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DLH Reports Fourth Quarter Fiscal Year 2019 Results

Strong Operating Performance, Debt Reduction Continues

ATLANTA, Dec. 11, 2019 (GLOBE NEWSWIRE) -- DLH Holdings Corp. (DLHC) (“DLH” or the “Company”), a leading provider of innovative healthcare services and solutions to federal agencies, today announced financial results for its fiscal fourth quarter ended September 30, 2019.

Highlights

  • Revenue was $54.2 million and $32.5 million for the three months ended September 30, 2019 and 2018, respectively; excluding the June acquisition, the Company delivered organic growth of approximately 6% year-over-year in the quarter

  • Operating income was $3.4 million for the fourth quarter versus $2.8 million for the prior-year period

  • Earnings of $1.6 million, or $0.12 per diluted share, for the fourth quarter of fiscal 2019 versus $1.8 million, or $0.14 per diluted share, for the prior-year period, reflecting the impact of interest expense on acquisition debt and amortization of acquired intangible assets

  • Operating cash flow was $6.9 million for the fourth quarter and $18.0 million for the fiscal year

  • Senior bank debt was reduced by $14 million since the S3 transaction on June 7, 2019, resulting in a remaining debt balance of $56 million as of September 30, 2019

Management Discussion
“We’re very pleased to report a solid finish to fiscal 2019, highlighted by the completion of the S3 acquisition, strong cash flow, and further debt reduction,” stated DLH President and Chief Executive Officer Zach Parker. “Driven by growth across our operations, revenue for the quarter reached $54.2 million and, for the fiscal year, $160.4 million. At the same time, we generated $18.0 million in operating cash flow for the year and continued to pay down debt, as we remain committed to strengthening our balance sheet and de-levering the Company heading into fiscal 2020.

“Not only did we bolster our presence in the Public Health & Life Sciences arena, we also prepared the Company to address increased demand across the key agencies we serve – leading to larger and differentiated contract opportunities that leverage our health IT applications, data analytics expertise, highly-credentialed staff, and recently-acquired cloud computing capabilities. We also announced a five-year, IDIQ contract with the CDC for public health management and logistics support, strategic health communications, and scientific & medical consultation. Given our growing reputation and skills - and the ongoing, bipartisan support in Washington for the markets we serve - we believe DLH is very well positioned for fiscal 2020 and beyond.”

Results for the Three Months Ended September 30, 2019
Revenue for the fourth quarter of fiscal 2019 was $54.2 million versus $32.5 million in the prior-year period. The increase in revenue is due primarily to the $19.8 million contribution from the new Social & Scientific Systems unit ("S3"), while the Company's legacy operations grew approximately 6% year over year.

Income from operations was $3.4 million for the quarter versus $2.8 million in the prior-year period and, as a percent of revenue, the Company reported an operating margin of 6.3% in fiscal 2019 versus 8.7% in fiscal 2018, The lower margin year-over-year was primarily due to increased depreciation and amortization, including amortization of acquired intangibles in the S3 transaction.

Interest expense in the quarter was $1.2 million, versus $0.3 million for the three months ended September 30, 2018, reflecting higher outstanding debt balances in recognition of the S3 transaction. Income before taxes was $2.2 million for the quarter versus $2.5 million in fiscal 2018. reflecting the impact of non-cash depreciation and amortization and interest expense.

For the three months ended September 30, 2019 DLH recorded a $0.6 million provision for tax expense versus $0.7 in the prior-year period. The Company reported net income of approximately $1.6 million, or $0.12 per diluted share, for the fourth quarter of fiscal 2019 versus $1.8 million, or $0.14 per diluted share, for the fourth quarter of fiscal 2018.

On a non-GAAP basis, Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) for the three months ended September 30, 2019 was approximately $5.3 million versus $3.4 million in the prior-year period. The year-over-year increase was primarily due to the impact of the S3 acquisition.

Balance Sheet and Cash Flow
DLH generated approximately $18.0 million in operating cash flow during fiscal 2019, versus $14.1 million last year, reflecting higher net income and improved working capital. Senior bank debt was reduced by $14 million since the S3 transaction on June 7, 2019, resulting in a remaining debt balance of $56 million as of September 30, 2019. The next required principal payment is not due until March 2022, although the Company intends to continue using free cash flow to make prepayments when possible.

As of September 30, 2019 the Company had cash and cash equivalents of $1.8 million, and senior debt of $56.0 million, versus cash of $6.4 million and senior debt of $7.7 million as of September 30, 2018.

Fiscal Year 2020 Expectations for Non-operational Expenses
The Company has taken substantial actions to control its interest expense for fiscal 2020, including the following:

  • Significant reduction in outstanding principal through $14 million of payments and prepayments in fiscal 2019.

  • Achievement of an improved leverage ratio, resulting in a 50-basis point reduction of interest rates under its credit facility.

  • Execution of a floating-to-fixed interest rate swap on $36 million of outstanding debt at the end of fiscal 2019 at 1.61%, plus applicable credit spread.

As a result, the Company expects interest expense of approximately $3.2 million for fiscal 2020 based on its fixed rate debt and a projection of interest expense on its floating rate debt at 2% LIBOR, plus applicable credit spread.

The Company expects fiscal year 2020 amortization of acquired S3 intangibles to be $3.0 million, reflecting allocation of approximately $30.6 million of the purchase price to intangible assets, with average lives of 10 years. The Company expects total amortization, including from prior acquisitions, to be $4.8 million in fiscal year 2020. In addition, the Company anticipates its tax rate to remain at 29% for fiscal 2020, and will continue to leverage the favorable tax attributes of our acquisitions and net operating losses to minimize required cash tax payments.

Conference Call and Webcast Details
DLH management will discuss fourth quarter results and provide a general business update, including current competitive conditions and strategies, during a conference call beginning at 11:00 AM Eastern Time tomorrow, December 12, 2019. Interested parties may listen to the conference call by dialing 888-347-5290 or 412-317-5256. Presentation materials will also be posted on the Investor Relations section of the DLH website prior to the commencement of the conference call.

A digital recording of the conference call will be available for replay two hours after the completion of the call and can be accessed on the DLH Investor Relations website or by dialing 877-344-7529 and entering the conference ID 10135728.

About DLH
DLH (DLHC) serves federal government clients throughout the United States and abroad delivering technology enabled solutions in key health and human services programs. The Company's seven core competencies include secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. DLH has over 1,900 employees serving numerous government agencies. For more information, visit the corporate website at www.dlhcorp.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
This press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or DLH`s future financial performance. Any statements that refer to expectations, projections or other characterizations of future events or circumstances or that are not statements of historical fact (including without limitation statements to the effect that the Company or its management “believes”, “expects”, “anticipates”, “plans”, “intends” and similar expressions) should be considered forward looking statements that involve risks and uncertainties which could cause actual events or DLH’s actual results to differ materially from those indicated by the forward-looking statements. Forward-looking statements in this release include, among others, statements regarding benefits of the acquisition, estimates of future revenues, operating income, earnings, earnings per share, non-operational expenses, backlog, and cash flows. These statements reflect our belief and assumptions as to future events that may not prove to be accurate. Our actual results may differ materially from such forward-looking statements made in this release due to a variety of factors, including: the risk that we will not realize the anticipated benefits of the acquisition of S3; the diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from the acquisition; the inability to retain S3 employees and customers; contract awards in connection with re-competes for present business and/or competition for new business; compliance with new bank financial and other covenants; the risks and uncertainties associated with client interest in and purchases of new services; changes in client budgetary priorities; government contract procurement (such as bid protest, small business set asides, loss of work due to organizational conflicts of interest, etc.) and termination risks; the ability to successfully integrate the operations of S3 and any future acquisitions; and other risks described in our SEC filings. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s periodic reports filed with the SEC, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as well as interim quarterly filings thereafter. The forward-looking statements contained herein are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Such forward-looking statements are made as of the date hereof and may become outdated over time. The Company does not assume any responsibility for updating forward-looking statements, except as may be required by law.

CONTACTS:

INVESTOR RELATIONS

Contact: Chris Witty

Phone: 646-438-9385

Email: cwitty@darrowir.com

TABLES TO FOLLOW


DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share amounts)

Three Months Ended

Twelve Months Ended

September 30,

September 30,

2019

2018

2019

2018

Revenue

$

54,183

$

32,489

$

160,391

$

133,236

Cost of Operations

Contract costs

41,803

24,687

124,551

105,374

General and administrative costs

7,067

4,395

20,525

16,838

Acquisition costs

1,391

Depreciation and amortization

1,919

588

3,956

2,242

Total operating costs

50,789

29,670

150,423

124,454

Income from operations

3,394

2,819

9,968

8,782

Interest expense, net

1,190

315

2,473

1,116

Income before income taxes

2,204

2,504

7,495

7,666

Income tax expense

639

747

2,171

5,830

Net income

$

1,565

$

1,757

$

5,324

$

1,836

Net income per share - basic

$

0.13

$

0.15

$

0.44

$

0.15

Net income per share - diluted

$

0.12

$

0.14

$

0.41

$

0.14

Weighted average common shares outstanding

Basic

12,036

11,889

12,018

11,881

Diluted

13,016

12,873

13,041

12,873


DLH HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value of shares)

September 30,
2019

September 30,
2018

ASSETS

Current assets:

Cash and cash equivalents

$

1,790

$

6,355

Accounts receivable

23,226

10,280

Other current assets

1,831

760

Total current assets

26,847

17,395

Equipment and improvements, net

5,343

1,566

Deferred taxes, net

2,345

4,137

Goodwill

52,758

25,989

Intangible assets, net

41,208

13,365

Other long-term assets

757

89

Total assets

$

129,258

$

62,541

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accrued payroll

$

8,852

$

4,983

Accounts payable, accrued expenses, and other current liabilities

20,633

10,950

Total current liabilities

29,485

15,933

Total long term liabilities

54,202

7,190

Total liabilities

83,687

23,123

Shareholders' equity:

Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,036 and 11,899 at September 30, 2019 and September 30, 2018, respectively

12

12

Additional paid-in capital

85,114

84,285

Accumulated deficit

(39,555)

(44,879)

Total shareholders’ equity

45,571

39,418

Total liabilities and shareholders' equity

$

129,258

$

62,541


DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

Twelve Months Ended

September 30,

2019

2018

Operating activities

Net income

$

5,324

$

1,836

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense

3,956

2,242

Amortization of deferred financing costs

982

275

Stock based compensation expense

790

1,375

Deferred taxes, net

1,792

5,502

Changes in operating assets and liabilities

Accounts receivable

617

1,631

Other current assets

(57)

(162)

Accrued payroll

178

1,260

Accounts payable, accrued expenses, and other current liabilities

5,262

54

Other long-term assets/liabilities

(805)

64

Net cash provided by operating activities

18,039

14,077

Investing activities

Business acquisition, net of cash acquired

(67,079)

Purchase of equipment and improvements

(405)

(654)

Net cash used in investing activities

(67,484)

(654)

Financing activities

Borrowing on senior debt

70,000

Repayments of senior debt

(21,708)

(11,979)

Deferred debt financing costs

(3,451)

(65)

Proceeds from stock option exercise

39

46

Net cash provided by (used in) financing activities

44,880

(11,998)

Net change in cash and cash equivalents

(4,565)

1,425

Cash and cash equivalents at beginning of year

6,355

4,930

Cash and cash equivalents at end of year

$

1,790

$

6,355

Supplemental disclosures of cash flow information

Cash paid during the period for interest

$

1502

$

800

Cash paid during the period for income taxes

$

543

$

876

Derivative warrant liability reclassified as equity

$

$

(306)

Noncash issuance of stock upon exercise of options

$

$

25


Revenue Metrics

Twelve Months Ended

September 30,

September 30,

2019

2018

Market Mix:

Defense/VA

58

%

65

%

Human Services and Solutions

25

%

31

%

Public Health/Life Sciences

17

%

4

%

Contract Mix:

Time and materials

84

%

95

%

Cost reimbursable

14

%

3

%

Firm fixed price

2

%

2

%

Prime vs Sub:

Prime

96

%

99

%

Subcontractor

4

%

1

%


Non-GAAP Financial Measures
The Company uses EBITDA as a supplemental non-GAAP measure of our performance. DLH defines EBITDA as net income excluding (i) interest expense, (ii) provision for or benefit from income taxes and (iii) depreciation and amortization.

For fiscal 2019 and the comparative period of fiscal 2018, the Company's net income was impacted by certain events that do not reflect the costs of our operations and which may affect the period-over-period assessment of operating results. We are reporting this non-GAAP metric to demonstrate the impact of these events. In fiscal 2019, DLH incurred $1.4 million of acquisition-related expenses incurred through the quarter ended June 30, 2019 for the acquisition of S3. The Company is excluding acquisition-related expenses from this non-GAAP measure. Additionally, in fiscal 2018, The Tax Cut and Jobs Act of 2017 ("TCJA of 2017") reduced corporate tax rates and revised rules regarding the usability of net operating losses. These changes resulted in a discrete charge to the first quarter tax provision for fiscal 2018 of $3.4 million due to revaluing the benefit of our net operating losses. Since the tax rate change was effective at the end of our first quarter in fiscal 2018, the reduction in rates was not fully reflected in fiscal 2018. Thus, for comparability, the tax provision for the prior year periods has been presented using the current year rate of 29%.

During the 2019 fiscal year, DLH acquired S3. The Company believes that it is helpful for investors to be able to evaluate the revenue performance of DLH’s underlying business excluding the impact of acquisitions. Therefore, the Company provides organic revenue growth as a non-GAAP measure to support this objective. To calculate organic revenue growth, the Company compares current year revenue, less revenue from acquisitions, to prior year revenue.

These non-GAAP measures of performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company's Board utilize these non-GAAP measures to make decisions about the use of the Company's resources, analyze performance between periods, develop internal projections and measure management performance. DLH believes that these non-GAAP measures are useful to investors in evaluating the Company's ongoing operating and financial results and understanding how such results compare with the Company's historical performance.


Reconciliation of GAAP net income to EBITDA, a non-GAAP measure:

(amounts in thousands)

Three Months Ended

Twelve Months Ended

September 30,

September 30,

2019

2018

Change

2019

2018

Change

Net income

$

1,565

$

1,757

$

(192)

$

5,324

$

1,836

$

3,488

(i) Interest expense

1,190

315

875

2,473

1,116

1,357

(ii) Provision for taxes

639

747

(108)

2,171

5,830

(3,659)

(iii) Depreciation and amortization

1,919

588

1,331

3,956

2,242

1,714

EBITDA

$

5,313

$

3,407

$

1,906

$

13,924

$

11,024

$

2,900


Reconciliation of GAAP net income to net income adjusted for the effect of The Tax Cuts and Jobs Act of 2017 and the acquisition costs of S3, a non-GAAP measure:

(amounts in thousands)

Three Months Ended

Twelve Months Ended

September 30,

September 30,

2019

2018

Change

2019

2018

Change

Net income

$

1,565

$

1,757

$

(192)

$

5,324

$

1,836

$

3,488

Write-down of deferred tax assets

3,365

(3,365)

Pro-forma impact of tax rate change

20

(20)

242

(242)

Acquisition costs

1,391

1,391

Tax effect of excluding acquisition costs, net

(403)

(403)

Net income, adjusted for the effect of The TCJA of 2017 and the acquisition of S3

$

1,565

$

1,777

$

(212)

$

6,312

$

5,443

$

869

Net income per diluted share

$

0.12

$

0.14

$

(0.02)

$

0.41

$

0.14

$

0.27

Impact of write-down of deferred tax asset

0.26

(0.26)

Pro-forma impact of tax rate change

0.02

(0.02)

Impact of acquisition costs, net

0.08

0.08

Net income per diluted share, adjusted for the effect of The TCJA of 2017 and the acquisition of S3

$

0.12

$

0.14

$

(0.02)

$

0.49

$

0.42

$

0.07