Q1 2023 DLH Holdings Corp Earnings Call
Speaker 2: So.
Speaker 3: Hello and welcome to the DLH Holdings Fiscal 2023 First Quarter Earnings Conference call.
Speaker 4: All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question you may press star, then one, on your telephone keypad. To withdraw from the question queue, please press star, then two.
Speaker 5: Please note, this event is being recorded. I would now like to turn the conference over to Chris Witte, Investor Relations Advisor. Chris, please go ahead.
Speaker 6: Thank you and good morning everyone. On the call with me today is Zach Parker, President and Chief Executive Officer and Catherine Johnbo, Chief Financial Officer.
Speaker 7: The company's earnings release and PowerPoint presentation are available on our website under the investor page.
Speaker 8: I would now like to provide a brief safe harbor statement which is also shown on slide three of the presentation.
Speaker 9: This call may include four-looking statements that relate to the Cubase Outlook for fiscal 2023 and beyond.
Speaker 10: These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements.
Speaker 11: Please refer to the risk factors containing the company's annual report on Form 10K and then our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.
Speaker 12: On today's call, we will be referencing both GAP and non- GAAP financial measures.
Speaker 13: A reconciliation of our non-GAP results to our reported GAP results is included in our earnings release and in the investor presentation on DLH's website.
Speaker 14: President and CEO Zach Parker will speak next, followed by CFO Jeth and Jambal, 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, Zach.
Speaker 15: Thank you, Chris, and good morning, everyone. Welcome to the 2023 first quarter conference call. I am truly excited about how well our leadership team and our talented workforce has delivered during this quarter.
Speaker 16: And I'm really excited to give you an update around all of those aspects on this session.
Speaker 17: Beginning with slide four, I'll first provide a high level overview of the quarters major developments in accomplishments, including of course our acquisition of the privately held GRSI on December 8th of last year, adding approximately 700 highly credentialed professionals to DLH.
Speaker 18: and significantly strengthening our digital transformation and cyber capabilities. DLH has incorporated some tremendously talented expertise both technically and analytically. Inter are already nationally recognized team of researchers, analysts, technologists, and
Speaker 19: and our shareholders.
Speaker 20: What we now bring to the market is more differentiated and powerful than ever before, and we look forward to this new growth stage in the company's history.
Speaker 21: Truly excited about the trajectory.
Speaker 22: Given the date of the acquisition, our financial results for this quarter include a portion of GRSI.
Speaker 23: We are well on our way to integrating this unique enterprise, which I'll discuss even more in a moment.
Speaker 24: The Q1 revenue was $72.7 million, which was lower than last year due to the large short-term FEMA contracts which we completed in Alaska during fiscal year 2022.
Speaker 25: Catherine will provide pro forma and adjusted numbers for all of our results momentarily.
Speaker 26: We reported operating income at 3.9 million and reported EBITDA with 6.3 million.
Speaker 27: Following the acquisition of GRSI, our debt grew, and at the end of the quarter, we had approximately 203 million of indebtedness outstanding.
Speaker 28: However,
Speaker 29: prior transactions, we have a plan and a strong track record of using the company's operating cash flow to de-lever the balance sheet as quickly as possible.
Speaker 30: Our reported EPS was 11 cents per diluted share.
Speaker 31: Bolstered by the acquisition, our backlog stood at $965 million at the end of the quarter, putting us in great shape for the rest of Fiscal 23 and beyond.
Speaker 32: Turning to slide 5, I want to briefly provide an overview of our most recent transaction.
As a reminder, we hosted a conference call specifically for the GRSI acquisition in December , which referenced a detailed presentation on our website. And I'd encourage our listeners to pursue this if they have not done so already.
That said, I believe this acquisition is one of the most strategically important decisions we've made over the past decade.
It has brought together tremendous capabilities and complementary businesses in terms of clients,
capabilities, culture, and strengthen our position for organic growth and a leader in digital transformation and IT modernization.
The acquisition also expands our portfolio programs at the National Institute of Health, which has been a strategic target for us for some time, and has offered diversified opportunities within the Department of Defense, particularly the Navy and the Marine Corps, which also have been very, very important.
targeted enterprises.
The information warfare community really helps to elevate our cyber positions and all things associated with digital transformation.
The bottom line is that this acquisition significantly broadens our technical capabilities, providing us greater access to mission critical areas expected to accelerate growth.
I think most of our investors are aware that we have been moving into the digital transformation space for some time, and this is where GRSI has unique improvement experience, expertise, as well as a strong track record.
Combining the technical capabilities with our nationally recognized research, scientific research expertise and capabilities along with our R&D competencies derived from our IBA acquisition, our role in providing highly differentiated solutions.
critical to the host of new business development initiatives remains tantamount.
GRSI has also enhanced our cybersecurity offerings.
Further diversifying our operational capabilities.
opened up new markets and brought an attractive book of business.
At closing, the company had a combined backlog of just around $1 billion and annualized adjusted EBITDA of approximately $50 million.
Given this transformational acquisition and a strong demand for our technology enabled services, we remain optimistic about the federal market and growth going forward.
There continues to be a commitment throughout the government for infrastructure upgrades, and overall modernization.
enhance cloud computing and cyber security.
And we have a solid pipeline of opportunities on the horizon and are actively engaged in new business development opportunities to expand that business.
particularly in the scientific and research side where we're looking at opportunities such as these the major CIO SP for opportunity coming up in the defiant
Suffice it to say, we are at a whole new level in terms of size and scope, but we're still the same innovative DLH with the entrepreneurial spirit to provide innovative, cost-effective technology solutions to our core customers in the adjacent markets.
With that, I'd like to turn the call over to our Chief Financial Officer, Catherine John . Catherine? Thank you, Adrian for letting me be here today.
Thank you, Zach and good morning everyone. We're pleased to report our first quarter for fiscal 2023, which includes the acquisition of GRSI. As Zach mentioned this closed on December 8th of 2022.
Turning to slide seven, we're providing a bridge from the reported gap numbers to the adjusted results, excluding both the GRSI transaction given its short duration in the quarter and last year's short-term FEMA contracts in Alaska, which we've discussed in the past.
We've also adjusted the fiscal 2023 first quarter for corporate development cost incurred to complete the GRSI acquisition such as legal expenses and financial due diligence costs among other items.
These results are prepared on a non-GAAP basis, and a full reconciliation to GAAP is included in the back of the presentation available on our website, as well as in our press release and associated filings. But the high-level takeaway is that on an apples-to-apples comparison basis, the data
CLH continues to report solid performance from the underlying legacy business.
Slide 8 shows this information in graphic form. The 7% adjusted revenue growth year over year generally reflects higher demand for our key programs.
Adjusted income from operations was 5.3 million for the quarter versus 4.9 in the prior year period. We anticipate operating margins to be positively impacted going forward, reflecting our growing base of business as well as GRS size, relatively higher value revenue, revenue mix.
Interest expense was 1.8 million in the fiscal first quarter of 2023 versus 0.7 million in the prior year period, reflecting higher debt outstanding due to the GRSI trend acquisition.
Following the close of the quarter, we implemented an additional floating to fixed interest rate swap. The notional amount of covered under swaps increased to 112 million or approximately 60% of the term debt outstanding with the remaining balance of debt subject to floating interest rates.
The fixed rate for the additional swap is 4.1% plus applicable credit spread, and the swap matures in January 2026.
We believe the swap will substantially mitigate interest rate risk.
ELH recorded a provision of $0.5 million and $2.7 million for tax expense during the first quarters of fiscal 2023 and 2022 respectively.
We reported adjusted net income in the first quarter of approximately 3.6 million.
or adjusted diluted earnings per share of 25 cents versus 3.1 million or 22 cents per diluted share last year.
Adjusted EBITDA for the three months ended December 31, 2022 was approximately $7.2 million versus $6.9 million in the prior year period, or 10.9% and 11.1% of revenue, respectively.
Moving to slide 9, we provide some historical perspective regarding our ability to pay down debt using the company's substantial operating cash flow. The bars represent debt levels at the end of each quarter for the past few years, during which time we completed the acquisitions of S3
and IBA.
The company has a strong track record of rapidly delivering the balance sheet after transactions are undertaken.
We are confident that this time is no different, and we anticipate future periods to continue in this tradition following the acquisition of GRSI as shown on slide 10.
When the transaction closed, we had approximately 208 million of dead outstanding.
And we subsequently prior to the end of the quarter
reduce that balance to just under $204 million.
However, while we're not providing specific guidance, based on our experience modeling our operating cash flow expectations, we anticipate that our debt will be between $180 and $190 million at fiscal year end. If that's the case, our leverage ratio will be under four times and thereafter we expect our cash generation to continue to rise.
This concludes my discussion of the financial statements. With that, I would now like to turn the call over to our operator to open for questions.
Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw from the question queue, please press star then two.
Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Joe Gomes with Noble Capital. Please go ahead.
Good morning, Vagna Catherine.
Check out the order
Thank you.
So, the first one I'm going to.
to lay it out there for Zach. You mentioned you were going to talk a little bit about the GRS integration and how that's been going. So maybe you can just kind of give us a little bit more detail on integration and if you're seeing the opportunity for cross-selling opportunities. you
Oh boy.
Maybe even when you model the transaction, I believe you factored in zero expense savings and are you seeing anything on the expense side that might lead to some
some expense savings
Yes, great questions, Joe. And thank you for the lead in with regard to integration and our compatibilities. I think we certainly featured some of the quotes between myself and David with regard to the cultural fit.
And we did a lot during the diligence phase, both directions in that regard as extremely important to the company as well as ourselves that we would see that tremendously great fit as
as post-closing skill, that's always a critical component success factors. And I got to tell you that it's been going tremendously well. We have stood up on an IMO and Integration Management Office that is consistent with representatives from...
the new company and our heritage resources. They've got their swim lanes and they're going very, very, very well. So we're excited about that. With regard to cross-sealing, absolutely. You know, we kind of started that during diligence phase. Absolutely. You know, we really feel like we want to come out of the gate.
some technologists supporting NIH that have come with the GRSI edition, working collaboratively with some of our nationally recognized scientific researchers, all working on value proposition and a solution set for some of these customers.
that we would otherwise not have in the room together. And it's really refreshing to see that inside of our first 100 days of integration, that our teams are working very, very collaboratively in that regard. And so we do see not only enhancements, but also improvements in the way that we're working
to some of our existing work, but new opportunities that we started developing in a pipeline that do reflect the power of the two companies, not just any of them individually. So really, really great there. We have actually started to implement
some synergies, some expense savings already. It should show up in another quarter or so. And of course, we have a plan for a lot of the infrastructure redundancies to be taken out over the course of the year. And our IMO has a pretty good cadence and a schedule on those. We see a lot of different things happening over the course of the year.
Nothing really taken us, you know, beyond the end of this fiscal, but we have a lot of quick wins already under our belt. So it's going well, Joe. Joe's still here.
Great. One follow-up. Scanning through the queue, you had really strong performance over at the VA Head Start. Pharmacy revenues were up 23%.
year over year, Head Start revenues were up almost 34% year over year. I'm just wondering, maybe you can touch base as to what is driving that and is that something that you see continuing or do you think that those types of growth rates will moderate over the rest of the year?
Well, with respect to the head start specifically, that program specifically, it's really more a case of returning to norm. If you'll remember, and boy, I'm happy to be among those who has put COVID way in the rear view mirror.
But it hasn't been that long ago, it was just this time last year that dealing with Omicron caused a significant realignment of the schedule and so some things that traditionally would have happened in RQ1 moved into Q2 and 3. So this year is performing much more to the norm.
So I think programmatic by the program, well, we have had some nice opportunities to continue to grow or reach there. Largely the volume on that program is going to be pretty consistent year on year. It's just a matter of which quarter it'll roll out in.
In contrast, the, the, the, as you probably remember in the success of quarters of twenty two, the pharmacy program and both sides of that program grew pretty significantly over the course of the year.
As the VA really took some operational changes to redirect work and really kind of rethink their business model using again, COVID as kind of an excuse to kind of do some, make some efficiency gains that were probably long overdue and steering work through that through that automated distribution center that they had previously held at their locations. And so.
Those came on largely throughout Q2 last year and so they're kind of catching up in Q1 this year. It's compared to Q1 last year but we think that Q1 volume kind of represents the norm of that program going forward.
Great, thanks for that insight. I'll stick to the two questions and pass it on. Thanks, Zach and Catherine.
Great talk, Nijal. And thanks for being a straight man on the revenue synergies. As you can tell, we're extremely excited about that.
The next question comes from Brian King-Slingler with Alliance Global Capitals. Please go ahead.
Hi there, this is Sherman, on for Brian .
Yeah, good quarter guys. Just piggybacking off of the integration question, should we expect the LHC personnel to focus
more on BPO, RFPs, whereas GS-SI personnel will focus on the IT opportunities.
Well, we're not going to operate that way. I think it's the real thing that we should expect. Each of us brings our strengths, but really the opportunity is in driving convergence on those pursuits. We know each of us has our strength and expertise that we bring to it. But...
And while each group will continue to leverage its expertise and capabilities, really the home run for us, or really the icing on the cake, or whatever cliche you want to use, is in that scenario where we take the expertise that both of us bring together, both in terms of capabilities, as Zach described, and in terms of
business models from a customer perspective and really driving convergence on those to drive those revenue synergies that we talked about. Yeah, and I'd say, you know, our vision as of aligned with the priority of this deal was to really be able to make this be a one plus one equals three. I know you hear that often in some of these.
or would have been able to drive before. And we're starting to see that with some of our opportunities now. If you think about some of the opportunities, for instance, we bid in one an IDIQ where the VA wants to do more innovation and drive more innovation in their systems development.
And we had a strong, and will continue to have a strong partnership team for that. But infusing the talent that comes with GRSI into that mix, supporting our existing competencies, some abilities that are really going to...
But now hitting those adjacencies is much harder than we have been able to do in the past.
Great. Thank you. Is there any way you can quantify GRS size proposal submitted in 2022 and or plan submission in 2023?
I don't understand which proposal.
Just a quantum one. Yeah. The pro forma?
Yeah, just a visibility on the pipeline. Yeah, it's more forthcoming on that Shervin as we really give forward treatment of the addressable markets on the on you know we're going to we've already moved well beyond talking about GRSI as a standalone so when we talk and this
but we are intentionally moving away from what's the pipeline for GRSI versus what's the pipeline for the company. It's really a DLH pipeline. So, you know, you'll see there how we think that'll drive more meaningful definition of the pipeline and really broader markets that we can access because of the broader capability. Yeah, and let me add to that.
We're viewing this as a DLH pipeline of which we've got three major operating entities that bring really strong capabilities to go to market. And that's very important for us to have that full one DLH approach as opposed to an addition of standalone entities.
You'll see us evolving structurally over the course of the next year in that regard, but from a market pursuit, our go-to-market strategy right now is literally a one-DLH approach. We'll address a single pipeline. There will obviously be some leads and partners and collaboration.
etc. on most of these deals now. But you know I'm excited, the reason I'm so excited about Joe's observation earlier and his question earlier is just that. That cross-selling is driving, we're driving our pipeline so there's going to depend upon cross-selling. And that's a exciting part about it. And it's kept an indicator.
you'll get a little more color around what that looks like in our upcoming annual meeting next month.
Alright, thank you so much guys, with all your...
You bet. Thank you very much. I hate a Brian . I will.
As a reminder, if you have a question, please press star then one.
The next question comes from Jeff Braunchick with Coff Street Capital. Please go ahead.
comes from Jeff Bronschick with Cov Street Capital. Please go ahead. Good morning everybody.
Stephen, hey umm....
You know, it's the indignity of West Coast, never treated right. My question is maybe just, you know, frame out what the seamop...
RIP process looks like...
today and you know how does it look and feel from you know different ways they've approached the contract in the past and then maybe sort of different ways that you're thinking about your own capabilities and what you want to do
and how relevant this is to you. And, you know, just maybe frame out some of the puts and takes. And then lastly, like a timeline. What's your best guess at how this rolls through? Good luck.
Yeah, thanks. I'll start with the timeline piece and then give some color again around the B.A.'s acquisition process. Timeline-wise, let me make sure we're level setting everyone. We are continue to be on SoulSource Bridges since 2016.
It's amazingly long procurement administrative lead time, or PALT if you will, but that is actually where we're currently operating. November of 2016 is when the second of the major contracts that were awarded in 2011-12 time for
was of course in the 2010-11 competition arena. Those contracts, the contracts we're performing on today were all awarded as and solicited as individual site bids. So we had maybe 40-50% share of one set of...
four of them as an incumbent, we did bid all seven. It so happened that we won all seven and having had that clean sweep the government has managed the work and we've collaboratively agreed to manage the work as though it was a logistics contract and a pharma contract.
But in each of those cases they were individually solicited, just like they are now, by sight. And of course, they gave preferential treatment to small businesses in Adirina as would normally be the case.
And then of course over the last few years we've had various versions of the Kingdomware induced acquisition changes. And appropriately so, the VA remains strongly committed as are we to the small business community, and particularly the service disabled veteran owned small businesses. We have partnerships that we've put into place over the last few years, and that's been an integral part of our strategy and continues to remain in need.
as standalone businesses, as standalone sites. The difference here is rather than encouraging service disabled small businesses as teammates, it is currently in a set-aside mode so that the SDVOSB has to be a part of the prime position for each of these. So we're continuing to...
To support them, we'll evaluate how the evolution of the acquisition strategy will come out as they work to a conclusion on this acquisition process. But either way, we remain fully, fully committed.
to serve in our veterans the way in which we have, providing differentiating capabilities to net out as high, high customer satisfaction ratings, up to an including JD Power Awards on a pretty extensive basis. So we remain committed in our partnership with our veterans.
and will continue to embrace the small business investment as well.
So just given the highly efficient way in which the government works particularly today, how would you envision a timeline of submission, review, initial awards, subsequent...
you know, complaints and whining and then, you know, into a final, you know, next phase of the sea baba, just roughly speaking.
Well, they currently have bridge coverage, I think we talked about in our filing, that carries us through the end of this fiscal year. That has to be an indication of the VA's thinking with regard to having coverage up through the end of this fiscal year to allow them to go through the adjudication of an evaluate form, and it only allows us to review out in a given week.
proposals in any potential protest. I can tell you that proposals have been submitted for each of those sites thus far so they have an idea of the competitive landscape and what their load of proposals to review will be. We are a part of them and you know the jury's out as in terms of what the timetable is going to take.
for calendar, you know, of some conceptual change would be there just, or there's, just there's just, okay. And just as this to be clear, so the way you framed it.
Would it be fair to say that if you look at things on a curve that winning all seven is on the right side of possible but maybe not volically and losing all seven is also on the other side of the curve is unlikely that you'll you know.
where you know we are very optimistic and continue to lean into protecting our business right and so we're not modeling scenarios that suggest that we will subordinate you know any of these clients in the critical mission critical work that we do for this this agency our leadership team
that we are really committed and optimistic that we offer, are going to offer some solutions that are going to prevail. And this is my last question. So it wouldn't be fair to say that there is economic advantage.
to running the whole show air go uh... different competitors you know will have you know if you're only gonna go for or win or expect to win maybe two that that would that would provide inferior economic in other words the attractiveness of of a part of
you're winning a part of this is infinitely less interesting economically than running the whole program as you are now. Is that a fair statement? Well, we obviously don't discuss, you know, proprietary bidding strategies, but I think your question is a fair question relative to...
If you're looking from the outside end, does it make sense for the government to maybe expect to see some synergies if you are operating across the all domains? And I would say there's good reason to, yes, that's a fair question and there's good reason to think that that might be the case.
Excellent. In into it. And don't ever mention the Eagles and my presence again. Thank you.
Yes sir.
Thank you.
Thank you. You took me under.
The next question comes from Burton Osterwise with Osterwise Business Consulting. Please go ahead.
This question comes from Burton Osterweiss with Osterweiss Business Consulting. Please go ahead.
Hey, good morning, Zach and Katherine. I don't have any questions. I'm good thanks. I just wanted to say a big thank you. You guys keep banging it, knocking it out of the quarter after quarter after quarter. And it's much appreciated. So thanks again and hope you all have a great week. We got you, you know, this flint.
You knew us, and it is gratifying. We appreciate your support. It's very gratifying to see the strategy that we laid out many years ago coming to fruition. And we were excited about it. Yes, like clockwork.
Yeah, and as you know, Burt, obviously we put on a little more debt than you're used to being too comfortable with us, but you know our history. Certainly the market, we think, knows our history and hopefully we'll be able to chat a little more about that. We'll see Catherine has taken some steps already.
You can see that trajectory and we can talk a little bit about that more if we see you in New York next month. Oh, I think it's a great thing because the stock will get beat up. We can all get in, load up for more, and then the balance sheet will clean up. It happens over and over.
Yeah, you go. Some things are predictable, right, Bert? Thanks so much. Have a good day. Bye. We appreciate it. Thank you for your support.
At this time, there are no additional callers in queue, so I'll turn back to Mr. Parker for any closing remarks.
Thank you, MJ. And again, a special thanks to all of you for your interest and your continued support for DLH, as Catherine indicated. We are really pleased that the strategy has enfolded us to get into what we call our third phase now. We are really pleased that the strategy has enfolded us to get into what we call our third phase now.
probably in many ways our most exciting phase of implementing a strategy for DLH. We want to invite you to join us next month at our annual meeting for greater disclosure of the new DLH. So with that, thank you, have a productive and a blessed day. Bye for now.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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