DLH Holdings Corp. — Form 10-Q Summary
Business context and reporting period
For the fiscal quarter and six months ended March 31, 2015. 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 (VA) accounted for 96% of six-month revenue. Healthcare Delivery Solutions and Logistics & Technical Services each contributed 52% and 48% of six-month revenue, respectively.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2015 / 2014 | $15.893m / $14.745m | $31.575m / $29.222m |
| Gross margin, 2015 / 2014 | $2.730m / $2.199m; 17.2% / 14.9% of revenue | $5.263m / $4.311m; 16.7% / 14.8% of revenue |
| Operating income, 2015 / 2014 | $515k / $225k | $774k / $291k |
| Net income (loss), 2015 / 2014 | ($82k) / $197k | $52k / $330k |
| Diluted EPS, 2015 / 2014 | ($0.01) / $0.02 | $0.01 / $0.03 |
| Operating cash flow, 2015 / 2014 | Six months: $587k / $258k |
Quarterly revenue increased 7.8%; six-month revenue increased 8.1%, primarily from contracts awarded in 2014 and expansion of existing contracts. Gross margin improved on better contract performance and higher-margin new business. Six-month Adjusted EBITDA, a non-GAAP measure, was $1.161m versus $638k.
At March 31, cash was $4.222m, working capital approximately $0.9m, and total debt outstanding was zero. The asset-based credit facility had approximately $2.6m of unused availability, including a $1.4m letter-of-credit reserve and $1.2m unused loan capacity; its stated interest rate was 4.0%. Six-month investing cash use was $98k and financing cash use was $175k, including $175k for shares repurchased and canceled. Cash increased $314k to $4.222m.
Material changes and unusual items
- Quarterly net loss and lower six-month net income principally reflected a $629k non-cash charge from resolving a legacy retroactive-pay claim. The March 30 mutual release with the VA ended the matter: DLH removed $9.306m of receivables and $8.677m of accrued payroll, recording the net expense in other expense. Excluding this charge, management reported quarterly net income of about $0.5m and six-month net income of about $0.7m.
- Current assets and current liabilities fell substantially from September 30, 2014, mainly following removal of the legacy claim balances. Reported accounts receivable declined from $12.372m to $3.231m, and accrued payroll from $11.465m to $2.824m.
- Quarterly G&A increased $249k year over year; six-month G&A increased $481k, attributed mainly to planned spending to manage and grow the contract base.
Outlook, risks and contingencies
Management said cash, available credit and planned operating cash flow should support operations for 12 months from the financial-statement date; no formal earnings guidance was provided. The strategy emphasizes growth in federal health services, including telehealth, medication management and health IT, alongside organic growth and selective transformative opportunities. DLH submitted a team bid for the VA’s T4NG contract vehicle; awards were expected in December 2015, with performance expected to begin in July 2016.
- Customer concentration is substantial: the VA generated 96% of six-month revenue. Management warned that losing or materially reducing the VA relationship could adversely affect results, cash flows and financial condition.
- Federal budget cuts, delayed or reduced task orders, contract termination, and increased use of lowest-price procurement could pressure revenue and margins.
- DLH carried an estimated $1.5m payroll-tax liability related mainly to former operations, including approximately $659k of accrued penalties and interest. Management believes the amount is fully accrued, but resolution is uncertain and additional amounts or cash-flow effects remain possible.
- Workers’ compensation claims-development liability was $1.2m, versus $0.8m at September 30, 2014. Management reported no known litigation reasonably likely to have a material adverse effect.
- Subsequent events included NLRB affirmation of a Chicago union election, with certification and bargaining pending, and an Atlanta office lease for 8.7 years with expected occupancy in August 2015. Management did not expect the union matter to materially affect future results.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvements persist as contracts progress, and whether the VA concentration is reduced.
- How the VA T4NG bid and other contract opportunities develop, including award timing and expected task-order contribution.
- Availability and renewal terms of the credit facility, including the July 29, 2015 renewal date and borrowing-base limitations.
- Ultimate resolution and cash impact of the payroll-tax liability, and the assumptions supporting workers’ compensation reserves.
- Lease costs, rent concessions and related commitments, and the eventual impact, if any, of union certification and collective bargaining.