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DH

DLH Holdings Corp. (DLHC)·Q4 2019 Earnings Summary

Executive Summary

  • Q4 2019 revenue rose 67% year over year to $54.2M, driven by ~$19.8M from the S3 acquisition and ~6% organic growth; EBITDA stepped up to $5.3M while operating margin compressed on higher D&A and G&A .
  • Diluted EPS was $0.12 vs $0.14 last year and $0.06 in Q3, reflecting higher interest from acquisition debt and amortization of acquired intangibles .
  • Management emphasized deleveraging: operating cash flow was $6.9M in Q4 and $18.0M for FY19; senior debt was reduced by $14M to $56M by quarter end, with revolver undrawn .
  • FY20 non-operational guidance set: interest expense ~$3.2M, total amortization ~$4.8M (S3 intangibles ~$3.0M), tax rate ~29%; Q4 margin profile deemed indicative near term .

What Went Well and What Went Wrong

What Went Well

  • Record quarterly revenue ($54.2M) and operating income ($3.4M) since restructuring; nine consecutive years of organic top-line growth underscored trajectory .
  • Strong EBITDA expansion to $5.3M on S3 contribution; FY19 operating cash flow of $18.0M funded accelerated debt paydown .
  • Strategic positioning improved via CDC five-year IDIQ and a nearly $900M pipeline, with focus on secure data analytics and FedRAMP-certified environment .
    Quote: “We are well placed across the healthcare space… customers are looking for more technology-enabled solution… including migration to the cloud and Internet of Things” .

What Went Wrong

  • Operating margin fell to 6.3% from 8.7% last year due to higher depreciation and amortization (including ~$1M amortization of acquired S3 intangibles) and higher G&A .
  • Diluted EPS declined to $0.12 vs $0.14 last year, pressured by interest expense rising to $1.2M from $0.3M on acquisition financing .
  • Government continuing resolutions throttled timing of new awards, contributing to lumpiness and delaying certain RFPs; organic growth required offsetting set-aside conclusion impacts .

Financial Results

MetricQ4 2018Q1 2019Q2 2019Q3 2019Q4 2019
Revenue ($USD Millions)$32.489 $33.752 $33.756 $38.700 $54.183
Operating Income ($USD Millions)$2.819 $2.557 $2.326 $1.690 $3.394
Net Income ($USD Millions)$1.757 $1.690 $1.265 $0.803 $1.565
Diluted EPS ($USD)$0.14 $0.13 $0.10 $0.06 $0.12
EBITDA ($USD Millions)$3.407 $3.1 $2.9 $2.6 $5.313
Operating Margin % (Q4 only)Q4 2018Q4 2019
EBIT Margin %8.7% 6.3%

Segment and contract mix (FY 2019):

  • Market mix: Defense/VA 58%, Human Services and Solutions 25%, Public Health/Life Sciences 17%
  • Contract mix: Time & materials 84%, Cost reimbursable 14%, Firm fixed price 2%
  • Prime vs Sub: Prime 96%, Subcontractor 4%

KPIs:

  • Operating cash flow: Q4 $6.9M; FY19 $18.0M
  • Senior debt at 9/30/19: $56.0M; reduced by $14M since S3 close; revolver undrawn
  • DSO: below 40 days
  • New business pipeline: just under $900M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Interest Expense ($USD Millions)FY 2020n/a~$3.2 Initiated
Amortization - S3 Intangibles ($USD Millions)FY 2020n/a~$3.0 Initiated
Total Amortization ($USD Millions)FY 2020n/a~$4.8 Initiated
Tax Rate (%)FY 2020n/a~29% Maintained
Maintenance CapEx ($USD Millions)Annual run-raten/a~$1.5–$2.0 Clarified
Margin OutlookNear-termn/aQ4 margin profile “indicative” near term Clarified
S3 Quarterly Revenue Contribution ($USD Millions)FY 2020 run-raten/a~$19.8–$20.0 Clarified

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3 2019)Current Period (Q4 2019)Trend
Secure data analytics / FedRAMPSSS platform viewed as “game-changer”; certifications in process; pipeline prequalified opportunities Progress monthly; early cross-sell wins; FedRAMP environment advancing; CDC IDIQ announced Strengthening execution
VA CMOP & medical logisticsExtensions expected; logistics likely follows pharmacy award; minimal FY19 impact Extensions through majority of FY20; negligible FY20 impact; 2021 scenarios modeled Stability near term; 2021 risk monitored
Budget/Continuing ResolutionsBipartisan Budget Act positive for key agencies; lumpiness persists CRs throttle new awards; some multi-year funding progress; potential legacy lift if budget certainty improves Mixed: timing headwind, funding backdrop supportive
Gross margin trajectory23.1% (Q1), 23.9% (Q2), 25.6% (Q3); mix and benefits management cited Q4 operating margin compressed on higher D&A and G&A; CFO reclass of certain costs clarified Near-term compression; structural clarity
M&A postureSelective; positioned; valuations competitive; post-Danya integration readiness FY20 M&A not off table; priority deleveraging; strong tax shields and cash flow capacity Opportunistic, balance-sheet aware
Organic growth driversPipeline ~$600M (earlier); cross-selling anticipated ~6% organic growth in Q4; on-contract growth; IDIQ hunting licenses Improving organic cadence

Management Commentary

  • “We have delivered attractive fourth quarter results with revenue at $54.2 million… and operating income… $3.4 million… highest values since restructuring” .
  • “We are rapidly delevering… paid down $14 million on our term loan… nothing drawn on our $25 million revolver” .
  • “Government services market is stable and growing… customers are looking for more technology-enabled solutions… data analytics… cloud and IoT” .
  • “Healthy new business pipeline… just under $900 million… optimistic about prospects for new wins next year and beyond” .

Q&A Highlights

  • S3 contribution/run-rate: ~$19.8M in Q4; management views that as a “pretty good” quarterly run-rate for FY20, with potential upside from task order awards and some recompete risk .
  • Margin outlook and cost reclassification: Q4 margins seen as indicative near term; CFO reclassified certain indirect costs to contract costs to align model and gross margin presentation across units .
  • VA contract exposure: CMOP and medical logistics contracts extended through most of FY20; negligible impact expected; 2021 scenarios modeled, noting VA mail-order pharmacy is “thinnest margin” business .
  • Organic growth drivers: ~6% organic growth supported by on-contract expansion, IDIQ task orders, and incentives; offsetting erosion from set-aside transitions .
  • Cross-sell and FedRAMP: Early wins; FedRAMP secure data environment progressing; new IDIQ broadens task order pursuits leveraging S3 analytics .
  • Cash discipline/CapEx: Strong run-rate FCF; maintenance CapEx light at ~$1.5–$2.0M/year; DSO below 40 days; some Q1 cash seasonality .

Estimates Context

  • Wall Street consensus (S&P Global) for Q4 2019 EPS and revenue was unavailable at time of analysis due to data request limits. As a result, we cannot quantify beats/misses versus consensus for Q4 2019 from S&P Global at this time.

Key Takeaways for Investors

  • S3 is scaling as expected, adding ~$20M quarterly revenue and driving EBITDA growth; focus on FedRAMP-enabled analytics should support higher-quality pipeline conversion .
  • Near-term margin compression is primarily mechanical (higher D&A and G&A from S3 integration); reclassification improves comparability of gross margin and sets a cleaner base for modeling .
  • Deleveraging is a central catalyst: $18.0M FY19 operating cash flow and $14M debt reduction to $56M; FY20 interest expense guided to ~$3.2M, enhancing EPS sensitivity to cash generation .
  • Contract timing risk from continuing resolutions persists; however, multi-year funding and extensions at VA reduce near-term revenue volatility; 2021 VA outcomes are manageable given margin mix .
  • Organic growth engines (on-contract expansion, CDC IDIQ, cross-sell) are intact; pipeline breadth (~$900M) provides multiple shots on goal across HHS/NIH/CDC .
  • Trading lens: watch for FY20 award flow and margin cadence updates; debt paydown and interest expense trajectory are likely positive EPS revision drivers absent macro award delays .
  • Medium-term thesis: diversified government health services portfolio with data analytics capabilities, disciplined M&A, and strong cash conversion underpin compounding potential as award flow normalizes .