DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021; comparative periods ended March 31, 2020. Amounts below are in millions unless noted. DLH provides technology-enabled health and human services, deriving approximately 99% of revenue from federal agencies.
Financial performance
| Metric | Three months ended Mar. 31, 2021 | Change year over year | Six months ended Mar. 31, 2021 | Change year over year |
|---|---|---|---|---|
| Revenue | $61.5 | +12.2% | $119.4 | +11.5% |
| Operating income | $4.6 | +$0.8 | $8.3 | +$1.3 |
| Operating margin | 7.5% | 7.0% prior year | 6.9% | 6.5% prior year |
| Net income | $2.6 | +$0.5 | $4.4 | +$0.8 |
| Diluted EPS | $0.19 | $0.16 prior year | $0.32 | $0.28 prior year |
| EBITDA, non-GAAP | $6.6 | $5.6 prior year | $12.3 | $10.6 prior year |
For the six-month period, contract costs were 79.4% of revenue versus 78.7% a year earlier; general and administrative costs were 10.3% versus 11.4%. Management attributed improved operating leverage and higher EBITDA mainly to IBA and management of G&A. Revenue growth was primarily from the IBA acquisition, partly offset by lower organic revenue, including reduced travel reimbursements. IBA contributed $14.4 million of six-month revenue and $7.4 million in the quarter.
Six-month operating cash flow was $6.1 million, compared with $0.7 million in the prior-year period. Investing activities provided $0.006 million; financing activities used $7.1 million, including $7.25 million of senior-debt repayments. Cash declined $0.9 million to $0.4 million. Accounts receivable rose to $41.7 million from $32.5 million at September 30, 2020.
Balance sheet, debt and liquidity
- At March 31, 2021, total assets were $186.2 million, total liabilities $127.3 million, and shareholders’ equity $58.9 million.
- Term-loan principal was $62.75 million; reported net debt obligations were $60.3 million after deferred financing costs. The revolving facility had no outstanding balance. The loan matures September 30, 2025 and bears interest at LIBOR plus 3.5%, subject to applicable terms and a LIBOR floor. A $28.8 million interest-rate swap covers part of the debt.
- Management reported compliance with loan covenants, including a minimum fixed-charge coverage ratio of 1.25:1.00 and leverage limits. The company stated operating cash flow should support operations for 12 months and that it intends to continue debt prepayments, subject to available cash.
- The filing gives inconsistent figures for unused revolver capacity: the credit-facility disclosure says $25.0 million available, while another liquidity passage says $23.0 million unused. Both describe a $25.0 million facility with no balance outstanding.
Business changes, outlook and risks
- Revenue mix shifted materially: six-month Department of Defense revenue increased to $14.5 million from $0.7 million, while HHS revenue declined to $43.5 million from $50.0 million. VA revenue rose to $55.5 million from $49.6 million. VA and HHS represented 47% and 36% of revenue, respectively.
- Defense and Veteran Health Solutions represented 59% of six-month revenue versus 47% a year earlier. Time-and-materials contracts generated 76% of revenue; prime-contract work generated 89%.
- Backlog was approximately $608.7 million at March 31, down from $688.4 million at September 30, 2020; $84.6 million was funded and $524.1 million unfunded. Backlog excludes the VA logistics award described below.
- In April 2021, after quarter-end, DLH received a VA follow-on medical-logistics contract with a one-year base period and four one-year options and a stated total value of $202 million. The award was under protest at the filing date; the existing contract was extended through August 2021. Nine VA pharmacy contracts were operating under extensions through October 2021, and the government had canceled the related procurement solicitation without announcing a future strategy.
- Management said COVID-19 had caused some travel and project-work disruption but expected no material impact to fiscal 2021 results; it noted continuing uncertainty, possible adverse effects from prolonged disruption, and potential additional federal public-health demand. There is no specific financial guidance in the provided filing text.
- Key risks include dependence on federal customers—especially the VA and HHS—contract renewals and protests, government budget and procurement changes, small-business set-aside rules, acquisition integration, covenant compliance, COVID-19 disruption, and potential goodwill impairment. Goodwill was $65.6 million; management reported no impairment indicator during the six months. No pending or threatened litigation was identified as reasonably likely to have a material adverse effect.
Important facts for investors to verify
- Resolve the filing’s $25.0 million versus $23.0 million discrepancy in reported unused revolver capacity.
- Check the status and outcome of the protest of the $202 million VA logistics award and the transition from the extended existing contract.
- Monitor VA pharmacy contract extensions and the government’s replacement procurement strategy, given customer concentration.
- Assess cash conversion and working-capital needs as receivables increased, alongside continued debt repayment and the company’s low cash balance.
- Track backlog conversion, especially the substantial unfunded portion, and the performance and integration of the IBA acquisition.