DLH Holdings (NASDAQ:DLHC)
Q2 2013 Earnings Call
May 15, 2013 11:00 am ET
Donald C. Weinberger - Managing Member
Zachary C. Parker - Chief Executive Officer, President and Director
Kathryn M. Johnbull - Chief Financial Officer, Principal Accounting Officer and Treasurer
Good day, ladies and gentlemen, and welcome to the Q2 2013 DLH Holdings Corp. Earnings Conference Call. My name is Grant, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Mr. Donald Weinberger. Please proceed.
Donald C. Weinberger
Thank you, Grant. Good morning, and thank you for joining us for today's conference call. I am Donald Weinberger, Managing Member of Wolfe Axelrod Weinberger Associates, Investor Relations Counsel on behalf of DLH Holdings Corp.
On the call with me today is Mr. Zach Parker, President and Chief Executive Officer; and Ms. Kathryn Johnbull, Chief Financial Officer.
Before I turn the call over to our host, let me take a moment to read the forward-looking statement.
This conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this conference call regarding DLH Holding Corp.'s business, which are not historical facts, are forward-looking statements that involve risks and uncertainties. DLH's actual results could differ materially from those described in such forward-looking statements as a result of certain risk factors and uncertainties, including, but not limited to, our ability to continue to recruit and retain qualified temporary and permanent health care professionals and administrative staff on acceptable terms; our ability to enter into contracts with government agencies and other customers on terms attractive to us and to secure orders related to those contracts; changes in the timing of customer orders for placement of temporary and permanent health care professionals and administrative staff; the overall level of demand for our services; our ability to successfully implement our strategic growth, acquisition and integration plan; the effect of existing or future government legislation and regulation; the loss of key officers and management personnel that could adversely affect our ability to remain competitive; other regulatory and tax developments; and the effect of other events and important factors disclosed previously and from time to time in DLH's filings with the U.S. Securities and Exchange Commission.
For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in the company's periodic reports filed with the SEC. The information in this conference call should be considered accurate only as of the date of the call. DLH expressly disclaims any current intention to update any forecast, estimates or other forward-looking statements contained in this call.
As part of today's call, we've created a slide presentation, which can be accessed on the DLH website at www.dlhcorp.com. Go to the Investor Relations tab towards the right side of the page and click on Presentations under the drop-down menu.
To begin our discussion this morning, I will turn the call over to Zachary Parker, President and CEO of DLH Holdings Corp. Zach, please proceed.
Zachary C. Parker
Thank you, Don. Good morning, and welcome to everyone on the call, and thank you for your interest in DLH. Joining me on today's call is Kathryn Johnbull, our Chief Financial Officer. Together, we will take you through those results and also provide a brief update on some of our strategic initiatives and an update on the government services budget environment, as well as our position with respect to the uncertainties and challenges in this space.
As you know, DLH announced our second quarter FY '13 results earlier this morning. The second quarter results reflect our continued progress in executing our strategy and driving value back into the company.
During the quarter, we received measured revenue growth and positive income from operations as our margins have continued to improve, in part from our enhanced program management and performance excellence initiatives. We managed to grow our revenues by 3.1% and improved upon our gross margin, which enabled us to record positive adjusted EBITDA of $800,000 for the quarter. We believe we are entering a promising time for DLH, and we continue to build momentum as we define our future as a premier provider of health care and logistic services to the Department of Defense and Federal Government agencies.
Recently, Kathryn and I attended meeting and event cosponsored by Houlihan Lokey and the Professional Services Council, focused on the state of the market facing federal contractors in 2013 and beyond. In addition, our leadership team continues to maintain extensive connectivity with the decision-makers in our space. As such, I'd like to provide a few key comments as a result of these efforts, as indicated on our presentation.
First, I and our team continue to have tremendous confidence in our vision and our future. Our recent performance and the government budget iterations reinforces this belief that we are properly aligned with the appropriate target markets. The market conditions, however, continue to be highly competitive and as -- and in of itself, creates margin pressures.
Yet we have a very strong addressable market with a very solid new business pipeline. And we continue to drive operational efficiencies and cost reductions while repositioning for growth. There continues to be a significant amount of federal business opportunities available and a record number of deals occurring in this space. And due to our strategic business alignment around national priority areas, I left the conference confident that DLH will successfully manage its way through this austere environment and continue to expand on our solid foundations.
I'd like now to turn the call over to Kathryn Johnbull, our Chief Financial Officer, for a more detailed discussion of our financial results. Kathryn, please proceed with your comments.
Kathryn M. Johnbull
Thank you, Zach, and good morning, everyone. Revenues for the 3 months ended March 31, 2013, and 2012 were $13 million and $12.6 million, respectively, which represents in the quarter an increase of $0.4 million or 3.1%, as Zach mentioned, despite extended government delay in major awards.
The increase in revenue is due primarily to expansion on current programs. Revenues for the 6 months ended March 31, 2013, and 2012 were a $26 million and $24.1 million, respectively, which represents an increase of $1.9 million or 7.8% over the prior fiscal period. The increase in revenue is also -- this increase for the year-to-date is also due primarily to expansion on current programs, as well as having the full 6-month impact of new business awards received during the prior year period.
Gross profit for the 3 months ended March 31, 2013, and 2012 was $1.8 million and $1.3 million, respectively, which represents an increase of $0.5 million or 36.4%. As a percentage of revenue, gross profit was 13.6% and 10.3%, respectively, for the 3 months ended March 13, 2013 and 2012. The gross profit rates overall benefited from improved contract contra performance in cost management. Gross profit for the 6 months ended March 31, 2013 and 2012 was $3.6 million and $2.9 million, respectively, which represents an increase of $0.7 million or 24.3% over the prior fiscal year period.
As a percentage of revenue, gross profit was 13.7% and 11.9% for the 6 months ended 2013 and 2012, respectively. The gross margins for the 6-month period also benefited from increased revenue and improved contract performance and cost management.
General and administrative or G&A expenses for the 3 months ended March 31, 2013 and 2012 were $1.7 million and $1.8 million, respectively, a decrease of $0.1 million or 5.8%. As a percent of revenue, G&A expenses were 13.3% and 14.5%, respectively, for the 3 months ended March 31, 2013 and 2012.
G&A expenses for the 6 months ended March 31, 2013 and 2012 were flat at $3.6 million. As a percent of revenue, G&A expenses were 13.8% and 14.9% for the 6 months ended March 31, 2013 and 2012, respectively.
These improvements in the G&A rate were due to resource consolidation and cost reduction initiatives we undertook to allow greater leverage of our resources as revenue grew.
Income from operations for the 3 months ended March 31, 2013, was approximately $9,000, as compared to a loss from operations for the 3 months ended March 31, 2012 of approximately $564,000. The improvement in income from operations results from improved gross margin and decreased general -- G&A expenses described above.
The company reported a loss from operations for the 6 months ended March 31, 2013, which was approximately $84,000, as compared to a loss from operations for the 6 months ended March 31 of 2012 of approximately $774,000.
Net loss for the 3 months ended March 31, 2013, was $0.1 million or $0.01 per basic and diluted share, as compared to loss from continuing operations of $0.7 million or $0.12 per basic and diluted share for the 3 months ended March 31, 2012. Net loss for the 6 months ended March 31, 2013, was $0.2 million or $0.03 per basic and diluted share, as compared to a net loss of $1.1 million or $0.18 per basic and diluted share for the 6 months ended March 31, 2012.
These improvements were due to increased gross profit, constraints on spending and reduced other expenses. Earnings before interest, tax, depreciation and amortization, or EBITDA, adjusted for other noncash charges, or also known as adjusted EBITDA, for the 3 months ended March 31, 2013, was $80,000, as compared to a loss of $487,000 for the 3 months ended March 31, 2012.
Adjusted EBITDA for the 6 months ended March 31, 2013, was $109,000, as compared to a loss of $503,000 for the 6 months ended March 31, 2012, due principally to the increased gross profit and reduced expenses explained a few moments ago.
Moving onto the company's capital structure. As of March 31, 2013, the company had $3.2 million in cash. The company release we had adequate reserves to fund operations over the next 12 months in due of its existing cash position, the additional funding committed by our lender and the forecasted cash flow from operations. We believe we're on track to meet our FY '13 objectives. Our cost-reduction focus has quickly shown results in the first 6 months of fiscal 2013 and should continue to yield additional efficiencies in upcoming quarters and allow us to sustain positive adjusted EBITDA over the upcoming quarters.
As Zach noted previously, the Houlihan Lokey and PSB conference provided some useful insights into the ways that companies are successfully managing through the impacts of sequestration. I'm pleased that DLH has already taken action and implemented many of the strategies suggested during the event. We remain, as always, focused on customer engagement and providing same outstanding quality levels of service we have throughout our history. We've established proactive cost savings namely as we discussed in a previous quarter our Project LEAN, that allows us to stay ahead of the curve rather than behind it. And finally, we cross-utilized our personnel to maximize their skill sets and leverage fully our team to ensure efficiencies and continuity throughout our sites.
That concludes my discussion of the financial statements, and I'll now turn it back over to Zach.
Zachary C. Parker
Thank you, Kathryn. To conclude, we believe that DLH remains well-positioned to weather the storms and uncertainties that remain in which many of our peers are experiencing due to the sequestration and the continuing resolution.
For us, the exemption of the Department of Veteran Affairs really insulated us in many ways from some of the damaging effects of that sequestration in the CR. We are particularly pleased with the recent signing of the new spending bill by the government, which gives us reason to see improvement for the second half of this year. I would be remiss by not acknowledging the excellent work from our workforce, both in the field and at headquarters during this period, which has really allowed us to take advantage of some of the efficiencies that Kathryn just referred to.
Our strategy remains aligned with the government's high priorities to provide a significant amount of support to the work fighter throughout their use of service and beyond. As always, we will remain focused on the long-term goal of improving the shareholder value at DLH.
That concludes my formal remarks for today. I would now like to open the call for any questions. Operator, please proceed.
[Operator Instructions] Your first question comes from Martin Saltzman from AFM Investments.
Mine is really not a question. Mine is more of just to say that I thought this was a great job, considering what you guys are dealing with, with the sequester and the bag of hammers we're dealing with out there. So I say good job to you. I scratch my head, of course, and wonder why we don't have recognition of value that you guys are obviously putting into the company, selling it $0.69, a lousy 100 shares makes you want to scratch your head. So I'm sure you're doing the same. I looked at the report and I just -- the only possibly negative thing I can see is just the fact that your current asset test ratio is not a 1:1. It's less than that. It's $17 million in total current assets, but you have almost $19 million in total current liabilities. Aside from that, I don't see too much wrong. I wish you guys of the best of luck and hopefully, we can get more sponsorship in the company's training. It just lacks interest. So that would be my only comments.
Zachary C. Parker
Martin, I certainly appreciate your comments and appreciate your certainly closed view of our business and certainly our market space, and we share your observations and concerns. But we remain pretty confident that now that we're starting to at least show some of the positive EBITDA and getting our metrics and a number of the things that were kind of drag in the company in the past, as Kathryn is getting now closed out of the books, that we're going to continue to now start to get more and more on some radars and that our true values going to start to be reflected in the marketplace. Certainly, your comments with regard to any negativity, it's -- we feel great that you have to look long and hard to things like the asset tests, et cetera, as issues. But again, I'll pass it onto Kathryn but I really think that the observations are accurate. We're extremely pleased that we're kind of leading in the market with regard to our performance right now during the sequestration. And we're very confident that the wise; investors and certainly take a look at the metrics and they'll speak for themselves
I would say I was pleasantly surprised to just see the revenue growth. A lot of companies in your space have dealings with a government like this are actually losing revenues. So good job for you, folks.
Kathryn M. Johnbull
Right. And we do see that as sort of the signs of the times that most companies are -- I should say, are having year-over-year declines in revenue. To the comment about the current assets, we do, obviously, we think about that ourselves. And I think there's room in the market to look for potential different debt structures that might go some ways with addressing that. And this is a good time to do that. So -- but certainly, we think that the interest level will be different if we are obviously, for -- profitable than not. So we, first things first, we'll generate profitable operations. And -- but we certainly are focused on the points you raised.
Yes, I'm just being -- I'm just pointing that out, as being the only real negative thing I've seen. Otherwise, like I say, I'm pleasantly surprised by the revenues and the decrease in the loss per share. I mean, it's all pointing in the right direction. So like I say, good job, guys. Keep it up.
Zachary C. Parker
I appreciate that. We do like our trajectory, and I think that's very important where we are. And I got to say, I appreciate yours and some of the other investors with the long view. As you know that it took a while for us to get here, this is kind of our plan and turnaround doesn't happen overnight, and the market pressures of today are certainly something we couldn't envision 3 years ago. But it's nice to be at this place right now with the trajectory we've got and the disciplines that Kathryn now only has put in place for the structure of the company. And we feel real good about the future. So thank you.
Your next question comes from Richard Greulich from Wedge Capital.
I'd like to kind of add my thank you to the work you've done to steady the ship in this difficult period of time. It's really outstanding.
Zach, you had mentioned that the new law at least allows for the possibility of some growth later on in the year. Are there any -- is there anything specific that you're looking at in the pipeline that might be awarded some time between now, let's say, in the end of 2013?
Zachary C. Parker
Yes, good question, Rich. We -- John Armstrong and Kevin Wilson and I have met just the latter part of last week to take a real hard look at what's remaining in the pipeline. And we've got about 9 deals that we think are very substantive that could have a positive effect on this. The challenge is how quickly they will be awarded, whether or not they will be delays due to things like protest as such, and whether or not we can get some of that revenue for this -- the remainder of this fiscal year. However, given the conditions that we anticipated, we did turn our attention to what we call some low-hanging fruit, they really try to drive some real strong value proposition on our existing contract base. Both Kevin and John just did a tremendous job with that. And we're very optimistic that we'll see certainly some uplift as a result of this. But the major awards, the potential exist, it's just going to be a function of whether or not the government can get those things to a short time. As you know, we already halfway through the fiscal year. But we generally see a push in the May, June timeframe, particularly by July, from the Federal Government to get their obligated funds in. And we're hopeful to take some -- to see some realization in there.
And any positive things you could work with the current business? Is this on terms of a little bit higher revenue or better profitability?
Zachary C. Parker
Actually, some of both. Yes, we actually believe that we've got some upside to this year, through the remainder of this year, in both categories. Kathryn, do you want anything to that?
Kathryn M. Johnbull
Well, what I do think that's normal behavior that you see as we kind of close the government fiscal year that the government does kind of jam a lot through in their fiscal fourth quarter, which aligns with our fiscal fourth. But of course, as we -- we're all smarting from the way its government is not behaving in its normal way. So we're certainly interacting with them and bringing forward ideas. And there is room on many of the vehicles we have to allow the government to do that. But of course, they have to put the pen to paper. So what we can do is continue to focus for them on ways that they can get some critical services they need with current vehicles they already have in place without additional excellence being required. And all we can do is continue the present that opportunity to them and hope that some of them close. So -- but I do share Zach's view that there are some definite opportunities that we can push hard on for the balance of year.
You have no further questions at this time. [Operator Instructions]
Zachary C. Parker
Great, Rob. Just like to add again and thank you for participating in today's call. Should you have additional questions, please feel free to contact myself or Kathryn or dial Weinberger of Wolfe Axelrod, Weinberger Associates. We thank you for your interest and support and look forward to speaking with you again in the coming months as we discuss the progress as a result of Q '13. And by then hopefully, we'll have a lot more added definition to reach your questions. Thank you, all. Bye for now.
Thank you for your participation in today's conference, ladies and gentlemen, this conclude your presentation. You may now disconnect. Have a good day, everyone.
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