DLH Holdings Corp. Aktie

Good day, and welcome to the DLH Holdings Fiscal 2026 Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. Please go ahead, Chris.

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 3 of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2026 and beyond. These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such 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. Please go ahead, Zach.

Thank you, Chris, 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 #1 asset as a company, and we lean on the passion, creativity and expertise of our staff in order to succeed. This past quarter, we 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 for this execution. Now turning to Slide 4. I'll 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 focus. We believe that the current federal funding environment is favorable to DLH. 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 '26 funding increases compared to the FY '26 -- FY '25 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 to be a healthy profile for us in the years to come. We believe that the improved clarity and stability, which has emerged in the 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 year Q1, budget uncertainty and large reductions to the 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 FY '25 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 time lines and procurement processes. DLH continues to maintain a healthy pipeline of opportunities, which will leverage our world-class workforce, 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 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 as 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 of their cost reimbursement contracts to fixed price arrangements with performance metrics. The changes aligned very well with DLH'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 health and C4ISR systems. These align very well with our DLH Cyclone and DLH 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 very strong to grow organically from these initiatives. It is always gratifying when DLH innovation and performance excellence is acknowledged by our industry. In recent months, DLH 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 an adjusted EBITDA margin of 9.0%. As Kathryn 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 '26. In late-breaking news, we were awarded a 2-year sole source extension of one of our contracts to provide world-class clinical research support services to the National Institute 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 for decades. Overall, we remain well positioned to succeed over the coming years and are excited to buy 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 workforce alignment exceptionally aligns exceptionally well to position us for work within our 3 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'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Thank you, Zach, and good morning, everyone. Thanks for joining our reporting on our second quarter results for fiscal 2026. Turning to Slide 6. I'd like to first provide a high-level overview of some key financial metrics for the 3 months ended March 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. 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 '25. Now turning to Slide 7. I'll wrap up with a summary of our debt reduction efforts, which remain a key focus area for DLH. 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 Instructions] Our first question comes from Joe Gomes with NOBLE Capital.

I just want to start out on the VA CMOP. Do we have anything left there? How much longer do you think that's going to run through? I know we were hoping it would end, I think, in this fiscal third quarter of this year, but maybe a little just update on where we stand on that.

Yes, I think we're still on plan with regard to that reduction. The VA and our team have been working collaboratively towards standing down the final couple of operations. Kathryn, do you have any greater specificity for that?

Sure. Yes. Our expectation is that we will wrap up the transition of those contracts just before Memorial Day.

Is that behind us?

Yes, sir.

Obviously, it served us well. We remain committed, Joe, to supporting our nation veterans. We've still got irons in the fire for transitioning to different types of work for the VA. But yes, once again, as the -- 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 the seats. We withdrew all of our joint venture bids and approached it accordingly, so we're -- it's bittersweet. As you know, we had a couple of decades of support in that arena, but we wish the small business community well.

Exactly. Agreed. And then Zach, you talked about how there's been multiple delayed procurements. There's some going through the pipeline now coming -- just now coming up for bids. You're hoping hear something here in the next couple of months. I guess kind of the concern here is, obviously, every September 30, we go into a threatened government shutdown, the contingency budget, all that, which then seems to always delay contracts. What's your comfort level of actually seeing some of these contracts be awarded in a timely manner versus getting caught back up in the whole contingency budget issue? And then if you might be able to provide us a little more color on that, the nice late-breaking news of the new award that you received.

You bet, Joe. First of all, on the -- I'll cover the market, what we see in the market and I'll ask Kathryn to address the extensions. Yes, we're always very mindful of what the headwinds could be as we've come to know continuing resolutions and shut down risk quite well over the years, recent years, and certainly with this administration. We're also encouraged by some multiyear funding initiatives that have gone forward. They have already been approved that we anticipate continuing to move forward in selected agencies. Particularly, we still find good strength and support on both sides for defense and intelligence budgets as well as critical health care programs. So we're really pretty comfortable in that arena. More importantly, Joe, in the last quarter, we have seen actually multiple RFPs that we have been signaling were coming. And so fortunately, these have gotten under the wire before the September crisis, the usual September crisis. And I think that was also attributed to some of the budget visibility once they got the budget passed, customers have had some pent-up demands for moving along on some of these procurements. We think that the fact that we've had 3 or 4 of the more material ones come through already. We have submitted bids. We're hopeful that the decision process will also move forward in the coming quarter. Often for the very material bids, it's often they see a protest or something of that nature that might delay the actual award and start of work. But we believe that we've got -- some that we're very well positioned that we should have decisions by this fiscal year. With regard to the contract extensions, Kathryn, over to you.

Sure. Yes. So it is -- as we mentioned, it's the continuation of a key contract we've 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 for under a sole-source bridge for 2 years. So any time, of course, an important part of your portfolio gets an extension and gives you additional revenue visibility, that's always very welcomed, and that's work that's really reflects, as Zach mentioned earlier, just as we value a strong presence and continue to have interest in veterans' health, of course, public health is a key dimension of our portfolio and market-facing strategy for addressing every aspect of federal health care delivery. And so this part of our portfolio of contracts in that public health sector is very critical to us. So we're pleased and honored to be able to continue to provide that support and to get the revenue -- the additional revenue visibility in the short run.

And then on the cost scaling or the rightsizing, are we where we need to be for the current and the expected near term revenue production? Or do you think there might even be more cost scaling that needs to occur here?

I think we've done the significant actions. We have -- we always have some strategies we're working through, and those would continue to be as leases come due, for example, continuing to evaluate our footprint in our real estate, those kind 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've accomplished the material reductions that are necessary to rightsize the business.

[Operator Instructions]

Hearing none, do we want to reopen it for Joe. Operator?

He is not back in the queue. Joe, if you need to requeue.

Just give Joe just a second as he did put himself back in the queue. That will move forward. All righty. Well, with that, I'd like to thank everyone for your participation throughout this call today...

Joe Gomes is on the call.

Okay. Joe, anything else?

Yes. Maybe a little more. Zach, you talked about some of the potential of reprioritizing federal health spending. Given what we've seen here in the past couple of years, it's just -- it's been a challenging time for DLH, And losing, obviously, the CMOP business and the Head Start and to potentially see reprioritizing federal health spending, it just throws up additional challenges for the company. And maybe you can give us a little more your thoughts and color and how you're going to go about this, addressing that.

You bet. No, great question again, Joe. Yes, I think the best way we characterize it is, as you well know, we advertised, communicated, try to be very transparent with regard to what largely was fueled by the Biden administration's commitment to move not only the VA, but a number of other agency contracts to small business. We anticipated that erosion started in '24 and certainly matured in '25. And as you indicated earlier, we expect to have the final pieces of the headline set aside for us, which was the VA CMOP finally running out this year. But having said that, we are also well positioned, and we're very optimistic that the RFPs and solicitations that had been earmarked for FY '24 aligned with our establishment of our differentiators in data science and data analytics. We're going to be fueled by RFPs in FY '25. Unfortunately, as we indicated earlier, it was -- all of those basically stalled, not all of them, but the overwhelming majority of those basically stalled. And so we had a flat -- relatively flat bid cycles for the major new business deals that are just now coming around. A few of those evolved and a few of those have evolved from the government deciding to move towards some grants. The DOGE effect certainly impacted a lot of our clients where they did not have the acquisition officials to issue those RFPs. They've begun to stabilize that over the course of the last 6 months. And again, we're starting to see both in the defense and intel side and in the public health arena, those solicitations come back. So we've got a few we're anticipating in the next few months. We've got a pretty healthy revenue potential for some that are recently submitted. So we're just optimistic that, that trend will continue. We're not expecting to have a series of the major DOGE government cuts, major doge program cuts, budget cuts followed by historical shutdowns in the coming months. And the global challenges, both including the war in the Gulf are going to certainly keep a strong commitment of funding and rapid development initiatives for the defense and defense health arena as well. So we right now do see good optimism that the flatness in terms of opportunities for us to compete in '25 is starting to break, and that's good for us. What we thought was going to be a pretty quick B curve turned out to become a little more bathtub, but we are starting to see the opportunities hit now and certainly feel that we'll be able to compete favorably for our share.

Much appreciated. I'm looking forward to starting to see some wins be put up on the board here after, as you said, a challenging period here. Nothing to really do with you guys, it's the government itself, but it'd be nice to start to see the engine start back up again and be moving strongly going forward.

We are absolutely -- we can't wait.

100%.

This concludes our question-and-answer session. I would like to turn the conference back over to Zach Parker for any closing remarks.

Well, again, I want to thank you all for, again, your participation, your interest in DLH. We remain committed to driving that shareholder value. We are looking forward to chatting with you in the coming quarters. And we ask that everyone have a blessed day, and we'll talk again soon. Bye for now.

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

This is the 2026 Annual Meeting of Shareholders of DLH Holdings Corp. I am Rick Wasserman, Chairman of the Board. I would like to take this opportunity to introduce Zachary C. Parker, the President and Chief Executive Officer of DLH Holdings Corp., who will be acting as the Chairman of this meeting.

Thank you, Rick, and good morning. I am Zachary Parker, President and CEO of DLH Holdings Corporation. It is now a little after 10:00 a.m., and the meeting will please come to order. First, I would like to thank all the shareholders who are here in attendance at this annual meeting. As described in our proxy statement, we are holding this annual meeting as a hybrid meeting, meaning that the shareholders are able to attend in-person or via the Internet. We hope that by hosting our annual meeting in this manner, it will offer a positive user experience for all participants. We will begin today's meeting with the formal agenda, which will be immediately followed by a presentation on the company's business and a Q&A session to follow.

I will now introduce the directors, nominees and members of senior management of DLH who are attending the meeting today, either remotely or in-person. Of course, myself, Zach Parker; Frederick Wasserman. We have Stephen Zelkowicz. Attending remotely are Judy Bjornaas, Dr. Elder Granger, Dr. Fran Murphy and Austin Yerks.

Here from my management team, we have our Chief Financial Officer, Kathryn JohnBull; our Senior VP and Corporate Controller, Mr. Steve Oroho. And also attending the meeting are Fatima Raza and Lauren Raspa of WithumSmith+Brown, PC, our independent accountants for the current fiscal year.

They will also be available to respond to appropriate questions during the general question-and-answer session. Also joining us today are Mr. Victor DiGioia, front row; Michael Goldstein, up here with us; and Vanessa Kabu-Asante of Becker & Poliakoff, our corporate accounts [indiscernible].

We will now proceed with the formal business of the annual meeting. Kathryn JohnBull as the Assistant Secretary of the company, will act as the Secretary of this meeting.

The agenda items for this meeting are: first, determining the presence of a quorum; second, electing 7 nominees to the Board of Directors to serve until the next annual meeting of the shareholders or until their respective successors have been duly elected and qualified; third, an advisory vote on the compensation of our named executive officers; fourth, approving an amendment to the 2025 equity incentive plan; fifth, ratifying the appointment of WithumSmith+Brown, PC as the company's independent registered public accounting firm for the fiscal year ending September 30, 2026; and finally, transacting such other business as may be properly brought before this meeting.

Those of you shareholders attending in-person are requested to ask questions at the appropriate time during the meeting. For those shareholders attending virtually, we'll have an opportunity to submit written questions via the Internet at any time during the meeting by following the directions on the meeting website. To submit written questions, shareholders must have their control number. The Q&A session will include both questions submitted in advance of as well as during the meeting.

The first order of business is to determine the presence of a quorum. Pursuant to action with the Board of Directors, only holders of record of common stock of the company at the close of business on January 21, 2026, are entitled to vote at this meeting.

Mr. Chairman, I wish to report that I have examined the list of shareholders of common stock entitled to vote at this meeting and have determined that the number of shares of common stock outstanding at the record date, January 21, 2026, and entitled to vote are 14,493,035 shares. I am advised by the inspector of elections that the number of shares of common stock represented at this meeting, in-person or by proxy, is not less than 7,246,518 shares and a quorum is therefore constituted. Accordingly, the meeting is legally convened.

Thank you, Kathryn. On the basis of the report of the secretary, a quorum is in attendance. Michael Goldstein of Becker Law has been appointed as Inspector of Election and has sworn to the oath of Inspector of Election.

The next order of business is the election of the directors of the company. The Board has nominated 7 individuals to serve as directors of the company for a term of 1 year or until their respective successors have been duly elected and qualified. I will now entertain nominations for the 7 directors of the company in accordance with the company's bylaws. Are there any nominations to the Office of Director of the company in accordance with the bylaws of the company?

I nominate the following persons to serve as directors of the company: Judith L. Bjornaas, Dr. Elder Granger; Dr. Frances M. Murphy; Zachary C. Parker; Frederick G. Wasserman; Austin J. Yerks, III; and Stephen J. Zelkowicz.

I second the nominations.

As there are no other nominations that have been received in accordance with the company's bylaws, it is ordered that the nominations be closed.

The next order of business is the nonbinding advisory vote to approve the compensation of the company's named executive officers as described in the proxy statement for this annual meeting, more commonly known, of course, as say on pay. As discussed in our proxy statement, we believe our executive compensation programs and policies provide fair, reasonable and competitive levels of compensation to our executive officers. Accordingly, our Board of Directors recommends a vote in favor of this proposal. The secretary will now present a resolution approving the adoption of the proposal by the shareholders.

Resolved that the company's compensation of its named executive officers is hereby approved, and it is further resolved that the officers of the company are hereby authorized and directed to take any and all actions as such officers of the company shall deem reasonable and necessary in their discretion in order to implement these resolutions.

Will someone move for adoption of these resolutions?

I so move.

I second the motion.

Resolved that the amendment up to the 2025 Equity Incentive Plan to increase the number of shares of common stock reserved for issuance pursuant to awards granted under the plan by 550,000 shares be hereby -- be and hereby is adopted and approved. And it is further resolved that the officers of the company are hereby authorized and directed to take any and all actions including changes to the form of the 2025 equity incentive plan. As such, officers of the company shall deem reasonable and necessary in their discretion.

Will someone move for the adoption of the resolution?

I so move.

I second the motion.

The next order of business is the proposal to ratify the appointment of WithumSmith+Brown as the company's independent registered public accounting firm for the fiscal year ending September 30, 2026. Secretary will now present a resolution approving the adoption of the proposal by the shareholders.

Resolved that the company's appointment of WithumSmith+Brown, PC as its independent registered public accounting firm for the fiscal year ending September 30, 2026, is hereby ratified and approved in all respects.

Can someone move for the adoption of the resolution?

I so move.

I second the motion.

It is now approximately 10:15 in the morning and the polls for voting on these proposals are now open. All DLH shareholders entitled to vote at this meeting have had the ability to do so online or in-person. All the shareholders who wish to vote in-person and who have not voted today, please raise your hand to so indicate, so we can provide you with a ballot. Please remember that if you have already voted by proxy, it is not necessary to vote again.

We will now entertain any questions that have been submitted, in advance of, and during the meeting, relating to the election of directors and the other proposals discussed in our proxy statement for this meeting. Questions not relevant to these proposals, but relating to general aspects of the business, will not be entertained at this time, please hold such inquiries for a Q&A session that will follow immediately after our presentation.

Substantially, similar questions will be answered what to avoid repetition and to allow time for other questions. If time does not permit us to address each question, the company's questions will be posted to the Investors tab of our corporate website after the meeting. Participating in today's meeting [indiscernible]. As no questions regarding the proposals, we will move to the next order of...

Mr. Chairman, I am in possession of the alphabetical list of shareholders of the company at the close of business on the record day [indiscernible] who are entitled to vote [indiscernible] the shareholders then able for account group located at [indiscernible] Broadway 17th floor, New York [indiscernible] for a period of 10 days for the annual meeting during [indiscernible] business hours and electronically on the company's meeting web page.

[indiscernible] The transfer agent of the company's common stock [indiscernible] close at 10:18 [indiscernible]

I got a report in just one minute. Thank you.

Please take your time, Mr. Goldstein. I'll mention while those are getting tabulated. During our management presentation, we're going to start with a very short video, one which has been developed in-house to give some greater context of transformation of the company. You all know, we believe that there have been just a major investments that are starting to mature for us that really has helped to develop essentially, a far more technology-enabled organization. Maybe give some context about that as well as if you had a chance to read any of the presentation material we talk about artificial intelligence aspects as well. So please feel free to conversations [indiscernible]

Chairman, I have tabulated the preliminary results of the votes cast on the proposals at this annual meeting. The preliminary results of the votes cast are as follows: each of the nominees for director has received more than 59% of the votes cast in favor of his or her election and has been elected as a director of the company to serve for a 1-year term or until their respective successors have been duly elected and qualified.

The resolution on an advisory basis for the compensation of our named executive officers has received more than 50.1% of the votes cast in favor of the proposal and has been approved.

The resolution to approve the amendment to the 2025 Equity Incentive Plan has received more than 50.1% proposal and has been approved. The ratification of the appointment of WithumSmith+Brown as the company's independent registered public accounting firm has received more than 90% of the votes cast in favor, and that appointment has been ratified. Thank you, Mr. Parker.

Thank you. As indicated by the report of the inspector, all of the matters voted on by the shareholders have been approved. We will file the final report of the inspector of election with the records of this meeting. We expect to report the results of the voting on a Form 8K to be filed with the SEC within 4 business days of this meeting today.

The Secretary will file the report of the inspectors of elections as part of the record of this meeting for the purpose of reference. The Secretary is directed to file the following additional papers with the records of the company: number one, list of shareholders of common stock entitled to vote at this meeting; number two, notice of [indiscernible] availability proxy materials and proxy safety, the affidavit of the meeting -- of the mailing; four, ballots and proxies presented to this meeting; five, Inspector's oath; and number sixth, report of the inspector of election.

So we'll take a real short pause, and I will now report on the business of the company, which will be followed by a question and answer session. For shareholders attending remotely, please follow the instructions on the annual meeting web page to submit questions during this period. Shareholders here in-person, you will have an opportunity to ask questions at the allotted time. A copy of the presentation materials is available on the Investor page of our corporate website as well as the web page for this annual meeting.

Let's begin the presentation.

[Presentation]

We remember 15 years or so ago, I sit down with Nelson at [indiscernible] restaurant, we're talking about -- I mean it feels we can put in the right boxes and get mailed out to our nation spectrums, et cetera, and something that we have been very proud of and that we've been able to build this company on. But Kathryn and I laid out a strategy several years ago on multi-phases, this is now Phase 3 of our transformation [indiscernible] largely went from our human capital team, who significantly by strategic acquisitions over the years. And today, I'm happy to say -- next slide that, we know that technology powered solutions that is well positioned to compete favorably and aggressively in the marketplace as well as to show the agility to deal with the evolution of the government acquisition strategy. If you haven't heard those, we'll talk a little bit about those as needed, but we've addressed those recent -- in our recent earnings release, earnings report.

So today, we're really leveraging tools and technologies. I want to talk about today how we're really empowering and leveraging the tools associated with AI, artificial intelligence, to help us continue this third phase of transformation with DLH. I'd like to begin by framing our current [indiscernible] regarding all of the benefits that are seen by as some of our peer companies as we implement digital modernization, including the use of Generative and Agentic AI and machine language applications.

DLH is distinguishing [indiscernible] by moving beyond the mere adoption and into true operational orchestration of how we leverage those tools for the business. AI for advanced research applications solve our customers' critical mission challenges. We've applied machine learning insured previously to accelerate biomedical analytics and telehealth, telesurgery and utilize natural language processing, NLP, to automate regulatory documentation, processes and reviews for agencies like NIH, CDC and the military health system community.

But now, we have turned in as part of this evolution and transformation to capture those same efficiency gains on enterprise. This isn't just a pilot program. It's again, fundamental and structural to the business and our evolution involving our corporate front and back office operations, organic growth functions and the like. Every aspect of our management and leadership team has been embracing and applying these tools, and we've got a strategic plan to continue to accelerate those to support our operations and growth.

Over the recent years, we are successfully taking out several million dollars out of our corporate infrastructure and services costs. We'll continue to talk a little bit about that in the future. I want to be clear to our shareholders that we will continue to do so without skipping a beat by leveraging these tools and Agentic AI. In addition to the savings that we've enjoyed, we are materially enhancing both the speed and quality of our services and solutions, not only to our customers, but to our internal customers and our operations as well.

If you look at Slide 4, the word cloud represents our initial foundational stack from last year. Tools like Google Gemini, GitHub, CoPilot, ServiceNow AI, these are key engines to our operations and are indicative of how our competitive advantage lies in the orchestration layer that we are building on top of it. What also differentiates us is how novel we apply these tools to everyday challenges as well as our intellectual property and development areas we've highlighted over the recent years. To soundly scale our internal operations, to innovate customer value propositions and expand our margins, we are exploring and deploying advanced Agentic frameworks that are not yet represented on this map.

Tools like Microsoft, AutoGen can create multi-agent systems where specialized AI personas, collaborate autonomously to resolve complex enterprise-wide workflows without the inbox obstacles and bottlenecks. LangGraph and other LangChain tools allow us to build staple multi-agent applications that can read and do so through cyclic processes, ensuring our automated workflows are robust and self-correct.

CrewAI allows us to explore into role-based agent teams that can effectively allow our infrastructure to self-manage routine administrative tasking, both from our IT team to our Research and Development cycles. DLH is changing the way we do business, [indiscernible] we do business and staying abreast commercial best application in our business. We will move from continued deterministic automation, which really just kind of describe some of our structured group-based process, like our SOC process where our system would just follow a script in some cases, to moving more into a Agentic reason where these tools that are AI-based will reduce cost, but increase materially throughput by planning and executing multistep tasks concurrently, really, again, changing the way in which we are doing business.

By advancing this modernization business model, we're not just enhancing productivity and defending our margins, we are also creating a far more scalable operation to accelerate the phase in and execution of new organic growth.

In the next slide, Slide 5, we're addressing how some of the recent congressional budget appropriations and activities have given our customers greater funding visibility that should lead to more timely solicitations for us to bid, win and enjoy that organic growth.

Next slide. Before we need that one. I want to indicate that there's a couple of significant things you'll see here. While the commitment to the defense and intelligence is reflected on here, from both Congress and the President's Budget Commission, it remains consistent. As the federal health side, our pipeline both for our current business and our new business pipeline that has had the most material impact, right? As you can see here, from '25 through the President's budget submission that's where you see the PBR in the middle, there's pretty major material reduction and budget commitments to the National Institute of Health and the Center for Disease Control, 2 very material parts of our current and future business.

And on the right side of that equation, you can see how the FY '26 congressional approved budget and appropriations. We moved to a greater position of stability from those customers, allowing our customers to have visibility to our budget, and we think thus be able to now start to really fund our current contracts at the appropriate levels and more importantly, issued the solicitation team to our organic growth.

Next slide. And as I indicated -- yes, we've covered this on a couple of areas during our last earnings call, but I want to draw your attention to 2 key areas. We touched on the fact that the acquisition means we're changing from the government. That meant that what were traditional classic RFPs that would request for proposals that would take 18, 24 months for government development, and then 6 months to a year before they reward from the proposal phase.

The government is looking at really moving into faster, quicker ways of buying business that the secretary of [indiscernible] initiated various user initiatives to really lean into commercial practices to secure and procure cloud services and solutions, much like ourselves. We're seeing those come in a variety of forms, but we are well positioned to participate in those, not only do we have the multiple award IDIQ contract vehicles, but we are also in partnerships with those consortiums and those agencies, and they're developing those new innovative type approaches. We think it's going to change the character of some of the awards right -- some of them will start with a pilot type program. You can think of a $100 million program being awarded initially at $5 million to $10 million. And then subsequently, once you get proof of test concept for your solutions, then you move into those larger contracts. So we'll be giving more color on those things downstream.

But the fact that we are still one of the few publicly traded [indiscernible] very fully completely transparent disclosures and mid-tier, which means we still have the speed and agility of the smaller companies without the bureaucracy of some of the tier we companies continues to put us in, we think, a great position as long as we continue to leverage the tools as I described on the previous slide.

Next slide. And so as we look at our pipeline, we've had budget uncertainty and the actions taken during largely as you may recall, the DOJ period, we have essentially retained a material amount of what we had forecasted from the FY '25 Q1 earnings presentation. You may remember in the upper last slide, we gave you some colors to what we call our new business roadmap. There were 17 items out of our qualified opportunities in that pipeline as a result of the government agencies looking at focusing more [indiscernible] with DOJ cuts and budget instability, a lot of those things, of course, denied us the opportunity to compete during FY '25, and with the previous slide with the budget bounce back that we've seen now, we're really anticipating seeing more of those that will still remain in our pipeline for organic growth is going to really fuel as we exit '26 and enter '27 with what we originally hopped would have been FY '25.

Mind you, during that time period. We were not being idle, much like I described for you the AI implementation, we're really doubling down, building not only the customer intimacy needed to accelerate and advance our win probabilities, but more importantly, our tools to be able to differentiate for those complex programs. So you have more color here. The slide does show you that we still have very material opportunities that are set to be awarded, potentially awarded during this fiscal year because they have slipped largely to the right, right?

For those we have yet to see a request for to the government has given a strong indication that there will be an output in a month or 2. We can see some Q4 awards taken [indiscernible] from both our Defense and Intel business as well as the Federal Health market. But for those things that we'll be closing and receiving RFPs think in Q3 and Q4, we're really showing those as largely awards in bookings in the early phases of FY '27.

Now, as I indicated with the acquisition changes down there on the bottom side, a lot of these now, we think are going to be some quick turning opportunities. In this environment for OTAs, which is other transaction authorities and CSOs, which are Commercial Solutions Opportunities, CSOs. These agencies are telling us use a couple of weeks to take a look at what we're conceptualized, and I think we're going to ask you to give us a solution approach. Short order, we'll down select from that phase and then go into an award to give a proof of concept that will lead to a multiyear contract.

We've got 2 or 3 of those that are in the Hopper Force right now that we're growing. And we've also been engaged for a couple of others in the Federal Health space. So we are starting to see some moves with the low-hanging fruit might deliver as well on some of the smaller programs.

Next slide. That will wrap the management presentation portion. We'll open to any questions or comments on any of that before we move to the final phase of [indiscernible].

So if there are no questions or comments, we will now entertain questions concerning the general business of the company. First, we'll take questions from the floor and then respond to any questions from the annual meeting website [indiscernible].

Any questions from the floor here?

[indiscernible]

Yes. Great question. The -- first of all, for -- on the Agentic side -- I'm sorry, on the Generative side, the question you referred to the LLMs, so the large language models. We do both, we've created our own little enclave type environment because what's very important for us especially on the mobile proprietary sensitive information, we want to make sure that our work is not going out in ChatGPT space where again we become generically accessible to others. So we will leverage some of those tools across our business in ways that -- again, we're so sensitive that we will accommodate those risks. So we'll do both, right? We will [indiscernible] on the Agentic side, using the LangChain [indiscernible] tools, keep developing those with the available tools out there that [indiscernible] LangChain [indiscernible] as well those algorithms [indiscernible].

Any other questions?

How many consultants do you use to complete a test? They're not all direct employees, right?

Overwhelming majority of our employees nowadays, right? We used to use like an [indiscernible] for something -- for some of the sites inspections et cetera we used to use more consultants with [indiscernible]. But we're starting to move even into -- the move away from a number of those a couple of years ago and I'd say everything that we're developing, which we gave about today is organically to develop in-house, maybe an occasional exception here and there. We do leverage some high-power consultants over things that are helping to represent some time on the [ hill ] or something of that nature. But all of the developmental activity, it was important for us to make sure that since we've got very proprietary associative information, and we do so with employees and signed up and signed off for protection of our intellectual property.

We've leveraged that side of the house for Becker Law to help us orchestrate and train all the folks to make sure that moving from consultants, moving to operating on DLH, devices and things of that nature are protected. Thank you.

[indiscernible].

Yes. It's twofold. Great question. The question was, is the hiring on the West Coast [indiscernible] particular contracts. Part of the hiring is for some existing work that was awarded to us by agencies on the Atlantic, but we have an initiative with some very strategic new business opportunities where we're going to leverage on more some of our recent wins on -- in the Defense and Intelligence business along with some of the investments we've made on the digital transformation side to help us organically on the West Coast. Most of that is in the San Diego corridor associated with both our public health and scientific research initiatives and some of our demand control organic growth. Any others?

Just curious how many contracts do you have that are more than $10 million. $10 million or more. How that works out?

That would be $10 million or more annually you said? Yes, yes, probably about a dozen.

And as you may have noticed, we recently had -- we announced anything on NIH, [indiscernible]

We have not. Not quite yet.

Is that a week coming with that.

It's fair to say that, that is an indication of a trend in the government that -- as they're thinking through their -- and dealing with their own shortages and resources. In some cases, they are opting to provide extensions beyond appearance or performance on key contracts. And so we do have a couple of key ones we are looking to publicize quickly. In the short run, I should say, not quickly, but in the short run, that we've gotten that kind of clarity on longer than usual. The typical government extension period is a [indiscernible] end of comparative performance. This is going well beyond that, giving us greater near-term revenue visibility, which is important. So we'll be signaling that or communicating that in the short run.

All right. Yes. Any more questions?

And there are no questions in the online queue.

All right. With there being no further questions on the online queue. We will -- let's see, there appears to be no other business to address that's come before the meeting. We will now move to adjourning the meeting. A motion to adjourn is in order.

I move the meeting be adjourned.

I second the motion.

Moved and seconded that the meeting be adjourned. All in favor, say aye.

Aye.

Aye.

All opposed, say nay. This concludes the business for the meeting. I now declare DLH's 2026 Annual Meeting of Shareholders adjourned. Thank you all for attending today's meeting.

Good day, and welcome to the DLH Holdings Fiscal 2026 First Quarter Earnings Conference Call. [Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. 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 3 of the presentation.

This call may include forward-looking statements that relate to the company's outlook for fiscal 2026 and beyond. These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such 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. Please go ahead, Zach.

Thank you, Chris, and good morning, everyone. Welcome to our first quarter conference call. I am pleased for the opportunity to report our financial results and provide color regarding the current environment and outlook. Now turning to Slide 4. I'll provide an overview of our achievements and outlook. The first quarter was marked by the longest government shutdown in our nation's history, followed by a short-term funding gap at the end of January.

However, the recently enacted budget provides increased funding capacity and improved visibility for our clients for the remainder of the fiscal year across our markets. We expect that to be a positive impact. Notably, key federal health agencies received funding increases compared to the fiscal 2025 levels, reversing in part previously disclosed funding reductions to our current and addressable markets. We believe this improved clarity and stability meaningfully support the company's organic growth initiatives.

This budget stability comes at an opportune time for DLH as we continue to see improving demand across our core markets. Defense and intelligence customers are emphasizing rapid delivery, cost efficiency, digital modernization and advanced technology integration through the application of command control, communications, computers, cyber defense and combat systems with intelligence, surveillance and reconnaissance, known as C6ISR expertise. At the same time, federal health agencies continue to prioritize system interoperability, cybersecurity, including Zero Trust applications, cloud migration and AI adoption, which positions DLH competitively well for modernization-driven awards.

These are areas that leverage our strengths, our capabilities and our innovative proprietary tools as discussed previously, to enhance productivity on current work while elevating our competitive position on organic growth opportunities. While revenue was down year-over-year, largely due to our previously discussed program transitions to small business set aside contracts such as the VA CMOP and Head Start, we are seeing improved visibility and are encouraged by the midterm outlook. More importantly, we delivered sequential improvement in adjusted EBITDA margins from the fourth quarter, as Kathryn will discuss in more detail shortly.

We remain firmly focused on expanding efficiencies and margins and improving overall returns as the year progresses and award decisions are made. We also continue to execute on our commitment to deleveraging the balance sheet. As is typical in the first quarter, debt increased modestly, driven primarily by the timing of labor and payroll tax repayments around public holidays. That said, we remain on track with our debt reduction plans for fiscal 2026. Overall, we remain well positioned to succeed over the coming years, including competing effectively for high organic value opportunities within a healthy and expansive addressable market.

Our differentiated technology application capabilities, tools and workforce alignment exceptionally well position us for 3 strategic -- within our 3 strategic pillars. Those are digital transformation and cybersecurity, science, research and development and systems engineering and integration. Importantly, the improved clarity around the fiscal '26 budget, combined with our broad portfolio of contract vehicles, bodes well for DLH's long-term growth outlook. We remain committed to continued investment in the talent, tools and technologies required to meet the evolving complex needs of our customers across each of our core markets.

Our customers leverage our capabilities to access leading-edge processing speeds, digital sandbox environments, tailored integrations with COTS products and technologies, advanced data science and actionable visualizations and dashboards that support mission-critical decision-making. While the government services market has experienced meaningful disruption this year, driven by delays in contract solicitations and awards and previously uncertain budget visibility, we have continued to use this period to transform DLH in a positive way.

Today, we are a technology, engineering and scientific solutions provider that is extremely well positioned to compete for the opportunities of the future. As we work to enhance our organic profile, we will remain disciplined in reducing our indirect costs and managing our capital deployment. The management team and I are confident that DLH is on track to exit fiscal 2026 in a much stronger position than we began, and we are encouraged by what lies ahead. Before I close, I would like to recognize the performance of our deep and highly credentialed workforce. In a challenging environment, we lean on the passion, ingenuity and expertise of our staff to succeed. This past quarter, you once again surmounted extraordinary challenges in support of our customers. As always, thank you to everyone at DLH for your commitment to excellence that you demonstrated each day.

With that, I'd now 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 results for fiscal 2026. Turning to Slide 6. I'd first like to provide a high-level overview of some key financial metrics for the 3 months ended December 31, 2025. We reported revenue of $68.9 million in the first quarter versus $90.8 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 conversions, primarily from CMOP and Head Start with an approximate $18 million decrease in the quarter versus fiscal 2025. We reported adjusted EBITDA of $6.5 million for the quarter compared to $9.9 million in the prior year period, with the decrease primarily driven by lower revenue levels, partially offset by effective management of indirect costs as we aligned our cost structure with reduced volume. Importantly, adjusted EBITDA margin improved sequentially to 9.5% for the quarter. Our cost scaling initiatives continue into the second quarter, including further reductions in indirect spend in anticipation of future CMOP site transitions, and we expect the impact of these actions to become more evident in our second quarter results.

From a free cash flow standpoint, we used approximately $4.8 million during the quarter, which is typical for the first quarter given seasonal increases in working capital requirements. Importantly, this represents a significant improvement compared to last year's use of $12.1 million of free cash flow, which reflects delays in -- which reflected delays in the collection of an unusually high level of receivables. As Zach mentioned earlier, the primary driver of cash usage this quarter was the timing of labor and payroll taxes around the public holidays at the end of the year.

Now turning to Slide 7. I'll wrap up with a summary of our debt reduction efforts, which remain a key area of focus for DLH. As a result of the first quarter working capital requirements I mentioned earlier, including the impact of the government shutdown, debt increased during the quarter to $136.6 million. We remain well ahead of our mandatory term repayment schedule and in full compliance with all financial covenants. Looking ahead, we expect to convert approximately 50% to 55% of EBITDA generated during fiscal 2026 to reduce debt by year-end.

As our investors know, we take deleveraging very seriously and have a strong track record of execution, even though the uncertainty of the past few years related to the runoff of small business set aside programs. We remain more than adequately capitalized to support our growth strategy and now have greater visibility into the year ahead than in prior quarters. As the year progresses, we look forward to improvement in our operating fundamentals and organic growth initiatives.

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

[Operator Instructions]

The first question today comes from Joe Gomes with Noble Capital.

So Kathryn, just you said about $18 million of the delta in the revenue decline was from CMOP and Head Start, and that would leave about $4 million still unaccounted for. What was the other $4 million? Where did that get lost?

Yes. It's what we have referred to as the nicks and the nibbles of the [ DOGE ] initiatives that happened in the early part of fiscal '25, somewhat after December, but in Q2 of fiscal '25. Also the wrap-up of that little -- that single international project that we had that completed in January of '25.

USAID.

Yes, USAID project. So it is a sundry of smaller impacts that were not strategic and not related to the small business set aside.

And Joe, those were those -- as Kathryn indicated, there are those smaller because those were the effect of unbundling contracts, right, so that they were able to make more work available also to small businesses or other contract vehicles that have been in existence.

Okay. And on the CMOP, I know we had 4 contracts at the end of last year and one they had recently awarded to somebody else. I think 2 more were out for bid. Any update on the 2 that were out? Have they been awarded? Any timing as to when they might transition? And anything new on the last remaining location?

Well, we're looking at -- we believe we'll be -- we're really in the wind-down phase across the board for the CMOP work. The VA has gotten more -- a little battle rhythm set for being able to do some of the transitions, complete their evaluations in a little more timely fashion and to move into a transition phase. We have been leaning very aggressively and supportive of making those transitions. The specifics on the contract coverage, I'll turn it over to Kathryn.

Yes. No, I think that's the right way to think about it. As we indicated as early as the first quarter of '25, we certainly expected the completion of the CMOP work to be near term. And as Zach said, the cadence now that there seems to be a pretty manageable process for making those transitions, we are looking at probably a complete wrap-up of CMOP in Q3 of this current fiscal year.

Okay. And when you talk about the cost reductions that you've taken so far. One, was there any cost to those? And where would that show up on the income statement? And two, is that inclusive of the expected CMOP losses? Or will you need to do additional cost outs once all 3 of those contracts transition?

Yes. Let me kick it off, and I'll let Kathryn handle those specifics. So when we exited '24, we kind of laid out, at least internally and with our Board, a game plan around this reset, right? The reset of the decline in business that we have been communicating that would result from CMOP and some of the unbundling and bundling of other contracts in small business set asides. -- while at the same time, we're anticipating more bid opportunities and wins throughout '25.

So we had looked at what we kind of call a V curve and managing that for exiting '24 and throughout '25. The delays, obviously, as Kathryn indicated, in the opportunity to bid opportunities during '25 due to all the challenges we've discussed had really necessitated that we made sure we had a plan that was flexible and would be phased for indirect reduction. We have implemented 2 major components of that indirect reduction. It's very important for us to maintain a competitive indirect cost profile to be able to compete organically, and that's been a key driver for us, while we've been managing the phaseout of these contracts, including those that still continue for CMOP.

So -- we've had a management plan to make sure we can do those indirect reductions. At the same time, I would tell you, we've been implementing new measures to drive efficiencies, applying some of the tools we do for our customers, AI, ML and things of that nature to drive efficiencies in executing not only for our customers, but also for our enterprise. And we're going to continue to look at deploying that. We've got a project or 2 that has some of that running out through this -- the remainder of this fiscal year where we can enhance and augment the caliber of services by our folks using some of these tools. We think those efficiencies will also help us in the long run.

Kathryn, do you want to answer a couple of the specifics on the timing and G&A impact.

Yes. To your question, Joe, about whether the cost of those reductions is factored in and where does it show up? That is reflected in our Q1 results. both the impact of the reduction in cost as well as the cost of achieving those reductions is all reflected in the Q1 financials and is also then considered as part of the crosswalk from standard EBITDA to adjusted EBITDA. In other words, that adjustment reflects as if those reductions had taken place at the beginning of the quarter. I'm sure you can appreciate that those have to be thought through and take some implementation time and so therefore, happened midway in the quarter.

In terms of addressing the change in volume of CMOP specifically, that's part of the overall program, and we have scaled costs related to supporting CMOP as CMOP has made its journey downward. But we do, of course, still carry some costs for running the remaining locations, but we will scale it in the appropriate time frame along with the changes in revenue volume, just as we do the volume of business for the entire enterprise.

Okay. And one more for me. I mean it sounds we might be starting to see some positivity here on the pipeline and bidding activity. Just wondering, Zach, we got named to a number of ID/IQ contracts, have they just not been putting anything out for bid or not stuff that DLH is bidding on? Or have there been some projects out there that you've bid on just have not won? I mean, is the -- I guess, kind of the hit rate of award for you guys, is that staying steady? Or has that declined? I mean maybe a little more insight into the market opportunity out there and how DLH is faring in that?

You bet, Joe. And we are planning on giving a deep color as we have historically from time to time on that pipeline during our upcoming annual meeting. with the shareholders. But to your point, yes, we've a little bit of each, right? So we've had -- in terms of the major ID/IQs and the MAC ID/IQs, the most recent news, of course, is CIO-SP4 has been canceled. And as we had stated before, we saw that as a very attractive and viable vehicle for us with a number of opportunities that we had anticipated being able to bid in '25 that would allow us to start to generate some revenue around this time period.

A number of those -- some of those jobs, some of our customers have moved to other vehicles already anticipating that CIO-SP4 was not going to be viable. And so we've had a couple of erosions to our pipeline attributed to work moving to a vehicle, which we could not prime. That's had some impact. And while at the same time, I'd have to say the biggest key has been customers, given the budget uncertainty, et cetera, have continued to do kind of like some of our customers, bridge work instead of extending the existing incumbents instead of having a competition.

And that's where we're thinking that now that they have stability, some visibility in their budget for some time that they'll be able to move on with it and get some of those procurements. So we still just have not had a large volume of bid opportunities. We had one bid opportunity for the entire month of January. And that's just really, really trickling. And that one is a small one. So we have our needle mover deals, which we invest a lot in. and we really push to drive a high win probability. And then we have some of those that come from some of these MAC ID/IQs. So many of those are much smaller.

But we're really feeling pretty encouraged that a number of the major needle movers for us now will start to get some stability. We're still actively working to make sure that some of those that were earmarked for CIO-SP4 and predecessor, CIO-SP3, that we're well positioned on the GSA schedules and OASIS, of which we think will be 2 of those where it would allow us to prime. But when they've moved -- a couple have moved to some vehicles where we were not primes very disappointing. Some of our customers just had not had the influence as they thought they would have with the acquisition shop. but we're continuing to monitor that very closely.

But getting that certainty, the key takeaway, as you set it up, Joe, is we view that as positive that to get certainty, even if it isn't the way we would have done it, it's really distracting from a resource perspective and not cost effective to be trying to support and straddle all possible paths. So for us, just give us an answer, give us clarity, we can pivot and get ourselves organized to address that way.

And so as Zach mentioned, while we're certainly majorly disappointed that CIO-SP4 has gone away as a vehicle, it's good to just have the clarity. It's been dangling for 3 years now, so at least 3, probably longer than that. So it's good to have the clarity. And while some things did drain off and go to vehicles we're not prime or positioned to prime on, the overwhelming majority of those opportunities pear-headed places that we can and will compete as a prime. So it's good to have resolution of that strategy and to be able to move out on responding to it and pivoting our strategy to address the path that's going to come out on so that we can get on with it already.

Yes. And one adjunct to that, Joe, is that we're seeing a major movement by a number of our customers, including Department of War to leverage more commercial best practice vehicles and approaches. We've referred to OTAs, other transaction authorities as something that has been viable and certainly demonstrated during COVID to be a viable means to get some of these bids out faster. What you're going to see is what we are seeing is a number of these vehicles start with a pilot that is a much smaller dollar value for the awarde. And then you move from pilot to true execution.

And so the revenue profile and the value of the awarded contract will shift a little bit, but we're preparing for that. We've been well prepared for that. We've made some down selects on a couple of those already. But we're going to see in the industry, a pretty heavy move towards not using our traditional RFP contracting model that just takes so long for the government to get this in place. And this administration is really, really keen to cut through those delays and to use more commercial best practices. So stay tuned on that. We'll talk a little bit around that as well during our upcoming annual meeting on the acquisition environment and our pipeline.

[Operator Instructions]

The next question comes from Bert Osterweis with Osterweis Business Consultation.

A little cold up here in Massachusetts. I was reading the annual report. And in a number of places, it states that we solve complex problems for civilian and government clients alike. But I only ever hear about the government clients. I was wondering more who those civilian clients are. And Zach, you mentioned in your -- what you just said, the last answer was about a focus of more commercial type of jobs or commercial type of going after the jobs. And I know, Kathryn, you said it's not possible to pursue all possible paths. It's not financially viable. But it almost seems like these civilian customers are easier to go after. And so I was wondering, first, who they are? And second, is that something we can focus on more?

Sure. No, great question. First of all, we probably should have a clarification of that because while we do work with the Defense Health Agency, the Department of War, in particular in the C5ISR arena, C6ISR arena, we are -- in the federal government space, we really refer to the civilian agencies that are still federal government, right? And those include customers like the National Institute of Health, the Center for Disease Control, [ ASPR ] would include DHS and other agencies, they're still federal clients.

Now -- and so that's really what we're referring to on the macro for us that we have civilian agencies and then those that are aligned with defense. The other point, though, that you raised is commercial work. And we do have a small book of business, small bit of business with commercial. We are doing some of that work through partnerships with universities. And we do believe that there's an incubator area that lends itself for us to be able to work with more commercial companies. It's not going to be a major portion of our business.

Kathryn and I have long stood and held the position that if we're going to try to move into that market in a meaningful way, it would be led probably with an acquisition. But we do have some adjacencies where we've been doing work, leveraging relationships with the federal government that have led us to doing some work, usually grant funded with the commercial community. And within our public health and scientific research organization, we are looking to perhaps try to pull a little more of that business in-house.

I was thinking of biotech firms and things like that.

It is biotech area. You're actually -- you're right spot on. It is in that arena that we have been doing some of that work. We've had some talent on our staff on [ Jeanine ] and Christian staff that have worked with the biotech and biopharma community, and we're looking to see if we can parlay that as well. We've just brought on a new resource that has tremendous reputation and experiences with the FDA and as such, it also worked closely with the biotech community. So we're taking a fresh look at that as a potential account for us right now. It's just targeted opportunities, specific opportunities. but it could develop into an account by year's end.

Yes. Those commercial enterprises need to access that government approval queue, and it's often an inscrutable protracted process for them. And so they're happy to opportunistically leverage our capability to help steer them through that. But as Zach said, that would be in the course of relationship building and opportunistic avenues, but not really something that we're going to -- we're prepared to invest a lot of money in pursuing commercial opportunities.

The other part of that, though, to your point, Bert, is we need to start to -- we need to make sure that even though 99% of our book of business is with the federal government, we need to be able to operate at speed like commercial companies. Truly commercial companies. We have -- and we believe that the administration is removing some of those barriers on allowing companies and customers that have interest in capabilities to be able to move at speed consistent with commercial companies. And so again, we're taking a look at leveraging some of these OTA type vehicles and our ability to leverage what has been our heritage, and that's to be able to be far more agile than a lot of our large tier companies to be able to be tremendously responsive and operate more like a commercially aligned company.

So please look for more of that. That often will mean our pipeline will look a little bit different with speed and smaller start-up sort of programs. a little bit less of 5-year booked values, but they offer the same organic growth profiles and trajectories that we have had otherwise, just a more rapid deployment. And we've developed some of our tools so we can do rapid prototyping, and that's going to help us in a number of areas where clients want to build a little, test a little and then make a longer commitment. And we think we're well positioned with some of our digital sandbox opportunities and our [ Cyclone ] platforms to demonstrate and move quickly from prototype to development and deployment.

One last question. Is there anything in our government contracts, which prohibits us from going after civilian contracts?

No, nothing that precludes it at all. It is a very different regulated environment. From time to time, you'll see things like you hear this administration talk about most favored nation kind of rates, in some cases, in our world, we have to look at where the best -- what am I looking for, Kathryn, the rate schedules that we offer the company, but no regulatory -- formalized regulatory constraints.

Right. It's really just a function more so of -- it's a distinctly different kind of sales model. And so you have to kind of weigh out your options for investing in that kind of a sales force, if you will, commercial sales force versus the model that makes sense in the government context. But there are some specific boutique opportunities that we're aware of and that we're leveraging.

At this point, there are no further questions in queue. I would like to turn the conference back to Mr. Parker for any closing remarks.

Once again, I want to thank everyone for participating in our call today and for being good stewards of the DLH equity stakes. We are really, really committed, remain committed to giving you good visibility into the future and look forward to seeing and chatting with you all at the upcoming annual meeting. With that, everyone, have a blessed day, and we'll connect again soon. Bye for now.

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

Good day, and welcome to the DLH Holdings Corp. Fiscal 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. 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 3 of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2026 and beyond. These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such 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 to questions. With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.

Thank you, Chris, and good morning, everyone. Welcome to the fourth quarter conference call. I'm pleased for the opportunity to report our financial results and provide color regarding the current environment and our outlook. Before getting into the meat of the presentation, I'd like to take a moment to state how important our people have been to DLH this past year. It has been a time of transformation with both challenges and opportunities, and we have relied relentlessly on our excellent staff to get us through. They continually surpass our expectations due to their passion, persistence and work ethic. So once again, I want to say thank you to everyone at DLH.

Throughout the year, we have achieved great success and national award recognition for major accomplishments in developing innovative countermeasures for diseases and health risks to citizens, service members and veterans. We also elevated the readiness posture of our naval fleet and we have made major advancements in developing top commercial data science and analytics platforms to drive solutions in digital transformation and cybersecurity. I'll address that a little bit later. We are again, very much indebted to our great talent. We ended the fiscal year 2025 in position for the opportunities of tomorrow, completing a pivotal year that involved, of course, the transition of several contracts to small business set-aside contractors as we had articulated and anticipated over the recent years. While we, at the same time, have developed additional capabilities and found additional industry providers. We were impacted by the change in priorities that come with every new administration.

However, what did not change was our commitment to investing in talent, tools and technologies developed to develop solutions for our pursuit of higher value-added technology-powered applications and our utilization of the company's prodigious cash generation to pay down debt and strengthen our balance sheet. As we begin fiscal 2026, we are optimistic about the growth opportunities in our addressable market.

Now turning to Slide 4. I'll provide an overview of our achievements and outlook. We accomplished a great deal this past year and remain on track for enhanced performance going forward. We've expanded our role in various leading industry organizations and research consortiums. More recently, I met with the administration's leaders at the White House, enabling us to collaborate with the top strategic decision makers and more closely align our business with national priorities and emerging security needs. We achieved Cybersecurity Maturity Model Level 2 Certification, CMMC, an important credential for our industry. The CMMC program is designed to enhance the force -- the protection of sensitive but unclassified information shared by the Department of War with its contracting base.

Level 2 certification demonstrates overall excellence in cybersecurity, positioning DLH to compete for higher-value business opportunities within our addressable market, including the C6ISR community. That is command, control, communications, computers, cyber, combat systems, intelligence, surveillance and reconnaissance. The achievement validates our ability to carry out national security missions with efficiency, security and agility. Customers know that DLH can leverage its core competencies and capabilities along with commercial best practices to deploy resilient systems built to withstand the rigors of the modern cyber threat environment. These capabilities are present also in a recent award with the National Institute of Health. Our specialized staff will design and implement cloud security migration strategies built on agility and impactful security.

Our experts will deliver full project management life cycle solutions to modernize information technology, to improve the customer experience and business processes, to optimize system performance and to integrate emerging technologies such as artificial intelligence. It is a great program that will continue to showcase many of our leading cutting-edge transformational capabilities. In addition, as Kathryn will review further momentarily, we were recently awarded an extension of our IDIQ contract by the VA to continue providing pharmaceutical and medical logistics services at multiple VA mail order regional distribution centers. The ordering period for this vehicle runs through November of 2026.

Strong cash flow during the quarter resulted in further significant debt reduction of $10.7 million, resulting in a fiscal year-end debt balance of $131.6 million. Suffice it to say that our steadfast commitment to delevering the balance sheet means that all mandatory term debt payments have been made through September 30, 2026, a year ahead of schedule.

Let's turn to Slide 5 for a review of our ongoing strategic transformation heading into fiscal 2026 and beyond. As we discussed earlier this fiscal year, DLH's transformation into a leading technology, engineering and scientific research solutions provider is illustrated through our core capability pillars, which are described in 3 areas: digital transformation and cybersecurity, systems engineering and integration and science, research and development. Across each of these, DLH professionals and our world-class data science cell have applied impactful cutting-edge solutions on behalf of our customers' mission-critical and evolving challenges.

To complement these capabilities, DLH has developed a suite of branded competitive differentiators, which help customers across all target markets execute their missions with increased speed, reduced cost and enhanced precision. Investing in proprietary tools within our DLH innovation labs framework further differentiates our company and advances our organic growth aims. To that end, I am pleased to report that fiscal 2025 brought significant progress towards refining these differentiators and bringing our value solutions to market.

Today, I will add further color to one of those tools, DLH Cyclone, an AI/ML-powered data science engine. Cyclone unleashes the infinite power of our clients' data. Cyclone is a disruptive competitive force challenging traditional norms for large-scale data analytics. It transforms the environment in which data ETL processes occur and includes data warehouses, data lakes, building blocks and so on. It uniquely harnesses the power of optimizing data science and evolving technology tools. In short, Cyclone accelerates the speed of actionable intelligence and visualization for users and decision-makers at reduced cost, particularly when compared to existing government systems and commercial platforms.

Cyclone specifically can ingest and process data from a nearly unlimited number of potential sources, spanning scientific and operational domains, including clinical, electronic health records, geospatial, atmospheric, tactical, logistical and beyond, all while maintaining robust data prominence. Leveraging our advanced machine language expertise, Cyclone organizes unstructured, diverse and vast data elements into real-time analytics. Having seen DLH Cyclone in action at trade shows, live demonstrations and transformational value propositions, several current and potential adjacent clients have expressed interest in transitioning to our Cyclone platform to improve efficiency, transparency and reduce costs.

DLH Cyclone, NEURA and DLH Nexus labs, exemplify the strategic transformation of our company. These tools are expected to be -- continue to be valuable resources to our customers across our markets, looking for efficient, cost-effective solutions to navigate big data challenging budget cycles, system disruptions and the like. They cover a wide range of use cases, providing digital secure sandboxes to pilot and test new tools and products to ingest data in simulated environments to support logistics decision-making, research and development or training as well as advancing the biomedical research initiatives such as precision medicine, biodata catalyst applications and chronic disease eradication. We are confident that with our top talent, our strategic differentiators and best practices, DLH will soon return to low double-digit organic growth in the future.

With that, I would like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn JohnBull?

Thank you, Zach, and good morning, everyone. Thanks for joining us as we report our fourth quarter results for fiscal 2025. Turning to Slide 7. I'd first like to provide a high-level overview of some key financial metrics for the 3 months ended September 30, 2025. We reported revenue of $81.2 million in the fourth quarter versus $96.4 million in the prior year period, reflecting contribution from contract awards, offset by the impact of program timing, contract unbundling, government efficiency initiatives and the conversion of certain programs to small business set aside contracts as discussed in the past.

In total, the revenue contraction due to such small business set aside conversions, including CMOP, was approximately $11 million in the quarter versus 2024, accounting for most of the decrease in revenue. Of the year-over-year decline, approximately $7.5 million was related to transitioned CMOP locations and $2.9 million was from the unbundling of certain other contracts. The acquired small business programs, which had a minor effect on the revenue decrease, have now materially completed their runout. During the quarter, one CMOP location transitioned to another vendor at the end of August. In October, the company was awarded a sole-source IDIQ contract to continue providing pharmacy and logistics services for multiple locations. We have already been awarded task orders under this IDIQ and expect to continue providing these services while the VA completes its procurement and transition process.

Since the end of the fiscal year, the VA has transitioned an additional location, and we currently provide services at the 3 remaining locations. We reported EBITDA of $6.6 million for the fourth quarter versus $10.7 million last year. EBITDA was down primarily due to the overall lower revenue level and corresponding pressure on gross margins as we retained our investment in key innovation resources necessary to address our growth pipeline. EBITDA as a percent of revenue was 8.1% this year versus 11.1% in fiscal 2024 through scaling activities implemented in late Q4 and current Q1 as well as with growth, we expect to return to our normal historical levels of gross and EBITDA margins. From a cash standpoint, we generated approximately $10.7 million in cash during the quarter, as Zach mentioned, due to increased collection of receivables and sound working capital management.

For the full year, as shown on Slide 8, we reported revenue of $344.5 million, EBITDA of $34 million, approximately 10% of revenue and free cash flow of $23 million. While these figures reflect the challenges we have experienced during the fiscal year, they also reflect the importance of the diversification strategy we have executed over the past years. While we are disappointed by some of our valued customers exiting our contract portfolio due to the contract unbundling and set aside imperatives of the prior administration, we are excited about the opportunities to build upon the foundation of technology-powered solutions and services we have assembled and that we offer today in the -- as a highly relevant service in today's market.

Now turning to Slide 9. Let me wrap up with a summary of our debt reduction efforts, which remain a key focus area for DLH. We reduced debt by $10.7 million during the quarter, ending the fiscal year with $131.6 million of debt outstanding, a total reduction of $23 million over the 12-month period. We have now made all mandatory term debt payments through September 30, 2026, a year ahead of schedule. We anticipate fiscal 2026 debt reduction to align with our historical performance of converting approximately 50% to 55% of EBITDA to debt reduction. Leveraging our strong balance sheet, reliable cash flow generation and robust credit facility, we are adequately capitalized to execute our growth strategy.

This financial foundation ensures we can aggressively pursue our busy pipeline of opportunities, confidently manage our existing book of business and make strategic necessary investments in our people and programs, ultimately securing stakeholder value. With that, I would now like to turn the call over to our operator to open up for questions.

[Operator Instructions] The first question comes from Joe Gomes with NOBLE Capital.

So I want to start off here. A lot of moving parts. The Head Start program, obviously, you guys put out an 8-K that program is transferred to small business. But you also mentioned there that there is the possibility of a protest. I was wondering if you have protested that. If so, where are we in that? Or is that now just lost?

Yes. Joe, thank you for the question. No, we were not a participant in the protest effort. As you may recall, we saw Head Start moving in that direction when the Biden administration in '24 or early '24, issued the executive order to pursue more small business set asides to include unbundling contracts such as that one. We had hoped and we're working at some of the higher levels that the government would change that strategy. But it became pretty clear last year, particularly when the actual RFP started to come up, that was the commitment. So we are not participating in the protests for any of that work.

Okay. And then on CMOP, you mentioned that originally -- you had the 4. They transitioned one here at the end of November. They have 2 more solicitations out. When do you think your best guess of when the other 2 awards are made? And correct me if I'm wrong, but so far, you guys haven't been able to garner any of those even as a subcontractor? Or do you think that there's a possibility that you would get any of the remaining 3 that are still out for new awards?

Yes. Just -- I appreciate that, Joe. Yes, again, as you may recall, originally before they made their major commitment to move from solutions to just more staffing, we did have bids on a number of those through our joint venture. We've removed all of those bids, and we've had -- and so we're not bidding as a joint venture on any of them. We did, however, support a small business partner on a couple of them. A couple are still pending, and we'll keep you posted on those. Those decisions are anticipated to occur somewhere over the coming quarter or 2. So we'll keep you posted on that. For greater color on the rest of your question, I'll turn it over to Kathryn.

Yes, I think that's right. There are 3 locations remaining, which we will continue to operate as the VA executes their strategy to transition to temporary staffing firms that are operating the programs. The interval has been roughly not -- of course, past is not always prologue, but the interval has typically been about 3 months between.

And then you mentioned that you expect to return to your historical gross and EBITDA margins. When do you think we would see that given where we stand today?

Yes. So there's a couple of factors in play there. First of all, as we kind of described, let me give you some color around just the VA kind of work. While we've enjoyed a good long-term relationship with the VA. We continue to have strategic objectives to support the VA. While CMOP has moved to temporary staffing, we've been actively positioning for new business within the organization for more enriching EBITDA margin generation kind of work because it will be back to technical and solutioning sort of work.

We anticipate some of those awards once we get through -- once the government gets through this holiday period and this budget drill that very likely in Q1 -- calendar Q1, we'll start to see some of that emanate. In addition, we've got -- 2025 has really been pretty static with regard to new contract awards in our marketplace. So a lot of the deals that we were anticipating, RFPs and potentially revenue in '26 -- '25 are now starting to hit. We've got -- we're in proposal development phases on a few of them. We are in potentially awaiting award on a couple that could, of course, occur very early. And most of those jobs are going to be positive to our margin basis.

I will say, however, that we -- where we're finding this administration really making a stronger commitment on these procurements has been in the support of the military and with the Department of War in that business area, which is been one where we have a very ripe pipeline as well. And some of that work ranges from digital transformation and cybersecurity as well as some integration and logistics work. And so it will be a function of how those come out timing-wise. Some of those are more cost reimbursable type contracts that do not lend themselves to much more in the fee generation area as we would in some of our time and material and fixed price. So it's going to be a function of how those come in and how we will evolve as the contract structures will govern some of that growth. But we do feel really still very optimistic that the growth will be reflected in both the defense and nondefense work. And in general, those things associated with digital transformation and cybersecurity have been able to have us return back to some really strong values there.

Kathryn, any additions?

I would add to that. And really, the fundamentals of the company are the hallmarks of how we're built is to achieve growth and scale and cash flow generation. So we do believe that the growth is critical, essential to allowing us to return that scale that allows us to get back on that path of our historical growth and EBITDA margins, Joe. So that is stating the obvious here. That's why growth is the imperative and really why we've worked hard to diversify the base of customers and capabilities and to really keep ourselves relevant and invest in the innovation necessary to be competitive in those fronts. So we're excited for those opportunities to finally be coming to life, as Zach indicated, and we think we will fare well as we compete through those.

And one last one for me. What's the size of the pipeline today?

It's very strong, Joe. As we ended the fiscal year, we were north of $3 billion. And again, for us, we describe those largely as qualified opportunities over a 24-plus month period. And so it still bodes well for a very healthy financial growth prospects.

[Operator Instructions] As it appears that there are no further questions, I would like to turn back to Mr. Parker for any closing remarks.

Thank you, Chloe. This has been a really, really great year for developing and setting us up nicely, we think, for the coming years, FY '26 and beyond. We anticipate giving additional color. We look forward to seeing any or many of you in our upcoming annual shareholder meetings. I want to thank you all for joining us today. Have a blessed day and happy holidays, and we'll chat with you again soon. Bye for now.

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

Good day, and welcome to the DLH Holdings Fiscal 2025 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Witty, Investor Relations Advisory. Please go ahead, sir.

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 3 of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2025 and beyond. These statements are subject to various risks and uncertainties which could cause actual results and events to differ materially from such 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 SEC. 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. Please go ahead, Zach.

Thank you, Chris, and welcome, everyone. Welcome to our third quarter conference call, and I'm pleased to have the opportunity to report on our financial results and provide an update about the current environment and an outlook. First and foremost, I'd like to begin by thanking our stellar employees for their steadfast dedication to our customers' missions. It has been a tumultuous period as we entered fiscal '26 for technical companies, solution companies like us. Yet our employees continue to rise to the occasion, leading with innovative and productive projects and solutions supporting our customers with excellent results. Their performance is why I'm so confident about the future of DLH.

Now if you'll turn to Slide 4, I'll provide an overview of our Q3 results. Starting with revenue. Our anticipated erosion from our previously discussed unbundling and small business set asides from the prior administration is continuing on plan. I'm also pleased with how effectively our team has managed through this period, and Kathryn will give some added color to that a little bit later. The new administration has added layers of funding review and approval cycles that have slowed our revenue stream, and this is from work from our existing contracts. That being compounded by the effect of both of those 2 features has tremendously stalled the flow of new business growth for DLH. This, of course, will be as reflective relative to prior quarters.

Our pipeline conversion has been slowly -- had been impacted and slowed. RFP flow over the recent quarter too has been slowed. Our delivery of proposals and material proposals that's things like over $25 million and over $100 million, much lower than anticipated and the same for contract awards. However, having said that, I've had an opportunity along with some of my industry colleagues to have met with appropriate influencers on the hill. And I really feel optimistic that anticipated changes will be productive and on their way soon. And I'll discuss this a little greater -- a little bit later.

With respect to margin delivery, cash flow generation and debt paydown, we've made significant progress again this period. Our operating expenses continue to decrease as we scaled operations to meet the changing revenue volume and protect margin delivery while we prioritize our investments, continue to prioritize our investment in growth initiatives. We reduced debt by $9.4 million compared with Q2. Our debt to close the quarter was $142.3 million, and we are a year ahead of our mandatory debt payments. We expect to continue to aggressively deploy capital to pay down debt, manage our leverage and strengthen our balance sheet.

The reconciliation bill, the fiscal 2025 budget bill and fiscal 2026 White House budget request combined to give greater clarity about the administration's spending priorities in the years ahead. This will help our customers. We are pleased that DLH's capabilities continue to align with the federal government's demand and believe that funding increases for our services in core areas of focus, which include technology integration, cybersecurity, artificial intelligence and machine learning and the like, will continue to provide opportunities for the company's growth organically. I will speak to this in further depth on the following slide.

The fusion of DLAs technology and research expertise is continuing to make mission-critical impact for our customers, and we see more opportunities in the near term. Solutions that we have developed and deployed through our internal R&D program, along with collaboration with military health agencies gives us reason to believe that our top technology programs seen by our government peers or well received. Such applications leveraging technology spend in AI, robotics, engineering, unmanned aircraft-s and automation demonstrates a crucial life-saving impact of the work carried out by our staff of data scientists, engineers, technologists, et cetera, to have such positive impact upon our citizens, our service members and our veterans.

Our unique combination of advanced technology of world-class scientific expertise provides -- continues to provide tremendous value for our customers and targeted growth, and we firmly believe that our company's experience and expertise will continue to open new doors, expand our book of business as we go forward.

Now let's turn to Slide 5 for a further review of the current federal spending outlook. As you can see, we continue to believe that our core competencies and capabilities align very well with the federal technology initiatives, and we expect that the current administration's priorities will lead to new business opportunities and contract wins for us in the medium and long term. The marketplace remains dynamic as the federal workforce is being reshaped. Procurements are being reshuffled based on the administration's priorities and certain departments and programs have undergone significant changes.

Our strategic actions this year, focusing on operational agility, financial flexibility and technology differentiation have proven effective in these market conditions. This approach has allowed us to navigate industry challenges and strengthening our long-term position. We remain tremendously committed to our organic growth initiatives, and we are confident in our strategy to increase this revenue and margin delivery in the quarters to come given some of the anticipated changes by this administration.

As mentioned before, recent weeks have brought increased clarity to the programs and initiatives that have been prioritized by the administration. Modernizing federal technology, maximizing efficiencies, integrating artificial intelligence and machine language and bolstering cybersecurity while keeping America leading edge are consistent thought lines. The enacted budget for the remainder of fiscal '25 and the administration's fiscal 2026 budget and the One Big Beautiful Bill Act provided increased funding for each of these initiatives.

I mentioned earlier that anticipated changes seem to support a positive outlook for DLH. This is largely attributed to some of the acquisition reforms that are in motion that will drive priority shifts in the way in which the client buys. And this administration is really committed to accelerating the speed of delivery on these type of new opportunities and contracts. We believe this provides significant opportunity for DLH. Our company has a strong legacy of making programs more efficient for customers through the integration of cutting-edge technologies, producing millions of dollars in cost savings to the government.

Federal investment in AI and ML, systems integration, cloud computing, software development, research and development, data analytics and other advances have aligned with what we have been building over the last 2 and 3 years and continuing to invest in for near-term opportunities. While we believe the upcoming quarters will have steady procurement activity, the realignment of the customers' contracting resources may cause again contract awards to slip to future periods.

To navigate the market dynamics, our goals are simple and threefold. First, we'll continue to delever the company. Second, we're going to do everything we can to protect our revenue base and focus on new business and organic growth with key opportunities that drive and deliver value for our business line. And finally, we're going to continue to preserve our margin delivery through proactive scaling initiatives. And as we move past these challenges created by short-term market dynamics, we believe the company is very, very well poised to once again become that growth enterprise that leverages its unique capabilities through differentiation and improve the governance mission and the lives of those that it touches.

With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn John. Kathryn?

Thanks, Zach, and good morning, everyone. We're happy to have you join us for our third quarter results for fiscal 2025. Turning to Slide 7. I'd like to provide a high-level overview of some key financial metrics for the 3 months ended June 30, 2025. We reported revenue of $83.3 million in the third quarter versus $100.7 million in the prior year period. The change in revenue volume reflects contributions from recent contract awards offset by the expected conversion of certain VA and DoD programs to small business contractors, which accounts for decreases of $8.5 million and $3.2 million, respectively. Additionally, government efficiency initiatives narrowed the scope of some of our work, resulting in a $2.2 million decrease.

As a reminder, we are under contract to manage 5 of the remaining CMOP locations through the end of October, while 1 location, Leavenworth, Kansas is expected to transition to a new contractor on August 31. This site represents approximately $10 million in annualized revenue. Award decisions for the remaining 5 sites could extend beyond our current period of performance as procurement strategies are shaped by the policies of the new administration. We reported EBITDA of $8.1 million for the third quarter versus $10 million last year, primarily due to the lower overall revenue. We have successfully navigated our key management priority of appropriately scaling operating costs to changes in business volume while preserving the resources necessary for growth. EBITDA as a percentage of revenue was 9.7% this year versus 10% in fiscal 2024.

From a cash standpoint, we generated approximately $9.5 million of operating cash during the quarter, as Zach mentioned, due to increased collections of receivables and sound working capital management. We noted a reduction in days sales outstanding to 46 days from 52 days at the end of Q2. Year-to-date our operating cash flow was $12.5 million versus $14.9 million last year, and we again used Q3 cash generation to delever the company. As you can see on Slide 8, we reduced debt by $9.4 million during the quarter, ending the period with $142.3 million debt outstanding. At this point, we have made all mandatory term debt payments through June 30, 2026, a year ahead of schedule, and we remain on track to convert approximately 50% to 55% of EBITDA to pay down debt this fiscal year.

Given our strong record of using cash flow to delever the company and strengthen the balance sheet, combined with the liquidity provided by our $50 million revolver, we continue to believe we have sufficient capital to pursue and support a busy pipeline of opportunities. We remain well ahead of our debt covenants supporting our positive outlook for the future. 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] And the first question will come from Joe Gomes with NOBLE Capital.

Joe, I think you're breaking up.

Yes, you may have cut off just a bit.

It seems Mr. Gomes his line has disconnected. [Operator Instructions] Mr. Gomes, if you are listening, you can press it as well to rejoin. [Operator Instructions]

Operator, you indicated that he disconnected.

Yes.

Let's give him a moment.

All right. Let's proceed and perhaps he'll join us.

Yes, Ma'am. [Operator Instructions]

While we're waiting for Joe, let me add a little color to a couple of comments that we had in the opening presentation. One in particular is, of course, the continued evolution of our small set-aside business that was largely initiated during the previous -- during the Biden administration, most notably for us, of course, has been our VA support for the mail order pharmacy programs. That, as Kathryn indicated, continues to move down the small business set aside path. We've been working very closely with the customer to affect smooth transitions. It has been a little bit slower than we had anticipated last year for that erosion. But by and large, we do see pretty heavy activity on that throughout the remainder of this quarter and we'll certainly keep you posted on that.

At the same time, some of the other contracts that were unbundled, those two, those that we anticipated as we entered fiscal year '25 have continued pretty much on track. As I indicated earlier, we did -- we were expecting to have some of that offset by our new business pipeline with the anticipated RFPs flows from what the government was indicating and our customers were indicating before. And I did just want to mention that, that has slowed materially this last quarter.

And again, many of those are attributed to administration factors. One factor that I did not specifically indicated is that there were a large number of cuts in the government, as Kathryn indicated, but it was largely due to contract acquisition people. So it's those folks that put together the RFPs, those folks that evaluate the contractors' proposals and then those that award those contracts with a number of that -- those workforce participants cut through administration activities.

There's just been gaps in resources to be able to move that along. I will say that both through court action and some initiatives from our agencies, some of those are being recalled. We've seen some of that in some of our agencies over the last month. And so we're hoping to see that the stability start to measurably come back with regard to the resources that the government needs to move these solicitations and contracts forward. So we're optimistic that some of that return will have some positive impact to our industry's pipeline, but particularly for those areas that we are focused. Any luck with Joe return?

No sir, not at all.

Yes, he has tried a couple of times to get back in.

Well, operator, if there are no further questions, I think we want to take this time to certainly thank those that have participated in our session today. We continue to feel really, really strong about the outlook of DLH. We think that we have a good grasp on the areas that are transitioning from the government. We've got good level of engagement with the decision makers and influencers and I feel very, very optimistic that as we exit '25, we'll have some good news in Q4 with regard to the positioning for a very, very strong recovery in '26. With that, I'll turn it back over to the operator, and we look forward to seeing everyone again soon. Have a blessed day.

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