Hello, welcome to the DLH Holdings fiscal 2023 first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, please press star then two. 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.
Thank you 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 three 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'll 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.
Thank you, Chris. Good morning, everyone. Welcome to the 2023 fist quarter conference call. I am 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 four, I'll 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 8th 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 our 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 and 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. 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 2023 and beyond. Turning to slide five, I want to briefly provide an overview of our most recent transaction.
As a reminder, we hosted a conference call specifically for the GRSi acquisition 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. It 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 has 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 a host of new business development initiatives remains tantamount. 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 the 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 infrastructure upgrades, overall modernization, enhanced cloud computing and cybersecurity. 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 these, 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. 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?
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 8th of 2022. Turning to slide seven, we're providing a bridge for, 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. 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.
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 eight 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 million 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. 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 an 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 quarters 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 31st, 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 nine, 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. We subsequently, prior to the end of the quarter, reduced 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 million and $190 million at fiscal year-end. 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 statements.
With that, I would now like to turn the call over to our operator to open for questions.
Thank you very much. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Joe Gomes with Noble Capital. Please go ahead.
[crosstalk] Good morning, Zach and Kathryn. Congrats on a quarter. Hey, Joe. Good morning.
Thank you.
The first one I'm gonna lay it out there for Zach. You mentioned you were gonna talk a little bit about the GRSi integration and how that's been going. Maybe you can just kinda give us a little bit more detail on integration and if you're seeing, you know, the opportunity for cross-selling opportunities.
Oh, boy.
Maybe, you know, even, you know, when you modeled the transaction, I believe you factored in zero expense savings. Are you seeing anything on the expense side that, you know, might lead to some expense savings?
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, you know, the cultural fit. We did a lot during the diligence phase, both directions, in that regard. It was extremely important to the company, as well as ourselves, that, we would see that, you know, tremendously great fit. You know, as post-closings go, that's always a critical component of success factors. I gotta tell you that, it's been going tremendously well. You know, we have stood up an IMO, an Integration Management Office, that is, consists of, representatives from, the new company and our, and our heritage, resources.
They've got their swim lanes, and it's going very, very well. We're excited about that. With regard to cross-selling, absolutely. You know, we kinda started that, during diligence phase.
Absolutely.
You know, we really feel like we wanna come out of the gate with some really great synergies, and it's probably one of the areas I'm most excited about. You know, as we talked about some of our previous IDIQ wins, you know, I'm thrilled when I see a war room that has, you know, some technologists supporting NIH that have come with the GRSi addition, working collaboratively with some of our, you know, nationally recognized, scientific researchers, all working 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.
It's, it's really refreshing to see that inside of our first 100 days of integration, that our teams are working very collaboratively in that regard. 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. Really great there. We have actually started to implement some synergies, some expense savings, already. It should show up in another quarter or so. Of course, we have a plan for a lot of the infrastructure redundancies to be taken out over the course of the year. Our IMO has a pretty good cadence and a schedule on those. We see nothing really taking us, you know, beyond the end of this fiscal.
We have a lot of quick wins already under our belt, so it's going well, Joe.
Great. One follow-up. Scanning through the queue, you know, you had really strong performance over at the VA, Head Start. You know, the pharmacy revenues were up 23% year-over-year. Head Start revenues were up almost 34% year-over-year. I'm 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 types of growth rates will moderate, you know, over the rest of the year?
With respect to the Head Start specifically, that program specifically, it's really more a case of returning to norm. If you'll remember, and boy, I'm happy to be among those who has put COVID way in the rearview mirror. It hasn't been that long ago, it was just this time last year that dealing with Omicron caused a significant realignment of the schedule, and so some things that traditionally would have happened in our Q1 moved into Q2 and Q3. This year is performing much more to the norm. I think programmatically, the program, while we have had some nice opportunities to continue to grow our reach there, largely the volume on that program is gonna be pretty consistent year-on-year. It's just a matter of which quarter it'll roll out in.
In contrast, the, the, you know, as you probably remember in the successive quarters of 2022, that the pharmacy program and both sides of that VA program grew pretty significantly over the course of the year, as the VA really took some operational changes to redirect work and really kind of rethink their business model using, again, COVID as kind of an excuse to kind of do some efficiency gains that were probably long overdue, and steering work through that, through that automated distribution center that they had previously held at their locations. Those came on largely throughout Q2 last year, they're kind of catching up in Q1 this year, as compared to Q1 last year. We think that Q1 volume kind of represents the norm of that program going forward.
Great. Thanks for that insight. I'll stick to the two questions and pass it on. Thanks, Zach and Kathryn.
Great to talk to you, Joe. Thanks for being a straight man on the revenue synergies. As you can tell, we're extremely excited about that.
The next question comes from Brian Kinstlinger with Alliance Global Capitals. Please go ahead.
Hi there.
Good morning, Brian.
This is Shervin on for Brian.
Hey, Shervin.
Good quarter, guys. Just piggybacking off of the integration question, should we expect the DLH personnel to focus more on BPO RFPs, whereas GRSi personnel focus on the IT opportunities?
Well, we're not gonna operate that way, I think is the real thing that we should expect. Each of us brings our strengths, but really the opportunity is in driving convergence on those pursuits. We know each of us has our strength and expertise that we bring to it, but. While each group will continue to leverage its expertise and capabilities, really the home run for us or really the icing on the cake or whatever cliche you wanna use is in that scenario where we take the expertise that both of us bring together, both in terms of capabilities, as Zach described, and in terms of business models from a customer perspective, and really driving convergence on those to drive those revenue synergies that we talked about.
Yeah, I'd say, you know, our vision align as it aligned with the priority of this deal was to really be able to make this be a 1 + 1 = 3. I know you hear that often in some of these kind of deals. In this particular case, it isn't really just having two separate channels, as Kathryn has indicated. We really believe there's really great value creation that's gonna come from positioning us in spaces that neither one has been before, right? Or would have been able to drive before. We're starting to see that with some of our opportunities now. If you think about some of the opportunities, for instance, we bid and won an IDIQ where the VA wants to do more innovation and drive more innovation in their systems development.
nd we'll continue to have a strong partnership team for that. But infusing the talent that comes with GRSi into that mix, supporting our existing competencies, adds some abilities that are really going to position us in a much more competitive light on the task orders as we hope to start to see some of those later this fiscal year. So that alignment really is going to be more of, you know, driving technology innovations into not only current customers, but now hitting those adjacencies much harder than we have been able to do in the past
Great. Thank you. Is there any way you can quantify GRSi's proposals submitted in 2022 and or planned submission in 2023?
Not sure I understand that. Which proposal?
[crosstalk] Just a quantum on. You're talking about. Yeah.
The pro forma ?
Yeah, just, a visibility on the pipeline. Yeah. It.
Mm-hmm.
There'll be more forthcoming on that, Shervin, as we really give forward treatment of the addressable markets.
Mm-hmm.
You know, We've already moved well beyond talking about GRSi as a standalone.
Right.
When we talk, this, the best place or the first place you will probably see this laid out, in broad strokes is the upcoming annual shareholders meeting where we will have some visibility into the addressable markets of the enterprise, leveraging the capabilities of both GRSi and DLH. We are intentionally moving away from what is the pipeline for GRSi versus what's the pipeline for the legacy parts [crosstalk] of the company. It's really a DLH pipeline. We You know, you'll see there how we think that'll drive more meaningful definition of the pipeline and r eally broader markets that we can access because of the broader capability.
Yeah. Let me add to that. As Kathryn has indicated, you know, probably, I don't know, at least a month or two before close, we did some really diligencing around some opportunities that were not in either of our respective pipelines.
Right.
That again, we're viewing this as a DLH pipeline, of which we've got three major operating entities that bring really strong capabilities to go to market. That's very important for us to have that full one DLH approach as opposed to, you know, an addition of standalone entities. You know, you'll see us evolving structurally over the course of the next year in that regard. From a market pursuit, our go-to-market strategy right now is literally a one DLH approach. We'll address a single pipeline. There'll obviously be some leads and partners.
Mm-hmm.
Collaboration, et cetera, on most of these deals now. You know, I'm excited. The reason I'm so excited about Joe's observation earlier and his question earlier is just that cross-selling, we're driving our pipeline, so it's gonna depend upon cross-selling. That's the exciting part about it. As Kathryn indicated, you'll get a little more color around what that looks like in our upcoming annual meeting next month.
All right. Thank you so much, guys. That's all I have.
You bet. Thank you, Shervin.
Great to talk to you, sir.
Say hey to Brian for us.
Indeed.
I will.
As a reminder, if you have a question, please press star then one. The next question comes from Jeff Bronchick with Cove Street Capital. Please go ahead.
Good morning, everybody.
Hey, Jeff.
Hey.
Yeah, Jeff.
Just to, you know, it's the indignity of West Coast. Never treated right.
Yeah.
My question is maybe just, you know, frame out what the CMOP RFP process looks like today and, you know, how does it look and feel, from, you know, different ways they've approached the contract in the past, and then maybe sort of different ways that you're thinking about your own capabilities and what you want to do and how relevant this is to you. You know, just maybe frame out some of the puts and takes. Lastly, like a timeline. What's your best guess at how this rolls through? Good luck.
Yeah.
Yeah.
Thanks, Jeff. Yeah. I'll start with the timeline piece and then give some color again around the VA's acquisition process. Timeline-wise, let me make sure we're level setting everyone. We continue to be on sole source bridges since 2016. It's amazingly long procurement administrative lead time or halt, if you will. That is actually where we're currently operating. November of 2016 is when one of the second of the major contracts were that were awarded in 2011 2012 timeframe came to fruition.
Now with regard to the way in which they've come out, they've actually come out the same as they did, similar to the way in which they did for the contracts that we won that ended in 2016. That was of course in the 2010 2011 competition's arena. Those contracts, the contracts we're performing on today, were all awarded as and solicited as individual site bids, right? We had maybe 40%, 50% share of one set of those and a little more on the other set. They were procured by the government and the VA as seven standalone bids. Some companies would bid one or two, some could bid more.
We, of course, where we had three or four of them as an incumbent, we did bid all seven. It so happened that we won all seven. And having had that clean sweep, the government has managed the work and we've collaboratively agreed to manage the work as though it was a logistics contract and a pharma contract. In each of those cases, they were individually solicited, just like they are now, by site. And of course, they gave preferential treatment to small businesses in that arena, as would normally be the case. Then of course, over the last few years, we've had various versions of Kingdomware-induced acquisition changes.
Appropriately so, the VA remains strongly committed, as are we, to the small business community and particularly the Service-Disabled Veteran-Owned Small Businesses. We have partnerships that we've put into place over the last few years, and that's been an integral part of our strategy and continues to remain an integral part of our strategy even today, is to leverage approaches that would have benefit for SDVOSBs. The current state, as you've seen, of the solicitations again, are back like they were when we won the last time as standalone businesses, as standalone sites.
The difference here is rather than encouraging Service-Disabled small businesses as teammates, it is currently in a set-aside mode so that the SDVOSB has to be a part of the prime position for each of these. We're continuing to support them. We'll evaluate, you know, how the evolution of the acquisition strategy will come out as a, as they work to a conclusion on this acquisition process. Either way, we remain fully committed to serving our veterans the way in which we have, providing differentiating capabilities to net out as high customer satisfaction ratings up to and including J.D. Power Awards on a pretty extensive basis.
We remain committed in our partnership with our veterans, and we'll continue to embrace the small business investment as well.
Just, you know, given the highly efficient way in which the government works, particularly today, how would you envision a timeline of, you know, submission, review, initial, you know, awards, you know, subsequent, you know, complaints and whining and then, you know, into a final, you know, next phase of the CBAR, just roughly speaking?
Well, they currently have bridge coverage I think we talked about in our filing that carries us through the end of this fiscal year. That has to be an indication of the VA's thinking, with regard to having, you know, coverage, up through the end of this fiscal year to allow them to go through the adjudication of proposals and any potential protests. I can tell you that proposals have been submitted for each of those sites, thus far, so they have an idea of the competitive landscape and what their load of proposals to review will be.
We are a part of them, and, you know, the jury's out in terms of, what the timetable is gonna take to execute that. As we had indicated, you know, you know, previously, we do feel that we won't see any disruption during this fiscal year. Every indication is that the VA is tracking with that as well.
Got it. Okay. A 2024 calendar, you know, of some conceptual change would be there. Their, just their okay. Just to be clear, so the way you framed it, would it be fair to say that if you look at things on a curve that, you know, winning all seven is, you know, sort of on the right side of, you know, possible, but maybe not, you know, the likely and losing all seven is also on the other side of the curve is unlikely that you'll, you know, you think normal and customary somewhere in the middle is a, is a reasonable middle of the curve expectation? Would that be a fair statement?
Well, now, Jeff, you look, I'm rooting for Patrick Mahomes, I would be betting on Philly. It's one of those sort of things where, you know, we are very optimistic and continue to lean into protecting our business, right?
Right.
We're not modeling scenarios that suggest that we will sub-subordinate, you know, any of these clients in the critical, mission-critical work that we do for this agency. Our leadership team is aligned that way. Our relationship partners are aligned that way. Our history has demonstrated that we've been able to deliver that. In any case, obviously the third parties can take a look at what they think may happen, but we're really committed and optimistic that that we are gonna offer some solutions that are gonna prevail.
Got it. My just my last question. Would it be fair to say that there is a, you know, there's economic advantage to running the whole show, ergo, different competitors, you know, will have, you know, if you're only gonna go for or win or expect to win maybe two, that would provide inferior economics. In other words, the attractiveness of a part of-- you're winning a part of this is infinitely less interesting economically than running the whole program as you are now. Is that a fair statement?
We obviously don't discuss, you know, proprietary bidding strategies, but I think your question is a fair question relative to, you know, if you're looking from the outside in, does it make sense for the government to maybe expect to see some synergies if you're operating across the all domains? I would say there's good reason to, yes, that's a fair question, and there's good reason to think that that might be the case.
Excellent. It's winning. Don't ever mention the Eagles in my presence again. Thank you.
Yes, sir.
Thank you.
He took me under.
The next question comes from Burton Osterweis with Osterweis Business Consulting . Please go ahead.
Hey, good morning, Zach and Kathryn. I don't have any questions. I'm good, thanks. I just wanted to say a big thank you. You guys keep banging it, knocking it out of the court, quarter after quarter after quarter, and it's much appreciated. Thanks again and hope you all have a great week.
Well, you knew a win. You knew a win. It is gratifying. We appreciate your support. It's very gratifying to see the strategy that we laid out many years ago coming to fruition.
On forward, yeah.
We are excited.
Just like clockwork.
Yeah. As you know, Burt, obviously we put on a little more debt than you're used to, being too comfortable with, but you know our history. You know, certainly the market, we think, knows our history. Hopefully we'll be able to chat a little more about that. You'll see Kathryn has taken some steps already, and you can see that trajectory, and we can talk a little bit about that more if we see you in New York next month.
Oh, I think it's a great thing because the stock will get beat up. We can all get in, load up for more, and then the balance sheet will clean up. It happens over and over.
There you go. Some things are predictable, right, Burt?
Thanks so much. Have a good day. Bye.
We appreciate it. Thank you for your support.
At this time, there are no additional callers in queue. I'll turn back to Mr. Parker for any closing remarks.
Thank you, MJ. Again, a special thanks to all of you for your interest and your continued support for DLH, as Kathryn indicated. You know, we are really pleased that the strategy has unfolded as to get into what we call our third phase now, and probably in many ways, our most exciting phase of implementing a strategy for DLH. We wanna invite you to join us next month at our annual meeting for greater disclosure of the new DLH. With that, thank you. Have a productive and a blessed day. Bye for now.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.