DLH Holdings Corp. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017. Amounts are in U.S. dollars; financial statement figures are unaudited. DLH provides technology-enabled health, readiness, and human-services solutions to federal agencies. All revenue is government-derived; VA and HHS accounted for approximately 66% and 32% of quarterly revenue, respectively.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $30.215 million | $26.111 million |
| Gross margin | $6.532 million (21.6%) | $5.811 million (22.3%) |
| Operating income | $1.146 million | $0.889 million |
| Interest expense, net | $0.278 million | $0.364 million |
| Income before taxes | $0.868 million | $0.525 million |
| Income tax expense | $3.719 million | $0.201 million |
| Net income (loss) | $(2.851) million | $0.324 million |
| Diluted EPS | $(0.24) | $0.03 |
| EBITDA (non-GAAP) | $1.652 million | $1.090 million |
Revenue increased 15.7%, primarily from higher workload volumes on existing contracts. Direct expenses rose 16.7%, faster than revenue, and gross margin rate fell 70 basis points. G&A rose 3.4% to $4.880 million, but declined to 16.2% of revenue from 18.1%, which management attributed to greater scale and integration of corporate functions. Operating income increased approximately $0.3 million.
The reported net loss primarily reflects a $3.4 million discrete tax charge from revaluing deferred tax assets after enactment of the Tax Cuts and Jobs Act, principally due to reducing the federal tax rate used for net operating loss carryforwards from 34% to 21%. Excluding that write-down, management reported non-GAAP net income of $0.514 million, or $0.04 per diluted share, versus $0.324 million, or $0.03, a year earlier. EBITDA increased 51.6%; these are non-GAAP measures.
Cash, debt, and liquidity
Cash declined to $3.243 million from $4.930 million at September 30, 2017. Operating activities used $0.394 million, compared with providing $0.297 million in the prior-year quarter; investing activities used $0.375 million and financing activities used $0.918 million. Quarterly capital purchases were $0.375 million.
At December 31, 2017, term-loan principal was $18.750 million ($17.861 million net of unamortized financing costs), with $6.529 million classified as current. The loan bears interest at LIBOR plus 3.0% and matures May 2021. The $10 million revolving facility had no borrowings; reported availability was $9.4 million after a $0.6 million standby letter of credit. Management said cash, eligible-receivable-backed revolver access, and expected operating cash flow should fund operations for 12 months from issuance. The company reported compliance with loan covenants.
On January 16, 2018, DLH paid $2.9 million under the credit facility’s excess-cash-flow provision. Management did not expect further such payments. Total contractual obligations were $22.267 million, including $18.750 million of debt and $3.517 million of lease obligations.
Changes, outlook, and risks
- The company restated September 30, 2017 and June 30, 2017 balance-sheet classifications to reflect additional excess-cash-flow debt payments as current liabilities: $2.9 million and $2.2 million, respectively. The reclassification did not change previously reported earnings, EPS, cash flows, total assets, total liabilities, or equity.
- DLH adopted ASU 2017-11 on December 31, 2017, reclassifying its $0.306 million warrant liability to equity; it will no longer remeasure that liability each reporting period.
- Management cited an expected gross-margin range of 20%–22%; the quarter’s 21.6% was within that range. It described FY2018 federal funding as uncertain but said budgetary uncertainty was not expected to materially affect the current business base. Delays in funding or awards, including a possible shutdown, could still affect timing and new business.
- Current VA and HHS awards had anticipated performance periods of approximately one to two years. The VA and HHS together represented about 98% of revenue, making contract continuity and customer concentration important risks. Management noted that losing either relationship could materially harm results, cash flows, and financial condition.
- The company reported no litigation it believed reasonably likely to have a material adverse effect, no material change in previously disclosed risk factors, and no material off-balance-sheet arrangements. Management reported disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and the current VA/HHS contract workload continue, and how concentrated future revenue remains.
- Whether gross margins remain within management’s 20%–22% expected range, given the quarter’s year-over-year decline.
- Cash generation, revolver availability, debt amortization, covenant compliance, and the effect of the January 2018 $2.9 million repayment.
- The ongoing tax and cash-flow implications of the Tax Cuts and Jobs Act; distinguish GAAP results from management’s non-GAAP adjustments.
- Federal budget and contract-award timing, as well as the impact of the balance-sheet restatement and warrant reclassification.