Earnings Call Transcript - DLHC Q4 2021

Operator, Operator

Good morning and welcome to the DLH Holdings Fiscal 2021, Fourth Quarter Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead.

Chris Witty, Investor Relations Advisor

Thank you. And good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer, and Kathryn JohnBull, Chief Financial Officer. The Company's earnings release and PowerPoint presentation are available on our website under the Investor page. I would now like to provide a brief Safe Harbor statement, which is also shown on Slide 2 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 in the investor presentation on DLH's website. President and CEO, Zach Parker will speak next, followed by CFO, Kathryn JohnBull. 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.

Zach Parker, CEO

Excuse me. Thank you, Chris, and good morning, everyone. Welcome to our fourth quarter conference call. I am pleased with how we finished out the year and I'm excited to tell you about fiscal 2022. Let me begin by sharing with all of you how proud I am of the extremely talented and committed DLH workforce who are responsible for generating our results. None of us knew that fiscal 2021 would impose such unique challenges, including the pandemic. Yet through it all, our diverse work team remained focused on performance excellence, and for that, we are truly indebted. Starting with Slide 3, I'll provide a high-level overview of the quarter and the year, which reflects exceptional results. We reported sales of $65.2 million in the fourth quarter and closed out fiscal '21 with revenue of $246.1 million, up nearly 18% from last year's $209.2 million. This underscores both the strength of our existing operations, which grew organically, as well as contributions from our IBA acquisition last year. We believe our focus on core health markets and high technology applications has proven a valuable one over the long term. Even during times of pandemic-related constraints, political paralysis, and economic uncertainty, we posted operating income of $4.0 million for the fourth quarter and $17.2 million for the full year. Leading to diluted EPS of $0.21 for Q4 and $0.75 for fiscal 2021 as a whole. These results highlight the impact of our business development initiatives, solid margins, and focus on the fundamentals, including controlling our costs. At the same time, we are able to use our cash-generating ability to pay down roughly $23 million of debt. This really strengthens the Company's balance sheet and leaves us in great shape to execute our growth strategy going forward. We ended the year with a backlog of $651.5 million, near record levels, which included some recent FEMA awards serving clients in Alaska, which I will touch on in a moment. Turning to Slide 4, I'd like to update our investors on our current market positioning and the outlook for FY '22. Just last week, Congress approved another continuing resolution that funds the government through mid-February. In such an environment, it is common for projects and programs to face delays based on a general lack of clarity with regard to spending priorities and ultimately, their budgets. Decision making is thus slowed, given the reduced visibility over their budgets impacting federal contractors across the board. However, even with this uncertainty, we believe that our services and our agencies will remain in high demand going forward. Our primary customers, which of course include the VA, Health and Human Services, Department of Defense, really enjoy widespread bipartisan support, which gives us confidence in the continued emphasis on the critical health-related services we provide. In addition, our advanced capabilities in data analytics and cloud computing are allowing DLH to win and pursue new markets, leveraging our cybersecurity in digital transformations across our clients. As evidenced this past year, there's great focus on utilizing Telehealth applications, infectious disease research, and big data to find solutions that can benefit millions of people here and abroad. Not only is DLH at the center of many of these initiatives, we've grown during an otherwise uncertain economic environment. Even with the possible implementation of pandemic-related vaccine requirements for government contractors, we do not anticipate any material negative impact to the Company. Our employees are ready for 2022 and beyond. With regard to the pandemic: since the pandemic began, we have had approximately 200 scientists, researchers, and engineers gain intimate knowledge and expertise in support of nationally recognized programs to develop countermeasures to COVID-19. In addition, we have leveraged our contingency and emergency response capabilities to deploy over 500 healthcare practitioners and medical logistics personnel to attack the spread of COVID-19, particularly in rural areas of the country. To make sure we stay on top of our game, of course, we will need to continue investing in human resources and recruiting top talent. In that event, as shown on Slide 5, we recently hired Maliek Ferebee as our Chief Human Resources Officer. Maliek has over 15 years of human capital leadership in positions within the federal government contracting space. He brings a unique set of competencies and strategies to help me and our executive leadership team tackle the challenges not only of today, but what we foresee tomorrow. He is a forward-thinking executive, adept at translating business vision into actions that improve performance, employee engagement, profitability, and growth. Our number one asset is our credentialed, top-tier workforce, which requires both Company-wide commitment and strong leadership. So we are really excited to have Maliek onboard, to help us to build the next generation of thought leaders at DLH. Slide 6 shows some of our recent organic wins, which will, of course, contribute to a great start to fiscal 2022. We believe this represents a vote of confidence in our strategy, our people, our technology, and our ability to be a trusted supplier of technical solutions and services, as well as unique capabilities across these agencies. Before turning the call over to Kathryn, let me summarize where we stand heading into fiscal 2022, as shown on Slide 7. This year, while challenging and certainly unique in many ways, has illustrated how adept DLH is in providing steady, solid results and leveraging our new opportunities in our target markets. We've embraced a leadership role in helping the federal government understand and respond to a pandemic, and in doing so, have racked up some impressive awards that have increased our role across the agencies we serve. We've been identifying and penetrating new avenues of expansion as well. In addition, while proving our ability to win new business organically, we have a strong track record of finding and integrating select, attractive acquisitions that improve our technology credentials, enhance our value proposition, and bolster our growth profile. We're confident that we have the leadership team in place to execute the next phase of our strategic vision, sitting on a history of success while laying out a roadmap for even greater days ahead. In closing, I believe DLH is very well-positioned for the year to come due to our strong backlog, including new wins with FEMA and the enduring demand for our services from a broad array of federal agencies. Having closed out a successful year for the Company in the midst of the pandemic and lingering issues impacting the economy, from supply chain constraints to elevated costs and a tightening labor market, we have proven that we are able to deploy our technology-enabled health solutions to serve the evolving needs of our customers. We're helping people across America to get the healthcare they need, analyze data for clinical research, optimize government delivered services, and in doing so improving the lives of millions. It is with this underlying mission to serve others, and our passionate dedicated staff, that I remain upbeat about fiscal '22 and beyond. With that, I'd like to turn the call over to our Chief Financial Officer, Kathryn JohnBull.

Kathryn Johnbull, CFO

Thank you, Zach. And good morning, everyone. We are pleased to report such a strong finish to fiscal 2021. Turning to Slide 9, we posted revenue of $65.2 million for the 3 months ended September 30th, 2021, versus $50.7 million in the prior year's fourth quarter. The growth reflects the impact of roughly $8.5 million in revenue tied to the acquisition of IBA, along with new business awards in the quarter and increased volume across our legacy programs. In addition, as Zach mentioned, we expect the first quarter of fiscal 2022, currently underway, to greatly benefit from the previously announced FEMA awards in Alaska. Such contracts in aggregate had a value of over $107 million for their base periods, and we believe the current run rate puts these in a range of $95 million to $100 million in our fiscal 2022 Q1 revenue. After that, the impact will depend on demand in Alaska for ongoing COVID-related services, as the customer evaluates whether option exercises are appropriate. To date, the customer has exercised the first of 3 one-month options on the emergency medical staffing contract valued at approximately $35 million, which will largely be reflected in our fiscal 2022 Q2. Turning to slide 10, income from operations was $4 million for the fiscal 2021 fourth quarter versus $2.7 million last year. Operating margins improved to 6.2% from 5.3% in fiscal 2020, reflecting a favorable program mix and greater operating leverage. The 2021 results had a large contribution of time and materials programs which generally yield stronger results than cost-reimbursable contracts. Note that, in line with my prior comments regarding the revenue impact expected in Q1 fiscal 2022, due to the Alaska related FEMA work, we expect that margins from those task orders will be approximately 5% of revenue, reflecting the significantly subcontracted nature of those services. We reported net income in the fourth quarter of approximately $2.9 million or $0.21 per diluted share versus $1.4 million or $0.10 a share last year. DLH recorded a provision of $0.3 million and $0.6 million pretax expense during the fourth quarters of fiscal 2021 and fiscal 2020 respectively. Interest expense was essentially flat at $0.8 million in both years. Turning to Slide 11, EBITDA for the fourth quarter of fiscal 2021 was $6 million versus $4.4 million in the prior-year period. As a percent of sales, EBITDA rose to $9.3 million this quarter versus $8.6 million last year. Q4 results in fiscal '21 absorbed the impact of $1.1 million in corporate development for a transaction evaluating, which was not ultimately closed. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and at the back of this presentation. On Slide 12, we wanted our investors to visualize our record of achievement over the past decade. As you can see, we've shown steady top-line growth, as well as expanding EBITDA and improving EBITDA rates, reflecting our progression up the value chain and our effective leverage of our corporate infrastructure, as we achieved scales through growth. This prospective illustrates our commitment to steadily improving the Company's performance and increasing returns to our shareholders. We're really proud of what we've accomplished so far, but think this is just the beginning of maximizing our potential. Slide 13 is an updated snapshot of our debt position at the end of the fourth quarter. As of September 30, we had approximately $46.8 million of debt outstanding under our credit facilities versus $70 million at the end of fiscal 2020, including a $21.1 million advance payment related to the first FEMA contract awarded in September. We generated approximately $45.7 million of operating cash flow during the year, allowing us to pay down approximately $23.3 million of debt. We have satisfied all mandatory principal payments on the loan facility through December 31st, 2023, but we'll continue to reduce debt when feasible to strengthen the balance sheet even more going forward. 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.

Operator, Operator

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster.

Zach Parker, CEO

Thank you, Anthony.

Operator, Operator

Our first question comes from Joe Gomes with NOBLE Capital. You may go ahead.

Joe Gomes, Analyst

Thanks. Good morning everyone, and congrats on the quarter end year results.

Kathryn Johnbull, CFO

Good morning Joe. Thank you. Thanks for joining us.

Joe Gomes, Analyst

So I want to start with the FEMA award in Alaska. Again, congratulations on getting the first exercise there also. Just maybe give us a little detail on how that's progressing and are there other additional state opportunities out there that you may be bidding on, or what you think you could bid on?

Zach Parker, CEO

Yes. Thank you very much, Joe. I appreciate that and appreciate your continued support for the business. So Alaska was competitively awarded – both of our Alaska awards were competitively awarded from FEMA and FEMA has a charter across the nation. As you may recall earlier in the year, shortly after the pandemic began, we were awarded a Basic Ordering Agreement, a BPA, which covered largely the Pacific Northwest area. And that's where these awards were competed and were successfully won. That same community across the Federal Government is looking to expand this type of disaster response capability across the nation. And we're at the forefront of working with them to see how broadly that may expand, so we do think and anticipate that the potential exists for other states to leverage the federal government's commitment to support countermeasures against COVID-19, much like this. So we'll stay tuned on that.

Joe Gomes, Analyst

Great. Thank you for that. And on the continuing resolution, you touched briefly on it. Maybe you could again, give a little more color. I know last quarter you talked about the incentive by cloud and there are a lot of major health IT IDIQs that were expected to be rolling forward here. Where do we stand on those now they've been pushed further to the right. Maybe a little more color on the continuing resolution impact would be appreciated?

Zach Parker, CEO

As you know, the continuing resolution which pushed the funding into mid-February did require a great deal of concessions and trade-offs as it moved from the House to the Senate. We're continuing to stay in close contact on what we think is going to come out in that way. But all indications are that for us in particular, the agencies associated with the work that we have in hand today, and in our near-term pipeline, continue to look strong. The Department of Defense probably has more pressure in the CR environment than do the civilian agencies due to their budget constraints. That's not necessarily the case for DOD since a number of the threats are still continuing to emerge. But we still feel pretty comfortable with what we're seeing and hearing as things move through Congress. The biggest impact is some of these new programs that do not get exceptions for pandemic-related funding are continuing to see extensions on current work rather than new contracts. But we believe that the effect of the CR will be neutral to potentially positive for our new business pipeline.

Joe Gomes, Analyst

Okay. Thanks for that, Zach. And maybe one year look back here. You made the S3 and the IBA acquisitions. You mentioned how they're now fully integrated. Just how are they performing versus your pre-acquisition plans? You mentioned in the past about one of the positives of these acquisitions was the ability to bid on more opportunities. Are you seeing that come to fruition today?

Kathryn Johnbull, CFO

Most definitely we have. Both of those acquisitions were part of our overall strategy to have full market presence in those key markets in health and human services: the defense VA, human services and solutions, and the public health and life sciences sector. And so we fulfilled that with the completion of that Phase 1 acquisition program. But of course, who could have guessed how timely and relevant an acquisition of a public health Company would turn out to be? None of us saw COVID coming at the time. We just knew that there was a primary role for the government in addressing healthcare and disease issues, especially long-term pervasive pandemic issues. So we are extremely proud and we see a lot of value in the addition of the S3 portfolio. Likewise, the IBA team has fulfilled our expectations in terms of establishing a foothold in the DHA and really leveraging their capabilities with key agencies inside DHA. We see that as a market for continued growth and expansion. Having their skills on our team has certainly strengthened our position in this competitive market, so we're quite pleased with that. Our lens for acquisitions will now move beyond just having market presence to focusing on capabilities that augment our position in those established markets. With that, we're looking to add capabilities and continue leveraging visibility with these key clients. The M&A market is very active, so we expect to successfully execute some additional enhancements to our portfolio in fiscal '22.

Joe Gomes, Analyst

Great. And one more, if I may sneak one in. Earlier in the year, Kathryn, you had some, let's call it slower-paying clients, but you were doing a great job in managing through that and everything. With the continuing resolution, are you starting to see any of that creep into the system again, or are things still running where you would like them on the cash receivable side?

Kathryn Johnbull, CFO

So far, our early returns in Q1 are favorable. Q1 is traditionally our softest cash-flow generating month because of the push to finalize everything for September 30. The government has quite a bit to do to return to their normal business after their fiscal year end at September 30, as well as ours. But early returns on Q1 are looking favorable. I certainly don't expect anywhere near the challenges we had last year where we were navigating the CR while also integrating an acquisition that closed at the end of the prior fiscal year. I expect this current year’s Q1 to be much more favorable and much more normal in terms of cash flow collection. If we manage to pay down some debt in the meantime, that would be icing on the cake. But I just want to emphasize that our team worked extremely hard to turn that around successfully. We exited the year with DSO at 46, which is going to be a tough achievement to top.

Joe Gomes, Analyst

Congratulations again on the excellent quarter and year, looking forward to 2022. Thank you.

Kathryn Johnbull, CFO

Thank you, Joe.

Zach Parker, CEO

Thank you, Joe.

Operator, Operator

Our next question comes from Brian Kinstlinger, with Alliance Global Partners. You may go ahead.