DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2016. The filing was signed May 16, 2016. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
DLH provides healthcare, medical logistics and technical services primarily to U.S. federal agencies. Before its subsequent acquisition of Danya International, all revenue came from federal customers; the Department of Veterans Affairs (DVA) accounted for 96% of revenue in both six-month periods. The filing reports more than 1,250 employees and operations at over 30 U.S. locations.
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Six months ended March 31, 2016 | Six months ended March 31, 2015 |
|---|---|---|---|---|
| Revenue | $16.934 | $15.893 | $33.493 | $31.575 |
| Gross margin | $3.224 (19.0%) | $2.730 (17.2%) | $6.141 (18.3%) | $5.263 (16.7%) |
| Operating income | $0.689 | $0.515 | $1.071 | $0.774 |
| Net income (loss) | $0.337 | $(0.082) | $0.221 | $0.052 |
| Diluted EPS | $0.03 | $(0.01) | $0.02 | $0.01 |
| Operating cash flow | Not presented for the quarter | $1.458 | $0.587 |
Financial position and material changes
- Revenue grew 6.6% year over year in the quarter and 6.1% for the six-month period, mainly from expansion on existing contract vehicles. Six-month gross margin improved 1.6 percentage points; management attributed the improvement to contract mix, performance and cost management.
- For the quarter, G&A rose 14.4% to $2.513 million; for six months it rose to $5.028 million from $4.448 million. Management cited added operating and business-development resources.
- At March 31, cash was $6.934 million, working capital approximately $5.3 million, and total liabilities $6.598 million. There was no balance outstanding on the then-existing credit facility; reported availability was approximately $2.5 million, subject to eligible receivables. Cash increased $1.376 million from September 30, 2015.
- On May 3, 2016, after the reporting period, DLH acquired Danya International for $38.75 million plus transaction expenses. Financing included $25 million of term debt, a $5 million revolving-credit draw, a $2.5 million subordinated loan, approximately $5 million of company cash, and $2.5 million of stock issued to the seller. The acquisition and financing are not reflected in the March 31 balance sheet or results.
- The new secured facilities provide up to $35 million: a $25 million term loan maturing in 2021 and a revolving facility of up to $10 million maturing in 2018. They bear interest at LIBOR plus 3.0%; the term loan has monthly principal installments and financial covenants, including fixed-charge-coverage and funded-debt-to-adjusted-EBITDA tests. The subordinated $2.5 million loan bears 4% interest and included warrants for 53,619 shares.
Outlook, risks and unusual items
- Management stated that cash, credit availability and planned operating cash flow were expected to support operations for 12 months from the financial-statement date. This assessment predates the acquisition and its substantial new debt. No specific revenue or earnings guidance is provided.
- Management expects Danya to broaden federal-market capabilities and support growth in federal health IT, program management and related services. Purchase-price allocation and pro forma financial information were not provided; valuation work was still underway.
- Customer concentration is a significant risk: the DVA represented 96% of six-month revenue. The filing identifies the DVA pharmacy healthcare contract as expected to recompete beginning in November 2016; losing or reducing major DVA work could materially affect results, cash flow and financial condition.
- Six-month other expense was $0.702 million, primarily acquisition-related advisory, financial-analysis and legal costs. The prior-year comparison included a one-time retroactive-payment-claim settlement. For the 2016 quarter, other expense was $0.127 million versus $0.651 million in the prior-year quarter, which included that settlement.
- Other risks include debt repayment and covenant compliance, dependence on federal contracting and government procurement, and potential goodwill impairment. The company reported no litigation it believed likely to have a material adverse effect and no material change in internal controls.
Important facts for investors to verify
- How the Danya acquisition performs, including the final purchase-price allocation, acquired intangible assets and goodwill, and post-close pro forma results.
- Post-acquisition debt, interest expense, cash generation, covenant headroom and compliance with required principal and excess-cash-flow payments.
- Progress and outcome of the DVA pharmacy healthcare contract recompete, and any change in the 96% DVA revenue concentration.
- Whether improved gross margins and revenue growth continue after acquisition-related costs and expanded G&A are considered.
- The filing’s stated 12-month liquidity assessment should be reassessed using post-acquisition cash, debt and operating results; the filing does not provide a clear post-close liquidity forecast.