DLH(DLHC) - 2021 Q3 - Quarterly Report

Part I — Financial Information Item 1. Financial Statements The company reported increased revenue and net income for the three and nine months ended June 30, 2021, compared to the prior year, with total assets slightly decreasing while total liabilities saw a more significant reduction, leading to a stronger shareholders' equity position and improved operating cash flow primarily used for debt repayment Consolidated Statements of Operations For the third quarter of fiscal 2021, revenue grew to $61.6 million from $51.5 million year-over-year, with net income rising to $2.9 million from $2.1 million, and for the nine-month period, revenue increased to $180.9 million from $158.5 million, and net income grew to $7.3 million from $5.8 million Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $61,555 | $51,459 | $180,913 | $158,495 | | Income from operations | $4,939 | $3,800 | $13,194 | $10,763 | | Net income | $2,880 | $2,124 | $7,261 | $5,752 | | Diluted EPS | $0.21 | $0.16 | $0.54 | $0.44 | Consolidated Balance Sheets As of June 30, 2021, total assets were $178.8 million, a slight decrease from $183.6 million at September 30, 2020, while total liabilities decreased to $116.5 million from $130.1 million, primarily due to debt repayment, resulting in an increase in total shareholders' equity to $62.2 million from $53.4 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 (unaudited) | September 30, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $739 | $1,357 | | Total current assets | $40,780 | $37,397 | | Total assets | $178,751 | $183,562 | | Total current liabilities | $45,024 | $47,961 | | Total liabilities | $116,505 | $130,125 | | Total shareholders' equity | $62,246 | $53,437 | Consolidated Statements of Cash Flows For the nine months ended June 30, 2021, net cash provided by operating activities increased to $15.4 million from $10.7 million in the prior-year period, with cash used in financing activities totaling $16.0 million, driven by $16.2 million in repayments of the secured term loan Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $15,388 | $10,707 | | Net cash provided by (used in) investing activities | $6 | $(152) | | Net cash used in financing activities | $(16,012) | $(11,687) | | Net change in cash and cash equivalents | $(618) | $(1,132) | Notes to Consolidated Financial Statements The notes detail the company's business, which is 99% reliant on U.S. federal government agencies, with the VA, HHS, and DoD being major customers, and revenue is primarily from Time and Materials contracts where the company acts as the prime contractor, maintaining a secured term loan and a revolving credit facility with all covenants in compliance, and contractual obligations mainly composed of debt and facility leases - The company derives 99% of its revenue from U.S. federal government agencies[22] Revenue by Customer (Nine Months Ended June 30) | Customer | 2021 Revenue (in thousands) | 2021 % of Total | 2020 Revenue (in thousands) | 2020 % of Total | | :--- | :--- | :--- | :--- | :--- | | Dept. of Veterans Affairs | $83,010 | 46% | $74,402 | 47% | | Dept. of Health and Human Services | $66,748 | 37% | $73,263 | 46% | | Dept. of Defense | $22,103 | 12% | $943 | 1% | Revenue by Contract Type (Nine Months Ended June 30) | Contract Type | 2021 Revenue (in thousands) | 2020 Revenue (in thousands) | | :--- | :--- | :--- | | Time and Materials | $137,492 | $110,918 | | Cost Reimbursable | $35,796 | $43,887 | | Firm Fixed Price | $7,625 | $3,690 | Contractual Obligations as of June 30, 2021 (in thousands) | Obligation Type | Total | Payments Due in 2021 (Remaining) | Payments Due in 2022-2023 | Payments Due Thereafter | | :--- | :--- | :--- | :--- | :--- | | Debt obligations | $53,800 | $— | $6,550 | $47,250 | | Facility leases | $28,503 | $802 | $6,726 | $20,975 | | Equipment operating leases | $239 | $21 | $166 | $52 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 19.6% quarterly and 14.1% nine-month revenue growth primarily to the acquisition of Irving Burton Associates (IBA), with the company's backlog decreasing to $566.2 million, and while key VA contracts are operating under extensions with procurement uncertainty, the federal budget outlook for the company's core markets (HHS, VA, DoD) is favorable, generating strong operating cash flow used for significant debt prepayments, and maintaining sufficient liquidity - Revenue for Q3 2021 increased by $10.1 million (19.6%) year-over-year, primarily due to the IBA acquisition which contributed $7.3 million[129] - Total backlog was approximately $566.2 million at June 30, 2021, a decrease from $688.4 million at September 30, 2020, with funded backlog at $76.4 million[114][115] - Key VA pharmacy and logistics contracts are operating under extensions through late 2021, but a renewal RFP for pharmacy services was canceled, and a follow-on award for logistics was protested and canceled, creating uncertainty about future procurement strategy[108][109][110] Reconciliation of GAAP Net Income to EBITDA (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $2,880 | $2,124 | $7,261 | $5,752 | | Interest expense, net | $893 | $813 | $2,977 | $2,659 | | Provision for taxes | $1,166 | $863 | $2,956 | $2,352 | | Depreciation and amortization | $2,014 | $1,721 | $6,105 | $5,340 | | EBITDA (Non-GAAP) | $6,953 | $5,521 | $19,299 | $16,103 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk associated with its variable-rate term loan, partially mitigated by a floating-to-fixed interest rate swap on a notional amount of $28.8 million, with a 1.0% increase in the LIBOR rate estimated to impact annual interest expense by less than $0.3 million - The company utilizes a floating-to-fixed interest rate swap with a notional amount of $28.8 million to manage interest rate risk on its term loan[177] - A hypothetical 1.0% increase in the LIBOR rate would result in an impact of less than $0.3 million per year to interest expense[177] Item 4. Controls and Procedures Based on an evaluation as of June 30, 2021, the CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of the end of the reporting period[178] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[180] Part II — Other Information Item 1. Legal Proceedings The company is subject to various claims and legal actions in the ordinary course of business but is not aware of any pending or threatened litigation that is reasonably likely to have a material adverse effect on its financial position or results of operations - 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 results of operations, financial position, or cash flows[181] Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 - The company states that there have been no material changes from the risk factors described in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020[183] Other Part II Items The company reported no unregistered sales of equity securities, no defaults upon senior securities, and had no other material information to disclose for the period, with the report listing required exhibits, including officer certifications - The company reported 'None' or 'Not applicable' for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information)[184][185] - Item 6 lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and iXBRL data files[187][188]