DLH Holdings Corp. — Form 10-Q Summary
Business context and period. This report covers the fiscal third quarter and nine months ended June 30, 2019. DLH provides technology-enabled health and human services primarily to U.S. federal agencies. On June 7, 2019, it acquired Social & Scientific Systems, Inc. (SSS), adding clinical research, epidemiology, and public-health capabilities.
Financial performance
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Revenue | $38.7 million | $106.2 million |
| Gross profit / margin | $9.9 million / 25.6% | $25.8 million / 24.3% |
| Operating income | $1.7 million | $6.6 million |
| Net income | $0.8 million | $3.8 million |
| Diluted EPS | $0.06 | $0.29 |
| Operating cash flow | Not provided for the quarter | $11.2 million |
- Quarterly revenue increased 7.1% year over year; gross margin improved from 23.1% to 25.6%. Operating income declined from $2.6 million and net income from $1.6 million, principally due to $1.2 million of SSS acquisition transaction expenses, higher amortization, and increased interest expense.
- Nine-month revenue rose 5.4%, operating income increased from $6.0 million, and net income rose from $0.1 million. The prior-year comparison includes a $3.4 million one-time deferred-tax-asset write-down; therefore, the net-income increase is not solely indicative of improved operating performance. Nine-month EBITDA, a company-reported non-GAAP measure, was $8.6 million versus $7.6 million.
- Cash was $6.0 million at June 30, 2019. Current assets were $32.7 million and current liabilities $28.2 million. Operating cash flow of $11.2 million was more than offset by $66.5 million of acquisition-related investing outflows; financing provided $55.0 million. Cash declined $0.4 million from September 30, 2018.
- Gross term-loan principal was $66.1 million, versus $7.7 million at September 30, 2018; the company also reported $19.6 million of unused revolver availability. The loan bears interest at LIBOR plus 4.0% at the reported leverage level, with a stated 6.4% rate at June 30. The balance sheet reports $0.8 million of current debt, while the debt note and contractual-obligations table report $1.3 million; the filing does not explain this difference.
Material changes, outlook, and risks
- SSS contributed approximately $4.5 million of revenue and $0.2 million of operating income after its acquisition. The preliminary purchase-price allocation includes $25.8 million of goodwill and $29.3 million of acquired intangible assets; valuations remain subject to revision.
- Customer concentration remains significant: the VA generated approximately 65% of nine-month revenue and HHS approximately 33%. Nine VA pharmacy contracts supporting about 58% of the VA business base were operating on extensions through October 2019; seven VA logistics contracts were extended through November 2019. DLH joined SDVOSB teams for the re-competes and may be unable to bid as prime contractor on set-aside awards. The company said extensions were possible, but procurement outcomes and timing were uncertain.
- The HHS Head Start contract generated 27% of nine-month revenue and runs through April 2020, including option periods. Management warned that a material reduction in VA or HHS work could materially harm results, cash flows, and financial condition.
- Management stated that planned operating cash flow should support operations for 12 months from issuance. It reported compliance with loan covenants and no expected material impact from federal budget negotiations. No specific financial guidance was provided. The company identified acquisition integration, retention of SSS employees and customers, contract re-competes, bid protests, federal budget priorities, and new debt covenants as risks.
- Contractual obligations totaled $87.3 million, including $66.1 million of debt and $21.2 million of facility leases. The company expected approximately $21.2 million of lease obligations to be recognized on the balance sheet upon adoption of the new lease standard. It also disclosed $2.3 million of restricted cash related to transition of letters of credit and credit cards, expected to be released before fiscal year-end.
- Management reported effective disclosure controls and no litigation believed reasonably likely to have a material adverse effect. SSS was being integrated into the company’s internal-control environment.
Investor verification points
- Track VA re-compete awards, extensions, protests, and the amount of work DLH retains through SDVOSB partners; monitor the HHS Head Start contract approaching April 2020.
- Assess SSS integration, customer and employee retention, final purchase-price allocation, and whether expected acquisition benefits materialize.
- Verify debt classification and scheduled repayments, covenant headroom, variable-rate exposure, and the effect of increased interest and lease obligations on liquidity.
- Separate recurring operating performance from acquisition costs and the prior-year tax write-down when comparing earnings; note that the filing’s EBITDA and adjusted-net-income measures are non-GAAP.