DLH Holdings Corp (DLHC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DLH Holdings Corp. fourth-quarter and full-year 2013 results conference call. My name is Patrick and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. If at any time you require operator assistance, please press star zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Michael Goldstein, partner, Becker & Poliakoff, LLP, counsel to DLH Holdings Corp. Please proceed, sir.

Thank you, Patrick. Good morning, everyone, and thank you for joining us for today's conference call. I am Michael Goldstein, partner with Becker & Poliakoff, LLP, counsel to DLH Holdings Corp.

On the call with me today is Mr. Zachary Parker, President and Chief Executive Officer of DLH, and Ms. Kathryn JohnBull, Chief Financial Officer of DLH.

Before we begin the substance of our discussion of this call, I'd like to make a few brief introductory comments. Earlier today, the Company posted its earnings release, which outlines the topics that management intends to discuss today. Should you have missed that release, it can also be found on DLH's corporate website at www.DLHCorp.com.

Additionally as part of today's call, we have created a slideshow presentation which can also be accessed on the DLH website. Go to the investor relations tab towards the right side of the page and click on presentations under the drop-down menu. We are also providing a simultaneous webcast of today's call, and a replay of this conference call will be available later today.

Please note that this conference call may contain forward-looking statements as defined by the federal securities laws. Statements on this conference call regarding DLH Holdings Corp.'s business which are not historical facts are forward-looking statements that involve risks and uncertainties. These statements reflect DLH's current views and are subject to important factors that could cause its actual results to differ materially from anticipated results as a result of various risk factors and uncertainties. Factors that could cause DLH's actual results to differ materially from those it anticipates are summarized in our earnings release filed earlier this morning and are described in the Company's Securities and Exchange Commission filings.

The Company's Safe Harbor statement is also included in the presentation and should be incorporated as part of any transcript to this call. DLH expressly disclaims any current intention to update any forecast, estimates, or any forward-looking statements contained in this call.

In addition, the Company's presentation today will include a discussion of non-GAAP financial measures. These non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.

With all that said, it is now my pleasure to turn the call over to Mr. Parker, President and Chief Executive Officer of DLH Holdings.

Excellent. Thank you, Michael. Good morning and welcome to all of our shareholders and other interested parties. We appreciate your participation in this conference call and webcast.

I will begin by reminding everyone of the strategy that we have been executing as a Company. I think it is important to have that context as we review our results and look to where we are taking the Company.

We're focused first on performance. That applies both to our customers and our shareholders. We have also endeavored to clean up our balance sheet. Here, we continue to make strides on removing several legacy overhangs. And finally, we continue our portfolio shaping as we continue to position, bid, and win new work in mission-critical areas that we are convinced will drive enhanced value to our customers. We will be talking a little bit more about this in the coming months.

As Michael indicated, earlier today we posted our fourth-quarter results, as well as our fiscal-year 2013 financials. The fourth quarter completed a transformational year for DLH, in which we delivered the financial turnaround of the Company that we set as our goal at the outset of fiscal 2013.

Just recapping the highlights, the first quarter we reported positive adjusted EBITDA, which was a first in recent history for the Company. During the second quarter, the Company delivered positive income from operations for the first time in several years, while also sustaining positive adjusted EBITDA. In our third quarter, we continued our positive results as we shared with you and also achieved positive net income for the first time also in a number of years. All of the key milestones that we achieved incrementally throughout the fiscal 2013 were sustained through the fourth quarter.

Additionally, during fiscal 2013 we generated strong cash flow from operations, reflecting our positive adjusted EBITDA and effective collection of customer accounts receivables. We believe that we have strengthened our operational model to consistently deliver these fundamentals on an ongoing basis.

In addition to our substantial improvement in operating results during 2013, we also significantly improved the Company's future business base. The crowning event of our very successful 2013 fiscal year was the award in September of all seven competed contracts issued by the Department of Veterans Affairs for the consolidated mail outpatient pharmacy logistics. With this award, DLH secured for up to five years this current contract base for the six regions it had previously supported. By adding the seventh region, DLH has become the exclusive provider of these mission-critical services to the Veterans Health Administration, and this will allow the Company to provide even greater value to our nation's veterans.

Since closing fiscal 2010, the Company has grown revenue by 30%. This growth has been realized against a backdrop of well-documented federal budget challenges. The Company closed fiscal 2013 with a backlog of firm orders at $240 million, as well as a strong qualified pipeline of opportunities for potential growth in the future. We believe that the markets that we have targeted will enhance our ability to expand our business base, applying operational expertise to secure contracts in adjacent markets. As always, we remain focused on long-term growth and improved shareholder value.

With regard to market expansion, we believe that our new business pipeline remains very healthy. Though the federal budget delays and sequestration have slowed the pace of sizable new contract awards, we believe that our capture activity and differentiation for DLH for strategic new business has placed us in an enhanced position to achieve our growth goals. We expect that these will provide critical new capabilities to our Company portfolio, much like we have realized towards the latter part of this year. These are all consistent with our long-range strategic plan.

In summary, DLH continues to successfully execute our strategy while facing the demanding headwinds and challenges imposed by the federal budget uncertainty and the defense drawdown. We continue to maintain a laser focus on providing top-quality services and best practices as we support our nation's high-priority health and logistics services to our veterans and uniformed service members. All of these factors combine to increase our confidence in the long-term prospects of the Company.

Kathryn will now provide a more detailed discussion of the financial results. Kathryn?

Thank you, Zach, and good morning, everyone.

Revenues for the three months ended September 30, 2013, and 2012 were $14 million and $12.5 million, respectively, which represents an increase of $1.5 million, or 12.7%. The increase in revenue is due primarily to small contract awards and expansion on current programs with existing customers.

Revenues for the fiscal years ended September 30, 2013, and 2012 were $53.5 million and $49.2 million, respectively, which represents an increase of $4.3 million, or 8.8%, year over year. This increase in revenue is also due primarily to expansion on current programs, small contract awards, and the full year impact of new business awards received during the prior year.

Gross profit for the three months ended September 30, 2013, and 2012 was two point -- $2 million and $1.1 million, respectively, which represents an increase of $0.9 million, or 72%. As a percentage of revenue, gross profit was 14% and 9.2% for the three months ended September 30, 2013, and 2012, respectively. The gross profit rate benefited from improved contract performance and effective cost management.

Gross profit for the fiscal years ended September 30, 2013, and 2012 was $7.5 million and $5.6 million, respectively, which represents an increase of $1.9 million, or 34%, over the prior fiscal year. As a percentage of revenue, gross profit was 14% and 11.4% for the fiscal years ended September 30, 2013, and 2012, respectively. The gross profit margin for the fiscal year benefited from increased revenue, improved contract performance, and cost management.

Total general and administrative, or G&A, expenses, including severance in fiscal-year 2012, for the three months ended September 30, 2013, and 2012 were $1.8 million and $1.9 million, respectively, a decrease of $0.1 million, or 5.2%. As a percent of revenue, G&A expenses were 12.6% and 14.9% for the three months ended September 30, 2013, and 2012, respectively.

Total G&A expenses for the fiscal years ended September 30, 2013, and 2012, including 2012 severance, were $7.1 million and $7.6 million, respectively, a decrease of $0.5 million, or 6.5%. As a percent of revenue, G&A expenses were 13.3% and 15.5% for the fiscal years ended September 30, 2013, and 2012, respectively. For both the three-month and fiscal-year periods, the year-over-year reduction in G&A expenses is due primarily to efficiency initiatives we implemented in the current year to allow greater leverage of administrative resources as our revenues grew.

Income from operations for the three months ended September 30, 2013, was $173,000, as compared to a loss from operations for the three months ended September 30, 2012, of approximately $752,000. Income from operations for the fiscal year ended September 30, 2013, was approximately $248,000, as compared to a loss from operations for the fiscal year ended 2012 of approximately $2.2 million. For both the three-month and fiscal-year periods, the improvement in income from operations results from improved gross margins and decreased general and administrative expenses, as described above.

Net income for the three months ended September 30, 2013, was $9,000 and essentially breakeven per basic and diluted share, as compared to a net loss of $354,000, or $0.04 per basic and diluted share, for the three months ended September 30, 2012.

Net loss for the fiscal year ended September 30, 2013, was $159,000, or $0.02 per basic and diluted share, as compared to a net loss of $2 million, or $0.29 per basic and diluted share, for the fiscal year ended September 30, 2012. These improvements reflect the contribution of our increased revenue, our improved gross profit, and ongoing constraints on discretionary spending, described previously.

Earnings before interest, tax, depreciation, and amortization, or EBITDA, adjusted for other non-cash charges, or also known as adjusted EBITDA, for the three months ended September 30, 2013, was $238,000, as compared to a loss of $676,000 for the three months ended September 30, 2012. Adjusted EBITDA for the fiscal year ended September 30, 2013, was $575,000, compared to a loss in fiscal year ended September 30, 2012, of $1.7 million, due principally to the increased gross profit and reduced expenses, as we previously discussed on this call.

Moving on to the Company's capital structure, as of September 30, 2013, the Company had $3.4 million in cash with very low bank debt, due to our strong cash flow from operations. The Company believes it has adequate liquidity resources to fund operations and support growth over the next 12 months in view of its existing cash position, the additional funding committed by our lender, and our forecasted cash flow from operations.

We are very pleased to have achieved our fiscal 2013 profitability and cash flow objectives. We believe we have implemented an operational model that can sustain this progress and that can scale as the Company grows. That concludes my discussion of the financial statements. I will now turn it back over to Zach.

Thank you, Kathryn.

In summary, we remain keenly focused on delivering value as we navigate through the government waves, both on the topline, as well as the margin pressures from the current fiscal environment. While there are many risk factors that we continue to manage, we believe we have refined our business model to consistently deliver positive adjusted EBITDA and shareholder value.

Our current and adjacent target markets remain quite viable and offer sustainable profitable growth opportunities and a healthy pipeline for DLH and our partners. Our key strategic initiatives for fiscal 2014 and beyond remain very well aligned with delivering the resulting shareholder value. In the coming months, we plan to share additional color around these strategic growth initiatives. In February, we will conduct our annual meeting of the shareholders in New York, right around the time of our FY14 first-quarter earnings release, and we will address then some key pillars to executing that strategy.

Let me -- before we start Q&A, let me also add one other key point in the metrics that Kathryn was mentioning. The substantial reduction in G&A as a percentage of revenue year over year is truly a reflection of the evidence, if you will, of our efficiencies, many of which Kathryn has implemented over the course of the year; our cost savings, where we have taken out a number of structural cost elements; and, more importantly, it enhances our competitiveness. That is a key indicator for us to ensure that we are able to pursue the high-growth and higher-margin business area and to compete favorably, given the budgetary environment. So we also believe that those metrics, in addition to the things that we've described operationally, will be a substantial key component to certainly organic growth in the near term.

With that, I would like to turn the call over to our operator to open the call for questions.

Ladies and gentlemen, if you have a question, please press star one on your phone. If your question has been answered or you would like to withdraw your question, please press star two. (Operator Instructions). Ian Corydon, B. Riley & Co.

Thank you. Is 14% the right gross margin for this business, just given the current mix? Or is there upside from here?

I would say let me start with that. Was this Ian?

It's Ian. That's correct.

Good question, Ian. We have -- when you look at our current business base, which, of course, is heavily weighed by the current VA mail-order work, we think 14% is very good.

It is, however, not indicative of the markets and the target markets and the nature of the contracts that we are starting to add to our portfolio. So as we talk more about our portfolio shaping, a key component of that is not just growth and sustainable growth, but enhanced profitable growth, as well. We expect to continue to move, as we refer to it, up the food chain, if you will, to the little better margin work.

We will still have to continue to be efficient, but the nature of some of the sort of things, much like the work that we just recently won at Fort Detrick, and we will talk a little bit about that later, we think they certainly bode well for us in moving up that margin chain.

That's great. And then on operating expenses, is there a lot more to take out there? Or should we expect operating expenses to grow from here as you grow revenues in 2014?

It's a little of neither. We don't think there is substantial additional costs to take out; however, we do feel that we've got a model that's operating in a way that can scale and will not require additional costs at the same pace that revenue grows, so it will be able to absorb some measure of growth before additional costs are required.

Excellent. Thank you very much.

You bet.

Raymond Yung, Dolphin Asset Management.

Hi. Good morning. Just a quick question on the CMOP logistics contracts? How many bidders were involved? And what was the bidding process?

Hi, Raymond. Thank you very much. Let me start with the latter part.

The bidding process was -- there were -- six of our current jobs that were done under the logistics worldwide contract were up for recompete, and there was also another company that was performing in one of the other regions. It was solicited through what's called full and open competition, which means it's not limited to any particular types of companies, like small business, etc., and large businesses as well were able to compete nationally. So there were very few restrictions.

We took an approach that assumed that it was going to be competitive that way all along as we continued to position and submit our approaches and pricing. It involved both a technical approach, where we were to tell the government what we thought was the best technical approach to compete in each individual location. They were all each individually evaluated. They were all each individually awarded.

We were just very, very excited to have, A, retained our current business base, which also had some growth in it, and, more importantly, to win the only other outstanding site, which allows us, we believe, to integrate some of the tools and technology that we seek to bring to bear for the client that will result in further efficiencies and value adds.

The first part of your question had to do with the competition, and we've got to say that as of today, we have not gotten yet feedback from the government with regard to the number of competitors. It is not likely that we will ever know who the competitors were, but we do know that there was, in the government's view, substantial competition.

Okay. And one other question on the qualified pipeline. I guess the first one is, how do you qualify the pipeline? Can you give us some color in terms of the year-to-year growth in that pipeline?

Yes, Raymond, yes, I appreciate the question. The way in which we handle that is we look at the type of business and the type of customers we think are going to allow us to accomplish our growth objectives generally three to five years out.

We do what we call long-range strategic planning; while at the same time, we look at relatively near-term opportunities where we can leverage existing core competencies and, in particular, existing customer bases. We have a process that is led by our Executive Vice President, U.S. Army Colonel, Retired, John Armstrong, which leverages best practices on identifying and then what we call qualifying opportunities, and then we will subsequently make pursuit and bid versus no-bid decisions.

An opportunity becomes qualified when it's been briefed to executive management. It's generally a year to a year and a half out. That briefing takes a look at the customer; aligns it up whether it is strategically aligned with the areas that we are pursuing, consistent with the strategies I shared with you earlier; and then, lastly, we as an executive team have to make a go-or-no-go decision. It is not until we have made that go-or-no-go decision that an opportunity becomes qualified.

So, it is very important for us to manage that. We use that on a monthly basis and report on a quarterly basis to our Board of Directors with regard to the viability of that qualified pipeline. It is largely an indication of the potential growth of the Company, which we hold very near and dear.

I can't give very much color beyond that today because of the competitive sensitivity to that; however, in February, we do intend to do a little more of a deeper dive in terms of those target opportunities, the type of stratification we have in those qualified opportunities.

Okay. Thank you.

Richard Greulich, REG Capital Advisors.

In that recent win in September where you added the seventh district, does that mean that there will be additional revenue starting November 1 when you begin to serve in that district, then?

Yes. That's absolutely right.

A couple of other questions, the paying back of the $350,000 convertible debenture was partly in stock and partly in cash. Was that up to the desire of the owner of the debenture, Winfield?

We actually collaborated with a small subcommittee on our Board of Directors, and we certainly did have discussions with Winfield and we felt that this was a very mutually beneficial arrangement. We were both very supportive of approaching it this way.

As you well know, Kathryn said early part of this year that we wanted to apply some focus on a number of things that may cloud our books going forward, and we thought that this was a good win-win. Kathryn, do you want to add anything to that?

That's absolutely right. It was important to us that we had a number of ways to address that maturity date of that convertible debt, and we were very pleased with the path that Winfield chose in terms of converting a bulk of it and settling out the balance of it to deal with their own cash flow requirements and, while they were at it, went ahead and exercised the warrants that were out there, too. So from our perspective, we appreciate the support that that represents.

Is it the second fiscal quarter for you that G&A bumps up a little bit because of taxes?

The bump we get from that really happens more so in Q1 and in Q4 of our fiscal years, around the heavy audit and tax consulting environment requirements.

And I'm just kind of curious, when you are talking about in February adding more color and going into more detail about some of the strategic moves you can make for growth, are you just waiting until then? Or are you just still getting those together, or --

It's actually both. There are some things that we've got in motion that we think will mature by, hopefully, calendar-year end, early part of January.

We do have that date scheduled, of course, on just a Reg FD process, and we think certainly as we complete now part of our finalized part of our target markets, we will be better prepared to address that to the community. Obviously, what we will be balancing, Richard, is I think it's very important for us to give -- now that we have turned this corner, we have demonstrated that we are at a tempo and a pace that will allow us now to focus more on growth, that we've gotten the numbers and the business model, we think, right-sized for the heritage and legacy business, we want to share a little bit more with you, so where we are going, to kind of substantiate the answer to Raymond's question earlier with regard to the margin creep, and Ian's question, as well.

So we will talk a little bit about where we see that coming and we will see how much more we can share with you, short of -- obviously, we are not intending on giving guidance or having a change in that regard, but we certainly want share a bit more, at least from an organic standpoint, of how and where we think the results will come from.

Thank you. And one last question, is there a rough number that you could give me in terms of what the allowable use of net operating carryforwards would be on an annualized basis, given the ownership changes and everything?

Yes. I appreciate that question very much, Rich, and it's nice to be in a position to be thinking that way, isn't it?

We are certainly well underway in evaluating that. It's probably a bit premature for me to offer a precise number yet, but we do think that the majority of the NOLs relate to things that are not subject to the ownership change requirements. But there is, on the other hand, and maybe I would say a 60/40 split, something like that -- let me just continue the exercise and get a more precise number for you, but to your point, I think the underlying question is your sense that there is a meaningful chunk that is subject to limitations under the 382 rules for ownership changes, and that doesn't mean they are gone forever. It just means that they are more constrained in your ability to use them.

But none of them expire until -- I think it starts out in 2023. We do think we have quite a significant runway to begin to use them, as we operate profitably, and we do expect that FY14 is the year that we will go through the details of that expected utilization and begin to evaluate more seriously whether any of that runs through the P&L.

Good. Thank you very much.

You betcha.

There are no additional questions at this time. I would now like to turn the call back over to Mr. Zach Parker for closing remarks.

Thank you, again, everyone, for participating in today's conference call and for a really good set of questions. We thank you all for your interest and support, and look forward to speaking to you again in the coming months as we report our fiscal 2014 first-quarter results. If there are no further questions, we thank you, and have a blessed day. Bye for now.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.