DLH Holdings Corp. (DLHC) Q4 2021 Earnings Report, Transcript and Summary

Good morning and welcome to The DLH Holdings Fiscal 2021, Fourth Quarter Earnings 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'd 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 2022 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.

Excuse me. Thank you, Chris, and good morning, everyone. Welcome to our fourth quarter conference call. I am pleased with how we finished out the year and I'm excited to tell you about fiscal 2022. Let me begin by sharing with all of you how proud I am of the extremely talented and committed DLH workforce who are responsible for generating our results. None of us knew that fiscal 2021 would impose such unique challenges, including the pandemic. Yet through it all, our diverse work team remained focused on performance excellence, and for that, we are truly indebted. Starting with Slide 3, I'll provide a high-level overview of the quarter and the year, which reflects exceptional results. We reported sales of $65.2 million in the fourth quarter. And closed out fiscal '21, with revenue of $246.1 million up nearly 18 % from last year's $209.2 million. This underscores both the strength of our existing operations, which grew organically, as well as contributions from our IBA acquisition last year. We believe our focus on core health markets and high technology applications has proven a valuable one over the long term. Even during times of pandemic-related constraints, political paralysis, and economic uncertainty. We posted operating income of $4.0 million for the fourth quarter and $17.2 million for the full year. Leading to diluted EPS of $0.21 for Q4 and $0.75 for fiscal 2021 as a whole. These results highlight the impact of our business development initiatives, solid margins, and focus on the fundamentals, including controlling our costs. At the same time, we are able to use our cash-generating ability to pay down roughly $23 million of debt. This really strengthens the Company's balance sheet and leaves us in great shape to execute our growth strategy growing forward. We ended the year with a backlog of 651.5 million near record levels, which included some recent FEMA award serving clients in Alaska, which I will touch on in a moment. Turning to Slide 4, I'd like to update our investors on our current market positioning and the outlook for FY '22. Just last week, Congress approved another continuing resolution that funds the government through mid-February. In such an environment, it is common for projects and programs to face delays based on general lack of clarity with regard to spending priorities, and ultimately, their budgets. Decision making is thus slowed, given the reduced visibility over their budgets impacting federal contractors across the board. However, even with this uncertainly, we believe that our services and our agencies will remain in high demand going forward. Our primary customers, which of course include the VA, Health and Human Services, Department of Defense, really enjoy widespread bipartisan support which gives us confidence and continued emphasis on the critical health-related services we provide. In addition, our advanced capabilities in data analytics and cloud computing, are allowing DLH to win and pursue new markets, leveraging our cyber -security in digital transformations across our clients. As evidenced this past year, there's great focus on utilizing Telehealth applications, infectious disease research, and big data to find solutions that can benefit millions of people here and abroad. Not only is DLH at the center of many of these initiatives, we've grown doing a -- during an otherwise uncertain economic environment. Even with the possible implementation of pandemic-related vaccine requirements for government contractors, we do not anticipate any material negative impact to the Company. Our employees are ready for 2022 and beyond. With regard to the pandemic: since the pandemic began, we have had approximately 200 scientist, researchers, and engineers, gain intimate knowledge and expertise in support of nationally recognized programs to develop countermeasures to COVID-19. In addition, we have leveraged our contingency and emergency response capabilities to deploy over 500 healthcare practitioners and medical logistics personnel to attack the spread of COVID-19, particularly in rural areas in the country. To make sure we stay on top of our game, of course, we will need to continue investing in human resources and recruiting top talent. In that event, as shown on Slide 5, we recently hired Maliek Ferebee as our Chief Human Resources Officer. Maliek has over 15 years of human capital leadership in positions within the federal government contracting space. He brings a unique set of competencies and strategies to help me and our executive leadership team tackle the challenges not only of today, but what we foresee tomorrow. Here's a -- he is a forward thinking executive, adept at translating business vision into actions that improve performance, employee engagements, profitability and growth Our number one asset is our credentialed, top-tier workforce, which requires both Company-wide commitment and strong leadership. So we are really excited to have Maliek onboard, to help us to build the next-generation of thought leaders at DLH. Slide 6, shows some of our recent organic wins, which will, of course, contribute to a great start to fiscal 2022. We believe this represents a vote of confidence in our strategy, our people, our technology, and our ability to be a trusted supplier of technical solutions and services, as well as unique capabilities across these agencies. Before turning the call over to Kathryn, let me summarize where we stand heading into fiscal 2022, as shown on Slide 7. This year while challenging and certain -- and certainly unique, in many ways, has illustrated how adept DLH is in providing steady, solid results and leveraging our new opportunities in our target markets. We've embraced a leadership role in helping the federal government understand and respond to a pandemic, and in doing so, have racked up some impressive awards that have increased our role across the agencies we serve. We've been identifying and penetrating new avenues and -- of expansion as well. In addition, while proving our ability to win new business organically, we have a strong new track – a strong track record of finding and integrating select, attractive acquisitions that improve our technology credentials, our value proposition, and boost our -- bolster our growth profile. We're confident that we have the leadership team in place to execute the next phase of our strategic vision, sitting on a history of success while laying out a roadmap for easing -- even greater days ahead. In closing, I believe DLH is very well-positioned for the year to come due to our strong backlog, including new wins with FEMA and the enduring demand for our services from a broad array of federal agencies. Having closed out of a successful year for the Company in the midst of the pandemic and lingering issues impacting the economy, from supply chain constraints to elevated costs and a tightening labor profile market, we have proven that we are able to deploy our technology-enabled health solutions to serve the evolving needs of our customers. We're helping people across America to get the healthcare they need, analyze data for clinical research, optimize government delivered services, and in doing so improving the lives of millions. It is with this underlying mission to serve others, and our passionate dedicated staff, that I remain upbeat about fiscal '22 and beyond. 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 are pleased to report such a strong finish to fiscal 2021. Turning to Slide 9, we posted revenue of $65.2 million for the 3 months ended September 30th, 2021, versus $50.7 million in the prior year's fourth quarter. The growth reflects the impact of roughly $8.5 million in revenue tied to the acquisition of IBA, along with new business awards in the quarter and increased volume across our legacy programs. In addition, as Zach mentioned, we expect the first quarter of fiscal 2022, currently underway, to greatly benefit from the previously announced FEMA awards in Alaska. Such contracts in aggregate had a value over a $107 million for their base periods. And we believe the current run rate puts these in a range of at or in-between $95 million to $100 million in our fiscal 2022 Q1 revenue. After that, the impact will depend on demand in Alaska, for ongoing COVID related services, as the customer evaluate whether option exercises are appropriate. To date, the customer has exercised the first of 3 1-month options on the emergency medical staffing contract valued at approximately $35 million, which will largely be reflected in our fiscal 2022 Q2. Turning to slide 10, income from operations was $4 million for the fiscal 2021 fourth quarter versus $2.7 million last year. Operating margins improved to 6.2% from 5.3% in fiscal 2020, reflecting favorable program mix and greater operating leverage. The '20 -- 2021 results had a large contribution of time and materials programs which generally yield stronger results than cost-reimbursable contracts. Note that, in line with my prior comments regarding the revenue impact expected in Q1 -- fiscal 2022 Q1, due to the Alaska related FEMA work, we expect that margins from those tax orders will be approximately 5 % of revenue. Reflecting a significantly subcontracted nature of those services. We reported net income in the fourth quarter of approximately $2.9 million or $0.21 per diluted shares versus $1.4 million or $0.10 a share last year. DLH recorded a provision of $0.3 million and $0.6 million pretax expense during the fourth quarters of fiscal 2021 and fiscal 2020 respectively. Interest expense was essentially flat at $0.8 million in both years. Turning to Slide 11, EBITDA for the fourth quarter of fiscal 2021 was $6 million versus $4.4 million in the prior-year period. As a percent of sales, EBITDA rose to $9.3 million this quarter versus $8.6 million last year. Q4 results in fiscal '21 absorbed the impact of $1.1 million in corporate development for a transaction evaluating, which was not ultimately closed. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and at the back of this presentation. On Slide 12, we wanted our investors to visualize our record of achievement over the past decade. As you can see, we've shown steady top-line growth, as well as expanding EBITDA and improving EBITDA rates, reflecting our progression up the value chain and our effective leverage of our corporate infrastructure, as we achieved scales through growth. This prospective illustrates our commitment to steadily improving the Company's performance and increasing returns to our shareholders. We're really proud for what we've accomplished so far, but think this is just the beginning of maximizing our potential. Slide 13, it's an updated snapshot of our debt position at the end of the fourth quarter. As of September 30, we had approximately $46.8 million of debt outstanding under our credit facilities versus $70 million at the end of fiscal 2020. Including $21.1 billion advance payment related to the first FEMA contract awarded in September. We generated approximately $45.7 million of operating cash flow during the year, allowing us to pay down approximately $23.3 million of debt. We have satisfied all mandatory principal payments on the loan facility through December 31st, 2023, but we'll continue to reduce debt when feasible, to strengthen the Balance Sheet even more going forward. 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] At this time, we will pause momentarily to assemble our roster.

Thank you, Anthony.

Our first question comes from Joe Gomes with NOBLE Capital. You may go ahead.

Thanks. Good morning everyone, and congrats on the quarter end year results.

Good morning Joe. Thank you. Thanks for joining us.

So I want to start with the female ward in Alaska. Again, congratulations on getting the first exercise there also. Just maybe give us a little detail on how that's progressing and are there other additional state opportunities out there that you may be bidding on, or what you think you could bid on?

Yes. Thank you very much, Joe. Appreciate that and continue -- appreciate your continued support from the business. So Alaska was a competitively awarded -- both of our Alaska Awards both competitively awarded from FEMA and FEMA has a charter across the nation. As you may recall earlier in the year, shortly after the pandemic began, they issued a -- we were awarded a Basic Ordering Agreement, a BPA, which covered largely the Pacific Northwest area. And that's where these awards -- these two awards were competed and were such successfully won. That same community across the Gulf Government is looking to expand that -- this type of disaster response capability across the nation. And we're going in the forefront of working with them to see how broadly that may expand, so we do think and anticipate that the potential exists for other states to leverage the federal government's commitment to support common measures against COVID-19, much like this. So we'll stay tuned on that.

Great. Thank you for that. And on the continuing resolution, you touched briefly on it. Maybe you could again, give a little more color. I know -- I think last quarter you talked about the incentive by cloud and there is a lot of major health IT IDIQs that were expected to be rolling forward here. Where do we stand on those now they've been pushed further to the right. Maybe a little more color on the continuing resolution impact would be appreciated?

As you know -- as you probably know, the continuing resolution which kind of kicked the can to the right 8 weeks or so into mid-February, did require a great deal of concessions and trade-offs as it moved from the house to the Senate. We're continuing to stay real pulsed on what we think is going to come out of it that way. But all indications are that for us in particular, the agencies associated with the work that we have in hand today and then, we have in our near-term portions of the pipeline continue to look strong. What -- the Department of Defense probably has more pressure in the CR environment, as a civilian agencies, largely because over the last year or two with the exception of COVID money, the civilian agencies are still under-running, under-spending, the funds in which they have been obligated. That's not necessarily the case for DOD since a number of the threats are still continuing to emerge in the budget uncertainty. It creates some challenges with the DOD. But we still feel really pretty comfortable with what we're seeing and hearing as things move through the Congress, that the things at our pipeline are very solid. The biggest impact is, as we indicated before, some of these programs that are new programs, that don't get exemptions, are pandemic type exemptions, are continuing to see extensions to the current work, as opposed to new money and new contracts. So we'll continue to monitor that. But we think that the effect of the CR will be neutral to potentially is -- neutral to our new business pipeline. There still has some risk baked in with regard to our organic work.

Okay. Thanks for that, Zach and maybe 1 year -- a look back here. You made the S3 and the IBA acquisitions. You mentioned how they're now fully integrated. Just how are they performing versus your pre -acquisition plans? You mentioned in the past about one of the positives of these acquisitions was the ability to bid on more opportunities. Are you seeing that come to fruition today?

Most definitely we have. Both of those acquisitions were part of our overall strategy to have full market presence in those 3 key markets in health and human services: the defence VA, human services and solutions, and the public health and life sciences sector. And so we fulfilled that with completion of that Phase 1 acquisition program. But of course, who could have guessed how timely and relevant an acquisition of a public health Company would turn out to be. None of us saw COVID coming at the time, we just knew that of course, there's a primary role for the government in utilizing healthcare and disease issues, and long-term, particularly long-term, or pervasive pandemic issues though. So certainly extremely proud and we see a lot of value in that addition of S3QR portfolio. Likewise, the IDA team has to fulfill in every way what we expected in terms of getting a beachhead in DHA and really leveraging their capabilities with a couple of key agencies inside DHA. We obviously see that as a market for continued growth and expansion and having their skills on our team has really upped our position in that competitive market, so we're quite pleased with that. We've now -- I think as we've discussed on prior calls, our emphasis or our lens for acquisitions will move away from being particularly market focused, and just trying to get a footprint in each of those key markets. More to capabilities that augment our position in those markets, now that we've rounded it out and going to have a [Indiscernible], a foothold in each of those markets. So we're looking to add capabilities and continue to leverage some visibility. We're getting with those key clients. And as you know, it's a very active M&A market. So we expect to be able to successfully execute some additional plus ups to the portfolio in fiscal '22.

Great. And one more, if I may sneak one in. Earlier in the year, Kathryn, is it -- you had some, let's call it slower paying clients, but that -- you've -- you were doing a great job in managing through that and everything. With the continuing resolution, are you starting to see any of that creep into the system again, or are the things still running where you would like them on the cash receivable side?

So far, our early returns in Q1 are favorable. And Q1 traditionally is our softest cash-flow generating month because of the -- as we often joke in -- there's a big press to get everything processed for September 30. And then of course, the government got quite a bit to do to return to their normal business after their fiscal year end at September 30, as well as ours. But early returns on Q1 are looking favorable. I certainly don't expect anywhere near the challenges we had last year where we were not only navigating the CR, but also, of course, integrating an acquisition that closed on the very last day of the prior fiscal year. So we had a lot of factors colliding in Q1 last year. I definitely don't look forward to repeating that. I expect this current year fiscal Q1 to be much more favorable in terms of -- and much more normal in terms of cash flow collection. But honestly, my expectation is that we just hold our position for Q1, just given our traditional Q1 Cash-flow requirements, I think I would consider that a success. And, of course, if we manage to pay down some debt. In the meantime, that would be nice icing on the cake. But quite right, as you said. Thanks for the observation that the team worked extremely hard to turn that around and highly successful exited the year with DSOs at 46, though. That's going to be a tough achievement to top.

Congratulates again on the excellent quarter and year, looking forward to 2022. Thank you.

Thank you, Joe.

Thank you, Joe.

[Operator Instructions] Our next question comes from Brian Kinstlinger, with Alliance Global Partners. You may go ahead.

Hi, guys. Thanks for taking my questions. And great results.

Thanks for joining us, Brian.

Yeah, of course. On the last, and hopefully, I'm understanding it right. After the 3 short-term options, what then with these short-term programs do you see the potential for follow-on work, compete for? Do you plan for a line down? Which, of course, would be easier given its subcontractor heavy. Just trying to understand how this plays out for the year.

Pardon me. It appears that the main speaker line has disconnected. I will join them in as soon as possible. Thank you.

Hello?

The main speaker line has been reconnected. Brian, you could restate your question, please.

Great, Maybe it was something I said, just kidding.

Right.

I just was trying to get an understanding after the short-term options, assuming they are or are not, executed on the Alaska contracts. What happens after, is there following awards, do you think there's something to compete for or you expect and plan for a wind-down, which of course, with subcontractors would be easier than typical.

Yes. No, a great question, Brian. Those are currently set as turnkey projects -- contracts for us, which means they have a ramp up and then, a ramp down. We call it mobilize and demobilization. They're going to range -- they also have in them some options that can be exercised to extend it. And so depending upon certain situation on the ground. But for each of those, we do expect that there will -- that we will A, be successful, and Alaska will start to get a hold of -- in front of it. Now, obviously, variance could change that. And so what we're going to continue to monitor that. With regard to could there be other opportunities? We hope so. At present, we know that FEMA, as I indicated to Joe's question, FEMA is looking to expand the scope to cover additional states throughout the U.S. That has not occurred as of yet. And -- but they are working feverishly we know, to provide contract coverage elsewhere. And Jackie, our Chief Growth Officer, is working with GSA and FEMA. So we hope to know more within the coming weeks as to whether or not that's going to occur. But as about now -- as of right now, our backlog with regard to Alaska, we do expect to get through Q1 and into Q2. But if we're all successful and as a nation, we hope that that will slow down. But we'll keep you posted on that.

Great. And then a follow-up. Can you quantify what percentage of your revenue will come up for renewal in fiscal 22 and whether that is front-end loaded or back-end loaded?

Yes. Well, excluding of course, Alaska. Our continuing operations, the largest re-competes that we have still continue to be the VAC Mops. And of course, that's been well documented, we discussed quite a bit of that over the recent years. We've just recently received an extension for 1 year for full-year on 1 of our C Mop contracts. And so we're going to continue -- we expect that the government will re-evaluate again their position on the re-competitions. Besides that, we have no material contracts that are up for renewal in FY '22.

Great. And then obviously, we talked about the CR environment and how it has less impact on civilian agencies you mentioned. Can you talk about what this means for your bid and proposal submissions for new business? Over the last 6 months, you've been bidding on less work than the year ago, more work. And then talk about the submission pipeline that you see plan for fiscal '22 and how it appears to be trending up or down or flat?

Yes. Of course, we do not have the crystal ball as to what we'll get through, but we do have a good understanding. We work very closely with our agencies and we're looking at what they still make issue for request for proposals over the next year. We do expect that 4 to 5 of our civilian agencies will have solicitations out within the next several months. We -- as you saw, the Center for Disease Control was able to issue relatively modest size, less than $40 million contract that we were awarded, just as we ended the fiscal year. And we think that they're going to continue for some of those recurring contracts that do not have a new scope added to them, that they will still continue to be able to get those released. We're seeing the same activity on the behavioral health side within HHS organizations such as Samsung. And we also found that some of the multiple award IDIQ contracts are still moving forward with some solicitations as well. So we expect that -- we have, first of all, had a very heavy bid activity for multi-award IDIQ contracts over this, roughly this last year. We're hopeful that that will translate into the actual funded contract bids within FY '22. So we'll have greater color on that as we look at coming out of the CR and we'll provide an update on that certainly early part of next year.

And I would just add to that Brian, that, of course it's never a welcome thing to be operating in a CR environment. And there's no question that, there will be some of our target pursuits that will be delayed as a result. However, comment, as we shared, given the way that we've expanded our ability to address the market and really leverage capabilities across the strategic acquisitions that we've been to integrated. And with the growth of our Chief Growth Officer -- or the addition of our Chief Growth Officer, and the cadence and the tempo of our business development efforts is definitely up. We think that mitigating or offsetting against the impact of the slowdown from the CR.

The last question I have, I realized in this call you mentioned the key you higher here, but are you win these programs, talk about your ability and or challenges to attract and retain personnel given the well documented labor shortage? Thanks.

Yeah. I couldn't agree with you more there. It's well documented, the whole great resignation is causing challenges, not only across the nation, it's particularly acute to our federal government agencies. We're faced, and the Federal government agency, is dealing with added things such as, vaccine mandates, volatility with regard to commitments to ESG, DE&I, and just a number of things that affect our ability to attract, retain some of the best talent. That's why it was so critical for us to treat that asset as an asset that is truly important for us to have on board in the Company. And why we were leaned in with a very high level nationwide executive search to really find the best of the best. And we're excited about having been able to get and attract someone of the caliber of Maliek Ferebee who's most recent assignment was with Alion Science. So we think that the challenges that you address when the notice came out from the executive order, we had 603 individuals unvaccinated. Right. And as you well know, if you unvaccinated in September, it's probably not due to your inability to find a vaccination, right. So we've had to wrestle with a workforce that had a degree of hesitant folks, while also trying to navigate ourselves through the varying regulations associated with how companies that how we're going to have to address on response there. So there's just a variety of things associated with the talent and work -- workforce and talent management that we have not seen at this magnitude for decades. But we feel really, really good having spent -- having had our executive leadership team spend quite a bit of time on the slate of candidates we have and then having curbed the vision laid out by Maliek. And we're well underway. Maliek is here with Kathryn in our Headquarters today, in Atlanta. And we're starting to lay some groundwork for how we're going to become the best in our industry, at that aspect of the business.

Great. Thanks for taking my questions, guys.

You bet. Thank you.

Take care, Brian.

[Operator instructions] At this time, there appear to be no further callers in the queue. So I'll turn it back over to Mr. Parker for any closing remarks.

Thank you, Anthony. And more importantly, thank you to each of you for participating on today's call. As I indicated, we're really pleased with the results of our fourth quarter of FY '21. Particularly excited about how that leverages a real strong entry into FY '22. Our upcoming activities will include, of course, the annual meeting of the shareholders, as we also evolve to develop the posture around the Q1 results. Please stay tuned and look forward to a greater clarity. We hope to have greater clarity from CR and its transition by the end as well. And thank you-all. Have a blessed day. Bye for now.

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