DLH Holdings Corp. (DLHC) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the Fiscal 2021 First Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 Investors 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 2021 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.
Zach Parker: Thank you, Chris, and good morning everyone. And welcome to our first quarter conference call. Let me begin with the recognition of the excellent and courageous work done by our DLH employees worldwide in executing the mission of our customers. Many of our employees largely attended workplace on a daily basis braving the challenges imposed by the pandemic. And we are truly indebted to the service of our folks as well as the close control and safety provisions provided by our customers were for those working at our customer sites and then by our leadership team and our COVID-19 task force for those of our employees that work in our existing facilities. We began fiscal 2021 with solid results. As I indicated last time remain very optimistic about the year ahead. Starting with Slide 3, I'll first provide a high level overview of our financial performance and some color around on the outlook for the balance of fiscal 2021. As I indicated the year started off strong and I am pleased to say with revenue of $57.9 million and operating margins of 6.3%. The company's top line benefited from almost $7 million in contribution from IBA as Kathryn will review in a moment. While overall profitability increased even as some of the pandemic-related headwinds continued. Due to ongoing travel restrictions as noted in the past, certain programs saw less activity and of course the subsequent buildings. But we believe that such challenges should lessen in quarters to come. We posted net income of $1.8 million or $0.13 per share and our backlog was $665 million at the end of the quarter, providing strong revenue visibility. Most importantly we're seeing a very active proposal bet environment. And as I’ll describe more in a moment we're pleased with the wide array of opportunities they've been open to us this fiscal year. Overall, I think the company performed well in Q1 and then we're on a path towards a sustained solid performance throughout the fiscal year. A quick brief note also that we ended the quarter, we have satisfied the majority of our transition and integration requirements associated with the IBA acquisition that started on day one of the quarter and it’s growing really quite well.
Kathryn JohnBull: Thank you, Zach and good morning everyone. We're pleased to start the year with continued positive results. Turning to Slide 6, we posted revenue for the three months ended December 31, 2020 of $57.9 million versus $52.2 million in the prior year’s first quarter. The revenue variance reflects the impact of roughly $7 million in sales tied to the acquisition of IBA as Zach mentioned offset in part by a reduction in organic revenue due principally to restrictions on pass through travel within the current COVID environment. These expenses were not incurred and therefore not billed to the government. Revenue delivery from labor was stable year-to-year albeit with a somewhat different distribution among programs. We anticipate revenue to grow organically during fiscal 2021 as a whole due to expansion on current programs, expected new business wins and general task order timing. Turning to Slide 7. Income from operations was $3.6 million for the fiscal 2021 first quarter versus $3.1 million last year. Operating margins improved to 6.3% from 6% in fiscal 2020, reflecting improved operating leverage. We reported net income of approximately $1.8 million or $0.13 per diluted share versus $1.6 million or $0.12 of share last year. DLH recorded a provision of $0.7 million and $0.6 million per tax expense during the fiscal 2021 first quarter and fiscal 2020 first quarter respectively. Interest expense in the current year quarter increased to $1.1 million versus $0.9 million for the three months ended December 31, 2019 due to higher outstanding debt levels resulting from the acquisition of IBA. Turning to Slide 8, EBITDA for the first quarter of fiscal 2021 was $5.7 million versus $5 million in the prior year period. As a percent of sales EBITDA rose to 9.8% this quarter versus 9.5% last year. A reconciliation of GAAP net income to EBITA is provided in our earning 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 31 we had $77.4 million of debt outstanding under our credit facility versus $70 million at the start of the fiscal year. This position largely stems from our use of $8.5 million of operating cash during the quarter versus $2.9 million last year, reflecting a significant growth in receivables. This was due to two key drivers, first the impact of the continuing resolution on the fiscal 2021 federal budget, which was not signed until December 27. And second a transition in key contract payment offices causing a delay in collections.
Operator: The first question comes from Joe Gomes with Noble Capital. Please go ahead.
Joe Gomes: Good morning, Zach and Kathryn nice quarter and thanks for taking my questions. I wanted to start out with you talked about the top line and how the lack of travel pass-through, but also on some of the compliance programs? And I’m wondering if you might give us a little more color on how much on the compliance programs it was in the quarter that was not received? And on those programs once we hopefully get back to normal sooner than later? Would you make that revenue up or is that revenue gone due to COVID and not doing those compliance programs at those times?
Zach Parker: Right, great question, Joe, and no you're absolutely right. We continue as we discussed briefly at the latter part of last year. The impact of the COVID induced restrictions for travel. A large portion - the overwhelming majority actually north of 90% of our compliance related reductions are associated with compliance and surveillance that we do that actually requires onsite visits. I can tell you that in terms of the go forward. We're working closely with our customers to leverage new methodologies to still get the job done that is less dependent upon having large numbers of people in specific facilities. Many of our compliance programs have to do with children and programs such as Head Start and our support to the Department of Homeland Security. And the best are - these groups that are and in many cases been closed and being very, very restrictive with regard to access. We have been working and postulating some alternative means to execute the mission in a reduced travel mode and are working closely with our customers to start to implement those. So, we think we're going to start to get some of that revenue less, of course the specific travel related component and we should start to see some of those gains we think by second quarter, having said that, the last part of your question we will probably not.
Joe Gomes: Okay, thanks for that Zach. And then you talked about the large number of opportunities associated with the pandemic especially in the public health arena. I was wondering, if you could might give us even a little bit more color because you combine that with you're seeing a expanded pace of proposal activity, what type of contracts are? Is there any way you can give some type of detail or color on the amount of bidding and has it - what’s the timing of some of those, any additional detail or color on that would be appreciated?
Zach Parker: Yes, there is a couple of forms of that. First and foremost as you may recall when we really began to step up our support largely in the . Our nation took it as approach to really apply all hands on deck, right. That was manifested not only by us and other contractors, but also the active participants of the Center for Disease Control and NIH both of our principal customers have said we are supporting the pandemic response. And so, we've been working with them to make sure that we can appropriately align our workforce for the added bandwidth. In many cases the customer is using non-traditional means - because of the urgency of getting the range of clinical trials and evaluations done in a relatively short time. So in many cases we've been drafting white papers that would allow our customer to not have to go through the normal competitive channels. And to expand some of the work on some of our existing contracts, we're starting to see quite a bit of bid activity that will - that is associated with expanding work on some of our existing contracts both IDIQ and some standalone scope increases to some of our contracts awarded in the last couple of quarters. So that's exciting for us. One, it reflects an acknowledgment of the quality and caliber of the work that we have been doing - as we continue to look at various types of vaccines and therapeutics. And they're asking us to expand our footprint and increasing our market share in that arena. So, some jury is still out - we've had a number of proposals that have been submitted in the course of the last several weeks - it’s not a few months. But there is a sense of urgency from the federal government to get these in place and in motion. So we're really leaning in on those. The majority of those are in our public health and life science arena.
Joe Gomes: Thank you for that. And just one more from me and I'll get back in queue. Kind of a two-part question, obviously we - you mentioned the increase in the accounts receivable part of that from the continuing resolution part of it from the transition in key contract payment offices. So question one, can you give us little more information on this transition and the key contract payment offices, what is that all actually mean? And two, we're now a month into the second quarter. Are your collections keeping up with what your internal forecasts are in order to get back to being able to pay-down debt and get a more normalized cash flow situation? Thank you.
Kathryn JohnBull: Yes, let me grab that one. Go ahead.
Zach Parker: Let me kick it off real quick. And then Kathryn will certainly add the colors. I just wanted to give the context. As you heard Kathryn mentioned earlier you know the two - key dates, one is that we closed our IBA acquisition on 30 September which happens to be the last day of the fiscal year of the prior fiscal year. And of course you know most of that activity from the government standpoint starts up on the first week with a brand new fiscal year which happens to be our Q1, consistent with the government in Q1 And so a substantial portion of that transition is impacted not only by the start up of new customers set and new paying offices - for us that is associated with that transition. Then as Kathryn also indicated there is - always a bit of a reluctance associated with funding when you're on a CR, moving towards with pending approved budget. And as you may recall during the - Q1 there were three changes to the date of implementing the - what was finally approved at the end of - December. And that caused a fair amount of paralysis with some of our customers and their paying office and we don't expect those to continue on a regular basis. Kathryn, over to you to - to add additional color there.
Kathryn JohnBull: Yes. No, that's absolutely, right. And historically for us our first quarter is always our softest quarter in terms of collections. It's just that this year sort of outdid itself in terms of the volume of cash consumed because of the factors Zach mentioned. So, it's typical for the government, our counterparts there to Have a lot of use or lose time that - once they get through their big government year-end work at September 30 - they have - there's a lot of time now in training time and all that. So that causes Q1 to be softer in general - and then we had a couple of exacerbating factors this quarter. And however to your second question in terms of whether we're on a pace - we know is definitely are - as we indicated we expect to return to normal pace of collections and really drain that backlog from Q1 and then deliver normal cash flow in Q2. So we're setting up for a strong Q2 in terms of cash delivery.
Operator: The next question comes from Ken Herbert with Canaccord. Please go ahead.
Ken Herbert: Yes well Kathryn I just wanted to first to follow-up on that - that last comment. It sounds like you're still expecting roughly sort of $25 million in deleveraging this fiscal year. And how should we think about the pace of that through - through the second quarter through the fourth quarter?
Kathryn JohnBull: Yes. It'll - it'll likely follow our historical - trend. We'll have a strong Q2 because we'll be burned - you know we'll be clearing that backlog from Q1, but historically for us our normal pattern is - it builds through the year in Q4 and ends - kind of our strong - typically our strongest quarter because obviously our government partners it's - it's the inverse of the Q1 effect where they have a lot of out of office time either on building their - use or lose leave and or doing their annual training. The flip side of that in the fourth quarter for us is that - as they're heading into their own fiscal year end to aligns with ours - they're clearing the decks and kind of resolving their issues. So to the extent there's anything pending that kind of tends to gush through Q4. But we expect strong Q2 kind of an average Q3 and a strong Q4. But also the goal or the expectation as you indicated that we expect are that level at the end of the year would be between 50 and 52.
Ken Herbert: And as we just to think maybe get to a finer point on, on the first quarter travelling compliance issues. Was that about in the quarter about a $2 million headwind or is it possible to sort of quantify how we should think about that from a top line standpoint?
Kathryn JohnBull: Yes that's, that's a pretty good sizing of it as we talked about in the, in our Q4 call. We expected that to slide out of Q4 and Q1 and into Q2 and Q3 as Zach indicated. And we are, we are pleased with the progress we've been able to make in converting some of those compliance events to a virtual environment. And in the case of our current first quarter helpfully we were able we were able to offset that significantly with revenue delivery from the, from the Defense and VA market on the C-MAP programs as Zach mentioned that due to the higher volume there. So the actual revenue delivery from labor was pretty well in line year-to-year notwithstanding the headwinds on the compliance programs.
Ken Herbert: Okay that's helpful. And then just finally on that point you had I think you reported about 60% of your sales in the quarter were from Defense and VA markets. And I know this includes maybe the majority if not all of IBA. But as you look at this market it clearly looks like you're seeing some growth in the Defense and VA besides just IBA especially in the quarter. Can you parse that out a little bit and maybe which particular contracts or is that run rate then with these sort of that organic growth in that business. Is that sustainable in second, third and fourth quarter or how should we think about that for the fiscal year?
Zach Parker: Yes, Joe. I think there's a couple of things in play here, first of all, you're right in that north of 95% of the IBA business is in the defense side of the equation. That was strategically exactly where we were looking to start to balance out the portfolio as you may recall into get ourselves into a stronger three legged stool of our market focus areas. So yeah you're spot on there. We're also seeing growth in some of those key programs, Helene and Helene Fisher whose heads our MSS Machines Services or Solutions operating unit is where the IBA acquisition landed in the company. And we did retain the leadership in - in term of that acquisition. And Mary Dowdall and her team have been doing an excellent job of positioning us to have growth excuse me growth in the some of the key programs. We are doing some COVID related work for the Defense Health Agency customers there as well. And it's difficult to try to forecast how much of that is surge versus sustained at this time but we do expect to see some Q3 and Q4 plus ups in our labor intensive work there as well. I think Kathryn properly categorized what we’re seeing in Kathryn will properly categorized with - what we're seeing in the VA, but that is - that was an intentional part for us to start to round out that portion of our market focus here.
Kathryn JohnBull: As you can see in the queue in our disclosure around our major contracts and major customers that the contribution from that those core VA programs grew from 46% of revenue last year to 48% this year. Notwithstanding that overall revenue grew pretty significantly. So you can see that - the - though just the volume of top line delivery from that - that set of programs has grown pretty substantially - and that's again - and pointing back to those factors - Zach mentioned earlier about redirection of workload from the MTFs or the military treatment facilities over to the same up - you know now time will tell whether that business model - whether that part of the incremental value - volume sustains to us - it seems eminently reasonable that it would because it's - very, very cost effective way of delivering that service. But - you know obviously veteran health delivery in some respects has a - has an element of it - in terms of the visual and the person attending - you know being in the military treatment facility. So we're expecting our best bet on that is to continue the excellent program delivery - and obviously the customer sees the value-add and getting it done cost effectively. So I think that kind of gives you a sense of where some of the growth in that market segment is coming from.
Ken Herbert: No that's very helpful. It sounds like you've got some - some nice runway in that business and just finally Kathryn as you do - or Zach you do start to catch-up or at least maybe some ideally loosening of travel restrictions and maybe more compliance opportunities through technology or in-person as we go through your fiscal year I imagine those businesses are or those revenues are probably margin dilutive to other parts of the business. As you do start to see that ramp, is it - is that the case and that would perhaps negatively impact margins in the remainder of the fiscal year. And to what extent could that be a factor for the margins?
Zach Parker: Sure, yes. First of all part of what we're doing to get it through this - through the rest of this year is again virtualizing a substantial amount of some of those compliance programs so that we can continue to deliver some value to the grantees and to the program office with no real crystal ball as to when the normalcy from before will come back. It's difficult to tell. It does have an effect that a lot of our compliance programs are leveraging a lot of the technology tools that we develop with the new completely modernized system. And that nets out into some cost savings and cost reductions for - and cost efficiencies as it relates to how we execute and deliver those services. So, I think the combination of those still have some pressure on our overall margin basis throughout the rest of the year as we start to stabilize the virtual approach throughout the rest of this year, we are also looking at much like we describe some of our initiatives with white papers for the clinical trials arena. We're also looking at some additional analytics, potential expansion on the analytics throughout this fiscal year that may also help us to offer some of that margin erosion on the compliance side. As Kathryn indicated that I think we're not expecting to recover, obviously the travel and the non-labor component of what has been lost in our first quarter of this fiscal as well as the final quarter of the last fiscal.
Operator: The next question comes from Bert with Business Consulting. Please go ahead.
Unidentified Analyst: Hi, good morning Zach and Kathryn. Happy New Year and thanks again for another great quarter.
Zach Parker: Thank you.
Kathryn JohnBull: Great to hear from you. Happy New Year.
Unidentified Analyst: Yes. I could hear your voices. I was pleased to see your form force in December. And I was tickled pink and giddy as a schoolgirl to learn that I could now start trading options on my favorite security. That has happened recently. Nobody mentioned that. That's a big deal.
Zach Parker: Yes. It did.
Unidentified Analyst: And I'm interested - I'm interested in learning more about the CMOP expiration, extension and also that exclusion which would have prevented us from our re-compete?
Zach Parker: Yes. No. Great points and we thank you again for your continued support and engagement in the business. You've been with us for quite a while and hopefully we're answering e-mail for you as well. With regard to CMOP, of course it is one of our longer and strong - longer heritage businesses and of course the VA that work as strong as it gets when it comes to protection under during various threats for funding and we expect that to continue. As relates to our prognosis for the extensions, as you may remember we have two primary extension. So as you may remember we have two primary channels for delivering those services. One is heavily on the pharmaceutical side and the others on what we call medical logistics. The, the program both programs and when they came out with their solicitations a couple of years ago now they were slated to be small business set asides as a, as a preferred option for the pharmacy when it is exclusively small business set aside, as they went through their evaluation process through evaluating all of the all of the bids including those the bid in which we had a partnership. The government made the decision that it was not in their best interest to continue the past that they had been on. So they did cancel that one that has resulted in us getting sole source extensions. We continue to operate on those extensions. They've been ranging from six months to three month of options. And we’ll continue in that mode until such time that the VA re-establishes and gets an approved new acquisition approach. And as of today, we have no knowledge that has been solidified as yet the acquisition plan. So that usually bodes well for your additional sole source extensions. We feel quite optimistic that that will go at least through the end of the fiscal year. And if a solicitation comes out then that normal path allows industry partners to get another couple of few months in the bid process. We will certainly notify when if and when that occurs as it is a material contract to us, and then that starts the whole evaluation cycle on the part of the government again which on the average range is really quite a wide range of generally ranges from about six months evaluation process to a couple of years. So we'll keep you posted on that. But we feel like we'll be on the extension level for a while. But the other one the medical logistics one, as you al saw we did some upsize that the government had taken that one to a down-select process and that one was a tiered approach which had the first option being the government evaluating those bids that were submitted by service disabled veteran and small businesses. And if they did not reach a decision that was in the best interest of the government for both price and technical execution requirements combined they would then look to a larger set of small businesses. They did go through that process ruled that out as the selectee and as of now, as we stand today the proposal that we submitted along with many other large businesses are those that are still in the acquisition cycle. There has been no formal notification with regard to the path on that one. And accordingly we are continuing to operate and receive sole source extensions bridges for that work as well. We can't give any real crystal ball information on that as well. But each of those opportunities has at least supported work of phasing activity. And so we fully expect the way that debt is that we'll be operating with extensions and bridges through the end of this fiscal year if we are successful and the government does decide to award on the basis of the proposal that we submitted previously. That could start before the end of this fiscal year. So we'll keep you posted on that one as well.
Unidentified Analyst: Thanks so much. You mentioned that it was material, how material is it? Is it 40% or 50% of revenue?
Zach Parker: Yes, we're doing north of about a $100 million for that customer. And so it’s been a very significant material contract even with our expansions with organic growth in two acquisitions that we've had over the last year plus.
Operator: The next question comes from Jeff Bronchick with Cove Street Capital. Please go ahead.
Jeff Bronchick: So just a quick question. So you know let's assume this COVID thing goes away in 2021. And when you look at ‘22 maybe looking back, would you say that over the two-year period that you know there is X amount of revenues that you've benefited from as you've helped your customers deal with just motivating and getting prepped through the COVID issues or would? And that would expect a drop off or would you say no it's the opposite. We’ve actually lost more revenue because we couldn't execute on either current or potential plans?
Zach Parker: Right, thank you, Jeff and for those of you enjoying 80 degree weather right now, I’m not sure that do you get any extra bonus points right now.
Jeff Bronchick: gloves on.
Zach Parker: Listen to you.
Kathryn JohnBull: Wow.
Zach Parker: And the means to boot no, that's a great question, Jeff. I can tell you that the way we are viewing it right now and we’re largely drawn upon history of some of our other pandemics and emerging infectious diseases. What we are hoping we will see is that over the course of the years whether its two years or three years, the nature of the trials and the studies and the evaluations and or the health comps - communications will evolve. But we really wouldn't expect to see much of a drop off right. There is certainly some surge associated with getting the networks in place and dealing with a very large population of subjects that are actually folks experiencing the infection and the disease itself. But often, there will - continue to be sustaining studies around its effects, sometimes environmental effects many cases looking for a variety of different types of therapeutics. And much like many of both other chronic as well as infectious diseases, there is a tail associated with evaluating it and really making sure we can understand its implications for decades - not only on our society - not only on our society, but in many cases - working with the global community. So we like to see it as something. We like to see it as something that we think we're standing up that would be sustainable. It may change - and of course the margin basis of that may change as well, but we don't see it - as having a substantial drop off as we enter in FY 2022 to specifically address your comments.
Operator: At this time there are no other callers in the queue. So I would like to turn the conference back over to Mr. Parker for any closing remarks.
Zach Parker: All right, well I just want to say again thank you all. We think - we're continuing to build this platform consistent with the strategies that you heard us layout several years ago. We're really excited about the continued transition - collaboration amongst our team to be able to help drive this one plus, one plus, one into a five, six and seven equation. We are truly, truly committed to continuing to execute the strategy where we focus and build our pipeline on complex and mission critical kind of work. We think that helps us as administrations change and budgets shift as well as dealing with some potential long-term headwinds associated with budget - debt issues at federal government and so forth. So stay tuned, we're going to continue to give you additional color. We are having - next month our annual meeting of the shareholders and as our custom we’ll give a deeper dive into our new business pipeline. Our targeted agencies as we start to see that we can open our aperture further and how well we continuing to do on the win rate. So stay tuned, we look forward to seeing you all soon and thank you very much for your participation today. Have a blessed day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
