DLH Holdings Corp. (DLHC) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the DLH Fiscal 2019 First Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead. Chris Witty

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 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 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.

Thank you, Chris, and good morning everyone. Welcome to our first quarter conference call which will demonstrate that 2019 is off to an excellent start. Starting with Slide 3, let me begin by providing a high level overview of our financial performance and some color on the outlook for 2019. Revenue for the first quarter rose to $33.8 million, up nearly 12% versus 2018 as we continue to see strong demand for our programs across the core agencies we serve. As noted last quarter, we did not anticipate any significant impact from the 35 day government shutdown as our key customers were already fully funded for fiscal 2019. Even if there is another shut down this year, we do not believe it will have a material effect on us going forward. We serve a very stable core set of agencies that are considered crucial to the day to day lives of millions of Americans and military and our veterans. Reflecting strong execution, our gross margin was 23.1% for the quarter versus 21.6% last year and the company's operating income more than doubled year-over-year to $2.6 million. We posted net income of $0.13 per diluted share and finished the quarter with approximately $4 million of cash on hand. Overall, we believe we are well positioned for continued execution of our strategic growth initiatives with a strong balance sheet and leverage ratio under one. Kathryn will address this further in a moment. Turning to Slide 4, let me provide an updated outlook on our competitive landscape. As noted previously, DLH has benefited by being closely aligned with agencies and funding trends that are considered important on both sides of the aisle in Washington. Whether we're talking about the Department of Defense of the Human Services or the Veterans Administration, our core clients are deemed critical to running the country and making sure that our people get the services that they are needing. We will continue to focus strategically in these accounts. Our new business pipeline has over $600 million of DLH qualified opportunities covering these and other key agencies. These will leverage our diverse core competencies. The federal government aligns very well with our focus areas of DoD and veterans, Human Services and Solutions and Public Health and Life Sciences. All of these three areas remained very viable and we have seen this administration and the government acquisition community move to reduce the number of IDIQ contract vehicles over the recent year. That coupled with a continued industry M&A mergers and acquisitions activity, continues to alter our competitive landscape. Thus, we're continuing to reshape our growth game plan to allow us to aggressively and successfully compete in this environment. With regard to our VA pharmacy re-compete work, there is no new update as it remains in the government solicitation evaluation phase. We continue to invest in our core capabilities and mission critical applications, training employees and hiring experienced innovative staff members with differentiating credentials that can move our agenda forward. It is important to have a highly skilled workforce to win new business and execute on our current program. This underscores our unique customer centric solutions and at the end of the day, completes our competent and high level of customer satisfaction. We also continue to engage a strategically focused M&A activity. We're looking for opportunities to build and diversify our base of business and to bolster the company's underlying capabilities. There seem to have been a slight slowdown in the activity near the end of 2018 with regard to transactions in our space, but things have certainly picked up this year. As always, we're very thorough and analyzing potential accretive acquisitions, but are optimistic; defining the right cultural fit is in our near future. We continue to see transactions that can boost our growth profile, fit nicely within our core markets that we serve and expand our value-added capabilities while also bolstering our margin improvement plans. Given our experience integrating acquisitions and the company's strong balance sheet, we believe we will continue to be actively positioning for opportunities that are presented. Overall, we feel positive about the remainder of fiscal 2019 and whether there is another shutdown or not, we believe DLH is on sound footing for stable, improving financial results going forward through FY 2019. 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 report a solid start to fiscal 2019. Turning to Slide 5, we've posted revenue for the three months ended December 31, 2018 of $33.8 million, representing an increase of 11.7% over the prior year’s first quarter. The higher revenue once again reflected strong demand across our key programs and expansion of services on existing contract vehicles. As Zach noted, DLH was not materially affected by the 35 day government shutdown as the agencies we primarily serve were already fully funded for fiscal 2019. Now moving to gross profit on Slide 6, this quarter, the company posted total gross profit of approximately $7.8 million versus $6.5 million last year with the 19.2% increase due to higher revenue as well as margin expansion. As a percent of sales, the first quarter gross margin was 23.1% versus 21.6% last year reflecting improved program mix. Turning to Slide 7, income from operations rose to $2.6 million for the fiscal 2019 first quarter from $1.1 million last year more than doubling, largely reflecting the higher gross profit I just mentioned as well as slightly lower G&A expenses. We reported net income for the three months ended December 31, 2018 of approximately $1.7 million or $0.13 per diluted share versus a loss of $2.9 million, or $0.24 a share in the prior year period. Remember that last year, we recorded a $0.7 million – sorry, in this year we recorded a $0.7 million provision for tax expense versus the $3.7 million we recorded last year, resulting from the one-time charge that that derived from the Tax Cuts and Jobs Act, where we had to revalue our tax assets then, and we took a charge of $3.4 million. Turning to Slide 8, EBITDA for the three months ended December 31, 2018 was $3.1 million versus $1.7 million in the prior year period. EBITDA as a percent of revenue was $9.2 million in fiscal 2019 Q1 versus $5.5 million in 2018 reflecting the factors I just discussed. A reconciliation of GAAP net income to EBITDA is in our earnings statement. Slide 9 shows a summary of our balance sheet at the end of the quarter. We had approximately $4.3 million of cash on hand versus $6.4 million at the beginning of our 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 $7.4 million. Our net debt to trailing EBITDA position remains less than one and while we used approximately $1.8 million in cash from operations during Q1, this primarily resulted from the timing of certain receivables that we've collected just after quarter end. This concludes my discussion of the financial statement. With that, I would now like to turn the call over to our operator to open for questions.

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Joe Gomes with Noble Capital. Please go ahead.

Hi, good morning, Joe.

Joe, are you still there?

Mr. Gomes, your line is now live.

Yes, excuse me. Can you hear me now?

There you go. How are you, Joe?

Good. Sorry. Sorry about that. Good morning and really nice quarter. My first question on the great job on the gross margin and the hold in G&A, relatively flat. I was wondering how does that kind of go out for the rest of the year? Are you still – are you expecting gross margin will still be that type of a differential for the succeeding quarters here? Just a little color or detail there would be appreciated.

Sure. Certainly, within that range. I mean, of course, it's going to vary likely period to period depending on the contribution of each of the respective business lines. But we do think there's some real sustaining improvement in the gross margins that will carry forward.

And is that just because of the type of businesses that you're getting going forward? Or what is causing your belief that those will be sustaining?

So in some respects it is the type of work where we're experiencing growth and in other cases, it derives from active steps we're taking to continue to be more – more actively manage some of our benefits costs and continue to position ourselves as competitive in the marketplace and delivering some savings in some of our cost of delivery of benefit.

Okay. And on the – just to make sure I'm clear on this. Obviously, there was a significant increase in accounts receivable at quarter’s end, but you're saying that was just a timing difference and those have been collected now.

Certainly. And important to know that definitely well within terms of the contracts either way, but as you can imagine, we have some very substantial receivables and we track them pretty much on a near-daily basis as they go through the system and our days sales runs well below 40 days in the aggregate. But if one of those large items slips from paying on the 29th of December over to the 3rd of January as was the case this quarter, just the cut-off at December 31st looks a little out of line, but those items did collect early in January and well within contract terms.

Okay, great. And then you mentioned that the pipeline is now back up to $600 million. And I’m just wondering if you can give a little more color. I know last quarter you guys talked about some of the opportunities might be coming here in early fiscal 2019. So just wondering kind of what you can lay out a little bit of a roadmap as to when some of these awards might start to be happening.

Yes, no, good question. We are still working very closely and looking very closely at these government opportunities and those that are both near-term and some that are out into a 2019 and 2020. We do think that the budget uncertainties around some of the new agencies and – that would be new agencies for us as well as some of the discussion around the president's concern regarding taking some budget from the existing programs has really held a number of the government acquisition folks in a position of waiting until they get through this round of the rest of the budget. We're seeing a substantial reduction and the number of major awards and operating much like a continuing resolution, not much in the way of new business awards of late. So we're going to continue to monitor that. We do have a pretty healthy as indicated, backlog in our pipeline, a number of these deals that we're still awaiting the request for proposals. But we're hopeful that they'll be able to turn those around in a reasonable time and have some effect, we would hope, on 2019 and certainly anticipate for 2020.

Okay, great, and one last one for me. I know you said there's no real update on the VA program, but any sense of timing there? Is it sooner rather than later? Or anything you could provide on that would be appreciated.

Yeah, nothing formal still. This is an obvious and appropriate quiet period when they’re going through these types of evaluations. But given the timing and where we are today and what we know still is usually to occur in this kind of a process. We're thinking that it probably will not have a material effect on our FY 2019 of course which ends in 30 September.

Okay, great. Thank you.

[Operator Instructions] There appear to be no further questions in the queue. I would like to turn the conference back over to Zach Parker, CEO for any closing remarks.

Thank you, again, operator, and thank you to everyone for participating in our webcast today. We know that some of you may have follow-up questions, so Chris, Kathryn and myself are available today and throughout parts of tomorrow for follow-up. In addition, we like to invite any of you in the New York corridor to attend and participate in our Annual Shareholder Meeting. It’s going to be scheduled for March 21st in New York, will be held at the offices of our business partner, Becker & Poliakoff. Expect to see more information on that, but both Kathryn and I and members of our leadership team and our board of directors will be there and we'll have a more detailed presentation in a few areas and look forward to engaging with any of you that may so choose to participate. With that have a great rest of the day and we'll look forward to chatting with you soon. Bye for now.

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