Good morning, and welcome to the DLH Holdings Fiscal 2022 Second Quarter Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead..

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 Parker. Please go ahead, Zach..

Thank you, Chris, and good morning to everyone. Welcome to our fiscal 2022 second quarter conference call. We continue to produce strong results and remain on track for one of our best years ever. Before addressing the financials, let me once again recognize the stellar performance of our nationally dispersed workforce during this period.

Business transformation and performance delivery depends upon our people and we are blessed to have a truly committed team. In addition, our hearts go out to the Ukrainian people who are suffering from the Russian aggression and the humanitarian crisis resulting. Now turning to Slide 3.

I remain pleased with our start through the second quarter of our fiscal 2022. Our second quarter results were consistent with our expectations and continue to demonstrate strong execution across both revenue and EBITDA.

Once again, as in Q1, our short-term contracts with FEMA in Alaska drove revenue significantly higher year-over-year to $108.7 million this quarter.

However, even excluding the $39.8 million of FEMA-related work, we saw sales grow organically 12% versus 2021 as our programs remain in very solid demand, albeit with a slowdown award environment in Washington. Revenue rose across all 3 of our market segments year-over-year.

This quarter saw a curtailing of the pandemic, along with the global disruption caused by the unprovoked Russian invasion of Ukraine. Since our last meeting, Congress enacted to FY ‘22 appropriations, which now provides our federal clients the necessary budget visibility to align their priorities with funding levels.

The subsequent funding actions associated with the Russian aggression also recognizes the national strategic pivot of our military posture. It is clear that our nation will strengthen our military readiness and we can expect both short- and long-term tailwinds to our DoD and Defense Health Agency portfolios.

The fact that we grew 12% organically without a formal budget in place speaks volume as to the value of our services and critical capabilities that are essentially played across all of our agencies. We posted operating income of $10.3 million or 9.4% of sales including the impact of our Alaska contracts.

That’s the highest level in many years, reflecting our move to a more advanced and value-added solutions and services. We recorded EBITDA of $12.1 million and the second quarter earnings of $0.50 per share or $0.22 without the FEMA work, while our term loan was further reduced to $37.5 million during the period.

As Kathryn will review in a moment, our deleveraging story continued after the quarter end.

Lastly, we finished the period with a backlog of $554.7 million, down sequentially from Q1 due to the slow pace of awards, as I mentioned earlier, and of course, the drawdown of the Alaska work, but we still are positioned well for the remainder of FY ‘22 and beyond. Turning to Slide 4.

I’d like to provide additional color on the current market outlook and our go-forward growth strategy. On a high level, federal budget priorities again continue to support DLH and the agencies we serve. It is important to note that as we mentioned earlier, decision-making should accelerate now that a formal budget has been adopted.

Positively impacting our business volume as we head into fiscal FY ‘23. For DLH, the demand for our services is underscored by the projects within current appropriation bills and the presidential budget request. Suffice it to say that we remain well aligned with health care-related government spending trends.

At the same time, we’re a company that is becoming known for its consistency, in terms of revenue growth, margin expansion and our underlying financial results. We remain on track with our strategy of utilizing cash to invest in our people and pay down debt, strengthening the organization and balance sheet in tandem.

Our people continue to expand and leverage technology to support our clients and differentiate work while investing in human capital initiatives to come in the current national workforce challenges. At the end of the day, we’re judiciously deploying capital, not just for growth, but for value creation and our addressable market remains very strong.

Our capabilities enable us to solve the complex problems based by federal civilian and military customers alike, whether it be in data analytics, with sooner for disease control or innovative data management and systems engineering for the Defenseself agency, we bring strong decades-long experience and uniquely qualified, highly trained professionals to the table.

Leveraging digital transformation, big data, secure data analytics, mining simulation, telehealth and several other differentiating capabilities to ensure that our clients can adequately assess and address the challenges of tomorrow.

In addition, our investment in human resources and technology to support the backbone of our organization will continue. We have a world-class workforce of skilled employees dedicated to improving public health with the best in certifications and credentials, including our recently achieved ISO 27001.

This accreditation signifies that our Information Security Management System conforms to the requirements of the ISO/IEC 27001:2013 policy, the only internationally recognized certifiable information security standard.

The credentials cover the IT systems supporting our underlying operations as well as our incentive by cloud, the company’s PaaS, that is Platform-as-a-Service, cloud computing offering and was awarded -- that was awarded following an extended -- extensive audit process that examines the company’s information security risk, controls and management processes.

It validates our commitment to the best-in-class information security and data management practices. So our federal clients can be assured that DLH provides the utmost in security and risk management protocols. It is just again, another example of how we’re leveraging technology to support our clients and to win new business.

Before turning the call over to Kathryn, let me take a moment to briefly review how much has changed over the past several years, as shown on Slide 5. And as you can see, our transformation has been rapid, turning DLH into a highly diversified organization that serves 3 core markets of the federal government.

This, of course, was consistent with our strategy. Our expansion has been helped along the way by a few strategic, very focused acquisitions that have broadened our capabilities as well as the agencies that we serve. Those 2 were consistent with the strategy we laid out several years ago.

But at the end of the day, it comes down to our people, both our recently hired boat troops as well as the long service employees who have driven this company forward.

Speaking of which, let me say how proud I am, again, of our excellent team’s professionalism and enthusiasm that has been instrumental in our ability to win and flawlessly execute recompete and the new contract -- recompetes and the new contract with FEMA in Alaska over these past 6 months.

This clearly demonstrates and illustrates that DLH is ready and able to be a much larger player in the GovCon space and is on a trajectory to become an even greater enterprise to serve health care and systems engineering needs of our nation.

We’re continuing to be on track to post very strong results this year, and more importantly, are positioning the company for even better days ahead. All this is made possible again by our talented people who are successfully bringing in new innovative solutions to our customers and winning new business that leverages our expanded capabilities.

With the federal budget enacted, a FedRAMP authorization in place inside of demand for our services, we really look forward to the future as we enter the second half of fiscal 2022. With that, I’d like to turn the call over to our Chief Financial Officer, Kathryn JohnBull.

Kathryn?.

Thank you, Zach, and good morning, everyone. Happy Cinco De Mayo. We’re happy to report another quarter of excellent results. Turning to Slide 6. We posted revenue of $108.7 million for the 3 months ended March 31, 2022, versus $61.5 million in the prior year’s fiscal second quarter.

The growth reflects the impact of roughly $39.8 million in revenue tied to the Alaska FEMA contracts, as Zach discussed, along with a 12% revenue increase across the other parts of our business. As an aside, we do not expect to see any material impact in Q3 related to Alaska since the work there has been largely fulfilled.

Income from operations was $10.3 million for the fiscal 2022 second quarter versus $4.6 million last year, again, reflecting the additional short-term FEMA contracts in Alaska. Operating margins improved to 9.4% from 7.5% in fiscal 2021.

Note that the fiscal -- the FEMA work this quarter was positively impacted by end of contract incentives, while our non-Alaska operations were impacted by planned investments in human capital and business development activity. Going forward, our margins will return to more typical levels associated with our sustaining revenue and program mix.

Interest expense was $0.6 million in the fiscal second quarter of 2022 versus $1 million in the prior year period, reflecting lower debt outstanding. DLH recorded a provision of $2.5 million and $1 million for tax expense during the second quarters of fiscal 2022 and 2021, respectively.

We reported net income in the second quarter of approximately $7.2 million or $0.50 per diluted share versus $2.6 million or $0.19 a share last year. Excluding the Alaska business, non-GAAP earnings for the fiscal 2022 second quarter were $3.1 million or $0.22 per diluted share.

A reconciliation of these results is included in the back of this presentation. EBITDA for the second quarter of fiscal 2022 was $12.1 million, versus $6.6 million in the prior year period due to the reasons I discussed earlier. As a percent of sales, EBITDA rose to 11.2% this quarter versus 10.8% last year.

Excluding $5.5 million related to our Alaska business, EBITDA for the fiscal ‘22 second quarter was $6.6 million, reflecting the planned investments in human capital and business development in the current quarter. A reconciliation of GAAP net income to EBITDA is provided in our earnings statement and at the back of this presentation.

Slide 7 gives an updated snapshot of our debt position at the end of Q2. As of March 31, we had approximately $37.5 million of debt outstanding under our credit facilities versus $46.8 million at the end of fiscal 2021, and our leverage ratio nudged under 1x.

Furthermore, after the end of the quarter at April, we paid off all remaining debt from our acquisition of Social & Scientific Systems in 2019, extinguishing that $70 million 5-year term debt in 35 months.

As promised, we’ll use our substantial cash generation to pay down debt and delever the balance sheet, leaving us in a strong position with plenty of financial flexibility for any appropriate transaction on the horizon. At this point, we expect to end the fiscal year with under $25 million of indebtedness.

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 Instructions] Our first question comes from Joe Gomes with Noble Capital Markets..

This is Joshua Zoepfel filling in for Joe Gomes. So my first question was, I know that the Head Start program revenues in the second quarter kind of jumped from the first quarter a little bit.

Can you tell me a little bit what is behind that? Do we expect that $8.9 million going forward?.

Yes. Great question, Josh. Yes. As we have been indicating in prior quarters, we’re severely impacted largely by the COVID-19 impact for these guaranteed facilities throughout the country. Big part of that reduction was associated with our abilities to go out to these sites and conduct on-site investigations.

With the cessation of the pandemic as well as some innovations that we put into place with regard to how we’re going to conduct those audits, we started to pick those back up during this quarter. And we’re optimistic and hopeful that, that will be signed at the time and it will continue..

And then I just know that you guys kind of had additional investment in the human capital management you guys discussed about last quarter. I know that is for retention and obviously attraction of new employees. But it also kind of sounds like building this workforce in anticipation of maybe receiving more work.

Is that -- is that a good line of thinking?.

Yes. All of the above, Josh. Certainly, we’re in some time. We’ve always had challenges sometimes come with regard to the workforce, but the great resignation has really challenged all of the GovCon community in a special way.

So Maliek Ferebee, our Head of our Human Capital Management efforts now is our [CHO] has really worked very closely with each of our operating unit leaders and our team to really come up with some innovative ways to address that. And that is going to continue to be very important for both, as you indicated, retention and attraction.

At the same time, we’re implementing some new measures to help build new tools and capabilities in all aspects of human capital, whether it’d be talent acquisition systems, talent management, learning management systems, et cetera, bringing in some best-of-breed tools to help us as we move forward in the future.

So we’re starting to see some of those investments this year, and we’ll continue to do so. As I indicated earlier, we’re in the people business and we’ll continue to go.

Kathryn, anything to add?.

No, that’s exactly what would have been my observation. Obviously, we’re fundamentally a people business. And so even pre-COVID and pre great resignation, we really understood the importance of continuing to really build that pipeline of talent and really give people visibility into the trajectory of their career path here.

That’s our really foundation for sustaining a growth outlook for the company. And so continuing to develop the 1 DLH culture that really weaves together the resources that come in via various acquisitions, helping people understand how they can matrix across the organization, continuing to scale up people and give them a path forward.

And then, of course, nothing about COVID and the great resignation has done anything but reinforce really the strategy we already had at play. So I think all those things really speak to the importance of committing meaningful resources to human capital development..

Okay, great.

And then another one for me is, I was wondering if you guys can have -- probably, I guess, additional detail just on major contracts you guys have kind of bid on already or maybe contemplating and bidding on like what are the size of those and obviously the timing?.

Yes, the range of our pipeline does vary. We’ve had a particularly heavy period over the recent few quarters that had to do with -- some of our recompetes really not very material. Overall, they’re very strategic to us. That is contracts less than $50 million, over $5 million.

While at the same time, we’ve had work on IDIQs, which are those type of contracts that for the next 5 or even 10 years, you have to have a role on in order to be able to compete for task orders in the future.

So we’re going to continue to look to those sort of vehicles and make sure that we have a good stable of those type of IDIQ contracts going forward.

We also have had -- we’re optimistic that with the budget certainties now that some of our larger opportunities north of $75 million and $100 million that we’re going to start to see some of those RFPs hit soon. We’ve had customers that have continued to extend the incumbency on those contracts and had reluctance to fund the new procurements.

And so we’re hopeful now that we move off of the continuing resolutions that we’ve been on for several years that the budget transparency now will move some of those forward. So we have been doing preparatory work for those.

As Kathryn indicated, some of our pre-RFP activity is to start to drive technical solutions and value propositions on the capture process that the yield will be subsequent to submitting the proposal and then, of course, the pinning awards..

Great. And just last question, if I may. I just wanted to kind of get an update just how the pipeline is looking or seeing the valuations out there when you’re looking at those companies..

You’re talking about on the corporate development M&A side?.

Yes..

Kathryn?.

Sure. Happy to address that. So I think it’s a factor of the M&A industry in general and particularly in our space that a lot of opportunities pulled forward into 2021, just the general expectation of the tax rate increase that ultimately never materialized. And so that sort of drained the queue, if you will, for the first quarter of the calendar 2022.

But everybody that we network with and our own sense of things was that things would start to spring to life in the April time frame. And indeed, that is what we are observing.

So I do expect there to be healthy volume for the balance of the calendar 2022, and we’re definitely going to be in there, evaluating the opportunities that are relevant for DLH. So we’re encouraged about our ability to have the capacity to respond to those opportunities.

And we think there is a lot in the market that would be meaningful in terms of continuing to expand our capabilities..

And let me add that Kathryn and I were pretty proactive beginning of the calendar year to actually meet with our close friends in that side of the business to let them know kind of what our strategy is. We have expanded our strategy in many ways. We believe that we’re well prepared to do larger type of opportunities than we had before.

And then we’re also opening our aperture a bit, while health is going to continue to be a core component of us. But the technology side and differentiating capabilities that we have built over the last couple of years, we think opens up some additional markets that will also come into play.

So we think that we’ve got some pretty good alignment so that they understand our expanded strategic vision on that side of the house, and that will help to drive, we think, opportunities in the near future..

Congrats on the quarter guys..

Thank you, Josh..

Thanks for joining, Joshua..

[Operator Instructions] At this time, there are no additional callers in queue. So I’d like to turn the call back over to the President and Chief Executive Officer, Mr. Zach Parker for any closing remarks..

Well, thank you to everyone for joining us today. This concludes our presentation this afternoon. As usual, Kathryn and I will remain available for any follow-up discussions. And for the rest of you, please have a blessed day, and we look forward to chatting with you next quarter. Bye for now..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..