DLH Holdings Corp. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. The filing also provides unaudited fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
DLH provides technology-enabled health, human-services, program-management, logistics, and public-health research services, primarily to U.S. federal agencies. Approximately 99% of revenue came from federal customers. The company had more than 2,300 employees and operated in over 30 U.S. locations and one overseas location. Its September 2020 acquisition of Irving Burton Associates (IBA) contributed to FY2021 growth.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $246.1 | $209.2 | +$36.9; 17.6% |
| Income from operations | $17.2 | $13.5 | +$3.8 |
| Operating margin | 7.0% | 6.4% | +0.6 percentage points |
| Net income | $10.1 | $7.1 | +$3.0 |
| Net margin | 4.1% | 3.4% | +0.7 percentage points |
| Diluted EPS | $0.75 | $0.54 | +$0.21 |
| EBITDA (non-GAAP) | $25.3 | $20.5 | +$4.9; 23.8% |
| Operating cash flow | $45.7 | $19.5 | +$26.2 |
Revenue growth included $30.2 million from IBA, included for a full fiscal year, with the balance attributed to expansion on existing contracts and new awards. Contract costs rose $31.0 million, while general and administrative costs increased $0.9 million but declined as a share of revenue, supporting operating leverage. Net interest expense increased $0.3 million to $3.8 million, principally reflecting debt used to finance IBA.
FY2021 quarterly revenue was $65.2 million and net income was $2.9 million in Q4, compared with $50.7 million and $1.4 million, respectively, in FY2020 Q4. Q4 operating income was $4.0 million, versus $2.7 million in the prior-year quarter.
Revenue mix and concentration
- By market: Defense/VA revenue was $141.4 million (57% of total), Human Services and Solutions $37.3 million (15%), and Public Health/Life Sciences $67.4 million (28%).
- By customer: VA revenue was $110.1 million (45%); HHS $91.5 million (37%); and DoD $30.9 million (13%). DoD revenue rose from $1.3 million in FY2020.
- By contract type: time-and-materials revenue was $185.7 million, cost-reimbursable $48.1 million, and firm-fixed-price $12.3 million.
- Total backlog was approximately $651.5 million, down from $688.4 million. It included $191.0 million funded and $460.5 million unfunded; backlog is not assurance of future revenue.
Cash, debt, and liquidity
- Cash was $24.1 million at year-end, compared with $1.4 million a year earlier. Operating cash flow was $45.7 million; the company attributed much of the increase to improved collections and an advance payment for FEMA emergency-resource deployment.
- Investing activities used $0.04 million, versus $32.8 million in FY2020, when the IBA acquisition was completed. Financing activities used $22.9 million, including $23.3 million of debt repayments.
- Term-loan principal was $46.8 million; the $25.0 million revolving facility was undrawn at year-end, with $25.0 million reported as available subject to facility conditions. The term loan matures September 2025 and is secured by substantially all company assets.
- Management reported compliance with debt covenants and expected operating cash flow to support operations for at least twelve months from the financial-statement issuance date. No current portion of debt was reported on the balance sheet at September 30, 2021.
- Operating lease liabilities totaled $21.6 million. Contractual obligations included $46.8 million of debt and $27.9 million of future minimum lease payments.
Material developments, outlook, and risks
- IBA contributed $30.2 million of FY2021 revenue. Management cited integration and acquisition benefits as growth contributors; goodwill was $65.6 million and no impairment was recorded.
- Two FEMA task orders awarded near year-end had a stated ceiling of approximately $107 million over three-month base periods, expected to be largely earned in FY2022 Q1. A one-month option worth approximately $35 million was exercised and expected to affect Q2. Management estimated an operating margin of approximately 5% on these task orders and said advance payments meant they were not expected to consume operating cash flow. These are task-order ceilings and options, not guaranteed revenue.
- Nine VA pharmacy-services contracts, which generated approximately $62.8 million in FY2021, were operating under a bridge contract through October 2022. The government canceled the prior solicitation and had not announced a future procurement strategy; further extensions were expected by management.
- Seven VA logistics contracts generated approximately $47.2 million in FY2021. A follow-on award was protested and canceled; the existing contract was extended through November 2022 while the government addresses procurement-process concerns. Management expected a new award after that process, but this was not assured.
- Management said it did not expect a material adverse COVID-19 impact in the next fiscal year, while noting uncertainty, possible service disruptions, travel-related delays, and the potential effects of federal vaccination requirements on staffing and performance.
- Management described federal health budgets as supportive of company markets but warned that continuing resolutions can delay program starts and awards. No formal consolidated revenue or earnings guidance was provided in the filing.
- Key risks include reliance on federal work and a small number of VA/HHS contracts, recompete and bid-protest outcomes, small-business set-asides that may limit prime-contract eligibility, federal appropriations and termination rights, personnel availability, cybersecurity, acquisition integration, and debt covenant and interest-rate exposure. A 1 percentage-point LIBOR increase was estimated to add about $0.2 million of annual interest expense.
- The independent auditor issued an unqualified opinion on the financial statements. Revenue recognition and workers’ compensation claims liabilities were identified as critical audit matters. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Track the VA pharmacy and logistics procurement plans, bridge-contract extensions, protests, and ultimate recompete awards.
- Confirm actual FEMA task-order revenue, exercised options, realized margins, and cash collection against stated ceilings and management expectations.
- Assess how much reported operating cash flow reflects recurring collections versus the large year-end deferred-revenue/contract-startup advance.
- Monitor funded versus unfunded backlog conversion, customer concentration, debt repayment, covenant headroom, and the effects of benchmark-rate changes.
- Review the assumptions underlying contract revenue estimates, the $7.0 million workers’ compensation liability, and goodwill valuation.