Item 1. Business
ITEM 1. BUSINESS
Overview and Background
DLH Holdings Corp. ("DLH"), founded in 1969 as a New Jersey Corporation, is a holding company whose direct 100%-owned operating subsidiaries include DLH Solutions, Inc. ("DLH Solutions"), Social & Scientific Systems, Inc. ("S3"), Irving Burton Associates, LLC ("IBA"), and Danya International LLC ("Danya").
DLH is a provider of technology-enabled business process outsourcing, program management solutions, and public health research and analytics. We bring a unique combination of government sector experience, proven methodology, and unwavering commitment to public health to improve the lives of millions. We combine our expertise and technical capabilities to build upon our strong record of delivering improved health and readiness solutions for federal programs through research, development, and innovative care processes including technology-enabled solutions, public health research, advance analytics, and other services. The Company's expertise in public health, performance evaluation, and health operations solve the complex problems faced by civilian and military customers alike, leveraging digital transformation, artificial intelligence, advanced analytics, cloud-based applications, telehealth systems, and more.
Competitive Advantages
We believe we are advantageously positioned within our markets by a number of features including, but not limited to:
• specialized credentials and licenses held by a substantial component of our employee base;
• primarily performing as the prime contractor;
• strong past performance record across our government contracts; and
• targeted expansion in critical national priority markets with Federal budget stability to include public health and epidemiological support related to COVID-19
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We continue to invest in credentials that drive excellence in our support to current clients and create differentiation as we compete in this space. These investments include development of secure IT platforms, sophisticated data analytic tools and techniques, and implementation of a lean six sigma environment. We are actively pursuing additional credentials that will support our customer's needs in providing a secure cloud computing environment.
Solutions and Services
We primarily focus on improved deployment of large-scale federal health and human services initiatives for the Department of Veterans Affairs ("VA"), Department of Health and Human Services ("HHS"), Department of Defense ("DoD"), Department of Homeland Security ("DHS"), and many of their sub-agencies.
Our following services and solutions are aligned with the long-term needs of our customers:
• Defense and Veteran Health Solutions;
• Human Services and Solutions;
• Public Health and Life Sciences; and
• Infinibyte® Cloud Services
We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a diverse mix of contract vehicles with various agencies of the United States Government, which supports our overall corporate growth strategy. Our revenue is distributed to time and materials contracts (78%), cost reimbursable contracts (12%) and the remaining are firm fixed price contracts (10%). We also provide services under Indefinite Duration, Indefinite Quantity ("IDIQ") and government wide acquisition contracts, such as General Services Administration ("GSA") schedule contracts. The Company currently holds multiple GSA schedule contracts, under which we provide services that constitute a significant percentage of our total revenue. These Federal contract schedules are renewed on a recurring basis for multi-year periods.
Defense and Veteran Health Solutions
We provide critical healthcare, technology, and logistics solutions to the VA, Defense Health Agency ("DHA"), Tele-medicine and Advanced Technology Research Center ("TATRC"), Navy Bureau of Medicine and Surgery, and the Army Medical Research and Material Command ("MRDC"). Our professionals specialize in supporting our customers' evolving needs by rapidly deploying resources, solutions, and services. We support our customers' missions by providing leading technology-enabled solutions and services encompassing new capabilities at the forefront of technology to include artificial intelligence, machine learning, health informatics, and robotics.
We are at the forefront of ensuring that veterans receive their out-patient prescriptions on time, each day, through our award winning VA Consolidated Mail Order Pharmacy ("CMOP") program. Further, we support our customer's efforts to broaden its abilities to reach veterans and their families through telemedicine technology and practices.
Human Services and Solutions
We support our customers by providing a wide range of services and solutions to HHS, DHS, and Department of State ("State"). Our professionals provide a range of support services critical to the customers' missions and their respective operating divisions, to include the Office of Head Start ("OHS"), Administration for Children and Families ("ACF"), the Federal Emergency Management Agency ("FEMA"), and the United States Agency of International Development ("USAID"). In this market, we combine subject matter expertise with our experience in information technology and analytics to provide large-scale program monitoring and evaluation; electronic medical records migration; data collection and management; and nutritional and social health assessments. Additionally, we also provide large-scale data analytics as well as enterprise-level IT system architecture design, migration planning, and ongoing management of system implementation and capacity building using experienced subject matter experts and project management resources. During the COVID-19 pandemic, we have supported our customers' efforts by rapidly deploying specialty resources to support resource constrained health-care providers.
Public Health and Life Sciences
We provide services to multiple operating divisions within HHS, including the National Institutes of Health ("NIH"), the Center for Disease Control and Prevention ("CDC"), and the Centers for Medicare and Medicaid Services ("CMS"). We have partnered with our customers to deliver solutions to combat the COVID-19 pandemic that allow the nation and its people to combat the pandemic and sustain operations and services.
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Our professionals provide services include clinical trials, epidemiology studies, advancing disease prevention methods and health promotion to underserved and at-risk communities. We deliver our services through development of strategic communication campaigns, research on emerging trends, health informatics analyses, and application of best practices including mobile, social, and interactive media. We leverage evidence-based methods and web technology to drive health equity to our most vulnerable populations through public engagement. Projects often involve highly specialized expertise and research methodologies.
Infinibyte® Cloud Service
We built Infinibyte ® Cloud as a platform-as-a-service cloud service offering, specially architected and engineered to meet federal information security and compliance requirements. It delivers a computing and storage platform to U.S. government agencies, enabling them to develop, run, and manage applications in a FedRAMP compliant environment. FedRAMP is the government's rigorous security compliance certification which provides a standardized approach to security assessment, authorization, and continuous monitoring for cloud service providers and prescribes the security requirements and processes cloud service providers must follow in order for the U.S. government to use their service. The solution has received a FedRAMP Moderate authorization and is one of the few platform-as-a-service solutions listed on the FedRAMP marketplace, further enhancing our ability to demonstrate our technical expertise and offer our customers a secure cloud environment. We have invested in agile software development credentials for our technical staff, and have achieved Capability Maturity Model Integration ("CMMI") level 3. We believe that these qualifications will further enhance our value propositions for current programs, as well as future business we pursue. In addition, we continue to build upon our heritage of excellent customer satisfaction in support of key federal programs. We have achieved Joint Commission certification for the safety and quality of our healthcare services delivery against national standards. These nationally recognized best practices certifications demonstrate our commitment to continuous improvement and performance excellence that is critical to our organic growth objectives.
We continue to invest in credentials that drive excellence in our support to current clients and create differentiation as we compete in this space. These investments include development of secure IT platforms, sophisticated data analytic tools and techniques, and implementation of a lean six sigma environment. We continue to actively pursue additional credentials that will support our customers' needs in providing a secure cloud computing environment.
Major Customers
The majority of our revenues are from agencies of the United States Federal government. A major customer is defined as a customer from whom we derive at least 10% of our revenues. The following table summarizes the revenues by customer for the years ended September 30, 2022 and 2021, respectively (in thousands):
2022 2021
Revenue Percent of total revenue Revenue Percent of total revenue
Department of Homeland Security $ 126,576 32.0 % $ 2,485 1.0 %
Department of Veterans Affairs 126,106 31.9 % 110,078 44.7 %
Department of Health and Human Services 102,201 25.9 % 91,543 37.2 %
Department of Defense 33,612 8.5 % 30,930 12.6 %
Customers with less than 10% share of total revenue 6,678 1.7 % 11,058 4.5 %
Total revenue $ 395,173 100.0 % $ 246,094 100.0 %
Major Contracts
We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a diverse mix of contract vehicles with various agencies of the United State government, which supports our overall corporate growth strategy. Our Federal contract schedules are renewed on a recurring basis for multi-year periods.
The revenue attributable to the VA customers was derived from 16 separate contracts for our performance of pharmacy and logistics services in support of the VA’s consolidated mail outpatient pharmacy program.
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• Nine contracts for pharmacy services, which represent approximately $70.4 million and $62.8 million of revenues for the years ended September 30, 2022 and 2021, respectively, are currently operating under a bridge contract through October 2023.
• Seven contracts for logistics services represent approximately $55.7 million and $47.2 million of revenues for the years ended September 30, 2022 and 2021, respectively, are currently operating under a bridge contract through November 2023.
The government has neither indicated nor announced its future procurement strategy with respect to these contracts. Due to the time required to conduct a procurement process, we expect these contracts to be further extended.
Pursuant to its customary acquisition process, the VA has indicated its intention to pursue renewal of these contracts with a service-disabled veteran owned small business ("SDVOSB") as the prime contractor. DLH maintains relationships with SDVOSB partners. Should the new contracts for performance of these services be awarded to a partner of DLH, the Company expects to continue to perform a significant amount of the contract’s volume of business as a subcontractor.
Should the VA conclude that an award to an SDVOSB prime contractor is not in the best interest of the government, they may reissue a solicitation in an unrestricted competition. DLH believes that its service excellence over many years on the program would provide an advantage in an unrestricted competition.
Our contract with HHS in support of the Head Start program generated $34.2 million and $28.2 million of revenue for the years ended September 30, 2022 and 2021, respectively. This contract has a period of performance through April 2025.
As previously reported, we were awarded two short-term task orders under a FEMA contract to provide support for states seeking temporary medical staffing support and COVID-19 related community testing, vaccination and therapy. Those contracts generated $125.8 million of revenue for the fiscal year ended September 30, 2022. The contract to support COVID-19 related community testing, vaccination and therapy ended on December 31, 2021. The contract to provide temporary medical staffing support completed on March 20, 2022.
Backlog
At September 30, 2022, our backlog was approximately $482.5 million, of which $98.9 million was funded backlog. At September 30, 2021 our backlog was $651.5 million, of which $191.0 million was funded backlog.
We define backlog as our estimate of remaining future revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under Indefinite Quantity/Indefinite Delivery ("IDIQ") contracts or if the contract is a single award IDIQ contract.
We define funded backlog as the portion of backlog for which funding is appropriated and allocated to the contract by the customer and authorized for payment by the customer, once specified work is completed. Funded backlog does not include the full contract value as Congress often appropriates funding for contracts on a yearly or quarterly basis.
Circumstances and events may cause changes in the amount of our backlog and funded backlog, including the execution of new contracts, extension of existing contracts, non-renewal or completion of current contracts, early termination, and adjustments to estimates. Changes in funded backlog may be affected by the funding cycles of the government. While no assurances can be given that existing contracts will result in earned revenue in any future period, or at all, our major customers have historically exercised their contractual renewal options.
Backlog value is quantified from management's judgment and assumptions about the volume of services based on past volume trends and current planning developed with customers.
Competitive Landscape
Competitive solicitations and long business development cycles are characteristics of the government and defense industry in which we operate. For major program competition, the business acquisition cycle typically ranges from 18 to 36 months. Companies may pursue work either as prime contractor or partner with other companies in a subcontractor role. Those competing as prime contractors normally expend substantially more resources than those in subcontractor roles. We partner and compete with several large and small-business companies in pursuit of acquiring new business.
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Our competitors include operating units within, among others: Booz Allen Hamilton Holding Corp., CACI International, Inc., ICF International, Inc., Leidos Holdings, Inc., Mantech International Corp., MAXIMUS, Inc., UnitedHealth Group, Inc. operating under Optum, RTI International, and Westat, Inc.
We compete with these companies by leveraging our differentiating suite of tools and uniquely integrating people and processes resulting in highly competitive proposals and a solid track record of past performance. We believe that our proprietary tools and processes, including e-PRAT ® and SPOT-m ® , along with our Infinibyte ® cloud-based management system differentiate us from our competitors. We compete for awards through a full and open competition on a best-value basis. We draw heavily from our consistently high-quality past performance ratings, proven and evolving technical differentiators, key personnel credentials and growing market recognition to compete. We believe that our track record, knowledge and processes with respect to government contract bidding represent significant competitive advantages. Further, we believe that the range and depth of educational experience and professional credentials and certifications held by our employees allows us to deploy highly-qualified teams to implement solutions to address the needs of our customers. Our recent and future success in this competitive landscape hinges on our ability to continue to uniquely integrate people, processes and technology tools to deliver best value solutions for our targeted clients (both government and industry partners).
Additionally, the Federal government may elect to restrict certain procurement activity, including renewals of our current contracts, to bidders that qualify for certain special statuses such as veteran owned, small, or small disadvantaged businesses. For those efforts, we would be limited to a subcontractor role.
Seasonality
The U.S. government's fiscal year ends on September 30 each year. It is not uncommon for U.S. government agencies to award extra tasks or complete other contract actions within this timeframe leading up to the fiscal year end in order to avoid losses of unexpended fiscal year funds.
Regulation
Our business is affected by numerous laws and regulations relating to the award, administration and performance of U.S. Government contracts. In addition, many federal and state laws materially affect our operations. These laws relate to ethics, labor, tax, and employment matters. As any employer is, we are subject to federal and state statutes and regulations governing their standards of business conduct with the government, including that government contracts typically contain provisions permitting government clients to terminate contracts without cause with limited notice or compensation. The development of additional statutes and regulations and interpretation of existing statutes and regulations with respect to our industry can be expected to evolve over time. Through our corporate membership with the Professional Services Council and other affiliations, we monitor proposed and pending regulations from relevant congressional committees and government agency policies that have potential impact upon our industry and our specific strategically targeted markets. As with any commercial enterprise, we cannot predict with certainty the nature or direction of the development of Federal statutes and regulations that will affect its business operations. See Risk Factors in Part I, Item 1A.
Intellectual Property
Our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright or trademark protections, although our operations make use of such protections and benefit from them as discriminators in competition. We claim copyright, trademark and other proprietary rights in a variety of intellectual property, including each of our proprietary computer software and data products and the related documentation. We hold the trademarks, e-PRAT ® and SPOT-m ® , for our offerings that optimize resource allocation and supply chain management processes in connection with our business process management services, as well as the registered trademark, Infinibyte ® , for our cloud-based solution. We maintain a number of trade secrets that contribute to our success and competitive distinction and endeavor to accord such trade secrets adequate protection to ensure their continuing availability.
Human Capital Management and Employee Relations
Our employees are critical to our success and are the reason we continue to execute at a high level. We believe our continued focus on making employee engagement a top priority will help us provide high quality insights and information to our clients.
As of September 30, 2022, we employed over 2,400 employees performing in over 30 locations throughout the U.S. and one location overseas. Management believes that it has good relations with its employees.
Vision and Values
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DLH's vision is to be the most trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to Military Service Members, Veterans, children and families, and other at-risk and underserved communities. As a market influencer and emerging leader, DLH strives to shape and enhance the sustainability and readiness posture of those we serve, delivering value to our customers, stakeholders, and shareholders.
DLH stands on strong values including:
• Integrity and Trust - We establish relationships throughout our organization and with clients and partners that are built on a foundation of mutual trust and respect, which exemplifies the way DLH does business. We are committed to the highest standards of ethical conduct during the course of all business.
• Performance Excellence - We are focused on achieving all requirements, with a passion for continuous improvement in the quality of our services and products. We strive to be our customers' "best value" provider and attain the highest measure of customer and shareholder satisfaction.
• Diversity and Inclusion - We create and sustain a corporate culture that fosters inclusion of all employees and values each individual's unique talents and perspectives. We leverage the value of our diversity into every aspect of our business.
• Agility - As we grow, we continue to evolve in a manner that maintains our flexibility and agility. This allows us to anticipate and respond to ever-changing government service requirements while delivering maximum value to clients and shareholders.
Talent Acquisition, Development, and Retention
We seek to attract and retain the best people by providing them with opportunities to grow, build skills, and be appreciated for their contributions as they work to serve our clients. We provide competitive compensation programs to help meet the needs of our employees. In addition to salaries, these programs may include bonus and participation in a 401(k) Plan. We have used targeted equity-based grants with performance and service based vesting conditions to facilitate attracting and retaining key personnel. We also invest in talent development initiatives including industry-leading learning management, professional credentialing, and applicant tracking systems. These will further enhance our highly qualified employee base and augment our efforts to infuse top talent into our operations through world-class recruiting and talent management tools.
Employee Safety and Health
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with flexible and convenient health and wellness programs, including competitive benefits arrangements to address healthcare needs, including health insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and family care resources. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes having our employees work from home when possible, implementing additional safety measures for employees continuing critical on-site work, and supporting our employees to receive the COVID-19 vaccination within appropriate medical and religious bounds.
Company Website and Information
Our corporate headquarters are located at 3565 Piedmont Road NE, Building 3 Suite 700, Atlanta, Georgia 30305. Our telephone number is (770) 554-3545. Our website is www.dlhcorp.com. The website contains information about our company and operations. Links to the Investor Relations section of our website, copies of our filings with the U.S. Securities and Exchange Commission ("SEC") on Forms 10-K, 10-Q, 8-K, and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including DLH. The information on our website is not incorporated by reference into and is not part of this Annual Report on Form 10-K.