DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2023. Comparisons are with the corresponding 2022 periods. Amounts below are in millions, except per-share data.
Business context
DLH provides technology-enabled health, public health, logistics, research and related services, primarily to U.S. federal agencies; approximately 99% of revenue is federal. The December 2022 acquisition of Grove Resource Solutions, LLC (GRSi), for approximately $188.0 million, expanded capabilities and federal customer exposure. GRSi contributed $34.4 million of Q3 revenue and $2.6 million of Q3 operating income.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $102.2 vs. $66.4; up 53.9% | $274.4 vs. $327.9; down 16.3% |
| Operating income | $7.1 vs. $7.1 | $16.9 vs. $28.6 |
| Operating margin | 7.0% vs. 10.7% | 6.2% vs. 8.7% |
| Net income | $1.7 vs. $4.9 | $4.1 vs. $19.8 |
| Diluted EPS | $0.12 vs. $0.34 | $0.28 vs. $1.40 |
| EBITDA (non-GAAP) | $11.4 vs. $9.0 | $28.2 vs. $34.3 |
Q3 revenue growth primarily reflected GRSi and increased volume on legacy contracts. Higher contract costs and acquisition-related amortization contributed to lower operating margin; interest expense rose to $4.9 million from $0.5 million, principally because of acquisition financing. For the nine-month comparison, management attributed the revenue decline primarily to the completion of FEMA COVID-response task orders that generated $125.8 million of 2022 revenue; GRSi added $73.9 million in 2023.
Management’s non-GAAP adjusted comparisons exclude FEMA task-order contributions from 2022 and include GRSi acquisition costs in 2023. On that basis, nine-month adjusted revenue increased $72.2 million to $274.4 million, adjusted operating income increased $2.5 million to $18.7 million, and adjusted EBITDA increased $8.1 million to $29.9 million. Adjusted EBITDA margin on adjusted revenue was 10.9%, versus 10.8%. These are supplemental, non-GAAP measures.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $15.0 million, compared with cash used of $4.8 million in 2022. Investing used $181.3 million, principally for GRSi; financing provided $166.6 million. Ending cash was $0.5 million.
- At June 30, cash was $0.5 million, accounts receivable $67.9 million, and current liabilities $75.3 million. Contract assets within receivables were $19.3 million.
- Debt obligations were $188.1 million net of deferred financing costs on the balance sheet; gross contractual debt was reported as $195.8 million. The balance included a $179.3 million term loan and $16.4 million revolver draw. Revolver availability was $32.9 million, subject to borrowing conditions.
- Borrowings are generally priced at SOFR plus 4.2%; the reported floating-rate debt rate was 9.3%. Interest-rate swaps covered $112.2 million of notional principal. Management estimated a 1 percentage-point SOFR increase would add approximately $0.8 million of annual interest expense.
- The company reported compliance with credit covenants and stated planned operating cash flow should support operations for 12 months from issuance. It intends to make mandatory and, subject to available cash, voluntary debt prepayments.
Outlook, risks and other notable items
- No specific revenue, earnings or cash-flow guidance was provided. Backlog was approximately $817.8 million, including $147.3 million funded, versus $482.5 million and $98.9 million, respectively, at September 30, 2022. Backlog is an estimate and is not assurance of future revenue.
- VA pharmacy and logistics contracts were operating under bridge arrangements through October and November 2023, respectively. The related procurements were set aside for SDVOSB prime contractors; DLH said it expected potentially to continue significant work as a subcontractor if a partner won. The company identified dependence on VA and HHS relationships as material.
- Management cited risks including contract recompetes and awards, federal funding delays or shutdowns, small-business set-asides, customer budget changes, inflation and higher interest rates, debt management and covenant compliance, and successful GRSi integration and retention of employees and customers.
- The filing reported no litigation believed reasonably likely to have a material adverse effect and no material change to previously disclosed risk factors. Disclosure controls were assessed as effective; GRSi integration into the control environment was ongoing.
Important facts for investors to verify
- Progress and award outcomes for the VA bridge contracts and related SDVOSB procurements, plus continued performance of material VA and HHS work.
- Whether funded backlog converts to revenue, and the assumptions behind total backlog estimates.
- GRSi integration, realized acquisition benefits, and the impact of acquired intangible amortization on earnings.
- Debt amortization, covenant headroom, refinancing or repayment capacity, and exposure to variable interest rates.
- Underlying operating performance alongside the company’s non-GAAP adjustments, particularly the treatment of FEMA task orders and acquisition costs.