Q2 2022 DLH Holdings Corp Earnings Call
Good morning, and welcome to the DLH Holdings fiscal 2022 second quarter earnings call.
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I'd 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 is that Parker, President and Chief Executive Officer, and Catherine Jon Bock, Chief Financial Officer, The Companys 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 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 the Investor presentation on Dlh's website.
President and CEO Zach Parker will speak next followed by CFO , Kathryn John Paul After which we'll open it up for questions with that I'd now like to turn the call over to Zach Parker. Please go ahead Jack.
Thank you, Chris and good morning to everyone and welcome to our fiscal 2022 second quarter Conference calls.
We continue to produce strong results and remain on track for one of our best years ever before addressing the financials.
Let me once again recognize the stellar performance of our nationally dispersed workforce during this period.
Business transformation and performance delivery depends upon our people.
And we are blessed to have a truly committed team.
In addition, our hearts go out to the Ukrainian people, who are suffering from <unk>.
Russian aggression and the humanitarian crisis resulted.
Now turning to slide three.
I remain pleased with our start through the second quarter of our fiscal 2022.
Our second quarter results were consistent with our expectations and continued to demonstrate strong execution across both revenue and EBITDA.
Once again as in Q1 are short term contracts with FEMA and Alaska drove revenues significantly higher year over year to $108 7 million this quarter.
However, even excluding the 30 $39 8 million of FEMA related work, we saw sales grow organically, 12% versus 2021.
As our programs remain in very solid demand, albeit with a slowed slowed down award environment in Washington.
Revenue rose across all three of our market segments year over year.
Yes.
This quarter saw a curtailing of the pandemic along with the global disruption caused by the unprovoked Russian invasion of Ukraine.
Since our last meeting Congress enacted the FY 'twenty through 'twenty, two appropriations, which now provides our federal clients the necessary budget visibility to align their priorities with funding levels.
The subsequent funding actions associated with the Russian aggression also recognizes the national strategic pivot of our military posture.
It is clear that our nation will strengthen our military readiness and we can expect both short and long term tailwind to our D O D and defense Health agency portfolios.
The fact that we grew 12% organic organically without a formal budget in place speaks volumes as to the value of our services and critical capabilities that are essentially.
Played across all of our agencies.
We posted operating income of $10 3 million or nine 4% of sales, including the impact of our Alaska contracts.
That's the highest level in many years, reflecting our move to a more advanced and value added solutions and services.
We recorded EBITDA of $12 1 million in the second quarter earnings of 50 cents per share or 22 cents without the FEMA work, while our term loan was further reduced to 37 5 million during the period.
As Kathryn will review in a moment.
Our deleveraging story continued after the quarter end.
Lastly, we finished the period with a backlog of $554 7 million down sequentially from Q1 due to the slow pace of awards as I mentioned earlier and of course, the drawdown of the Alaskan work.
But we still are positioning are positioned well for the remainder of FY 'twenty two and beyond.
Turning to slide four.
To provide additional color on the current market outlook and our go forward growth strategy.
On the high level federal budget priorities again continue to support DLH in the agencies we serve.
It is important to note that as we mentioned earlier decision, making should accelerate now that a formal budget has been adopted positively impacting our business volume as we head into fiscal FY 'twenty three.
For DLH the demand for our services is underscored by the projects within current appropriation bills and the presidential budget request.
Suffice it to say that we remain well aligned with health care related government spending trends.
At the same time, we're a company that is becoming known for its consistency in terms of revenue growth margin expansion and our underlining underlying financial results.
We remain on track with our strategy of utilizing cash to invest in our people and pay down that debt strengthening the organization and balance sheet in tandem.
Our people continued to expand and leverage technology to support our clients and differentiate work while investing in human capital initiatives to counter the current national workforce work.
Force challenges.
At the end of the day, we're judiciously deploying capital not just for growth, but for value creation and our addressable market remains very strong.
Our capabilities are.
Our our capabilities enabled us to solve the complex problems faced by federal civilian and military customers alike, whether it be in data analytics with the center for disease control or innovative data management and systems engineering for the Defense Health Agency.
We bring strong decades long experience and uniquely qualified highly trained professionals to the table leveraging digital transformation big data secure data analytics modeling and simulation telehealth and several other differentiating capabilities to ensure that our clients can adequately assess.
And address the challenges of tomorrow.
In addition, our investment in human resources and technology to support the backbone of our organization will continue.
We have a world class workforce of skilled employees dedicated to improving public health with the best in certifications and credentials, including our recently achieved ISO 27000 point 27001.
This accreditation signifies the information security management system conforms to the requirements of the ISO I E. C. 27, 001, 2013 policy the only internationally recognized certifiable information security standards.
Their credentials cover the I T system supporting our underlying operations as well as our incentive by cloud the companies.
Past that as platform as a service cloud computing offering and was awarded but that was awarded following an extended our extensive audit process that examines the company's information security risk controls and management processes. It validates our commitment to the best in class class information.
Security and data management practices. So our federal clients can be assure that DLH provides the utmost in security and risk management protocols.
Just again. Another example of how we're leveraging technology to support our clients and to win new business.
Before turning the call over to Kathryn Let me take a moment to briefly review how.
How much has changed here over the past several years as shown on slide five as you can see our transformation has been rapid turning DLH into a highly diversified organization that serves three core markets of the federal government. This of course was consistent with our strategy.
Our expansion has been helped along the way by a few strategic very focused acquisitions that have broadened our capabilities as well as the agencies that we serve those two were consistent with the strategy, we laid out several years ago.
But at the end of the day it comes down to our people.
Both our recently hired vote troops as well as the long service employees, who have driven this company forward.
Speaking of which let me say how proud I am again of our excellent teams professionalism and enthusiasm that has been instrumental in our ability to win and flawlessly execute a recompete and the new contract Recompete and the new contract with FEMA and Alaska over these past.
Six months.
This clearly demonstrates and illustrates that DLH is ready and able to be a much larger player in the Gulf can space and is on a trajectory to become an even greater enterprise to serve health care and systems engineering needs of our nation.
We're continuing to.
To be on track to post very strong results. This year and more importantly are positioning the company for even better days ahead.
All of this is made possible again by our our talented people who are successfully bringing in new innovative solutions to our customers and winning new business that leverages our expanded capabilities.
With the federal budget enacted a fed ramp authorization in place and solid demand for our services, we really look forward to the future as we enter the second half of fiscal 'twenty to 'twenty two.
With that I'd like to turn the call over to our Chief Financial Officer, Kathryn Dzhambul Kathryn.
Thank you Zach and good morning, everyone happy Cinco de Mayo.
We're happy to report another quarter of excellent results.
Turning to slide six we posted revenue of $108 7 million for the three months ended March 31, 2022 versus 61 5 million in prior years fiscal second quarter.
The growth reflects the impact of roughly $39 8 million in revenue tied to the Alaska Athena contracts that Zach discussed along with a 12% revenue increase across the other parts of our business as an aside we do not expect to see any material impact in Q3 related to Alaska since the work there has been largely for.
Phil.
Income from operations was $10 3 million for the fiscal 2022 second quarter versus $4 6 million last year again, reflecting the additional short term FEMA contract in Alaska operating margins improved to nine 4% from seven 5% in fiscal 2021 note that the fiscal.
The theme of work this quarter was positively impacted by end of contract incentives, while our non Alaska operations were impacted by planned investments in human capital and business development activity.
Going forward, our margins will return to more typical levels associated with our rep on sustaining revenue in program mix.
Interest expense was $6 million in the fiscal second quarter of 2022 versus $1 million in the prior year period, reflecting lower debt outstanding DLH recorded a provision of $2 5 million and 1 million for tax expense during the second quarters of fiscal 2022 and 2021 respectively.
We reported net income in the second quarter of approximately $7 2 million or 50 cents per diluted share versus $2 6 million or 19 cents a share last year, excluding the Alaska business non-GAAP earnings for the fiscal 2022 second quarter were $3 1 million or <unk> 22 cents per diluted share.
A reconciliation of these results is included in the back of this presentation.
EBITDA for the second quarter of fiscal 2022 was $12 1 million versus $6 6 million in the prior year period due to the reasons I discussed earlier.
As a percent of sales EBITDA rose to 11, 2% this quarter versus 10.8 last year, excluding $5 5 million related to our Alaska business EBITDA for the fiscal 'twenty two second quarter was $6 6 million, reflecting the planned investments in human capital and business development in the current quarter a.
A GAAP net income to EBITDA is provided in our earnings statement and at the back of this presentation.
Slide seven gives an updated snapshot of our debt position at the end of Q2 as of March 31, we had approximately $37 5 million of debt outstanding under our credit facilities versus $46 8 million at the end of fiscal 2021, and our leverage ratio nudged under one times.
Furthermore, after the end of the quarter in April we paid off all remaining debt from our acquisition of social <unk> scientific systems in 2019, extinguishing that $70 million five year term debt in 35 months.
As promised we will use our substantial cash generation to pay down debt and delever the balance sheet, leaving us in a strong position with plenty of financial flexibility for any appropriate transaction on the horizon.
At this point, we expect to end the fiscal year with under 25 million of indebtedness.
This concludes my discussion of financial statements with that I would now like to turn the call over to our operator to open for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Joe Gomes with Noble capital markets. Please go ahead.
Good morning, everyone. Hey, this is Joshua was awful and filling.
Filling in for Joe gallons sold.
So my first question look the last one.
Good morning.
So my first question was.
I know that our the head start program revenues in the second quarter kind of jumped from the first quarter a little bit can you tell me a little bit what is behind that you would expect that $8 9 million going forward.
Yeah, Great question, Joshua Yes, as we had been indicating and prior quarters were severely impacted largely by the COVID-19 impact for these.
These grantee facilities throughout the country Big part of that reduction was interest associated with our abilities to go out to these sites and conduct our onsite investigations with the cessation of the of the pandemic as well as some innovations that we put into place with regard to how we're going to conduct those audits, which.
Started to pick those back up during this quarter.
And we're optimistic and hopeful that that will be a sign of the times and it will continue.
Great. Thank you so much and then I just know that you guys kind of had an additional investment in the human capital management, you guys discussed about last quarter.
This is for retention and obviously attraction employees, but it also it kind of sounds like you're building. This workforce in anticipation of maybe receiving more workers is that.
Is that a good line of thinking.
Yeah, all of the above their Joshua certainly.
We're in some times, we've always had challenges sometimes come with regard to the workforce, but.
The great resignation is really challenged all of the Gov Con community in a special way so.
Melissa <unk> B R. R R.
Head of our human capital management efforts now as our CRO has really worked very closely with each of our operating unit leaders in our team to really come up with some innovative ways to address that and that is going to continue to be very important.
For both as you indicated retention and attraction at the same time, we are implementing some new measures to.
To help build new tools and capabilities in all aspects of human capital, whether they'd be talent acquisition systems talent management learning management systems et cetera.
And some best of best of breed tools to help us as we move forward in the future. So we're starting to see some of those investments this year and we'll continue to do so as I indicated earlier, we are in the people business, absolutely and we'll continue in that regard Kathryn anything like.
That's exactly what we might would have been my observation.
Obviously, we're fundamentally a people business and so even even pre COVID-19 and pre the great resignation, we really understood. The importance of continuing to really build that pipeline of talent and really and give people visibility into their trajectory of that career path here. That's our that's our that's our really foundation for sustaining.
Our growth outlook for the company and so.
<unk> developed the one DLH culture that that really leaves together the resources that come in via various acquisitions, helping people understand how they can matrix across the organization continuing to scale up people and give them a path forward and then of course, nothing nothing about COVID-19 and the great resignation has done anything but real.
Enforced.
Really the strategy, we already have play so I think all of those things really speak to the importance of committing.
Meaningful resources to human capital development.
Yeah, great. Thank you so much and then another one for me is I was wondering if you guys can have right eat like additional detail just on major contract do you guys have kind of bid on or already or maybe if contemplating a bidding on like what are the size of those and obviously the timing.
Yeah or the range of our pipeline does vary we've we've had a particularly.
Heavy period over the recent few quarters that had to do with.
Some of our re competes are really not very material overall, but very strategic to us.
The contracts are.
Less than $50 million over five.
At the same time, we've had work on the IDI cues of which of those type of contracts. It for the next five or even 10 years you have to have a roll on in order to be able to compete for task orders in the future. So we're going to continue.
Continue to.
Look to those sort of vehicles and make sure that we have a good stable of those type of idea IQ contracts going forward.
We also have had.
We're optimistic that with the budget certainties now that some of our larger opportunities north of 75 and $100 million.
That we're going to start to see some of those rfps hit soon we've had customers that have continued to extend the incumbency on those contracts and had reluctance to fund.
The new procurements and so we're hopeful now that we move off of the continuing resolutions that we've been on for several years that the budget transparency now will move some of those forward. So we have been doing pre.
Preparatory work for those in scatter and indicated some of our some of our pre RFP activity is to start to drive technical solutions and value propositions on the capture process.
That the yield will be subsequent to submitting the proposal and then of course the pending awards.
Yeah.
Yeah, Great and then just last question if I may I, just wanted to kind of get an update just how the pipeline is looking and it seems the valuations out there when you're looking at those companies.
The are you talking about on the corporate development M&A side, yes.
Yes.
Kathryn sure happy happy to address that so so it is a I think I'd say, it's a factor of the M&A industry in general and particularly in our space that a lot of opportunities pulled forward into 2021, just a general expectation of a tax rate increase.
Ultimately never materialized, and so that sort of drained the Q. If you will for the first quarter of the calendar 2022, but.
Everybody that we network with N and our own sense of things with that things would start to spring to life in the April timeframe and indeed that is what we are observing so I do expect there to be healthy volume for the balance of the calendar 2022, and we are definitely going to be and they're evaluating the opportunities that are relevant for <unk>.
H.
We're encouraged about our ability to have the capacity to respond to those opportunities and and we think there is a lot in the market that would be meaningful in terms of continuing to expand our capabilities and let me add that Catherine I, we're pretty proactive beginning of the of the calendar year two.
Actually meet with our our close friends in that side of the business to let them know kind of what our strategy is we have expanded our strategy in many ways. We believe that we're.
Well prepared to do larger.
Type of opportunities than we had before and then we're also opening our aperture a bit while health is going to continue to be a core component of us, but the technology side and differentiating capabilities that we have built over the last couple of years, we drink opens up some additional markets.
That will also come into play so.
We think that we've got some pretty good alignment so that they understand our expanded strategic vision on that side of the house and that will help to drive we think opportunities in the near future.
Yeah, great. Thank you so much for answering all my questions. Congrats on the quarter guys I guess I'll jump back in the queue.
Thank you Joshua and thanks for joining Joshua say, hey to Joe for Us.
If you'd like to ask a question. Please press Star then one on your telephone keypad.
Again, if you have a question. Please press Star then one.
At this time there are no additional callers in queue. So I'd like to turn the call back over to the President and Chief Executive Officer, Mr. Zach Parker for any closing remarks.
Well, thank you to everyone for joining US today. This concludes our presentation. This afternoon as usual Kathryn and I will remain available for any follow up discussions.
And for the rest of you. Please have a blessed day and we'll look forward to chatting with you next quarter Bye for now.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.