DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; filed August 6, 2018. Unless otherwise noted, financial amounts below are in millions.
Business context
DLH provides technology-enabled health, human-services, and readiness solutions to U.S. federal agencies. All revenue is from federal government agencies. The VA and HHS are its largest customers; for the nine-month period, they represented approximately 64% and 34% of revenue, respectively. About 97% of current contracts were time-and-materials arrangements.
Financial performance
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $36.1 | $29.3 | $100.7 | $85.3 |
| Gross margin | $8.3 (23.1%) | $6.4 (21.8%) | $22.3 (22.2%) | $18.5 (21.7%) |
| Operating income | $2.6 (7.2%) | $1.8 (6.0%) | $6.0 (5.9%) | $4.5 (5.3%) |
| Net income | $1.6 | $0.9 | $0.1 | $2.2 |
| Diluted EPS | $0.13 | $0.08 | $0.01 | $0.18 |
| EBITDA (non-GAAP) | $3.2 | $2.3 | $7.6 | $5.7 |
- Quarterly revenue rose 23.5%; management attributed growth primarily to higher workload volumes on VA and HHS contracts. Quarterly gross margin improved as direct expenses declined to 76.9% of revenue from 78.2%.
- Nine-month revenue grew 18.1%, and operating income increased about $1.5 million. Nine-month net income fell to $0.1 million, primarily due to a $3.4 million discrete tax charge related to the 2017 Tax Act’s reduction in the value of deferred tax assets. Excluding the tax-law effect, the company reported non-GAAP nine-month net income of $3.4 million.
- Cash from operating activities was $8.0 million for the nine months, versus $5.0 million in the prior-year period. Investing used $0.6 million, principally for equipment and improvements; financing used $5.8 million, including $5.7 million of senior-debt repayments. Cash increased $1.7 million to $6.6 million.
Balance sheet, debt, and liquidity
- At June 30, 2018, cash was $6.6 million, current assets $19.9 million, current liabilities $19.1 million, and total assets $66.3 million. Shareholders’ equity was $37.5 million.
- Term-loan principal was $14.0 million ($13.1 million net of unamortized issuance costs), down from $19.7 million principal at September 30, 2017. The loan bears interest at LIBOR plus 3.0% and matures May 1, 2021. The reported lender rate was 4.98%.
- The $10 million revolving facility had no borrowings; eligible-receivable availability was $10 million, including a $1.3 million standby letter of credit and $8.7 million unused borrowing capacity. The company said it was in compliance with loan covenants and expected operating cash flow to support operations for 12 months from issuance.
- Contractual obligations totaled $17.0 million, including $14.0 million of debt and approximately $3.0 million of facility leases. Management reported no off-balance-sheet arrangements.
Material changes, outlook, and risks
- The VA renewal is a significant business risk: approximately 55% of the company’s current VA business base came from nine contracts extended through October 31, 2018. The renewal RFP requires an SDVOSB prime contractor, preventing DLH from bidding as prime; DLH has teamed with an SDVOSB partner and expects to retain significant work if that partner wins. Pre-award protests had been filed, and further protests could delay resolution. DLH expected to continue performing during the process.
- Management stated that federal budget uncertainty was not expected to materially affect its fiscal 2019 business base, while noting a continuing resolution might be needed after September 30, 2018. This is management’s expectation, not a quantified forecast.
- Revenue and financial condition are substantially exposed to federal procurement, contract renewals, budget priorities, and especially VA and HHS workload. Management identified possible contract loss or reduced customer activity as potentially materially adverse.
- The nine-month tax charge is unusual and materially depressed reported earnings. The company reported no known pending or threatened litigation expected to have a material adverse effect, and no material changes to previously disclosed risk factors.
- The company planned to adopt the new revenue standard beginning October 1, 2018 and did not anticipate a material impact given its contract mix. The new lease standard was expected to take effect October 1, 2019.
Most important facts for investors to verify
- Outcome, timing, protest status, and DLH’s likely work share in the VA SDVOSB set-aside recompete.
- Whether VA and HHS workload growth continues, and whether customer concentration or contract mix changes.
- Cash conversion, debt repayments, covenant compliance, and continued availability of the revolving facility.
- Reported versus tax-adjusted earnings, including the deferred-tax-asset write-down and subsequent tax expense.
- Federal fiscal 2019 funding and the effect of any continuing resolution or procurement delays.