DLH(DLHC) - 2021 Q1 - Quarterly Report

Part I — Financial Information This section presents the company's unaudited consolidated financial statements and management's discussion and analysis for the three months ended December 31, 2020 Item 1. Financial Statements This section presents the unaudited consolidated financial statements for the three months ended December 31, 2020, including the Statements of Operations, Balance Sheets, Statements of Cash Flows, Statements of Shareholders' Equity, and detailed Notes Consolidated Statements of Operations The company reported revenue of $57.9 million and net income of $1.8 million for the three months ended December 31, 2020, with diluted earnings per share rising to $0.13 Consolidated Statements of Operations (Unaudited) | Financial Metric | Three Months Ended Dec 31, 2020 (in thousands) | Three Months Ended Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Revenue | $57,852 | $52,238 | | Income from operations | $3,635 | $3,126 | | Net income | $1,814 | $1,551 | | Net income per share - basic | $0.15 | $0.13 | | Net income per share - diluted | $0.13 | $0.12 | Consolidated Balance Sheets As of December 31, 2020, total assets increased to $191.9 million from $183.6 million, primarily driven by an increase in accounts receivable, while total liabilities reached $135.9 million and shareholders' equity grew to $55.9 million Consolidated Balance Sheet Highlights (Unaudited) | Account | Dec 31, 2020 (in thousands) | Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $370 | $1,357 | | Accounts receivable | $44,885 | $32,541 | | Total assets | $191,866 | $183,562 | | Total current liabilities | $55,402 | $47,961 | | Total liabilities | $135,931 | $130,125 | | Total shareholders' equity | $55,935 | $53,437 | Consolidated Statements of Cash Flows For the three months ended December 31, 2020, the company reported a net cash outflow of $8.5 million from operating activities, offset by $7.6 million in cash provided by financing activities, resulting in a net decrease in cash of $1.0 million Consolidated Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended Dec 31, 2020 (in thousands) | Three Months Ended Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Net cash (used in) operating activities | $(8,518) | $(2,884) | | Net cash (used in) investing activities | $(53) | $(162) | | Net cash provided by financing activities | $7,584 | $1,618 | | Net change in cash and cash equivalents | $(987) | $(1,428) | Consolidated Statements of Shareholders' Equity Total shareholders' equity increased from $53.4 million to $55.9 million during the quarter, primarily driven by $1.8 million in net income and stock-based compensation expense - Shareholders' equity increased by approximately $2.5 million during the quarter, primarily due to $1.8 million in net income and stock-based compensation expenses[17] Notes to Consolidated Financial Statements The notes provide detailed information on the company's accounting policies and financial statement components, including revenue sources, major customers, lease obligations, debt facilities, and stock-based compensation plans - The company derives 99% of its revenue from U.S. Federal government agencies[23] - The Department of Veteran Affairs (VA) and the Department of Health and Human Services (HHS) are the two largest customers, comprising 48% and 35% of revenue, respectively, for the three months ended December 31, 2020[24] Debt Obligations as of Dec 31, 2020 (in thousands) | Debt Instrument | Balance | | :--- | :--- | | Bank revolving line of credit | $9,150 | | Bank term loan | $68,250 | | Net bank debt obligations | $74,807 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides an analysis of the company's financial performance and condition, highlighting a 10.7% year-over-year revenue growth driven by the IBA acquisition, and discussing operational results, liquidity, and forward-looking trends Business and Markets Overview DLH provides technology-enabled solutions to federal health and human service agencies, with 99% of revenue from the U.S. government, operating in Defense and Veteran Health, Human Services, and Public Health and Life Sciences market areas - The company's business offerings are aligned to three market focus areas: Defense and Veteran Health Solutions, Human Services and Solutions, and Public Health and Life Sciences[107] - The acquisition of Irving Burton Associates, LLC ("IBA") on September 30, 2020, is a key component of the company's recent performance and strategy[106] Major Customers and Contracts The Department of Veterans Affairs (VA) and the Department of Health and Human Services (HHS) remain the company's largest customers, contributing 48% and 35% of revenue, respectively, with several key VA contracts operating under extensions Revenue by Major Customer (Q1 FY21 vs Q1 FY20) | Customer | Q1 FY21 Revenue % | Q1 FY20 Revenue % | | :--- | :--- | :--- | | Department of Veterans Affairs | 48% | 46% | | Department of Health and Human Services | 35% | 46% | | Department of Defense | 12% | 1% | - Nine VA pharmacy services contracts are operating under extensions through October 2021 after a previous RFP was canceled, with the government's future procurement strategy yet to be announced[112][113] - Seven VA logistics contracts have been extended through June 2021, and a renewal RFP has been issued as a full and open acquisition, allowing DLH to bid as the prime contractor[114] Backlog As of December 31, 2020, the company's total backlog was approximately $665.2 million, consisting of $103.9 million in funded orders and $561.3 million in unfunded amounts Backlog Summary | Backlog Category | As of Dec 31, 2020 (in millions) | As of Sep 30, 2020 (in millions) | | :--- | :--- | :--- | | Total Backlog | $665.2 | $688.4 | | Funded Backlog | $103.9 | N/A | | Unfunded Backlog | $561.3 | N/A | Results of Operations For the first quarter of fiscal 2021, revenue increased by 10.7% to $57.9 million, primarily due to the IBA acquisition, with income from operations growing to $3.6 million and non-GAAP EBITDA increasing to $5.7 million - Revenue for the three months ended December 31, 2020, increased by $5.6 million (10.7%) year-over-year, primarily due to the acquisition of IBA, which generated $7.0 million of revenue[133] Reconciliation of GAAP Net Income to EBITDA (non-GAAP) | Metric (in thousands) | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net income | $1,814 | $1,551 | | Interest expense, net | $1,080 | $941 | | Provision for taxes | $741 | $634 | | Depreciation and amortization | $2,062 | $1,859 | | EBITDA | $5,697 | $4,985 | Liquidity and capital management The company's primary liquidity sources are cash from operations and its $25 million revolving credit facility, with $9.2 million outstanding and $25.0 million available borrowing capacity as of December 31, 2020 - As of December 31, 2020, the company had $25.0 million of available borrowing capacity on its revolving line of credit and a balance outstanding of $9.2 million[144] - The company used $8.5 million in cash from operations during the quarter, which management attributes to short-term impacts from the continuing resolution for the federal budget and transitions in contract payment offices[146] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's main market risk exposure is to interest rate fluctuations on its variable-rate debt, partially mitigated by a floating-to-fixed interest rate swap on a notional amount of $28.8 million - The company utilizes a floating-to-fixed interest rate swap with a notional amount of $28.8 million to manage interest rate risk, where a 1.0% increase in the LIBOR rate would impact annual interest expense by less than $0.4 million[174] Item 4. Controls and Procedures As of December 31, 2020, the company's CEO and CFO concluded that its disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report[175] - No changes in internal control over financial reporting occurred during the fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[180] Part II — Other Information This section covers legal proceedings, risk factors, and exhibits filed with the report Item 1. Legal Proceedings The company is not aware of any pending or threatened litigation that is reasonably likely to have a material adverse effect on its results of operations, financial position, or cash flows - The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its business[181] Item 1A. Risk Factors The company states that there have been no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020 - There have been no material changes from the risk factors described in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020[182] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial data formatted in iXBRL - The exhibits filed with the report include certifications from the CEO and CFO pursuant to SEC regulations and financial statements formatted in iXBRL[186]