DLH Holdings Corp. (DLHC) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the DLH Investor Update Fourth Quarter and Fiscal Year 2015 Results Call. My name is Ian. I’m your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference [Operator Instructions]. As a reminder, the call is being recorded for replay purposes. I would like to hand the call over to Mr. Casey Stegman, Investor Relations Advisor. Please proceed sir.

Thank you, Ian. Good morning everyone and thank you for joining us on today's conference call. My name is Casey Stegman of Stonegate Capital Partners, Investor Relations Advisor to DLH Holdings. On the call with me today is Zach Parker, President and Chief Executive Officer of DLH; and Kathryn Johnbull, Chief Financial Officer of DLH. Earlier today, the company posted its earnings release, which outlines the topics that management intends to discuss today. Should you have missed that release, it can be found on the investor page of DLH's corporate website at www.dlhcorp.com. As a part of today's call, we have provided a slide show presentation that can be accessed on the DLH website. Go to the Investor Relations tab towards the right side of the page and click on Presentations under the drop down menu. We are also providing a simultaneous webcast of today's call with a replay available later today on our website. Please note that this conference may contain certain Forward-Looking Statements as defined by the Federal Securities Laws. Statements in this call regarding DLH Holding Corp's business, which are not historical facts are forward-looking statements that involve risks and uncertainties. While these statements reflect DLH's current views and outlook, they are subject to factors that could cause its future results to differ materially. These risks and uncertainties are discussed in detail in our documents filed with the SEC, specifically, the most recent reports on Form 10-Q and 10-K. On today's call, we will be referencing both GAAP and non-GAAP financial measures. A reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the Investor Presentation on DLH's website. All comparisons throughout this call will be on a year-over-year basis unless stated otherwise. With that said, it's my pleasure to turn the call over to Zach Parker, President and Chief Executive Officer of DLH. Zach.

Thank you Casey. Good morning and welcome to our shareholders and other interested parties. We really appreciate your participation in this conference call and the webcast. I want to start this call today to state how proud we are that one of our primary clients, the Department of Veterans Affairs’ Mail Order Pharmacy program has once again achieved the top rating by the J.D. Power & Associates organization. For over a decade, the men and women of DLH have had the privilege of serving this customer and ultimately coming for our nation’s heroes, particularly during their time of need. Our team remains committed to a spirit of continuous improvement as the primary government contractor providing day-to-day quality services here, this award really validates part of the return on investment of our technology enabled services solutions, which continue to differentiate the company as we continue to expand in this and adjacent markets. As Casey indicated today, we posted our fourth quarter and total fiscal year 2015 financial results. We are very pleased that our business solutions has delivered a high quality cost effective value for our clients while generating strong financial performance with improvement in all key metrics compared to the prior year performance periods. We achieved 8% growth in revenue over the prior year with expansion on existing and new opportunities including telehealth. We achieved significant increases in our operating margins for the quarter and year-end as of 30 September with the full-year gross margin increasing by 30% to $11.7 million and adjusted EBITDA increasing by over a 125% to $3.0 million. Our margin growth in attributed to contribution from new programs, our skilled staff who continue to deliver strong contract performance, productivity from our application of technology enabled differentiators, many of which we have synopsized in the past and further management of our cost structure. Late in the year, we have consolidated two of our corporate offices into a single facility that has already contributed to enhanced collaboration and greater synergy in the way that we operate. Our operating results reflect our strategy to expand our business within our key customer base and into adjacent federal markets. Our pharmacy related telehealth services has increased over the past year in helping to drive some of these results. During the fourth quarter of 2015 DLH’s team won a small but strategic contract to provide additional behavioral healthcare services. In addition, as we synopsized previously we are awarded IDIQ contract for army medical product clinical research and development. And our team has also been down selected on the VA’s T4 Next Generation IDIQ contract vehicle. We foresee a growing federal healthcare market that showed bipartisan support for increased funding during the next several years. We are investing our capital for growth, resourcing to deliver bids within the current market sales cycles and continue to position for strategic acquisitions. All of these are consistent with our DLH growth game plan. We continue to have a solid backlog and a robust pipeline with greater than $400 million of qualified new business opportunities that will be pursued over the next 36 months. Our competencies in health and wellness, medical logistics, public health and pharmaceutical services will enable us to serve not only current but also future customer. We will continue to invest in the growth and business capture process in these strategic healthcare market areas to deliver and grow even greater value to our shareholders. Given the growing federal healthcare needs we believe we are well position and continuing to position for continued success in this arena. Kathryn will now provide a more detailed discussion of our financial results, Kathryn.

Thank you, Zach and good morning everyone. Let me take a moment first to briefly describe the tax benefit that we realized for the year, as reflected in our fourth quarter and full-year results. Due to our recent or due to our ongoing trend of positive operating results, we realized a $5.5 million tax benefit related to the release of a portion of our valuation allowance to reflect the amount of our differed tax asset that we expect to realize in future years. This release is based upon our current estimate of future taxable earnings. Our estimate of future taxable income will be revised at least annually or more frequently upon the currents of an event that warrants a new estimate. We expect to be able to utilize net operating losses to offset future cash taxes into the foreseeable future. We will now turn to our detailed financial results, beginning with results for the fourth quarter ended September 30 versus the prior year fourth quarter. Revenues for the quarter were $17 million an increase of $1.4 million or 9.1% over the prior year. Revenue growth was due to primarily to expansion on existing programs and new business awards. Gross margin of $3.4 million increase by $1 million or 44.7% over the prior year fourth quarter. As a percentage of revenue, our gross margin rate was 19.9% an improvement of 4.9 percentage points over the prior year fourth quarter. Our gross margin benefited from improved program performance and higher margin on new business. G&A expenses were $2.4 million an increase of $0.3 million over the prior year fourth quarter due principally to managing our expanded contract base and business development initiatives to grow our business. As a percentage of revenue, G&A expenses were 14.2% an increase of 0.7% over the prior year fourth quarter. Income from operations was approximately $1 million, an increase of nearly $800,000 or $28 million over the prior year fourth quarter. Income growth in fourth quarter of 2015 was due principally to improve gross margin of $1 million partially offset by increased expenses as described above. Income before taxes was approximately $2.4 million an increase of approximately $2.2 million over the prior year. This increase is due principally to the $0.8 million improved operating margin and $1.5 million favorable closure f a legacy payroll tax issue that’s been reserved on our books and that occurred in fourth quarter of 2015. Net income for fourth quarter of 2015 was approximately $8.2 million or $0.82 per diluted share, compared to $4.8 million or $0.48 per diluted share for the prior year fourth quarter. The fourth quarter increased of approximately $3.5 million results from many factors, including the $0.8 million of improved operating margin, the $1.5 million of favorable closure of the legacy payroll tax issue and the additional tax benefit realized from our net operating losses. Diluted earnings per share was $0.82 compared to $0.48 per share over the prior year fourth quarter. Adjusted EBITDA is a non-GAAP measure that represents earnings from operations with non-cash item such as stock expense and depreciation out of backend. This is the key measurement that our management team and directors use to evaluate the cash contribution attributable to our business operation. And it's particularly important in this period when there are as I would call several noisy factors impacting our results that are non-operational. Specifically the closure of the two legacy issues related to payroll taxes and the retros that we discussed in our second quarter this year, as well as the impact of the revaluation of our expected utilization of tax operating losses. So setting aside all of those non-operational noisy events, the results of our core operations is reflected in our adjusted EBITDA number. And that for the fourth quarter of 2015 was approximately $1 million, an increase of $0.7 million over the prior year fourth quarter due to principally to improved operating performance. Diluted earnings per share on this adjusted EBITDA, just to give us again a consistent representation of the results of operations period-to-period, diluted earnings per share on that adjusted EBITDA for the fourth quarter was $0.10 compared to $0.03 for the prior year fourth quarter. Turning to results for the full fiscal year, revenues for the year ended September 30 were $65.3 million an increase of approximately $4.9 million or 8% over the prior year, due principally to new contract awards and expansion on current programs. Gross margin was approximately $11.7 million, an increase of approximately $2.7 million or 30.5% over the prior fiscal year. As a percentage of revenue, our gross margin rate was 17.9% for the year ended September 30 an increase of 3.1% over the prior year period. Favorable margin results are due principally to improved performance on programs and higher margins on new business. G&A expenses were approximately $9.1 million, an increase of approximately of $1 million or 13% over prior year period due principally to managing our increased business volume, investing in business development resources to increase our proposal activity in pursuit of new business and ongoing management of the business. As a percentage of revenue, G&A expenses were approximately 14%, an increase of 0.6% over the prior year. Income from operations for the year ended September 30 was approximately $2.5 million, an increase of approximately $1.7 million over the prior year period. Fiscal 2015 income growth was due principally to improved gross margin of approximately $2.7 million offset by $1 million increased expenses as described above. Income before taxes for the fiscal year ended September 30 was approximately $3.2 million, an improvement of approximately $2.5 million over the prior fiscal year due principally to the $1.7 million improved income from operations and the net $700,000 of income from the closure of those legacy issues that we previously discussed. Net income for the year ended September 30 was approximately $8.7 million or $0.87 per diluted share compared to approximately $5.4 million or $0.54 per diluted share in the prior year period. The total year net income increase of $3.4 million results from improved operating margin of $1.7 million, net other income items for the closure of those legacy issues of $0.7 million and the additional tax benefit reflected on our net operating losses. Adjusted EBITDA for year ended September 30 was approximately $3 million, an increase of approximately $1.7 million over the prior fiscal year. And since this is all operational, this results of course from our improved gross margins of $2.7 million offset by expense growth of $1 million. Diluted earnings per share on this operating metric of adjusted EBITDA for the year ended September 30 was $0.30 for the year compared to $0.14 for the year ended September 30, 2014. Moving on to the balance sheet, our fourth quarter and fiscal year results reflect our trend of increasing our cash and our working capital position. We ended fiscal year 2015 with excess working capital of $4.6 million, an increase of $3.9 million over the prior year, due principally to generating cash from profitable operations. We expect our working capital position to align with our planned business growth efforts during the next year. At September 30, we had cash on hand of approximately $5.6 million, available loan reserves of $2.6 million and no borrowing on our line of credit. We believe we have adequate liquidity and resources to fund our operations and support growth over the next 12 months in view of our existing cash position, availability into our credit line, our funded backlog and our internal business plans for earnings and cash flow from operations. We are pleased with our fiscal 2015 results. We believe we have implemented an operational model that can sustain this progress and that can scale as the company grows. That concludes my discussion of the financial statements and with that I would now like to turn the call over to our operator to open the call for questions.

Thank you [Operator instruction] And that comes from the line of [Anthony Marchese] (Ph). Please go ahead Anthony.

Hi good morning. First of all, outstanding results. Question for you, we are two and a half month I guess into - almost two and a half months into the current quarter, do you anticipate - can you speak about margins in this quarter? You had a very healthy increase should we look at last quarter's margin has been indicative of where you be going forward? I guess it's my first question.

Thanks for the question Anthony and thanks for joining us on the call. We do think that there is a bit of seasonality to our margins, it's a function of when particular cost of operations materialize particularly in the delivery of fringe benefit programs, and so from our perspective we guide ourselves more towards the overall full-year margin. We think that we are certainly very consistently at around high teen pushing up against 20 on the gross margins for the existing business, but my guidance or my planning factor I would say it's obviously not capital [G] (ph) guidance and my planning factor is that margin delivered on the business over the course of the full-year.

Okay thank you. And in terms of your funded backlog, I am sort of new to the story, could perhaps provide some perspective on a quarter-to-quarter basis has that been up, staying the same?

Well it's always a function of course of the timing of the award of very good programs right. So funding stays pretty consistent, because most of our core customers tend to fund on quarterly interval, but overall backlog is a function of the timing of particular awards and so what is a better metric for us is to look at the measure of total backlog as a factor on top line revenue. And so that we are well on access of two times revenue and already and in full backlog. So in our industry in this space is a very healthy level of backlog.

Okay. Final question, do you have any analyst coverage? I guess what I’m saying is, its sounds like you have fairly maybe it’s one expression fairly predictable business? Without some type of forward guidance I suspect that’s one of the reasons why the stock doesn't get the valuation that I believe it deserves, you have very good margins and very healthy business, no debt, yet the stock seems to languish. And so I’m just trying to figure out why that’s the case and I believe one of the reasons maybe sort of a lack of guidance. And again, it doesn't have to be on a quarterly basis, but perhaps you might want to consider doing something on an annual basis, just to give people a feel for where the business could be going short of analyst coverage?

Yes, very good questions and comments Antony. First of all, with regard to guidance, yes the company does have the position today that we do not of course provide guidance. We think that’s certainly an inhibitor as you described, first be to communicate where we are going in the number of the financials. And it’s something we continue to look at along with our Board of Directors to look at the company is a profitable company with this type of book of business was the most appropriate way going forward and we are also working with our IR firm to address what we can do there. Kathryn and I also committed to doing a road show if you will, we are committed to do things like - was it last August Kathy that we did in a Mid West Idea's conference.

Yes, right.

So that we can get the greatest story as to where we are going with the company and where we are taking them and what that might look like as we continue to expand in this adjacency. So I would encourage you certainly to take a look at on our IR website link that we do have description there that talks about what book of business might look like as we execute the growth strategy. With that I would also say that with regard to analyst coverage, we give sporadic coverage from time-to-time, we do not have a formal program in place to guide that and something that we are certainly taken to look at what's the best way of going forward. So please stay tuned on that, we are going to have our annual meeting of the shareholders and we will have a presentation to support that and maybe there we will be able to add color to that question in February.

Great and just final question. You mentioned potential acquisitions. Are you seeing anything that could be accretive at this point or do you see many opportunities?

We are, as a very important part of our strategy we've added that to our growth game plan pretty much over the last year. And Kathryn and I have taken some proactive steps to get some deal flow through and we've been quite pleased with what we've been seeing over the course of the last six to nine months in that regard. So I do think the M&A market is still relatively healthier, on a buyers’ perspective and this space is still really ripe. So yes, we are going to keep the acquisitive component as part of our toolkit. Kathryn do you want to add anything there?

No I think that’s very clear that we are definitely applying some significant energy there and looking at opportunities. To come back to that conversation about the Midwest Ideas Conference. Anthony as you are coming up to speed on this and getting to know us better. I think is really good reference point, because though we don’t provide guidance we do get your question pretty frequently in terms of what could it look like. And it’s very clear we’ve provided some scenarios on that presentation and while we are very clear to caveat it appropriately to obviously caution a person on that it’s not speaking with respect to timelines and/or it doesn’t represent guidance. It does give you a sense of how it - take our primary objective of moving up the value chain and the level of complexity of work that we are doing, which we believe equates to stronger gross margins to come all the way back to your very first question. That coupled with further leveraging our operating model that we have invested in already, which has capacity to absorb substantially more top-line. Those things feathered together, we think we’ve given a couple of slides in there that give you a good sense of okay what could that represent in terms of improvement of the company’s financials and the future outlook on the results of the company. So I think that’s a really good place to start.

Okay, I'll look on your website, read and review the presentation at the conference. Thank you very much.

You bet.

You bet. Thanks for question.

Thank you. There is no further question at this moment in time [Operator Instructions] just come through now is from Howard Brous at Wunderlich Securities. Please go ahead.

It’s Wunderlich Securities. Zach, Kathryn, good morning to both of you.

Good morning Howard, how are you?

Doing okay for a guy of my age. I want to congratulate you both on a great quarter and a great year. Now one of the things that you brought up that poses a question for me is utilization rate. So that if I looked at the company today, what is generating X number of revenue, what utilization rate of your company are you at, let’s put it that way?

Sorry, help me with utilization?

Okay so, utilization, how much more business could you put in without expanding the number of people?

Okay, so capacity and scale, got you.

Right.

Yes. Well we certainly believe that well of course some of the more junior and project driven resources, project control and those sort of things would be necessary as we grow the business. The basic back office payroll, accounts payable, we would probably like to add more recruiting resources as we grow of course, but those sort of things will need a little further investment. But at the management level, I mean we expect to have ourselves position to run $200 million, $250 million organization, both of us came here for that size organization and so we believe we are resourced appropriately at the leadership level. Obviously our job day-in day-out is to continue to develop the resources that report into us and we believe we have a strong second layer at the management level. So, we are positioned and you have a set of resources that’s accustomed to supporting a public company and being able to provide timely closure of the books in a regulated and public company environment. So that’s obviously a pretty significant and substantial intangible as you are trying to grow the company.

And we have put in Howard, we've put in some infrastructure over the last couple of years as Kathryn been here to allow us to be able to scale that effectively with the type of business, book of business that we have in our pipeline. So we feel real comfortable, and it kind of relates to Anthony’s question too for bringing on certain types of new business whether it is organically or acquisitively to make sure that it adds that acquisitive effect or that accretive effect on the business. So we feel real comfortable that the [ditches] that we have worked with over the last couple of years have us well positioned to be able to bring on that business and operate with a very positive effect on the bottom line as well.

Let me try to approach in a different vein, because what I’m really trying to guesstimate at is for the next 50 million of organic growth, where am I going to be in terms of gross margins on the incremental business? That’s really what I’m trying to get a sense of.

Yes, absolutely let me start with again. Kathryn did a pretty good graphic with three scenarios of adding types of books of business that we are talking about and that too is posted on our website on the Investor Relation's tab.

Was that a Chicago presentation?

Yes. From the Chicago…

Okay that I have fine, okay.

And so I think, [indiscernible] enough memory we don’t have that pulled up, but Kathryn refresh my memory was that scenario one or two. I think scenario one had a sale about $100 million entity and scenario two had a $150 million.

Right.

With the types of books of business that you have discussed and she has factored in what we would have to do on the G&A and indirect side as well. So those I think are good indicators really as to what the art of the likely could look like.

Okay that will be sufficient. And I thought maybe something else has changed, I have that.

Okay. Those are scenarios with certain assumptions, I think we gave some basis of assumption, there are some types of deals that could affect that, that would move that needle upwards or downwards depending upon that mix of business. And those again are always predicated on us retaining our lower margin business that we have today as well. Those are generally of course consolidated numbers, we do not have any intentions now to move away from any of our lower margin business as we continue to bring in the higher margin business. So as you heard I think today our most recent wins are the types of deals that are higher complexity work, higher level of professional types of classes of work, which bring favorable results on the margin side as well, it just today happens to be still less than 15% to 20% of our book of business.

Again congratulations, great quarter.

Thank you Howard.

Great to hear from you Howard.

Pleasure.

There are no further questions for you.

All right. Well thank you again to everyone for participating in today's call. We are again really pleased with our results for 2015, we are looking forward to a transformational 2016. Should you do have any additional questions, please feel free to contact either myself or Kathryn. And again, we look forward to speaking with you in either February during our annual meeting or of course as we then project and post and discuss our Q1 of FY 2016. Thanks again to everyone and have a very, very happy holiday season. Bye for now.

Thank you for your participation in today's conference ladies and gentlemen. This concludes the presentation and you may now disconnect. Have a good day.