DLH Holdings Corp. (DLHC) Q1 2022 Earnings Report, Transcript and Summary

Good morning and welcome to The DLH Holdings Fiscal 2022 First 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 would now 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 like to now turn the call over to Zach. Please go ahead, Zach.

Thank you, Chris, and good morning, everyone. Welcome to our fiscal year 2022, first quarter conference call and Happy New Year. As we hope you will agree, fiscal 2022 is off to a great start at DLH. I want to first give credit to our tremendous committed leadership team and workforce for keeping focused on the missions of our customers. None of us would have predicted two years ago that we would be discussing great results despite the challenges of the pandemic. Beginning with Slide 3, I'll first provide a high level overview of the quarter, which represented outstanding results for the company. [Indiscernible] by our recent short-term contracts with FEMA, providing pandemic-related assistance in Alaska, revenue rose to $152.8 million in Q1. Even excluding the $91.1 million of FEMA related work, we saw a revenue growth of 7% year-over-year as our programs remained strong and in strong demand despite an ongoing continuing resolution in Washington. We posted operating income of $11.2 million, which equates to 7.3% of sales, including the impact of our lower margin, Alaska Contracts. First-quarter earnings were $0.55 per share or $0.22 without the FEMA work reflecting the value of our technology offerings and highly credentialed staff. A reconciliation of the numbers is in the back of this presentation. We also paid down an additional $3.9 million our term debt loan this quarter, further delivering the balance sheet and closed out December with a backlog of $633.6 million. Turning to Slide 4, I'd like to give an update of our markets, applications and advanced capabilities. We continue to serve the federal arenas that will define the next decade of public and military health investment. And we've built a strong and growing position across a number of enhanced emerging technology offerings. Demand for our services in existing and adjacent markets continues to expand due to an increase emphasis across the board on advanced data analytics and digital transformation. DLH is an established provider of innovative solutions for medical assistance and diagnostics, including Telehealth and Pharmaceutical Systems. And with our scientific and research capabilities, we can have the federal government effectively assess and respond to current and future health challenges across the nation. At the same time, our advanced capabilities in digital transformation include experience in IT infrastructure and modernization, cloud-based solutions, and continuous software development, all with a healthcare focus. And we possess robust capabilities in data analytics and cyber-security, providing a large scale management services that leverage technology with highly credentialed subject matter experts. These focus areas, in total, are expected to benefit from the high demand going forward. And DLH believes we are -- we have the right people, proper expertise, and customer relationships in place to drive growth in the quarters and years to come. In closing, the company is stepping up to the next level in terms of its offerings and the breadth of innovative solutions that we bring to bear. While the FEMA business will come to a close in quarter two, DLH is well positioned to have a highly successful year with a strong balance sheet, long-standing partnerships with key agencies, and an exciting array of technology applications. Although we are mindful that the federal budgetary uncertainties need to be resolved in the near future, we are well on our way to another year of solid organic growth and customer expansion and continue looking at possible acquisition opportunities that can further accelerate our top-line growth going forward. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn Johnbull. Kathryn.

Zach, and good morning, everyone. We're pleased to report such a great start to fiscal 2022. Turning to Slide 6, we posted revenue of $152.8 million for the three months ended December 31st, 2021 versus $57.9 million in the prior year's first quarter. The growth reflects the impact of approximately $91.1 million in revenue tied to the Alaska FEMA contracts as Zach discussed, along with a 7% revenue increase across the other parts of our business. The majority of the Alaska contracts have been fulfilled such that we see approximately $30 million of additional revenue during Q2 and none thereafter. If additional revenue is awarded based on pandemic needs in the region, we will let our investors know. Turning to Slide 7, income from operations was $11.2 million for the fiscal 2022 first quarter, versus $3.6 million last year, again reflecting the additional short-term FEMA business. Operating margins improved to 7.3% from 6.3% in fiscal 2021, with the current year results including the impact from lower-margin Alaska work. But at the same time, reflecting a larger contribution of time and materials programs in the remaining business, which generally yield stronger returns than cost-reimbursable contracts. Interest expense was $0.7 million in the first fiscal quarter of 2022 versus $1.1 million in the prior year period, reflecting lower debt outstanding. DLH recorded a provision of $2.7 million and $0.7 million for tax expense during the first quarters of fiscal 2022 and fiscal 2021, respectively. We reported net income in the first quarter of approximately $7.8 million or $0.55 per diluted share versus $1.8 million or $0.13 per share last year. Excluding the Alaska business, non-GAAP earnings for the first fiscal quarter of 2022 were $3.1 million or $0.22 per diluted share. A reconciliation of all these results is included in the back of this presentation. Turning to Slide 8. EBITDA for the first quarter of fiscal 2022 was $13.2 million versus $5.7 million in the prior-year period due to the reasons I discussed above. As a percent of sales, revenue -- EBITDA rose to 8.6% this quarter versus 9.8% last year. But excluding $6.3 million related to our Alaska business, EBITDA for our ongoing contract portfolio was approximately $6.8 million or 11.1% as a percent of revenue in the fiscal 2022 first quarter. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and at the back of this presentation. Slide 9 gives an updated snapshot of our debt position at the end of the first quarter. As of December 31st, we had approximately $42.9 million of debt outstanding under our credit facilities versus $46.8 million at the end of fiscal 2021. We now have satisfied all mandatory principal payments on the loan facility through March 31st, 2024, but we will continue to reduce debt when feasible to strengthen the balance sheet going forward. This concludes my discussion of the financial statements. With that, I would now like to turn the call over to our Operator for questions.

We will now begin the question-and-answer session. [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Hey, great. Thanks. Great first quarter here. Did I hear right excluding the FEMA contracts that your EBITDA margin was 11% versus 8% a year ago? And if that's right, can you just describe factors that drove that to get some of its mix, but I also figure you're paying your people more in this market? So just maybe go through the dynamics if I did hear that right.

Yes. You did hear that right, Brian. And by the way, good morning thanks for joining us. EBITDA as a percent of revenue for the three months last year was 9.8% and 11.1% this three months, excluding Alaska. And the improvement comes from a couple of things as you suggested. The contract mix where we had a healthier proportion of the revenue delivered from timing materials largely and a little bit of fixed fee for service contracts whilst last year where a stronger portion of the mix was from cost-reimbursable work. But secondarily, the operating leverage we've got on our indirect expenses improved as the revenue base grew as well. And so the two of those together yielded that strong EBITDA performance for the quarter.

Okay. And then can you talk about your pipeline? Are there any other short or long-term contracts that are COVID-related? Of course, non-including the existing Alaska or CDC contracts you have where you're doing research and the long-term impacts. I'm just wondering, is there a pipeline of similar contracts or are those slowly subsiding as Omicron seems to be getting a little bit better?

A great question, Brian. And again, thank you for your participation. The answer is yes to both. We are in discussions on short-term impact certainly as Omicron starts to secede a bit. There is a look at potential additional variants and what sort of therapeutics we believe might be more germane as COVID continues to morph, while at the same time, we are seeing that the government is starting to think about longer-term research projects associated with it as well. There's a little bit of both. The biggest challenge has been for all of us in Gulf Con is the government acquisition folks being able to get those contracts out. And as you might imagine, in a CR environment, it's very difficult to get new contracts out. Sometimes we're using more novel contracts certainly for large buys, things like OTAs, but we're hopeful that the discussions that we're hearing and the customers interest will turn into solicitations.

Great. I have two more. The first one is as it relates to challenges in recruiting talent, is that challenge -- has that challenge subsided at all. And secondarily, has it caused any lost revenue, meaning we -- have you been able to fill and -- or fully staff all your contracts.

We have seen some erosion as the rest of the nation has. As you know, the great resignation has placed a real challenge for the labor market across the field. And we're seeing some of that. We're experiencing some of that on some of our contracts; not only for a smaller labor base, but also from time to time COVID-induced absences. So we're continuing to manage that. As you know, we have stepped up our investment in human capital management within the business. That involves both retention and attracting of new talent. We have seen a small impact thus far through Q1 of what we're seeing across the nation.

Great. Lastly, if you can just talk about your M&A pipeline? And as you look, what are management's priorities in terms of what you hope a target will bring DLH see?

Yeah, let me just kick off that we have -- we are opening our aperture in that regard. Strategically, Kathryn and I have really felt that, as you may be reading, that the conclusion of this last fiscal year really represents the having satisfied our strategic plan, in particularly the first phase of our strategic acquisitions plan. And we're looking at expanding our opportunities in the M&A arena. And Kathryn has led some activity over the recent month or so, and can talk about the pipeline more specifically. Kathryn.

The pipeline, we expect to continue to be quite healthy. There is quite a bit of activity out there and our focus, as we've indicated, from our perspective, we closed our first phase of our acquisition strategy, which was principally focused on market presence -- in our target markets. And has the beneficial effect of having some improvement and enhancing of our technology capabilities as well. But from a perspective of our Phase II acquisition strategy, we're going to flip around those priorities. We think we've got good coverage in the relevant markets. Although, as Zach indicated, there are some definite adjacent markets that we continue to be keeping an eye on. But our primary emphasis from an acquisition strategy perspective is adding capabilities and really extending our reach in those relevant technologies that benefit our current customers and any potential future ones. So digital transformation, AIML, the things that are really relevant, modeling simulation; those things are applicable across the set of markets that we currently play in and those that are near adjacent. That's really going to be the primary lens through which we evaluate competitive acquisition opportunities.

Great, thanks so much, guys. Nice quarter.

Thank you for joining, Brian.

[Operator instructions] Our next question comes from Joe Gomes, with Noble Capital. Please go ahead.

Thanks. Good morning. Congratulations on a great quarter.

Thank you, Joe, and good morning to you my friend.

Hey, Joe. Great to hear from you.

So if we could just take a step back for a second on FEMA, just want to drill down on that just for a second here. You got the two initial contracts, they were $107 million valued up to then you did the $35 million extension, so that's a $142 million. You did $91 million in the quarter, so that leaves it let's call it 50ish from the headline and you're saying that in the second quarter you're thinking $30 million and then that's it. What happened to the other $20 million? Is that just not being filled or is there something else there?

Yeah, I think the awarded values really function as an estimate at a point in time and as we all know, COVID is a fast-moving environment. And so from our perspective, and our current visibility on the program and the needs from the customer, in terms of the support we're providing, we expect to deliver an additional $30 million, though they have funded, or they have earmarked more than that in the event that they have additional surges, or other variants or other things that could happen. We can only share with you the visibility based on the trend line as we see it today.

Right.

That varies. We'll have to provide a further update.

As probably worth noting also, Joe, that the way this program is working through FEMA, it's -- is the states actually drawing upon federal money that has been obligated for this effort and is contingent. So the States are actually working off of, as Kathryn indicated, predictions, and contingencies as well. And so this could operate in either directions like Kathryn indicated. Right now, we're seeing with the cessation of Omicron that there's new indication and particularly in Alaska, that it will be accelerating. But we'll all stay tuned and we certainly hope that remains the case.

Okay, great. And our next continuing resolution consist -- seems to be dragging on a little bit longer than normal here. What -- From your perspective or from your looking at the potential programs that you were hoping to be awarded, what ones are most at risk of continuing to be pushed to the right? And does this have, as this continues to go on, an impact on your two big VA contracts, which are currently operating under bridges? I would think that if the continued resolution is extended, that maybe it -- then for you guys that you will see just those two contracts also extended out another year. I wonder if you might just speak a little comment on that.

Sure. With regard to the CR. First of all, we have rated this from a company standpoint neutral to slightly positive. Largely because the agencies that we serve are very, very strong with their mission and our budget stability is very strong, accordingly. Both sides of the aisle are committed to the type of programs that we have in place supporting veterans, military, and the underserved community. Having said that, 12 of the last 13 budgets we've had to deal with CRs. And we're seeing frustration largely on the civilian side of the house. The DOD community and our DHA business has been pretty good at spending against the budget. While in the recent years, the civilian agencies have had challenges in executing and getting the full budgetary spend. So, we've seen some of that impact, and COVID of course, accelerates that because during the CR period, the acquisition community had to do more on COVID than the steady-state business. We have continued to see two or three major programs slip to the right new business opportunities for us. You usually find that when there is a case where there's some evolving scope in the work and it could be perceived as new. And again, we can only be hopeful that a couple of those requests for proposals will come out in the near-term. We are getting good body language, good vibes from those customers, that we should see something this fiscal year for a couple of our major programs. But we're on our third year and a couple of cases for things slipping to the right. Of course, our CMOP contracts as you referred to with the VA, they're on their fifth year but so is source Bridge's. Our first one expired in November of 2016. And so we're optimistic that we're going to continue on that business with the CR. We've -- these are missions that we have to address every day and every week to ensure that we get the appropriate services and products to our veterans. And our clients remain just as vigorous. So we remain very optimistic that we'll continue with DBA support. And we're hopeful that we'll see some of our larger programs that have slipped to the right start to come back this fiscal year.

Okay. Thank you for that color, Zach. And then maybe you could give us a little more detail on what drove the 7% X Alaska revenue increase. I noticed in your revenues were Health and Human Services were up almost 15% year-over-year to $20.31 million. What are the color those contracts that are driving that type of revenue increase?

Yes, it is. In general, expansion on current contracts as well as some of the awards we had laid in fiscal 2021, like the CDC DHAP program that we announced last August, as well as a bit of starting to return to, I hesitate to call it normal, but maybe I'd put air quotes around the word normal, return to activities in our headstart program. So those things that are both expanding on current programs as well as starting to return to some of the more normal operating patterns, as well as the awards that we had late in fiscal 2021.

Okay. Great. And anything new that you can share with us on InfiniByte? It's something you've talked about a lot in the past, and how is that rolling out here? Are you hitting internal plans that you had for that? Maybe you just give us a little more detail on that product.

Yeah, no, I appreciate that. It's still a very exciting part of our toolkit for us as we may have shared earlier. Just relatively recently we just added to resources to really focus on the good market for that program. On the government side, there's been some slippage from some of the Secure Data Analytics contracts and the Cloud Based Hosting contracts. The -- things such as CMMC etc. that were to be incorporated in the contracts, the government is redefining some of those cyber security requirements. And -- but in the meantime, we're looking to try to take InfiniByte for a spin and not wait passively for that. So we have started to build a pretty good pipeline there. Our current customers, of course, that we've been hosting for quite some time, are really getting some tremendous benefits. And we're also looking at very soon completing an audit that should get our system fully certified externally. Kathryn, you want to add anything to that?

I think that's exactly right. We're in that final phase of going from being on the market to being fully federally certified through GSA.

Okay. Great. Thanks for the update. And one -- last one for me if I may. Kathryn, this is more for you. I know there's been a bug through the last two years on the accounts receivable this time of the year. They're -- were always running a little behind, and you had to use some of your magic with all eventually come in. But just trying to -- where we standing today on the accounts receivable, are you comfortable where they are. Are you seeing some extension on payments in this type of environment? Anything there would be great. Thank you.

Okay. Sure, we continue the pattern that we've seen in the last couple of years. First, our first quarter, which happens to end right around the year-end holidays, and particularly this year with the way the calendar fell, I think people even exited a little bit earlier than they normally do for their Christmas and New Year holidays. So as per that trend, we did have a peak in Q1, but as per our usual trend, that's already clearing, and the congestions cleared and we've had a very healthy January and it looks like a good start to February based on this morning in collection. So I expect our full-year trend to be very much in line with our normal strong cash generation that we generally deliver. The only variable for us this year is that we've moved from being able to shield our earnings with our NOLs. We fully consumed those during fiscal '21. So we will be tax paying in fiscal 22, but that old saying you got to be making money to pay taxes. So we are among the tax paying population now, but we still nonetheless expect our net return free cash flow to be very strong.

Kind of strange to be excited about having to pay taxes.

Zach, Kathryn, thank you very much again. Great quarter. Looking forward to seeing how the rest of the year plays out. Thank you.

Thank you, Joe.

Thanks for joining us.

[Operator Instructions] The next question today comes from Victor Hernandez with Hernandez Capital. Please go ahead.

Thank you. Congratulations on a great quarter. I had, I think, a simple question. On the statement of cash flows that you released, you had a line for deferred revenue. I wanted to see if you can give any details of what that line represents and what the impact would be on the full year.

Sure. Thank you for joining, Victor. Welcome.

Welcome, Victor.

And so the deferred revenue and the use of cash for performance of deferred revenue really reflects the fact that right before the end of last fiscal year, we collected a very large advance payment from the state of Alaska for these FEMA contracts that we've talked about so much on this call. And so Q1's results just reflect the fact that we had to perform the obligations that we got the advance payment for. And so we consume that advance payment in the quarter, and we'll fully deliver against that by the time the program executes in Q2.

Excellent. Thank you.

You bet your.

Thanks for joining.

At this time there are no further questions in the question queue. So now I would like to turn the conference over to Mr. Parker for any closing remarks.

Well, thank you. I'd like to express my appreciation for those of you that are engaged both live and via the website and also for those of you who will be checking it out offline. We are looking forward to sharing additional information with you at our annual meeting of the shareholders, which is scheduled for March the 10th. We're scheduled to be in New York, provided that the pandemic allows us. We will look forward to meeting with not only you all but with our Board of Directors at that session and we'll give you additional color around the strategy in the business. Thank you all for joining us today. Have a blessed day.

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