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DLH Holdings Corp. (NASDAQ:DLHC)

Q3 2013 Earnings Conference Call

August 14, 2013, 11:00 AM ET

Executives

Michael A. Goldstein - Becker & Poliakoff, LLP

Zachary C. Parker - CEO, President and Board Director

Kathryn M. Johnbull - CFO

Analysts

Richard Greulich - REG Capital Advisors

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 DLH Holdings Corporation Earnings Conference Call. My name is Tony, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a Q&A toward the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Michael Goldstein, a partner with Becker & Poliakoff. Please proceed, sir.

Michael A. Goldstein

Thank you, Tony. Good morning, everyone. Thank you for joining us for today's conference call. I am Michael Goldstein, a partner with Becker & Poliakoff, LLP, counsel to DLH Holdings Corp.

On the call with me today is Mr. Zachary Parker, President and Chief Executive Officer of DLH; and Mrs. Kathryn Johnbull, Chief Financial Officer of DLH.

Before we begin the substance of our discussion of our call, I'd like to make a few brief introductory comments. Earlier today the company posted its earnings release which outlines the topics that management intends to discuss today. Should you have missed that release, it can also be found on DLH's corporate website at www.dlhcorp.com.

Additionally, as part of today's call, we have created a slideshow presentation which can also be accessed on the DLH website. Go to the Investor Relations tab towards the right-size of the page and click on Presentations under the dropdown menu.

The company is also providing a simultaneous webcast of today's call and the replay of this conference call will be available later today. Please note that 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, the company's ability to enter into contracts with government agencies and other customers on terms that are attractive to it and to secure orders related to those contracts.

The effective existing or future government legislation and regulation changes in government customer priorities and requirements and the effect of other events and important factors disclosed previously and from time-to-time in DLH's filing with the U.S. Securities and Exchange Commission.

For a discussion of such risks and uncertainties, 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 forecasts, estimates or other forward-looking statements contained in this call.

With all that said, it is now my pleasure to turn the call over to Mr. Parker.

Zachary C. Parker

Excellent. Thank you, Michael. Good morning, and welcome to our shareholders and other interested parties. We appreciate your participation in this conference call and webcast. As Michael indicated, earlier today we posted our third quarter financial results in key trends describing our results. While these results reflect a substantive turnaround for the company, it is the trajectory of our performance that best reflects the hard work of our workforce and my executive team.

As you may recall, the first quarter reflected a positive adjusted EBITDA which was a first in recent history for the company. During Q2 the company delivered positive income from operations for the first time in several years, while we also sustained our positive adjusted EBITDA. And for this, our third quarter, I'm particularly pleased to report the achievement of positive net income also for the first time in recent memory.

While we have a ways to go, these indicators validate our strategic structural changes within the company's operations and I believe that we remain on plan to deliver sustainable, profitable organic growth and to drive enhanced value to our shareholders. We will continue to seek to profitably leverage our modest investments in areas that increase our efficiencies and expansion into our targeted markets going forward.

With regard to market expansion, our new business pipeline remains very healthy. Though the federal budget delays and sequestration has slowed the pace of the sizable new contract awards, our capture activity, our market differentiation and the positioning of DLH for strategic new business has never been better. These will provide critical new capabilities to our company portfolio consistent with our long range strategic plan.

In summary, DLH continues to successfully executive our strategy while facing the demanding headwinds and challenges imposed by the federal deficit. In addition, the reduction in the Department of Defense drawdown is another challenge that we are continuing to weather.

We continue to maintain a laser focus on providing top quality services and best practices as we support our nation's high priority healthcare and logistics services to our veterans and uniform service members. All of these factors combine to increase our confidence in the long-term prospects of the company.

Kathryn will now provide a more detailed discussion of our financial results. Kathryn?

Kathryn M. Johnbull

Thank you, Zach, and good morning, everybody. Revenues for the three months ended June 30, 2013 and 2012 were $15.5 million and $12.6 million, respectively, which represents an increase of $0.9 million or 6.7%, despite extended government delays in major awards.

The increase in revenue is due primarily to small contract awards and expansion on current programs with existing customers. Revenues for the nine months ended June 30, 2013 and 2012 were 39.5 million and 36.7 million, respectively, which represents an increase of 2.8 million or 7.4% over the prior fiscal period. The increase in revenue is also due primarily to expansion on current programs, as well as having the full nine-month impact of new business awards received during the prior-year period.

Gross profit for the three months ended June 30, 2013 and 2012 was $2 million and $1.6 million, respectively, which represents an increase of $0.4 million or 24.2%. As a percent of revenue, gross profit was 14.7% and 12.6% for the three months ended June 30, 2013 and 2012, respectively. The gross profit rate benefited from improved contract performance and cost management.

Gross profit for the nine months ended June 30, 2013 and 2012 was $5.5 million and $4.5 million, respectively, which represents an increase of $1 million or 24.2% over the prior fiscal year period. As a percentage of revenue, gross profit was 14% and 12.1% for the nine months ended June 30, 2013 and 2012, respectively. The gross profit margin for the nine-month period benefited from increased revenue, improved contract performance and cost management.

Total general and administrative or G&A expenses for the three months ended June 30, 2013 and 2012 were $1.8 million and $2.1 million, respectively, a decrease of $0.4 million or 18%. As a percent of revenue, G&A expenses were 13.5% and 17.6% for the three months ended June 30, 2013 and '12, respectively.

Total G&A expenses for the nine months ended June 30, 2013 and 2012 were $5.5 million and $5.9 million, respectively, a decrease of $0.4 million or 6.7%. As a percent of revenue, G&A expenses were 13.8% and 15.9% for the nine months ended June 30, 2013 and '12, respectively.

For both the three and nine-month periods, the year-over-year reduction in G&A expenses is due in part to CFO transition expenses of $0.2 million in the prior year period as well as to efficiency initiatives implemented in the current period to allow greater leverage of administrative resources as revenue grew.

Income from operations for the three months ended June 30, 2013, was approximately $158,000, as compared to a loss from operations for the three months ended June 30, 2012 of approximately $625,000. The improvement in income from operations derives from the improved gross margin and decreased general and administrative expenses described above.

Income from operations for the nine months ended June 30, 2013, was approximately $74,000 as compared to a loss from operations for the nine months ended June 30, 2012 of approximately $1,399,000.

Net income for the three months ended June 30, 2013 was $68,000 or $0.01 per basic and diluted share as compared to a loss from continuing operations of $568,000 or $0.09 per basic and diluted share for the three months ended June 30, 2012.

Net loss for the nine months ended June 30, 2013 was $0.17 million or $0.02 per basic and diluted share, as compared to a net loss of $1.67 million or $0.27 per basic and diluted share for the nine months ended 2012. These improvements reflect the contribution of our technology and process-driven efficiencies, increased gross profit, changes in mix by decisions and reduced G&A expenses.

Earnings before interest, tax, depreciation and amortization adjusted for other non-cash charges, also known as adjusted EBITDA, for the three months ended June 30, 2013 was $228,000 as compared to a loss of $498,000 for the three months ended June 30, 2012. Adjusted EBITDA for the nine months ended June 30, 2013 was $337,000 as compared to a loss of $1,003,000 for the nine months ended June 30, 2012, due principally to the increased gross profit and reduced expenses explained a few moments ago.

Moving on to the company's capital structure, as of June 30, 2013, the company had $3.3 million in cash. The company believes that it has adequate liquidity resources to fund operations over the next 12 months in view of its existing cash position, the additional funding committed by the company's lender and the forecasted cash flow from operations.

We believe we're on track to meet our FY '13 objectives. Our Project LEAN has allowed us to more efficiently leverage our administrative resources in the first nine months of fiscal 2013 and should continue to yield additional efficiencies in the coming quarters. We've established proactive cost savings initiatives, mainly Project LEAN, which have allowed us to stay ahead of the curve rather than behind it, and finally we cross utilize our personnel to maximize the skill sets and assure efficiencies and continuity throughout our sites.

That concludes my discussion of the financial statements. I will now turn it back over to Zack.

Zachary C. Parker

Thank you, Kathryn. I'll keep my concluding remarks brief. We do believe that the market outlook for DLH remains sound and very solid for both our near-term and our long-term addressable markets. We have a strong, strong support on Capitol Hill for these targeted clients.

We also expect that our strong backlog and position within the Veterans' Health Administration will see a benefit from the drawdown and theater while many government contractors will see a major reduction in the overseas contingency operations budget.

Further, the addition of our two new IDIQ subcontracts, one with the Center for Disease Control here in Atlanta, the other with the U.S. army's Eagle Logistics program will offer substantial opportunity for growth to DLH in the near term.

Finally, while there are many risk factors that we continue to manage, we believe we have refined our business model to consistently deliver positive adjusted EBITDA and shareholder value.

With that, I would now like to turn the call over to our operator, Tony, to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Mr. Richard Greulich of REG Capital Advisors. Please proceed.

Richard Greulich - REG Capital Advisors

Good morning, Zack and Kathryn. The comment you made, Zack, on the two IDIQ contracts is offering potentially some substantial growth in the near term. Just want to kind of narrow that down, what does substantial actually mean? Is that relative to what you're doing with the contracts now or relative to the overall company's revenues?

Zachary C. Parker

Can you hear me okay, Rich?

Richard Greulich - REG Capital Advisors

Yes, I can.

Zachary C. Parker

I appreciate your question. Mostly these are indefinite delivery, indefinite quantity contracts that will initially start as an opportunity to bid on opportunities beginning as early as we believe the latter part of this fiscal year, so with the course of the next month and a half. Without those vehicles we generally have been locked out for roughly three years, maybe a year and a half if they were to allow what we call open admissions. So the substantial importance of us getting approved as subcontractors on those contractors now is that it opens up the door for us to bid on past quarters that could be awarded as early as first quarter or second quarter FY '14, so it's very important for us.

Richard Greulich - REG Capital Advisors

The contract renewal time in September, let's see I noticed in your 10-Q, so you've submitted anything you needed to submit but at the time of the 10-Q yesterday, you had not heard back from the government whether they're going to extend that contract?

Zachary C. Parker

That's correct. For several of the contracts that we bid, we are the incumbent and it's generally around the time that the government's going to need to make a decision on either giving an extension to us until they can complete the new decisions or to go ahead and make an award. But as of close of business yesterday, we've had neither. In the last few years, it's usually a very quick administrative effort for them to initiate an extension to us, it's usually closed within 48 hours of notification to us. We don't expect any administrative issues with them.

Richard Greulich - REG Capital Advisors

Are you aware of anyone else in the running at this point?

Zachary C. Parker

It's in the government's hands right now from a competitive standpoint, so it's really a closed window for us to have access to any of that kind of information. We do know though that over the last year, especially with sequestration and the budget cuts, a lot of companies have looked at the Veteran Health Affairs organization, it is one that is very viable funding market. That tells us that we see companies being acquired that have a strong presence there, we see a number of companies looking at trying to become competitive in this arena. So we expect that there will be some competition but we can't give you any specifics as to what that might be.

Richard Greulich - REG Capital Advisors

Just in the offsite case that you would not get a renewal, what would be – do you have a fallback in terms of your cost structure?

Zachary C. Parker

Yes, we do. I should say we're very, very cautiously optimistic, we've very optimistic. We believe we're very well positioned to not only retain our work but we're hopeful we may be able to grow there. There are actually multiple bids that reflects the work that we're talking about and I think there's a total of seven, if I'm correct, Kathryn. And so we have looked at the contingencies that if we were to lose any combination of one or two or potentially more and what actions over the course of the year we might need to take. The range of those include a delay in the award that may keep us extended for some time on our current contracts, could be a government decision that we are not the awardee in which case there may be a tail that would allow for any contest or the decisions that were made. So there's a variety of contingencies that we have in fact prepared for but in each case we believe that we'll be able to weather that storm with some good due diligence to do the [right thing] for the business.

Richard Greulich - REG Capital Advisors

And what is the likelihood that that contract would increase in size on the renewal? Is there any chance of that?

Zachary C. Parker

There is a chance that it could increase in size and we're not at liberty since its very competition sensitive right now to address specifically that. But we are cautiously optimistic that there will be an option.

Richard Greulich - REG Capital Advisors

Okay, good. I appreciate it. Thanks for the good work.

Zachary C. Parker

You bet. Thank you, Rich.

Operator

(Operator Instructions). There are no more questions in the queue at the moment. I would now like to turn the call back over to Mr. Zack Parker for closing remarks.

Zachary C. Parker

Hello, this is Zack Parker again. First, I want to thank you again for your call. I appreciate your patience for the delay and getting the correction to the dial-in number. For all of you and for any referrals, again the entirety of the presentation will be available for replay this afternoon through either Thomson Reuters and/or our investor website tab. Thank you again and we look forward to giving a follow-up report in the next 90 days. Good bye for now.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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