DLH(DLHC) - 2023 Q1 - Quarterly Report

Part I — Financial Information Item 1. Financial Statements The unaudited consolidated financial statements for the three months ended December 31, 2022, reflect a significant year-over-year decline in revenue and net income, substantial asset and liability increases from the GRSi acquisition, and improved operating cash flow Consolidated Statements of Operations Revenue for the three months ended December 31, 2022, sharply declined to $72.7 million from $152.8 million, primarily due to completed FEMA contracts, leading to a significant decrease in net income to $1.5 million Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended Dec 31, 2022 (in thousands) | Three Months Ended Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Revenue | $72,738 | $152,801 | | Income from operations | $3,921 | $11,219 | | Net income | $1,547 | $7,804 | | Net income per share - basic | $0.12 | $0.61 | | Net income per share - diluted | $0.11 | $0.55 | Consolidated Balance Sheets As of December 31, 2022, total assets increased to $367.3 million from $169.0 million, driven by the GRSi acquisition which added significant goodwill and intangible assets, while total liabilities sharply rose to $266.8 million from $77.0 million due to new debt Consolidated Balance Sheet Highlights (Unaudited) | Metric | Dec 31, 2022 (in thousands) | Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $367,328 | $169,012 | | Goodwill | $139,277 | $65,643 | | Intangible assets, net | $136,729 | $40,884 | | Total Liabilities | $266,819 | $76,952 | | Debt obligations - long-term | $165,942 | $20,416 | | Total shareholders' equity | $100,509 | $92,060 | Consolidated Statements of Cash Flows Net cash provided by operating activities for the three months ended December 31, 2022, significantly improved to $8.0 million from a $16.2 million use of cash, while $180.3 million was used in investing activities for the GRSi acquisition, funded by $173.5 million from financing activities Consolidated Cash Flow Summary (Unaudited) | Activity | Three Months Ended Dec 31, 2022 (in thousands) | Three Months Ended Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7,973 | $(16,155) | | Net cash used in investing activities | $(180,342) | $0 | | Net cash provided by (used in) financing activities | $173,505 | $(3,675) | | Net change in cash | $1,136 | $(19,830) | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial statement components, including the basis of presentation, revenue recognition, GRSi business combination specifics, new debt structure, lease obligations, and stock-based compensation plans - On December 8, 2022, the Company acquired 100% of Grove Resource Solution, LLC (GRSi) for a net preliminary purchase price of $185.1 million. The acquisition was financed through $178.1 million in borrowings and $7.0 million in common stock[50] Preliminary Purchase Price Allocation for GRSi (in thousands) | Item | Amount | | :--- | :--- | | Preliminary purchase price | $188,458 | | Total identifiable net assets acquired | $114,824 | | Intangible assets | $98,004 | | Goodwill | $73,634 | - Following the acquisition, GRSi contributed approximately $6.9 million in revenue and $0.3 million in income from operations for the period from December 8 to December 31, 2022[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 52.4% year-over-year revenue decrease to the completion of a $91.1 million FEMA contract, while the GRSi acquisition significantly increased the company's backlog to $942.7 million and adjusted non-GAAP measures show underlying revenue growth and solid liquidity Business and Markets Overview DLH provides technology, cyber, and engineering solutions for federal health and human service initiatives, with 99% of revenue from U.S. government agencies, and the VA and HHS became the largest customers this quarter, shifting from DHS in the prior year Revenue by Customer (in thousands) | Customer | Q1 FY2023 Revenue | Q1 FY2023 % | Q1 FY2022 Revenue | Q1 FY2022 % | | :--- | :--- | :--- | :--- | :--- | | Dept. of Veterans Affairs | $33,708 | 46.4% | $28,193 | 18.5% | | Dept. of Health and Human Services | $27,305 | 37.5% | $23,126 | 15.1% | | Dept. of Defense | $10,263 | 14.1% | $8,495 | 5.6% | | Dept. of Homeland Security | $167 | 0.2% | $91,328 | 59.8% | - The company's backlog increased substantially to $942.7 million at December 31, 2022, from $482.5 million at September 30, 2022, largely due to the GRSi acquisition[108] Results of Operations Q1 FY2023 revenue decreased 52.4% to $72.7 million from $152.8 million, primarily due to completed FEMA task orders, with operating income falling to $3.9 million, though non-GAAP adjustments show adjusted revenue and EBITDA growth - The primary reason for the $80.1 million revenue decrease was the completion of two FEMA task orders which contributed $91.1 million in revenue in the prior-year quarter[124] - Corporate development costs of $1.7 million were incurred in Q1 FY2023 related to the GRSi acquisition, with no comparable costs in the prior year[122][127] - Interest expense increased to $1.8 million from $0.7 million year-over-year, primarily due to borrowing required to finance the GRSi acquisition[129] Non-GAAP Reconciliation Highlights (in thousands) | Metric | Q1 FY2023 | Q1 FY2022 | Change | | :--- | :--- | :--- | :--- | | Revenue (GAAP) | $72,738 | $152,801 | $(80,063) | | Less: Acquired/FEMA Revenue | $(6,878) | $(91,125) | - | | Adjusted Revenue | $65,860 | $61,676 | $4,184 | | Net Income (GAAP) | $1,547 | $7,804 | $(6,257) | | Adjusted Net Income | $3,575 | $3,108 | $467 | | EBITDA (GAAP) | $6,323 | $13,204 | $(6,881) | | Adjusted EBITDA | $7,200 | $6,858 | $342 | Liquidity and Capital Management As of December 31, 2022, the company held $1.4 million in cash and access to a $70.0 million secured revolving line of credit with $31.2 million available, having financed the GRSi acquisition through new debt, resulting in a $186.4 million term loan and $16.9 million revolving credit balance - The company has a $70.0 million secured revolving line of credit, with an outstanding balance of $16.9 million and available capacity of $31.2 million as of December 31, 2022[143][146] Debt Obligations as of Dec 31, 2022 (in millions) | Facility | Loan Balance | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | Secured term loan | $186.4 | SOFR + 4.2% | Dec 8, 2027 | | Secured revolving line of credit | $16.9 | SOFR + 4.2% | Dec 8, 2027 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk on its variable-rate debt using floating-to-fixed interest rate swaps, with a $16.2 million swap in place as of December 31, 2022, and a 1.0% SOFR rate increase would raise annual interest expense by approximately $0.9 million - The company utilizes floating-to-fixed interest rate swaps to manage interest rate risk. As of the quarter-end, a swap with a notional amount of $16.2 million was in place. Post-quarter, this was increased to $112.2 million[166] - A hypothetical 1.0% increase in the SOFR interest rate would increase the company's annual interest expense by approximately $0.9 million[167] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2022, and the company is actively integrating the acquired GRSi business into its internal control environment - Disclosure controls and procedures were deemed effective at a reasonable assurance level as of the end of the period[168] - The company is in the process of integrating the acquired GRSi business into its internal control over financial reporting[171] 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 likely to have a material adverse effect on its financial results or position - The Company is not aware of any pending or threatened litigation expected to have a material adverse effect on its operations, financial position, or cash flows[172] Item 1A. Risk Factors This section highlights new risks from the GRSi acquisition, primarily increased indebtedness limiting operational flexibility and challenges in successfully integrating GRSi's operations, systems, and employees - The company incurred significant additional indebtedness to finance the GRSi acquisition, which could adversely affect the business by using a larger portion of cash flow for debt service and limiting operational flexibility[174] - The company faces potential difficulties in integrating GRSi's operations, which could result in the loss of key employees, disruption of ongoing business, and inconsistencies in systems and policies[175][177] - There is a risk of being required to take write-downs, restructuring, or impairment charges related to the acquisition if due diligence did not uncover all material issues or if unexpected risks arise[179] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period, though an employee surrendered 67,208 shares of common stock in November 2022 to cover stock option exercise price and tax obligations - In November 2022, 67,208 shares were repurchased by the company in connection with an employee stock option exercise, where the holder surrendered shares to pay the exercise price and taxes[181][182] Item 3. Defaults Upon Senior Securities None reported Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information None reported Item 6. Exhibits This section lists the exhibits filed with the report, including the Equity Purchase Agreement for the GRSi acquisition, the Second Amended and Restated Credit Agreement, and various officer certifications