DLH Holdings Corp (DLHC) 2022 Q4 法說會逐字稿

Good morning, and welcome to the DLH Holdings Fiscal 2022 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. Please go ahead.

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. President and CEO, Zach Parker, will speak next; followed by CFO, Kathryn JohnBull, after which we'll open it up for questions. With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer; and Kathryn JohnBull, Chief Financial Officer. The company's earnings release and PowerPoint presentation are available on our website page. I would now like to provide a brief safe harbor statement, which is also shown on Slide 2 of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2023 and beyond. These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the company's annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Thank you, Chris, and good morning, everyone. Welcome to our fiscal year 2022 fourth quarter conference call. Earlier this morning, we posted our quarter and year-end earnings. I am pleased to report that the end of the fiscal year came with record results that position us very well for the future. I must say that the employees, the leadership and partners of DLH have remained incredibly focused and committed to our clients' missions to allow us to achieve these results.

Beginning with Slide 3, I will first provide a high-level overview of the quarter and year, starting with the top line results. During Q4, we grew revenue by 3% year-over-year to $67.2 million, reflecting organic growth and increased overall demand for our diverse range of programs and services. For the full fiscal year, revenue climbed to $395.2 million, reflecting the COVID-19-related FEMA contracts in Alaska that completed earlier in 2022. The fiscal year was certainly a standout one in terms of top line performance, yet we are most excited by the numerous opportunities, which still lie ahead. I will discuss the outlook more in a moment.

We posted fourth quarter operating income of $4.7 million or 7% of sales. And for the full year, $33.4 million or 8.4% of sales. EBITDA was $6.6 million for Q4 and $40.9 million for fiscal '22 as a whole, while we reported EPS of $0.24 per share for the fourth quarter and $1.64 for the year. In addition, we paid down $6.5 million of debt during the quarter, ending the year with $22 million outstanding. Our backlog entering fiscal 2023 was $482.5 million, reflecting 7 new multiple-award IDIQ wins and 3 strategic recompetes during the year.

Turning to Slide 7. I wanted to show our track record of performance over the past 10 years. While fiscal 2022 benefited from the contribution of our turnkey FEMA contracts in Alaska, the growth and consistency of our EBITDA margins speak for themselves. I am so proud that we have such a talented, dedicated workforce, which, leveraging our in-demand advanced technology services and solutions, have driven DLH to the high level of operating results that we now enjoy.

In addition, the future continues to look bright. If you look at Slide 5, it provides an overview of current market conditions, which we believe bode very well for the company going forward. It's reassuring to note that our programs and the agencies that we serve focusing on public health, Department of Defense, veterans and digital transformation services continue to enjoy solid, long-standing support in Washington on both sides of the isle. So while the government is still operating under a continuing resolution, which we expect to be extended, we do not anticipate any major changes to the outlook for FY '23. There has been an obvious shift from COVID to Ukraine-related activities for our federal government during the year as well as expanded regulatory reporting requirements. However, we are confident that this demand, the demand within our core markets remains very, very strong. There continues to be a commitment throughout the federal government for technology upgrades and overall modernization of agencies and programs within NIM. This includes, for example, digital transformation and a focus on cloud computing, incorporating cybersecurity and particularly with regard to health-related information in the Department of Defence. Federal clients are looking for exactly the type of services in which we have been strategically aligned; agile-based innovation and cost-effective solutions to enhance science, research and development and policy deployment to support critical missions for our nation.

In fact, while the outside world has had to deal with additional challenges this year, including supply chain constraints and inflationary pressures, the government market for our services has remained quite stable. There has been an increased focus on equitable adjustments leading to higher competition and greater use of multiple award contract IDIQ vehicles. We are effectively managing through these minor headwinds well and winning new contracts in tandem. In addition, while the tight labor markets continue, we have in place and continue to attract top-notch research and engineering talent to the company. Of this, I'm especially proud.

I'd like to talk a bit more about the opportunities which lie ahead for DLH. While the federal government's fiscal 2023 budget has yet to be finalized, as we mentioned, we feel confident due to the fact that historically, our work has proven to be strong bipartisan support programs. Our business solutions align well with spending priorities in Washington with increased funding expected for the Department of Veterans' Affairs, defence and health and human services. Importantly, during the past year, DLH was selected as a competitor for future task orders across 7 domains of 3 multiple award IDIQ programs, a $665 million ceiling with the VA, one with a $320 million ceiling with the National Institute of Health, and a large 10-year $10 billion ceiling Omnibus program with the Department of Defence and its health agency. These give us a seat at the table for some very attractive opportunities in the future for which we expect to be bidding during FY '23. Such awards with multiple participants are not included in our backlog number, but provide us with meaningful path to accelerate growth in the quarters to come. So even without a formal budget in place, we remain very optimistic about FY '23's continued growth and beyond.

At the same time, we have a solid pipeline of strategically aligned M&A transactions that could further improve our market position and offer up new pathways for capability expansion and profitable growth. Our balance sheet remains strong due to the company's robust cash generation and ability to pay down debt, providing the financial flexibility needed for our future success. And yes, while we continue to enjoy excellent free cash flow. With that, I'd like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Katherine?

Thank you, Zach, and good morning, everyone. We're pleased to report another quarter of solid results and a great end to fiscal 2022. Turning to Slide 8. We posted revenue of $67.2 million for the 3 months ended September 30, 2022, versus $65.2 million in the prior year's fiscal fourth quarter. The 3% increase year-over-year reflects higher demand for services across many of our existing programs. Excluding the $1.7 million derived from FEMA contracts in Q4 of fiscal 2021 revenue increased 6% year-over-year. Given high bidding activity levels in our current backlog, we are optimistic about solid organic growth heading into fiscal 2023 and beyond.

Moving to Slide 9. Income from operations was $4.7 million for the quarter versus $4 million in the prior year period. And as a percent of revenue, the company reported an operating margin of 7% in fiscal 2022 versus 6.2% in fiscal 2021. The increase in margins resulted from a higher portion of our revenue in fiscal 2022, deriving from contracts with stronger margins. Interest expense was $0.5 million in the fiscal fourth quarter of 2022 versus $0.8 million in the prior year period, reflecting lower debt outstanding. DLH recorded a provision of $0.8 million and $0.3 million for tax expense during the fourth quarters of fiscal 2022 and 2021, respectively. We reported net income in the fourth quarter of approximately $3.4 million or $0.24 per diluted share versus $2.9 million or $0.21 a share last year. As a percent of revenue, net income was 5.1% for the fourth quarter of fiscal 2022 versus 4.4% for the prior year period.

Turning to Slide 10. EBITDA for the 3 months ended September 30, 2022, was approximately $6.6 million versus $6 million in the prior year period or 9.8% and 9.3% of revenue, respectively. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement at the back of this presentation.

Slide 11 gives an updated snapshot of our debt position at the end of the year. As of September 30, we had approximately $22 million of debt outstanding under our credit facilities versus $46.8 million at the end of fiscal 2021, and our leverage ratio remains well under 1x. We continue to use our substantial cash generation to pay down debt and delever the balance sheet, leading us in a strong position for any future opportunistic transactions during fiscal 2023. This concludes my discussion of the financial statements. With that, I would now like to turn the call over to our operator to open for questions.

We will now begin the question-and-answer session. (Operator Instructions) Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Joe Gomes with Noble Capital.

Good morning Zach and Kathryn, nice end to the fiscal year. So I wanted to follow up, Zach, you talked about, obviously, the potential M&A and having a nice backlog of potential opportunities. And one of the things you talked about was capability expansion. I was wondering if you can give us a little more color on what kind of capabilities would you be looking at, you think, to expand into through some M&A?

Yes. As you know, we've talked a lot this a lot, at least Kathryn and I, and while we've been on the road this year around having really established pretty much a well-rounded platform across the 3 market focus areas once we completed the full integration of the IBA team. And so our emphasis going forward has been really to focus on the digital transformation of cybersecurity aspects of delivering greater value propositions for our current customers as well as our clients in areas supporting our scientific research, research and development and other systems and engineering work. So they will largely continue to find good opportunities in both the health IT component, Department of Defence and other clients that really emphasize our digital transformation and cybersecurity capabilities.

Okay. And kind of a follow-up. You talked about, obviously, the government is operating under continuing resolution. You think that will be extended. Just looking at that, maybe you can refresh our memories, in the past, when this has happened, what kind of impact, if any, has it had on the company? And do you see this kind of as the biggest challenge here in the near term? Or is there something else that you think is the biggest challenge the company is facing right now?

Well, I do think across our industry, the continuing resolution generally restricts amount of brand-new programs and new work that will be contracted out. Fortunately, probably 90%, or north of 90% of the organic opportunities for new business growth for us are with recurring work, things that there's a current incumbent or multiple parties from which we'll compete. So we're hopeful that with the acquisition community across the federal government, that those will still come forward. I do think that while there are some programs such as our VA new technology, IDIQ, that are looking for new funding, might slow a little bit of the acquisition pace there. But other than that, we really feel pretty comfortable that the recurring work across the agencies that are well supported by the Hill will continue.

Next question today comes from Brian Kinstlinger with Alliance Global Partners.

The first question I had, I'm hoping you can give some more detail regarding the pipeline and maybe planned submissions over the next 12 months versus the trailing 12 months, as I'm trying to gauge your ability to accelerate or sustain organic growth.

Great question, Brian. As we featured in our discussion, we've been waiting for a few of these multiple word IDIQs for a couple of years now. It was great to see that they were completed in FY '22. And even more importantly, that we were successful on the awards that we did secure. Every expectation is that we will start to see task orders by Q2 across these agencies. The dispense health agency has expressed indication that they are going to be having opportunities to compete. The other one, which we've talked about is with the National Institute of Health, in particular, the National Cancer Institute. We expect to see those this year. And then as we alluded to, the VA one, which is largely new technology innovations, great and important strategic win for us, might slip a bit before we start to see those task orders.

Outside of those multiple award contracts, we do still continue to have a pretty strong pipeline of new business opportunities, both single award, which deliver immediate revenue as well as a couple of more major IDIQs that we've had our sights on. We've talked quite a bit around the CIO-SP4 for now 2 years. The government has continued to see more than a dozen protests against that opportunity. So continue to slip it to the right. We're hopeful of seeing some success and awards on that during this fiscal year, which will create opportunities, hopefully, later in the fiscal or certainly to launch us into a pretty good position going forward into FY '24.

Great. And then my follow-up, kind of similar, Kathryn, you mentioned a high number of bids awaiting, sorry, high bid submissions in your prepared remarks. Can you say either what bids awaiting adjudication, the value of that is? And if you can't share that number, can you talk about how it compares maybe to a year ago, excluding anything that includes FEMA and in particular FEMA award?

Sure, of course. So the trend does continue to reflect forward momentum. As we've talked about the process of adding a corporate Chief Growth Officer and really getting our full access to the 3 market sets that we completed at the end of fiscal '20. We believe all of that helps to provide the momentum that allows us to engage on a broader set of opportunities and to increase the level of opportunities that we're submitting. So from our perspective, we believe there's reason to be optimistic about our ability to continue to compete favorably on a growing set of opportunities.

And just one last follow-up, sorry. You mentioned a Chief Growth Officer, as you guys have looked at the business, the market opportunity, is there a need for more business development folks? Is there planned hires coming to add to the business capture team?

Great question. Yes. We made that move strategically because it was very important for us first to be able to have a vision and a view of an integrated one DLH, right? And we didn't really have that when we had both our existing heritage business development team as well as those as the new capabilities across our newly acquired companies. So the CGO really allowed us to look across the enterprise, and that was, quite frankly, extremely instrumental in our ability to win both of the domains that we bid for the Defence Health Agency. And during this year, we have committed to, in the past year, to growth in that in our growth organization, it includes business development, capture, and proposal operations. We have a good budget going into this year to continue expansion there because that organic growth is now continuing to be a very, very top priority for us. So yes, you'll see a fair amount of continued expansion in our investment for organic growth.

(Operator Instructions) Our next question comes from Debra Fiakas with Crystal Equity Research.

I would like to perhaps return again to the pipeline question that was asked previously and maybe take a look at it from a little different vantage point. You had a very good organic growth rate, if you want to call it that, the growth rates, excluding the FEMA contract this last year. And I wondered, do the bidding opportunities and the programs that you've been talking about this morning, do they provide for that same pace of growth higher, lower?

Thanks for joining us, Debra. It's good to have you joined the crowd of interested parties for DLH. Those pipeline opportunities do help. They are a channel for organic growth. Of course, the easiest and first channel for us is to grow our presence on our existing set of contracts, and we actively work that path of organic growth every day as we interact with our customers and look for additional opportunities to be of service and support for them. But in addition to that, of course, these pipeline opportunities really provide a significant accelerator to organic growth because they're additive to the base of contracts that we have in hand presently. And so while we are enjoying, as you said, an industry very competitive to the industry's organic growth rate, it is deriving mostly from expansion on current contracts and some meaningful incremental awards. But our expectation is that the pursuit of these additional awards that are in our pipeline are going to really accelerate that meaningfully. And particularly, as Zack mentioned earlier, leveraging those IDIQ vehicles that we've recently secured as task orders start to flow underneath those IDIQs.

Okay. And then if I could just ask a follow-up question, and this is in regard to, again, to the top line, but from the vantage point of the backlog. There seems to be, to me, a pretty significant portion that's not funded. Is this something to be concerned about? Or does it speak less to the magnitude of sales and more perhaps to the pace you have to wait for funding in order to get started on a program?

Yes. It is not something that we're concerned about. It's a required disclosure, but it is really a function of the behaviours of the particular customers we have that some of them choose to fund annually. And of course, that makes administratively most efficient and effective. Some of them choose to fund on quarterly intervals. And so depending on where they are in that funding cycle, whether they get it done right before the end of the quarter or immediately thereafter. That's what's going to affect how much moves out of unfunded and into funded. But generally speaking, the customer inclination is to funding in supportive programs and represents, sorry, the backlog, I should say, represents their expectation of the services they need in order to execute the programs. And so it's highly probable that dollars will move from the unfunded bucket to the funded bucket based on whatever administrative cycle they choose to adopt.

Yes. And Debra, several years ago, we were intentionally conservative on making sure that we published that way because as Kathryn indicated, there are agencies as well as peer companies that will look at the full contract period performance ceiling, but we wanted to make sure that we were really, really giving the shareholders the funded piece in the most conservative fashion.

The next question comes from Joe Gomes with Noble Capital.

A couple of quick follow-ups here, maybe more directed towards Kathryn. So in the quarter, there was a pretty substantial both sequentially and year-over-year jump in G&A expenses. One, wondering what was behind that? And two, is that elevated level something you're looking at going forward? Do you think it goes back to a more normalized percentage of revenue in the out periods.

Thank you, Jeff, for that question. A couple of factors impacting it for the year. Probably top of that list is just the noncash stock compensation expense component. And so that is really a function of our having brought on an additional named executive officer and having a stock compensation award to that at a time when our stock price was high enough to cause a pretty significant book charge related to that noncash charge related to that. Additionally, and this, you'll see this in our 10-K as it's filed, we have, for the first time in the company's history become subject to full review for SOX purposes. So we've always self-certified our internal controls as a public company. But because of the company's success and increase in equity value, we have become subject to the requirements of an external review of our internal controls. And so we did accomplish that for the fiscal year end of 2022. And you can imagine that, that took some resources to get through that cycle over the first time. And of course, it's an ongoing requirement. So it will have ongoing incremental resources, but at their side, they won't be as substantial as they were in the first cycle through. And then thirdly, and to the point Brian asked earlier about investments in organic growth, you do see some peaking of that requirement in fourth quarter as we were in pursuit of these pipeline submissions that Zack talked about earlier.

Okay. And then one more. The last couple of years, there's been, going into the first quarter or so, even bleeding into the second, some delay, let's call it, in the accounts receivable getting paid. Just wondering how comfortable you are where the accounts receivable are today. Is everything kind of up to date? Or is there any concern there here in the near term on the accounts receivable end?

Sure. I think that I'm certainly comfortable with where we ended up for the quarter ended September. There's the normal congestion that's happened post year-end as is always the case when the government fiscal year flips over. But exiting fiscal '22, I was satisfied where we were, notwithstanding that we consumed a bit of working capital by growth in receivables. And as we've talked about many times over the year, as the nature of our work moves away from the trade-based oriented work that's building on very favorable terms to a more traditional net 30, our day sales is going to creep up a little bit, but we're still very competitive at a day sales of about 54%. So we're converting to cash very quickly. And that doesn't mean I'm done and it doesn't mean that we're not paying daily attention to looking for ways to kind of still continue to improve that cycle. But I don't see anything in the September numbers that gives me any concern and I'm satisfied with where we are as indicating our ability to generate cash flow.

At this time, there are no further callers in the queue. I'll turn it back to Mr. Parker for any closing remarks.

Thank you, MJ. And once again, I'd like to thank you all for your continued interest and support for DLH. We look forward to following up with you as we address at the annual meeting of the shareholders and in preparation for the launch of FY '23. Thank you all, and have a blessed day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.