DLH Holdings Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; comparisons are with the same periods in 2013. DLH provides healthcare delivery, logistics and technical, and contingency/staffing services to U.S. government agencies.
Financial results
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Revenue | $15.692 million; up 16.6% | $44.914 million; up 13.8% |
| Gross profit / margin | $2.308 million / 14.7%; margin unchanged | $6.619 million / 14.7%; up from 14.0% |
| Operating income / margin | $268,000 / 1.7% | $559,000 / 1.2% |
| Net income (loss) | $251,000; $0.03 per diluted share | $582,000; $0.06 per diluted share |
| Adjusted EBITDA, non-GAAP | $373,000 | $1.011 million |
| Operating cash flow | Not presented for the quarter | $1.538 million |
All dollar amounts in the table are U.S. dollars. No income tax expense was recorded; the company cited net operating loss carryforwards. Nine-month results improved from a $169,000 net loss in 2013, principally due to revenue and gross-margin growth and lower financing-related expense, including a nonrecurring gain associated with the convertible instruments.
Balance sheet and liquidity
At June 30, 2014, cash was $3.841 million, working capital was approximately $335,000, and total liabilities were $16.410 million. Debt obligations were zero, compared with $1.313 million at September 30, 2013. The company had no credit-facility borrowing outstanding and reported $2.2 million of available loan reserves, including letter-of-credit reserves and unused capacity. Nine-month financing cash use was $1.092 million, mainly reflecting debt repayments; cash increased $433,000 from fiscal year-end.
Management said cash, eligible-asset-based credit availability, expected operating cash flow, and cost initiatives should support operations for twelve months from the financial-statement date. The facility’s stated maximum availability was $3 million, subject to eligible receivables; a higher limit requires conditions and lender consent.
Changes, outlook, and risks
- Quarterly revenue growth came primarily from new business awarded in 2013 and 2014 and expansion of existing programs. Nine-month direct expenses grew more slowly than revenue, helping lift gross margin; management cited favorable contract performance and cost management, partly offset by higher workers’ compensation costs.
- G&A rose with business growth and business-development spending, but declined as a share of revenue. Management continues to pursue organic growth, selective acquisitions or partnerships, and expansion in federal healthcare and logistics markets. The filing provides no numerical earnings or revenue guidance.
- Customer concentration is substantial: the U.S. government accounted for all revenue; the Department of Veterans Affairs generated 96% of quarterly revenue and 97% for the nine-month period. Management identifies loss, reduction, or nonrenewal of DVA work, federal budget pressure, sequestration, and price-focused contract awards as risks.
- Approximately $9.3 million of unbilled receivables relates to 2008 retroactive DVA billings, with about $8.7 million of related accrued employee payroll. The company expected billing and collection within twelve months, but timing and collection are uncertain. Additional indirect costs and fees of $0.4–$0.6 million remained subject to government review.
- A $1.4 million accrued payroll-tax liability, including an estimated $600,000 of penalties and interest, remains under IRS review. Management believes it has accrued the estimated liability but cannot assure favorable resolution; additional amounts or settlement timing could affect cash flow.
- The DOJ declined to intervene in and dismissed in its entirety the previously reported Service Contract Act claim. Management reported no material change in risk factors from its 2013 Form 10-K.
Key facts for investors to verify
- Whether DVA contract performance, renewals, and customer concentration remain consistent with the company’s growth expectations.
- Collection timing and final government-approved amounts for the retroactive billings and related employee payments.
- Resolution and potential cash impact of the IRS payroll-tax matters, and the status of the $1.4 million accrual.
- Actual borrowing availability under the asset-based facility, given its eligible-receivables limits and letter-of-credit reserves.
- Whether improved margins and cash generation persist after accounting for workers’ compensation costs, stock-based compensation, and other nonrecurring items.