DLH Holdings Corp. (DLHC) Q3 2020 Earnings Report, Transcript and Summary

Good day and welcome to the DLH Holdings Fiscal 2020 Third Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Chris Witty, Investor Relations Advisor. 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 2020 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 statement. 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 everyone and welcome to our fiscal 2020 third quarter conference call. I’d like to begin with wishing all of you and your families well during these difficult days of the pandemic. Please note that you are in our thoughts and prayers. We will modify our standard format a little bit, so that we can provide you an update on how we are doing as a company as we deal with the unusual challenges associated with COVID-19 – the COVID-19 virus and the awakening of social and diversity issues attributed to the murder of George Floyd, which occurred during the middle of the quarter. 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 remainder of fiscal 2020. I’m pleased to report, that we have continued solid results even in the midst of a global pandemic and social unrest. The company posted revenue of $51.5 million for the quarter, reflecting another period of excellence in client delivery. We attribute all of that to just a tremendous attitude and credentials and capabilities of our workforce. Operating income rose to $3.8 million in Q3 and we posted EBITDA of $5.5 million both consistent with the results – of the second-quarter results. We generated $10 million of operating cash in the quarter and paid down $10.5 million of debt. Our strong performance from a cash flow perspective was aided by the collection of receivables this quarter as we indicated would occur on the last earnings call. We’ve now paid down over $25 million of senior debt since the S3 acquisition last year as we continue to delever the company, strengthen the balance sheet and reduce interest expense. I’m also pleased that after the end of the quarter, we announced the DLH had won a series of competitively awarded projects related to COVID-19 testing and clinical trials, which in aggregate, are expected to contribute over $15 million in revenue during the coming quarters depending upon the resilience of the various therapeutics evaluated by our team. I’ll discuss this more in a moment. With regard to the pandemic, we continue to do everything possible to safeguard the health of our employees as we – as well as our customers and we are grateful for the professionalism and dedication of our staff this year. It’s truly been outstanding. Now turning to Slide 4, I’d like to take a moment to talk about two new additions to our leadership team. Jeanine Christian as President of our S3 operating unit, which includes the business acquired last year; and Jackie Everett as our DLH Chief Growth Officer. Jeanine’s scientific expertise, her longstanding customer relationships and her leadership skills make her a fantastic fit to lead this business for us. We are thrilled to have her join from her prior role at Battelle Memorial Institute, where she led a team of over 300 scientists, clinicians, researchers and data analysts in turning scientific data and technology advances into distinct benefits for a variety of government and commercial clients. She has already leaned in and has begun making valuable contributions for her team, our customers and the shareholders for the business going forward. Jackie Everett is another great addition to our company, as somebody recognized throughout our industry as an accomplished dynamic and results-oriented leader. Her drive and motivation and experience are expected to enable our company to win new business and execute our strategic vision. I am pleased also with her initial contributions as she evolves and grows our organic growth profile. Both of these individuals will make tremendous contributions to enhancing our performance excellence and growth trajectory. Turning to Slide 5, I want to provide an update on COVID-19 and its impact to DLH internally. First and foremost, our most valuable asset is our people. They bring not only their experience, credentials and subject matter expertise, but as we have learned this year, their courage. We have over 1,000 employees entering government production and distribution center facilities to ensure that over half a million vital medical supplies and prescriptions get to our nation’s veterans each and every day. We take this pandemic very seriously, and while it has provided some new business opportunities for us, and again, we’ll revisit those in a moment, it has also meant, we’ve had to change the way in which we do business and accomplish our strategic objectives. I’m proud of our leadership team, our staff and the way that they have all adapted to the situation. Demonstrating a level of commitment and business continuity, this is almost unbelievable. We have implemented, of course, a work at home currently scheduled to go throughout the end of the year to ensure that our workers that work from our facilities work safely. And although this could change over time in the months to come, we are committed to ensuring their safety first. Part of our work includes monitoring and evaluating compliance with government-funded requirements involving actual physical onsite inspection of facilities both large and small across the country as well as collaboration and interviews with onsite personnel covering a range of disciplines. As you would expect, most all of these facilities were either in a shutdown mode, operating with skeleton crews or implementing virtual measures to try to keep afloat. As such, our onsite inspection workforce was impacted heavily, which resulted in a portion of our workforce being furloughed in accordance with the CARES Act during the quarter. We are coordinating with the appropriate agencies that we serve to provide the utmost responsiveness to their needs and are factoring in implementation of those federal provisions. Finally, we have formed an in-house task force, which includes our physicians and health care experts that allow us to monitor and manage all aspects of the disease as it relates to our business. We hold weekly assessments as a task force, we determine plans and procedures for the future, and we’re constantly staying abreast with the evolving CDC guidelines, as it pertains to our people, our workforce and our facilities. We’re doing everything in our power to keep the company moving forward. Even in such strange and challenging times. Turning to Slide 6. We are proud, from a service perspective, to be involved in several initiatives and clinical trials associated with COVID -19. We have a longstanding history of providing analytical and assessment support to the National Institute of Health and the Center for Disease Control and Prevention in the fight against infectious diseases and within NIH. We also have built a long-term close relationship with the National Institute of Allergy and Infectious Diseases under, Dr. Fauci. As NIH leads the national response to combating this pandemic and finding relevant vaccines, we’ve been called on to leverage our contract research organization experience to rapidly evaluate multiple therapeutic products. Our epidemiological experience and working – and managing clinical trials, has set us apart as an – has set us apart as an organization. We possess deep experience and leading a consortium of partners securing the necessary patients subjects and conducting clinical trials to achieve success, which I am very, very proud. In addition, our technology-enabled cloud-based solutions continue to see growing interest in the agencies we serve and we’ve invested in new business development initiatives to penetrate programs and fuel top-line growth. I do not think DLH has ever been more relevant to address this kind of several challenges. These create opportunities and currently in the health care market, as well as our longstanding relationships with the Veterans Administration Department of Defense and the health and human services agencies. These position us very well for FY 2021 and beyond. For our investors, DLH has proven to be a company with stable and predictable performance even in the midst of a global pandemic. Through it all, DLH continues to deliver on our plans and our commitments and are demonstrating our resilience and business continuity. Before turning the call over to Kathryn, I would like to address how DLH is responding to the social issues of the day and how we are committed to being a diverse and inclusive organization. We want to lead through example. If you’ll turn to Slide 7, you’ll notice that we have joined our local and national communities in bringing the issue of diversity inclusion and social injustice into our conversations, communications and actions. Up and down across our organization, there have been quite a number of engagements, and we are putting our words into action. In short, walking in the talk. These have included virtual open mics with the CEO, many town halls, engagements with the GovCon community and we are partnering with historically black colleges and universities, to further invest in research and understand the health disparities pervasive upon the communities of color. Researching and dissecting such complex issues is a core competency of the company. Secondly, we have launched a giving campaign to support two organizations that have a longstanding history of fighting social injustice, the Equal Justice Initiative and the NAACP’s Legal Defense Fund. Caring for our community and giving back are part of DLH’s foundation. This is the – a time in our nation’s history that calls for thoughtful, engaged and integrity driven leadership and DLH is ready to be an agent for change, growth and progress in that domain. 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 another quarter of solid performance. Turning to Slide 8, we posted revenue for the three months ended June 30th, 2020 of $51.5 million versus 38.7 million in the prior year’s third quarter. The revenue increase derived largely from the impact of our S3 acquisition, which was reported for the full quarter in 2020 versus three weeks in the prior-year period. As Zach mentioned, while we’ve won a considerable amount of new work related to COVID-19 research and testing, this will be reported as revenue in the coming quarters. Turning to Slide 9, income from operations rose to $3.8 million for the fiscal 2020 third quarter from $1.7 million last year. Reflecting operating margins of 7.4% and 4.4% respectively. The greater operating income reflects increased revenue while margins also rose due to improved operating leverage. We reported net income of approximately $2.1 million or $0.16 per diluted share, versus $0.8 million or $0.06 a share last year. The company recorded a $9 million – $0.9 million provision for tax expense this third quarter versus $0.3 million in fiscal 2019 and interest expense was $0.8 million in fiscal 2020 versus $0.6 million last year. The year-over-year increase in interest expense was due to higher outstanding debt balances from our fiscal 2019 acquisition. However, we continue to pay down debt as expeditiously as possible, as I’ll review further in a moment. Turning to Slide 10, EBITDA for the three months ended June 30, 2020 was $5.5 million versus $2.6 million in the prior-year period, reflecting the S3 acquisition and improved operating leverage. As a percent of sales, EBITDA rose to 10.7% this quarter versus 6.7% last year. A reconciliation of GAAP net income to EBITDA is in our earnings statement and the back of this presentation. Slide 11, once again, illustrates the progress we’ve made, reducing our senior debt since 2019. As Zach mentioned, we’ve continued our practice of using operating cash to pay down debt, reducing it by $10.5 million in the third quarter. As of today, we’ve paid down $25.5 million of senior debt since the S3 acquisition in June 2019. We generated $10 million of cash from operations during the quarter, which was unusually strong given the outstanding receivables at the end of Q2. With the current outlook for the coming quarter, we anticipate a debt balance of between $40 million to $42 million at fiscal year-end. This concludes my discussion of the financial statements. With that, I would now like to turn the call over to our operator to open for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Ken Herbert with Canaccord. Please, go ahead.

Hi. Good morning, Zach and Kathryn.

Hi, Ken. Good morning.

Good morning, Ken.

Kathryn – good morning. Kathryn, I just wanted to ask, over the last two to three years, you’ve typically seen seasonally a pretty nice sequential improvement in your EBITDA margins from the third to the fourth quarter, fiscal third to the fourth quarter. And I’m just curious as you look with the recent bookings and trends, should we expect a similar type of sequential improvement in EBITDA margins into the fourth quarter of this year?

I think that w – while we’ve been building sustained improvement, I think that’s become sustaining. And so I’m not expecting a significant bump in Q4, though I am expecting us to sustain the levels we delivered in Q3.

Okay. Yeah, that’s fair. You’re certainly starting from a more elevated position or coming out of the third quarter.

Right

That’s great. And of the $15 million you’ve called out, the recent bookings COVID related in the wins there, can you talk about timing of when we should expect those record – those revenues to get recognized and how that flows through over the next few quarters?

Yeah, Ken. Let me comment on that. And before I go there, let me also just add to Kathryn’s comment or at least to your question with regard to the quarter – quarterly – quarter sequential trends, I did want to reiterate, again as Kathryn mentioned and I mentioned briefly in our introductory portion, over the recent couple of quarters, in particular, there has been some unique one-time kind of hits and we’re going to probably continue to see some varying aspects of the revenue grow over the coming quarter, some of which, like I say, a metric which is outside of our control. So there will continue to be some volatility as it has been from Q2 to Q3, where Q2 had some unique things that they gave it that sort of help. So we’ll continue to try to do our best to keeping color around those areas that are – do offer some variability, but as Kathryn indicated, the overwhelming more portion of our business does continue to have that annuity kind of feel. With regard to our COVID in our clinical trials, it is the nature of that work, right? In the early phases, what our nation is doing in a big way through NIH is taking a look at a variety of types of potential therapeutics and/or vaccines in various stages. In many cases, as is our current newly awarded work, we’re going to be trying multiple types of therapeutics to see what carries – what can carry forward. In many cases, several of these may drop off very early after 50 subjects test it, and we may say, okay, let’s drop that one, and now let’s move on to another prospect. And so we are in a Easter egg mode as a nation right now still searching for the right mix of some of these therapeutics and we are going to get there. And so when you’re operating in that kind of environment and we’re standing up, launching our initial set of subjects and testing this month, in fact, with one of our partners here in Atlanta, Emory Medical Research Center and we’re going to be replicating this throughout the country as we deal with this constantly moving and changing virus. So it’s really going to be difficult for us to really ascertain exactly what that revenue flow is because the virus is dictating that as well as the impact on hospitals and clinics and medical research centers, which is largely the source of the subjects for us that we’re building together. So we’re going to ask that you obviously recognize that there will be some volatility in that $15 million under Jeanine. We’ve also got two or three near term bids in place for some quick reaction responsibilities. So we’ll continue to give you some color around that, but do bear with us on what that revenue flow is going to look like. The virus is just not giving Kathryn and I enough to give you that context. But know that we expect it to be a good, strong flow of revenue because this NIH and our team of consortium partners are committed to finding the therapeutics and the cure.

It’s going to continue to be a tension between urgency of response, and safety, and frankly, competing right now, as everything’s urgent right, nothing’s urgent. So, all things that are happening in front of COVID response are urgent. And so, you’re working with – the people to have to monitor safety have to review everything that’s happening. So, but I think our conditioning and communicating it was really trying to set the understanding that, unlike our classic model, where when we get a new award, it tends to be – our typical engagement is over a five-year duration, this is clearly not of that ilk. This is clearly have a relatively short duration. Everybody is motivated to access the capabilities and conduct that research and response as quickly as possible, but have to counterbalance, as Zach said, with developments in the virus itself,as well as the counter demanding imperative of safety. So, that – we’ll continue to give more visibility as we get it. But that – I hope that gives you some sense of how to think about it.

No, that’s very helpful, Zach and Kathryn. And just on that note, so just one final follow-up, is there more in the pipeline COVID-related, considering the sense of urgency that could come through? I guess maybe without putting numbers on it, how much more beyond the $15 million are you bidding for today and is out there that could be further opportunities for you in the near term, considering the urgent sense of what’s going on today?

Janine has a team that has built a pretty good surveillance, if you will, relationship with our customer with the NIH, there’s probably not been – in the course of the last quarter, there has probably not been a two or three-week period where we have had to take a look at a new challenge posed by COVID-19. So, if you think about it, very early on, there was an assessment that it doesn’t affect children, and children have been exposed, and so, there are some tests now that are particularly trying to get a population base that is focused around children, as opposed to just the general population. And then as some therapeutics – you’ve heard of our success early on with remdesivir testing and the clinical trials, and that has led to further testing, looking at different types of environmental and different types of populations. So yes, again, we expect that things aren’t going to change in the coming quarters, where NIH is going to be tasked to address different types of aspects of combating this disease and we stay very closely engaged with them to look at what is the next challenge. And in some cases, you’re standing down testing on certain therapeutics that have proven that they have not been either the appropriate level of efficacy or safety. And as such, once you make those determinations, you close those out, and our team discontinues activity there. However, it would be unusual for us not to see another variant that needs testing as a result of those. So, it’s going to continue to be dynamic effort, as I indicated. Just in, in a couple of short weeks, Janine, as her team aligned with developing an approach, we’ll see if it gains merit on tackling some other aspects of the COVID-19 challenge.

It will be an unfolding picture for many quarters to come. And as you remember, it was only last quarter. It was – COVID was new and we were talking about triage, and really just trying to save critically ill people. Now, we’re in the early stages of response and an orderly response that will sustain. But then following that, which who knows how long that phase will take. But then of course, there are already lots of discussions about long-term effects for people who come through in are fortunate enough to survive, but then have scarring on their lungs. And if they were already COPD patient, what’s the impact of that to their recovery plan for that? So, there will be – I would think it’s reasonable to expect there will be COVID impacts in the public healthcare system for years to come. So, that’s why we were so keen to get positioned with the public health segment of our business to really position on this decision.

And it’s important enough also to recognize that while NIH has the lead on looking at developing the cures, we’re pretty well positioned in our MSS arena with the Center for Disease Control and Prevention to really to start to look at prevention measures, communication measures, and so forth with respondents to pandemic. You saw we announced end of last year entering this fiscal year, within IDIQ, and we’re expecting to see some evolution of some opportunities present themselves there. And of course, as we’ve talked about the VA and Department of – and DHA, the Department of Defense’s Health Agencies, we think there are a number of areas where there’s opportunities that may be longer-term opportunities to stem from addressing the challenges to our veterans and our service members as well. So, we’re going to continue to lean into our legacy competencies that we’ve had for the last decade or two and see if we can build upon those relationships to help with other aspects of dealing with disease prevention and control.

Zach, thank you very much for all the detail.

You bet.

Thanks, Ken.

[Operator Instructions] At this time, there appears to be nobody in the queue. Just a second. The next question is from Joe Gomes with NOBLE Capital. Please go ahead.

Hi, good morning. This is Chris, speaking for Joe. Thanks for taking the call. Just a couple of questions that we wanted to ask. Can you talk about…

Pardon me? Excuse me?

Excuse us. You’re breaking up a little bit. Can you get a little closer to your mic?

Sorry. Can you hear me better now? It’s Chris Bliska.

Much better. Thank you.

For Joe, can you talk about the revenues in the quarter? They were a little bit light of our estimate.

Sure. Yes. So as we’ve talked about, and we mentioned the typical five-year contract and the typical GovCon services work. We often describe that as an ongoing annuity, if you will, if you think about an workforce of our direct labor primarily and complemented in some cases by sub-contractors, that work is sustaining and generally carries forward period to period with very little variation. But for numbers of workdays and slight things like that, that represents about 93% to 95% of our revenue quarter-in, quarter-out. The remaining 5% to 7% is comprised of what we would call accommodation revenue, so things that you would not independently seek to bid on. They are necessary in order to conduct those services, and a classic example that would be travel. So that that variability – those accommodation revenues tend to not be particularly margin contributing. There are things that you do that you get compensated for as you’re performing your services, but they’re not key to the value you’ve delivered to the customers. That accommodation revenue can be variable, and that was the number one contributor for the variability from Q2 to Q3. We had a pretty strong complementary accommodation revenue in Q2 and pretty light in Q3. And so, that little component of our revenue is not material to the total, but is going to tend to vary quarter to quarter a bit. Does that help?

Yes, it does. Thank you very much. And then a second question. Can you just talk about accounts receivable? They seem a little bit elevated still. Any discussion there?

Sure. It is – as you remember from our prior quarters, we talked about our integration efforts and just the transition effect of getting customers onto the new system and familiar with the new system, and clearly, as we expected, we would make some significant headway with that in Q3, and we did indeed. We still have some work to do and we expect to be at a normalized level by the end of this fiscal period.

Okay, great. Thank you. And can you give us an estimate of what organic growth would have been in the quarter?

You said would have been in the quarter?

Yes, organic growth.

Well, we – all of the quarter – I think you’re referring to this quarter versus the prior year quarter, correct?

Yes. That’s correct.

Let us get back to you, because we had really good substantial organic growth. I know in our earlier comment, we addressed – Kathryn addressed a part that – the component that the acquisition, which started in June of last year, it was a contributor. But please make no mistake about it, organically, our continued operations had good growth from that fiscal quarter to this fiscal quarter, largely driven by some of our expansion with some of our work in our HLS operating unit associated with services to the veterans. So, we can quantify that for you. We think that will start to – that has had continued growth over the course of the last year. We think it will be leveling off by the end of this fiscal and become more of a norm, but we’re real proud of the organic growth as well. So, we’ll try to break that number up for you a little bit later.

Okay, great. Thank you. Those are all my questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Parker for any closing remarks.

Thank you. Thank you, Francisca. I’m going to get off the mute here. Again, I want to thank everyone for your interest and participation in the quarter’s results. Again, please be sure that you and your families maintain all of the social distancing and health and safety guidance from the Centers for Disease Control, and that what you hear from us and some of our other peer companies. We do look forward to engaging with you again on Q4 as we close out this fiscal year. Please stay tuned also and pay attention to some of the virtual town halls and conferences that we’ll be setting up over the course of the coming quarters. So, thank you. And with that, have a blessed day, and we look forward to chatting with you soon again. Bye for now.

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