You may now disconnect.