DLH Holdings Corp. — Form 10-Q Summary
Business context and reporting period
Fiscal first quarter ended December 31, 2012; comparisons are with the three months ended December 31, 2011. DLH provides healthcare, logistics, technical, and staffing services to the U.S. government. Approximately 1,100 employees serve customers at more than 25 U.S. locations. The company reported that all revenue came from government customers and that the Department of Veterans Affairs (DVA) accounted for 96% of quarterly revenue.
Financial performance and position
- Revenue: $12.994 million, up 13.0% from $11.495 million, primarily from expansion on existing programs and the full-quarter contribution of prior-period awards.
- Profit and margins: Gross profit was $1.788 million, up 14.1%; gross margin improved to 13.8% from 13.6%. Operating loss narrowed to $94,000 from $210,000. Net loss was $128,000, or $0.01 per share, versus $389,000, or $0.06 per share. Adjusted EBITDA, a non-GAAP measure, was $29,000 versus negative $16,000.
- Expenses: Direct expenses were $11.206 million (86.2% of revenue), compared with $9.928 million (86.4%). General and administrative expense rose to $1.849 million from $1.754 million, but declined to 14.2% of revenue from 15.2%, reflecting cost reductions and resource consolidation.
- Cash flow: Operating activities provided $731,000, compared with $1.325 million used in the prior-year quarter, principally reflecting improved receivable collections. Investing activities used $9,000; financing activities used $572,000, mainly to repay the revolving line. Cash increased $150,000 to $3.239 million.
- Liquidity and debt: At quarter-end, working capital deficit was approximately $1.8 million. Bank borrowings were $1.816 million, with only $168,000 of unused availability under the asset-based facility, subject to eligible receivables. Convertible debentures have $350,000 principal, bear 10% interest, and mature October 2013; their balance-sheet carrying amount was reported net of discounts. Total assets were $25.828 million and shareholders’ equity was $7.706 million.
Material changes versus the prior-year quarter
- Revenue grew 13.0%, while gross margin increased 0.2 percentage points and the operating loss narrowed by $116,000.
- Net loss improved by $261,000, reflecting higher gross profit, lower expense as a share of revenue, and reduced other expense. The change in fair value of derivative instruments contributed $61,000 of income in the current quarter versus $56,000 of expense in the prior-year quarter.
- Weighted-average shares outstanding increased to 9.286 million from 6.070 million, reflecting the 2012 rights offering and other share activity; the rights offering raised $4.2 million gross in June 2012.
Outlook, risks, contingencies, and unusual items
- Management said cash, limited available credit, forecast operating cash flow, and cost-reduction initiatives were expected to support operations for 12 months from the financial statement date. It cautioned that a shortfall in these assumptions could require additional spending cuts or capital, potentially diluting shareholders.
- Federal budget uncertainty, potential sequestration, delayed awards, tighter pricing, and increased competition could pressure funding and margins. Management did not expect cancellation of a major program and anticipated limited impact on existing DVA contracts, but gave no assurance.
- Customer concentration is significant: the DVA represented 96% of quarterly revenue. One DVA blanket purchase agreement accounted for 52% of quarterly revenue and has a stated ceiling of approximately $145 million through October 31, 2016; actual work awarded is not assured. Other DVA contracts representing 43% of quarterly revenue had order coverage through September 30, 2013, with extensions uncertain.
- A $9.3 million DVA receivable from retroactive billings remains unbilled; related accrued employee costs were approximately $8.7 million. DLH expected to invoice and collect during fiscal 2013, but timing was uncertain. Additional indirect costs and fees of $0.4–$0.6 million remained subject to government review.
- Payroll-tax disputes with the IRS had a recorded liability of $1.3 million, including about $500,000 of estimated penalties and interest. Management believed it had accrued the estimated liability, but additional amounts and the timing of settlement were uncertain and could affect liquidity.
- The U.S. Attorney was reviewing alleged Service Contract Act prevailing-wage violations for 2003–2010. The company disputed that adjustments were required; the potential impact was not determinable and an adverse outcome could be material.
- Goodwill was $8.595 million; management reported no impairment at September 30, 2012, but warned that loss of major contracts or other adverse business changes could result in impairment. A Nasdaq minimum-bid-price deficiency was reported December 31, 2012; the company subsequently reported regaining compliance on February 6, 2013.
Important facts for investors to verify
- Whether DVA contract volumes, extensions, and the dominant blanket purchase agreement sustain revenue concentration and cash generation.
- Actual invoicing, collection, and employee payments relating to the $9.3 million retroactive DVA receivable, plus resolution of the additional fee claim.
- Available borrowing capacity under the receivables-based facility, compliance with its terms, and repayment or refinancing of the October 2013 debentures.
- Ultimate cost and settlement timing of the IRS payroll-tax matter and the government wage investigation.
- Effects of federal budget actions, contract pricing pressure, and customer concentration on margins, liquidity, and goodwill value.