DLH Holdings Corp. (NASDAQ:DLHC) Q1 2023 Earnings Call Transcript

DLH Holdings Corp. (NASDAQ:DLHC) Q1 2023 Earnings Call Transcript February 9, 2023

Operator: Hello and welcome to the DLH Holdings Fiscal 2023 First Quarter Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Chris, please go ahead.

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 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. 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: Thank you, Chris, and good morning, everyone. Welcome to the 2023 first quarter conference call. I’m truly excited about how well our leadership team and our talented workforce has delivered during this quarter. And I’m really excited to give you an update around all of those aspects on this session. Beginning with slide 4, I will first provide a high level overview of the quarter’s major developments and accomplishments, including of course, our acquisition of the privately held GRSi on December 8 of last year, adding approximately 700 highly credentialed professionals to DLH and significantly strengthening our digital transformation and cyber capabilities. DLH has incorporated some tremendously talented expertise, both technically and analytically into already nationally recognized team of researchers, analysts, technologists and project managers.

This powerful combination of resources positions DLH, to drive even greater value for our shareholders, our stakeholders, which include our talented employees in this leadership team, our mission critical customers and our shareholders. What we now bring to the market is more differentiated and powerful than ever before. And we look forward to this new growth stage in the company’s history. Truly excited about the trajectory. Given the date of the acquisition, our financial results for this quarter include a portion of GRSi, we are well on our way to integrating this unique enterprise, which I’ll discuss even more in a moment. Q1 revenue was 72.7 million, which was lower than last year due to the large short term FEMA contracts, which we completed in Alaska during fiscal year 2022.

Kathryn will provide pro forma and adjusted numbers for all of our results momentarily. We reported operating income at 3.9 million and reported EBITDA was 6.3 million. Following the acquisition of GRSi our debt grew and at the end of the quarter, we had approximately 203 million of indebtedness outstanding. However, as prior transactions, we have a plan and a strong track record of using the company’s operating cash flow to delever the balance sheet as quickly as possible. Our reported EPS was $0.11 per diluted share. Bolstered by the acquisition our backlog stood at 965 million at the end of the quarter, putting us in great shape for the rest of fiscal €˜23 and beyond. Turning to slide 5, I want to briefly provide an overview of our most recent transaction.

As a reminder, we hosted a conference call specifically for the GRSi equity decision in December, which referenced a detailed presentation on our website. And I’d encourage our listeners to pursue this if they have not done so already. That said, I believe this acquisition is one of the most strategically important decisions we’ve made over the past decade has brought together tremendous capabilities and complementary businesses in terms of clients, capabilities, culture, and strengthen our position for organic growth and a leader in digital transformation and IT modernization. The acquisition also expands our portfolio of programs at the National Institutes of Health, which has been a strategic target for us for some time, and is offered diversified opportunities within the Department of Defense, particularly the Navy and the Marine Corps, which also have been very, very targeted enterprises.

The information warfare community really helps to elevate our cyber positions and all things associated with digital transformation. The bottom line is that this acquisition significantly broadens our technical capabilities, providing us greater access to mission critical areas expected to accelerate growth. I think most of our investors are aware that we have been moving into the digital transformation space for some time. And this is where GRSi has unique and proven experience, expertise, as well as a strong track record. Combining the technical capabilities with our nationally recognized research scientific research expertise and capabilities, along with our R&D competencies derived from our IBA acquisition, our role in providing highly differentiated solutions critical to the host of new business development initiatives remains tanomo.

The GRSi has also enhanced our cybersecurity offerings, further diversifying our operational capabilities, opened up new markets and brought an attractive book of business. At closing, the company had a combined backlog of just around 1 billion and annualized adjusted EBITDA of approximately 50 million. Given this transformational acquisition and a strong demand for our technology enabled services, we remain optimistic about the federal market and growth going forward. There continues to be a commitment throughout the government, for instance, infrastructure upgrades, overall modernization, enhance cloud computing and cybersecurity. And we have a solid pipeline of opportunities on the horizon and are actively engaged in new business development opportunities to expand that business, particularly in the scientific and research side where we’re looking at opportunities such as the major CIO-SP4 opportunity, coming up in the near term.

Suffice it to say, we are at a whole new level in terms of size and scope. But we’re still the same innovative DLH with the entrepreneurial spirit to provide innovative cost effective technology solutions to our core customers in the adjacent markets. With that, I’d 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 first quarter for fiscal 2023, which includes the acquisition of GRSi. As Zach mentioned this closed on December 8 of 2022. Turning to slide 7, we’re providing a bridge from the reported GAAP numbers to the adjusted results excluding both the GRSi transaction given its short duration in the quarter, and last year’s short term FEMA contracts in Alaska which we’ve discussed in the past. We’ve also adjusted the fiscal 2023 first quarter for corporate development costs incurred to complete the GRSi acquisition such as legal expenses, and financial due diligence costs among other items. These results are prepared on a non-GAAP basis and a full reconciliation to GAAP is included in the back of the presentation available on our website as well as in our press release and associated filings.

But the high level takeaway is that on an apples to apples comparison basis DLH continues to report solid performance from the underlying legacy business. Slide 8 shows this information in graphic form. The 7% adjusted revenue growth year-over-year generally reflects higher demand for our key programs. Adjusted income from operations was 5.3 million for the quarter versus 4.9 in the prior year period. We anticipate operating margins to be positively impacted going forward, reflecting our growing base of business, as well as GRSi’s relatively higher value revenue mix. Net interest expense was 1.8 million in the fiscal first quarter of 2023 versus 0.7 million in the prior year period, reflecting higher debt outstanding due to the GRSi acquisition.

Following the close of the quarter, we implemented an additional floating to fixed interest rate swap. The notional amount of covered under swaps increased to 112 million or approximately 60% of the term debt outstanding with the remaining balance of debt subject to floating interest rates. The fixed rate for the additional swap is 4.1% plus the applicable credit spread and the swap matures in January 2026. We believe the swap will substantially mitigate interest rate risk. DLH recorded a provision of 0.5 million and 2.7 million for tax expense during the first quarter of fiscal 2023 and 2022 respectively. We reported adjusted net income in the first quarter of approximately 3.6 million or adjusted diluted earnings per share of $0.25 versus 3.1 million or $0.22 per diluted share last year.

Adjusted EBITDA for the three months ended December 31, 2022 was approximately 7.2 million versus 6.9 million in the prior year period or 10.9% and 11.1% of revenue respectively. Moving to slide 9. We provide some historical perspective regarding our ability to pay down debt using the company’s substantial operating cash flow. The bars represent debt levels at the end of each quarter for the past few years, during which time we completed the acquisitions of S3 and IBA. The company has a strong track record of rapidly de-levering the balance sheet after transactions are undertaken. We are confident that this time is no different. And we anticipate future periods to continue in this tradition. Following the acquisition of GRSi as shown on slide 10.

When the transaction closed, we had approximately 208 million of debt outstanding. And we subsequently, prior to the end of the quarter, reduce that balance to just under 204 million. However, while we’re not providing specific guidance, based on our experience modeling our operating cash flow expectations, we anticipate that our debt will be between 180 and 190 million in fiscal year and if that’s the case, our leverage ratio will be under four times and thereafter we expect our cash generation to continue paying down debt, strengthening the balance sheet over the coming years. We believe our investors have come to trust our operational excellence and track record in this regard providing them confidence in our ability to proceed in this tradition.

We look forward to doing just that. This concludes my discussion of the financial statement. With that I would now like to turn the call over to our operator to open for questions.

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Q&A Session

Operator: Thank you very much. We will now begin the question and answer session. Today’s first question comes from Joe Gomes with Noble Capital. Please go ahead.

Joe Gomes: Thank you. So, first one, I am going to lay it out there for Zach, you mentioned you’re going to talk a little bit about the GRSi integration and how that’s been going. So maybe you can just kind of give us a little bit more detail on integration and if you’re seeing the opportunity for cross selling opportunities and maybe even when you model the transaction I believe you factored in zero expense savings. And are you seeing anything on the expense side that might lead to some expense savings?

Zach Parker: Yes, no. Great, great questions. Joe, and thank you for the lead in with regard to integration and our compatibilities, I think we certainly featured some of the quotes between myself and David with regard to the cultural fit. And we did a lot during the diligence phase, both directions, in that regard, as extremely important to the company as well as ourselves, that we would see that tremendously great fit as post closings go, that’s always a critical component of success factors. And I got to tell you that it has been going tremendously well. We have stood up an IMO and integration management office, that is consists of representatives from the new company and in our heritage resources. They’ve got their swim lanes, and it’s going very, very, very well.

So we’re excited about that. With regard to cross selling. Absolutely. We kind of started that during diligence phase. We really feel like we want to come out of the gate with some really great synergies, and it’s probably one of the areas I’m most excited about as we talked about some of our previous IDIQ wins. I’m thrilled when I see a room that has some technologists supporting NIH, that come with the GRSi addition, working collaboratively with some of our nationally recognized scientific researchers, all working on a value proposition and a solution set for some of these customers that we would otherwise not been able to have in the room together. And it’s really refreshing to see that inside of our first 100 days of integration, that our teams are working very, very collaboratively in that regard.

And so we do see not only enhancements to some of our existing work, but new opportunities that we started developing in a pipeline that do reflect the power of the two companies, not just any of them individually. So really, really great there. We have actually started to implement some synergies, some expense savings already show up in another quarter. So and of course, we have a plan for a lot of the infrastructure redundancies to be taken out over the course of the year. And IMO has a pretty good cadence and a schedule on those we see. Nothing really taken us beyond the end of this fiscal. But we have a lot of quick wins already under our belt. So it’s going well, Joe.

Joe Gomes: Great, and one follow up. So scanning through the queue. You had really strong performance over at the VA headstart at a pharmacy revenues were up 23% year-over-year. Headstart revenues were up almost 34% year-over-year. I was just wondering, maybe you can touch base as to what is driving that? And is that something that you see continuing? Or do you think that those kinds of types of growth rates will moderate over the rest of the year?