DLH Holdings Corp. — Q3 FY2021 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended June 30, 2021; DLH’s fiscal year ends September 30. The company provides technology-enabled health and human services, deriving 99% of revenue from U.S. federal agencies. Its largest customers are the VA, HHS, and DoD. Results include the contribution of Irving Burton Associates (IBA), acquired September 30, 2020.
Financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $61.6 million, up 19.6% | $180.9 million, up 14.1% |
| Income from operations | $4.9 million; 8.0% margin | $13.2 million; 7.3% margin |
| Net income | $2.9 million; diluted EPS $0.21 | $7.3 million; diluted EPS $0.54 |
| Operating cash flow | Not separately provided | $15.4 million, versus $10.7 million |
- For the quarter, revenue increased $10.1 million year over year, including $7.3 million from IBA and higher volume on existing contracts. Nine-month revenue growth included $21.6 million from IBA.
- Quarterly operating margin improved from 7.4% to 8.0%; nine-month operating margin rose from 6.8% to 7.3%. Contract costs increased faster than revenue in both comparisons, while G&A was broadly stable.
- Management reported non-GAAP EBITDA of $7.0 million for the quarter and $19.3 million for the nine months, compared with $5.5 million and $16.1 million, respectively, in the prior-year periods.
Balance sheet, debt and liquidity
- At June 30, cash was $0.7 million, accounts receivable $36.4 million, current assets $40.8 million and current liabilities $45.0 million. Total assets were $178.8 million and shareholders’ equity $62.2 million.
- Term-loan principal was $53.8 million ($51.5 million net of financing costs), down from $70.0 million at September 30, 2020. The company repaid $16.2 million during the nine-month period, including approximately $9.0 million of voluntary prepayments in the quarter.
- The $25 million revolving facility had no balance outstanding. The filing reports $23.0 million of unused capacity net of letters of credit and also cites $25.0 million total borrowing availability, subject to borrowing conditions.
- Operating cash flow funded debt repayment; financing activities used $16.0 million. Cash declined $0.6 million from fiscal year-end. Management expects planned operating cash flow to support operations for 12 months from issuance and intends to continue debt prepayments.
- The term loan matures September 30, 2025, is secured by substantially all company assets, and carries variable-rate exposure; a portion is covered by an interest-rate swap. The company said it was in compliance with covenants.
Material changes, outlook and risks
- Customer mix shifted: nine-month DoD revenue rose to $22.1 million from $0.9 million, while HHS revenue declined to $66.7 million from $73.3 million; VA revenue increased to $83.0 million from $74.4 million. Defense and Veteran Health Solutions increased to 58% of revenue from 48%.
- Backlog was approximately $566.2 million at June 30, down from $688.4 million at September 30, 2020; $76.4 million was funded and $489.8 million unfunded. Backlog is not assurance of future revenue.
- Nine VA pharmacy contracts, representing about $47.5 million of nine-month revenue, were operating under extensions through October 2021. The government canceled the related renewal RFP and had not announced its future procurement strategy. Seven VA logistics contracts, representing about $35.5 million of nine-month revenue, were extended through November 2021 after a follow-on award was protested and canceled; the company expected a new award after the government addressed procurement concerns.
- Management said it did not expect a material COVID-19 impact in the fiscal year, while warning that pandemic duration, new strains, operational disruption, or government spending shifts could adversely affect results. It also identified federal contract competition, set-aside rules, contract renewals and protests, acquisition integration, customer concentration, and covenant compliance as risks. No specific financial guidance was provided.
- The company reported no litigation it believed reasonably likely to have a material adverse effect, no material off-balance-sheet arrangements, and no material change to previously reported risk factors.
Important facts for investors to verify
- Progress and procurement decisions for the VA pharmacy and logistics contracts, including extensions, protests, and replacement awards.
- Backlog conversion, particularly the large unfunded portion, and the pace of new contract awards.
- Whether IBA-related growth translates into sustained organic growth and margins as acquisition-related amortization and financing costs continue.
- Debt repayment, available revolver capacity, covenant headroom, and sensitivity to variable interest rates.
- Exposure to the VA and HHS, which together represented 83% of nine-month revenue, and the potential effect of federal budget or set-aside changes.