Q3 2023 DLH Holdings Corp Earnings Call
Pardon me, ladies and gentlemen, the DLH Holdings earnings call will begin in two minutes. Thank you for standing by.
[music].
Good morning, and welcome to the DLH Holdings fiscal 2023 third quarter earnings Conference call.
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I would now like to turn the conference over to Chris Witty Investor Relations adviser. Please go ahead Sir.
Thank you and good morning, everyone on the call with me today is that Parker, President and Chief Executive Officer, and Katherine John Bull 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 three of the presentation.
This call May include forward looking statements that relate to the company's outlook for fiscal 2023 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.
Reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the Investor presentation on Dlh's website.
Residents CEO is that Parker will speak next followed by CFO , Kathryn John Bull 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.
Thank you, Chris and good morning, everyone welcome to our 2023.
Third quarter conference call.
We continue to make good progress and remain on track for a strong end to fiscal 2023.
[noise] accomplishments are attributed to the great commitment and talent of our accomplished and distinguished employee base.
Whether the pandemic storm and continue to deliver high caliber solutions and services to our clients.
Let's dive into the financial highlights on slide four.
<unk> provides a high level overview of the quarter's financial highlights.
I am pleased to announce third quarter revenues surpassed the 100 million Mark setting a new milestone for our ongoing operations that reflects our success acquiring and integrating growing organizations as well as importance of key programs and agencies that we serve.
We anticipate being at or better than this run rate going forward testimony of our new phase of growth of our next phase of growth, which is built upon the organic strengths a broad array of technology enabled solutions and reflects strong demand for the company's extensive capabilities by the.
Federal government.
During this quarter our reported operating income was $7 1 million and EBITDA rose to 11 4 million.
We also managed to reduce our debt by over $8 million since the end of the quarter too.
Utilizing our strong cash flow to delever the balance sheet efficiently.
Our reported EPS was <unk> 12 cents per diluted share.
Our backlog at quarter end was approximately $817 8 million.
We're operating in a very active and attractive bid environment and anticipate winning our fair share of our new contracts in the coming quarters supporting the accelerated growth going forward.
Turning to slide five I wanted to I want to give an update on some key developments for the company and its outlook.
We recently announced the DLH had been awarded a contract to compete for expanded digital transformation systems Engineering, and cyber security services for the National Heart lung and Blood Institute.
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As part of this program, we will continue to provide advanced solutions and technology services to support this customer as a global leader in heart lung and blood research and training and education as well.
This multiple award contract indefinite delivery indefinite quantity contract.
Hasnt awards ceiling is $85 million and a five year contract term.
Our integration of our GRS is also on track and we're continuing to achieve anticipated the anticipated enterprise results.
Since the deal announcement.
The transition of G. Rsi to key DLH business systems, such as our enterprise resource planning ERP and our human resource information systems Human resource information systems is complete leading to a greater operational efficiencies across the board.
Our expanded go to market strategy is evolving as the teams pulled together and demonstrate the.
Range of the DLH enterprise capabilities to our customers.
And lastly, as you may recall the fiscal responsibility Act of 2023 was enacted early in 2023.
This was incurred this increased it increased the debt ceiling and allowed budget negotiations to begin for the next fiscal year.
This includes providing initial funding targets for defense and nondefense agencies alike of course, there's always the possibility that we will face another year that began with a continuing resolution, but any in any case, our programs and capabilities remain in high demand with strong bipartisan support.
We believe the outlook is positive for fiscal 2024.
And numerous opportunities to grow our top line and continue to improve the companys underlying result.
As a reminder, DLH has access to many billion dollar plus <unk> contract vehicles.
And then allow us to compete more value added agency work than ever before.
Also the Whitehouse fiscal 'twenty for 2024 preliminary budget called for a historic investments in research artificial intelligence and machine learning and digital transformation areas, which would also bolster our growth trajectory and bottom line performance.
Our highly differentiated capabilities broad area, a broad array of contracts and diversified suite of technology solutions make us a one stop shop for advancing the government goals of Tomorrow, and we look forward to our fiscal 'twenty 'twenty four will break.
With that I'd like to turn the call over to our Chief Financial Officer Kathryn.
Catherine.
Yeah.
Thank you Zach and good morning, everyone.
We're pleased to report our third quarter results for fiscal 2023.
Turning to slide seven I wanted to once again begin by showing the adjusted results I'll be speaking about today.
Current year metrics require no adjustment, we are providing financial data for fiscal 2022 with and without the short term FEMA contract in Alaska that we discussed in the past a full reconciliation.
Conciliation of this information is also included in the back of the presentation as well as in our press release and associated filings.
Slide eight shows these details in graphic form adjusted revenue rose, 43% to just over 102 million this quarter from $71 5 million last year.
We're obviously very pleased to have officially crossed the 100 million quarterly revenue threshold for the first time, Inc. Excluding our prior FEMA related work.
Adjusted income from operations was $7 1 million for the quarter versus $6 5 million in the prior year period, an increase of 9% as a percent of revenue that the company reported an operating margin of 7% in fiscal 'twenty three versus 10, 7% in fiscal 'twenty, two reflecting higher.
Noncash depreciation and amortization expense as a result of the <unk> acquisition.
Interest expense was $4 9 million in the fiscal third quarter of 2023 versus <unk> 5 million in the prior year period, reflecting higher debt outstanding due to the transaction.
The acquisition of <unk> Si.
<unk> interest rate or cash interest paid in the third quarter of 2023 was $8 six 4%.
DLH recorded a provision of <unk> 5 million and $1 7 million respectively for tax expense during the third quarters of fiscal 'twenty, three and 'twenty two.
We reported net income in the third quarter of approximately $1 70 million or 12 cents per diluted share versus $4 9 million or 34 cents a share last year adjusted EBITDA for the three months ended June 30th 2023 was approximately $11 4 million versus $8 4 million.
In the prior year period, an increase of 36%.
As a percentage of sales adjusted EBITDA margin was 11, 1% versus 11, 7% in the prior year period, reflecting the contribution of more broadly differentiated capabilities through which we expect to earn better returns over time.
The company generated $15 million in operating cash year to date versus $8 3 million on an adjusted basis in the prior year period.
As we will discuss on slide 10.
We believe our ability to produce strong cash flow from operations will allow the company to reduce our debt, thereby reducing interest expense and providing meaningful earnings growth to our shareholders.
Slide nine gives an overview of key metrics for the company in terms of year over year improvement the acquisition of G. Rsi has bolstered our topline and EBITDA performance, although the impact of noncash depreciation and amortization largely related to acquired intangibles offset some of that progress from a GAAP earnings.
Perspective.
Importantly, the company showed progress sequentially from the second quarter and we remain on track for additional underlying improvement going forward, well noncash depreciation and amortization expense will continue to be high we are working hard to deliver that delever the balance sheet and reduce interest expense in tandem.
Interest will be reduced through both mandatory and voluntary repayments and we are actively managing our paydown strategy with approximately 60% of that carrying a fixed interest rate.
Our fixed interest rate near term payments are all apply to our higher interest floating rate debt.
Note that approximately <unk> 6 million of quarterly interest expense is noncash being the amortization of the financing arrangement fees.
Slide 10 provides an update regarding our deployment of the company's ongoing cash flow generation to pay down debt and strengthen the balance sheet, reducing interest expense as I mentioned, we paid off approximately eight and a half million of floating rate debt in high school.
Quarter, three ending the period with $195 8 million outstanding this puts us squarely on track to meet our quarterly pay down targets and reduced debt by approximately $22 million. This fiscal year from the level of almost 208 million. Following the acquisition of <unk> we are at.
Tiddly, managing our working capital needs and utilize they need the favorable tax attributes of our acquisitions, along with stock comp plans to minimize income tax payments. We continue to anticipate that our delevering strategy will leave us with between 185 and $187 million of debt at fiscal year end.
And we expect to pay down even greater amounts in fiscal 'twenty four.
This concludes my discussion of the financial statements with that I would now like to turn the call over to our operator for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone stone.
If youre using a speakerphone please pick up your handset before pressing the keys into withdraw a question. Please press Star then two.
We also ask that you please limit yourself to one question and one follow up on today's call.
At this time, we will take our first question, which will come from Joe Gomes with Noble capital. Please go ahead.
Good morning, and congrats on the on the earnings.
Good morning.
Joe.
So wanted to just.
Start off Zach you mentioned about the idea of chooses you guys have won recently.
And you know it looks.
And some of your prepared remarks and in the earnings release, you talked about you know some of the difficult environment.
I'm just trying to get a better idea of how you see some of those bigger IDI cues. You know why are they really going to start putting out opportunities for you to bid on.
New awards.
So great Great question, Joe those are always.
That's very material to our ability to drive that organic growth as you well know.
I'm actually pretty encouraged by it.
Particularly our most recent.
Ones.
NH L B I Oh.
Contract is one in which it's.
It's bringing new opportunities for new work for us, but we're in a position of really leveraging.
A real strong.
Rack record.
That we've had with that particular customer.
Particularly within the competitive environment, while it is a multiple award contract we have over the last.
45 years exhibited a real real strong ability to have a high win rate in this community. So we are hoping that with our.
And valued.
Prize capabilities that that will continue.
We have been disappointed as as you know with the governments.
Slow down.
Up until relatively recently as it relates to issuing new work on our previous IDI cues I think I mentioned to you before last time that odor Defense Health agency omnibus for IV IQ still has yet to issue their first a request for a.
Proposal <unk>.
And we have been on standby with a real strong team for quite some time there still continues to be the case.
But we are starting to hear some.
Being very proactive on that and we're starting to hear that.
They are prepared they are getting closer and closer to <unk>.
<unk> issued a few of those some of them. We've had had just a slower than anticipated.
Government announced work.
On our some of our other ones within within NIH and then lastly.
As you May know many of us across the industry.
Our real anxiously looking for the government to resolve the protest on the large the largest of the IV iqs to see I O S. Before it is where the biomedical.
Research technology.
Work is at war, largely health and human services agency is to be conducted a one that has been very strategic for DLH.
We're fortunate that in the heritage contract.
Our GRS I has some presence in some opportunities to pursue but those will expand once <unk> before.
It's resolved it has been delayed by I think over 100 protests largely by some of the small business partners.
And that has slipped any opportunities for us to prime any of the unrestricted work that we've had our eyes on the toward better part of the year.
The upside of that is we do think that I guess is that with the with the approval getting beyond the budget control Act that.
It should give some of our agencies greater clarity of budget and the ability to issue some of the recurring work.
Okay, great. Thanks for that.
Update and then on the V. A obviously you know we've talked about this in the past.
Continuing work there I think through October on one of the contracts in November on on the other on the bridge contracts.
Just wondering kind of an update if any on the V. A process there.
Yeah, It's still no no definitive actions as you as you know and for the benefit of the audience we have been on.
Effectively bridge contracts since November of 2016 for the VA they have.
Applied to strategies relative to the acquisition approach to date since 2016.
And.
They have.
Based upon market conditions and other factors.
We are continuing to participate there in a very meaningful way as well as we're on standby should they elect to once again revisit that acquisition strategy and to to reissue those.
Unrestricted environment. So we are very committed to continuing to support our veterans and distinguish way deliver.
Delivering a high degree of customer satisfaction as we have for over a decade now represented by of course J D. Power Awards among other indicators of high degree of customer satisfaction. So no new no new news there yet.
Joe, but we remain optimistic that.
We're going to have an opportunity to continue to.
To impress the agency as we go forward.
Great. Thanks for that and I will get back in queue.
You bet. Thank you Joe.
Okay.
Again, if you have a question or follow up you May Press Star then one to join the queue.
Our next question will come from Brian Kingston, Lindner with Alliance Global Partners. Please go ahead.
Great. Thanks to only one question.
The.
Channel engaged at least in the short term you've talked about.
And the government with with awards in.
Or if you call them delays.
Can you talk on the other side of the bid and proposal equation.
Our bid submissions as many as last year.
Are you bidding on a lot more work just maybe talk about why the proposal activity.
Quantitative perspective, I'll qualitative perspective thanks.
Yes, Great question, Brian Yes outside of the IDI cues, we have really targeted as we've described before a pretty healthy.
Bidden proposal backlog.
Number of those that started to come come forward of course earlier in the year as you heard US describe the end of December timeframe in January quite a bit on the recompete activity associated with the VA work.
But subsequent to their we've we've seen the last several months really pickup with regard to some a couple of our major bids. So we will be finding that you will be seeing that BMT activity.
It really goes to our G&A.
We will be pretty heavy doing.
During Q3.
And certainly as we move into the final stages of the fiscal year. So yeah. We are we're starting to see some of that picked up in the non Ivy IQ Arena.
Which which we're hopeful is going to be more of a trend over the course of.
The rest of this fiscal year, you know it would not be uncommon for us.
Number of these agencies to feel the pressure at the end of this fiscal year. They had been very restrained and particularly in our areas with within health and human services very restrained in many cases issuing.
Contracts, where they do have funding, but I know a lot of that again was due to the uncertainty.
I have two the first school act being deployed Kathryn anything to add there.
Oh, I think that's right yeah slow start to the fiscal year, but encouraging recent trends.
Great. Thanks, so much.
And our next question will be a follow up from Joe Gomes of Noble capital. Please go ahead.
Thanks, just on.
The H S. S R HFF.
Head start program.
<unk> had a great start to the year when you look.
Year over year. It looks you know if I'm reading the numbers correctly.
The last couple of.
Quarters, you've been below what you did the prior year was there anything specific going on with that program or is it just normal ebb and flow.
I would think of this year as the more indicative huh.
The program from here from a good news perspective has returned to its normal cadence of being pretty front loaded in our fiscal year Q1, and Q2, because that aligns to up.
Many of the grantees, who are if not sponsored by us.
Inside of school are certainly affiliated and trying to align around the school system cycle. So Ah.
22 definitely was extremely back loaded because remember we were all still working our way through Omicron Hill and.
In Q1, and Q2, our fiscal 'twenty, two and so things got pretty Backloaded that that's what makes the comparison of organic revenue.
Year on year for Q3, this year look a little a little lumpy because some of the backend lift we got from head start this year as opposed to this year or last year pardon me as opposed to this year returning to the normal lay out.
Performance.
Okay. Thanks for that after I appreciate it.
No problem.
At this time there are no further questions in the queue. So I'll hand, it back over to Mr. Zach Parker for any closing remarks.
Well. Thank you all for your continued interest and support in DLH.
You probably have heard we're really pretty excited about the company that we have become a as we I can assure you. This so have by our human capital assets.
And we really really are looking forward to closing strong and really entering FY 'twenty four with the type of trends and expectations that we shared before I might add that.
We are also going to be attending if you look at our investor website attending a couple of investor conferences.
I have some.
Additional color around the business over the coming months, we will look forward to.
Engaging with you more in the near term and certainly look forward to closing out Q4.
As we as we enter.
The latter part of the year. Thank you all for your time and have a blessed and productive day bye for now.
Yeah.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.