DLH Holdings Corp. (DLHC) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the DLH Holdings Fiscal 2021 Second Quarter Earnings 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.
Zach Parker: Thank you, Chris, and good morning to everyone, and a special thanks to the troops within DLH that continue to drive great performance productivity and quality to our customers, our managers and to our shareholders. During this difficult times I just can't say enough about the courage experienced and delivered by our workforce. I'd like to welcome the shareholders to the second quarter conference call. We've continued to post solid results this fiscal year and I remain optimistic about the quarters to come. Starting with slide 3. I'll first provide a high-level overview of the quarter and some color on the outlook for fiscal 2021. The second quarter was certainly one of accomplishment with revenue rising 12% to a new record 61.5 million as we continue to benefit from strong performance from our recent IBA acquisition, our AMS business unit and solid results across the board. The sales increase was followed by a higher operating margins at 7.5% and earnings of $2.6 million or $0.19 per share. We were also able to resume our debt prepayments this quarter as Kathryn would review in a moment and closed out the period with a backlog just shy of $610 million. And then of course shortly after the end of the quarter we announced that DLH had once again won our VA CMOP medical logistics contract adding over 200 million in contracted value over a five-year period. With that in total, we will have a backlog in and around $800 million its highest level ever for the company. And this will certainly set the foundation for growth beyond.
Kathryn JohnBull: Thank you, Zach and good morning everyone. We're pleased to continue posting positive results this year. Turning to slide six, we posted record revenue for the three-months ended March 31st 2021 of 61.5 million versus 54.8 million in the prior year second quarter. This variance reflects the impact of roughly 7.4 million in sales tied to the acquisition of IBA, offset in-part by a reduction in travel related revenues, on programs impacted by ongoing COVID-19 restrictions. Given the lower infection rates and progress with vaccinations, the constraint on that part of our business has begun to lessen. And as Zach mentioned we believe it will continue to do so in the quarters to come. Turning to slide seven, income from operations was 4.6 million for the fiscal 2021 second quarter versus 3.8 million last year. Operating margins improved to 7.5% from 7% in fiscal 2020, reflecting favorable program mix and operating leverage achieved. We reported net income of approximately 2.6 million or $0.19 per diluted share versus 2.1 million or $0.16 a share last year. DLH recorded a provision of one million and 0.9 million for tax expense during the fiscal 2021 second quarter and fiscal 2020 second quarter, respectively. Interest expense in the current year quarter increased to $1 million versus 0.9 million for the three months ended March 31st 2020, due to higher outstanding debt levels reflecting the acquisition of IBA. Turning to slide eight, EBITDA for the second quarter of fiscal 2021 was 6.6 million versus 5.6 million in the prior year period. As a percent of sales, EBITDA rose to 10.8% this quarter versus 10.2% last year. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and is included in the back of our presentation. Slide nine gives an updated snapshot of our debt position at the end of the second quarter. As of March 31st we had $62.8 million of debt outstanding under our credit facilities versus $77.4 million at the end of last quarter. We generated approximately $14.6 million of operating cash during the quarter and paid down roughly $14.7 million of debt. As a reminder, the strong cash flow this quarter was due to delayed collections from Q1 in-part, largely reflecting transition in certain contract payment terms.
Operator: We will now begin the question-and-answer Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.
Brian Kinstlinger: Great. Thanks for taking my questions. Can you tell us maybe I missed it what the organic growth rate was and then on the mail outpatient pharmacy program, how much larger do you expect that annual revenue contribution to be at peak compared to the prior contract and will you need to hire more resources to deliver any increased scope?
Zach Parker: Great question Brian and welcome. And we thank you for your call. I'll take the second part and pass that first part over to Kathryn real quick. But yes, we're excited about the potential for the renewal of the CMOP contract. Its very nature is one that is somewhat demand responsive to the needs and the challenges faced by our veterans on the health front. We've had, as you've seen, pretty good real growth over the recent couple few years. And the COVID-19 challenge has increased that burden, not only from the health standpoint but the protocols associated with going to the VA medical centers and hospitals. With a lot of the restrictions for hanging out for instance in the lobbies or in the areas where they're providing those deliveries have led to an increase in the mail order process. So what remains to be seen is how if at all any of that will be ratcheted back in the out use. Every indication is that they're here to stay that the quality and the productivity at which the mail order system is delivering the services relative to the in house has proven to be a tremendous value for the VA and our veterans. And we expect that with the new leadership, they're going to continue to go down this path. So we think the upside is a good bet that we'll continue to build on that. And as we continue to have a larger group of veterans living and meeting the demands, we expect it to grow as opposed to plateau. So we're looking forward to that.
Kathryn JohnBull: Sure. Yes. Perfect. So for the period end year today, Brian, as we mentioned, the organic revenue is down slightly. Of course, there's growth in the business as you already referenced to in the CMOP part of the business as well as in the COVID support parts of the business and other places, but those are the two highlights. But that has been offset by the deferral of revenue on the site monitoring, compliance and monitoring programs that we discussed. So we do expect there's some pent-up demand there just as a function of the COVID protocols and as things continue to improve we expect that there'll be some recovery of that. Of course, the customer has got to work through exactly how they'll reschedule those programs and those site visits. But from that perspective, we see the pause on those site inspections as beginning to ease in the second half of the year.
Brian Kinstlinger: Great. And then were there any changes to the economics of the CMOP contract, such as either lower pricing or efficiencies you need to deliver to the customer?
Zach Parker: For this particular one, the medical logistics, the solicitation did have some differences, some different characteristics than the previous one. These were things that we were fully aware of and were looking forward to. So it will be a little bit of – a bit of a mixed change but we did not – given the nature of the work and the complexity of the work, we did not see the need to drive any particular cost or investments into business down. There'll be a fair amount of it that will – and some of the cost there will ease because we've implemented a number of things historically that did not need to be implemented in this next year or two. So a little bit of softening in that regard but nothing material.
Brian Kinstlinger: Great. My last question is several – I may have missed it, if you've mentioned this sorry. Several defense IT contractors have been talking about delays in procurements. There's just so much volume of submissions industry-wide coupled with challenging evaluation process. The DLA is experiencing the same on their submissions and their contracts that are now going through the procurement cycle. Thanks so much.
Zach Parker: Yes. No great question. The answer is absolutely yes. As I've mentioned briefly in my opening comments, we too have experienced that. We build a strong new business pipeline. We've bolstered that with the addition of Jackie Everett to our business development team and she's bringing on resources to help qualify and position us to bid some opportunities. The trouble is as you've pointed out, my peers are experiencing the same as I am where, while our CMOP has been on some of our contracts have been on – source of extensions for several years, we're seeing the same for some opportunities that we literally thought we would have been bidding and winning in 2019. We have yet to get those solicitations. So, yes, the acquisition community is very upfront about the fact that they have on the government side, they've lost a lot of talent to help move these contracts and these procurements along. They've been working to incentivize bringing in new blood, because they lost a lot through attrition and retirement and just have not been able to make that up in a very cost-effective way. But they're addressing it. When I mentioned the OMB has put into place a new initiatives one in particular is focused on what they call PALT, which is an acronym for Procurement Administrative Lead Time. So they're raising accountability and focus on that effort so that they can get these procurements in place and contracted in a timely fashion. But it has been brutal for us. It has been the number one headwind towards stunting our organic growth through business opportunities, because we just can't wait to get this proposal submitted. We think we've built some really tremendous solutions. We've added our capabilities through M&A, but we've got -- most of our programs that we have they are north of 100 million in new business continue to slip to the right for what we call single award contract. So we're hopeful that that backlog will be uncorked as Kathryn indicated in the next coming months and that they will bode well for our FY 2022 and hopefully it's still at the end of the FY 2021.
Brian Kinstlinger: Great. Thanks for taking my questions.
Operator: The next question comes from Chris Bliska with NOBLE Financial. Please go ahead.
Chris Bliska: Hi. Good morning, Zach and Kathryn. I'm sitting in for Joe Gomes. Thanks for taking my call this morning and my questions.
Zach Parker: Welcome Chris.
Kathryn JohnBull: Thanks for joining us.
Chris Bliska: Glad to be here. And let's see. A couple of questions that we had have already been addressed, but Kathryn maybe you can answer one about accounts receivable. There were some improvement in the quarter. Are you satisfied with those results or were you expecting more? The timing on getting the accounts receivable down further please?
Kathryn JohnBull : Yes. So there was progress as you noted during the quarter and I'm pleased with the progress made, but you know me well enough to know I'm never satisfied. So I do think there is additional progress that we will continue to make as we work with paying offices and get an understanding of how to transition for all of their requirements. But I'm expecting by the time we complete our process of addressing changing customer needs, they've had some transition in their own place of contact and people responsible for managing things. And I do see roughly $3 million that I think will be -- if you want to consider a permanent transition just because of some additional layers that the customers have added as we break competed some of these contracts. So as compared to last year and on a steady state revenue, I think, I'll end up with about a $3 million level of AR higher, but all that in the context of I'm currently sitting at around 60 days sales outstanding. I see a path to getting closer to 50 so that should free up some pretty strong operating cash flow and get us back in a realm of what I consider to be appropriate for our business.
Chris Bliska: Thank you. And then the next question on VA logistics contract. The protests can you give any more detail about that? Who's protesting and what the argument is and when it will be decided time line please?
Zach Parker: Yes. Just a little bit of color. Obviously, these are very procurement-sensitive information, so I really can't give you much more than what is public. The protests of this nature are made public through a few channels. There have been only one company that has protested. It is a service disabled veteran-owned small business, which means they are in that first tier for priority for the award. And there's some public information out there with regard to what their particular position is on the protests. The norm I should probably say, there really is no norm what to expect on the timing of these. My personal assessment is based upon the nature of this one. It is not one that usually results in a long protracted protest period, right? It’s usually -- the type of adjudication involved here is usually relatively timely. Of course, in the federal government space that still could be 90 days, 120 days for resolution. So that's about how we're mapping this one right now. I can tell you that in the meantime, the contracting officer has notified us their intent to and put into place an extension to take us out through pretty close to the end of the fiscal year that's August, September time frame so that they can get this adjudicated. Then we would begin the phase-in period of that contract.
Chris Bliska: Okay. Thanks so much.
Kathryn JohnBull: I would just add in context of course the protest cycle is as unfortunately these days a normal part of the awards and procurement cycle, so we don't view it as anything particularly significant.
Chris Bliska: Okay. Great. Thank you. Last question then on the Head Start program, the revenue decline there was that all related to travel reimbursement, or are there other reasons for that revenue decline in the Head Start business?
Zach Parker: Yes. There've been a couple of major factors. Right? And I touched on the fact that we had late last fiscal started the new contract an exciting part of the completion. One of the most attractive features of that operation for us was the ability to design from re-architecting, fully testing and integrating a completely new IT modernization process. We completely transform both the operations and protocols for executing the business and it was a really a full-fledged digital transformation effort under the previous contract. With the new key objectives of that modernization were not just modernizing it and transforming for the sake of transformation, but to drive efficiencies. And so in our new bid that we won announced that 150 million that was about 30 million -- 30 million to 35 million over five years more cost-effective than before. We believe that the great success in executing digital transformation efforts should result in benefits to the ultimate customer and the users. And we've done so by implementing all these new mobile-friendly technologies, substantially reducing what was labor-intensive before by implementing new methods of digital visualization and things of that nature. So it so we understood that. That of course was in our plan as we went forward and once again arguably five million, six million more cost effective on an annual basis. But we did not factor in COVID...
Kathryn JohnBull: Right, didn't see that one coming.
Zach Parker: In 2020 and of course still rearing its ugly head on our revenue now. We do expect that the haircut that we've experienced over the recent couple of quarters Helene is working very closely with the government leadership there has been turnover -- recent turnover with the new administration at the top they're getting their arms around. We've got outstanding new leadership in place we believe; leadership that has great intimate understanding of the program having come up through the program and she sees the benefit of implementing our new system. So we're optimistic that by this fall, I'd love to see it be sooner, but sometime by this fall that most of the states -- we're in all 50 states and as states start to allow more mobility and access we expect to start to realize that revenue back again. Certainly by our first option your period before it comes to completion.
Kathryn JohnBull: And Chris in just the echoing that and reinforcing part of what that referred to. That cost-effectiveness and a recompete cycle is an important part of our value proposition as we implement technology and enablement. Zach said that was completely expected, but as you're looking at like-for-like period-to-period remember that the COVID restrictions really came in at the very tail-end of Q2 last year. So Q2 last year is essentially – normal, but for the impact of the value delivered in the technology enablement. So it makes period-to-period comparisons a little bit challenging a little bit difficult, but in terms of the soundness of the program we do expect that, however, unexpected and undesirable this pause has been in terms of the long-term view of the program we're greatly encouraged at -- you hear it almost every day in the headlines about the need to really reinforce and help to recover some of the education gap that happened during this year of everybody being at home. And we think that Head Start provides a great channel for doing that. So our commitment and our enthusiasm for the program is as strong now as it's ever been. But that doesn't mean we're not looking forward to the backlog starting to clear and really starting to pick back up the normal momentum.
Chris Bliska: Right. Thank you. That makes sense. Thank you very much. Those are my questions.
Zach Parker: You bet. Thank you. And say hello to Bill for us. I am sorry, Joe.
Operator: There appears to be no callers in the queue. I would like to turn the conference back over to Mr. Parker for any closing remarks.
Zach Parker: Thank you. And let me just say thank you again to full -- to our shareholders and the current investors and interested parties. We again remain very, very excited about the future of the company. We really believe that we've got just a great trajectory with opportunities to continue to deliver some certainly sound performance or our current clients, but also to build that client base. We're also excited about having at the end of this fiscal year with a very balanced portfolio, right? And that portfolio covers all three of our marketing focused areas identified in our 10-Q. We're really excited that as we look both organically and acquisitively that we can continue to be very selective with high probabilities of success and we look forward to delivering on that in the near future. So thank you for your participation and have a blessed day. Bye for now.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
