DLH Holdings Corp. — Form 10-Q Summary
Business and period: The filing covers the fiscal quarter and six months ended March 31, 2017. DLH provides technology-enabled healthcare, human services, program management, and related services to U.S. government agencies. It reported more than 1,400 employees and derived all revenue from federal customers. The May 2016 acquisition of Danya expanded the company’s service offerings and scale.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $29.9 million, up 76.6% year over year | $56.0 million, up 67.2% |
| Gross margin | $6.4 million; 21.4% of revenue, versus 19.0% | $12.2 million; 21.8%, versus 18.3% |
| Operating income | $1.8 million, versus $0.7 million | $2.7 million, versus $1.1 million |
| Net income | $1.0 million, versus $0.3 million | $1.3 million, versus $0.2 million |
| Diluted EPS | $0.08, versus $0.03 | $0.10, versus $0.02 |
| Adjusted EBITDA (non-GAAP) | $2.5 million, versus $0.7 million | $4.0 million, versus $1.5 million |
For the six months, operating cash flow was $2.5 million, investing cash flow was negative $0.9 million, and financing cash flow was negative $1.9 million. Cash declined by $0.3 million to $3.1 million. Capital spending was $0.7 million, and debt repayments were $1.9 million.
At March 31, 2017, current assets were $12.7 million and current liabilities were $16.0 million, a $3.3 million working-capital deficit. Gross bank debt was $21.6 million (net carrying amount $20.5 million); $3.6 million was classified as current. The company had no revolving-line borrowings and reported $5.4 million of unused borrowing capacity, subject to eligible receivables, plus a $0.9 million standby letter of credit.
Changes and management commentary
- Revenue and earnings growth reflected Danya, which contributed $11.8 million of quarterly revenue and $20.5 million for the six-month period, as well as expansion on legacy contracts.
- Management attributed higher gross-margin rates to Danya, more complex contracts, and staff deployment and productivity. Six-month G&A rose to $8.7 million, or 15.6% of revenue, partly due to acquisition-related resources.
- Management said cash, available credit, and planned operating cash flow should support operations for 12 months from the financial-statement date. It reported compliance with loan covenants.
- No company-specific revenue or earnings guidance was provided. Management described potential growth in federal health services, organic contract expansion, and selective acquisitions, particularly in health IT. It also noted uncertainty around federal budget priorities and fiscal 2018 funding.
Risks, contingencies, and unusual items
- Customer concentration remains significant: VA accounted for approximately 58% and HHS 30% of six-month revenue. Management said inability to continue relationships with either major customer could materially harm results.
- Federal contract funding, renewal, and performance levels are uncertain; reported award periods extend up to three years. The company also depends on federal budget decisions.
- Debt is secured by substantially all company assets, bears interest at LIBOR plus 3%, and is subject to financial covenants and required principal payments. Cash flow is partly committed to debt repayment.
- Danya purchase-price allocation was finalized during the period, increasing recognized intangible assets by approximately $9.0 million and reducing goodwill. Goodwill and intangible-asset valuation and future impairment are risks; no impairment was identified at the reporting date.
- The company recorded $0.6 million of six-month amortization of acquired intangibles and a $0.1 million six-month loss from revaluing its warrant liability. It also recorded $0.1 million of quarterly severance expense related to Danya integration.
- Management reported no litigation believed likely to have a material adverse effect and no material change in previously disclosed risk factors. Disclosure controls were judged effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist after separating Danya’s contribution from organic contract growth.
- VA and HHS contract funding, renewal, and revenue concentration, along with the impact of federal budget decisions.
- Debt amortization, covenant headroom, interest costs, and the actual availability of the revolving credit facility.
- Receivables and working-capital trends, given the six-month increase in receivables and the current-liability deficit.
- Danya integration performance, realized synergies, and the carrying values of goodwill and acquired intangibles.