DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2015; filed February 9, 2016. DLH provides healthcare, logistics and technical services to U.S. government agencies.
Financial performance
| Metric | Quarter ended Dec. 31, 2015 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $16.559 million | $15.682 million | Up 5.6% |
| Gross margin | $2.917 million; 17.6% | $2.533 million; 16.2% | Up $0.384 million; margin up 1.4 percentage points |
| Operating income | $0.382 million; 2.3% of revenue | $0.259 million; 1.7% | Up $0.123 million |
| Net income (loss) | $(0.116) million; $(0.01) per share | $0.134 million; $0.01 per share | Declined $0.250 million |
| Adjusted EBITDA (non-GAAP) | $0.734 million | $0.557 million | Up 31.8% |
Direct expenses were $13.642 million, or 82.4% of revenue, versus $13.149 million, or 83.8%. General and administrative expense rose to $2.515 million from $2.251 million, increasing from 14.4% to 15.2% of revenue. Management attributed improved gross margin to stronger contract performance, a richer contribution from more complex contracts, productivity initiatives and cost management; higher G&A reflected increased business volume and investment in business development.
Cash, liquidity and obligations
- Cash was $5.995 million at quarter-end, up from $5.558 million at September 30, 2015. Operating cash flow was $0.480 million, versus $(0.053) million in the prior-year quarter. Investing and financing uses were $0.020 million and $0.023 million, respectively.
- Working capital was approximately $4.7 million. DLH had no outstanding balance on its credit line; reported availability was approximately $2.6 million, including about $1.2 million of unused borrowing capacity after a letter-of-credit reserve.
- The asset-based facility had a stated maximum of $6.0 million, but current availability was subject to a $3.0 million sublimit and eligible receivables. Its current term expires July 29, 2016, with annual renewals unless terminated.
- Total liabilities were $6.137 million and shareholders’ equity was $23.085 million. Contractual operating lease payments totaled $2.275 million, including $0.208 million due within one year.
Management stated that cash, eligible credit availability, expected operating cash flow and cost-control efforts should fund operations for twelve months from the financial-statement date.
Material changes, outlook and risks
- Revenue growth was primarily attributed to program management initiatives and expansion on existing contracts. Healthcare Delivery Solutions represented 53% of revenue, compared with 52%; Logistics & Technical Services represented 47%, compared with 48%.
- Other expense included $0.575 million of non-operational costs associated with potential acquisitions, including advisory, financial-analysis and legal services. This drove the pretax loss despite higher operating income. Adjusted EBITDA excludes acquisition expense and equity-grant expense and is a non-GAAP measure.
- All revenue came from federal agencies. The Department of Veterans Affairs (DVA) accounted for 95% of revenue, down from 97% a year earlier; the company said substantially all receivables were also from federal agencies. DLH identified continued DVA relationships as important to its financial condition.
- A DVA Consolidated Mail Order Pharmacy healthcare contract was anticipated to run through October 2016 and was expected to be recompeted for a new five-year term beginning November 2016. DLH said it intended to pursue renewal. Another related medical-logistics contract was expected to run through November 2018. Contract amounts and performance periods remain subject to federal contract terms and actual service levels.
- Management’s strategy emphasized growth in federal healthcare markets, including behavioral health, telehealth, medication management and health IT, alongside organic expansion and potential strategic acquisitions. The filing provides no formal earnings or revenue guidance.
- Key risks include heavy dependence on federal contracting and the DVA, contract recompete and renewal outcomes, government funding and procurement conditions, and potential goodwill impairment. Goodwill was $8.595 million; management reported no quarter-end indication of material adverse valuation changes. The company reported no litigation it believed likely to have a material adverse effect and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Progress and timing of the DVA healthcare contract recompete expected to begin in November 2016, and the degree of revenue exposure if DLH does not retain the work.
- Whether acquisition-related spending continues, and how reported GAAP results compare with management’s adjusted EBITDA measure and its exclusions.
- Credit-facility renewal, borrowing availability based on eligible receivables, and the company’s liquidity as contracts and working-capital needs change.
- Changes in DVA and other federal-agency concentration, contract performance, and the assumptions supporting the carrying value of goodwill.