DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; filed August 5, 2015. Amounts below are in millions unless otherwise noted.
Business context
DLH provides healthcare, logistics and technical services to U.S. government agencies. All revenue came directly or indirectly from the federal government; the Department of Veterans Affairs accounted for 95% of nine-month revenue, versus 97% a year earlier. Nine-month revenue mix was 53% Healthcare Delivery Solutions and 47% Medical Logistics & Technical Services.
Financial performance
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Nine months ended June 30, 2015 | Nine months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $16.781 | $15.692 | $48.357 | $44.914 |
| Gross margin | $3.038; 18.1% | $2.308; 14.7% | $8.302; 17.2% | $6.619; 14.7% |
| Operating income | $0.763; 4.5% | $0.268; 1.7% | $1.538; 3.2% | $0.559; 1.2% |
| Net income | $0.437 | $0.251 | $0.489 | $0.582 |
| Diluted EPS | $0.04 | $0.03 | $0.05 | $0.06 |
| Operating cash flow | Not separately stated | Not separately stated | $1.182 | $1.538 |
Quarterly revenue increased 6.9%; management attributed growth to contracts awarded in 2014 and expansion of existing contracts. Gross margin improvement reflected better contract performance and higher margins on new work. G&A rose $0.257 million in the quarter, primarily from planned costs to manage and grow the contract base.
Nine-month revenue increased 7.7%, and operating income rose $0.979 million. Despite stronger operating results, nine-month GAAP net income declined, principally because of a $0.629 million non-cash, non-operating pretax charge related to resolving a retroactive payment claim. Management’s pro forma presentation excludes the after-tax impact: nine-month pro forma net income was $0.866 million and diluted EPS was $0.09, versus GAAP net income of $0.489 million and diluted EPS of $0.05.
Balance sheet, cash flow and liquidity
At June 30, 2015, cash was $4.738 million, working capital was approximately $1.6 million, and total liabilities were $6.761 million. No amount was outstanding under the credit facility. The facility’s current maximum availability was $3 million, subject to eligible receivables; approximately $2.5 million was available, including a $1.4 million letter-of-credit reserve and $1.1 million of unused borrowing capacity. The stated interest rate was 4.0%.
For the nine months, operating cash flow was $1.182 million, investing cash outflow was $0.169 million, and financing cash outflow was $0.183 million, including $0.183 million used to repurchase and cancel shares. Cash increased $0.830 million to $4.738 million. The company reported no loan payable at quarter-end. Contractual obligations included $2.333 million of operating lease payments; the company signed a new 8.7-year Atlanta lease, with occupancy expected in September 2015.
Accounts receivable fell to $3.079 million from $12.372 million at September 30, 2014, largely because the retroactive claim was resolved. Accrued payroll declined to $2.109 million from $11.465 million for the same reason. Management said cash, eligible credit availability and expected operating cash flow should support operations for twelve months from the financial-statement date.
Outlook, risks and unusual items
- Growth strategy: Management plans to expand federal health services, including behavioral health, telehealth, medication management and health IT; pursue new contract vehicles and teaming opportunities; and consider selective joint ventures or acquisitions. No quantified company guidance was provided.
- Customer and funding concentration: The company depends heavily on the DVA; losing or materially reducing that relationship could adversely affect results, cash flows and financial condition. Federal budget cuts, delayed orders, and greater use of lowest-price contracting could also pressure revenue and margins.
- Retroactive payment claim: In March 2015, DLH and the DVA mutually released claims relating to historical wage and benefit matters. The company removed $9.306 million of receivables and $8.677 million of accrued payroll, recording a $0.629 million non-cash charge. This affected the nine-month comparison but not the June quarter’s reported income.
- Payroll tax matter: DLH had approximately $1.493 million accrued for disputed IRS payroll-tax matters, including estimated penalties and interest of about $0.674 million. Management believes the liability is fully accrued, but additional interest or penalties may arise and a payment plan is not assured.
- Other risks and items: Workers’ compensation claims liability was $1.1 million, compared with $0.8 million at September 30, 2014. Management reported no litigation believed likely to have a material adverse effect, no material risk-factor changes from the prior 10-K, and no subsequent events requiring disclosure. Goodwill was $8.595 million; no impairment indicator was identified for the nine-month period.
Most important facts for investors to verify
- Whether revenue growth and gross-margin gains continue, especially on new and existing contracts.
- How concentrated future revenue remains in the DVA and whether key awards are renewed or expanded.
- Cash generation and actual borrowing availability under the receivables-based facility.
- Final resolution and cash consequences of the IRS payroll-tax matter, including potential additional penalties and interest.
- The treatment and comparability of the $0.629 million retroactive-claim charge when assessing underlying earnings.
- Lease commencement, costs and ongoing obligations under the new Atlanta lease.