DLH Holdings Corp. (NASDAQ:DLHC) Q2 2024 Earnings Call Transcript May 3, 2024

DLH Holdings Corp. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the DLH Holdings Corp. Fiscal 2024 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. 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.

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