DLH Holdings Corp. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing also reports unaudited fourth-quarter results. DLH provides healthcare, logistics and technical services to U.S. government agencies, principally through its wholly owned DLH Solutions subsidiary.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $60.5 million | $53.5 million |
| Gross margin | $9.0 million; 14.8% of revenue | $7.5 million; 14.0% |
| Operating income | $0.8 million | $0.2 million |
| Income (loss) before taxes | $0.8 million | $(0.2) million |
| Net income (loss) | $5.4 million | $(0.2) million |
| Adjusted EBITDA (non-GAAP) | $1.3 million | $0.6 million |
| Cash provided by operating activities | $1.7 million | $1.8 million |
Revenue grew 13.1%, primarily from new awards and expansion of existing programs. Gross margin improved 0.8 percentage points, reflecting new business and contract performance, partly offset by higher workers’ compensation costs. Net income included a $4.6 million non-cash tax benefit from releasing part of the deferred-tax-asset valuation allowance; it substantially exceeded pretax income.
Fourth quarter: Revenue was $15.6 million versus $14.0 million in FY2013 Q4; gross profit was $2.34 million versus $1.96 million; operating income was $205,000 versus $173,000. Net income was $4.78 million, including the $4.60 million tax benefit, compared with $9,000. Diluted EPS was $0.48 versus approximately $0.00.
At September 30, 2014, cash was $3.9 million, working capital was $0.7 million, total liabilities were $16.2 million, and shareholders’ equity was $13.8 million. There was no outstanding bank or other debt reported; the prior-year total debt balance was $1.3 million. The asset-based credit facility had up to $3 million current availability subject to eligible receivables, with approximately $1.1 million unused borrowing capacity and $1.4 million reserved for a letter of credit. Management stated available cash, credit, and expected operating cash flow should support operations for twelve months from the financial-statement date.
Material changes and business position
- DLH’s customer concentration remained high: the U.S. Government generated 100% of revenue and the Department of Veterans Affairs (DVA) generated approximately 96% in both FY2014 and FY2013.
- Backlog declined to approximately $184 million from $240 million. It included $17 million funded and $167 million unfunded; the latter depends on future funding, options, and contract performance.
- Healthcare Delivery Solutions generated 52% of revenue, versus 54% in FY2013; Logistics & Technical Services generated 48%, versus 46%.
- The company repaid its bank loan and settled convertible debentures during the year. Part of the $350,000 debenture principal converted into shares and the remaining $140,000 was repaid; associated warrants were exercised.
Outlook, risks, and unusual items
Management cited continued opportunity in veterans’ healthcare, health IT, and logistics, and plans to pursue organic growth, prime-contract awards, partnerships, and selective acquisitions. The company reported a continuing federal budget and procurement uncertainty, including the continuing resolution then in effect through December 11, 2014, and the possibility of constrained spending and sequestration. The filing provides no quantified revenue or earnings guidance.
- Customer and funding concentration: Dependence on the DVA and federal appropriations exposes results to budget changes, delayed awards or payments, contract reductions, non-renewals, and terminations.
- Contract and margin risks: Competitive bidding, protests, fixed-price performance obligations, use of lowest-price award methods, and labor and insurance costs may pressure margins and results.
- Legacy billing and tax matters: Approximately $9.3 million of unbilled DVA receivables relates to retroactive wage adjustments recognized in 2008, with approximately $8.7 million of associated accrued employee wages and benefits. DLH submitted a claim for a final DVA determination; expected collection timing was not assured. Estimated additional indirect costs and fees were $0.4–$0.6 million, subject to government review.
- Payroll tax contingency: A liability of approximately $1.4 million, including about $0.6 million of estimated interest and penalties, remained recorded. Resolution and any additional amounts were uncertain.
- Goodwill and taxes: No goodwill impairment was recorded; goodwill was $8.6 million. The company reported U.S. NOLs of approximately $40.8 million and state NOLs of $29.2 million, subject to limitations and expirations. Future effective tax expense may rise following the valuation-allowance release.
- Other developments: The DOJ declined to intervene in and the claim was dismissed concerning alleged Service Contract Act wage underpayments for 2003–2010. Chicago non-management employees voted for union representation after year-end; certification and bargaining were pending. Management did not expect a material operating impact.
Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2014. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Whether the DVA’s approximately 96% revenue contribution and high contract concentration have changed, and whether key contracts and options are funded and renewed.
- Collectability and timing of the $9.3 million retroactive DVA receivable, payment of related accrued wages, and the outcome of the additional-fee claim.
- Resolution and cash-flow implications of the $1.4 million payroll-tax liability.
- Actual liquidity available under the receivables-based credit facility, its renewal and covenant terms, and the effect of the letter-of-credit reserve.
- Whether operating profitability and cash generation can support growth after excluding the one-time $4.6 million tax benefit; also review diluted share-count effects from options, warrants, and stock awards.