DLH Holdings Corp. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing is an annual report, not a standalone quarterly filing; fourth-quarter results are shown separately below. DLH provides technology-enabled health, human-services, research, and program-management services, deriving approximately 99% of revenue from U.S. federal agencies.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $160.4 million | $133.2 million | +20.4% |
| Income from operations | $10.0 million | $8.8 million | +13.5% |
| Operating margin | 6.2% | 6.6% | Down 0.4 percentage points |
| Net income | $5.3 million | $1.8 million | +$3.5 million |
| Diluted EPS | $0.41 | $0.14 | +$0.27 |
| EBITDA, non-GAAP | $13.9 million | $11.0 million | +26.3% |
| Cash flow from operations | $18.0 million | $14.1 million | +$3.9 million |
Revenue growth principally reflected the June 7, 2019 acquisition of Social & Scientific Systems (S3), which contributed approximately $24.3 million of revenue and $1.3 million of operating income after acquisition. Contract costs were 77.7% of revenue, down from 79.1%; reported net margin was approximately 3.3%, versus 1.4%.
Fourth-quarter FY2019 revenue was $54.2 million, versus $32.5 million in Q4 FY2018. Operating income was $3.4 million versus $2.8 million, while net income was $1.6 million versus $1.8 million; diluted EPS was $0.12 versus $0.14. FY2019 Q3 and Q4 include S3 results.
Cash, debt, and liquidity
- At September 30, 2019, cash was $1.8 million, current assets $26.8 million, and current liabilities $29.5 million.
- Gross term-loan principal was $56.0 million; the balance sheet reported net bank debt of $53.6 million after deferred financing costs. The loan is secured by substantially all company assets and matures June 7, 2024.
- The company had no revolver borrowings and reported $16.3 million of available borrowing capacity under a $25 million revolving facility, subject to borrowing conditions.
- Operating cash flow of $18.0 million funded part of the year’s investment and financing needs. Investing cash outflow was $67.5 million, primarily reflecting the S3 acquisition; financing cash inflow was $44.9 million. Year-end cash declined by $4.6 million.
- Management reported compliance with debt covenants and expected operating cash flow to support operations for at least twelve months from issuance of the statements. A $36 million interest-rate swap fixed a portion of the loan; the remaining debt remained exposed to rate movements.
Material changes, outlook, and risks
- S3 acquisition: Acquired for a final purchase price of approximately $70.1 million, financed primarily with a new $70 million senior credit facility. The acquisition added public-health research and analytics capabilities, and expanded goodwill and intangible assets. No goodwill impairment was recorded.
- Customer concentration: VA accounted for approximately 57% of FY2019 revenue, down from 63%; HHS accounted for 39%, up from 34%. Management expected HHS to become the largest customer in FY2020. Approximately 96% of revenue came from prime contracts.
- Contract renewals: VA pharmacy contracts representing about $52.5 million of FY2019 revenue were extended through October 2020 while procurement proceeded; the solicitation requires an SDVOSB prime, so DLH is participating as a subcontractor on a qualifying team. VA logistics contracts representing about $39.4 million were extended through June 2020, with a similar SDVOSB preference. The HHS Head Start contract generated $37.6 million and runs through April 2020, with an RFP expected in FY2020.
- Backlog: Total backlog was approximately $414.1 million at year-end, including $114.8 million funded and $299.3 million unfunded. Backlog increased from $172.2 million a year earlier, largely reflecting S3. Backlog is not assurance of future revenue, particularly where funding or options remain contingent.
- Outlook: Management expected FY2020 revenue mix of approximately 45% Defense and Veteran Health, 20% Human Services, and 35% Public Health and Life Sciences. It saw opportunities in VA and HHS programs and stated it did not expect budget negotiations to materially affect its current business base. These are expectations, not earnings guidance.
- Government funding and competition: Continuing resolutions may delay contract awards and program starts; federal agencies may reduce, terminate, or decline to renew contracts. Small-business and veteran-owned set-asides can limit DLH’s ability to compete as prime contractor. Procurement protests, contract concentration, and dependence on federal customers are significant risks.
- Other exposures: Debt covenants, interest rates, workforce availability and benefit costs, cybersecurity and protected health information, government audits, and potential goodwill impairment could affect results. The company reported no litigation it believed likely to have a material adverse effect.
- Unusual items: FY2019 included $1.4 million of S3 acquisition costs and higher interest expense associated with acquisition financing. FY2018 net income was reduced by a $3.4 million deferred-tax-asset write-down following the federal tax-rate change; this makes year-over-year GAAP net income growth less directly comparable.
Important facts for investors to verify
- Results and margins after a full year of S3 ownership, including integration progress and realization of expected strategic benefits.
- Outcomes and timing of the VA pharmacy and logistics recompetes, the Head Start solicitation, and DLH’s role and economics if contracts are awarded to SDVOSB primes.
- Funded backlog conversion, contract renewals, and the assumptions underlying the much larger unfunded backlog.
- Debt repayment, covenant headroom, excess-cash-flow prepayments, and interest-rate exposure beyond the $36 million swap notional.
- Whether federal appropriations, continuing resolutions, or set-aside policies affect program funding and DLH’s access to prime contracts.