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Edited Transcript of DLHC earnings conference call or presentation 13-Dec-18 4:00pm GMT

Q4 2018 DLH Holdings Corp Earnings Call

Somerset Jan 15, 2019 (Thomson StreetEvents) -- Edited Transcript of DLH Holdings Corp earnings conference call or presentation Thursday, December 13, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Witty

DLH Holdings Corp. - MD IR

* Helene Loraine Fisher

DLH Holdings Corp. - President of Mission Services & Solutions operating unit

* Kathryn M. JohnBull

DLH Holdings Corp. - CFO & Treasurer

* Zachary C. Parker

DLH Holdings Corp. - President, CEO & Director

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Conference Call Participants

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* Joseph Anthony Gomes

NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the DLH Holdings Corporation Fiscal 2018 Quarter 4 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Chris Witty of Investor Relations. Please go ahead.

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Chris Witty, DLH Holdings Corp. - MD IR [2]

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Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and CEO; Kathryn JohnBull, CFO; and Helene Fisher, President of the company's Mission Services and Solutions operating unit. The company's fourth quarter press release and PowerPoint presentations 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 2019 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 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 with Helene Fisher, 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.

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Zachary C. Parker, DLH Holdings Corp. - President, CEO & Director [3]

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Thank you, Chris, and good morning, everyone. Welcome to our fiscal 2018 fourth quarter conference call. It's been a strong financial year here at DLH. Starting with Slide 3. Let me begin by providing a high-level overview of our financial performance and recent accomplishments.

Revenue for the fourth quarter rose to $32.5 million, up 6.9% over 2017, and we recorded sales of $133.2 million for the full fiscal year compared to $115.7 million in the prior 12-month period. This represents growth of 15.2% year-over-year, reflecting a solid performance across the many agencies we serve. We're very proud of the great work by our workforce out in the field and this top line achievement, which speaks very much to our capabilities, the intense talent of our staff and the enduring demand for our programs under the contracts. Our gross margin was 24.3% for the quarter, and we posted net income of $0.14 per diluted share versus $0.08 a year ago. We also generated $6.1 million of cash from operations and greatly reduced our leverage during the quarter.

After paying down $6.3 million during the period, we ended the year with just $7.7 million of senior debt versus $19.7 million at the beginning of the fiscal 2018.

As Kathryn will review in a moment, it's been a great year from a balance sheet perspective as we generated $14.1 million in cash from operations and begin fiscal 2019 with $6.4 million on the books.

As you turn to Slide 4, I'd like to turn the presentation over to Helene Fisher, our President of Mission Services and Solutions operating unit. Helene?

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Helene Loraine Fisher, DLH Holdings Corp. - President of Mission Services & Solutions operating unit [4]

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Thank you, Zach. Good morning, everyone. I will go over some recent developments that shaped the quarter and support our outlook for 2019. One of the most positive things that took place in Q4 was that for the first time in several years, Congress passed 5 out of 12 appropriation bills for fiscal 2019, including our key customers, the Department of Defense, HHS and the VA. These agencies are already fully funded through fiscal 2019, such that our view of the coming year should not be materially impacted by ongoing budget negotiations or any possible government shutdowns. We continue to bid on strong pipelines and opportunities, including approximately $500 million in qualified leads. So the outlook for growth remains strong. At the same time, as discussed last quarter, we'll be diligent in defense -- excuse me, diligent in defending our recompete and taking steps as appropriate to mitigate any challenges encountered due to the changing landscape across key programs.

We continue to look at potential accretive acquisitions on a regular basis and the market remains quite active. While the last transactions proved to be excellent in nearly every aspect boosting our growth profile, expanding our value-added capabilities and increasing margins, we will continue to be selective when looking at possible opportunities. We continue to seek out technology-focused enterprise providers for the federal government market that serve our existing customers, and we can bolster both the breadth and depth of our solutions. Given DLH's solid balance sheet and demonstrated ability to service acquisition debt, we believe we are well positioned to consummate a transaction if an appropriate opportunity presents itself.

At the same time, we continue to invest in our core capabilities and business development activities. We have positioned key assets to further enhance our technology-based solutions, including the announcement of Gil Tadmor to the position of corporate Chief Technology Officer. Gil is now heading up our various innovation initiatives, including health IT, system modernization and data analytics for our current and future customers.

Earlier in August, we announced that DLH was appraised at a level 3 rating for the Capability Maturity Model Integration or CMMI's version 1.3. A level 3 appraisal indicates our organization possesses a well and understood and described process for standards, procedures, tools and methods. Achieving this rating validates our commitment to performance excellence, agility and process improvement.

I'd also like to mention that DLH earned the Joint Commission's Gold Seal of Approval for health care staffing services certification. This demonstrates the company's commitments for providing quality and competent health care professional. We appreciate this opportunity to share with you the results of 2018, a year of solid revenue and performance.

As shown on Slide 5, 2018's results continue a long trend of growth in revenue and EBITDA. Following the detailed discussion of fiscal year 2018 financial results from Kathryn, Zach will share his thoughts about the operating outlook for fiscal 2019.

With that, I'd like to now turn the call over to our CFO, Kathryn JohnBull. Kathryn?

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Kathryn M. JohnBull, DLH Holdings Corp. - CFO & Treasurer [5]

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Thanks, Helene, and good morning, everyone. We are pleased to report a solid end to fiscal 2018. Turning to Slide 6. We posted revenue for the 3 months ended September 30, 2018, of $32.5 million, representing an increase of 6.9% over the prior year fourth quarter. The higher revenue reflected ongoing demand across our key programs and expansion of services on existing contract vehicles. While we expect revenue to generally remain above $30 million per quarter in fiscal 2019, there can, as stated in the past, be swings in programmatic spending quarter-to-quarter. We are optimistic about demand trends next year due to the factors Zach discussed, and we will endeavor to offset any headwinds faced by changing recompete dynamics.

Now moving to gross profit on Slide 7. This quarter, the company posted total gross profit of approximately $7.9 million versus $7.3 million last year, with the 8.7% increase due to both higher revenue and margin expansion. As a percentage of sales, the fourth quarter gross margin was 24.3% versus 23.9% last year, reflecting program mix. As with revenue, gross margins can vary quarter-to-quarter due to program timing across our key contracts.

Turning to Slide 8. Income from operations rose to $2.8 million for the fiscal 2018 fourth quarter from $2.1 million last year, an increase of 31.2%, reflecting the higher gross profit and slightly lower G&A expenses. We reported net income for the 3 months ended September 30, 2018, of approximately $1.8 million or $0.14 per diluted share versus net income of $1 million or $0.08 per diluted share in the prior-year period.

DLH recorded a $0.7 million provision for tax expense in 2018 versus $0.8 million in fiscal -- in Q4 of fiscal 2017. The tax provision for 2018 reflects the prorated impact of the tax rate reduction from the Tax Cuts and Jobs Act enacted in December 2017.

Turning to Slide 9. EBITDA for the 3 months ended September 30, 2018, was $3.4 million versus $2.6 million last year. EBITDA as a percentage of revenue was 10.5% in fiscal 2018 Q4 versus 8.7% in 2017, reflecting the growth in revenue and gross margin while -- and direct expenses were effectively controlled. A reconciliation of GAAP net income to EBITDA is in our earnings statement.

Now turning to Slide 10. You can see a snapshot of our balance sheet at the end of the quarter. We had approximately $6.4 million of cash on hand versus $4.9 million at the beginning of the fiscal year. We had nothing borrowed under our revolving credit facility at the end of the quarter, and our term loan had a balance of $7.7 million. Our net debt to trailing EBITDA position now stands at less than 1 due to our strong cash flow and the pay down of $12 million of debt this fiscal year, as Zach mentioned. That concludes my discussion of the financial statements.

With that, I would now like to turn the call back over to Zach for a discussion of the forward indicators for DLH operations in fiscal 2019. Zach?

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Zachary C. Parker, DLH Holdings Corp. - President, CEO & Director [6]

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Thank you, Kathryn. I'd like to spend just a few minutes covering up some of the factors that would influence our operating environment in fiscal 2019 as shown on Slide 11. First, despite all the headlines about the budget negotiations and government shutdowns, it's helpful to remember that key contracts that DLH manages are within agencies that have been fully funded for fiscal 2019. And that the services delivered under those contracts enjoy very strong bipartisan support.

Given that there is budget certainty for our current primary customers, we're able to focus a bit more on the addressable budget and to help develop and sustain a strong new business pipeline. In addition, we believe we are well positioned to compete in the M&A, mergers and acquisitions arena as well, having demonstrated our previous ability to service acquisition debt and successfully integrate new businesses as we believe the volume of M&A opportunities will continue to be robust. From both inorganic and acquisitive perspective, we believe that our enhanced credentials and certifications, some of which Helene alluded to, which have high value in the industry will allow us to further differentiate DLH and enhance our value propositions when pursuing new work.

Of course, every business has to navigate through challenges and we are no exception. The primary issue that we are monitoring today is the status of our VA CMOP recompete. As we disclosed in our 10-K and discussed on prior earnings call, this recompete was issued under the provision settled at -- settling it for a small business, veteran-owned set aside contract as a prime contractor. We are participating in the recompete opportunity, and we'll continue to keep you posted in that regard.

An additional factor that we are monitoring for fiscal 2019 is a continuing resolution. For some parts of the federal budget, this will be more important than others. As Helene mentioned, the primary agencies that DLH supports have already been fully funded for 2019. Some programs that we are pursuing and -- for new business opportunities are within those agencies that are still looking at some budget uncertainty, and we'll continue to monitor that on a regular basis.

In closing, we anticipate another dynamic year in fiscal 2019 and believe that DLH will continue to be well prepared for both the opportunities and challenges that it will bring.

With that, I would now like to turn the call over to our operator to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Joe Gomes with Noble Capital.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [2]

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So I just was wondering if we could talk a little bit more first on -- you say next year should be a dynamic year, how that -- are you talking, you're thinking similar type of level of revenue increase is the -- the quarters that you think going to play out kind of the same as what they did this year. I wonder if you can just give a little more color and detail there.

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Zachary C. Parker, DLH Holdings Corp. - President, CEO & Director [3]

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Sure. I'd be happy to Joe. Yes, so we're looking at both operationally with our current book of business and the things we're doing on leveraging technology and implementing our new systems as well as our pursuits with new customers. We do continue to have the range of new contract opportunities that will -- some will be impacted by the budget stability and others we think on the smaller scale will be less impacted by what's happening on the hill. So we'll have to continue to monitor that on a quarterly basis. As you well know, the government did extend the delay for the budget impasse until later on this month. I would expect they'll probably kick it to the right one more time. Okay. But in doing so, I would expect it will be in large part under a continuing resolution for the majority of the federal space throughout FY '19, and that will help us to get a better handle on how we're going to navigate those funding dynamics throughout the year.

We continue, however, at both Kevin Wilson and Helene's operations, to continue to implement some quality and continuous improvement initiatives, and we'll be excited about reporting those as they evolve throughout the year.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [4]

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Okay. And I wonder if you, again, provide a little more color. I know that you've talked about the M&A space and potential for doing another acquisition for a while here. And, obviously, we're not looking for you to just run right out and buy the first thing you see, but what [wagged] so to speak or lengthening out of this process, so -- that something hasn't been consummated yet?

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Kathryn M. JohnBull, DLH Holdings Corp. - CFO & Treasurer [5]

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Yes. So I think for that question, Joe, definitely if you just look at the statistics out there in the M&A marketplace, '17 was just a higher volume breakout year and '18 looks to be a similarly sized year. But once you drill down into what -- where those transactions are coming from, it was pretty dominated in the first part of '18 by things that are really not in our addressable space. So more on the Intel hardware products, may be heavy fiber. And those are just not things that at the present point are on our road map for our sub-service offerings. So really from -- just coincidentally, I expect really as a function of when the particular targets that mature and major contracts within those targets come up -- come secure their recompete cycle.

In contrast, the first half of the year that was dominated by those things are part of our addressable space. The second half of the year has had much stronger flow for things that are squarely aligned with our addressable markets in the things that we're interested in. So we see the second half of '18 as very active, and it's keeping us plenty focused on that as an opportunity. So hard to gauge timing exactly, but I would definitely tell you that there are a number of presently active opportunities.

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Zachary C. Parker, DLH Holdings Corp. - President, CEO & Director [6]

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Yes, let me just add to that, as Kathryn indicated, we are still seeing good deal flow. And as just Kathryn indicated, our range of interest is what will really drive how aggressive we are with some of those. And our range still is -- sweet spots are around probably $35 million to $65 million, and we'll look at opportunities up to $100 million if it's something we think we might be able to address. And I think with the large -- with our ability to -- with some of the steps we've taken in deleveraging and so forth, we're able to open our apertures a little bit more than we were as we ended last year. So we'll continue to keep you posted in that regard, but I think the kind of deal flow that we're seeing now gives us reason to think that it's going to be a good opportunity for us to assess some quality opportunities there this year.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [7]

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Okay. And one last one from me. I just wonder if you might kind of give us a little update, what are the key awards that you're looking for here the rest of this year may be into the first quarter of next year?

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Zachary C. Parker, DLH Holdings Corp. - President, CEO & Director [8]

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Sure. So we have, like many of our folks in our industry, we've got 2 kind of broad categories of the sort of things that are driving our bid activity. The first one was called IDIQs. These are the indefinite quantity contracts where there are often some very small quick turnaround proposals required to pursue smaller value work. We've had some recent successes and posted some of those on our internal website. We're going to continue to think that they'll continue with a number of those while we're operating under uncertainty of the budgets in the other departments. Having said that, we have also positioned ourselves, as you well know, with opportunities that are more in our sweet spot and those are opportunities in the $35 million to $50 million range and a few in north of $100 million. These are opportunities that generally, we think, are going to be maturing in the FY '19 period, particularly those that we started to really address substantially once we've got the Danya integration in place. So we're open to assume that if the budget folks get their acts together that they'll do a little less bridging of so forth -- bridging of existing contracts and making some awards in some of these that are gaining steam for us. That's why we're -- you'll see that we've got a qualified pipeline that is approaching $0.5 billion already, and this is again still a little bit of a backlog for the government to uncork some of these wins.

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Operator [9]

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(Operator Instructions)

At this time, there are no further questions in the question queue. I would now like to turn the conference over to Mr. Parker, President and CEO, for any closing remarks.

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Zachary C. Parker, DLH Holdings Corp. - President, CEO & Director [10]

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All right. Well, thank you, operator. Appreciate your support.

Thank you. Again, I'd like to thank you for the questions that you've had. I think I've indicated that we expect this to be not only a dynamic year closing out FY '19, but I'd like to add a little bit of color in that. We are going to continue to invest in driving performance improvement in each of our business areas, while we have fully integrated now, our ERP system from the platform that would support, not only the Danya acquisition, but as Kathryn and I've laid out, we really kind of built this company and built most of the infrastructure to support $400 million to $500 million worth of an entity. We're continuing to implement new features and capabilities. And as we do that, we'll keep you posted throughout this fiscal year. So I want to thank, everyone, for your time today. Wish you a Merry Christmas, Happy Hanukkah, Happy Kwanzaa, and you all have a blessed new year. Bye for now.