Business context and reporting period
DLH Holdings Corp. provides technology-enabled health and human services, program management, public health research and analytics, and related services, primarily to U.S. federal agencies. This Form 10-K covers the fiscal year ended September 30, 2020; the fourth quarter ended that date. Approximately 98% of revenue came from federal agencies. The VA and HHS represented 48% and 45% of annual revenue, respectively.
Financial performance and liquidity
Unless otherwise noted, amounts are in U.S. dollars.
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $209.2 million | $160.4 million | +30.4% |
| Operating income / margin | $13.5 million / 6.4% | $10.0 million / 6.2% | +$3.5 million |
| Net income | $7.1 million | $5.3 million | +$1.8 million |
| Diluted EPS | $0.54 | $0.41 | +$0.13 |
| EBITDA (non-GAAP) | $20.5 million | $13.9 million | +47.0% |
| Cash from operations | $19.5 million | $18.0 million | +$1.4 million |
Revenue growth primarily reflected inclusion of acquired Social & Scientific Systems (S3) for a full year in FY2020. Operating costs rose 30.1%; contract costs increased with revenue, while general and administrative costs grew more slowly. Net interest expense rose to $3.4 million from $2.5 million, primarily due to acquisition financing. The effective tax rate was approximately 29% in both years.
Fourth-quarter FY2020 revenue was $50.7 million, operating income $2.7 million, net income $1.4 million, and diluted EPS $0.10. In Q4 FY2019, the respective figures were $54.2 million, $3.4 million, $1.6 million, and $0.12.
Operating cash flow was $19.5 million; investing used $32.8 million, mainly for IBA; and financing provided $12.9 million. Year-end cash was $1.4 million. Gross term-loan principal was $70.0 million, secured by substantially all company assets; the balance-sheet debt, net of financing costs, was $67.3 million. The $25.0 million revolver had no balance drawn, with $24.8 million available subject to borrowing conditions. Current liabilities exceeded current assets by approximately $10.6 million. Management said operating cash flow and available borrowing capacity were expected to support operations for at least 12 months.
Material changes versus the prior year
- Revenue mix shifted: Public Health/Life Sciences increased to 31% of revenue from 17%, while Defense/VA declined to 49% from 58%; Human Services and Solutions was 20% versus 25%.
- HHS revenue grew to $95.0 million from $62.0 million; VA revenue rose to $100.2 million from $91.9 million. Customer concentration remained high.
- Cost-reimbursable revenue increased to $58.1 million from $23.2 million; time-and-materials revenue was $147.5 million versus $134.1 million. Prime-contractor revenue was $193.4 million, or about 92% of total.
- IBA was acquired on September 30, 2020 for a preliminary net purchase price of $32.7 million, funded primarily with new borrowings. Its preliminary purchase accounting included $14.4 million of goodwill; acquired intangible valuations remained subject to revision. The acquisition occurred at year-end, so FY2020 results do not reflect a full-year IBA contribution.
- Total backlog rose to approximately $688.4 million from $414.1 million, including $121.3 million funded and $567.1 million unfunded. Backlog is not assured revenue.
Outlook, risks and unusual items
Management reported continued demand for most services during COVID-19, with services generally deemed essential, but noted travel-related project postponements and possible disruption, reduced demand, or changes in federal spending priorities. It anticipated potential additional CDC and NIH demand but could not predict the pandemic’s duration or effects. Management did not expect a material FY2020 impact and reported no material COVID-related liquidity constraint at the filing date.
Management viewed federal budget conditions as stable under the 2019 budget agreement, while warning that the continuing resolution expiring December 11, 2020 could delay awards or lead to a shutdown. The VA had extended seven logistics contracts through June 2021; a renewal solicitation was open to full and open competition. Nine VA pharmacy contracts, generating about $56.5 million in FY2020 revenue, were operating under a bridge contract through October 2021. The government canceled the prior renewal solicitation, and its future procurement approach was not yet announced. The company expected further extensions given procurement timing.
Key risks include dependence on federal contracting and concentrated VA/HHS customers and contracts; recompete losses, bid protests, small-business set-asides, appropriations delays, and termination rights; acquisition integration and goodwill impairment; employee and subcontractor availability; cybersecurity and handling of protected information; and debt service and covenant compliance. The company reported compliance with its loan covenants. Term-loan principal amortization begins in December 2020, with scheduled annual principal payments of $7.0 million in FY2021 and FY2022 and $8.75 million in each FY2023–FY2025, plus potential excess-cash-flow prepayments. A $36 million interest-rate swap partially hedges variable-rate exposure; the filing estimates a 1 percentage-point LIBOR increase would raise annual interest expense by $0.2 million.
The company reported no goodwill impairment, no material off-balance-sheet arrangements, and no litigation it believed reasonably likely to materially affect results, financial position, or cash flows. The independent auditor gave an unqualified opinion on the financial statements; management reported effective internal control over financial reporting, which was not subject to auditor attestation.
Important facts for investors to verify
- Progress, award outcomes, and extension terms for the VA pharmacy and logistics contract recompetes, and the revenue exposure if awards are lost or restricted to eligible small-business primes.
- How much of the $688.4 million backlog—particularly its $567.1 million unfunded portion—converts into funded work and revenue.
- IBA’s final purchase-price allocation, contribution to results, and integration performance; assess leverage and acquisition-related amortization alongside reported non-GAAP EBITDA.
- Debt repayment capacity, covenant headroom, borrowing-base availability on the revolver, and effects of interest rates and the LIBOR transition.
- Whether COVID-19, federal budget decisions, or client demand changes materially affect service delivery, contract funding, cash flow, and goodwill valuations.