DLH Holdings Corp. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended March 31, 2013. Financial statements are unaudited; amounts below are in U.S. dollars. Unless noted otherwise, figures are in millions.
Business context
DLH provides healthcare, logistics and technical, and staffing services to the U.S. government. The federal government accounted for all revenue; the Department of Veterans Affairs (DVA) generated approximately 97% of revenue in the quarter and first half. One DVA blanket purchase agreement represented about 50% of revenue.
Financial performance and liquidity
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $13.007 | $12.619 | $26.002 | $24.114 |
| Gross profit | $1.771 | $1.298 | $3.560 | $2.865 |
| Gross margin | 13.6% | 10.3% | 13.7% | 11.9% |
| Operating income (loss) | $0.009 | $(0.564) | $(0.084) | $(0.774) |
| Net loss | $(0.109) | $(0.715) | $(0.237) | $(1.104) |
| Adjusted EBITDA (non-GAAP) | $0.080 | $(0.487) | $0.109 | $(0.503) |
Q2 diluted loss per share was $0.01, versus $0.12; first-half diluted loss per share was $0.03, versus $0.18. Operating cash flow was $0.044 million for the first half, compared with cash used of $0.884 million a year earlier. Cash rose to $3.196 million from $3.089 million at September 30, 2012.
At March 31, current assets were $17.032 million and current liabilities $18.952 million, a working-capital deficit of approximately $1.9 million. Bank borrowings were $2.476 million, with only $0.038 million of unused availability under the asset-based facility. The facility’s stated term ran to July 29, 2013, subject to automatic annual renewal unless terminated. The company also had $0.350 million principal of convertible debentures, due October 2013 and bearing 10% interest, and capital lease obligations.
Changes versus prior comparable periods
- First-half revenue increased 7.8%; Q2 revenue increased 3.1%, primarily from expansion of existing programs and the full-period contribution of prior-year awards.
- Gross margin improved in both periods, which management attributed to contract performance and cost management. First-half G&A was broadly flat in dollars and lower as a share of revenue, reflecting resource consolidation and cost reductions.
- Operating and net losses narrowed substantially. First-half operating cash flow also improved to slightly positive, mainly due to collections and working-capital changes.
Outlook, risks, contingencies and unusual items
- Management stated that cash, limited credit availability, forecast operating cash flow, and cost initiatives should support operations for 12 months from the financial-statement date. It cautioned that failure to achieve assumptions could require further spending cuts or additional capital, potentially diluting shareholders. No numerical earnings or revenue guidance was provided.
- Federal budget uncertainty, sequestration, procurement delays, pricing pressure, contract competition, and potential reductions or termination of government work pose risks. Management did not expect cancellation or significant reduction of major programs but acknowledged uncertainty.
- The DVA BPA had an estimated total contract value of approximately $145 million and was scheduled to expire October 31, 2016, including option years; actual work is not assured. Other DVA work orders ran through September 30, 2013, with extensions uncertain.
- A previously accrued, unbilled DVA receivable of approximately $9.3 million relates to retroactive wage determinations, with about $8.7 million of associated accrued employee wages and benefits. The company expected to invoice and collect within 12 months, but timing was not guaranteed. It was also negotiating a possible additional $0.4–$0.6 million for indirect costs and fees, subject to government review.
- Payroll-tax disputes with the IRS had a recorded liability of approximately $1.4 million, including about $0.6 million of estimated penalties and interest. The company said it had accrued the estimated remaining liability, but additional amounts and payment timing were uncertain.
- The company was reviewing a U.S. Attorney claim alleging prevailing-wage violations under the Service Contract Act for 2003–2010. The merits and potential impact were not yet determinable; an adverse outcome could be material.
- On May 3, 2013, Nasdaq notified the company that its share price had failed the $1.00 minimum bid requirement. The initial compliance period ran through October 30, 2013; failure to regain compliance could lead to delisting.
- Goodwill was $8.595 million. Management reported no impairment at the September 2012 test, but noted that loss of a major contract or adverse business changes could result in a material impairment charge.
Investor verification priorities
- Track cash conversion, eligible receivables, and the company’s very limited remaining credit availability and facility renewal or replacement.
- Verify DVA contract performance, option-year decisions, work-order extensions, and the degree of concentration in the BPA and DVA overall.
- Monitor collection and employee-payment timing for the $9.3 million retroactive billing, and the government’s decision on the additional indirect-cost claim.
- Follow developments in the IRS payroll-tax matter and the Service Contract Act investigation, including any settlement, payment plan, or additional accruals.
- Check Nasdaq bid-price compliance and any effects on listing, liquidity, or access to capital.