ewsba.se
President and Chief Executive Officer — Zachary C. Parker
Chief Financial Officer — Kathryn M. Johnbull
Zachary C. Parker: Thank you, Chris Witty, and good morning, everyone. Welcome to our second quarter conference call. I am pleased for the opportunity to report our financial results and provide color regarding the current environment and our outlook. As I begin, I would like to recognize the performance of our highly skilled workforce. Our people are our number one asset as a company, and we lean on the passion, creativity, and expertise of our staff in order to succeed. This past quarter, you once again demonstrated the innovative thinking required to support our customers' critical missions and delivered excellence across the way. We continue to thank everyone at DLH Holdings Corp. for this execution.
Now turning to Slide 4, I will provide an overview of the federal marketplace achievements and financial performance. The fiscal 2026 budget cycle is now complete, and the 2027 outlook is coming into full focus. We believe that the current federal funding environment is favorable to DLH Holdings Corp. Clients across our markets have increased funding capacity and improved budget visibility, allowing for a steadily improving procurement environment. Key federal health agencies received FY 2026 funding increases compared to FY 2025 levels, reversing in part the previously proposed funding reductions outlined by the President's request for fiscal 2026. Agencies in the defense and intelligence market have received significant budget increases that align particularly well with our capabilities.
These are supported on both sides of the aisle, and we expect this to be a healthy profile for us in the years to come. We believe that the improved clarity and stability which has emerged in recent months meaningfully expands the company's addressable market and supports the company's strategic organic growth initiatives. Last year, and throughout the shutdown in our fiscal Q1, budget uncertainty and large reductions to federal agency contracting departments significantly slowed procurement activity across the government. As such, numerous key deals and strategic large procurements that we were expecting in 2025 are just now coming up for bid.
We are encouraged by the increase in bidding activities and are experiencing a busy second half of the fiscal year responding to procurement requests. We expect certain award decisions over the coming months, subject to customer timelines and procurement processes. DLH Holdings Corp. continues to maintain a healthy pipeline of opportunities which will leverage our world-class workforce, our advanced capabilities, and our recently developed commercial technology differentiators to elevate our win probabilities in this pipeline. Notably, the President's recently released fiscal 2027 budget request calls for historic spending increases in the defense and intelligence sector. The administration proposes that this investment be partially offset by unspecified reductions in federal health spending.
As always, the President's budget request is an initial step in the multi-phase federal budget cycle. We will remain engaged with the Hill, our customers, and influential industry groups as this process advances. Additionally, the current administration has taken several actions intended to simplify contracting and to accelerate the time required to complete transactions. We find this is very healthy for our industry. In addition to nontraditional contract arrangements that we discussed at our recent shareholder meeting, there have been executive orders to streamline the regulatory environment in contracting and to rebalance the risk-reward trade-off, moving away from some cost-reimbursement contracts to fixed-price arrangements with performance metrics. The changes align very well with DLH Holdings Corp.'s strategy and our heritage.
We welcome this needed shift by our government. Our defense and intelligence customers continue to prioritize prototyping, rapid delivery, cost efficiency, digital modernization, and the integration of advanced technologies, particularly as they relate to C4ISR systems. These align very well with our DLH Holdings Corp. Cyclone and DLH Holdings Corp. Nexus Labs digital sandbox investments that are cloud-secure. In parallel, federal health agencies remain focused on interoperability, cybersecurity including zero trust architectures, cloud migration, and AI adoption. Collectively, these priorities position DLH Holdings Corp. very strongly to grow organically from these initiatives. It is always gratifying when DLH Holdings Corp. innovation and performance excellence are acknowledged by our industry.
In recent months, DLH Holdings Corp.-supported projects in automation, artificial intelligence, scientific research, data science, and information technology were recognized by customer and industry organizations for outstanding program performance and significant technology achievements. We are proud of these accomplishments, as they illustrate the thought leadership, ingenuity, and passion of our employees in advancing the missions of our customers. While revenue was down year over year, largely due to the previously discussed program transitions to small business set-aside contracts—these include the VA CMOP and Head Start—we remain committed to maximizing shareholder value. Through strong project management, delivered margins, and implemented cost-scaling initiatives, we delivered adjusted EBITDA margin of 9%. As Kathryn M.
Johnbull will discuss in more detail shortly, we continue to delever our commitment to the balance sheet. Total debt was reduced to $132.7 million, aligned with our debt reduction plans for fiscal 2026. In late-breaking news, we were awarded a two-year sole-source extension of one of our contracts to provide world-class clinical research support services to the National Institutes of Health. We truly appreciate the opportunity to continue this tremendous support in this critical public health mission that has been a primary focus area for DLH Holdings Corp. for decades. Overall, we remain well positioned to succeed over the coming years and are excited to vie for the high-value organic growth opportunities that our company was assembled to compete for.
Our differentiated suite of data science and AI/ML technology applications, our outstanding capabilities, and our workforce alignment exceptionally well position us for work within our three strategic pillars: science, research and development; digital transformation and cybersecurity; and systems engineering and integration. As government acquisition strategies evolve, we remain prepared and proactive, leveraging speed, innovation, and agility to compete on multiple fronts in an accelerated acquisition landscape. With that, I would now like to turn the call over to our Chief Financial Officer, Kathryn M. Johnbull. Kathryn M. Johnbull?
Kathryn M. Johnbull: Thank you, Zachary C. Parker, and good morning, everyone. Thanks for joining as we report on our second quarter results for fiscal 2026. Turning to Slide 6, I would like to first provide a high-level overview of some key financial metrics for the three months ended 03/31/2026. We reported revenue of $59.3 million in the second quarter, versus $89.2 million in the prior-year period, reflecting contributions from expansion on existing contracts offset by the impact of conversion of certain programs to small business set-aside contracts, as discussed in the past, and certain government efficiency initiatives.
In total, the revenue contraction was mostly due to small business set-aside initiatives, primarily from CMOP and Head Start, with approximately a $24 million increase in the quarter-over-quarter results [inaudible]. The remaining change was due to year-over-year contract completions and government efficiency initiatives. We reported adjusted EBITDA of $5.3 million for the quarter, compared to $9.4 million in the prior-year period, with the decrease primarily driven by the change in revenue volumes. Adjusted EBITDA margin was 9% for the quarter, adjusting for the timing and incremental cost impact of our cost-scaling initiatives implemented in the second quarter. From a free cash flow standpoint, we generated approximately $3.8 million during the quarter.
In comparison to the prior-year period, the prior year reflects the results of significant working capital build stemming from the transition of a CMOP location that restricted cash collections early in fiscal 2025. Now turning to Slide 7, I will wrap up with a summary of our debt reduction efforts, which remain a key focus area for DLH Holdings Corp. Debt reduced during the quarter to $132.7 million, a reduction from $136.6 million at the end of the previous quarter. This marks the resumption of our deleveraging trend after the typical seasonal uptick we experienced in the first quarter. We expect to convert approximately 50% to 55% of EBITDA generated during fiscal 2026 to reduce debt by year end.
We remain well ahead of our mandatory repayment schedule and in full compliance with all financial covenants. With that, I would now like to turn the call over to our operator to open up for questions.
Operator: We will now begin the question and answer session. If you are using a speakerphone, our first question comes from Joseph Gomes with NOBLE Capital.
Joseph Gomes: Good morning. I just want to start out on the VA CMOP. Do we have anything left there? How much longer do you think that is going to run through? I know we were hoping it would end in this fiscal third quarter of this year, but maybe a little update on where we stand on that.
Zachary C. Parker: Yes, I think we are still on plan with regard to that reduction. You know, the VA and our team have been working collaboratively towards standing down the final couple operations. Kathryn M. Johnbull, do you have any greater specificity for that?
Kathryn M. Johnbull: Sure. Yes, our expectation is that we will wrap up the transition of those contracts just before Memorial Day.
Zachary C. Parker: Yes, it obviously served us well. We remain committed, Joseph Gomes, to supporting our nation's veterans. We have still got irons in the fire for transitioning to different types of work for the VA. But once the VA changed that acquisition process, not only to small business set-aside, but changed it from being a solutions- and tech-derived execution to just butts-in-seats, we withdrew all of our joint venture bids and approached it accordingly. So it is bittersweet. As you know, we had a couple of decades of support in that arena. But we wish the small business community well.
Joseph Gomes: Right, exactly. Agreed. And then, Zachary C. Parker, you talked about how there have been multiple delayed procurements. There are some going through the pipeline now, just now coming up for bids. You are hoping to hear something here in the next couple of months. I guess the concern is, obviously, every September 30th we go into a threatened government shutdown, a continuing resolution, all that, which then seems to always delay contracts. What is your comfort level of actually seeing some of these contracts be awarded in a timely manner versus getting caught back up in the whole continuing resolution issue?
And then if you might be able to provide us a little more color on the nice late-breaking news of the new award that you received.
Zachary C. Parker: You bet, Joseph Gomes. First of all, I will cover what we see in the market, and I will ask Kathryn M. Johnbull to address the extensions. We are always very mindful of what the headwinds could be, as we have come to know continuing resolutions and shutdown risk quite well over the recent years and certainly with this administration. We are also encouraged by some multiyear funding initiatives that have gone forward. They have already been approved, and we anticipate continuing to move forward in selected agencies. We particularly still find good strength and support on both sides for defense and intelligence budgets as well as critical health care programs, so we are pretty comfortable in that arena.
More importantly, in the last quarter we have seen multiple RFPs that we have been signaling were coming, and fortunately, these have gotten under the wire before the usual September crisis. I think that was also attributed to some of the budget visibility once they got the budget passed. Customers have had pent-up demands for moving along on some of these procurements. We think that the fact that we have had three or four of the more material ones come through already, we have submitted bids, and we are hopeful that the decision process will also move forward in the coming quarter.
Often for very material bids, you may see a protest or something of that nature that might delay the actual award and start of work. But we believe that we have some where we are very well positioned and that we should have decisions by this fiscal year. With regard to the contract extensions, Kathryn M. Johnbull, over to you.
Kathryn M. Johnbull: Sure. Yes, as we mentioned, it is the continuation of a key contract we have been working in support of the NIH for a number of decades. It would have gone through a normal recompete cycle at the completion of its 10-year period of performance here shortly, but the NIH has decided to, or made the case to, extend it under a sole-source bridge for two years. So anytime an important part of your portfolio gets an extension and gives you additional revenue visibility, that is always very welcomed. And that is work that really reflects, as Zachary C.
Parker mentioned earlier, just as we value a strong presence and continue to have interest in veterans’ health, public health is a key dimension of our portfolio and market-facing strategy for addressing every aspect of federal health care delivery. This part of our portfolio of contracts in that public health sector is very critical to us. So we are pleased and honored to be able to continue to provide that support and to get the additional revenue visibility in the short run.
Joseph Gomes: Okay. Thank you for that color. And then on the cost scaling or the right-sizing, are we where we need to be for the current or the expected near-term revenue production, or do you think there might be more cost scaling that needs to occur here?
Kathryn M. Johnbull: I think we have done the significant actions. We always have some strategies we are working through, and those would continue to be, as leases come due for example, continuing to evaluate our footprint in our real estate—those kinds of activities. So we continue to evaluate and assure that our cost structure remains competitive and allows our rates to stay competitive for bidding on new work. But we think that we have accomplished the material reductions that are necessary to right-size the business.
Joseph Gomes: Okay, great. Thanks. I will get back in queue.
Zachary C. Parker: You bet. Thank you, Joseph Gomes. Thanks, Joseph Gomes. Hearing none, do we want to reopen it for Joseph Gomes?
Operator: He is not back in the queue. Joseph Gomes, if you need to requeue.
Zachary C. Parker: Just give Joseph Gomes a second as he gets himself back in the queue.
Operator: We will move forward. Alrighty. So with that—
Zachary C. Parker: I would like to thank everyone for your participation throughout this call. Joseph Gomes, anything else?
Joseph Gomes: Yes. Maybe a little more. Zachary C. Parker, you talked about some of the potential reprioritizing of federal health spending. Given what we have seen here in the past couple of years, it has been a challenging time for DLH Holdings Corp. with losing the CMOP business and Head Start, and to potentially see reprioritizing federal health spending just throws up additional challenges for the company. Maybe give us a little more of your thoughts and color on how you are going to go about addressing this.
Zachary C. Parker: You bet. Great question again, Joseph Gomes. I think the best way we characterize it is, as you well know, we communicated and tried to be very transparent regarding what was largely fueled by the Biden administration's commitment to move not only the VA but a number of other agencies’ contracts to small business. We anticipated that erosion—it started in 2024 and certainly matured in 2025—and as you indicated earlier, we expect to have the final pieces of the headline set-aside for us, which was VA CMOP, running out this year.
But we are also well positioned, and we are very optimistic that the RFPs and solicitations that had been earmarked for 2024, aligned with our establishment of our differentiators in data science and data analytics, were going to be fueled by RFPs in 2025. Unfortunately, as we indicated earlier, the overwhelming majority of those basically stalled. So we had a relatively flat bid cycle for the major new business deals that are just now coming around. A few of those have evolved from the government deciding to move toward some grants. The DOJ certainly impacted a lot of our clients where they did not have the acquisition officials to issue those RFPs.
They have begun to stabilize that over the course of the last six months, and again we are starting to see both in the defense and intel side and in the public health arena those solicitations come back. So we have got a few we are anticipating in the next few months. We have a pretty healthy revenue potential for some that were recently submitted, so we are optimistic that the trend will continue. We are not expecting to have a series of major DOJ program budget cuts followed by historical shutdowns in the coming months.
And the global challenges, including the war in the Gulf, are going to keep a strong commitment of funding and rapid development initiatives for the defense and defense health arena as well. So right now we do see good optimism that the flatness in terms of opportunities for us to compete in 2025 is starting to break, and that is good for us. What we thought was going to be a pretty quick V-curve turned out to become a little more of a bathtub, but we are starting to see the opportunities hit now and certainly feel that we will be able to compete favorably for our share.
Joseph Gomes: Thanks for that color, Zachary C. Parker. Much appreciated, and I am looking forward to starting to see some wins be put up on the board here after, as you said, a challenging period—nothing to really do with you guys, it is the government itself—but it would be nice to start to see the engine start back up again and be moving strongly going forward.
Zachary C. Parker: We absolutely cannot wait. Yes, 100%.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Zachary C. Parker for any closing remarks.
Zachary C. Parker: Well, again, I want to thank you all for your interest in DLH Holdings Corp. We remain committed to driving shareholder value. We are looking forward to chatting with you in the coming quarters, and we ask everyone to have a blessed day.
Joseph Gomes: And we will talk again soon.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Dlh (DLHC) Q2 2026 Earnings Call Transcript was originally published by The Motley Fool