DLH Holdings Corp. — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended June 30, 2012; fiscal year ends September 30. Amounts below are in millions of dollars unless stated otherwise. The filing is unaudited. DLH provides healthcare, logistics, technical and staffing services to U.S. government agencies, primarily the Departments of Veterans Affairs and Defense. It changed its name from TeamStaff, Inc. in June 2012.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2012 | $12.618 | $36.732 |
| Revenue, 2011 | $10.579 | $31.598 |
| Gross profit, 2012 / 2011 | $1.590 / $1.513 | $4.455 / $4.339 |
| Gross margin, 2012 / 2011 | 12.6% / 14.3% | 12.1% / 13.7% |
| Operating loss, 2012 / 2011 | $(0.625) / $(0.275) | $(1.399) / $(0.631) |
| Net loss, 2012 / 2011 | $(0.568) / $(0.140) | $(1.672) / $(0.660) |
| Basic and diluted loss per share | $(0.09) / $(0.02) | $(0.27) / $(0.12) |
Revenue increased 19.3% for the quarter and 16.2% year to date, primarily from new business awards. Gross profit rose only modestly as competitive pricing and lower average billing rates reduced margins. Higher general and administrative costs—including proposal and business-development activity, new-contract startup costs, stock compensation and $0.236 million of severance—contributed to wider operating losses. Adjusted EBITDA, a non-GAAP measure, was $(0.498) million for the quarter and $(1.003) million year to date, versus $(0.225) million and $(0.439) million, respectively.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash use was $2.238 million, investing cash use was $0.137 million, and financing provided $4.739 million. Cash increased to $3.127 million from $0.763 million at September 30, 2011.
- At June 30, current assets were $16.397 million and current liabilities $17.516 million, a working-capital deficit of approximately $1.1 million. Accumulated deficit was $67.1 million; shareholders’ equity was $8.213 million.
- Reported debt and related obligations included a $1.464 million revolving-bank balance, $0.711 million notes payable, and a $0.156 million net convertible debenture. The debenture has $0.350 million principal, bears 10% interest, and is due in fiscal 2014. The company also reported $0.130 million of derivative liabilities.
- The lender’s facility has a stated maximum of $6 million, but higher borrowing limits are conditional; the filing says the current maximum sublimit is $3 million. Unused availability is reported as $0.588 million in the liquidity discussion and debt note, but as $0.302 million elsewhere in MD&A; the filing does not provide a clear reconciled value.
- A June rights offering raised $4.2 million gross by issuing 3,230,769 shares at $1.30 per share. Wynnefield-affiliated entities bought 2,840,251 shares; their reported ownership rose from about 21% to about 44%. Shares outstanding were 9,305,702 as of August 6, 2012.
Outlook, risks and unusual items
- Management said available cash, eligible-receivables-based borrowing, expected operating cash flow, anticipated collection of retroactive billings, disputed or non-cash-settled liabilities, and cost reductions should support operations for 12 months from the financial-statement date. This depends on those assumptions; management said shortfalls could require further spending cuts or new capital, potentially diluting shareholders. No numerical earnings or revenue guidance was provided.
- All revenue is from federal agencies. DVA contracts are particularly significant: a blanket purchase agreement has a ceiling of approximately $145 million through October 2016, but the ceiling is not a guarantee of work. The company warned that reduced or lost DVA business could materially harm results and liquidity. Federal budget constraints and delayed awards are also risks.
- DLH had approximately $9.3 million of unbilled DVA receivables related to historical wage-determination adjustments, with approximately $8.7 million of related accrued employee salary and benefit liabilities. DVA modifications were received in April 2012; collection and employee payments depend on the billing process. Management estimated possible additional indirect costs and fees of $0.4–$0.6 million, subject to government review.
- The company disclosed a newly advised U.S. Attorney claim alleging prevailing-wage violations during 2003–2010. Details had not been provided, so DLH could not assess the merits or potential impact. Separately, it recorded a $1.3 million liability for IRS payroll-tax matters, including approximately $0.5 million of claimed interest and penalties; resolution and any payment plan remain uncertain.
- A settlement guarantee related to former RS Staffing owners was recorded at $0.711 million at June 30. After quarter-end, management estimated the remaining exposure would not exceed $0.356 million, subject to reconciliation. A material impairment of $8.6 million of goodwill is possible in a future period if contract prospects or valuation assumptions deteriorate; no impairment was recorded at June 30.
- The company appointed a new CFO effective June 25, 2012. Management reported disclosure controls were effective at a reasonable-assurance level and no other material change in internal controls during the quarter.
Important facts for investors to verify
- Reconcile the conflicting disclosed revolving-credit availability ($0.588 million versus $0.302 million) and confirm borrowing conditions and covenant compliance.
- Track collection and billing of the $9.3 million retroactive DVA receivable, related employee obligations, and any approval of the estimated additional fees.
- Monitor DVA contract renewals, task-order volumes and actual work under the $145 million ceiling, as well as federal budget effects.
- Assess the potential financial and operational consequences of the U.S. Attorney prevailing-wage claim and the IRS payroll-tax matters.
- Confirm the final RS Staffing settlement-guarantee exposure and the impact of the rights offering on dilution and shareholder concentration.