DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; filed August 5, 2020. Dollar amounts below are in millions unless noted. DLH provides technology-enabled health and human services, with essentially all revenue from U.S. federal agencies.
Financial performance
| Metric | Three months 2020 | Three months 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $51.5 | $38.7 | $158.5 | $106.2 |
| Income from operations | $3.8 | $1.7 | $10.8 | $6.6 |
| Net income | $2.1 | $0.8 | $5.8 | $3.8 |
| Diluted EPS | $0.16 | $0.06 | $0.44 | $0.29 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $10.7 | $11.2 |
Quarterly revenue increased 33.0%; nine-month revenue rose 49.2%. Operating margins were 7.4% versus 4.4% in the quarter and 6.8% versus 6.2% year to date. Net margins were 4.1% versus 2.1% in the quarter and 3.6% versus 3.5% year to date. Management attributed growth primarily to the inclusion of acquired Social & Scientific Systems (S3), alongside increased volume in legacy contracts. EBITDA, a company-defined non-GAAP measure, was $5.5 million for the quarter and $16.1 million for nine months, compared with $2.6 million and $8.6 million, respectively.
Financial position and liquidity
- At June 30, cash was $0.7 million, accounts receivable was $29.6 million, and current assets and current liabilities were $34.1 million and $35.5 million, respectively.
- Term-loan principal was $44.5 million ($42.5 million net of financing costs), down from $56.0 million principal at September 30, 2019. There were no revolver borrowings; availability was $19.3 million under the $25 million facility.
- Nine-month operating cash flow was $10.7 million; investing activities used $0.2 million and financing activities used $11.7 million, mainly reflecting $11.5 million of term-debt repayments. Cash declined $1.1 million to $0.7 million.
- Operating lease liabilities totaled $23.5 million. The company adopted lease accounting standard ASC 842 in October 2019, recording right-of-use assets and lease liabilities.
Changes, outlook and risks
- Year-to-date growth reflects S3 and legacy contract volume. General and administrative expenses declined as a share of revenue, while depreciation and amortization and interest expense increased, principally due to S3-related acquired intangibles and acquisition financing.
- Revenue mix shifted toward HHS: for nine months, VA accounted for 47% of revenue versus 65% a year earlier, and HHS for 46% versus 33%. The two agencies together represented 93% of revenue.
- Backlog was approximately $384.7 million at June 30, down from $414.1 million at September 30, 2019, including $95.5 million funded and $289.2 million unfunded.
- Several important contracts faced procurement or extension uncertainty. Nine VA pharmacy contracts were extended through October 2020, with the customer indicating intent to extend further; seven VA logistics contracts were extended through June 2021 and were subject to a renewal process. The HHS Head Start contract had a funded extension through August 2020, with an award decision expected in the following fiscal quarter. DLH reported joining SDVOSB teams for relevant VA procurements.
- Management said services remained in demand and were largely considered essential, COVID-19 effects had been minor, and it did not expect material pandemic impacts for the fiscal year or related liquidity constraints. It cited possible disruption, reduced demand, facility closures, delayed procurement and changing government priorities as risks. The filing gives no formal revenue or earnings guidance.
- Management stated the company was compliant with credit covenants and expected planned operating cash flow to support operations for 12 months from issuance. Voluntary prepayments meant no scheduled term-loan amortization until September 2023, according to management.
- The company reported no litigation believed reasonably likely to have a material adverse effect and no material off-balance-sheet arrangements. It reported no goodwill impairment and no material COVID-related asset impairment; future contract losses or adverse business changes could affect goodwill valuation.
Important facts for investors to verify
- Progress and outcomes of the VA pharmacy and logistics contract procurements and the HHS Head Start award, including extensions and any effects on revenue or backlog.
- Whether backlog converts to funded work and revenue, particularly the $289.2 million unfunded portion.
- Cash conversion and working-capital trends: receivables rose to $29.6 million, including contract assets of $10.2 million, while cash was $0.7 million.
- Debt repayment, covenant compliance, borrowing availability and exposure to variable interest rates; $36 million of term debt was covered by an interest-rate swap.
- Effects of COVID-19 and federal budget or procurement changes on contract performance, employee operations and customer demand.