DLH Holdings Corp. — Form 10-Q Summary
Business context and period: This filing covers the fiscal third quarter and nine months ended June 30, 2017. DLH provides technology-enabled health, human-services, and readiness services to U.S. government agencies. All figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Three months ended June 30, 2017 | Prior-year quarter | Nine months ended June 30, 2017 | Prior-year period |
|---|---|---|---|---|
| Revenue | $29.3 | $25.0 | $85.3 | $58.5 |
| Gross profit / margin | $6.4 / 21.8% | $5.5 / 21.8% | $18.5 / 21.7% | $11.6 / 19.8% |
| Operating income / margin | $1.8 / 6.0% | $1.7 / 6.7% | $4.5 / 5.3% | $2.7 / 4.7% |
| Net income | $0.9 | $0.8 | $2.2 | $1.0 |
| Diluted EPS | $0.08 | $0.07 | $0.18 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $2.3 | $2.1 | $6.4 | $3.6 |
Cash flow and liquidity: Nine-month operating cash flow was $5.0 million, compared with $3.4 million in the prior-year period. Cash at June 30 was $4.6 million, up from $3.4 million at September 30, 2016. Investing used $1.0 million, including $0.8 million of equipment purchases; financing used $2.8 million, principally for debt repayments.
Debt and balance sheet: Gross bank debt was $20.6 million, with $3.6 million classified as current; net bank debt after issuance costs was $19.6 million. The $25 million term loan bears interest at LIBOR plus 3.0% and matures May 1, 2021. No revolving borrowings were outstanding; reported availability was $5.8 million, subject to eligible receivables, with a $0.9 million standby letter of credit. Total assets were $67.1 million and shareholders’ equity was $34.8 million. The company reported compliance with debt covenants.
Changes and management commentary
- Revenue rose 17.1% for the quarter and 45.8% year to date. Management attributed growth primarily to the Danya acquisition and expansion on existing contract vehicles. Danya contributed $10.6 million of quarterly revenue versus $7.4 million in the prior-year quarter, and $31.0 million year to date versus $7.4 million.
- Year-to-date gross margin improved by 1.9 percentage points, which management attributed to acquired business, more complex contracts, and staff deployment. Quarterly gross margin was unchanged; quarterly operating margin declined as G&A grew faster than revenue.
- Year-to-date net income increased 125.5%. Adjusted EBITDA increased $2.8 million to $6.4 million; this is a non-GAAP measure defined by the company.
- Management expects cash, available credit, and planned operating cash flow to support operations for twelve months from the financial-statement date. The filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- All revenue is from federal agencies. The VA represented approximately 58% of nine-month revenue and HHS 32%; the VA share was 83% in the prior-year period. Loss or nonrenewal of major contracts, or changes in federal budgets and priorities, could materially affect results.
- The company’s secured debt is subject to financial covenants and restrictions; excess cash flow may be required for debt prepayments. Floating-rate borrowing creates interest-rate exposure.
- Goodwill and other intangible assets totaled $41.6 million. Management reported no impairment indicator during the period, but stated that contract nonrenewal or other adverse changes could affect future valuation.
- Workers’ compensation claims liability was $1.25 million, up from $0.98 million at September 30, 2016. Management reported no litigation believed reasonably likely to have a material adverse effect.
- The filing records a measurement-period adjustment to Danya acquisition allocations and a $49,000 year-to-date charge from revaluing warrants. It also reclassified $0.1 million from G&A to direct expenses for consistent presentation.
Important facts for investors to verify
- Whether VA and HHS contract awards are renewed and whether customer concentration continues to decline.
- How much reported growth and margin improvement is sustainable apart from Danya acquisition contributions.
- Cash conversion, receivables collection, and compliance with debt covenants and required repayments.
- Federal budget and procurement developments affecting the company’s major programs.
- The assumptions supporting goodwill and intangible-asset valuations and the company’s non-GAAP Adjusted EBITDA reconciliation.