DLH Holdings Corp (DLHC) 2021 Q4 法說會逐字稿

Good morning, and welcome to the DLH Holdings Fiscal 2021 Fourth Quarter Earnings Call. (Operator Instructions) Please note, this event is being recorded. I'd now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead.

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 under the Investor 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 2022 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.

On today's call, we'll 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, Chris, and good morning everyone. Welcome to our fourth quarter conference call. I am pleased with how we finished out the year and I'm excited to tell you about fiscal 2022.

Let me begin by sharing with all of you how proud I am of the extremely talented and committed DLH workforce, who are responsible for generating our results. None of us knew that fiscal '21 would impose such unique challenges including the pandemic. Yet through it all, our diverse work team remained focused on performance excellence and for that we are truly indebted.

Starting with Slide 3. I'll provide a high-level overview of the quarter and the year, which reflects exceptional results. We reported sales of $65.2 million in the fourth quarter and closed out fiscal '21 with revenue of $246.1 million, up nearly 18% from last year's $209.2 million. This underscores both the strength of our existing operations, which grew organically, as well as contributions from our IBA acquisition last year. We believe our focus on core health markets and high technology applications has proven a valuable one over the long term even during times of pandemic-related constraints, political paralysis and economic uncertainty.

We posted operating income of $4.0 million for the fourth quarter and $17.2 million for the full year, leading to diluted EPS of $0.21 for Q4 and $0.75 for fiscal 2021 as a whole. These results highlight the impact of our business development initiatives, solid margins and focus on the fundamentals, including controlling our costs. At the same time, we are able to use our cash-generating ability to pay down roughly $23 million of debt. This really strengthens the company's balance sheet and leaves us in great shape to execute our growth strategy going forward.

We ended the year with a backlog of $651.5 million, near record levels, which included some recent FEMA awards serving clients in Alaska, which I will touch on in a moment.

Turning to Slide 4, I'd like to update our investors on our current market positioning and the outlook for FY '22. Just last week, Congress approved another Continuing Resolution that funds the government through mid-February. In such an environment, it is common for projects and programs to face delays based on general lack of clarity with regard to spending priorities and ultimately their budgets. Decision-making is thus slowed given the reduced visibility over their budgets, impacting federal contractors across the board. However, even with this uncertainty, we believe that our services and our agencies will remain in high demand going forward.

Our primary customers, which of course include the VA, Health and Human Services, Department of Defense really enjoy widespread bipartisan support, which gives us confidence in continued emphasis on the critical health-related services we provide. In addition, our advanced capabilities in data analytics and cloud computing are allowing DLH to win and pursue new markets, leveraging our cybersecurity and digital transformations across our clients.

As evidenced this past year, there's great focus on utilizing telehealth applications, infectious disease research and big data to find solutions that can benefit millions of people here and abroad. Not only is DLH at the center of many of these initiatives, we've grown during an otherwise uncertain economic environment. Even with the possible implementation of pandemic-related vaccine requirements for government contractors, we do not anticipate any material negative impact to the company. Our employees are ready for 2022 and beyond.

With regard to the pandemic, since the pandemic began, we have had approximately 200 scientists, researchers and engineers gain intimate knowledge and expertise in support of nationally recognized programs to develop countermeasures to COVID-19. In addition, we have leveraged our contingency and emergency response capabilities to deploy over 500 health care practitioners and medical logistics personnel to attack the spread of COVID-19, particularly in rural areas in the country. To make sure we stay on top of our game, of course, we will need to continue investing in human resources and recruiting top talent.

In that vein, as shown on Slide 5, we recently hired Maliek Ferebee as our Chief Human Resources Officer. Maliek has over 15 years of human capital leadership in positions within the federal government contracting space. He brings a unique set of competencies and strategies to help me and our executive leadership team tackle the challenges not only of today, but what we foresee tomorrow. He is a forward-thinking executive adept at translating business vision into actions that improve performance, employee engagements, profitability and growth.

Our #1 asset is our credentialed top-tier workforce, which requires both company-wide commitment and strong leadership, so we are really excited to have Maliek on board to help us to build the next generation of thought leaders at DLH.

Slide 6 shows some of our recent organic wins, which will of course contribute to a great start to fiscal 2022. We believe this represents a vote of confidence in our strategy, our people, our technology, and our ability to be a trusted supplier of technical solutions and services as well as unique capabilities across these agencies.

Before turning the call over to Kathryn, let me summarize where we stand heading into fiscal 2022, as shown on Slide 7. This year, while challenging and certainly unique in many ways, has illustrated how adept DLH is in providing steady, solid results and leveraging our new opportunities in our target markets. We've embraced a leadership role in helping the federal government understand and respond to a pandemic, and in doing so, have racked up some impressive awards that have increased our role across the agencies we serve. We have been identifying and penetrating new avenues of expansion as well.

In addition, while proving our ability to win new business organically, we have a strong track record of finding and integrating select attractive acquisitions that improve our technology credentials, our value proposition, and bolster our growth profile. We are confident that we have the leadership team in place to execute the next phase of our strategic vision building on a history of success while laying out a road map for even greater days ahead.

In closing, I believe DLH is very well positioned for the year to come due to our strong backlog including new wins with FEMA and the enduring demand for our services from a broad array of federal agencies. Having closed out a successful year for the company in the midst of a pandemic and lingering issues impacting the economy from supply chain constraints to elevated costs and a tightening labor profile market, we have proven that we are able to deploy our technology-enabled health solutions to serve the evolving needs of our customers.

We're helping people across America to get the health care they need, analyze data for clinical research, optimize government-delivered services, and in doing so, improving the lives of millions. It is with this underlying mission to serve others and our passionate dedicated staff that have remained upbeat about fiscal '22 and beyond.

With that I'd like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Thank you, Zach, and good morning everyone. We're pleased to report such a strong finish to fiscal 2021. Turning to Slide 9, we posted revenue of $65.2 million for the 3 months ended September 30, 2021, versus $50.7 million in the prior year's fourth quarter. The growth reflects the impact of roughly $8.5 million in revenue tied to the acquisition of IBA along with new business awards in the quarter and increased volume across our legacy programs.

In addition, as Zach mentioned, we expect the first quarter of fiscal 2022, currently underway, to greatly benefit from the previously announced FEMA awards in Alaska. Such contracts, in aggregate, have a value of over $107 million for their base periods and we believe the current run rate puts these in a range of adding between $95 million to $100 million in our fiscal 2022 Q1 revenue. After that, the impact will depend on demand in Alaska for ongoing COVID-related services as the customer evaluates whether option exercises are appropriate. To date, the customer has exercised the first of 3 1-month options on the emergency medical staffing contract, valued at approximately $35 million, which will largely be reflected in our fiscal 2022 Q2.

Turning to Slide 10. Income from operations was $4 million for the fiscal 2021 fourth quarter versus $2.7 million last year. Operating margins improved to 6.2% from 5.3% in fiscal 2020, reflecting favorable program mix and greater operating leverage. The 2021 results had a large contribution of time and materials programs, which generally yield stronger results than cost reimbursable contracts. Note that in line with my prior comments regarding the revenue impact expected in fiscal 2022 Q1, due to the Alaska related FEMA work, we expect that margins from those task orders will be approximately 5% of revenue, reflecting the significantly subcontracted nature of those services.

We reported net income in the fourth quarter of approximately $2.9 million or $0.21 per diluted share versus $1.4 million or $0.10 per share last year. DLH recorded a provision of $0.3 million and $0.6 million for tax expense during the fourth quarters of fiscal 2021 and fiscal 2020, respectively. Interest expense was essentially flat at $0.8 million in both years.

Turning to Slide 11. EBITDA for the fourth quarter of fiscal 2021 was $6 million versus $4.4 million in the prior year period. As a percent of sales, EBITDA rose to $9.3 million this quarter versus $8.6 million last year. Q4 results in fiscal '21 absorbed the impact of $1.1 million in corporate development for a transaction evaluated, which was not ultimately closed. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and at the back of this presentation.

On Slide 12, we wanted our investors to visualize our record of achievement over the past decade. As you can see, we've shown steady top line growth as well as expanding EBITDA and improving EBITDA rates, reflecting our progression up the value chain and our effective leverage of our corporate infrastructure as we achieve scale through growth. This perspective illustrates our commitment to steadily improving the company's performance and increasing returns to our shareholders. We're really proud of what we've accomplished so far, but think this is just the beginning of maximizing our potential.

Slide 13 gives an updated snapshot of our debt position at the end of the fourth quarter. As of September 30, we had approximately $46.8 million of debt outstanding under our credit facility versus $70 million at the end of fiscal 2020. Including a $21.1 million advance payment related to the first FEMA contract awarded in September, we generated approximately $45.7 million of operating cash flow during the year, allowing us to pay down approximately $23.3 million of debt. We have satisfied all mandatory principal payments on the loan facility through December 31, 2023, but we'll continue to reduce debt when feasible to strengthen the balance sheet even more going forward.

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.

(Operator Instructions) Our first question comes from Joe Gomes with NOBLE Capital.

Congrats on the quarter and year results. So I want to start with the FEMA award in Alaska. Again, congratulations on getting the first exercise there also. Just maybe give us a little detail on how that's progressing? And are there other additional state opportunities out there that you may be bidding on or what you think you could bid on?

Yes. Thank you very much Joe. Appreciate your continued support for the business. Yes. So both of our Alaska awards were both competitively awarded from FEMA, and FEMA has a charter across the nation.

You may recall earlier in the year shortly after the pandemic began the issue that we were awarded a basic order agreement, BPA, which covered largely the Pacific Northwest area and that's where these two awards were competed and we successfully won. That same community across the government is looking to expand this type of disaster response capability across the nation and we're kind of in the forefront of working with them to see how broadly that may expand.

So we do think and anticipate that the potential exists for other states to leverage the federal government's commitment to support current measures against COVID-19 much like this, so we'll stay tuned on that.

Great. And on the continuing resolution, you touched briefly on it. Maybe you could again give a little more color. I think last quarter you talked about the Infinibyte cloud and there's a lot of major health IT IDIQs that were expected to be rolling forward here. Where do we stand on those now? Have they been pushed further to the right? Maybe a little more color on the continuing resolution impact would be appreciated.

Yes. As you probably know, the continuing resolution, which kind of kicked the can to the right 8 weeks or so into mid-February, did require a great deal of concessions and trade-offs as it moved from the House to the Senate. We're continuing to stay real pulsed on what we think is going to come out of it that way, but all indications are that for us in particular, the agencies associated with the work that we have in hand today and that we have in our near-term portions of the pipeline continue to look strong.

The Department of Defense probably has more pressure in the CR environment than the civilian agencies, largely because over the last year or 2, with the exception of COVID money, the civilian agencies are still under-spending the funds in which they've been obligated. That is not necessarily the case for DoD since a number of the threats are still continuing to emerge and the budget uncertainty creates some challenges within DoD. But we still feel really pretty comfortable with what we are seeing and hearing as things move through the Congress that the things in our pipeline are very solid.

The biggest impact is, as we indicated before, some of these programs that are new programs that don't get pandemic-type exemptions are continuing to see extensions to the current work as opposed to new money and new contracts. So we'll continue to monitor that, but we think that the effect of the CR will be potentially neutral to our new business pipeline that still has some risk baked in with regard to our organic work.

Okay. And maybe one kind of a look back here, you made the S3 and the IBA acquisitions you mentioned, how they're now fully integrated. Just, how are they performing versus your pre-acquisition plans? You mentioned in the past about one of the positives of these acquisitions was the ability to bid on more opportunities. Are you seeing that come to fruition today?

Most definitely. Both of those acquisitions were part of our overall strategy to have full market presence in those three key markets in health and human services, the defense, VA, human services and solutions, and the public health and life sciences sector. And so we fulfilled that with the completion of that phase 1 acquisition program.

But of course, who could have guessed how timely and relevant an acquisition of a public health company it would turn out to be, right? None of us saw COVID coming at the time. We just knew that, of course, there's a primary role for the government in analyzing healthcare and disease issues and particularly long-term or pervasive pandemic issues. So certainly, extremely proud, and we see a lot of value in that addition of S3 to our portfolio.

Likewise, the IBA team has fulfilled in every way what we expected in terms of getting a beachhead in DHA and really leveraging their capabilities with a couple of key agencies inside DHA. We obviously see that as a market for continued growth and expansion and having their skills on our team has really upped our position in that competitive market. So we're quite pleased with that.

I think, as we've discussed on prior calls, our emphasis or our lens for acquisitions will move away from being particularly market focused and just trying to get a footprint in each of those key markets, more to capabilities that augment our position in those markets now that we've rounded out and have at least a foothold in each of those markets. So we're looking to add capabilities and continue to leverage some visibility we're getting with those key clients, and as you know, it's a very active M&A market, so we expect to be able to successfully execute some additional plus-ups to the portfolio in fiscal '22.

Great. And one more if I could sneak one in. Earlier in the year, Kathryn, you had some, let's call it, slower paying clients, but you did a great job in managing through that and everything. With the Continuing Resolution, are you starting to see any of that creep into the system again? Or is it things still running where you would like them on the accounts receivable side?

So far, our early returns in Q1 are favorable and Q1 traditionally is our softest cash flow generating month just because of, as we often joke, there's a big press to get everything processed for September 30. And then of course the government has got quite a bit to do to kind of return to their normal business after their fiscal year end at September 30, as well as ours.

But early returns on Q1 are looking favorable. I certainly don't expect anywhere near the challenges we had last year where we were not only navigating the CR, but also, of course, integrating an acquisition that closed on the very last day of the prior year. So we had a lot of factors colliding in Q1 last year, and I definitely don't look forward to repeating that.

So I expect this current year fiscal Q1 to be much more favorable and much more normal in terms of cash flow collection. But honestly, my expectation is that we're just holding our position for Q1, just given our traditional Q1 cash flow requirements. I think I would consider that a success, but of course, if we manage to pay down some debt in the meantime, that would be a nice icing on the cake.

But quite right as you said, thanks for the observation that the team worked extremely hard to turn that around and highly successful exited the year with DSOs at 46. So that's going to be a tough achievement to top.

Well, congratulations again on the excellent quarter and year. Looking forward to 2022.

(Operator Instructions) Our next question comes from Brian Kinstlinger with Alliance Global Partners.

Great results. So on Alaska and hopefully, I'm understanding it right, after the three short-term options, what then with these short-term programs. Do you see the potential for follow-on work to compete for? Do you plan for a wind down, which of course would be easier given it's subcontractor-heavy? Just trying to understand how this plays out for the year.

Pardon me. It appears that the main speaker line has disconnected. I will join them in as soon as possible. Thank you.

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The main speaker line has been reconnected. If Brian you could restate your question please?

Yes. Great. Maybe it was something I said. Just kidding. I just was trying to get an understanding, after the short-term options, assuming they are or are not executed on the Alaska contract, what happens after? Following the work, you think there's something to compete for? Or do you expect and plan for a wind down, which of course with subcontractors would be easier than typical?

Yes. No, great question, Brian. Those are currently set as turnkey projects -- contracts for us, which means they have a ramp-up and then a ramp down. We call it, mobilize and demobilization. They're going to range. They also have in them some options that can be exercised to extend it depending upon the situation on the ground. But for each of those, we do expect that we will, a, be successful, and in Alaska we will start to get a hold in front of it. Now obviously, variants could change that, right? And so we're going to continue to monitor that.

With regard to, could there be other opportunities? We hope so. At present, we know that FEMA, as I indicated to Joe's question, FEMA is looking to expand the scope to cover additional states throughout the U.S. That has not occurred as of yet. But they are working feverishly, we know, to provide contract coverage elsewhere, and Jacque Everett, our Chief Growth Officer, is working with GSA and FEMA. And so we hope to know more within the coming weeks as to whether or not that's going to occur.

But as of right now, our backlog with regard to Alaska, we do expect to get through Q1 and into Q2. But if we're all successful, then as a nation we hope that that will slow down. But we'll keep you posted on that.

Great. And then a follow-up, can you quantify what percentage of your revenue will come up for renewal in fiscal '22 and whether that is front-end loaded or back-end loaded?

Yes. Well, excluding of course Alaska, our continuing operations, the largest recompetes that we have still continue to be the VA CMOPs, and of course that's been well documented. We've discussed quite a bit of that over the recent years. We have just recently received an extension for 1 year -- for a full year on one of our CMOP contracts and so we're going to continue. We expect that the government will reevaluate again their position on the recompetitions. Besides that, we have no material contracts that are up for renewal in FY '22.

Great. And then obviously, we talked about the CR environment and how it has less impact on civilian agencies you mentioned. Can you talk about what this means for your bid and proposal submissions for new business. Over the last 6 months, are we bidding on less work than a year ago? More work? And then talk about the submission pipeline that you see planned for fiscal '22, and how it appears to be trending, up or down or flat?

Yes. And of course, we do not have the crystal ball as to what will get through. But we do have a good understanding. We work very closely with our agencies and we're looking at what they still make issue for request for proposals over the next year.

We do expect that 4 to 5 of our civilian agencies will have solicitations out within the next several months. As you saw, the Center for Disease Control was able to issue a relatively modest size, less than $40 million contract that we were awarded just as we ended the fiscal year. And we think that they're going to continue for some of those recurring contracts that do not have a new scope added to them, that they'll still continue to be able to get those released.

We're seeing the same activity on the behavioral health side within HHS for organizations such as Samsung, and we also found that some of the multiple award IDIQ contracts are still moving forward with some solicitations as well.

So we have, first of all, had a very heavy bid activity for the multi-award IDIQ contracts over this last year. We're hopeful that that will translate into the actual funded contract bids within FY '22. So we'll have greater color on that as we look at coming out of the CR and we'll provide an update on that certainly early part of next year.

And I would just add to that, Brian, that of course, it's never a welcome thing to be operating in a CR environment and there's no question that there will be some of our target pursuits that will be delayed as a result.

However, comment, as we've shared, given the way that we expanded our ability to address the market and really leverage capabilities across the strategic acquisitions that we've integrated, and with the addition of our Chief Growth Officer, really the cadence and the tempo of our business development efforts is definitely up. And so we think that's mitigating or offsetting against the impact of sort of the slowdown from the CR.

Great. Last question I have, I realize in this call you mentioned the key new hire here, but as you win new programs, talk about your ability and/or challenges to attract and retain personnel given the well-documented labor shortage?

Yes.

Yes. Look, I couldn't agree with you more that it's well documented. The whole great resignation is causing challenges not only across the nation, it's particularly acute to federal government agencies. We are faced in the federal government agencies dealing with added things such as vaccine mandates, volatility with regard to commitments to ESG, DE&I, and just a number of things that affect our ability to attract, retain some of the best talent.

That's why it was so critical for us to treat that as an asset that is truly important for us to have on board in the company and why we were leaned in with a very high-level nationwide executive search to really find the best of the best. And we are excited about having been able to get and attract someone of the caliber of Maliek Ferebee, whose most recent assignment was with Alion Science.

So we think that the challenges that you address, I mean, when the notice came out from the executive order, we had 603 individuals unvaccinated, right? And as you well know, a few unvaccinated in September is probably not due to your inability to find vaccination, right? So we've had to wrestle with a workforce that had a degree of hesitant folks, while also trying to navigate ourselves through the varying regulations associated with how we're going to have to address our response there.

So there's just a variety of things associated with the talented workforce and talent management that we have not seen at this magnitude for decades. But we feel really, really good having had our executive leadership team spend quite a bit of time on the slate of candidates we have and having heard the vision laid out by Maliek and we're well underway. Maliek is here with Kathryn and I in the headquarters today in Atlanta and we started to lay some ground work for how we're going to become the best in our industry at that aspect of the business.

(Operator Instructions) At this time, there appear to be no further callers in the queue. So I'll turn it back over to Mr. Parker for any closing remarks.

Thank you, Anthony, and more importantly, thank you to each of you for participating on today's call. As I indicated, we're really pleased with the results of our fourth quarter of FY '21, particularly excited about how that leverages a real strong entry into FY '22.

Our upcoming activities will include, of course, the Annual Meeting of the Shareholders, as we also evolve to develop our posture around the Q1 results. So please stay tuned and look forward to greater clarity. We hope to have greater clarity from the CR and its transition by then as well. And thank you all. Have a blessed day. Bye for now.

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