DLH Holdings Corp. (NASDAQ:DLHC) is a diversified government services provider that delivers improved health and cyber readiness solutions for federal government customers. The company has established a strong foothold in the government services market, leveraging its expertise in digital transformation, science research and development, and systems engineering and integration.
In the fiscal year ended September 30, 2023, DLH reported annual revenue of $375,872,000 and net income of $1,461,000. The company generated robust operating cash flow of $31,033,000 and free cash flow of $30,408,000 during the same period, showcasing its ability to convert earnings into cash.
For the second quarter of fiscal 2024, DLH reported revenue of $101,007,000, up from $99,417,000 in the prior-year period. The company's EBITDA for the quarter was $10,185,000, compared to $10,486,000 in the same quarter of the previous year. DLH generated $5,200,000 in operating cash flow during the second quarter, contributing to the $10,301,000 in cash flow from operations for the first half of fiscal 2024.
DLH's diverse service offerings and strong customer relationships have been key drivers of its financial performance. The company's revenue is derived from a mix of time and materials contracts (55.4%), firm fixed price contracts (23.9%), and cost reimbursable contracts (20.7%), providing a balanced and stable revenue stream.
Business Overview
DLH operates in three primary service areas: Digital Transformation and Cyber Security, Science Research and Development, and Systems Engineering and Integration.
Digital Transformation and Cyber Security:
DLH provides critical digital transformation and cyber security solutions across the federal civilian and cyber defense communities. The company leverages advanced technology, including artificial intelligence, machine learning, and cloud enablement, to modernize obsolete systems, protect sensitive information, manage large datasets, and enhance operational efficiency.Science Research and Development:
DLH advances scientific knowledge and understanding through its extensive research portfolio and domain expertise. The company primarily provides large-scale data analytics, testing and evaluation, clinical trials research services, and epidemiology studies to support multiple operating divisions within the Department of Health and Human Services (HHS), including the National Institutes of Health (NIH) and the Centers for Disease Control and Prevention (CDC).Systems Engineering and Integration:
DLH's employees specialize in delivering engineering solutions that support its customers' evolving needs. This includes specialized expertise in areas such as pharmaceutical delivery logistics, fire protection engineering, biomedical equipment, and technology engineering on behalf of the Department of Veterans Affairs (VA), the Naval Information Warfare Center (NIWC), HHS, and other federal agencies.Major Customers and Contracts
DLH's primary customers are agencies of the U.S. federal government, including the Department of Health and Human Services (46.1% of revenue), the Department of Veterans Affairs (35.4% of revenue), and the Department of Defense (16.7% of revenue).
During the second quarter of fiscal 2024, DLH won several notable contract awards, including:
1. A $23 million contract to provide IT services to the National Institute on Drug Abuse, the leading federal agency supporting scientific research on drug use and addiction.
2. A contract with a base value of $52 million, and potential additional $86 million in optional services, to provide scientific computing and data analytics services to the National Cancer Institute, the largest organization within the NIH.
These contract wins demonstrate DLH's ability to leverage its expertise and expand its presence with key government customers.
Liquidity and Capital Management
As of March 31, 2024, DLH had $238,000 in cash and $22,511,000 in available credit facility capacity, providing ample liquidity to support its operations and growth initiatives. The company has been actively managing its debt, paying down $3,600,000 of higher-interest floating rate debt during the second quarter, ending the period with $170,772,000 in total debt outstanding.
DLH's management expects to further reduce debt to between $153 million and $157 million by the end of fiscal 2024, which would result in a leverage ratio below 3.5x. This debt reduction is expected to lead to lower interest expense and improved earnings.
Risks and Challenges
DLH's business is heavily dependent on its relationships with major government customers, and the loss of any of these customers or a significant reduction in the services provided to them could have a material adverse effect on the company's financial performance.
Additionally, DLH's operations are subject to various government contracting regulations and requirements, which can create uncertainty and risk around contract awards, renewals, and modifications.
Outlook
Despite these risks, DLH's management remains optimistic about the company's future prospects. The company has a robust backlog of $736.2 million as of March 31, 2024, up from $704.8 million at the end of the previous fiscal year. DLH's diversified service offerings, strong customer relationships, and focus on high-growth areas such as digital transformation and cyber security position the company well for continued success.
Conclusion
DLH Holdings Corp. is a well-positioned government services provider with a diverse portfolio of capabilities and a strong customer base. The company's focus on digital transformation, science research and development, and systems engineering and integration has enabled it to deliver consistent financial performance, with annual revenue of $375,872,000 and net income of $1,461,000 in the fiscal year ended September 30, 2023.
DLH's robust liquidity, active debt management, and growing backlog suggest the company is poised for continued growth and value creation for its shareholders. While the company faces certain risks inherent in the government contracting industry, DLH's management team has demonstrated the ability to navigate these challenges and capitalize on emerging opportunities in the federal market.