DLH Holdings Corp. — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended June 30, 2013; balance-sheet comparisons are to September 30, 2012. Amounts below are in millions except per-share data.
Business context
DLH provides healthcare, logistics, technical, and staffing services to U.S. government customers. The U.S. government represented all revenue; the Department of Veterans Affairs (DVA) generated approximately 96%. One DVA blanket purchase agreement accounted for about 53% of revenue and is scheduled to run through October 31, 2016, subject to actual work orders and federal contracting terms.
Financial performance
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Nine months ended June 30, 2013 | Nine months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $13.460 | $12.618 | $39.462 | $36.732 |
| Gross profit | $1.975 | $1.590 | $5.535 | $4.455 |
| Gross margin | 14.7% | 12.6% | 14.0% | 12.1% |
| Operating income (loss) | $0.158 | ($0.625) | $0.074 | ($1.399) |
| Net income (loss) | $0.068 | ($0.568) | ($0.169) | ($1.672) |
| Net income (loss) per share | $0.01 | ($0.09) | ($0.02) | ($0.27) |
| Adjusted EBITDA, non-GAAP | $0.228 | ($0.498) | $0.337 | ($1.003) |
- Quarterly revenue rose 6.7%; nine-month revenue rose 7.4%. Management attributed growth mainly to expansion of existing programs and, for the nine-month period, the full-period contribution of prior-year awards.
- Direct expenses declined as a share of revenue, which management attributed to favorable contract performance and cost management. G&A fell 8.0% for the quarter and 3.0% for the nine months; severance expense was zero in 2013 versus $0.236 million in the prior-year periods.
- Quarterly results turned profitable, while the nine-month period remained loss-making. There was no income tax expense; the company maintained a 100% valuation allowance on net deferred tax assets.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was positive $0.367 million, compared with negative $2.238 million in 2012. Investing cash outflow was $0.009 million; financing cash outflow was $0.137 million. Cash increased $0.221 million to $3.310 million.
- At June 30, cash was $3.310 million, current assets were $16.474 million, and current liabilities were $18.551 million, implying a working-capital deficit of approximately $2.1 million. Total assets were $26.306 million and shareholders’ equity was $7.735 million.
- Asset-based credit-facility borrowings were $2.313 million, with only $0.035 million of reported unused availability, subject to eligible receivables. The facility is secured by substantially all operating-subsidiary assets; stated rates were 5.2% on receivables and 7.2% on unbilled receivables.
- The $0.350 million convertible debenture bears 10% interest and matures October 28, 2013. It is subordinated to the secured facility. The filing’s balance sheet reports the debenture net of financing adjustments; contractual principal is $0.350 million.
- Management said cash, limited credit availability, forecast operating cash flow, and cost reductions were expected to support operations for 12 months from the financial-statement date, but warned that adverse variances could require further spending cuts or additional capital, potentially dilutive to shareholders.
Material changes, outlook, and risks
- Other than the trends described above, no specific financial guidance was provided. Management reported delays in government funding and contract awards amid budget uncertainty, while stating it did not expect significant impacts from sequestration or federal budget cuts on existing DVA and DoD contracts. It also noted tougher price competition, more small-business set-asides, and increased use of lowest-price-technically-acceptable awards.
- Work orders for additional DVA services ran through September 30, 2013; DLH was awaiting DVA decisions on renewal proposals submitted in July. The company cautioned that losing or reducing this work could materially harm results, cash flows, and financial condition.
- A $9.3 million unbilled DVA receivable relates to retroactive wage determinations recognized in 2008; associated accrued employee wages and benefits were approximately $8.7 million. DLH expected to invoice and collect within 12 months, but timing and collection were not assured. It was also negotiating an estimated $0.4–$0.6 million of additional indirect costs and fees, subject to government review.
- Payroll-tax disputes with the IRS relating primarily to former operations had a recorded liability of $1.4 million, including about $0.6 million of estimated penalties and interest. Management believed it had accrued the estimated liability, but additional interest or penalties and a material liquidity effect remained possible.
- The company was reviewing a U.S. Attorney/Department of Justice claim alleging Service Contract Act prevailing-wage underpayments for 2003–2010. The potential impact was not determinable; an adverse outcome could be material.
- Nasdaq notified DLH that its share price had been below the $1.00 minimum bid for 30 consecutive business days. The initial compliance period ran through October 30, 2013. Goodwill was $8.595 million; management warned that contract nonrenewal or adverse business changes could trigger impairment.
Key facts for investors to verify
- Renewal outcomes, funding, and actual work volume under DVA contracts, especially the work orders expiring September 30, 2013 and the agreement responsible for about 53% of revenue.
- Collection timing and government approval of the $9.3 million retroactive DVA receivable, related employee payments, and the additional indirect-cost claim.
- Available borrowing capacity and renewal or termination status of the credit facility following its July 29, 2013 base-term date; the reported unused availability was only $35,000.
- Repayment, refinancing, or conversion of the $350,000 debenture due October 28, 2013, and any related dilution.
- Resolution and potential cash effects of the IRS payroll-tax matters and the prevailing-wage investigation, and progress toward Nasdaq bid-price compliance.