Q2 2021 DLH Holdings Corp Earnings Call
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Okay.
Good day and welcome to the DLH Holdings fiscal 2021 second quarter earnings call all participants will be in a listen only mode.
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I would now like to turn the conference over to Chris Witty Investor Relations adviser. Please go ahead.
Thank you and good morning, everyone on the call with me today exact Parker, President and Chief Executive Officer, and Catherine Jon Baugh, 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 two of the presentation.
This call May include forward looking statements that relate to the company's outlook for fiscal of 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 on the company's annual report on form 10-K and on our other filings with the Securities and Exchange Commission.
Does 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 for reported GAAP results is included on our earnings release and on the Investor presentation on <unk> website.
President and CEO of Zach Parker will speak next followed by CFO, Kathryn Dzhambul 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 Sir.
Thank you, Chris and good morning to everyone.
The special thanks to the troops within DLH there continue to drive.
The performance productivity and quality to our customers.
Managers and to our shareholders.
During the difficult times I, just can't say enough about the the courage experienced and delivered by our workforce.
I'd like to welcome the shareholders through the second quarter Conference call. We've continued to post solid results of this fiscal year and I remain optimistic about the quarters to come.
Starting with slide slide three I will first provide a high level overview of the quarter and some color on the outlook for fiscal 'twenty one.
The second quarter was certainly one of the accomplishment with revenue rising 12% to a new record $61 5 million as we continued to benefit from strong.
Performance from our recent <unk> acquisition.
A M S business unit and solid results across the board.
The sales increase was followed by higher operating margins at seven 5% and.
<unk> earnings of 2.6 million or 19 cents per share.
We were also able to resume our debt prepayments this quarter as Kathryn will review in the moment and closed out the period with a backlog of just shy of 610.
And then of course the shortly after the end of the quarter, we announced the DLA has once again, one of our VA Cmos medical logistics contract, adding over $200 million and contracted value over a five year period.
With that in total we will have a backlog.
And at around 800 million its highest level ever for the company and this will certainly set the foundation for growth.
Turning to slide four I'd like to update our investors on DLH as business outlook, given the variety of issues impacting our industry.
Again, the first of all I want.
On to expand on the comment I made the mortgage of about the Cmos.
And on a recent award as many of you likely already know we have served this program into the VA for over two decades. So the win was certainly not unexpected by us.
However.
On the award has been delayed or the had been delayed due to several reasons during the procurement process.
At the VA considered proposals from various tiers of small businesses from a potential set aside contract.
Ultimately.
The move through each of those set aside tiers from consideration and evaluate the proposals from large business the only the large business tier.
That competition loose eventually awarded to DLH as a reminder of this program functions as a virtual extension of the VA Medical Center pharmacies.
Last year, we processed over $120 million prescription from seven locations nationwide.
While this is a mail order service has always been important for our veterans the.
COVID-19 pandemic has continued to demonstrate its value at a level that the COVID-19.
Had not experienced before and we are thrilled to continue to provide.
Prescriptions medications in search of med surge products to our various service members in this fashion.
We are of course waiting for the day to make a decision on the other part of the pharmacy support for the Cmos and that.
That the acquisition has not restarted.
The contract when finalized will likely also be worth.
A neighborhood of 250 now over five years. So we look forward to net acquisition beginning.
On another front.
As you know as the country continues to make progress with COVID-19 vaccinations.
Of course, various states move towards reopening and an increase of mobility several of our programs that have experienced revenue erosion over the recent year attributed to COVID-19 may we began to see a resurrection in the fall timeframe.
As you May recall, our digital transformation team on digitally and fishers operation had implemented a new system that reduced cost increased efficiencies through a major business process reengineering effort.
While that achievement.
Reduced.
Our headstart related revenue.
Once implemented entering the fiscal year, we did not anticipate further reduction due to COVID-19 induced.
Reductions in a couple of very key processes, both of those key processes involved travel.
The it reviews inspections and things of that nature.
The program were truly benefit as restrictions are eased.
I'm hopeful that perhaps by fall timeframe, we will start to recover.
That revenue stream and helped to deliver a higher quality to our grantees across the nation.
In the meantime, we continue to qualify and pursue a strong set of growth opportunities from strategically small opportunities to very large opportunities.
Unfortunately like Oh.
Much like our VA sema of procurement several of the large procurements of continuing to slide two of the right and continue to be delayed.
On the good news.
The office of management and bus and budget OMB has recently issued some new directors two of these federal agencies intended to improve these timelines.
And to also drive greater accountability into the contract procurement process.
You are welcome those changes to help accelerate our organic growth prospects.
While both parties both political parties are dedicated to our veterans and health care issues.
We are also seeing positive momentum in terms of additional investments tied to areas, where DLH plays a pivotal role and we believe that the company is very well positioned for solid organic growth this year and next.
At the same time I'd be remiss, if I didn't speak to the strong digital transformation in the deal flow of opportunities within our sector as market valuations and net interest in adding technology applications of heightened the heightened interest within the <unk>.
The mergers and acquisitions front.
There is demand across the board for next generation capabilities that leverage artificial intelligence data analytics cloud computing.
And the types of services that we have been continuing to build.
And I think the global pandemic has only accelerated the trend towards some of the network modernization of insuring.
Convenience and security for individuals performing critical work under the fluid in the oil environment.
While the economy is improving and the impact from COVID-19 subsiding.
Some things are here to stay including a greater reliance on telecommuting, and staycations, leading to new opportunities for companies like DLH and the advanced technology service offerings.
With valuations near all time highs it takes a focused effort.
To look at the numerous opportunities and decide what strategically aligns with the company.
Something that we would value.
We always we always thought that the corporate culture was a key part of any transaction. We will continue this in the future.
And we will continue to examine potential deals for near term and longer term.
The creation.
Overall, the outlook for fiscal 'twenty, one remains very positive for DLH, and we believe the coming quarters of a great opportunity for the for the company to report solid top line results the strong underlying performance.
Our competitive position leveraging our expanded capabilities and long term client relationships are key mission critical federal agencies leaves us very optimistic about the future and I couldnt be more proud of the team that we've assembled here today.
We're making it happen and taking the relates to the next level in terms of service performance and shareholder returns.
With that I'd like now to turn the call over to our Chief Financial Officer, Kathryn Jackson Catherine.
<unk>.
Thank you Zach and good morning, everyone. We're pleased to continue posting positive results this year.
Turning to slide six we posted record record revenue for the three months ended March 31, 2021 at $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 IPA offset in part.
By a reduction in travel related revenue on programs impacted by ongoing COVID-19 restrictions.
Given the lower infection rates and progress with vaccination 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 75% from 7% in fiscal 2020, reflecting favorable program mix and operating leverage of Kate.
Yes.
We reported net income of approximately $2 6 million or <unk> 19 per diluted share versus $2 1 million or <unk> 16 effects of share last year.
DLH recorded a provision of $1 million.
$9 million per tax expense during the fiscal 2021 second quarter and fiscal 2022nd quarter respectively.
Interest expense in the current year quarter increased to $1 million versus $9 million for the three months ended March 31, 2020, due to higher outstanding debt levels, reflecting the acquisition of IPA.
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 percentage 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 as of in the back of our presentation.
Slide nine gives an update of snapshot of our debt position at the end of the second quarter as of March 31, 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 of the strong cash flow. This quarter was due to delayed collections from Q1 in part largely reflection, reflecting transitioning certain contract payment terms.
We continue to anticipate strong cash flow this fiscal year and estimate debt of between 50 and $52 million at the end of fiscal 2021 range.
Starting in a stronger balance sheet and of much lower leverage ratio improvement on our leverage ratio during the current quarter reduced the.
Interest rate on our outstanding debt by 50 basis points.
This concludes my discussion of the financial statements with that I would now like to turn the call over to our operator to open the call for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Brian.
Kim player with Alliance Global Partners. Please go ahead.
Great. Thanks for taking my questions can you tell us maybe I missed it what the organic growth rate wise and then on the male outpatient pharmacy program. How much larger you expect that annual revenue contribution to be of peak compared to the prior contract and where you need to hire more resources to deliver any increased scope.
Great question Brian.
Welcome and we think of your call I'll take the second part of the past in the first part over to Katherine real quick but.
Yes, we're excited about the potential for the renewal of the CE Mark contract.
Its very nature is one that is somewhat demand responsive to the needs and the challenges faced by our veterans on the <unk>.
Sales front.
We've had as you've seen pretty good real growth over the recent couple of few years and the COVID-19 challenge.
<unk> increased debt burden.
Not only from the health standpoint, but the protocols associated with <unk>.
Going to the VA medical centers and hospitals with a lot of of the restrictions for hanging out for instance in.
And the and the lobbies are in the areas, where they're providing those deliveries of led to an increase in the mail order per.
Process, so what remains to be seen as.
How if at all any of that will be ratcheted back in the out years every indication is that the here to stay that.
On the quality and the productivity at which the mail order system is delivering the services relative to the.
In house it has proven.
To be a tremendous value for the VA and our veterans as we expected with the new leadership, they're going to continue to go down. This path. So we think the upside is of good bet that we will continue to build on that and as we continue to have on larger group of <unk>.
<unk>.
Living in meeting the demands we expect it to grow as opposed to.
Two of plateau, so we're looking forward to that.
At the same time the day is expanding.
These facilities were looking to expand the workforce over the next quarter.
Quarter, or so Kevin Wilson and the leads that effort for us has been.
Assuming a really really good team to make sure that we can be responsive and still grow in some some challenging workplace environment. So during the tremendous job. These are people that as you think about it every day. They go into regional distribution Center that has 200 of 300 books going on.
To work in a in a major of assembly line sort of environment. So they really take on that day.
The risks associated with large groups that manage it very well on the pad at very very very low.
Right.
Of the infection and most of that to continue.
Continuing with regard to the numbers that we quoted on share yeah.
Yes, yes.
Perfect. So.
For the period and year to day, Brian as we mentioned the <unk>.
The organic revenue is down slightly.
Of course Theres growth in the business as you already referenced in the steam up part of the business as well as in the COVID-19 support parts of the business.
In other places, but those of the two highlights.
But that has been offset by the deferral of revenue on the on the site monitoring and compliance of monitoring programs that meet the Scott.
So we do expect there is some pent up demand there just as a function of the COVID-19 protocols and and as things start to continue to improve we expect that there'll be some recovery of that of course, the cash customers got to work through exactly how the schedule of this program centers site visits.
But from.
From that perspective, we see the pause on the site inspections at the site is beginning to ease in the second half of the year.
Great and then.
Were there any changes to the economics of the <unk> conference, which is either lower pricing or efficiencies you need to deliver to the customer.
There were for this particular on the medical logistics. The solicitation did have some differences from different characteristics than the previous one.
These are things that we were.
We're fully aware of and we're looking forward to the okay. A lot of a bit of a mix change, but we did not given the nature of the work in the.
Complexity of the work, we did not see the need to drive in particular cost of investments into the business down.
And there'll be a fair amount of it that moves of some of the cost of it.
Well, because we've implemented a number of things historically, the do not need to be implemented in this next year or two so a little bit of softening in that regard, but nothing material.
Great and my last question is.
Several and I may have missed if you mentioned the story several of independent contractors have been talking about delays in procurements.
Just so much volume of submissions industrywide, coupled with challenging the evaluation process the deal.
It's experiencing the same on there as it makes sense in your contracts or debt.
And I'm going through the procurement cycle. Thanks, so much.
Yes, no great question and the answer is absolutely, yes, we as I've mentioned the briefly.
The covenants.
<unk> comments.
We do have experienced that we build a strong new business pipeline.
Most of that with the addition of Jacki average of our business development team and she's bringing on resources to help qualify and position us to bid some opportunities and the trouble is as you've pointed out.
On my peers are experiencing the same his eye on where.
<unk> has been on some of our contracts had been on extreme sole source extensions for.
Several years, we're seeing the same for some opportunities that we literally thought we would've been bidding and winning in 2019, and we have yet to get those solicitation. So the.
On the acquisition community is very upfront about the fact that they have on the government side. They have lost a lot of talent to help move these contracts on these procurements along the.
<unk> 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.
Very cost effective way, but they are addressing it and when I mentioned the OMB is put into place of new initiatives. One in particular is focused on what they call pumped which is an acronym for procurement administrated lead time. So they are raising accountability of our focus on that effort. So that they can get these.
<unk> in place and contracted in a timely fashion, but it had been brutal for us has been the number one headwind towards.
The stunting our organic growth.
The business opportunities.
Because we just can't wait to get the proposals submitted and we think we've built some really tremendous solutions.
The added to our capabilities.
Through M&A.
But we've got most of our programs that we have the north of $100 million of new business continue to slip to the right.
What we call single award contracts. So we're hopeful that that backlog will be on the court Katherine indicated in the next.
Coming months and that the will bode well from our FY 'twenty, two and hopefully still some at the end of the FY 'twenty one.
Great. Thanks for taking my questions.
Mhm.
The next question comes from Chris the lets get with Noble financial. Please go ahead.
Hi, good morning, Zach and Kathryn sitting in for Joe Gums, Thanks for taking mine.
I call. This morning of my questions.
Welcome and thanks for joining us.
Okay.
Glad to be here and there.
Let's see of couple of questions that we had have already been addressed but Katherine maybe you can answer one about accounts receivable. There was some improvement on the quarter are you satisfied with those results or were you expecting more.
And the timing on getting the accounts receivable down further please.
Yeah. So so there was progress that you noted during the quarter and Im pleased with the progress made but meanwhile, on up to now never satisfied on the side I do think there is additional progress that we will continue to make as we work with them paying offices and get an understanding of how that might how the trends.
Mission for all of their requirements, but they're there I'm expecting by the time, we complete our processes addressing the changing customer needs and they've had some transition in their own.
Points of contact any of people responsible for managing things and I do see roughly $3 million that I think will be kind of if.
If you want to consider of permanent transition just because of some additional layers that the customers of added as we've re competed some of these contracts so as compared to last year and on.
On a steady state revenue I think I'll end up with about a 3 million dollar level of our higher but all of that in the context of on currently sits at around 60 day sales outstanding Mike I see a path to getting closer to 50, so that should free up some some pretty strong operating cash flow and get us back on in a realm.
So what I consider to be.
Appropriate for our business.
Thank you and then the next question on the.
The logistics contract. The protests can you give any more detail about that who's protesting and what the argument is in.
When when the be decided timeline please.
Yes, just a little bit of color.
The these are very procurement sensitive information, so I really can't give you much more than the whether it's public.
The protests of this nature are made public through a few channels.
There has been.
Only one company.
Of that has protested it is of service disabled veteran on small business, which means they were in that first tier.
From a priority for the award.
And.
There is some public information out there with regard to what their particular position is on the protest.
The norm.
I should probably say there really is no nor net do.
Do you expect on the on the timing of these.
My personal assessment is based upon the nature of this one it is not one of the.
That usually results in a long protracted protest period.
Accuse the type.
Type of adjudication and volunteers usually relatively timely.
Of course, we're in the federal government space that still could be 90 days 120 days for resolution. So that's about how we were mapping of this one right now I can tell you that in the meantime the.
Contracting officer has notified us.
The intent to put into place and the extension to take us out through pretty close to the end of the fiscal year.
As of August September timeframe.
So that they can get this adjudicated.
And then.
We would begin the phase in period.
On track.
Yeah.
Okay.
The same context of of course, the protest cycle is unfortunately, these debt kind of a normal part of the award and procurement cycle. So we don't view it as anything particularly significant.
Okay, great. Thank you.
Last question then on the.
Headstart program. The revenue decline there was that all related to travel reimbursement or are there other reasons for the Rev.
The decline in the <unk>.
That's our business.
Yeah.
That's been a couple of major factors right.
I touched on the fact that we had.
Late last fiscal and had started the new contract.
An exciting part of the completion of one of the most attractive features of the.
That operation for Us was the ability to design.
From the re Architected.
Fully testing and integrating.
Very a completely new.
The modernization process and completely.
Transform both the operations of protocols for executing the business and it was really a full fledged digital transformation effort under the previous contract with the nuc.
The objective of that modernization, where not just modernizing and transforming for the sake of transformation, but to drive efficiencies and so in our new bid that we won are announced that the $150 million that was about 30 mill 30 of 35, the mineral over five years.
More cost effective.
Then before we believe that the great success and and executing the digital transformation efforts should result in benefits to the ultimate customer and the usage.
And we've done so by implementing all of these new mobile a mobile friendly technologies substantially reducing what was the labor intensive before by implementing new methods of digital digital visualization and things of that nature. So.
So we understood that net of course was in our plan as we went forward.
And was again.
Arguably five 6 million more cost effective on an annual basis, but we did not factor in COVID-19.
Right.
Income from 2020 and of course still we're in the.
Suddenly had on our revenue now.
So we do expect that the.
The haircut that we've experienced over the recent couple of quarters.
The lean is working very closely with the.
With the government leadership, there has been turnover at the recent turnover with the new administration at the top.
They are getting their arms around who's got the outstanding New leadership in place we believe.
The leadership that has great intimate understanding of the program having.
Come on through the program.
And she sees the benefit of.
Implementing a new system, so we're optimistic that.
By this fall.
Love to see it be sooner, but sometime by this fall the most of the states. We're in all 50 states.
And as states start to tell.
To allow more on mobility and access.
We expect to.
To start to realize that revenue back.
Back again.
Certainly by.
Our first option year period before it comes to completion.
And Kristen just yes, just the echoing that.
Reinforcing the part of what that referred to.
Of that cost effectiveness in the Recompete cycle is an important part of our value proposition as we implement technology enablement. So Zach said that that was completely expected.
But as you're actually looking at like for like period to period remember that the COVID-19 restrictions really came in at the very tail end of Q2 last year. So Q2 last year is essentially kind of normal but for the impact of the of.
On the value of the.
<unk> delivered in the technology enablement.
So so it's a lot of it makes the period to period comparisons a little bit challenging of a little bit difficult, but in terms of the soundness of the program. We do expect that however, however on.
On the.
Unexpected and on desirable. This pause has been in terms of the long term view of the program.
The greatly encouraged at you here on almost every day on the headlines about the need to really reinforce can help to recover some of the education GAAP that happened during this year of everybody being at home and we think that head start provides a great channel for Duane net so our commitment of our enthusiasm for the program has the strong analysis type of day.
But that doesn't mean, we're not looking forward.
So that's the the backlog starting to clear and really starting to pick back up the normal momentum.
Alright. Thank you that makes sense. Thank you very much those are my questions.
You bet, Thank you and say Hello to Bill Force.
I'm sorry Julien.
As a reminder, if you have a question. Please press star then one to be joined into the queue.
Yeah.
Uh huh.
There appears to be no callers on the queue I would like to turn the conference back over to Mr. Parker for any closing remarks.
Thank you and let me just say thank you again to the full.
At the.
The our shareholders in the current investors and interested parties.
We again remain very very excited about the future of.
The company.
Really believe that we've got just a great trajectory with the opportunities to continue to deliver.
Deliver some shutdown of the solid performance of our current clients, but also the build their client base. We're also excited about having.
The.
This fiscal year, where the very balanced portfolio right in that portfolio covers all three of our market focus areas identified in our 10-Q.
And we're really excited that as we look at both organically and acquisitive Lee.
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 the Blessed day bye for now.
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