DLH Holdings Corp. (DLHC) Q2 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the DLH Second Quarter Earning Conference Call. My name is Candice and I’ll be the operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Casey Stegman with Investor Relations. Please proceed, sir.

Thank you, Candice. And good morning everyone, thank you for joining us on today’s conference call. I’m Casey Stegman of Stonegate Capital Partners, Investor Relations Advisor to DLH Holdings Corp. 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 this week, 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 the Presentations under the drop down menu. We’re also providing a simultaneous webcast of today’s call with a replay available later today on our website. Please note that this conference call may contain 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 welcome and welcome to our shareholders and other interested parties. We appreciate your participation in this conference call and webcast. As Casey indicated, earlier this week, we posted our second quarter fiscal year 2016 financial results. As many of you may know two weeks ago, Kathryn and I reported on our acquisition of Danya International. Today’s reported financials will only represent the results of our heritage company. We are pleased to report another quarter of continued growth in revenue and operating margins over the prior year second quarter, as well as cash generation from profitable operations. We’ve improved our gross margins by 18.1% through a combination of effective management controls of our programs, technology enablers, process improvements and specified cost controls. Kathryn will expand upon our financial results later in the call. While we continue to focus on executing our core business and growing the company organically, we’ve moved forward with a strategic plan to accelerate growth through the acquisition of Danya International, which we completed earlier in May. We are very excited about this transaction and believe that Danya represents the perfect complement to DLH’s culture, services and solutions. We believe this combination significantly enhances our abilities, capabilities and enables us to achieve multiple objective of our strategic growth plan, which we have been describing over the recent years. Moreover we expect to leverage our combined experience in mission critical Federal programs to focus on expanding within the Federal health IT market. Danya capabilities include, managing, monitoring and supporting large scale health human services and technology programs across the continuum of care and case management. We’re particularly pleased to have brought on board a strong federal IT system integration, migration and management capabilities. Danya’s monitoring and evaluation services to the Department of Health and Human Services are critical to ensuring that education, health, social standards and other key domains are achieved through school readiness for under-served communities, particularly children and families. As you already know DLH provides proven cost effective, quality professional services and solutions within the growing Federal healthcare and medical logistics market. Our market focus is service members and veterans requirements for telehealth, pharmaceuticals’ behavioral health, medication therapy management, process management and healthcare delivery. This is included the expansion of DoD’s research and developing, test and evaluation of medical devices to be deployed in combat theaters in support of our services members and our support to [indiscernible]. DLH’s flagship contracts support all seven of the Department of Veteran Affairs consolidated male outpatient, fulfillment and distribution centers. This provides mission critical services that ensure that our nation’s veterans receive prescriptions in a timely and accurate manner. During the second quarter, DLH Solutions was notified that its prime teaming partners were award seats on the Department of Veteran Affairs, technology, next-generation, multiple award IDIQ contracts. We believe that Danya complements DLH services with significant operational synergies that we expect will serve the existing customer base as long as the expansion of the business base to additional government agencies. This will include the T4 next-generation customer, future task quarter pursuits in that domain and key strategic focus areas which will include medication adherence and medication therapy management solutions. Telehealth, research and service offerings to the Department of Defense and Federal civilian agencies, health IT and information system solutions and services and case management system solutions and services as well. Together, we believe the two companies are better position to execute on their respective programs and missions going forward and are also able to leverage their combined capabilities to target larger opportunities that would not have previously been available to either company as a standalone entity. DLH continues to see the critical need for expanded healthcare solutions within our sectors of the Federal health market with funding in both the Department of Veterans Affairs and health and human services increasing significantly over the past few years and planned increases for the years ahead. Given our combined strong backlog of long-term federal contracts, the recurring and core nature of the work in which we do, our history of successful re-competes, coupled with some of our new technology enabled performance differentiators leads us to believe that the foundation for our business is solid and well positioned for growth and we are looking forward to 2016 being a transformational year for DLH Holdings. I would now like to turn the call over to our Chief Financial Officer, Kathryn Johnbull, who will provide a more detailed discussion of our financial results, after which we will begin our Q&A session. Kathryn?

Thank you, Zach and good morning, everyone. Just a reminder that the results we’re reporting today are pre acquisition, as the Danya transaction closed on May 3rd. We’re pleased with our earnings and financial position, we are reporting to you today. Our second quarter results continue our trend of improving our key metrics, as we delivered growth in revenue, gross margin and adjusted EBITDA, compared to the prior year quarter. We believe that our business base is solid and performing well. Operating margins continue to improve over the prior year period, with adjusted EBITDA increasing by 19.2% over the prior year second quarter. We continue to generate strong operating cash flow, ending second quarter 2016, with a net cash position of approximately $6.9 million and working capital surplus of approximately $5.3 million. Our strong cash position contributed approximately $5 million to a financer acquisition of Danya International earlier this month, allowing us to obtain financing at competitive interest rates. Turning to the results of operation for the three months ended March 31st, revenues for the three months were $16.9 million, an increase of $1 million or 6.6% over the prior year quarter. The increase in revenue is due primarily to expansion on existing contract vehicles, resulting from program management and customer satisfaction with our services. Gross margin for the three months ended March 31st, was approximately $3.2 million, an increase of $0.5 million or 18.1% over the prior year quarter, on higher revenue and improved performance on the contract. As a percentage of revenue first quarter gross margin of 19% increase by 1.8% over the prior year quarter. Favorable gross margin results are due principally to increased contribution from more complex contracts, and effective assignment of staff to deliver strong contract performance with emphasis on improving productivity through application of our DLH differentiators. We continue to focus on internal measures to control cost and improve our gross margins. G&A expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contract administration, human resources and business development. For the three months ended March 31st, G&A expenses were approximately $2.5 million, an increase of $0.3 million or 14.4% over the prior year quarter. As a percentage of revenue, G&A expenses were approximately 14.8%, an increase of approximately 1% over the prior year quarter. The increase in expenses was due principally to additional program and operational resources to manage and grow our business, and increased business development to pursue and capture new business opportunities. Income from operations for the three months ended March 31st was approximately $0.7 million, an increase of $0.2 million or 33.8% over the prior year quarter. The improvement is due to increased gross margin of $0.5 million, partially offset by $0.3 million of additional G&A expenses. Other expenses net for the current fiscal year includes non-operational expenses related to the acquisition of Danya that closed on May 3rd. Prior year other expenses net included interest expense and a one-time charge of related to the settlement of the retroactive payment claim in March of 2015. For the three months ended March 31, 2016, other expense was approximately $0.1 million, a reduction of $0.5 million over the prior year, which included that retroactive payment claim settlement. Income from before taxes for the three months ended was approximately $0.6 million attributable to $0.7 million from operations, partially offset by $0.1 million other expenses described earlier. This represents an improvement of approximately $0.7 million over the prior year quarter, which was impacted by that March 2015 settlement. Net income for the three months ended March 31, 2016 was approximately $0.3 million or $0.04 per basic and $0.03 per diluted share compared to net loss of $0.1 million or $0.01 per basic and diluted share in the prior year quarter. Net income improvement of $0.4 million or $0.05 per basic and $0.04 per diluted share was due principally to the increased results of operations and a reduction in the non-operational other expenses. Results of operations for the six months ended March 31st follows; revenue for the six months was $33.5 million, an increase of $1.9 million or 6.1% over the prior year, due principally to expansion on existing contracts resulting from program management and customer satisfaction with our current services. Gross margin for the six months was approximately $6.1 million, an increase of $0.9 million or 16.7% over the prior year period. As a percent of revenue our gross margin rate of 18.3% increased by 1.6% over the prior year six months period. Favorable gross margin results are due to increased contribution from more complex contracts and emphasis on improving productivity through the application of our differentiators. G&A expenses primarily relate to the administrator functions of running the business and for the six months ended March 31, 2016 were approximately $5 million, an increase of $0.6 million over the prior year period. As a percent of revenue G&A expenses were 15%, an increase of approximately $0.9 million over the prior year period, due principally to additional program management resources to manage our business and increased business development resources. Income from operations for the six months ended March 31st was approximately $1.1 million, an increase of $0.3 million over the prior year period, due to improved gross margin partially offset by increased G&A expenses. Other income net for the current six months period includes the acquisition related expenses for the Danya transaction and compared to prior year expenses, which included the interest expense in that one-time charge related to the retroactive payment claim. For the six months ended March 31st other expense net was approximately $0.7 million essentially even with the prior year period, which included that settlement claim. Income before taxes for the six months ended March 31st was approximately $0.4 million, an improvement of $0.3 million over the prior year period attributable to increased income from operations. Net income for the six months period ended March 31st was approximately $0.2 million or $0.02 per basic and diluted share compared to prior year net income of $0.1 million or $0.01 per basic and diluted share. The improvement was due principally to $0.3 million increased income from operations, partially offset by an increased tax provisions. Turning to the non-GAAP financial measures, we use adjusted EBITDA as a supplemental non-GAAP measure of our performance and we define adjusted EBITDA as net income adjusted to exclude interest, taxes, depreciation, and amortization and further adjusted to exclude other expenses including acquisition expenses, which we exclude because they tend to vary significantly based on the timing of proposed transaction and they do not lay to the ongoing operation of the business base. We further exclude non-cash equity expense. We believe that these two adjustments allow for better comparability of results from period-to-period and a better understanding of the health of the underlying business operations. So on a non-GAAP basis adjusted EBITDA for the three months ended March 31, 2016 was approximately $0.7 million, an improvement of $0.1 million or 19.2% over the prior year three months period. Growth is attributable to increased revenue and gross margin as previously described. Diluted earnings per share on adjusted EBITDA was $0.07 compared to $0.06 per share in the prior year’s three months period. Adjusted EBITDA for the six months ended March 31st was approximately $1.5 million, an improvement of approximately $0.3 million or 25% over the prior year period. This increase is due principally to increased revenue and gross margin as previously described. Diluted earnings per share on adjusted EBITDA was $0.14 per share for the six months period compared to $0.12 per share in the prior year six months period. Overall, we’re pleased with our second quarter operating results and we believe we’ve implemented an operational model that will sustain our progress and allow us to continue to scale and see growth. That concludes my discussion of the financial statements and with that I would now like to turn the call back over to our operator to open up for the Q&A.

Thank you. [Operator Instructions] And our first question comes from Laura Engel of Stonegate Capital. Your line is now open.

Thank you, good morning. And great results. I had two questions related to Danya. Last call when you were introducing acquisition you mentioned some cost synergies and gave a number in your pro forma. I wondered if you could just review, I guess high level nature of the synergies and now couple of weeks later if that’s still a good number and if you expect additional synergies once the combination is further along?

Hi, good morning Laura how are you? This is Zac. Right well the majority of our synergies of course are result of combined capabilities for growing the business. There is some new development resources we’re repositioning to grow the business. There is always going to be some savings as a result of as you well know common dual infrastructures. And we’ve begun a team already that is orchestrated largely by Fred Wago and Kevin Wilson to take a look today at our respective infrastructures through our earlier due diligence we did realized that there would be some synergies there some of those will be largely in the financial system side of the business where we do believe that we’ll be able to sunset some of our legacy systems. There are probably three or four areas in the IT arena that we also expect some relatively early results as well. So we just begun that integration effort what I guess Kathryn formally last week. But we do remain pretty much on schedule with the plan.

We think that’s a good number.

Okay. And then I just haven’t had a little bit more time to look into Danya and the background information available it looks like they cover many sectors and even historically you’ve had some commercial customers. Do you see the focus of your business remaining strictly on government based on the focus in this healthcare and human services or do you see this as an opportunity to maybe beyond -- expand beyond this that customer base?

We see a huge addressable market for us staying within our lanes of the Federal government space right now. We do believe that the addressable side of several domains within the monitoring, evaluation capability arena, the IT and health IT information systems migration arena as something that is very right targeted market for us where we can continue to grow and keep our resources, our business development resources aligned in that market space. Now that does not preclude us from having occasional commercial opportunity that maybe very synergistically are linked to a Federal space. But we still see a very, very strong addressable market for us within the Federal domain.

Okay, well I appreciate again. Great quarter and I will get back in the queue.

Thank you. [Operator Instructions] And our next question comes from Howard Brous of Wunderlich. Your line is now open.

It’s Howard Brous, but that’s okay. Again Zac, Kathryn congratulations on the acquisition. And a follow-up to the first question about synergies. So SG&A as a percentage of sales on a going forward basis, looking at 2017-2018 what number could one look at SG&A as a percentage of sales rather than going down specifically to what items?

Well thanks for that question Howard it’s great to hear from you again. So…

This is not a softy question.

And I’m going to let regret that right. So SG&A expenses from our perspective both companies operate in a very lean fashion. And so while we do expect to achieve scale from combining the two enterprises from our perspective really the best opportunity for the enterprise is to reinvest that savings in growing the business. Because I think both companies have tremendous opportunities to really expand our reach in the Federal Health IT market, but of course that takes some business development resources. So I wouldn’t be expecting as a percent of revenue that we’re going to get much leaner than where we have traditionally been. We will get some benefits of scale and then as the company grows out that will nudge down similar to what you saw in some of our earlier presentations back in the Ideas Conference contexts. But in the short learn we think there needs to be some particular emphasis on growing the business and reinvesting any resources that we economies on by leveraging the company in the aroma of that business development.

I was going to refer to August of last year even that was…

Right, that’s right.

In your Q unfilled receivables September over March is up about $300,000 anything to point out about that issue?

It’s really just as quirky as is the function of how the month end cuts and what that means in terms of where we are in our billing cycles all of those term very quickly and we don’t in legacy business particularly carry any kind of retainages [ph] or amounts that are not be able to be converted to cash at any short timeframe.

Okay, that’s all I had. Thank you very much.

Yes.

Hey Howard this is Zac, I want to just add one other thing with regard to your very astute question and focused on the SG&A as a percentage of revenue we do monitor that for a number of internal reasons as well to be cost competitive in the markets in which we’re pursuing. We are very sensitive to that as a key metric, which addresses our competitiveness. We look very closely at our peers and benchmark companies and the various markets in which they perceive. So we’ll continue to place great focus on keeping ourselves competitive, leveraging as much as we can on our differentiators to increase our effectiveness and efficiencies so that we can very favorably compete on price and cost in that arena as well.

Absolutely.

Great, again congratulations and thanks. Great quarter.

Thanks for calling in Howard.

My pleasure.

Thank you. And I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Parker for any further remarks.

Well thank you and we again appreciate everyone’s interest in our continuing performance and as we conclude second quarter and move into our third quarter fiscal ‘16. We look forward to welcoming everyone to our next call and please if you have any questions during this period feel free to contact either Kathryn or myself. With that we are adjourned.

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Have a great day everyone.