DLH Holdings Corp. (DLHC) Q4 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the DLH Holdings Corporation Fiscal 2018 Quarter Four Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty of Investor Relations. Please go ahead.

Thank you and good morning everyone. On the call me today is Zach Parker, President and CEO; Kathryn JohnBull, CFO; and Arlene Fisher, President of the Company's Mission, Services and Solutions operating unit. The Company's fourth quarter press release and PowerPoint presentations are available on our Web site under the investor page. I would now like to provide a brief safe harbor statement, which is also shown on slide two of the presentation. This call may include forward-looking statements that relate to the Company's outlook for fiscal 2019 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 non-GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH's Web site. President and CEO Zach Parker will speak next with Arlene Fisher, followed by CFO Kathryn JohnBull. After which, we will open it up for questions. With that, I would now like to turn the call over to Zach. Please go ahead, Zach.

Thank you, Chris and good morning everyone. Welcome to our fiscal 2018 fourth quarter conference call. It's been a strong financial year here at DLH. Starting with Slide 3 let me begin by providing a high level overview of our financial performance and recent accomplishments. Revenue for the fourth quarter rose to $32.5 million, up 6.9% over 2017 and we recorded sales of $133.2 million for the full fiscal year compared to $115.7 million in the prior 12 month period. This represents growth of 15.2% year-over-year, reflecting solid performance across the many agencies we serve. We're very proud of the great work by our work force out in the field and this top line achievement, which speaks very much our capabilities, the intense talent of our staff and the enduring demand for our programs under the contracts. Our gross margin was 24.3% for the quarter and we posted net income of $0.14 per diluted share versus $0.08 a year ago. We also generated $6.1 million of cash from operations and greatly reduced our leverage during the quarter. After paying down $6.3 million during the period, we ended the year with just $7.7 million of senior debt versus $19.7 million at the beginning of fiscal 2018. As Kathryn will review in a moment, it's been a great year from a balance sheet as we generated $14.1 million in cash from operations and began fiscal 2019 with $6.4 million on the books. I'll just turn to Slide 4, I'd like to turn the presentation over to Arlene Fisher, our President of Mission Services and Solutions operating unit. Arlene?

Thank you, Zach. Good morning, everyone. I will go over some recent developments that shaped the quarter and for our outlook for 2019. One of the most positive things that took place in Q4 was that for the first time in several years, Congress passed five out of 12 appropriation bills for fiscal 2019, including our key customers, the Departments of Defense, HSS and the BA. These agencies are already fully funded through fiscal 2019. Such that our view of the coming years should not be materially impacted by ongoing budget negotiation for any possible government shutdown, we continue to bid on strong pipeline and opportunities including approximately 500 million in qualified leads. So the outlook for growth remains strong. At the same time, as discussed last quarter, we will be diligent in the sending our recompete and takings steps as appropriate to mitigate any challenges encountered due to the changing landscape across key programs. We continue to look at potential accretive acquisitions on a regular basis and the market remains quite active. While the last transaction proved to be excellent in nearly every aspect using our growth profile, expanding our value added capabilities and increasing margins, we will be continue to be selective when looking at possible opportunity. We continue to seek out technology focused enterprise providers for the federal government markets to serve our existing customers, and we can both bolster both the breadth and depth of our solutions. Given DLH's solid balance sheet and demonstrated ability to service acquisition debt, we believe we are well positioned to consummate a transaction if an appropriate opportunity presents itself. At the same time, we continue to invest in our core capabilities and business development activity. We have positioned key aspects to further enhance our technology based solutions, including the announcement of Gil Tadmor to position our corporate Chief Technology Officer. Gil is now heading up our various innovation initiatives, including health IT, system modernization and data analytics for our current and future customers. Earlier in August, we announced the DHL was appraised at a level three rating for the capability and maturity model integration or CMMI's version 1.3. A level three appraisal indicates our organization posses a well and understood and described process for standards, procedures tools and methods. Achieving this rating validates our commitment to performance excellence, agility and process improvement. I would also like to mention that DLH earned the joint commission's Gold Seal of Approval for a healthcare staffing services certification. This demonstrates the Company’s commitment for providing quality and confidence healthcare professional. We appreciate this opportunity to share with you the results of 2018, a year of solid revenue and performance. As shown on Slide 5, 2018 results continue a long trend of growth in revenue and EBITDA. Following the detailed discussion of fiscal year 2018 financial results with Kathryn, Zach will share his thoughts about the operating outlook for fiscal 2019. With that, I would like to now turn the call over to our CFO, Kathryn JohnBull. Kathryn?

Thanks Arlene and good morning everyone. We are pleased to report a solid end to fiscal 2018. Turning to Slide 6, we posted revenues for the three months ended September 30, 2018 of $32.5 million, representing an increase of 6.9% over the prior year fourth quarter. The higher revenue reflected ongoing demand across our key programs and expansion of services on existing contract vehicles. While we expect revenue to generally remain above $30 million per quarter in fiscal 2019, there can as stated in the past be swings in programmatic spending quarter-to-quarter. We are optimistic about demand trends next year due to the factors Zach discussed, and we will endeavor to offset any headwinds faced by changing re-compete dynamics. Now, moving to gross profit on Slide 7. This quarter, the Company posted total gross profit of approximately $7.9 million versus $7.3 million last year with the 8.7% increase due to both higher revenue and margin expansion. As a percentage of sales, the full fourth quarter gross margin was 24.3% versus 23.9% last year, reflecting program mix. As with revenue, gross margins can vary quarter to quarter due to program timing across our key contracts. Turning to Slide 8, income from operations rose to $2.8 million for the fiscal 2018 fourth quarter from $2.1 million last year, an increase of 31.2%, reflecting the higher gross profit and slightly lower G&A expenses. We reported net income for the three months ended September 30, 2018 of approximately $1.8 million or $0.14 per diluted share versus net income of $1 million or $0.08 per diluted share in the prior year period. DLH recorded $0.7 million provision for tax expense in 2018 versus $0.8 million in Q4 of fiscal 2017. The tax provision for 2018 reflects the prorated impact of the tax rate reduction from the Tax Cuts and Jobs Act enacted in December 2017. Turning to Slide 9, EBITDA for the three months ended September 30, 2018 was $3.4 million year versus $2.6 million last year. EBITDA as a percent of revenue was 10.5% in fiscal 2018 Q4 versus 8.7% in 2017, reflecting the growth in revenue and gross margin while indirect expenses were effectively controlled. A reconciliation of GAAP net income to EBITDA is in our earnings statement. Now turning to Slide 10, you can see a snapshot of our balance sheet at the end of the quarter. We had approximately $6.4 million of cash on hand versus $4.9 million at the beginning of the fiscal year. We had nothing borrowed under our revolving credit facility at the end of the quarter, and our term loan had a balance of $7.7 million. Our net debt to trailing EBITDA position now stands at less than 1 due to our strong cash flow and the pay down of $12 million of debt this fiscal year as Zach mentioned. That concludes my discussion of the financial statements. With that, I would now like to turn the call back over to Zach for a discussion of the forward indicators for DLH operations in fiscal 2019. Zach?

Thank you, Kathryn. I'd like to spend just a few minutes covering some other factors that will influence our operating environment into fiscal 2019 as shown on Slide 11. First, despite all the headlines about the budget negotiations and government shutdowns, it's helpful to remember the key contracts that DLH manages are within agencies that have been fully funded for fiscal 2019 and that the services delivered under those contracts enjoy very strong bipartisan support. Given that there is budget certainty for our current primary customers, we're able to focus a bit more on the addressable budget and to help develop and sustain a strong new business pipeline. In addition, we believe we are well positioned to compete in M&A mergers and acquisitions arena as well, having demonstrated our previous ability to service acquisition debt and successfully integrate new businesses as we believe the volume of M&A opportunities will continue to be robust. From both an organic and acquisitive perspective, we believe that our enhanced credentials and certifications some of which Arlene alluded to, which have high value in the industry, will allow us to further differentiate DLH and enhance our value propositions when pursuing new work. Of course, every business has to navigate through challenges and we are no exception. The primary issue that we are monitoring today is the status of our VA COMP recompete. As we disclosed in our 10-K and discussed on prior earnings call, this recompete was issued under the provisions settling it for a small business veteran set aside contract as a prime contractor. We are participating in the recompete opportunity, and we'll continue to keep you posted in that regard. An additional factor that we’re monitoring for fiscal 2019 is a continuing resolution. For some parts of the federal budget, this will be more important than others. As Arlene mentioned, the primary agencies that DLH supports have already been fully funded for 2019. Some programs that we are pursuing for our new business opportunities are within those agencies that are still looking at some budget uncertainty and we will continue to monitor that on a regular basis. In closing, we anticipate another dynamic year in fiscal 2019, and believe that DLH will continue to be well prepared for both the opportunities and challenges that it will bring. With that, I would now like to turn the call over to our operator to open the call for questions.

[Operator Instructions] Our first question comes from Joe Gomes with Nobel Capital. Please go ahead.

So I was just wondering if we could little bit more, first on you say next year should be a dynamic year. How that -- are you talking you thinking similar level of revenue increase as the quarters that you think going to play out same as what they did this year. I wonder if you could give a little more color and detail there.

So we're looking at both operationally with our current book of business and the things we're doing on leveraging technology and implementing our new systems, as well as our pursuit with new customers. We do continue to have the range of new contract opportunities that some will be impacted by the budget stability and others we think on a smaller scale will be less impacted by what's happening on the hill. So we will have to continue to monitor that on a quarterly basis. As you well know, the government did extend the delay for the budget in past until later on this month. I would expect they'll probably kick it to the right one more time. But in doing so, I would expect it will be in large part under continuing resolution for the majority of federal space throughout FY '19. And that will help get a better handle on how we're going to navigate those funding dynamics throughout the year. We continue, however, at both Kevin Woolsen and Arlene's operations, to continue to implement some quality and continuous improvement initiatives and we'll be excited about reporting those as they evolve throughout the year.

And I wonder if you again provide a little more color, I know that you've talked about the M&A space and the potential for doing another acquisition for a while here. Obviously, not looking for you to just run right out and buy the first thing you see. But what flags, so to speak, or lengthening out of this process of something hasn't been consummated yet?

Definitely, if you just look at the statistics out there in the M&A marketplace, '17 was just a high volume breakout year and '18 looks to be a similarly flat year. But once you drill down into what or where those transactions are coming from, it was pretty dominated in the first part of '18 by things that are really not in our addressable space, so more in the Intel hardware products, maybe heavy fiber and those are just not things that point on our roadmap for special service offerings. So really from just coincidently I expect really as a function of when the particular targets that mature and the major contracts within those targets come secure their re-compete cycle. In contrast to the first half of the year that was dominated by those things are part of our addressable space. The second half of the year has had much stronger flow for things that are squarely aligned with our addressable markets and the things that we're interested in. So we see the second half of '18 as very active and it's giving us plenty focus on that as an opportunity. So hard to gauge timing exactly, but I would definitely tell you that there a number of presently active opportunities.

Let me just add to that as Kathrin indicated. We are still seeing good deal flow and as Kathryn indicated our range of interests is what will really drive how aggressive we are with some of those. And our range still is sweet spot around probably $35 million to $65 million, and we will look at opportunities up to $100 million if it's something we think we might be able to address. And I think with the large -- with our ability to -- with some of the steps we've taken in deleveraging and so forth, we’re able to open our apertures a little bit more than we were as we entered last year. So we will continue to keep you posted in that regard. And I think the deal flow that we’re seeing now gives us reason to think it's going to be a good opportunity for us to assess some quality opportunities there this year.

And one last one for me, I just wonder if you might give us a little update on what are the key awards that you're looking for here rest of this year, maybe into first quarter of next year?

So we have like many of our folks in industry, we've got two broad categories of the things that are driving our bid activity. The first one it was called IDIQ, these indefinite quantity contracts where there are often some very small quick turnaround proposals required to pursue smaller value work. We've had some recent successes and posted some of those in our internal websites. We’re going to continue to think that that will continue the number of those, while we’re operating under uncertainty of budgets in the other departments. Having said that, we’ve also positioned ourselves, as you well know, with opportunities that are more our sweet spot and those are opportunities of $35 million to $50 million range and a few north of $100 million. These are opportunities that generally we think are going to be maturing in FY19 period, particularly those that we started to really address substantially once we've got the integration in place. So we’re open to see that if budget folks get their acts together that they will do a little less bridging of existing contracts and making some awards in some of these that are gaining speed for us. That’s why we feel that we've got a qualified pipeline that is approaching half a billion already. And this is again still little bit of a backlog for government and of course some of these wins.

[Operator Instructions] At this time, there are no further questions in the question queue. I would now like to turn the conference over to Mr. Parker, President and CEO for any closing remarks.