DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Amounts are in millions of dollars, except per-share data. DLH provides technology-enabled health, human services, logistics, and readiness services to U.S. federal agencies.
Financial results
| Metric | Three months ended Mar. 31, 2019 | Prior-year quarter | Six months ended Mar. 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $33.756 | $34.401 | $67.508 | $64.616 |
| Gross margin | $8.074 (23.9%) | $7.448 (21.7%) | $15.861 (23.5%) | $13.980 (21.6%) |
| Operating income | $2.326 | $2.204 | $4.883 | $3.350 |
| Net income (loss) | $1.265 | $1.316 | $2.955 | $(1.535) |
| Diluted EPS | $0.10 | $0.10 | $0.23 | $(0.13) |
| EBITDA, non-GAAP | $2.886 | $2.764 | $6.006 | $4.416 |
- Quarterly performance: Revenue fell 1.9%, mainly due to lower workload volumes on HHS contracts. Gross margin increased 8.4% as direct expenses declined faster than revenue, which management attributed partly to a higher contribution from internal resources. G&A rose 10.8%, principally from corporate development costs. Net income decreased slightly, reflecting higher G&A and a debt-financing-cost write-off.
- Year-to-date performance: Revenue rose 4.5%, mainly from increased VA and HHS workload. Gross margin increased 13.5%; operating income rose to $4.883 million. Net income improved substantially from the prior-year loss, largely because the prior period included a one-time $3.365 million deferred-tax-asset write-down following the 2017 Tax Act. Excluding that item, the filing reports prior-year adjusted net income of $1.996 million versus $2.955 million in 2019.
- Cash flow and liquidity: Six-month operating cash flow was $6.779 million, compared with $3.996 million a year earlier. Investing used $0.004 million and financing used $7.669 million, including $7.708 million of senior-debt repayments. Cash declined from $6.355 million at September 30, 2018 to $5.461 million at March 31, 2019. Current assets were $16.366 million and current liabilities $16.522 million; working capital was therefore slightly negative.
- Debt: The $25 million original term loan was fully repaid by March 31, 2019; no term-loan or revolver balance was outstanding. The company reported a secured revolving facility with a $10 million ceiling, subject to borrowing conditions, and said it was in covenant compliance. The filing gives inconsistent availability figures: it states total borrowing availability of $7.2 million, but also describes $8.3 million unused capacity plus a $1.1 million standby letter of credit. Verify the actual available amount.
- Other balance-sheet items: Total assets were $59.527 million and shareholders’ equity was $42.804 million. Goodwill was $25.989 million, with no impairment identified for the six-month period. Deferred tax assets were $3.160 million. Accrued workers’ compensation liability increased to $3.5 million from $2.6 million.
Business, outlook, and risks
- All revenue is from federal agencies. For the six-month period, the VA represented approximately 67% of revenue and HHS approximately 31%. Approximately 97% of current contract revenue was time-and-materials. This customer and contract concentration makes results sensitive to federal awards, workload, and funding.
- Nine VA pharmacy contracts, representing approximately 58% of the company’s current VA business base, were operating on extensions through October 2019 pending a recompete. The solicitation requires an SDVOSB prime contractor, so DLH cannot bid as prime; it joined an SDVOSB team as a subcontractor and expects to perform a significant share if its partner wins. Seven VA logistics contracts were expected to be extended through November 2019 and may face similar set-aside requirements. Award timing, extensions, and protests remain uncertain.
- The HHS Head Start contract runs through April 2020, including option periods. Management states that losing or materially reducing VA or HHS work could materially adversely affect operations, cash flows, and financial condition.
- Congress funded affected agencies through September 30, 2019. Management said it did not expect material impact from delays in the fiscal 2020 federal budget, while noting negotiations could be prolonged and short-term shutdowns after September 30 were possible.
- Management stated that planned operating cash flow should support operations for twelve months from issuance of the statements. No quantitative revenue or earnings guidance was provided. The company continued to consider strategic acquisitions and cited potential opportunities from larger contractors’ divestitures, but no transaction was announced.
- Unusual items include the approximately $0.4 million write-off of remaining deferred financing costs when the term loan was repaid, increasing reported interest expense. The prior-year tax-asset write-down is non-recurring and materially affects year-over-year net-income comparability.
- The filing reported no known pending or threatened litigation reasonably likely to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Current status, timing, and outcome of the VA pharmacy recompete and related SDVOSB teaming arrangements, extensions, and any protests.
- Actual revolver borrowing availability, given the inconsistent availability and standby-letter-of-credit figures in the filing.
- Whether VA and HHS workload, contract renewals, and federal funding sustain revenue and margins after the reported period.
- Cash generation and liquidity after term-loan repayment, including the effect of the slightly negative working capital position and scheduled lease obligations.
- Year-over-year earnings comparisons adjusted for the prior-year tax charge and the current-period financing-cost write-off.