DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. The unaudited filing was submitted May 4, 2022. DLH provides technology-enabled health and human services, primarily to U.S. federal agencies; approximately 99% of revenue comes from federal government customers.
Financial performance
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Revenue | $108.7 million; up 76.7% year over year | $261.5 million; up 119.1% year over year |
| Operating income / margin | $10.3 million / 9.4% | $21.5 million / 8.2% |
| Net income | $7.2 million | $15.0 million |
| Diluted EPS | $0.50 | $1.04 |
| EBITDA (non-GAAP) | $12.1 million | $25.3 million |
For the six-month period, contract costs were $221.5 million, general and administrative costs $14.6 million, and depreciation and amortization $3.9 million. Net margin was 6.6% for the quarter and 5.7% for the six months. Interest expense, net, was $0.6 million for the quarter and $1.2 million for the six months; the decrease from the prior year primarily reflected lower term-loan balances. The effective tax rate was 26% for both current-period comparisons.
Cash flow, debt and liquidity
- Operating cash flow was negative $14.8 million for the six months, versus positive $6.1 million a year earlier. Cash declined $23.7 million to $0.4 million.
- Management attributed the operating cash use chiefly to completing work funded by advance billings in fiscal 2021 and FEMA contract close-out activity. Receivables rose $28.7 million; DLH said FEMA-related receivables and corresponding payables were largely settled after quarter-end.
- Term-loan principal was $37.5 million at March 31, 2022, with a $35.6 million net carrying amount after financing costs. The company made approximately $5.4 million of voluntary debt prepayments during the quarter. The loan matures September 30, 2025; no revolving-credit balance was outstanding.
- The secured revolver has a $25 million ceiling. The filing reports $23 million of unused capacity net of letters of credit and also states total borrowing availability of $25 million based on eligible receivables.
- DLH reported compliance with its loan covenants and said planned operating cash flow should support operations for 12 months from issuance. The credit agreement includes minimum fixed-charge coverage and maximum leverage requirements.
Changes and business drivers
- Growth was driven predominantly by two short-term FEMA task orders supporting Alaska’s COVID-19 response, which contributed $130.9 million of six-month revenue and $39.8 million in the quarter. The community testing, vaccination and therapy task order ended December 31, 2021; temporary medical staffing work ended March 20, 2022. Management expects only limited close-out activity and no significant effect on the remainder of fiscal 2022.
- Excluding FEMA task orders, six-month revenue was $130.6 million, up $11.3 million from the prior year; operating income was $9.6 million, up $1.3 million. For the quarter, remaining-portfolio revenue rose $7.4 million, while operating income was approximately flat at $4.7 million. These are company-presented non-GAAP portfolio comparisons.
- Revenue concentration shifted sharply: DHS represented 50.2% of six-month revenue, compared with 0.3% a year earlier, largely because of FEMA work. VA contributed 22.5% and HHS 19.4%. The VA and HHS together accounted for 41.9%.
- Total backlog was approximately $554.7 million at March 31, down from $651.5 million at September 30, 2021; funded backlog was $82.4 million and unfunded backlog $472.3 million.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management cited federal funding measures for the remainder of fiscal 2022 and said it did not anticipate significant operational changes. It also described continued demand across much of its contract portfolio, while noting that pandemic-related opportunities may decline as public-health conditions improve.
- Nine VA pharmacy contracts were operating under a bridge contract through October 2022 and seven VA logistics contracts through November 2022. The government had not announced its future procurement strategy; DLH expected further extensions because procurement takes time. The HHS Head Start contract runs through April 2025.
- Management identified risks including federal contract recompetes and protests, customer budget changes, contract termination or non-renewal, small-business set-aside rules, COVID-19 disruption, inflation and higher interest rates, and acquisition integration. Loss or material reduction of VA or HHS business could materially harm results.
- A $22.8 million notional interest-rate swap runs through 2024; the remaining term-loan balance remains exposed to rate changes. DLH estimated that a 1-percentage-point LIBOR increase would raise annual interest expense by less than $0.2 million.
- Management reported no goodwill impairment, no material litigation expected to adversely affect the company, and no material off-balance-sheet arrangements. Ordinary-course claims and government inquiries remain possible. Disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- How earnings, margins, cash generation and backlog develop after the FEMA task orders end, particularly whether underlying growth can offset the lost temporary revenue.
- Renewal or replacement plans and award timing for the VA bridge contracts, and continued performance and funding of the HHS contract.
- Whether receivables convert to cash as expected, and whether liquidity remains adequate given the low quarter-end cash balance and revolver availability subject to borrowing conditions.
- Debt repayment progress, covenant headroom, and exposure to floating interest rates.
- Customer concentration and the funded versus unfunded composition and realization of backlog.