Q2 2024 DLH Holdings Corp Earnings Call

Participants

Chris Witty; Managing Director, Investor Relations; DLH Holdings Corp

Zachary Parker; President, Chief Executive Officer, Director; DLH Holdings Corp

Kathryn JohnBull; Chief Financial Officer; DLH Holdings Corp

Joe Gomes; Analyst; Noble Capital Markets, Inc.

Presentation

Operator

Hello, and welcome to the DLH Holdings Corp. Fiscal 2024 second quarter earnings conference call. 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. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to hand the call over to Chris Witty, Investor Relations Adviser.

Chris Witty

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 3 of the presentation. This call may include forward-looking statements that I will that relate to the company's outlook for fiscal 2024 and beyond. These statements are subject to various risks and uncertainties which could cause actual results and events to differ materially from. As such, 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 Q&A.
With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.

Zachary Parker

Thank you, Chris, and good morning, everyone. Welcome to our 2024 second quarter conference call. We remain on track for solid performance midway through the fiscal year. We would not be where we are today without the tremendous support and passion of our strong workforce who remain laser focused on serving our customers, and they are dedicated to growing the Company and instilling excellence in everything that they do. I would once again like to thank them for executing in a way that led to another great quarter of operating results, setting the stage for a bright future for DLH.
Turning to Slide 4, I'll provide an overview of our financial results. We reported second quarter revenue of $101 million and EBITDA of $10.2 million, while generating operating cash of $5.2 million during the period, which translates to more than $10 million of cash flow year to date. This served underscore the cash-generating ability of our enterprise as well as the sound working capital management, as Kathryn will review in a moment.
We also continued to delever the company paying down $3.6 million of debt and ending the period with $170.8 million of total debt outstanding. Overall, we had a sound financial quarter that showed growth in key strategic markets and strong cash generation, laying the foundation for solid results going forward.
Turning to slide 5, I'd like to summarize important elements of our current positioning and outlook. First, we increased our backlog sequentially from the end of Q1, up over $80 million to $736 million. We won several awards this past quarter, including two key recompetes that bolster our technology front at the National Institute of Health and provide an ample opportunity to expand our presence with this and other customers. The first provides IT services at the National Institute on Drug Abuse, the leading federal agency supporting scientific research on drug abuse and addiction, a growing problem in the United States and a priority for our federal government this award extends a partnership that began with our first contract with that customer in 2014, the contract value is approximately $23 million, of which approximately $10 million is from recurring services and the balance of $13 million for potential service expansion through the contract, we will help manage the agency's advanced clinical research informatics system, enabling the sharing of data and resources in real time, a competency which we look to expand into adjacent markets.
In addition, we won a contract to expand our IT services with the National Cancer Institute, the largest organization within the National Institute of Health and the government's principal agency for Cancer Research, training and health information dissemination. This award utilize the contract which we announced last year with the Center for biomedical informatics and information technology, a multiple-award, highly competed contract. We are providing scientific computing and data analytics services to support the agency's research mission.
The contract has a base value, including all option periods of approximately $52 million over 5.5 years. But it also has provisions for an additional $86 million in our optional IT services, which if fully exercised, will bring the total value to $138 million. This award is a great example of the ongoing demand for our company's unique skill sets and integrated services as we will be handling a broad range of requirements from hardware configuration, software management strategies, network connectivity, platform, integration, engineering, and much more. We look forward to continuing our support of these and other NIH programs for years to come. These contract wins are illustrative of view of the value DLH brings to our customers, and we expect similar momentum during the second half of fiscal 2024 as we continue to invest and reshape our portfolio with business development activities and respond to a variety of active pipeline opportunities.
I'd also like to comment on our legacy VA smart contracts, which are currently proceeding through the procurement process. As previously announced, the VA issued RFPs for medical logistics and pharmacy services for the eight Seema bids and these procurements were set aside for prime contractors that were service-disabled veteran-owned small businesses. As such, we partnered with a highly qualified small business to bid this work as part of a joint venture. While these bids are evaluated, we continue to operate as the prime contractor for all C-MAC locations.
In later in late February, we were informed that the VA had made an initial award decision for one of the two. The challenge for a Chelsea location awarding the contract to a small business that is unaffiliated with our joint venture. However, that award remains subject to the completion of the VA's acquisition process. And I believe that our joint venture remains a viable container contributor for that work.
While the VA continues to evaluate the eight separate procurements. We have been awarded a sole-source IDIQ contract with a $200 million ceiling value to continue the VA Seamap operations at all locations this remains dynamic with the initial tasking having a period of performance through July 31st of this year with a potential for additional orders beyond with the beyond the initial tasking overall, we see a wide array of opportunities across our core targeted markets in the coming quarters, including through the multiyear large IDIQ. contracts that we've discussed in the past, some of which are now starting to define a specific task orders and some of which we expect to governments to make decisions on later this year, given the government is fully funded now through the remainder of the fiscal year. It is a time of healthy and heightened bid activity across the agencies that we serve.
A wide array of applications, research and development, digital transformation capabilities and our highly credentialed workforce, along with our strong agency relationships, are anticipated to drive continued growth this year and beyond. Even with the same up uncertainty of the future DLH looks tremendously bright. We have continued to build our new business pipeline, which aligns with federal budget priorities and our expanded capabilities in digital transformation and cybersecurity and his role their role in enhancing science, research and development and readiness activities.
With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Kathryn JohnBull

Thank you, Zach, and good morning, everyone. We're pleased to report our second quarter results for fiscal 2020. For Turning to slide 7, I'd like to provide a high-level overview of some key financial metrics for the three months ended March 31st, 2024, we reported revenue of $101 million in the second quarter versus $99.4 million in the prior year period. We saw expansion within our public health and Enterprise IT Management portfolios, partially offset by the impact from turnover of certain small business set-aside awards in our national security program area.
We reported EBITDA of one of $10.2 million for the second quarter versus $10.5 million last year and generated cash from operations of $10.3 million year to date compared with $6.9 million in fiscal 2023, reflecting improved cash collections. This result, this resulted in days sales outstanding of 50 days, which represents a decrease of 11 days over the comparable period in fiscal 2023. Our EBITDA for the quarter was in line with last year, even given approximately $1 million in aggregate of Seamap procurement related legal costs and strategic positioning expenses.
Now if you turn to slide 8, I'll provide an update regarding our deployment of the company's cash to reduce debt, strengthen the balance sheet and lower interest expense. We paid off approximately $3.6 million of our higher interest floating rate debt during the quarter, ending the period with $170.8 million of total debt outstanding. Approximately $0.4 million of quarterly interest expense is noncash amortization of financing arrangement fees.
We remain on track to reduce debt to between one 53 and one $57 million at the end of the fiscal year. As we expect debt payments to accelerate in the second half of the fiscal year. The debt reduction is expected to result in a leverage ratio below 3.5 times, providing further cash savings and earnings expansion through reduced reduced interest expense.
This concludes my discussion on our financial statements. With that, I would now like to turn the call over to our operator to open for questions.

Question and Answer Session

Operator

We will now begin the question and answer session. To ask a question. You may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster.
And our first question will come from Joe Gomes of NOBLE Capital. Please go ahead.

Joe Gomes

Good morning and thanks for taking the questions. And Joe, good morning, Joe. So on the national security contracts that were awarded to small businesses Any way to size that? And then how much more of that, if any, is at risk?

Zachary Parker

Yes, Joe, great question. As you may recall, we had during the end of 2022, early part of 2023. We did discuss it with the acquisition that we completed with the GRO side that there were some some opportunities, some of the programs have previously been awarded in the small business environment. And so we did expect to have to have some runoff of those when they came around for recompetition and that accounts for largely what you have seen thus far net worth net, which Kathryn referred to. We still have a couple or a few of those that are still pending.
We expect most of those decisions this fiscal year. And we will have some degree of certainty as to what that that conversion rate will look like. As you know, some of these contracts we can we would generally Puerto Rico recompete. Those will recompete them generally as a subcontractor position, which potentially affords us 49% of retention as those contract values. And so we'll keep you all informed as to how those progress downstream.

Joe Gomes

Okay. Thanks for that, Zach. And on the G&A, you mentioned some of the legal cost increased driving some of the increase in G&A, do you see that continuing going forward? Or should G&A drop back down off to the more historical type of a run rate?

Kathryn JohnBull

Well, we do see it continuing, albeit likely at a lower level of consumption. However, I think our even even notwithstanding that, our G&A rate for the quarter was not particularly out of line. I think our Q1 was perhaps a little bit of an outlier to the to the favorable. If you look at that, if you look at the percentage of G&A costs in Q1 was really a function of our getting the operating leverage we expected to get post the integration of activities from the GRSI. acquisition and not yet having fully as is always our model, redirected those costs to really position the Company for growth, really the emphasis now Zach will go into this more as he talks about group growth and the rest of this call and upcoming quarters.
But really, as we've talked about before, our strategy for growth is working well to have each of the each of the parties pursuing their own portfolios and really continuing to support their current customers and continuing to grow their independent lines business where we're positioning and really investing is really cross cross-selling opportunities and really integrating the company and really making sure that we're pulling the capabilities up to pursue opportunities that would not have been viable for any of the independent parts of the Company. And so we do expect to continue that in the out-quarters. And that is a bit of a backfill to some of the savings, the operating leverage savings we've achieved.

Joe Gomes

Okay. And on the the VA contract making grants and kitting extent extended once again. But I don't know, Zach, if you can provide any more color as to what the VA's thinking is the Essentis change gears at the drop of a moment's notice. I'm just trying to see if we can get a little better understanding their whole thinking and process here. Like you said, the funding now is through the end of this fiscal year and then potentially through October of 25. And we have seems to be a long time for them to have to make a decision from fixed contracts, but I know this has happened in the past. So just any other insight you can give would be greatly appreciated.

Zachary Parker

Sure. No, thank you for the question. Joe. And again, yes, you're correct. As you may recall, this is the this this procurement cycle with that with recompetes for us started back in November of 2016. And in fairness to the VA acquisition community, there was really heightened degree of commitment and new approaches associated with the only player Kingdom where decisions that forced the VA and various acquisition shops to take a look at kind of the other appropriate acquisition strategies. And or over the years, the VA has had two versions, if you will, of this acquisition.
And of course, each was set back in large part due to a protest. And so this is really we're currently in in this phase where it again yet again, is another approach where we've had, which by location, and it is combined both the medical logistics and pharmacy. So it is kind of a first time for them on this arena with the with it being exclusively center side. And the way in which the process works is that first of the VA is required to do a thorough evaluation of the set aside the set-aside environment and then make a determination around market, best value interest to the government and should they determine that the awarding of a small business environment set-aside environment is not in their best interest then they must restart a new acquisition.
So this is in large part driven by the formalized acquisition regulations that evolve from from that law and they're doing their best. They're trying to get an acquisition strategy that will first evaluate the small business opportunities, take a look at what risks associated with that if that is suitable, then continuing with the awards and if not then reopen it to an unrestricted environment. So we'll therefore, first attempt at this new model of bundling, and we'll see how it yields in the future.

Joe Gomes

Thanks for that insight, Zach, and if you were to lose one or more of the eight contracts on how quickly can you get rid of the cost that are associated with serving those contracts?

Zachary Parker

Yes, great question. We have, as you might imagine, over the years, continue to model various scenarios that that align with the new acquisition strategies. And of course, this strategy, which came out in the procurement phase last year. We have taken a look at and we have. So we do have some step-down approaches and plans to execute on. It's going to be a function you have what you know of how many of them are awarded in a given time period.
Right now, every indication is they would not award all seven or eight concurrently so that they can manage the phase-in process, which is ranging from 60 to 90 days in those solicitations. So if they would do that, if you think about it, we would be we would have we have various models that we have a scale down associated with the range of contracts, but we but we feel very comfortable that we will within that within a full operating quarter, I'll be able to hit hit this, but a pretty quick reduction into them and to be able to operate efficiently with regard to our EBITDA margin basis?

Kathryn JohnBull

Yes. I mean that's a services business. Of course, our components of our cost are the direct cost to performing the contracts. So those are and that is by far and away the majority of the cost. And naturally that scales of the contract moves, the costs move with it. There's also, of course, cost to running any particular part of our operation that is distinct to that operation. And Seamap, as we've described before, is a very large scale up deceptively complex. I mean, we think of it as it's in its fulfillment of prescriptions. And of course, it is, but it's complex in terms of the deployment of the workforce in response to variable demand. And so there is an infrastructure supporting that particular operation in a unique way.
And that is, of course, scalable as the as the effort, the volume of business scales. And then there, of course, the corporate costs of running the overall business. So it does suggest the scaling will be I expect to be very well aligned with the timing of the revenue volume changes. And then we have to address the impact to the corporate infrastructure costs. We're going to go down when we model we model this regularly, and we are we are prepared for this as an outcome, even as we continue to support BA as a key customer and something that we've invested in in helping their outcomes be strong and in the operation continued continue to improve.

Joe Gomes

Okay. One more for me and I'll get back in queue that you guys haven't talked about the InfiniBand our product here lately. And I was wondering, can you give us kind of an update and how that is going out and being accepted.

Zachary Parker

Great straight man, Joe. (laughter) I appreciate that. And I know our federal government is really stepping up activity with regard to security and cyber security across across all agencies. And recently believe in the last year, the White House has issued cyber security guidelines is implementing regulations being a phone. There's a strong, strong commitment to execution of sound cyber security principles as well as a major commitment to cloud modernization for programs. We're starting to see those, and we're hearing more from those agencies.
I met with some of the highest levels of leadership and federal government just earlier this week in that regard. So we believe that our incentive by solutions still offers a very, very highly secure differentiating capability since we are one of the one of the certified FedRAMP certified companies. So it still remains, we think, a strong, a strong differentiator as we start to see the cyber security and information assurance opportunities coming down the pipeline, it is an area, Joe, where we have a strong campaign, obviously was bolstered with the with the capabilities that we have brought in both with them with the work that we're doing, the cybersecurity mission engineering work that we're doing for the Navy and complemented by some exacting high security up to and including Zero Trust architecture that we're doing within NIH in driving some of their transitions as for the biomedical research community.
So we're really excited about how we think Infinity by both complements and gives us a breadth and a capability that somewhat unique. And we're looking to include that in our value propositions for this new bid backlogs that are finally starting to uncork a little bit with some budget certainty with some of these customers.

Kathryn JohnBull

But that would be a great example of what we talked about earlier in this call about the cross selling opportunities.

Joe Gomes

Yes. Okay, great. Thanks for the taking the questions. I appreciate it and nice strong quarter and look forward to seeing how the second half of the year unfolds.

Kathryn JohnBull

We do too.

Operator

Once again, if you would like to ask a question, please stars one. This concludes our question and answer session. I'd like to turn the call back over to Zach Parker for any closing remarks.

Zachary Parker

Thank you, Andrea, and thank you all for your attention today and please stay tuned over the coming quarter. Kathryn and I will be providing some additional color around our pipeline for new business as well as update on our current and organic on-contract growth opportunities as some upcoming investor conferences. Thank you all for your support and have a blessed day. Bye for now.

Operator

Conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.