DLH Holdings Corp (DLHC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and fiscal year 2014 DLH Holdings Corp. earnings conference call. My name is Greta and I will be your operator for today. (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, Casey Stegman, Director at Stonegate Capital Partners. Please proceed.

Thanks, Greta. Good morning, everyone, and thank you for joining us for today's conference call. I am Casey Stegman, Director of Corporate Advisory of Stonegate Capital Partners, Investor Relations advisor to DLH Holdings Corp. On the call with me today is Zach Parker, President and Chief Executive Officer of DLH; and Kathryn JohnBull, Chief Financial Officer of DLH.

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 be found on the Investor Relations page of DLH's corporate website at www.DLHCorp.com. As a part of today's call, we have provided a slideshow presentation that can 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, with a replay available later today on our website.

Please note that this conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this call regarding DLH Holdings Corp.'s business, which are not historical facts, are forward-looking statements that involve risks and uncertainties. While these statements reflect DLH's current views and outlook, they are subject to factors that could cause its future results to differ materially. These risks and uncertainties are discussed in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-Q and 10-K.

On today's call, we will be referencing both GAAP and non-GAAP financial results. A reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH's website. All comparisons throughout this call will be on a year-over-year basis, unless stated otherwise.

And with that said, it's my pleasure to turn the call over to Zach Parker, President and Chief Executive Officer of DLH. Zach?

Thank you, Casey. And good morning, and welcome to our shareholders and other interested parties. We appreciate your participation in this conference call and webcast. As Casey indicated, earlier today we posted our fourth-quarter and total year fiscal 2014 financial results. Our performance for the fiscal 2014 improved across the board, with increases in revenue, gross margin, adjusted EBITDA, and net income.

For the year, revenues increased 13.1% over the prior year. Gross margin dollars grew 19.5%, consistent with our strategic plans. And adjusted EBITDA increased 133% over the prior year, as we continue to grow revenue and increase our operating efficiencies. Net income earned for fiscal 2014 was $5.4 million, including a $4.6 million tax benefit. Our successful earnings for the year have resulted in a $0.7 million working capital surplus, an improvement of $2.7 million for the year.

We also achieved another key milestone in fiscal 2014 with the addition of Dr. Elder Granger, US Army Major General, retired, to our Board of Directors. Dr. Granger is very focused on healthcare innovation, and his insights will be invaluable in overseeing DLH's continued transformation. His medical practitioner awareness and his substantial leadership experience will also be invaluable as we continue to pursue our strategic initiatives.

We have continued our proud tradition of strong operating performance and value delivery to our customers and their beneficiaries. For example, for the fifth consecutive year, the Department of Veteran Affairs consolidated mail outpatient pharmacy, we refer to as CMOP, received the highest customer satisfaction score amongst the nation's public and private mail-order pharmacies, as determined by the JD Power customer satisfaction and quality award program. DLH is the sole support contractor providing on-site program and project management, pharmacy services and pharmaceutical quality assurance, and medical logistics in support of this major program.

I'd like to talk a little bit about our business climate. On slides 6 through 9 of our online presentation, we provide a summary of our market and business development focus. We are excited about our new business this year, including our Department of Defense research, development, testing, and evaluation work regarding the medical devices in use by our troops in theater. In addition, we are also proud to have started and expanded our virtual pharmacy support to the Department of Veteran Affairs.

On top of our strong contract backlog, our business development activity has built a strong, qualified new business pipeline which exceeds $400 million in opportunities. These opportunities have been repositioned with a major focus on the federal health agencies market, most of which are within the department of health affairs -- or the Defense Health Affairs Agency and the Department of Veteran Affairs health community. These are consistent with our new business strategy. The budgets remain very strong in these agencies, with strong support from both sides of the aisle and within the Pentagon.

In summary, DLH continues to leverage excellent program performance, increased business development, and a much improved business balance sheet to deliver growth and greater value to our shareholders.

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

Thank you, Zach, and good morning, everyone. We are very pleased with our earnings and financial positions that we're reporting to you today. Let me first take a moment to briefly describe the tax benefit that we realized for the year, as reflected in our fourth-quarter and full-year results. For a more extensive discussion of this issue, please refer to our 10-K. But in summary, due to our recent trend of positive operating results, we realized a $4.6 million tax benefit related to the release of a portion of our valuation allowance to reflect the amount of our deferred tax asset that we expect to realize in future years.

This release for the current year is based on our current estimate of future taxable earnings, which will be updated at least annually, or more frequently upon the occurrence of an event which warrants a new estimate. We expect to be able to utilize net operating losses, and the tax benefit of them, to offset future cash taxes into the foreseeable future.

We now turn to our detailed financial results, beginning with results for the fourth quarter ended September 30, 2014, versus prior-year fourth quarter. Revenues increased $1.5 million or 10.9% over the prior year, with the increase due primarily to new business awarded in late 2013 and throughout 2014, as well as expansion on current programs. Gross margin of $2.3 million increase by approximately $0.4 million or 19.1%. As a percentage of revenue, our gross margin rate of 15% improved by 1 percentage point over prior year, benefiting from improved contract performance while partially offset by increased workers' compensation cost. We continue to implement internal measures to control costs and improve our margins.

D&A expenses, which includes general, administrative, operating, and business development activities, were $2.1 million for the quarter, an increase of $0.3 million over the prior-year fourth quarter, due principally to expenses related to growing our contract base. As a percentage of revenue, G&A expenses were 13.5%, an increase of 0.9% over prior-year fourth quarter. Excluding non-cash stock and stock option expenses, G&A expenses were 2.9% of revenue, an increase of 0.6% over the prior-year fourth quarter.

Income before taxes was approximately $178,000, an improvement of $169,000 over prior-year fourth quarter, due principally to improved income from operations and lower financing and borrowing expenses. Income before taxes per share, basic and diluted, before taxes, was $0.02 per share for fourth quarter ended September 30, an improvement of $0.02 over the prior-year period. Net income was approximately $4.8 million, an improvement of that same $4.8 million over the prior-year fourth quarter. This improvement was due to the previously discussed $4.6 million tax benefit and a $0.2 million improvement in income before taxes.

Net income per share, basic, was $0.50 per share for the fourth quarter, an improvement of $0.50 over the prior-year period. Net income share, diluted, was $0.48 per share for the fourth quarter, an improvement of $0.48 per share over the prior-year period.

Adjusted EBITDA is a non-GAAP measure that represents earnings from operations, with non-cash items such as stock expense and depreciation added back in -- depreciation added back in. This is a key measurement that we use to evaluate cash contribution available to our business operations. Adjusted EBITDA for the fourth quarter 2014 was approximately $0.3 million, an increase of approximately $0.1 million or 39.1% over the prior year. This increase is due principally to increased revenue and gross margin.

Next, let's look at the results for the fiscal year ended September 30, 2014, versus the prior fiscal year. Revenue was $60.5 million, an increase of $7 million or 13.1% over the prior year. This increase in revenue was due primarily to new business awarded late in 2013 and throughout 2014, as well as expansion on current programs.

Gross margin was approximately $9 million, an increase of approximately $1.5 million or 19.5% over the prior fiscal year. As a percentage of revenue, our gross margin rate was 14.8% for the year ended September 30, 2014, an increase of 0.8% over the prior-year period. The gross margin rate benefited from improved contract performance, offset in part by increased workers' comp costs. We continue to implement internal measures to control our costs and improve our margins.

Turning to operating expenses, G&A expenses were approximately $8.1 million, an increase of approximately $1 million or 13.5% over the prior-year period. This increase was primarily attributable to managing our increased business volume, increased spending on new business acquisition initiatives, and non-cash stock option expense for awards during fiscal year 2014. As a percentage of revenue, G&A expenses were 13.4%, nearly flat at 0.1% increase over the prior-year. Excluding non-cash stock and stock option expenses, G&A expenses were 12.6% of revenue, a decrease of 0.3% over the prior year.

Income before taxes for the fiscal year was approximately $0.8 million, an improvement of approximately $0.9 million over prior fiscal year, due principally to improved income from operations and lower financing and borrowing expenses. Income before taxes per basic and diluted share was $0.08, an improvement of $0.10 per share over the prior-year period.

Net income for the fiscal year ended September 30, 2014, was approximately $5.4 million, an improvement of $5.5 million over the prior fiscal year. This improvement was due to a $4.6 million tax benefit that we previously discussed, and a $0.9 million improvement in income before taxes.

Net income per share, basic, was $0.56 per share, an improvement of $0.58 over the prior-year period. Net income per share, diluted, was $0.54 per share, an improvement of $0.56 over the prior year. Total year adjusted EBITDA slightly exceeded $1.3 million for the year, an increase of $0.8 million or 133% over the prior fiscal year, due principally to increased revenue and gross profit.

Moving on to the balance sheet, our fourth quarter and fiscal year results reflect our trend of improving our working capital position, erasing our beginning deficit of $2 million, and ending the year with a surplus of $0.7 million. As the key contributor to this improvement is profitable operations, therefore we expect our working capital position to continue to improve during fiscal 2015.

Net cash of $3.9 million at September 30 compares favorably to net cash of $2.1 million at September 30 of last year, with the improvement derived principally from the operating cash flow of $1.7 million in the current fiscal year. At September 30, we had cash on hand of approximately $3.9 million, available loan reserves of $2.5 million, and no borrowings. We believe we have adequate liquidity resources to fund our operations and support our growth over the next 12 months in view of our existing cash position, availability under our credit facility, our funded backlog, and our internal business plan for earnings and cash flow from operations.

We're pleased with our FY14 results, and we believe we have implemented an operational model that can sustain this progress, and that can scale as the Company continues to grow. That concludes my discussion of the financial statements.

I will now turn the call over to our operator to open it up for Q&A.

(Operator Instructions). Richard Greulich, REG Capital Advisors.

Could you elaborate on the strategic new business startups that you identified -- the DoD medical systems RDT&E, and then the virtual pharmacy services for the VA?

Sure, Rich, I'd be happy to. Yes, the research and development work that we're doing is with the center of the universe, if you will, in medical logistics and acquisition, is an agency headed by the Army up at Fort Detrick, Maryland. And we're really pleased that we're doing some work that involves the very front end of the medical support for our troops in theater. In short, what we're doing is evaluating, from a research and development standpoint, potentially new products to be fielded by our armed services in order to assist their ability to stay in the fight, and to increase the medical readiness of the troops for the commanders out there.

The research and development efforts involve us working very closely, not only with the Army and the other services, but also with some of the think tanks and universities, and, of course, medical product vendors that have products emerging that have the potential to emerge and become not only deployable for our troops, but also for commercial applications. As such, our folks work very closely with the FDA. Biomedical engineers will help to ensure that the technology readiness level moves from research and development.

We're also involved in developing the test and evaluation plans for these products and devices. We conduct those tests, in many cases, as well, on behalf of the armed services. And then also we make recommendations for potential fielding. So it's really exciting work to us. And as you know, we talked about before moving more into the higher -- up the food chain, as we refer to it, in terms of the higher-margin work. And it is, in fact, doing that for us as well.

Does that relate to a specific contract that was then let -- that you competed with and won to provide this service? And over what period of time does this range? How ongoing is this?

Yes. You may recall, a couple of years ago we announced that we won a contract -- an indefinite-delivery, indefinite-quantity contract called [PASS], and (technical difficulty) that one. So this work is a task order that we had to compete for, and we were successful on under that IDIQ. And we've got probably three or four additional opportunities over the course of the next six months that we look to compete on at the task order level, as well.

I'll have to come back to you on the period of performance. I want to say it was a three-year award. These are -- nominally, they are 3- to 5-year contract awards. I believe, for this particular task order, it is three years.

Okay. And this was started this year?

We actually began the work this year. I think it's one of the ones that Kathryn referred to -- they announced the award, I think, at the very close of FY13.

Right.

Okay. Okay, thank you. And then the virtual pharmacy services for the VA?

Yes, this is one that we're really excited about. It's a real nice adjacency for the kinds of work that we do for the VA and the mail-order -- and the CMOP and the mail-order pharmacy piece. But this is one that we think has really good tentacles into other federal agencies and the Department of Defense as well. But in short, it is to provide pharmacy services. It will address both the compliance with the prescribed -- the doctor-prescribed medications from the VA medical centers, as well as potentially commercial doctors at retail pharmacy sites to support various dependents for veterans throughout the US. And, as such, we will be providing these services not at -- physically at the medical centers. And so, it's really virtual.

We are also in the process of standing up an infrastructure and some tele-health technology which will allow us to do telepharmacy. And this will be a key part of it, so that, as Kathryn indicated earlier, we don't have to increase our infrastructure as we start to bring on more work.

So, in short, we really consider this a major initiative that goes well beyond the level of support that we're starting today with the VA. But we are really excited about that work, too. We think it has just great go-to-market opportunities for us.

When I saw the large EPS at the bottom line in the headline, unlike Thomson, I thought you might have finally concluded that protracted negotiation, whereas you billed and you didn't get reimbursed, et cetera. But, still, that hasn't happened?

You're referring to the retros, I believe?

Right.

Yes.

Yes, we are -- as we've described before, of course, we are very optimistic that we will prevail. We are getting closer. We have taken additional steps to move that further. And I think we've adequately synopsized that.

Kathryn, is there anything you want to --?

Right, right. So just to move the process along, there are additional steps that you can take. And we did formalize that interaction through a claim that we submitted at the end of September. So that puts a timeline on it, so that keeps the process moving forward. So that's the activity we took in late fiscal 2014 so that we can get it moved on, and get that one off the books -- is certainly a key goal for us.

Okay, Zach and Kathryn. Thanks for the additional details. Appreciate it.

(Operator Instructions). Roger Nedrow, Stifel.

Would you explain that $4 million tax benefit again? I don't quite understand that.

Sure, Roger. This is Kathryn. We, as you know, had an extended period of generating losses back in the history of the Company. And as you generate losses, those create what are called tax net operating loss carryforwards. And as a GAAP filer, of course you are obligated to go through an assessment of what's your possibility and probability of using those losses. So as long as you're -- in short, to simplify it -- as long as you're continuing to lose money, you have to book a reserve against those tax assets. Because there's no assurance that you're going to be able -- or you're not -- you can't demonstrate you have an ability to use them at any point.

So, once you become profitable, you go through a different exercise and you evaluate your prospects for using those tax assets against future earnings. And so we've made a judgment. We do have significant loss as carryforward. But we've made a judgment, based on our current level of volume, that we expect to be able to use $4.6 million of those net operating losses. It's a long-term, 20-year carryforward period. And so it's obviously a forecasting exercise that has a significant number of assumptions around it.

So, in real simple terms, I have this -- as long as we keep making money, we're never going to pay income taxes, because we carry over the losses from prior years.

Well, at least until we run through -- yes, significant tax operating losses. That's right.

So we put cash back into the Company because we've earned money, but we don't pay tax on that.

Absolutely right. You got it.

Perfect. Good. Okay, thanks.

And there are no other questions on the audio line at this time.

All righty. Well, I'd like to again, in closing, say thank you to everyone. We look forward to continuing to keep you updated on the progress of the Company, and to give you an updated report as we launch the first quarter of FY15. Thanks again, everyone. Bye for now.

Thank you very much. This concludes your conference. Thank you for your participation. You may now disconnect. Have a great day.