DLH Holdings Corp. — Q1 Fiscal 2014 Form 10-Q
Reporting period: Three months ended December 31, 2013; comparative period is the three months ended December 31, 2012. Amounts below are in millions unless stated otherwise.
Business context
DLH provides healthcare delivery, logistics and technical, and contingency/staff augmentation services to U.S. government agencies. All revenue came from the federal government; the Department of Veterans Affairs (DVA) represented 97% of quarterly revenue, compared with 96% a year earlier. Healthcare delivery contributed 53% of revenue and logistics and technical services 46%.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $14.477 | $12.994 |
| Gross profit / margin | $2.112 / 14.6% | $1.788 / 13.8% |
| Operating income (loss) | $0.066 | $(0.094) |
| Net income (loss) | $0.133 | $(0.128) |
| Diluted EPS | $0.01 | $(0.01) |
| Adjusted EBITDA, non-GAAP | $0.309 | $0.029 |
| Operating cash flow | $(0.702) | $0.731 |
Revenue increased 11.4%, primarily from new awards and expansion of existing programs. Gross profit rose 18.1%; direct expenses fell to 85.4% of revenue from 86.2%, which management attributed to favorable contract performance and cost management. G&A increased 9.2% to $2.020 million, partly reflecting higher noncash stock compensation ($0.217 million versus $0.090 million).
Cash declined $0.842 million during the quarter to $2.566 million. The operating cash outflow primarily reflected timing of receivable collections; accounts receivable increased $1.258 million. At quarter-end, current assets were $16.428 million and current liabilities $16.731 million, a working capital deficit of approximately $0.303 million. Debt included $0.940 million outstanding on the asset-based bank facility and $0.009 million of current capital lease obligations; convertible debentures had been converted or repaid. The facility had approximately $1.1 million of unused availability, subject to eligible receivables and other conditions.
Management said cash, available credit, forecast operating cash flow, certain noncash-settled liabilities, and cost initiatives were expected to support operations for twelve months from the financial statement date. This is conditional on those factors occurring as expected; the filing gives no formal earnings or revenue guidance.
Material changes, outlook, and risks
- Results improved from a prior-year quarterly loss to net income, driven principally by higher gross profit. Other income also improved, principally due to gains associated with the convertible-debt-related derivative instruments. The statements report a $0.099 million change in fair value; the notes also describe a $0.119 million nonrecurring gain on debt closure and $0.020 million of warrant fair-value expense.
- The $0.350 million convertible debenture matured in October 2013: $0.210 million converted into shares and $0.140 million was repaid. Warrants were also exercised, and the company repurchased 17,275 shares during the quarter for approximately $0.021 million.
- Management described federal-market funding as uncertain. Budget reductions, sequestration, lower-price procurement, delayed or reduced orders, contract losses or terminations, and bid protests could affect performance. The company said it did not expect significant sequestration or budget-cut impacts on existing DVA or DoD contracts, while acknowledging broader budget risks.
- Concentration is material: approximately 97% of current-quarter revenue was DVA-related, substantially tied to healthcare and logistics services, including the DVA Consolidated Mail Outpatient Pharmacy program. Contract terms and anticipated performance periods do not assure actual future service volumes.
- A legacy DVA retroactive-billing matter includes approximately $9.3 million of unbilled receivables and $8.7 million of accrued employee wages and benefits. DLH expected to bill and collect within twelve months, but timing and additional indirect-cost recovery of an estimated $0.4–$0.6 million remained subject to government review.
- Accrued payroll-tax liabilities were approximately $1.4 million, including about $0.6 million of estimated interest and penalties. Management believed the recorded amount covered the estimated liability, but settlement timing and any additional amounts were uncertain; a payment plan with the IRS was not assured.
- The U.S. Department of Justice declined to intervene in a prevailing-wage claim and the claim was dismissed in its entirety in December 2013. Management reported no other known pending or threatened litigation it believed likely to have a material adverse effect.
- Goodwill was $8.595 million; management reported no impairment indicator in the quarter. A future impairment could materially affect results. No income tax expense was recorded, and a 100% valuation allowance remained against net deferred tax assets.
Important facts for investors to verify
- Whether receivable collections and operating cash flow improve, given the quarterly cash outflow and working capital deficit.
- Whether the DVA retroactive billings are approved, collected, and matched by timely employee payments, and whether any incremental indirect costs are recovered.
- Available borrowing capacity under the receivables-based credit facility, its conditions and covenants, and the company’s ability to maintain liquidity.
- Resolution and timing of the IRS payroll-tax matter, including any additional interest, penalties, or cash payments.
- Renewal, funding, and actual service volumes under DVA contracts, given the company’s customer concentration and federal budget uncertainty.
- Future margin and earnings quality, including the contribution of noncash stock compensation and derivative/debt-related gains to reported results and Adjusted EBITDA.