DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2014; comparisons are to the corresponding 2013 periods. Financial statement amounts are in thousands except per-share data.
Business context
DLH provides healthcare, logistics and technical, and staffing services to U.S. government agencies. All revenue was from the federal government; the Department of Veterans Affairs (DVA) accounted for approximately 97% of revenue in the first half of fiscal 2014. Healthcare and logistics services represented approximately 52% and 47% of first-half revenue, respectively.
Financial results
| Metric | Three months ended Mar. 31, 2014 | Three months ended Mar. 31, 2013 | Six months ended Mar. 31, 2014 | Six months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Revenue | $14.745 million | $13.007 million | $29.222 million | $26.002 million |
| Gross profit / margin | $2.199 million / 14.9% | $1.771 million / 13.6% | $4.311 million / 14.8% | $3.560 million / 13.7% |
| Operating income (loss) | $225 thousand | $9 thousand | $291 thousand | $(84) thousand |
| Net income (loss) | $197 thousand | $(109) thousand | $330 thousand | $(237) thousand |
| Diluted EPS | $0.02 | $(0.01) | $0.03 | $(0.03) |
| Adjusted EBITDA (non-GAAP) | $330 thousand | $80 thousand | $638 thousand | $109 thousand |
Revenue increased 13.4% in the quarter and 12.4% for the first half, primarily from new business awarded in 2013 and expansion of existing programs. Management attributed improved gross margin and operating results to favorable contract performance and cost management. First-half G&A was $3.967 million, up from $3.578 million, including higher non-cash stock compensation. No income tax expense was recorded; the company maintained a full valuation allowance against deferred tax assets.
Cash flow and balance sheet: First-half operating cash flow was $258 thousand, versus $44 thousand in 2013; investing cash outflow was $13 thousand and financing cash outflow was $506 thousand. Cash declined by $261 thousand to $3.147 million. At March 31, cash was $3.147 million, accounts receivable was $12.488 million, total assets were $25.045 million, and shareholders’ equity was $8.711 million. Working capital was in a deficit of approximately $10 thousand. Bank borrowings were $576 thousand; unused line availability was approximately $500 thousand, subject to eligible receivables and facility terms.
Material changes and notable items
- Compared with the prior-year periods, the company moved from losses to profits, with higher revenue, gross profit, and operating income.
- Convertible debentures matured in October 2013: $210 thousand was converted into shares and $140 thousand was repaid. Related warrants were exercised. The first-half results include a $99 thousand gain from the change in fair value of derivative instruments.
- A March 2014 credit-facility amendment lowered the rate to 0.75% above the greater of prime or 3.25%, reduced certain service fees, and extended the facility term to July 29, 2015. Borrowing remains limited by eligible collateral and lender conditions.
- The previously disclosed U.S. Attorney claim alleging prevailing-wage violations for 2003–2010 was dismissed in its entirety after the Department of Justice declined to intervene.
Outlook, risks, and contingencies
Management said cash, available credit, forecast operating cash flow, certain liabilities expected not to require cash settlement, and cost initiatives should support operations for 12 months from the financial statement date. It cautioned that failure of these assumptions could materially affect liquidity and might require spending cuts or additional capital, potentially dilutive to shareholders. The filing provides no specific revenue or earnings guidance.
- Customer concentration: The company is highly dependent on the DVA; loss of or reduced work under DVA contracts could materially affect results and liquidity. Contract periods were expected to range from approximately three to five years, but actual service volumes are not assured.
- Government spending and procurement: Budget constraints, sequestration, contract competition, award delays, changes in agency priorities, and use of lowest-price awards may reduce demand or pressure margins. Management cited the proposed DVA fiscal 2015 budget as supportive, while noting ongoing federal spending uncertainty.
- Retroactive DVA billings: Approximately $9.3 million of unbilled receivables and $8.7 million of related accrued employee costs remained. The company expected to bill and collect within 12 months, but timing was uncertain. Additional indirect costs and fees of $0.4–$0.6 million were under government review and not assured.
- Payroll-tax matter: A $1.4 million liability, including approximately $600 thousand of estimated penalties and interest, remained recorded. No payments were made during the first half; a future payment plan was not assured, and additional amounts could not be estimated.
- Goodwill: Goodwill totaled $8.595 million. No impairment indicator was identified for the period, but contract non-renewal or other adverse business changes could lead to a material charge.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether DVA contract performance, renewals, and actual service volumes sustain revenue growth and customer concentration.
- Whether the company collects the $9.3 million retroactive unbilled receivable on the anticipated timetable and how the related employee costs are settled.
- Whether the $1.4 million payroll-tax matter is resolved as accrued, and the timing and cash impact of any settlement.
- Actual borrowing availability under the receivables-based credit facility, including compliance with its covenants and lender conditions.
- Whether improved margins and positive operating cash flow continue, given the narrow working-capital position and reliance on federal contracts.