DLH Holdings Corp (DLHC) 2020 Q4 法說會逐字稿

Good day, and welcome to the DLH Holdings Fiscal 2020 Fourth Quarter Earnings Call. (Operator Instructions) Please note this event is being recorded.

I would like now to turn the conference over to Chris Witty, 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 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.

Thanks, Chris, and good morning to our friends and shareholders. Welcome to our fourth quarter and year-end conference call. The last 12 months have been a very active time for the company, setting the stage for continued solid operating performance in fiscal 2021.

First, however, as we all know, 2020 has been a tumultuous year for our nation as well as our DLH employees throughout the world, one which saw major social and civil unrest ignited by a series of high-profile killings in black communities and, of course, the onset of the coronavirus, which has become the worst global pandemic in a century.

I'd like to take a moment to praise our courageous and truly mission-focused employees who, throughout these difficult times, have been long committed to the services that we provide to the underserved, our military and our veterans. Throughout the pandemic, we have had over 1,000 essential personnel entering government facilities on a daily basis, braving the challenges -- braving the various challenges to deliver high quality and highly productive services to our customers throughout the country and doing so with complete adherence to CDC and DLH guidelines, resulting in an infinitesimal number of COVID cases.

And to the several hundred employees assigned to our DLH offices but adhering to our stay-at-home directive, thank you. You have done a tremendous job of adjusting to the many challenges of the quarantines and telework without skipping a beat. We realize this can be taxing and look forward to the days where your choice become -- can become the driver for our workplace decisions. We are indebted to you all.

Starting with Slide 3, let me begin by providing a high-level overview of our financial performance and some color on the outlook for the coming year. The company posted revenue of $50.7 million for the quarter, as Kathryn will review in a moment, and $209.2 million for the fiscal year in total. This represents an increase of more than 30% year-over-year, reflecting recent acquisitions, new contract awards and solid results across our core programs and services despite the global pandemic.

Operating income was $13.5 million for the year, and we posted earnings of $0.54 per share, while EBITDA rose to $20.5 million in fiscal 2020 versus $13.9 million last year. We also completed the acquisition of Irving Burton Associates for $32 million on September 30, [bringing prudently aligned] health IT solutions and strong credentials with the Defense Health Agency and the medical research and development command to DLH.

We generated $19.5 million in cash from operations during the year, which we used to pay down $19 million of debt prior to the acquisition of IBA. So while starting FY '21 with $70 million of indebtedness, you can rest assure that we plan to once again use the same recipe going forward, utilizing free cash flow to delever the company, as Kathryn will go over momentarily.

As shown on Slide 4, a record backlog of nearly $700 million provides a strong foundation for the long-term health of the company, bolstered by new wins related to COVID-19, a stronger position within the markets we serve and greater opportunities for growth than ever before. Technology innovations to drive program efficiencies contributed to our recompete award of $150 million Office of Head Start system contract during the quarter.

We have benefited from the recent actions of the VA on our heritage CMOP programs with determinations leading to cancellation of the small business set aside solicitation while remaining in contention for associated medical logistics work. Accordingly, I feel real proud about the company's performance and our outlook going forward.

As I mentioned earlier in the year, DLH is well positioned within our key spending areas, and we believe strongly that the recent election has not changed that. In fact, we address it -- I address it as neutral to positive.

Turning to Slide 5. We show that we normally state that our key markets and specific programs enjoy widespread support from both sides of the aisle. I would also add one positive note given the election results. We believe that several health care-related spending items will be higher priority under the new administration, resulting in greater access to health care and new spending opportunities on health-related priorities, not only for the general public but also for our military and veterans community.

We expect that the pandemic preparation will also take a larger role going forward and that the Affordable Care Act may be enhanced and adjusted during the next 4 years, assuming that Congress concurs. The bottom line is that we anticipate that the agencies we serve will likely operate at current or better spending levels over the next several years, again, underscoring both the strength and stability of the markets we served. Of course, we expect that the BCA caps will expire during FY '21, but the potential of a continuing resolution provides good stability as we enter FY '21.

Turning to Slide 6. I want to provide an update on the pandemic and its impact to DLH. As we have said in the past, our portfolio of mission-critical health care-related services across key federal agencies provide numerous opportunities to assist the government in addressing the challenges based due to COVID-19, though, as always, there are some headwinds in the government contracting market when facing outbreaks and the like.

We remain cautiously optimistic about the continuing opportunities for DLH to be at the forefront of combating this threat and working feverishly alongside our clients towards mitigation. We won new awards this year in that realm during FY '20, and we will continue to conduct trials for the safety and efficacy of investigational therapeutics, working closely with the agency, their thought leaders regarding policies and approaches to respond to the pandemic.

I'm sure our listeners are well aware of the ongoing dynamics regarding COVID-19, with the positive news about vaccines offset by increases in infections worldwide. It is still a very fluid situation involving the partnership of government and industry, and DLH remains well poised to continue support in a variety of these programs.

We have an active pipeline of opportunities across the entire business platform. And overall, such growth areas are far more offsetting than the near-term headwinds created by certain opportunities associated with program delays, travel restrictions and potential cancellations.

While we can't eliminate -- or while we can't elaborate further just yet, we do expect that additional work and anticipated task orders could increase organic growth rate in FY '21 to a higher level than this past year. These are very critical times, and DLH is playing a vital role in moving the nation forward addressing many near-term health-related priorities.

Turning to Slide 7. I'd like to review our current strategic visions before handling -- handing it over to Kathryn. We've come a long way since I came onboard 10 years ago, and we wanted to celebrate the fact that DLH has completed its transition into a strong, differentiated company with broad, unique capabilities, spanning across all 3 of our market areas in the -- our market focus areas. And our recent acquisitions, including Danya, S3 and IBA, have continued to bolster our strategic direction.

We're also rapidly developing our market presence in data analytics, artificial intelligence and machine learning and secure systems. The cyber community will also continue to be key as we position our InfiniByte Cloud solution to expand in the digital transformation technologies. We are at the next stage of our development, and we look forward to organically growing as well as through acquisitions into an even greater technology-leading enterprise that can serve the health-related customers throughout the full life cycle of modernization.

It is an exciting time here at DLH, but we won't be looking to grow just for growth's sake. Rather our new capabilities and market pursuits will continue to be strategically aligned and continue to diversify the business base. We'll improve the lives of millions of Americans and, ultimately, increase the returns for our shareholders. Of course, we'll continue to utilize our operating cash flow to pay down the debt, to delever the balance sheet and reduce the interest expense while investing appropriately in business development opportunities and technology enhancements.

We are focused on the next decade during which we will build upon what we've accomplished thus far, further transforming DLH into the leader -- into a leader in health care-related, technology-enabled, cloud-based solutions for key agencies in the federal government. Given our accomplishments in 2020, our investments coming in 2021 during this pandemic and global economic downturn, we are upbeat about the future and the opportunities for tomorrow.

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 end the year on a strong note.

Turning to Slide 8. We posted revenue for the 3 months ended September 30, 2020, of $50.7 million versus $54.2 million in the prior year's fourth quarter. This year-over-year revenue variance largely reflects deferrals in monitoring and compliance programs and a reduction of non-labor cost from the changing business conditions due to the ongoing pandemic. We anticipate revenue to grow organically in fiscal 2021 due to our new COVID-19 contracts and task order timing.

Turning to Slide 9. Income from operations was $2.7 million for the fiscal 2020 fourth quarter versus $3.4 million last year. Adjusting for $0.9 million of acquisition expense, current period operating income improved year-over-year, notwithstanding the revenue delays previously mentioned. This reflects improved operating leverage on G&A costs and reduced depreciation and amortization.

We reported net income of approximately $1.4 million or $0.10 per diluted share versus $1.6 million or $0.12 a share last year. Adjusted for acquisition expense of $0.9 million, net income would have been $2.3 million, and earnings per share would have been $0.15.

The company recorded a $0.6 million provision for tax expense in the fourth quarter of both 2020 and 2019. Interest expense declined to $0.8 million in 2020 versus $1.2 million last year due to lower interest rates and lower outstanding debt for most of the period prior to the acquisition of IBA.

Turning to Slide 10. EBITDA for the 3 months ended September 2020 was $4.4 million and adjusted for acquisition cost was $5.3 million, in line with the prior year period. As a percent of sales, acquisition-adjusted EBITDA rose to 10.4% this quarter versus 9.8% last year. Reconciliations of GAAP net income to EBITDA and adjusted EBITDA are in our earnings statement and at the back of this presentation.

Slide 11 shows the growth of our backlog since fiscal 2018. Our backlog grew over 66% in fiscal 2020, and we're pleased that this not only reflects recent acquisitions but also speaks well of our base business. Organic backlog growth was fueled by the Head Start recompete, as Zach mentioned earlier, CMOP extensions and other awards. As Zach indicated, we now have a much more diverse and balanced portfolio of programs and services and stronger revenue visibility for the upcoming fiscal periods.

Slide 12 gives a snapshot of our debt position at the end of the fiscal year, reflecting the closing of our recent acquisition of IBA on the last day of [fiscal year]. DLH generated $19.5 million in operating cash during fiscal 2020 versus $18 million last year, and we reduced our senior bank debt by $19 million during the past 12 months. This resulted in a remaining debt balance of $37 million prior to closing the IBA acquisition on September 30.

Even with the new debt, our improved operating performance and higher EBITDA means that our leverage ratio, as calculated under our credit agreement, is approximately 2.8x EBITDA, a substantially lower leverage ratio on similar net debt levels than after our last acquisition in June of 2019. As Zach mentioned, we'll continue our practice of using operating cash to pay down debt and expect levels -- debt levels of $50 million to $52 million at the end of fiscal 2021.

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

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

Doing well here. I hope everyone there is staying safe also. First question, I was wondering if you might be able to quantify, for the quarter or maybe for the full year, what the impact on the top line was for some of the pass-through revenues and the delays that occurred in the fourth quarter.

Impact of -- I'm sorry, Joe. Impact of which revenues?

The absence of the pass-through revenues and some of the delays that occurred in the fourth quarter, what was that impact on the top line for the quarter and the full year?

I can take that.

Yes. Yes. Joe, let me just begin by indicating, it -- as you know, we did address it as it entered into our book of business in Q3, and it has continued, we'll say, also into the fourth quarter, has had some impact as well as currently into our current quarter as well.

So Kathryn, can you give some -- [a round] for Joe?

Yes, it's exactly that. We're rounding that at $7 million to $8 million, Joe.

About $7 million to $8 million?

$7 million to $8 million.

Okay. That's very helpful. Hopefully, some of these restrictions are -- we're able to lift some of these restrictions sooner rather than later so we can get back to a normalized state of business.

Well, we're all keeping our fingers crossed there, as you well know. It's -- at present, though, we do expect that with the activities of the Thanksgiving holiday, we're really forecasting, as are the most models, that this week and next, we'll see greater spikes and potentially the same following the end of [this] year December. So probably won't be seeing much regaining of that for Q1 and Q2. And hopefully, we'll start to see some rebound after that.

Okay. And if I was looking -- took a quick look at the K here, and if I look at year-over-year growth, you had really nice growth in VA, really nice growth in VA logistics part of it. But revenue year-over-year at Health and Human Services was down about 14%.

Can you just kind of break that out? And as you guys are looking forward, do you expect the same type of growth rates on the VA type of business? And can we expect or anticipate a rebound in the Health and Human Services side?

Yes, Joe, I think that you've accurately described the model that I expect to continue for at least another quarter or 2. I think we'll continue to see that veterans will be held out of the communal areas and all of the VA hospitals and clinics throughout the country and thus be far more dependent upon the mail order versions of satisfying their prescription needs, potentially even additional spikes as we look at distributions to our veterans once vaccines and expanded therapeutics come online.

Similarly, of course, on the Public Health and Life Sciences arena, we're continuing to invest and double down towards the potential of expanding our large network of support team to really tackle and build a large sample base for COVID-19 therapeutics and so we hope to see that part grow. I think it will be relatively flat still in the market around our HHS-related business just because of, again, the nature of the business and how it seems to carry the brunt of the restrictions aspect in our book of business.

And to clarify, that flat is in the Human Services and Solutions.

Correct.

Right. Great. Okay. And you mentioned a little bit, Zach, on the call, but we are operating under a continuing resolution at least for a couple of more days. Have you seen any negative or, hopefully, positive impact here in the current quarter of operating under the continuing resolution?

Yes. The CR is really kind of our friend as much as I hate to describe that sort of state of affairs. There's a tremendous risk associated with, of course, closure; tremendous risk of going into the caretaker state that the federal government could do. So we were really excited to see both the President and the 2 sides -- the other 2 sides of the government support CR.

Of course, we have some things that are expiring on December 11 and 12 that we're optimistic. The folks that we're engaged with on the hill give us a great reason to believe that certainly some continuation there and even the potential of some form of stimulus may mitigate some of the risks associated with this quarter and potentially the first part of FY '21.

So we'll stay tuned there. But the CR is our friend from the standpoint of retention of our businesses, the ability to get these kinds of extensions that have been important to not only us but some of our peers in the company -- in the industry. It has had an effect of slowing down new work that's usually one of the first casualties of a CR and the lack of a new budget, and that is that the acquisition folks in the GovCon are really, really restricted from issuing new types of awards and new types of contracts.

So we've got 1 or 2 of those in our crosshairs, and they just continue to slip to the right. But we're benefactors of that as well as we look at some of the extensions in our recompete work as well.

Okay. And one more for me and then I'll hop back in queue. Accounts receivable, Kathryn, you might be able to talk a little bit to that. I know that's something where it's been -- something we've been working on and reducing that. And it looks like it went up sequentially from the third quarter to fourth quarter. So just trying to get a little more insight into the accounts receivable situation.

Yes. So some of that -- so there was, as you pointed out, some sequential growth attributable principally to 2 factors. One is, of course, the acquisition. So our fourth quarter number includes the effect of the accounts receivable we acquired of about $3.5 million. Additionally, we had a switch in the dispersing office when we -- as a part of the Head Start recompete. And so just getting that process transitioned caused a little bit of ability in accounts receivable. But all that in proper context, we still have a days sales outstanding of less than 60. But it is an opportunity as you imply that -- for us to derive some additional operating cash flow. And so we know where that will go when it happens.

(Operator Instructions) Our next question comes again from Joe Gomes with Noble Capital.

Well, if nobody else is going to ask any questions, I'll ask a couple more.

Go ahead.

Can count on you.

So just -- I know it's early days, but how is the Irving Burton integration going? What do you guys see there? If you could talk a little bit about opportunities for new business on that platform?

Sure. No, I mean very excited. You must be my straight man today, Joe, because we're tremendously excited about the additions -- the new additions to the DLH family in the form of the IBA team. Mary has proven to be a really good leader and has been integral to our transition efforts across the company. We haven't said it publicly, that organization is an integral component of our Mission Services and Solutions operating unit under Helene Fisher. And of course, many of you know, Helene has that -- has the Army background and the Army health IT background to really help infuse the type of potential for expansion that the folks at IBA have been really poised for.

We're excited about what the customer base brings to our platform. I've had an opportunity to speak with some of our corps and critical customers to date. And we just think that there's a real good opportunity in L.A. to continue with their current work, but they really position us well in 3 or 4 key strategic areas that the company has been focused on over the last couple of years.

And again, Mary and the team just -- not only do they add great credentials, but really, really tremendous talent. The kind of expertise that we're really looking for to build our R&D platform, our AI/ML components is going to be tremendous, tremendous assets to expand our telehealth, telepharm, telemed marketplace and go-to-market strategy.

So we're just really, really excited about it. No major issues at all with regard to integration. Kathryn and her team are slated to fully complete the ERP component by the first of the year. So we're in the testing phase now. And thus far, no unexpected issues. So we're really excited about it, and we think it's come along well.

Great news. And one more on the Infinity Cloud (sic) [InfiniByte Cloud]. I mean if you could just talk a little bit about more where you see that product going? Are we making sales today on that? Or is it still like kind of more of a trial-type phase? I mean it sounds like there's huge potential here. Just trying to get more of an idea of when we might start seeing that potential realized?

Be careful, Joe. People are going to start thinking that I put you up to these questions here. This is really an exciting one.

As you know, we're really believing that now is the time to invest and to double down on our nation's commitment to secure environments, secure large-scale data analytics platforms. And InfiniByte Cloud is our entry there. As you know, we secured appropriate approvals as a FedRAMP marketplace provider earlier this year. And there are just a number of opportunities that we think we can offer it, especially in the upcoming future.

To answer the second part of your question, yes, we have actually been providing it for some customers already. We are in the process of starting to implement it for another client. We've received requests for some other firms that do not have the capability, that also have a commitment to support our target agencies, including the VA and HHS. So we're really excited about the potential.

There are also a number of major -- or a few major IDIQs for government-wide agencies coming up in the next 3 to 6 months. And they will be drivers for health IT -- secure health IT solutions in the cyber realm for 10 years -- for the next 10 years. And it's critical that we have a seat at that table. And InfiniByte is our tool to get there. We're investing today and developing solutions and approaches to increase our win probability there, and we'll continue those investments over the coming months.

So we think that while there is a -- there's some -- certainly some near-term opportunities and substantial investments going on right now that the cyber community and the secure data analytics in the health arena are going to be huge over the next 24 months, and we want to be substantial players there. So we're excited about where it's going. We have a great team under Jeff (inaudible), they have been really, really helping us to field a super, super tool to be an enterprise-wide capability.

We also think IBA has areas bringing -- some areas with some customer sets that are looking for that type of secure platform, and we think it's really, really a great opportunity for us to really take it as an enterprise-wide asset.

Great. Thank you for that insight, Zach. And thanks, again, to you, Kathryn, for answering my questions. We'll be talking in the next quarter, again, I'm sure.

You bet, Joe.

We appreciate your support, Joe.

Back to you, Matt.

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

Thank you. Well, again, we just want to wish everyone on the call a tremendous holiday season. We realize that it's the time to be very, very careful and that you may have to modify your plans. But we're really committed to ensuring that we get everyone through this pandemic and these difficult times and look forward to brighter days.

We will be communicating further over the next coming months with first an investor conference tomorrow and then we've got participation, Jeanine Christian will be participating in the Baird conference for -- on the panel for Healthcare and COVID-19-related Panel. So we may give some added color around some of the offerings in that Q&A session. And then Kathryn and I and the executive team are looking to put together a summary annual report that should all precede our annual meeting of the shareholders next calendar quarter.

So stay tuned. Please keep looking out for additional DLH color because we're really excited about that which is going on today.

With that, I want to ask everyone to have a blessed day, and we look forward to catching up with you soon. Bye for now.

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