DLH Holdings Corp. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; unaudited. Comparisons are with the three months ended December 31, 2019 unless otherwise noted. DLH provides technology-enabled health and human services, deriving approximately 99% of revenue from U.S. federal agencies. The quarter includes revenue from Irving Burton Associates (IBA), acquired September 30, 2020.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $57.9 million | $52.2 million |
| Income from operations | $3.6 million; 6.3% margin | $3.1 million; 6.0% margin |
| Net income | $1.8 million | $1.6 million |
| Diluted EPS | $0.13 | $0.12 |
| EBITDA (non-GAAP) | $5.7 million | $5.0 million |
| Cash from operating activities | $(8.5) million | $(2.9) million |
Revenue increased 10.7%, primarily from $7.0 million of IBA revenue, partly offset by lower organic revenue, particularly travel reimbursements. Contract costs rose $4.7 million, largely with IBA; G&A increased $0.2 million. Operating margin improved 0.3 percentage points and net margin was 3.1%, versus 3.0%. Interest expense rose to $1.1 million from $0.9 million, primarily due to acquisition financing. The effective tax rate was 29% in both periods.
Operating cash use increased mainly because of higher accounts receivable, including a $12.3 million quarterly increase, which management attributed to the federal continuing resolution and transitions in contract payment offices. Investing used $0.1 million. Financing provided $7.6 million, including $9.2 million of net revolver borrowing and $1.75 million of term-loan repayments. Cash declined to $0.4 million from $1.4 million at September 30, 2020.
Balance sheet, debt and liquidity
At December 31, 2020, accounts receivable was $44.9 million, including $15.6 million of contract assets, versus $32.5 million of receivables at September 30. No doubtful-account allowance was recorded. Current liabilities were $55.4 million and current assets $48.7 million.
Debt principal was $77.4 million: a $68.3 million secured term loan and $9.2 million drawn on a $25 million revolving facility. Debt net of deferred financing costs was $74.8 million. The company reported $13.9 million of unused revolver capacity in MD&A; a separate note describes $25.0 million of borrowing availability based on eligible receivables, so the precise available amount merits confirmation. Debt matures September 30, 2025, bears interest at LIBOR plus 3.5% at the reported terms, and is secured by substantially all company assets. DLH stated it was compliant with its covenants, including leverage and fixed-charge coverage requirements. Operating lease liabilities totaled $23.1 million.
Business developments, outlook and risks
- VA revenue was $27.6 million (48% of total), HHS $20.2 million (35%), and Department of Defense $7.0 million (12%). The VA share increased from 46% a year earlier; HHS declined from 46%.
- VA pharmacy contracts representing about $15.9 million of quarterly revenue were extended through October 2021; the government canceled the prior renewal RFP and had not announced its future procurement approach. VA logistics contracts representing about $11.8 million were extended through June 2021; a new full-and-open procurement was issued.
- Backlog was approximately $665.2 million, down from $688.4 million at September 30, 2020, including $103.9 million funded and $561.3 million unfunded. Backlog is an estimate and does not guarantee future revenue.
- Management said COVID-19 had caused some travel and project disruptions but had not materially affected results to date; it did not expect a material impact for the fiscal year and anticipated liquidity sufficient for 12 months. It also noted risks from prolonged pandemic effects, federal budget or priority changes, contract losses or procurement delays, small-business set-aside rules, and acquisition integration. These statements are expectations, not guarantees.
- Management intended to resume debt prepayments in future quarters, subject to available cash. No specific revenue or earnings guidance was provided.
- DLH reported no litigation it believed reasonably likely to have a material adverse effect and no goodwill impairment for the quarter. IBA purchase-price valuation adjustments reduced goodwill by $1.7 million.
Important facts for investors to verify
- Collection timing for the sharp rise in receivables and contract assets, and whether operating cash flow normalizes.
- Outcomes and timing of the VA pharmacy and logistics contract procurements, extensions, and any effects on revenue.
- Actual revolver availability under borrowing-base conditions, debt repayment requirements, and continued covenant compliance.
- IBA integration, contribution to organic growth and profitability, and any further acquisition valuation adjustments.
- Backlog conversion and the effects of VA/HHS customer concentration, federal budget priorities, and small-business set-aside rules.