DLH Holdings Corp. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended December 31, 2021. Financial statements are unaudited. DLH provides technology-enabled health and human services, deriving approximately 99% of revenue from U.S. federal agencies.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $152.8 million | $57.9 million | +164.1% |
| Income from operations | $11.2 million | $3.6 million | +$7.6 million |
| Operating margin | 7.3% | 6.3% | +1.0 percentage point |
| Net income | $7.8 million | $1.8 million | +$6.0 million |
| Diluted EPS | $0.55 | $0.13 | +$0.42 |
| EBITDA, non-GAAP | $13.2 million | $5.7 million | +$7.5 million |
Revenue growth was primarily driven by $91.1 million from two short-term FEMA task orders supporting Alaska’s COVID-19 response. Excluding those orders, revenue was $61.7 million, up $3.8 million, or about 6.6%; net income on the same basis was $3.1 million versus $1.8 million. Management attributed improved margins on the FEMA work partly to using internal staff instead of subcontractors. Reported net margin was 5.1%, versus 3.1% a year earlier.
Operating cash flow was negative $16.2 million, compared with negative $8.5 million. Management attributed the current-period outflow mainly to performing FEMA work for which advance funding had been received in fiscal 2021. Investing cash flow was zero. Financing cash flow was negative $3.7 million, including $9.9 million of debt repayments and $6.0 million of new borrowings. Cash declined $19.8 million to $4.2 million.
Balance sheet, debt, and liquidity
- At December 31, 2021, cash was $4.2 million and accounts receivable was $46.8 million. Total assets were $188.0 million; shareholders’ equity was $74.1 million.
- Term-loan principal was $42.9 million ($40.9 million net of financing costs on the balance sheet). There was no revolver balance. The secured revolving facility has a $25 million ceiling; the filing reports $23 million of unused capacity net of letters of credit in one disclosure, while another describes $25 million as available.
- DLH made approximately $3.9 million of voluntary term-debt prepayments during the quarter and reported that mandatory principal amortization had been satisfied through March 31, 2024. The term loan and revolver mature September 30, 2025. The company said it was in compliance with loan covenants.
- Operating lease liabilities totaled $20.3 million. Total contractual obligations were reported as $68.9 million, including debt and leases.
Material changes, outlook, and risks
- Revenue mix shifted sharply: DHS revenue was $91.3 million, or 59.8% of total revenue, versus $0.2 million a year earlier. VA contributed 18.5% and HHS 15.1%. The two FEMA task orders represented most of the year-over-year increase.
- The COVID-19 community testing, vaccination, and therapy task order ended December 31, 2021. The Alaska temporary-medical-staffing task order was expected to generate approximately $30 million in the second quarter and to produce substantially lower revenue than in the first quarter. Management said it expected approximately 5% operating margin on the option periods, while noting that FEMA margins in the reported quarter were stronger than initially anticipated.
- Backlog was approximately $633.6 million at quarter-end, including $132.4 million funded and $501.2 million unfunded. Backlog is not a guarantee of future revenue.
- Several VA pharmacy contracts were operating under a bridge through October 2022; the government canceled a prior procurement and had not announced its future approach. VA logistics contracts were extended through November 2022 following cancellation of a protested award. These contract transitions and re-competes create revenue risk.
- Management stated that planned operating cash flow should support operations for 12 months from issuance of the statements and that it did not expect COVID-19-related liquidity constraints. No specific full-year financial guidance was provided.
- Key risks include reliance on federal customers and contract awards, customer concentration, protests and set-aside rules, possible federal budget delays or shutdowns, COVID-19 disruption, and variable interest rates. Approximately $22.8 million of debt was covered by an interest-rate swap; management estimated a 1 percentage-point LIBOR increase would raise annual interest expense by about $0.2 million.
- The company reported no litigation it believed reasonably likely to have a material adverse effect, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much FEMA-related revenue and margin can be replaced after the task orders ended or scaled down, and whether the anticipated second-quarter staffing revenue materialized.
- The status, timing, and outcome of VA pharmacy and logistics procurements, including bridge extensions and possible set-aside requirements.
- Cash conversion and working-capital trends, particularly collection of receivables and the timing of deferred contract funding.
- Actual revolver availability: the filing gives both $23 million net of letters of credit and $25 million available.
- The FEMA staffing extension date is stated in the filing as March 20, 2021, although the surrounding discussion indicates a future second-quarter extension. Verify the correct date.
- Debt covenant headroom and refinancing or repayment requirements through the September 2025 maturity.