DLH Holdings Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Fourth-quarter figures are for the three months ended that date. The company provides healthcare, human-services, and related technology services to U.S. federal agencies.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $133.2 million | $115.7 million |
| Gross margin | $30.2 million; 22.7% | $25.9 million; 22.3% |
| Operating income | $8.8 million; 6.6% margin | $6.6 million; 5.7% margin |
| Interest expense, net | $1.1 million | $1.2 million |
| Income before taxes | $7.7 million | $5.4 million |
| Income tax expense | $5.8 million | $2.1 million |
| Net income | $1.8 million; $0.14 diluted EPS | $3.3 million; $0.27 diluted EPS |
| Operating cash flow | $14.1 million | $6.5 million |
Revenue rose 15.2%, principally from increased workload on VA and HHS contracts. Gross margin improved 40 basis points, and G&A fell to 14.4% of revenue from 15.1%. EBITDA, a non-GAAP measure, was $11.0 million, up 31.5%.
FY2018 Q4: Revenue was $32.5 million versus $30.4 million in Q4 FY2017; operating income was $2.8 million versus $2.1 million; net income was $1.8 million versus $1.0 million; diluted EPS was $0.14 versus $0.08.
Balance sheet, debt, and liquidity
- At September 30, 2018, cash was $6.4 million, current assets $17.4 million, current liabilities $15.9 million, and shareholders’ equity $39.4 million.
- Term-loan principal was $7.7 million, down from $19.7 million a year earlier; the revolving facility had no balance. The company repaid $12.0 million of debt during FY2018, including a $5.6 million voluntary prepayment.
- Unused revolver availability was $7.6 million after eligible-receivables limits and a $1.3 million standby letter of credit. The company reported compliance with debt covenants and stated planned operating cash flow should support operations for 12 months from the financial-statement date.
- Investing cash use was $0.7 million. Financing cash use was $12.0 million. Funded backlog was approximately $60 million; total backlog was $172 million, including $112 million unfunded.
Material changes and unusual items
- Net income declined despite higher operating income, mainly because the Tax Act caused a $3.4 million write-down of deferred tax assets as the federal tax rate changed from 34% to 21%. Excluding that discrete charge, management reported adjusted net income of $5.2 million, a non-GAAP measure.
- Federal NOL carryforwards were approximately $23.8 million at year-end and begin expiring in 2021. Management expected to use them, but that outcome depends on future taxable income.
- The company reclassified a $0.3 million warrant liability to equity after adopting updated accounting guidance. No goodwill impairment was recorded; goodwill was $26.0 million.
- ASC 606 was adopted on October 1, 2018, after the reporting period; management reported an approximately $0.1 million increase to opening shareholders’ equity and did not expect a material change in revenue-recognition patterns.
Outlook, commentary, and risks
- No quantified revenue or earnings guidance is provided. Management described growth priorities in federal health services, telehealth, behavioral healthcare, program management, and public-health services, and said it would continue considering strategic acquisitions.
- Federal agencies accounted for all revenue. The VA represented approximately 63% and HHS 34%; the two together therefore represented nearly all revenue. Time-and-materials contracts made up 95% of the current contract base.
- Nine VA pharmacy contracts representing about 57% of the company’s VA business base were under extensions through April 2019 while a replacement procurement proceeded. The solicitation required an SDVOSB prime, so DLH could participate only as a subcontractor on its chosen team. Seven VA logistics contracts were due to expire in May 2019 and could face similar set-aside requirements.
- Risks include federal budget changes, shutdowns and procurement delays, contract protests or non-renewals, small-business set-asides, customer concentration, and dependence on qualified personnel. At filing, a continuing resolution had been extended through December 21, 2018; the filing warned a shutdown could delay programs or create unreimbursed costs.
- The company reported no pending or threatened litigation it believed likely to have a material adverse effect. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor’s report gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Outcome, timing, and DLH’s subcontract role in the VA pharmacy recompete; also the status and set-aside treatment of the seven VA logistics contracts.
- Renewal and funding of major VA and HHS programs, including the Head Start contract, whose term ran through April 2020.
- Whether backlog—especially its $112 million unfunded portion—converts to revenue, and whether operating cash flow remains sufficient to meet debt terms.
- Future tax expense, NOL utilization, and the lasting comparability of earnings after the one-time Tax Act charge.
- Contract concentration, workforce and insurance costs, and the impact of ASC 606 and new lease-accounting requirements.