Business context and reporting period
DLH Holdings Corp. provides technology-enabled health and human services, primarily to U.S. federal agencies. This unaudited Form 10-Q covers the fiscal third quarter and first nine months ended June 30, 2022; the comparable period is the quarter and nine months ended June 30, 2021. Approximately 99% of revenue came from federal agencies.
Financial performance and position
| Metric | Three months ended June 30, 2022 | Nine months ended June 30, 2022 |
|---|---|---|
| Revenue | $66.4 million | $327.9 million |
| Operating income / margin | $7.1 million / 10.7% | $28.6 million / 8.7% |
| Net income | $4.9 million | $19.8 million |
| Diluted EPS | $0.34 | $1.40 |
| EBITDA (non-GAAP) | $9.0 million | $34.3 million |
- Quarterly revenue rose 7.9% year over year; net income increased from $2.9 million. Nine-month revenue rose 81.3% and net income from $7.3 million.
- Cash from operations was negative $4.8 million for the nine months, versus positive $15.4 million a year earlier. Management attributed the use of cash mainly to completion of $22.3 million in previously funded deferred contract obligations and a $16.9 million increase in receivables.
- Cash was $1.1 million at June 30, down from $24.1 million at September 30, 2021. Current assets were $55.8 million and current liabilities $50.5 million.
- Term-loan principal was $28.5 million (balance-sheet debt, net of financing costs: $26.8 million); no revolver balance was outstanding. The company made $9.0 million in voluntary term-debt prepayments during the quarter and reported compliance with loan covenants.
- Reported revolver availability is described as up to $25.0 million based on eligible receivables, and as $23.0 million of unused capacity net of letters of credit.
Material changes and operating drivers
- Nine-month growth was heavily driven by two temporary FEMA task orders supporting Alaska’s COVID-19 response: $125.8 million in revenue. The community testing, vaccination and therapy order ended December 31, 2021; temporary medical staffing ended March 20, 2022.
- Quarterly FEMA revenue was negative $5.1 million because closeout reconciliations reduced previously accrued pass-through revenue and costs. The company reported remaining-portfolio quarterly revenue of $71.6 million, up $10.0 million, and nine-month revenue of $202.2 million, up $21.3 million. These are company-presented non-GAAP portfolio measures.
- Nine-month remaining-portfolio net income was $10.6 million versus $7.3 million; diluted EPS was $0.76 versus $0.54. Management said FEMA task-order margins exceeded initial expectations, partly because internal staff were used where appropriate. It also cited planned investments in human-capital management and business development.
- Customer concentration shifted sharply: DHS represented 38.6% of nine-month revenue versus 0.3% in the prior-year period, largely reflecting the FEMA work. VA contributed 28.1% and HHS 23.9%.
- Total backlog was approximately $509.7 million at June 30, versus $651.5 million at September 30, 2021; funded backlog was $87.4 million and unfunded backlog $422.3 million.
Outlook, risks and unusual items
- The filing provides no specific company revenue or earnings guidance. Management stated that planned operating cash flow should support operations for twelve months from issuance and that it intends to continue debt prepayments subject to available cash.
- VA pharmacy-service contracts were operating under a bridge through October 2022 and VA logistics contracts through November 2022. The government had not announced its future procurement strategy; management expected further extensions, but renewal and recompete outcomes remain uncertain. The HHS Head Start contract runs through April 2025.
- Management cited federal procurement and budget priorities, contract awards and protests, small-business set-asides, customer concentration, COVID-19-related demand uncertainty, inflation and higher interest rates, and acquisition integration as risks. It noted that pandemic-related work may decline as public-health needs ease.
- The term loan is floating-rate, partly hedged by a $22.8 million swap maturing in 2024; the remaining debt is exposed to rate changes. The company estimated a 1 percentage-point LIBOR increase would add less than $0.1 million of annual interest expense.
- Management reported no goodwill impairment indicator during the period and no pending or threatened litigation believed reasonably likely to materially affect results, financial position or cash flows. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of reported growth and profitability is repeatable after the FEMA task orders ended, and how the closeout adjustment affected quarterly results.
- Progress on VA bridge-contract extensions, recompetes and replacement awards, given the importance of VA and HHS relationships.
- Receivables collection and operating cash conversion, including the effects of deferred-revenue roll-off and contract billing terms.
- Backlog conversion, particularly the unfunded portion, and any changes in major-customer concentration.
- Debt paydown, covenant headroom, revolver availability and exposure to floating interest rates; the filing reports both $25.0 million of gross availability and $23.0 million net of letters of credit.