DLH Holdings Corp (DLHC) 2021 Q3 法說會逐字稿

Good day, and welcome to the DLH Holdings Corporation Third Quarter Earnings Conference Call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Chris Witty, the Investor Relations adviser. 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 2021 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 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 the 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 third quarter conference call. I couldn't be more pleased with our performance, and we're on track with our best year ever with even greater plans in place for fiscal '22. I remain very proud of our tremendous employees across the globe, who continue to deliver top-quality services and solutions to our clients despite very challenging times.

Starting with Slide 3. I'll first provide a high-level overview of the quarter and some color on the outlook for the rest of 2021. Revenue rose nearly 20% year-over-year to $61.6 million as we benefited from the acquisition of IBA, along with organic growth across the enterprise. We posted operating margins of 8%, reflecting a strong mix of programs, and earnings of $2.9 million or $0.21 per share.

We also generated some $9.3 million of cash from operations and used this to pay down approximately $9 million of debt during the quarter. Year-to-date, we've paid down roughly $16.2 million of debt due in the company's strong cash-generating ability. We continue to de-lever and improve our overall financial flexibility, as Kathryn will discuss more in a moment.

We previously announced that we won the VA's CMOP Medical Logistics award in the third quarter, which was expected to add over $200 million in contracted value over a 5- year period to our backlog. During the quarter, this contract was protested by a small business [veteran], and the government continues to work through their standard process, addressing the concerns, and to proceed to a resolution and award. In the meantime, the company's Medical Logistics CMOP contract was extended through November of 2021, and our backlog remains robust even as we await resolution on this contract, for which, of course, we expect a favorable outcome.

Now turning to Slide 4. I'd like to update our investors on our long-term strategy for success, which includes -- and continues to evolve as we grow the company. Given our track record of successfully integrating acquisitions, delivering excellent performance on large nationally dispersed programs and expanding our health care technology capabilities, we believe that DLH has enhanced its position for growth within the markets that we serve. While several long-term anchor contracts give us visibility and stability regarding a portion of our revenue base, our diversification strategy has given us a presence across all -- across the full range of federal health and military health systems and services with key programs and agencies in our sites.

We continue to serve the citizens, the soldiers, the service members and our veterans. Our -- even as we've expanded, we remain focused on our formula for success, serving clients where we can truly bring value-added real-world solutions to address the health care needs of today and tomorrow. Our services are leveraging an expanded set of technical -- technology solutions, but our targeted agencies are largely the same, as this is our dedication to our strategy and to the utmost in customer service.

We continue to hire the best and the brightest, leveraging talent that we bring from a variety of health care related industries and companies. We've built a foundation for strong long-term growth with a professional, highly credentialed workforce that can compete and win against the most respected names in the industry. Therefore, we've been able to see revenue rise to a level of nearly $250 million annually and we are confident that we are well positioned to grow to our next revenue target of $500 million based on our existing platform, including research, technology, health care delivery and performance management.

The past year during the pandemic has shown that our services are more valuable than ever and that our workforce is flexible, committed and can adapt to rapidly changing requirements in terms of working remotely, interacting with customers in new ways and winning business that leverages our expertise in digital transformation, artificial intelligence, advanced analytics, cloud-based applications, modeling and simulation, telehealth systems and more.

And we've accomplished all this in a sensible way in terms of capital deployment. By accessing our credit lines to make acquisitions and invest in the business, we prevent frequent equity dilution of our existing shareholders. We then use our prodigious cash flow generation to pay down debt and strengthen our balance sheet, which enables us to replicate this process. We've used this strategy consistently, leading to a refined acquisition process that maximizes shareholder returns and growth on the capital deployed.

We remain well positioned to take advantage of the opportunities ahead and are confident that as we near fiscal 2022, the company will continue posting solid financial results. Our backlog remains strong, and we will capitalize on the increasing need for technology-enabled health care solutions for which we are so well known and respected. I feel confident in our ability to provide the returns our shareholders have come to expect, just as I am proud of our staff and partners in performing so well during such unusual times.

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 have once again posted solid results this quarter.

Turning to Slide 6 in the presentation. We posted revenue of $61.6 million for the 3 months ended June 30, 2021, versus $51.5 million in the prior year's third quarter. The variance reflects the impact of roughly $7.3 million in revenues tied to the acquisition of IBA, along with organic growth across a variety of existing programs that follow increased activity this year. We anticipate such trends to continue in the fourth quarter and into fiscal 2022.

As Jack mentioned, our CMOP logistics award is being protested, so we're operating under an extension of the prior award through at least November. We remain optimistic about a favorable outcome of the award.

Turning to Slide 7. Income from operations was $4.9 million for the fiscal 2021 third quarter versus $3.8 million last year. Operating margins improved to 8% from 7.4% in fiscal 2020, reflecting favorable program mix and greater operating leverage. We reported net income of approximately $2.9 million, or $0.21 per diluted share, versus $2.1 million, or $0.16 a share, last year.

DLH recorded a provision of $1.2 million and $0.9 million for tax expense during the fiscal 2021 third quarter and fiscal 2020 third quarter, respectively.

Interest expense in the current year quarter increased to $0.9 million versus $0.8 million for the 3 months ended June 30, 2020, due to higher outstanding debt levels reflecting the acquisition of IBA.

Turning to Slide 8. EBITDA for the third quarter of fiscal 2021 was $7 million versus $5.5 million in the prior year period. As a percent of sales, EBITDA rose to 11.3% this quarter versus 10.7% last year. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and in the back of this presentation.

Slide 9 gives an updated snapshot of our debt position at the end of the third quarter. As of June 30, we had $53.8 million of debt outstanding under our credit facilities versus $62.8 million at the end of last quarter. We generated approximately $9.3 million of operating cash flow during the quarter and paid down roughly $9 million of debt. We estimate debt below $50 million at the end of fiscal '21, reflecting a stronger balance sheet and much lower leverage ratio than at the beginning of the year.

This concludes my discussion of financial statements. With that, I would now like to turn the call over to the operator to open for questions.

(Operator Instructions)

The first question will be from Joe Gomes of NOBLE Capital.

First question, we saw some organic growth in the quarter. The last year or so, you had pointed out the absence of travel-related pass-through revenues. I was just wondering, have they returned, did that help pump up the organic growth? Are we still waiting for that -- those types of revenues to come back?

Yes. Those are still slow to come back. We are starting to see some plans that, of course, were through -- determined before the delta variant started to come in place. We're starting to see plans where later this year, we'll start to do more of that travel. Even though mobility has substantially increased, of course, in the -- in our country, we're still looking at, since ours involves inspections and being around some of our clients and ultimately some of our team members, we're still proceeding very cautiously that way. So the majority of the organic growth has been with delivery of key talent for our customers, and we're pleased to see that.

Great. Thanks for that. And on the logistics contract, maybe you can give a little more color as to what exactly caused the VA to cancel that contract? I know you had some verbiage in there in the press release, but maybe we get a little more color there. When do you think timing? And why are you confident that you will ultimately be successful in getting this award?

You bet, Joe. Thank you, Joe, for the question. Yes, it is pretty -- unfortunately, a pretty common course now that when there's some larger contracts such as this one for the VA, that the government will frequently see a common -- a protest. They had a large number of potential bidders as well that have made the investment to pursue work of this magnitude. They're very focused on seeing if there's an opportunity for them to have a shot at it. So it has been a normal course of action nowadays to see a protest arise on contracts of this magnitude.

Regarding the process, the deal is consistent with all of the federal agencies, that they've got to run through due course to evaluate, to treat seriously any protest. This particular one happened to be from a small business, a service-disabled-veteran-owned small business. And so they're going through their normal course of action to adjudicate and to ultimately make sure that they can make an award that's consistent with the requirements. We, however, remain pretty optimistic that our proposal and our commitments and [effort] will prevail, but it is going to have to go on its usual course, and we're into it now a couple of months.

And really, the basis of our confidence is -- it's a couple-fold. It's firstly that the nature of the procurement is the best value procurement. So in the best interest of the government, from our perspective, our strong cash performance and the quality and cost-effectiveness that we've introduced over many years of working in support of the VA, from our perspective, represents the best interest of the government. So that's really the basis of our confidence in a successful outcome.

Okay, great. Thanks for that update. And last quarter, you talked about some of the opportunity set that you've seen over the next couple of years. I was wondering if you might be able to give us a little more update as to what are you seeing in the near term that could be coming up for award that you're pretty confident or hope to see winning those awards.

Yes. So great recall there. We still remain optimistic that the deals coming out of our pipeline will mature. This has been a very heavy proposal-development quarter 4; it's one of the largest we've seen in a while. A couple of our very strategic opportunities that really position or are great examples of positioning DLH, as a result of the capabilities we acquired over the last few years, have just now hit. So there are a couple of large-scale, indefinite quantity, IDIQ, multiple award contracts that will just determine the opportunities over the next 2 years that are recently out, one for the (inaudible) agency, which involves military health and research; obviously, the capabilities that were derived from IBA and S3 were pretty critical towards raising our profile and our win profitability. That has gone in as an IDIQ this quarter. We're also in the throes as we speak of one of the large IDIQs for the National Institute of Health associated with biomedical research and IT systems, referred to as CIO SP4. It now is on the Street and anticipating having the proposals delivered and completed this month. So those are 2 large government-wide-type access contracts that we think are representative now of the current state of the company, being able to have a high degree of success for those.

Those have been our -- the hunting-license-type vehicles, if you will, we have identified a large number of past orders that we think are very addressable by us (inaudible), and (inaudible). In addition to that, the normal course of the regular opportunities, we continue to see some of our [major ones] slip to the right. However, we're still optimistic that we'll see even more of this (inaudible) fiscal year. And we do expect a continuing resolution, and all indications are (inaudible) the budget process, while moving along, we would assume they're still very active in doing their write-ups, and we're just not optimistic that the infrastructure build and everything will be resolved by early September.

And having said that, we do think that there's still a good number of opportunities for us to have some continued organic wins, and that will lead to a good launch point in FY '22.

Thank you for that. Let me ask one more, and I'll jump back into queue. In your Q -- you kind of mentioned here, we're leading right into it, about the continuing potential for continuing resolution for the budget. And in the Q, you talked about some of the budgeting proposals being made for some of the various -- for the VA and Health & Human Services. And looking at the potential budget proposals there, anything that jumps out as a huge positive in your guys' view? Or anything that would be on the flip side, kind of disappointing from your viewpoint, looking at the proposed budget for today?

Yes. Our general assessment of the budget proposals is that they are, not surprisingly, extremely favorable to the agencies that really -- that support Health & Human Services initiatives. So from our perspective, we think that, while we understand there's quite a bit of the process to still play out to get to the final number, we think the general sentiment is that those programs are highly supported and from a bipartisan perspective. And of course, so the veterans always enjoy strong support from both sides of the aisle, and they did get a very nice proposal for an estimated increase in their budget.

But in addition to that, not surprisingly, there's a substantial increase in the NIH funding, of course, in the ongoing, as we've said consistently for the last several months. We are just exiting Phase I triage critical response and in fact, we may end up having to go back there a little bit, just given what's going on with the variants. But naturally, we expect that there will be a long tail for scientific analysis there and study of the impact of the coronavirus -- COVID-19 both independently and its effect on comorbidities for the public health populations that we study.

So we're not surprised to see the increase, but we do think it validates that the country is positioned and really focused on those sustaining health issues that really affect so many people. And we think we are extremely well positioned with the skills required to respond to those opportunities.

And just going back and doubling back a little bit on those IDIQs, as Zach mentioned, really very gratifying. It was not the intent of our first phase of the acquisition program to build a full set of capabilities, to be prepared to fully respond even without (inaudible) from teammates, but of course, we'll team where appropriate. But having our own independent capability to fully respond to those very large IDIQ vehicles and be positioned to have the hunting license as the past quarters mature, is a key part of our fundamental strategy over the last few years, and it's validated by, now, our response to those large RFPs. So we're certainly bullish on the opportunities we enjoy both organically and those things that will evolve out of the budget plus-ups that we see evolving.

The next question will be from Brian Kinstlinger of Alliance Global Partners.

Really the questions I had, and maybe I missed it, is can you provide the basis for the -- it's where I was looking for -- for the small business that protested? Was it not enough small businesses being evaluated? Or was it -- they felt they had the best value? What was the basis that was upheld?

Yes, there's a little bit of information that's publicly available on the basis of the protest. You can usually find those at gao.gov for us. And so we really just don't get into specifics. We know nothing more than is publically available in that regard. But we do know that the VA has started to operate on its due course to render an opinion, and each one of our previous proposals, of these CMOP contracts, they've always sustained the protest. The VA has gone through this process and ultimately (inaudible) optimistic to (inaudible) here.

Okay. But additionally, clearly, the protest was upheld, and so it's going through a new proposal, or they're still evaluating that?

No. Yes, what they do is -- they always find some way to suspend the award so that we're not starting on it until such time as they go through what's usually a 120- or 180-day process due to the nature of it.

Yes. All right. When you said canceled the contract -- I get it. That was the wording that confused me, whether it was upheld or being reproposed. And so the answer is, no, it's not being reproposed yet; they're evaluating the protest up.

That's correct, right.

Right. Is that right? Okay, good. And then my second question for you, as you pay down debt with cash flow, at what point, again, do you get comfortable in evaluating M&A opportunities?

We remain active in that space regardless of transactions that we've just closed. So we never really stop looking. But certainly, once we slip below 3x levered, which we're well, well below right now, we would -- we would expect that we've got capacity to execute on a deal. Having said that, even if we were over 3x, we have an extremely supportive lending group that is responsive to opportunities as they come up for us.

(Operator Instructions)

At this time, there appears to be no further questions in the queue, I would like to turn the conference back over to Zach Parker for any closing remarks.

Thank you, Carrie. And once again, thank you all for your attention and interest and continued support of DLH. We look forward to following up with you as we approach our year-end and to give you some color, not only around the results for FY '21, but our future forecast and our vision for what's yet to come. Thank you again. Have a blessed day. Bye for now.

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.