DLH Holdings Corp. — Q1 FY2019 Form 10-Q
Business context and period. The quarter ended December 31, 2018. DLH provides technology-enabled health, human services, and readiness services to U.S. federal agencies; all revenue came from federal customers. The VA accounted for 68% of quarterly revenue and HHS 30%.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $33.752 million | $30.215 million |
| Gross margin | $7.786 million; 23.1% | $6.532 million; 21.6% |
| Operating income | $2.557 million; 7.6% | $1.146 million; 3.8% |
| Net income (loss) | $1.690 million; diluted EPS $0.13 | $(2.851) million; diluted EPS $(0.24) |
| EBITDA (non-GAAP) | $3.120 million | $1.652 million |
| Operating cash flow | $(1.756) million | $(0.394) million |
Revenue grew 11.7%, primarily from higher workload volumes on VA and HHS contracts. Gross margin increased 19.2%, with management citing improved revenue quality and greater contribution from internal resources. G&A declined 4.4%, mainly due to lower non-employee stock compensation. The prior-year loss included a $3.4 million discrete tax charge to write down deferred tax assets following the 2017 Tax Act; the current-quarter effective tax rate was 29%.
Financial position and liquidity
At December 31, 2018, cash was $4.325 million, down $2.030 million from September 30. Current assets were $19.715 million and current liabilities $15.464 million. Receivables rose to $14.123 million from $10.280 million; the increase in receivables was a significant operating cash use. Capital expenditures were nil in the quarter.
Term-loan principal was $7.395 million (carrying amount net of financing costs: $6.718 million); the loan bears interest at LIBOR plus 3.0% and matures May 1, 2021. The $10 million revolver was undrawn; the filing states borrowing availability of $8.7 million, subject to eligible receivables. DLH reported compliance with its loan covenants and said planned operating cash flow should support operations for the next 12 months. Debt is secured by substantially all company assets.
Outlook, risks, and notable items
- VA contract renewals: Nine VA pharmacy contracts, representing about 58% of the company’s VA business, were under extensions through April 30, 2019 pending a new procurement. The RFP requires an SDVOSB prime contractor, preventing DLH from bidding as prime; DLH joined an SDVOSB team as a subcontractor. Seven additional VA logistics contracts were due to expire in May 2019 and could face similar set-aside requirements. Management expected further extensions but disclosed uncertainty over procurement timing and outcomes.
- Customer concentration: The VA and HHS together generated about 98% of quarterly revenue. The HHS Head Start contract contributed approximately 28% of revenue and runs through April 2020, including option periods. Losing or materially reducing work with either major customer could adversely affect results, cash flow, and financial condition.
- Federal funding: Management said key programs had bipartisan support and expected no material impact on the FY2019 business base from federal budget uncertainty. The filing noted that a temporary funding measure had been enacted through February 15, 2019, while VA, HHS, and DoD had been funded for FY2019.
- Guidance: The filing provides no quantified financial guidance. Management described opportunities in federal health and human services and continued consideration of strategic acquisitions.
- Other: Adoption of ASC 606 had an immaterial impact. Management reported no litigation believed likely to have a material adverse effect, no material change in risk factors, and effective disclosure controls.
Important facts for investors to verify
- Progress, extensions, and final awards for the VA pharmacy and logistics procurements, including DLH’s expected role as a subcontractor.
- Whether higher receivables convert to cash and whether operating cash flow improves.
- Performance and renewal prospects for the VA and HHS contracts, given their concentration in revenue.
- Revolver availability, debt repayment requirements, and continued compliance with financial covenants.
- Whether federal funding or procurement delays affect contract workload or payment timing.