DLH Holdings Corp. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
DLH provides professional healthcare, human services, and technology-enabled program management to U.S. federal agencies. It reported more than 1,400 employees and derived all revenue from federal government agencies. The May 2016 acquisition of Danya International expanded the company’s services and contributed materially to the quarter’s growth. The VA accounted for approximately 61% of quarterly revenue and HHS for 29%; the VA had represented approximately 95% in the comparable prior-year quarter.
Financial results
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $26.111 million | $16.559 million |
| Gross margin | $5.811 million; 22.3% of revenue | $2.917 million; 17.6% |
| Income from operations | $0.889 million | $0.382 million |
| Net income (loss) | $0.324 million | $(0.116) million |
| Diluted earnings (loss) per share | $0.03 | $(0.01) |
| Adjusted EBITDA, non-GAAP | $1.575 million | $0.734 million |
| Net cash provided by operating activities | $0.297 million | $0.480 million |
Revenue increased 57.7%, primarily because Danya contributed approximately $8.7 million, with additional growth from existing contracts. Gross margin rose 4.7 percentage points, which management attributed to Danya’s contribution, more complex contracts, and staff deployment. General and administrative expense increased 87.7% to $4.721 million, reflecting the acquired business and added resources. Other expense was $0.364 million, including interest, financing-cost amortization, and a $0.079 million warrant revaluation charge.
Cash and cash equivalents were $2.471 million at December 31, 2016, down from $3.427 million at September 30, 2016. Investing activities used $0.291 million, including the final $0.250 million Danya purchase-price payment, and financing activities used $0.962 million, primarily for senior-debt repayments. The company reported a $4.2 million working-capital deficit.
Gross bank term debt was $22.5 million, versus $23.438 million at September 30, 2016; the balance-sheet carrying amount, net of unamortized issuance costs, was $21.338 million. The term loan bears interest at LIBOR plus 3.0% and matures May 1, 2021. The revolving facility had no balance; reported availability was $4.1 million after a $0.9 million standby letter of credit. DLH said it was compliant with loan covenants.
Material changes and unusual items
The Danya acquisition was financed with debt, cash, DLH shares, and subordinated financing from the company’s largest stockholder. In December 2016, DLH finalized the purchase-price allocation, increasing recognized intangible assets by approximately $9.5 million and reducing goodwill correspondingly; the final valuation also affected amortization. Danya contributed approximately $0.9 million of operating income in the quarter. The company also issued 93,750 shares to non-employee directors during the quarter.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management stated that cash, eligible borrowing availability, and planned operating cash flow should support operations for 12 months from the financial-statement date. Its stated strategy is to pursue organic growth in federal health and human services and consider selective acquisitions, particularly in health IT.
Management discussed uncertainty around federal budgets and continuing resolutions, and evolving spending priorities under the new administration. Customer concentration is significant: the VA and HHS together represented approximately 90% of quarterly revenue. The filing warns that losing or failing to renew a major contract could materially harm results, cash flows, and financial condition. Other risks include the working-capital deficit, debt service and covenant requirements, and potential impairment of goodwill or other intangible assets. DLH reported no litigation it believed likely to have a material adverse effect, no material change in previously disclosed risk factors, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- How much of reported growth and improved margins is sustainable after separating Danya’s contribution from organic growth?
- What are the renewal, recompete, and funding outlooks for major VA and HHS contracts, given customer concentration and federal budget uncertainty?
- Can operating cash flow cover scheduled debt repayments, contractual obligations, and working-capital needs while maintaining covenant compliance?
- How do the finalized Danya purchase-price allocation and projected intangible amortization affect future earnings and impairment exposure?
- Confirm the debt balance and borrowing availability under the facility’s eligibility limits and covenant terms.