DLH Holdings Corp. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022. The filing also reports fourth-quarter results. DLH provides technology-enabled health, human services, program management, logistics, and public-health research primarily to U.S. federal agencies.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $395.2 million | $246.1 million |
| Operating income / margin | $33.3 million / 8.4% | $17.2 million / 7.0% |
| Net income / margin | $23.3 million / 5.8% | $10.1 million / 4.1% |
| Diluted EPS | $1.64 | $0.75 |
| EBITDA (non-GAAP) | $40.9 million | $25.3 million |
| Cash from operations | $1.2 million | $45.7 million |
Revenue increased 60.6%, principally because two temporary FEMA task orders supporting Alaska’s COVID-19 response contributed $125.8 million. Those orders ended during FY2022. Excluding the FEMA work, management’s non-GAAP presentation showed revenue of $269.4 million versus $244.4 million, operating income of $20.8 million versus $17.1 million, and diluted EPS of $0.99 versus $0.74. The remaining-portfolio figures are company-defined supplemental measures, not GAAP results.
Contract costs were 81.7% of revenue, compared with 79.1% in FY2021; operating margin nevertheless rose to 8.4%. Management attributed strong FEMA-task-order margins partly to staffing with internal personnel rather than subcontractors. Interest expense declined to $2.2 million from $3.8 million, principally due to lower term-loan balances.
Fourth quarter: Revenue was $67.2 million, operating income $4.7 million, net income $3.4 million, and diluted EPS $0.24. In Q4 FY2021, the respective figures were $65.2 million, $4.0 million, $2.9 million, and $0.21.
Cash, debt, and liquidity
- Operating cash flow fell to $1.2 million from $45.7 million, mainly reflecting completion of FEMA contract obligations for which advance funding had been received in the prior year.
- Cash was $0.2 million at year-end, versus $24.1 million a year earlier. The company used $24.2 million in financing activities and repaid approximately $24.8 million of term-loan principal during FY2022.
- Term-loan principal was $22.0 million at September 30, 2022; the balance-sheet carrying amount, net of financing costs, was $20.4 million. The loan matures September 30, 2025 and is secured by substantially all company assets.
- The revolving facility has a $25.0 million ceiling; disclosed unused borrowing capacity was $23.0 million at year-end, subject to borrowing conditions. No revolver balance was outstanding.
- Management said expected operating cash flow would support operations for at least 12 months from issuance of the financial statements. The company reported compliance with its debt covenants and had satisfied mandatory term-loan principal payments through September 2025.
Material changes and business position
- Revenue from DHS rose to $126.6 million, or 32.0% of total, from $2.5 million in FY2021, largely reflecting the FEMA work. VA revenue was $126.1 million (31.9%), and HHS revenue was $102.2 million (25.9%). Approximately 99% of revenue came from federal agencies.
- Backlog declined to approximately $482.5 million from $651.5 million; funded backlog declined to $98.9 million from $191.0 million. Backlog includes options and other amounts not guaranteed to be funded or realized as revenue.
- VA pharmacy and logistics contracts were operating under bridge arrangements through October and November 2023, respectively. The VA had indicated an intention to pursue SDVOSB prime contractors; DLH said it could continue as a subcontractor if a partner wins, or compete in an unrestricted procurement if one is issued.
- HHS Head Start work, which generated $34.2 million in FY2022 revenue, has a performance period through April 2025.
- At year-end, goodwill was $65.6 million and intangible assets were $40.9 million. Management’s qualitative goodwill review found no impairment; a major contract non-renewal or other business change could affect future valuations.
Outlook, risks, and unusual items
The filing provides no quantified company revenue or earnings guidance. Management cited federal FY2023 budget priorities in public health, veterans’ services, and defense, and said it did not expect budget negotiations to materially affect its current business base. It warned that continuing resolutions can delay new program starts and contract awards; the then-current resolution was due to expire December 16, 2022.
- Contract concentration and recompetes: Dependence on federal spending and a small number of VA, HHS, and other contracts exposes results to non-renewals, reduced tasking, bid protests, termination, and small-business set-asides.
- COVID-19 transition: FEMA task orders were temporary and ended in FY2022; management noted that fewer pandemic-related opportunities may follow as public-health conditions improve.
- Costs and execution: Inflation and labor-cost pressure may reduce profitability, particularly on fixed-price and multi-year contracts. Hiring and retaining qualified staff is also important to contract delivery.
- Funding and liquidity: Federal appropriation delays may postpone awards and collections. Low year-end cash and working-capital timing make the revolving facility and timely receivable collection relevant to liquidity.
- Interest-rate exposure: A $16.2 million portion of debt was covered by an interest-rate swap maturing in 2024; the remaining balance was exposed to rate changes. The company estimated a 1 percentage-point LIBOR increase would add about $0.3 million in annual interest expense.
- Legal and audit matters: DLH reported no pending or threatened litigation believed reasonably likely to materially affect results or financial position. The auditor issued unqualified opinions on the financial statements and internal controls, while identifying revenue recognition and workers’ compensation reserves as critical audit matters.
Investor verification points
- Track outcomes and timing for the VA pharmacy and logistics recompetes, including whether DLH remains prime or performs as a subcontractor.
- Assess the durability and margins of the business excluding the completed FEMA task orders, and compare operating cash flow with reported earnings.
- Monitor funded backlog conversion, new awards, customer concentration, and the effects of federal appropriations or continuing resolutions.
- Confirm revolver availability under its borrowing-base conditions, debt covenant headroom, scheduled debt service, and interest-rate exposure.
- Review future staffing, inflation, workers’ compensation reserve development, and any resulting effect on contract margins or goodwill valuations.