DLH Holdings Corp. — FY2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2013; fourth-quarter results are also reported. DLH provides healthcare, logistics and technical, and contingency staffing services to U.S. government agencies. The Department of Veterans Affairs (DVA) accounted for 96% of FY2013 revenue. Healthcare generated approximately 54% of revenue and logistics approximately 45%.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $53.5 million | $49.2 million |
| Gross profit / margin | $7.5 million / 14.0% | $5.6 million / 11.4% |
| Operating income (loss) | $248,000 | $(2.15) million |
| Net loss | $(159,000), or $(0.02) per share | $(2.03) million, or $(0.29) per share |
| Adjusted EBITDA (non-GAAP) | $575,000 | $(1.68) million |
| Operating cash flow | $1.81 million | $(2.83) million |
FY2013 Q4: Revenue was $14.05 million, gross profit $1.96 million, operating income $173,000, and net income $9,000. In Q4 FY2012, revenue was $12.46 million and net loss was $354,000.
At September 30, 2013, cash and cash equivalents were $3.41 million, current assets $15.95 million, current liabilities $17.95 million, and working capital deficit approximately $2.0 million. Bank borrowings were $951,000, with $891,000 of borrowing availability under the asset-based facility, subject to eligible receivables. The balance sheet also included $340,000 of convertible debentures, net of discount; subsequent to year-end, $210,000 principal converted to shares and $140,000 was repaid. Total liabilities were $17.97 million and shareholders’ equity $7.78 million.
Material changes versus FY2012
- Revenue increased 8.8%, primarily from expansion of existing programs and the full-year effect of prior-year awards.
- Gross margin improved 2.6 percentage points, which management attributed to improved contract performance.
- G&A, including severance, declined to $7.13 million from $7.63 million; severance expense was nil versus $267,000 in FY2012.
- Operating results improved by approximately $2.4 million. FY2012 included a nonrecurring $500,000 gain on settlement of notes payable.
- Operating cash flow improved by $4.6 million, principally reflecting receivables collections and improved profitability. Financing cash flow shifted to a $1.48 million use, including repayments on the revolving facility; FY2012 included $4.20 million of rights-offering proceeds.
- Backlog rose to approximately $240 million from $153 million. Of FY2013 backlog, $19 million was funded and $221 million unfunded; backlog is not a guarantee of revenue.
Outlook, risks, and unusual items
- Management stated that cash, expected operating cash flow, credit availability, collections, and cost reductions were expected to support operations for 12 months from the financial-statement date. This depends on forecast assumptions and timely collections.
- In September 2013, DLH won seven DVA Consolidated Mail Outpatient Pharmacy logistics task orders, with an estimated maximum value of $133 million over a base year and four option years; performance began November 1, 2013. The maximum value is not assured revenue.
- Management cited constrained federal discretionary spending, budget and sequestration uncertainty, procurement delays, competitive pricing pressure, and potential contract reductions or terminations. The company depends heavily on federal work and the DVA.
- A $9.3 million DVA receivable for historical retroactive billings remained unbilled at year-end, with $8.7 million of related accrued payroll. Management expected billing and collection in FY2014 but could not guarantee timing. Additional indirect costs and fees of $0.4–$0.6 million remained subject to government review.
- A U.S. Attorney claim alleges failure to pay prevailing wages under the Service Contract Act for certain work during 2003–2010. The company disputed that an adjustment was required; the ultimate merits and financial impact were unresolved.
- A $1.4 million payroll-tax liability was recorded, including approximately $600,000 of estimated penalties and interest. The company was working with the IRS and reported no payments in FY2013; additional amounts and timing remained uncertain.
- DLH reported $8.6 million of goodwill and no impairment at year-end. A major contract non-renewal or adverse business change could prompt a material impairment charge. The company also had substantial tax-loss carryforwards, but recorded a full valuation allowance on net deferred tax assets.
- Wynnefield Capital and affiliates held approximately 45% of outstanding shares; management, directors, and the largest shareholder collectively held approximately 54%. The filing also reports subsequent warrant exercises, debenture conversion/repayment, and share repurchases under a $350,000 authorization.
Important facts for investors to verify
- Whether the DVA historical receivable is billed and collected, and whether the corresponding accrued payroll is paid.
- Actual revenue and profitability realized from the new CMOP task orders, including option-year funding and contract execution.
- Resolution and any cash impact of the Service Contract Act investigation and payroll-tax notices.
- Liquidity and borrowing-base availability, including compliance with facility terms and the effect of the working-capital deficit.
- How much of the reported $240 million backlog is funded, retained, and converted into revenue, given the concentration in DVA contracts.