DLH Holdings Corp. (then TeamStaff, Inc.) — Form 10-Q
Business context and period: Unaudited fiscal second quarter and six months ended March 31, 2012. The company primarily provides healthcare, logistics and technical, and staffing services to U.S. government agencies through DLH Solutions. It reported that shareholders had approved changing the parent’s name to DLH Holdings Corp.; the change was expected during fiscal 2012.
Key financial results
Amounts below are in millions except per-share data. Fiscal Q2 comparisons are with the three months ended March 31, 2011; six-month comparisons are with the six months ended March 31, 2011.
| Metric | Fiscal Q2 2012 | Six months 2012 |
|---|---|---|
| Revenue | $12.62; up 21.2% | $24.11; up 14.8% |
| Gross profit / margin | $1.30 / 10.3%, versus $1.51 / 14.4% | $2.87 / 11.9%, versus $2.83 / 13.4% |
| Operating loss | $(0.56), versus $(0.08) | $(0.77), versus $(0.36) |
| Net loss | $(0.72), or $(0.12) per share, versus $(0.18), or $(0.04) per share | $(1.10), or $(0.18) per share, versus $(0.52), or $(0.10) per share |
| Adjusted EBITDA (non-GAAP) | $(0.49), versus $(0.03) | $(0.50), versus $(0.20) |
Revenue growth was attributed primarily to new awards. Profitability weakened as direct costs rose faster than revenue. Management cited higher workers’ compensation expense for previously incurred claims (about $0.2 million for the quarter and $0.4 million for six months), the absence of a prior-year $0.2 million benefit from a medical-plan trustee consent, new-contract start-up costs, and increased business-development spending. G&A rose 12.5% for the quarter and 14.9% for six months. Six-month interest expense was $0.16 million and financing-cost amortization was $0.09 million; derivative fair-value changes added $0.08 million of expense.
Cash, liquidity and debt
- Six-month operating cash use was $0.88 million, versus $1.12 million; investing cash use was $0.09 million. Financing provided $0.81 million, mainly revolving-credit advances. Cash fell $0.16 million during the period to $0.60 million.
- At March 31, working capital was negative approximately $4.2 million; total liabilities were $18.15 million and shareholders’ equity was $4.71 million. Current liabilities included $1.60 million drawn on the bank facility and $0.71 million of notes payable. The credit line had $0.30 million of availability, subject to eligible receivables, within a $3.0 million maximum facility.
- The company had $0.35 million principal outstanding on convertible debentures, due in fiscal 2014, bearing 10% interest and convertible initially at $1.30 per share. The balance-sheet carrying value was $0.12 million, net of discounts and costs. A further $0.27 million liability represented derivative instruments.
- Management said cash, available credit, expected operating cash flow and cost reductions were expected to support operations for 12 months, but warned that missed assumptions could require further spending cuts, delayed supplier payments, asset sales or curtailed programs. The company reported no lender-declared default.
Material developments, outlook and risks
- Retroactive DVA billings: The company reported $9.3 million of unbilled DVA receivables relating to historical wage-rate adjustments, alongside about $8.7 million of accrued employee salary and benefit liabilities. In April 2012, the DVA signed contract modifications reflecting wage determinations. Final indirect costs and fees remained under review; the company estimated potential additional revenue of $0.4–$0.6 million and expected collection during fiscal 2012, but gave no assurance of approval or timing.
- Funding after quarter-end: A $4.2 million rights offering was planned at $1.30 per share, potentially issuing up to 3.23 million shares and diluting non-participating holders. Wynnefield Capital agreed, subject to conditions, to purchase unsubscribed shares. In May, the lender temporarily permitted up to $0.5 million of borrowing beyond eligible collateral, still subject to the facility’s $3.0 million cap; advances were to be repaid from billing collections or offering proceeds and the accommodation expired no later than June 30, 2012.
- Customer and contract exposure: All revenue was from federal agencies, with substantial DVA dependence. A DVA blanket purchase agreement had a stated maximum value of about $145 million through October 2016, but actual services depended on task orders. Management also noted federal award delays and constrained government spending; reductions or non-renewals could materially affect results and goodwill.
- Contingencies: The company recorded a $1.3 million liability for disputed legacy payroll-tax matters, including about $0.5 million of IRS-claimed penalties and interest; no payments were made in fiscal 2011 or 2012. A U.S. Attorney had raised an alleged Service Contract Act prevailing-wage violation for 2005–2010, but details had not been provided and the potential impact could not be assessed. A $0.71 million recorded obligation remained under guarantees related to a settlement with former acquisition sellers; maximum contingent exposure was stated as $0.75 million.
- Other items: No goodwill impairment was recorded at March 31, 2012; goodwill was $8.60 million. The company had recorded a $2.6 million non-cash trademark impairment in fiscal 2011 as part of its rebranding. Management provided no quantified operating or earnings guidance.
Important facts for investors to verify
- Progress, collectability and final approved amount of the $9.3 million DVA retroactive billing, including related accrued payroll and potential additional fees.
- Rights-offering proceeds, Wynnefield’s actual participation, resulting dilution, and the status of the temporary excess-collateral borrowing accommodation.
- Eligible-receivables borrowing availability, compliance with credit-facility covenants, and the company’s cash runway given its working-capital deficit and operating losses.
- Developments in the Service Contract Act allegation and resolution of the $1.3 million payroll-tax accrual and seller-guarantee obligation.
- DVA task orders, renewals and funding levels, and whether revenue growth can translate into recovery of gross margins and operating profitability.