DLH Holdings Corp (DLHC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 DLH Holdings Corp. earnings conference call. My name is Emily and I will be your operator for today.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Casey Stegman, Investor Relations. Please go ahead.

Thank you, Emily. Good morning, everyone, and thank you for joining us for today's conference call. My name is Casey Stegman with Stonegate Capital Partners, investor relations advisor to DLH Holdings.

On the call today with me is the 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 page of DLH's corporate website at www.DLHCorp.com.

As part of today's call we have provided a slideshow presentation that can be accessed on the 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 may contain forward-looking statements as defined by the federal securities laws. Statements in this call regarding DLH 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 measures. 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.

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. Good morning and welcome to our shareholders and other interested parties. We appreciate your participation in the conference call today and our webcast.

Earlier today we posted our second-quarter fiscal year 2015 financial results. We are very pleased with our operating performance in the second quarter of fiscal 2015 as we received and achieved record results in several of our key operating metrics.

Second-quarter revenue of $15.9 million was a record high since we began our corporate transformation and grew 7.8% over the prior-year second quarter. Similarly, gross margin of $2.7 million was also a record high and an improvement of 24% over the prior-year period.

Income from operations more than doubled over the prior year and adjusted EBITDA improved 83%. As previously disclosed, we recorded a non-cash nonoperational charge of $0.6 million related to the settlement of the retroactive payment claim and Kathryn will discuss that in a little greater detail later in the call.

Our mix of new business awards and improved contract performance has generated a gross margin rate of return of 17.2% for the quarter, another improvement of 2.3% over the prior-year second quarter. Our operating results reflect the strategy and our strategy to expand on business within our key customer base and into adjacent federal markets. We continue to enhance our industry knowledge and expertise by adding business development resources with deep federal health IT industry experience to our team.

Our strategic business capture initiative still include the military and veterans requirements for telehealth services, medication therapy management, health IT solutions, process management, clinical systems support, and healthcare delivery. We believe these priorities allow us to expand within what we consider to be top national priority programs and budget areas which have very, very strong addressable markets. These are in line with demand-driven healthcare trends within the federal government space.

The Department of Veterans Affairs health spending trends, which included an improved FY 2015 budget allocating $65.3 billion in discretionary funding to provide needed care and other benefits to veterans and their families. Moreover, in March 2015 the president of the US proposed a 2016 federal budget that includes an increase of $5.2 billion for the Department of Veterans Affairs, largely for healthcare, and $1.2 billion to expand telehealth services.

These follow, of course, the Veterans Access, Choice, and Accountability Act of 2014 that, as I mentioned previously, is estimated to result in net spending of roughly $10 billion through 2024. Portions of the bill cover our addressable market by providing services to facilitate access to and quality of care for veterans.

We continue to have a strong backlog and a robust pipeline of qualified new business opportunities that we will continue to pursue over the next 18 to 24 months. Our competencies in health and wellness, medical logistics, public health, and pharmaceutical services will enable us to serve our current and future clients well within this business climate. We will continue to invest in new business capture in these strategic healthcare market areas to deliver growth and greater value to our shareholders.

I would now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull, who will provide a more detailed discussion of our financial results, after which we will begin our Q&A session. Kathryn?

Thank you, Zach, and good morning, everyone. We appreciate your joining us today.

Our second-quarter results continued our trend of improving our key metrics as we delivered growth in revenue, gross margin, income from operations, and adjusted EBITDA compared to the prior-year period. Detailed financial results for the second quarter ended March 31, 2015, versus the prior-year second quarter are as follows.

Revenue of $15.9 million increased $1.1 million, or 7.8%, over the prior-year second quarter, with the increase due principally to new business awarded in 2014 and expansion on current programs. Gross margin of $2.7 million increased by $0.5 million, or 24.1%, over the prior-year second quarter. As a percentage of revenue, our gross margin rate of 17.2% improved by 2.3 percentage points over the prior-year second quarter.

Favorable margin results are attributed to improved contract performance and higher margins on new business. G&A expenses, which include general, administrative, operating, and business development activities, were $2.2 million, an increase of $0.2 million over prior-year second quarter due to principally to planned related to managing and growing our contract base. As a percentage of revenue, G&A expenses were 13.8% of revenue, an increase of 0.6% over the prior-year second quarter, within anticipated levels required to manage and grow our contract base.

Income from operations was approximately $0.5 million, an increase of $0.3 million, or 129%, over the prior-year second quarter due to improved gross margins, partially offset by increased G&A expenses, as described earlier. Other expense of approximately $0.7 million was principally due to the settlement of the retroactive payment claim, which we previously disclosed in an 8-K and represents a variance of approximately $0.6 million over the prior-year period.

As a result of the closure of this legacy issue and as incorporated in our results recorded for the quarter ended March 31, we removed the accruals of estimated revenue and expense which were recorded in the year ended September 30, 2008. The net expenses related to this issue is non-cash and not related to income from current operations.

Net loss was approximately $0.1 million, or $0.01 per basic and diluted share, compared to net income of $0.2 million, or $0.02 per basic and diluted share, due principally to the other expenses related to the settlement of that retroactive payment claim. Excluding that non-cash non-operating item, fiscal year 2015 second quarter generated net income of $0.5 million, or $0.05 per basic and diluted share, compared to net income of $0.2 million, or $0.02 per basic and diluted share, in the prior-year second quarter.

Adjusted EBITDA is a non-GAAP measure that represents earnings from operations with non-cash items such as tax, stock expense, and depreciation added back in. This is a key measure that our management team and directors use to evaluate the cash contribution attributable to our business operations. Adjusted EBITDA for the second quarter ended March 31 was approximately $0.6 million, an increase of $0.3 million, or 83.3%, over the prior-year second quarter. This increase was due principally to increased revenue and the resulting gross margins.

Detailed financial results for the six-month period are as follows. Revenues for the six months ended March 31, 2015, was $31.6 million, an increase of $2.4 million, or 8.1%, over the prior-year period. This increase in revenue is due principally to contracts awarded throughout 2014 and an expansion of existing contracts.

Gross margin for the six months ended was approximately $5.3 million, an increase of $1 million, or 22%, over the prior year. As a percentage of revenue, our gross margin rate of 16.7% for the six months improved by 1.9% over the prior-year period. Favorable margin improvement is due principally to improved contract performance and higher margins on new business.

G&A expenses for the six months were approximately $4.4 million, an increase of $0.5 million over the prior-year period due principally to planned expenses related to managing and growing our contract base. As a percentage of revenue, G&A expenses were 14.1%. Expenses were within planned levels required to manage and grow our contract base.

Income from operations for the six months ended March 31 was approximately $0.8 million, an increase of approximately $0.5 million, or 166%, over the prior-year period, due to improved gross margins offset by increased G&A expenses described earlier. Other expense of approximately $0.7 million was principally due to the settlement of the retroactive payment claim described earlier under our second-quarter results.

Net income for the six months ended March 31, 2015, was approximately $0.1 million, or $0.01 per basic and diluted share, compared to $0.3 million, or $0.03 per basic and diluted share, due principally to that other expense related to the settlement of that claim. Excluding that non-cash non-operating charge of $0.6 billion related to the settlement of the retroactive payment claims, the six months ended March 31, 2015, generated net income of $0.7 million, or $0.07 per basic and diluted share, compared to net income of $0.3 million, or $0.03 per basic and diluted share, in the prior-year period.

Adjusted EBITDA for the six months ended March 31, 2015, was approximately $1.2 million, an increase of approximately $0.5 million over the prior six-month period. This increase is principally due to increased revenue and including gross margins as described earlier.

Moving on to the balance sheet, the previously disclosed non-cash non-operating settlement of the 2008 retroactive payment claims occurred on March 30 and including a reduction of $9.3 million in accounts receivable with a corresponding reduction of $8.7 million in accrued liabilities. Our second-quarter results reflect our trends of improving our liquidity. We closed the quarter with $4.2 million of net cash and we expect that this cash, in addition to ongoing operating cash flow and our borrowing capacity, will provide adequate liquidity resources to fund operations and support growth over the next 12 months.

We are pleased with our second-quarter operating results. 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 financial statements and I will now turn the call over to our operator to open for questions.

(Operator Instructions) Burton Osterweis, Osterweis Business Consulting.

Zach and Kathryn, congratulations on another good quarter. I have three questions for you. The first question has three parts, so I will ask all three and then you can respond.

The first question is on our labor cost sensitivity. I saw in Bloomberg yesterday that labor costs are climbing and we hear in the news that Walmart and others are increasing wages and so I was wondering if we could pass that on to our customer. That was the first part.

And then second part is kind of related. Based on that, do we have fixed price bids or time and materials? What percentage is fixed price and so forth, if you could give me some feeling there?

And then the third part of that question is I saw in the 10-Q on page 14 under Section 13 under subsequent events it mentioned the forming of a Chicago union for the purposes of collective bargaining. And I was wondering if that was a trend, start of a trend and if that would also have an impact. Thank you.

Thank you, Burt. Let me start with the response and thank you, again, very much for your astute paying attention to the events within the Company. We think it's very important for us to communicate these types of events and appreciate your questions.

The first comment with regard to Bloomberg and their assessment on labor costs and sensitivity, we follow a lot -- we do a lot in conjunction with Bloomberg. They also have a segment within their industry analyst which is Bloomberg Government, and we generally fall far more closely aligned with the Bloomberg Government analysts, some of which we include their content in some of our messaging and analysis of our market.

With regard to the labor cost sensitivity, generally in our space, the federal government support and the military side, we are not seeing any substantial impact to labor costs. As you know, there is an -- industrywide, of course, there are themes such as health and welfare and ACA compliance and things of that nature that are affecting a number of companies, but in large part we are not seeing an upward trend or any unusual trends that results from other analysis.

A lot of our business, particularly the blue-collar business, is -- the labor costs are heavily driven by what's called wage determinations in the Service Contract Act and there's really no unique things happening there. So a lot of what they are talking about in terms of basic minimum wage increases, etc., we do not see any substantial impact.

Kathryn, you want to add anything to that?

That's definitely a factor for us in terms of the application of wage determination. And generally speaking, those schedules provide for a wage that is well in excess of the minimum wage and so upward pressure on the minimum wage is still well within the compensation levels prescribed under our contracts. So we don't -- for that reason, we don't feel the pressure, as Zach previously described.

The second part of your question had to do with the types of contracts and the overwhelming majority of our contracts are fixed price. Many of our fixed-price operate as -- very much like a T&M though, a time and materials, so we do want to annotate that. We are also pursuing a fair amount of contracts that also have -- and we have some IDIQs that allow for cost reimbursable or cost plus fixed fee contracts. So we will continue to see some variations there.

I think that being tied to your first comment with regard to cost sensitivity; we do have certain options to explore with the federal government anytime there are any externally-driven cost increases relative to labor. One of those clauses it what is called equitable adjustments and then there are also other triggers that include things like escalations, etc., within the government contracts. We feel we have pretty much all of those levers in place for us to be able to manage that effectively as we see these kind of waves.

It's generally a routine part of the annual auction exercise interaction, so as it's the annual renewal auctions come up there is a dialogue that occurs with respect to the cost of delivering the resources that are under contract.

And with regard to item three, the disclosure with regard to the Chicago union, it was -- we do not see that as a trend. I can tell you that Chicago happens to be in one of the many states in which we perform, as you well know. It is an environment that has historically been substantially far more union-like in the way in which things have operated there, etc., and it is a natural course of events for us to start to work to develop an agreement.

We refer to them as CBAs, which are --.

Collective bargaining.

Yes, collective bargaining agreements.

We will be starting that process very specifically right away. In fact, we've got a meeting, is it this afternoon or tomorrow?

Tomorrow afternoon.

To start to work part of that strategy. But we do not see that as having a substantial negative impact. We've got a number of ways in which we are going to explore that and we feel we have a team in place to really work that to where it's a good win-win for our customers, our employees, and ourselves.

But we will stay tuned and keep you apprised if -- obviously if we start to see it has had any impact in terms of erosion of our margins and fees, we will look to address those in the variety of ways in which we have done that before.

Fortunately, as you know, Kevin Wilson is the president of our operations. Kevin has had experience managing with unions and environments. Both Kathryn and I have had extensive involvement with represented employees and union contracts, so it's certainly nothing that we find foreign. We feel very comfortable that we have teams in place to be able to manage that.

Okay, thank you both. That was terrific. That was really great.

Moving on to my next question, Zach, you may remember that during the Q&A session at the most recent annual meeting in New York you mentioned that the DLH website for our job postings was getting an overhaul so that we could see or we could have better visibility into those higher-margin listings. And so three-part question again.

I was wondering if that had occurred, that was the first part. And, secondly, I saw that you are getting a senior executive assistant that was posted there on April 24. I was wondering if you did not already have one.

And then the third question was -- a third part of that question was I saw there was also another job posting for capture manager, which is one of those business development roles that was posted on April 17. And I am wondering is that kind of the same as the business development role that was posted three quarters ago?

Your slides here mentioned that we had -- were continuing to hire business development people and I was wondering if there were others and if there was any update on the very first -- the results from the very first one.

Sure, I appreciate that. With regard to the website changes, we're still -- it's still under development. We are looking at treating the new hiring and the career opportunities differently, as we may have discussed before, than we have historically.

We are still, as you probably know, still continuing to use CareerBuilder and it's pretty much our landing page right now, which is one of the things we want to try to change. And so it will certainly continue to reflect those that we have, professional positions as well. You are starting to see that of course with the capture managers, etc., where historically you would look on our sites and almost exclusively just find pharmacy techs and some of the logistics and administrative support.

We are starting to use it more for that, but we've still got plans to revise the website approach as it relates to that. Some other tools that we think we are going to bring to bear that makes things a little more cost-effective for us on the professional side as well.

Second item with regard to the EA or the executive assistant, recently we have just been working through a temporary agency in that position. Your timing is impeccable because we just did a round of interviews with Kathryn, myself, Kevin, and John for EA candidates yesterday and we expect to have that position filled within the next few days. HR is going through the process of finalizing our background investigations and things of that nature, so we're pretty excited about getting that full-time position back as a part of our team.

And the last one is one that is very important and strategic as well. As you know, Kathryn and I have talked a lot about the changes. Even though we have been continuing to show greater margins, we have continued to want to recognize that we think that the thing -- the next phase of transformation of this company is growth and it is a critical piece. We think that it's going to take signature wins to start to move the needle and us giving the value to you and other shareholders.

As such, we have had to take some costs out of certain parts of the business and add more. And this is certainly a reflection that again that in addition to the resources we have recently brought on there's still an opportunity for us to bring someone to help close on business development pursuits. We think that is a critical, critical stage. That is what we've got to deliver in the next 18 to 24 months.

And we are going to continue to reduce the structural costs that operate in this business and increase the growth components. I've got to give a lot of credit to Kathryn, who has continued to take action to reduce some of the structural costs.

We've got a number of other initiatives ranging from efficiencies and the way we operate it and cancellation of some long-term legacy vendor relationships, the consolidating facilities. And just taking a number of steps to compare us to being able to not only pursue and bring that business in, but to execute in a way that will allow us to continue to do so with scale and to preserve the top line as well.

So were there other capture managers hired over the last quarter or the one before?

Yes, we have brought on in the last couple of quarters two very seasoned business development support folks. They will work in concert with the capture managers. We have done some transition where we have had some folks under consulting agreements for very short-term kind of support, which we, quite frankly, generally end up paying a higher rate per hour kind of thing for that.

We are bringing some of those resources in-house so that we can leverage their capabilities for a larger portion of our pipeline and bringing that home.

Okay. My last question now is when we last met -- we ended the last quarter with $3.8 million worth of cash on hand, which is about $0.40 a share, or 12.6% of total assets, and now we've just ended this quarter with $4.2 million cash on hand, which is about $0.44 per share, or 20%, of total assets.

I like that we are buying the stock back, but with our tiny trading value it already presents kind of a liquidity issue. I can't buy or sell more than 100 shares without moving the price and reducing the number of shares more would probably make that a bit worse. So I was wondering if perhaps we could instead issue a tiny dividend, say $0.05 per share, and still have enough or more than enough cash left to run and grow our business.

It's something to take under consideration, Burt, but honestly I think the better use for our cash is really in the context of the growth opportunities we see in front of us. So right now we certainly believe we have adequate cash on hand, in addition to our access to our credit facility and the cash flow we are generating, but we wouldn't want to --. I think it's -- the better use of cash resources would be to keep them available to continue to fund growth.

I, candidly, don't see a dividend strategy as a near-term event, but it is something we're always mindful of and certainly understand the shareholder interest in that.

Just to add to that, we are both very big proponents and looking forward to the day when we think it is timely for us to do the dividend distribution. We think that is a very important component. It will be also an indication of the status of the Company that is, quite frankly, exactly where we plan to take this company in the relatively long term.

It is certainly something we're keeping in front of us. We also couldn't agree with you more; it is still very difficult. As you probably may have noticed, we had a lot more institutional holders than we had a year or so ago, which is a positive drive, but it is very difficult to get any substantive shares, as you well noted.

So it is a challenge; we are going to continue to work with that. Kathryn and I are going to be meeting with our IR folks in Dallas I guess this next month and we certainly want to look at some additional measures. We will brainstorm some things to see how we can make it a little more attractive for folks to be able to get some substantive impact there.

But, yes, clearly we do visualize and have on our plate the opportunity to provide some dividends, but we are just not there yet.

All right. Well, thank you both for your questions -- or for your answers. I appreciate it. Thank you.

Robert Brous, Wunderlich.

Congratulations on the quarter. I have two very quick questions. It's nice to see the balance sheet getting cleaned up. It's only, what, seven years?

(laughter) Right, exactly. We are very -- obviously very pleased to have that issue -- just it's an overhang legacy issue and it's nice to have it off the books.

Actually, there are three quick questions. One, what is your ROI, return on invested capital?

That's good. We'll probably have to get back to you with a specific number.

Okay, secondly (multiple speakers). That's fine; at your convenience offline. Secondly, you referred to higher margins on new business. Is that new business telehealth services or is that just in general?

Well, certainly telehealth is one of those areas where the margins are substantially higher than what our trades work has been historically, so answer is yes, but it's not the only one. Denise has brought on -- Denise Ciotti, who is kind of heading for John the health IT piece of the business, is working several initiatives that include telehealth but also several that are outside of telehealth that are higher margins than we are today.

I can generally say that across the board most of the new business that we are bringing is higher than where we are today (multiple speakers).

The direction -- we are about as low as we will be historically, so we don't plan on -- all the things that we had previously two years ago in our pipeline that were in the base ops support of the logistics, etc., we have taken those out of the pipeline, terminated most of the folks. We've brought those kind expertise and resources to the Company and that has been a part of the transformation.

So we will generally, when we have any substantive new business, much like -- I will say we have had some small wins that have not been needle movers over the last year and less, but again they are just a small, very small portion of our revenue basis is why we haven't seen that. The needle-mover contracts will be, for the large part, whether they are telehealth or not, should generally give us positive lift in the margins.

Right. Last question, seasonality to the business; is there any real significant seasonality?

No, sir.

Okay. Just one comment with respect to the prior questioner. At this point in time, don't pay a dividend. Use it for acquisitions, working capital; build up that cash.

You get to a mature business, that's a different story. That's not today. That is just one person's opinion.

I would clearly agree with you. Certainly it's not off the table, It's certainly something; we look forward to that day, but it's certainly not today.

And as you probably well know, we've talked about the fact that we've got the majority of our focus around organically growing this company. But over the course of the next two to three years it would not be a surprise to us if we found the right piece to tuck in through an acquisition and Kathryn is making sure that she is protecting our capital so that we can do that.

It's in a lockbox.

That's where it's supposed to be. Zach, Kathy, congratulations again. Thank you. Thank you very much.

Richard Greulich, REG Capital Advisors.

The gross margin was outstanding; is it sustainable? It sounds like it is, from what you said earlier.

Of course, there is going to be minor variations from period to period as depending on the particular levels of volume we have on our programs, but the point is, if you just look back at FY 2013 for example, over the course of the whole year our gross margins were $14 million. Last year they were just under $15 million.

I expect that in the aggregate over the course of the year the gross margins will continue to improve. And that's a function of mostly the more favorable margins on the new work coming in. We've talked before about how we believe we've pretty much reached steady-state on the current book of business, or the legacy business in the Company.

We never quit looking for ways to continue to improve, of course, but we do think we have wrung out of that work about what we can. So the opportunity to continue to improve gross margins is as we blend in new higher returns, more value-added work, and that's what we're all about doing.

There will be some occasional variation due to some business climate items. As Kathryn mentioned in a previous session, we've had to bring some outside counsel to help move the needle on coming to final agreements on things like retros and some of the other overhangs. And certainly the CBA negotiations we are bringing some outside resources to help us there; that will show up on the books in the near term.

But we consider those the sort of things you have to do to evolve businesses much like ours and they are not really terribly unusual so we've got to manage around that. But, by and large, we think most of those costs -- while we will continue to disclose those to you on a quarterly basis, we think those are all things that are still manageable and will still continue to have a sustainable trajectory of positive growth.

That IDIQ I guess contract or acceptance you talked about in the 10-Q possibly very late in the year being awarded, is there anything in particular about the kind of contracts that would be involved with that IDIQ that would suggest that they would also be fairly high margined?

Good question. We have (multiple speakers). I'm sorry, were you finished?

Yes, I am.

So we've got I think we've talked about three or four pretty important, we call them strategic, IDIQs. The one I believe that you may be referring to is with the VA on the IT side that we refer to as T4 or T4 next generation.

And, yes, we have done a fair analysis of the type of work over the last three years that that client has purchased through that IDIQ. We consider probably a third or so to be very addressable by us and our teammates and of that -- the reason I say that, some of them are just pure buying of equipment. You go to HP for printers and you go to a different company for software buys, etc.

But a substantial amount have to do more with bringing some sort of expertise relative to the health or the pharmacy environment and the integration of tools and technologies to bring to bear for the VA and with some of the subject matter understanding that we have gained over our years of experience with the VA. In all cases -- I can tell you that in all the cases of the types of task orders that we envision pursuing, there will be a higher-margin business than we are doing today.

And probably a better way to cash that isn't that it's necessarily just higher-margin business. The type of business is far more professional than trades. The complexity of the work are some the things that we're doing on a small scale, but doing very well today that will add scale.

We are generally convinced that we will have higher margins, better margin flow with the type of task orders that we will bid under that T4. That is, of course, why we consider it strategic.

I have a couple of just detail questions then. Let's see, the new lease paying about $250,000 a year; how does that compare to your current lease expenses?

Well, the market here is starting to improve, but we believe we were ahead of the trend there and as a result we were able to get a very competitive lease set. The cost per square foot is actually lower than what we are currently paying for the two facilities that we are combining.

Great. The stock-based compensation expense for the quarter was $73,000 and so quarter to quarter that's down from $273,000, but I noticed that last year the first fiscal quarter was also high. Is that sort of inherent or is the $73,000 level the new quarterly run rate for the next couple quarters?

That would be a reasonable expectation.

And would that likely then pop back up in fiscal Q1 of 2016 or no?

You betcha.

Right. First quarter is -- the reason that tends to peak is because that's -- couple things. That is the annual allotment for the stock compensation for the Board of Directors and then any management awards associated with annual results occur in that period.

Okay. There was kind of a small shift in terms of your prepaid benefits, so that increased but then the prepaid -- some other items in that same category decreased. Was there -- how does that work out? Do you know what I'm talking about? I'm not sure I am making it clear.

You're referring to the medical?

It is a function of where -- and an increase compared to September is what you are picking up. So as you might expect, given that we are -- the way our fiscal period falls, most of the load for benefits, particularly around holidays, happens in our first two quarters because of all the holidays that occur in the November/December/January timeframe. And so by the time you come to the end of September the annual benefits cost has to settle out and then clear to zero.

So that's why at any given quarter through the year you're going to see, as compared to September, an increase.

Okay. The one item (multiple speakers)

(multiple speakers) reconciling it to last quarter.

The one item that has been going up in the last couple quarters on an improved expense basis is your workers' comp insurance accrual. Is that a matter of being -- is there a trend that you are looking at possibly developing or is that just a matter of being conservative?

It is developed claims based on actual claims incurred and so as our workforce has grown and then just as a matter of how -- what your particular claims experience is, those are expected costs. We think it's appropriate; we don't think it's particularly conservative, but we think it's appropriate.

But that is an area that we manage very actively and we have implemented many operational changes that we believe have yielded significant cost controls around that. But cost development that you see show up in that accrued liabilities, in some cases, relates to claims that are five, six, seven years old. So it doesn't necessarily -- it shouldn't be interpreted as a problem or an area that isn't getting actively managed currently. If that helps clarify.

From what I could see, the cost of having your credit facility is about $25,000 a quarter and you haven't used it for a little while. Assuming there is no acquisition, you are probably unlikely to use it. Does it make any sense just to drop it?

Help me where you are picking that up, Rick.

The $25,000.

I assume that -- you don't have any interest expense, right?

Right.

And so I assumed that that was simply like a fee for the facility.

There is a facility monitor or a commitment fee, if you will, for the fact of having the credit in place, but it's not at that level. There's also interest accrual on other obligations related -- for example, we talk about the payroll tax issue that we disclosed and we continue to accrue interest on that so that's running through that same line.

I see. Okay, thanks.

Now you bought 75,000, 76,000 more shares. You're getting close now to sort of finishing. If you do that one more quarter would you be likely to go in and get a reauthorization if you do?

We're looking at that in the context, particularly, the comment that Burt made earlier. We're not sure that that is the best use of cash at this point any longer. I think we are in a different environment now than we were when we authorized the plan, but it is something that is on our action to evaluate because, as you said, the plan is getting fairly fully expended at this point.

Yes, and I would like for us to have kind of our plan of attack in that regard probably completed in the next 30 to 60 days. We will review it with our Board next week, in fact, I believe, so we will certainly be able to give you an indication before next quarter.

Okay, thanks for your time.

Thank you for your question. There currently are no further questions. (Operator Instructions)

There currently are no further questions and I would now like to turn the call over to Zach Parker for closing remarks.

Great. Thank you again, Emily, and thank you all again for participating in today's conference call. Should you have any additional questions, please feel free to contact myself or Kathryn.

We thank you for your interest and support and look forward to speaking with you again in August as we report our third-quarter fiscal year 2015 results. Thank you and have a blessed day. Bye for now.

Thank you to Kathryn, Zach, and Casey. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day.