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Item 7. Management’s Discussion and Analysis

2023-12-06 compared with 2022-12-05 · 151 added, 149 removed, 148 unchanged (67% of the section changed)

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Business Overview:

We are a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics;

primarily focused to improve and better deploy large-scale federal health and human service initiatives.

We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including the Department of Veterans Affairs, Department of Health and Human Services, Department of Defense, and Department of Homeland Security.

DLH is a holding company operating through a number of operating subsidiaries.

In December 2022, we acquired Grove Resource Solutions, LLC ("GRSi"), which provides research and development, systems engineering and integration, and digital transformations solutions to federal agencies, notably the National Institutes of Health ("NIH"), U.S.

Navy and U.S.

Marine Corps.

We deliver improved health and cyber readiness solutions for federal government customers through digital transformation, science research and development, and systems engineering and integration.

We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including the HHS, VA, DoD, and DHS.

The following table summarizes the revenues by customer for the years ended September 30, 2023 and 2022, respectively (in thousands):

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 $ 161,311 42.9 % $ 102,201 25.9 %

Department of Veterans Affairs 138,862 37.0 % 126,106 31.9 %

Department of Defense 70,325 18.7 % 33,612 8.5 %

Department of Homeland Security 919 0.2 % 126,576 32.0 %

Customers with less than 10% share of total revenue 4,455 1.2 % 6,678 1.7 %

Total revenue $ 395,173 100.0 % $ 246,094 100.0 %

See “Item 1A – Risk Factors - A significant portion of our revenue is concentrated in a small number of contracts and we could be seriously harmed if we were unable to continue providing services under, or unsuccessful in our recompete efforts on, these contracts." for a discussion of concentration risk within our VA and HHS portfolio of contracts

The Company is a full-service provider of technology-enabled health and human services, providing solutions to three market focus areas:

Defense and Veteran Health Solutions, Human Solutions and Services, and Public Health and Life Sciences.

We deliver domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging seven core competencies:

secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications.

The Company manages its operations from its principal executive offices in Atlanta, Georgia, and we have a complementary headquarters office in Silver Spring, Maryland.

We employ over 2,400 skilled employees working in more than 30 locations throughout the United States and one location overseas.

In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets.

On June 7, 2019 we acquired Social & Scientific Systems, Inc.

("S3") and on September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA").

$ 375,872 100.0 % $ 395,173 100.0 %

The following table summarizes revenues by our markets for the years ended September 30, 2023 and 2022, respectively (in thousands):

Revenue Percent of total revenue Revenue Percent of total revenue

Human Services and Solutions $ 165,970 42.0 % $ 37,260 15.1 %

Defense and Veteran Health Solutions $ 209,187 55.7 % $ 159,719 40.4 %

Human Services and Solutions 110,068 29.3 % 165,970 42.0 %

Public Health and Life Sciences 56,617 15.0 % 69,484 17.6 %

Total revenue $ 395,173 100.0 % $ 246,094 100.0 %

$ 375,872 100.0 % $ 395,173 100.0 %

Forward Looking Business Trends:

Our mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, veterans, and civilian populations and communities.

Our primary focus within the defense agency markets include military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, process management, clinical systems support, and healthcare delivery.

Our primary focus within the civilian agency markets includes healthcare and social programs delivery and readiness.

Our primary focus within the defense agency markets includes cyber security, military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, process management, clinical systems support, and healthcare delivery.

Our primary focus within the civilian agency markets includes digital transformation, IT modernization, healthcare and social programs delivery and readiness.

These include compliance monitoring on large scale programs, technology-enabled program management, consulting, and digital communications solutions ensuring that education, health, and social standards are being achieved within underserved and at-risk populations.

We believe these business development priorities will position the Company to expand within top national priority programs and funded areas.

COVID-19 impact

We are exposed to and impacted by macroeconomic factors and U.S.

government policies.

Current general economic conditions continue to be impacted by the COVID-19 pandemic, which resulted in both market size contractions due to economic slowdowns and government restrictions on movement during the height of the pandemic.

While the rollout of vaccines has positively correlated to an improvement in macroeconomic indicators, the lifting of various public health constraints, and a reduction of many restrictions on economic activity, there continues to be significant uncertainty as to the effects of the pandemic on the economy, which may impact our results of operations or cash flows in future periods.

We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential.

Although we have also been successful in winning new contracts tied to the need to support public health initiatives in response to the pandemic, as the public health situation improves, there may be fewer such opportunities in the future.

General uncertainty related to the pandemic, the long-term efficacy of vaccines and the spread of new variants, may nonetheless cause reduced demand for certain services we provide, particularly if it results in a recessionary economic environment or the spending priorities of the U.S.

government shift in ways adverse to our business focus.

Our ability to continue to operate without any significant negative impacts will in part depend on our continued ability to protect our employees.

We have endeavored to follow recommended actions of government and health authorities to protect our employees and have been able to broadly maintain our operations.

Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we have been and expect to continue to execute on the remainder of our contracts through remote and teleworking arrangements.

We continue to monitor the evolving situation related to the COVID-19 pandemic and intend to continue to work with government authorities and other stakeholders to assess further potential implications to us, continue with employee safety measures to ensure that we are able to continue our operations during the pandemic, and take other actions where appropriate to mitigate other adverse consequences.

However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our operations (for example a closure of a key distribution facility) that may not be fully mitigated.

To date we have experienced continuity in the majority of our work for our government clients.

While there have been postponements of events and challenges around some project work requiring travel, overall, our government clients have continued to require our services.

We are unable to predict whether, and to what extent, this trend will continue.

It would be reasonable to expect some restriction of certain client activities due to COVID-19.

Due to our ability to continue to perform on our contract portfolio and generate cash flow, we do not presently expect nor have experienced liquidity constraints related to COVID-19.

We are presently in compliance with all covenants in our secured term loan and have access to a secured revolving line of credit to meet any short-term cash needs that cannot be funded by operations.

As such, mandatory demands on our cash flow remain low.

Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.

For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of this Form 10-K.

Federal budget outlook for fiscal year 2024 :

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Specifically, the investment in public health infrastructure involves improving the nation’s readiness for future pandemics and other biological threats, expanding access to vaccines and healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and HIV/AIDS epidemics.

The budget's initiatives are further reflected in the budget requests for the Department of Health and Human Services, Department of Veterans Affairs, and Department of Defense.

The budget's initiatives are further reflected in the budget requests for the HHS, VA, and DoD.

While Congress has not completed the final appropriation bills for the government’s 2024 fiscal year, the Company continues to believe that its key programs benefit from bipartisan support and does not expect a material impact on its current business base from budget negotiations.

If the appropriations bills are not timely enacted, government agencies operate under a continuing resolution ("CR"), which may negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors.

On September 30, 2022, the President signed a CR providing funds to the federal government through December 16, 2022.

On November 16, 2023, the President signed a CR providing funds to the federal government through January 19, 2024 for several agencies and through February 2, 2024 for the remaining.

When a CR expires, unless appropriations bills have been passed by Congress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity.

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Department of Veterans Affairs

The VA is requesting a total of $301.4 billion for FY 2023, an increase of $30.7 billion above the FY 2022 request.

The VA is requesting a total of $325.1 billion for FY 2024, an increase of $16.6 billion above the FY 2023 enacted level.

It includes $142.8 billion in discretionary funding, an increase of $3.0 billion, and $182.3 billion in mandatory funding, an increase of $13.6 billion from FY 2023 enacted.

The VA research program is expected to allocate increased funding to advance the Department’s understanding of the impact of traumatic brain injury and toxic exposure(s) on long-term health outcomes, coronavirus related research and impacts, and precision oncology.

The 2023 budget request for the VA's research enterprise is $916 million, an increase of $34 million from the 2022 budget, excluding mandatory funding.

In addition, the 2023 budget estimates $4.8 billion will be spent on telehealth treatment in 2023, an increase of $622 million from the 2022 current estimate.

The FY 2024 budget request for the VA's research enterprise is $938.0 million, an increase of $22.0 million from the FY 2023 budget, excluding mandatory funding.

In addition, the FY 2024 budget estimates $4.9 billion will be spent on telehealth treatment in FY 2024, an increase of $78.0 million from the FY 2023 estimate.

The VA is continuing to expand this program because of its ability to leverage VA providers and provide better services to veterans.

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The FY 2024 budget request proposes $144.3 billion in discretionary budget authority for HHS and $1.7 trillion in mandatory funding for the department.

The budget proposes $63 billion in discretionary and mandatory resources for NIH, an increase of $16 billion above FY 2022 enacted, to address the opioid crisis and ending HIV crises, make new investments in pandemic preparedness and nutrition research, and drive biomedical innovations.

The budget also requests $45 million for telehealth, which is $9 million above FY 2022 enacted, to promote health services with telehealth technologies.

The budget proposes $48.6 million in discretionary and mandatory resources for NIH, an increase of $920.0 million above FY 2023 enacted, to address the opioid crisis and ending HIV crises, make new investments in pandemic preparedness and nutrition research, and drive biomedical innovations.

The budget also requests $45.0 million for telehealth, which is an increase of $7.0 million above FY 2023 enacted, to promote health services with telehealth technologies.

The budget also provides for investment in programs that improve the health and well-being of young children and their families.

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The funding and personnel to support MHS’s mission is referred to as the Unified Medical Budget ("UMB").

The FY 2023 UMB request for the Defense Health Program ("DHP") is $36.9 billion, a decrease of $0.4 billion from FY 2022 enacted.

The FY 2024 UMB request for the Defense Health Program ("DHP") is $58.7 billion, an increase of 0.5% from FY 2023 enacted.

It is anticipated that COVID-19 costs will decrease in FY 2024, driving a reduction in the budget request for DHP In Direct Care and Private Sector Care.

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As previously reported, various agencies within the federal government have policies that support small business goals, including the adoption of the “Rule of Two” by the VA, which provides that the agency shall award contracts by restricting competition for the contract to service-disabled or other veteran-owned businesses.

To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.

When two qualifying small businesses cannot be identified, the VA may proceed to award contracts following a full and open bid process.

The Company believes that its past performance in this market and track record of success provide a competitive advantage.

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General and administrative costs 37,795 10.1 % 30,730 7.8 % 7,065

Impairment loss of long-lived asset 7,673 2.0 % — — % 7,673

Corporate development costs 1,735 0.5 % 614 0.1 % 1,121

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Interest expense 16,271 4.3 % 2,215 0.6 % 14,056

Income before provision for income taxes 31,063 7.8 % 13,439 5.4 % 17,624

Provision for income taxes 7,775 2.0 % 3,294 1.3 % 4,481

Income before provision for income tax (benefit) expense 820 0.2 % 31,063 7.8 % (30,243)

Provision for income tax (benefit) expense (641) (0.2) % 7,775 2.0 % (8,416)

Net income $ 1,461 0.4 % $ 23,288 5.8 % $ (21,827)

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Net income per share - diluted $ 0.10 $ 1.64 $ (1.54)

For the year ended September 30, 2022 revenue was $395.2 million, an increase of $149.1 million or 60.6% over the prior year period.

The increase in revenue is due primarily to the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.

The revenue contribution from those task orders was $125.8 million.

The remainder of our revenue growth of approximately $25 million was from our remaining contract portfolio was primarily due to additional contracts awarded in late fiscal 2021 and increased volume on existing contracts.

For the year ended September 30, 2023 revenue was $375.9 million, a decrease of $19.3 million or 4.9% over the prior year period.

The decrease in revenue is due primarily to the completion of two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.

The revenue contribution from those task orders in fiscal year 2022 was $125.8 million.

Included in fiscal 2023 revenue is $107.0 million contributed from GRSi subsequent to the acquisition.

Cost of Operations

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These costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the related management and infrastructure costs.

For the year ended September 30, 2022, contract costs increased by approximately $128.3 million principally due to the direct costs associated with the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.

General and administrative costs are for those employees not directly providing services to our customers, including but not limited to executive management, bid and proposal, accounting, and human resources.

These costs increased as compared to the prior fiscal year by $5.7 million to approximately $30.7 million primarily due to increased investment in the human capital and business development functions, increased regulatory compliance costs, primarily increased external accounting fees, and increased stock compensation expense from employees option grants awarded in the current fiscal year..

For the year ended September 30, 2023, the contract costs decreased as compared to the prior fiscal year by $26.9 million to approximately $296.0 million primarily due to completion of the FEMA task orders, offset by the contribution from the acquisition of GRSi.

General and administrative costs are for employees and third parties not directly providing services to our customers, including but not limited to executive management, bid and proposal, accounting, and human resources.

These costs increased as compared to the prior fiscal year by $7.1 million to approximately $37.8 million primarily due to the acquisition of GRSi.

Impairment loss of long-lived assets is a loss associated with a reduction of the fair value of an asset during the fourth quarter of fiscal 2023, DLH reduced its leased office space requirement by consolidating underutilized premises as part of a facility rationalization effort, to accurately reflect the operational needs of the business.

As a result, the Company has determined that its Right of Use Assets experienced a reduction in fair value below its associated carrying value of $7.7 million.

Corporate development costs are incremental due diligence costs, such as legal and accounting fees.

Fiscal year 2021 costs were due to a transaction that was evaluated but was not executed.

For the year ended September 30, 2022, depreciation and amortization costs were approximately $1.1 million and $6.6 million, respectively, as compared to approximately $1.5 million and $6.6 million for the prior fiscal year, an aggregate decrease of $0.5 million.

Fiscal year 2023 and 2022 costs were associated with the acquisition of GRSi.

For the year ended September 30, 2023, depreciation and amortization costs were approximately $0.8 million and $14.8 million, respectively, as compared to approximately $1.1 million and $6.6 million, respectively for the prior fiscal year, an aggregate increase of $7.9 million which is primary due to the acquisition of GRSi during the fiscal year.

Interest Expense

Interest expense includes items such as interest expense and amortization of deferred financing costs on debt obligations.

For the year ended September 30, 2022, interest expense was $2.2 million compared to interest expense, net of $3.8 million in the prior year, a decrease of approximately $1.6 million over the prior year period.

The decrease in interest expense was primarily due to the decreased balance on our secured term loan.

For the year ended September 30, 2023, interest expense was $16.3 million compared to interest expense, net of $2.2 million in the prior year, an increase of approximately $14.1 million over the prior year period.

The increase in interest expense was primarily due to the increase in long-term debt associated with the acquisition of GRSi during the fiscal year.

Provision for Income Taxes

Provision for Income taxes for the fiscal year ended September 30, 2022 was $7.8 million, an increase of approximately $4.5 million from the prior fiscal year.

The effective tax rate was 24.8% and 24.5% for the fiscal years ending September 30, 2022 and 2021 respectively.

Provision for Income taxes for the fiscal year ended September 30, 2023 was a reduction of tax by $0.6 million, a decrease of approximately $8.4 million from the prior fiscal year.

The effective tax rate was a negative 72.2% for the fiscal year ending September 30, 2023 and 24.8% for the fiscal year ending September 30, 2022.

Non-GAAP Financial Measures for Fiscal 2023 and 2022

The Company uses EBITDA as a supplemental non-GAAP measures of our performance.

The Company defines EBITDA as net income excluding (i) interest expense, (ii) provision for or benefit from income taxes, if any, and (iii) depreciation and amortization.

On a non-GAAP basis, Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) for the year ended September 30, 2022 was approximately $40.9 million, an increase of approximately $15.6 million, or 61.6%, over the prior fiscal year.

The increase from the prior fiscal year was principally due to the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.

Those contracts contributed a significant percentage of the growth we experienced for the year-to-date period, reflecting stronger margins than initially anticipated.

The increased margins were achieved by effectively staffing the projects with internal resources, rather than subcontractors, where appropriate.

The Company is presenting additional non-GAAP measures to describe the impact from two short-term FEMA task orders on its financial performance for the year ended September 30, 2022.

The measures presented are revenue, operating income, net income, diluted earnings per share, and EBITDA for our enterprise contract portfolio less the respective performance on the FEMA task orders.

These resulting measures present the contract portfolio's financial performance compared to results delivered in the prior year period.

Definitions of these additional non-GAAP measures are set forth in the footnotes to the reconciliation table below.

These non-GAAP measures of our performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented.

Management and our Board utilize these non-GAAP measures to make decisions about the use of our resources, analyze performance between periods, develop internal projections and measure

management's performance.

We believe that these non-GAAP measures are useful to investors in evaluating our ongoing operating and financial results and understanding how such results compare with our historical performance.

By providing this non-GAAP measure as a supplement to GAAP information, we believe this enhances investors understanding of our business and results of operations .

GAAP net income to EBITDA, a non-GAAP measure for the years ended September 30, 2022 and 2021 (in thousands):

The Company is presenting certain non-GAAP measures regarding its financial performance for the fiscal years ended September 30, 2023 and 2022.

The measures presented are Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share ("EPS"), Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), EBITDA Margin on Revenue, Adjusted EBITDA, and Adjusted EBITDA Margin on Adjusted Revenue.

In calculating these measures, we have added the corporate development costs associated with completing the GRSi acquisition to our results for fiscal year 2023 and 2022, removed the impairment loss on certain real estate assets, and removed the contribution from the FEMA task orders from the results for fiscal year 2022.

These resulting measures present our financial performance compared to results delivered in the prior year period.

Definitions of these additional non-GAAP measures are set forth below.

We have prepared these additional non-GAAP measures to eliminate the impact of items that we do not consider indicative of ongoing operating performance due to their inherently unusual or extraordinary nature.

These non-GAAP measures of performance are used by management to conduct and evaluate its business during its 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.

We believe 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.

These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry.

Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue, and Adjusted EBITDA Margin on Adjusted Revenue are not recognized measurements under accounting principles generally accepted in the United States, or GAAP, and when analyzing our performance investors should (i) evaluate each adjustment in our reconciliation to the nearest GAAP financial measures and (ii) use the aforementioned non-GAAP measures in addition to, and not as an alternative to, revenue, operating income, net income or diluted EPS, as measures of operating results, each as defined under GAAP.

We have defined these non-GAAP measures as follows:

“Adjusted Revenue” represents revenue less the contribution to revenue from the short-term FEMA task orders.

“Adjusted Operating Income” represents operating income plus the corporate development costs associated with completing the GRSi acquisition in fiscal 2023 and 2022 and the impairment loss on the right of use asset incurred only in fiscal 2023, less the contribution from the FEMA task orders, which occurred only in fiscal 2022.

“Adjusted Net Income” represents net income including the corporate development costs associated with completing the acquisition, the impairment loss on the right of use asset, as well as the FEMA task orders.

“Adjusted Diluted EPS” represents diluted EPS calculated using Adjusted Net Income as opposed to net income.

"EBITDA" represents net income before income taxes, interest, depreciation and amortization.

“Adjusted EBITDA” represents net income before income taxes, interest, depreciation and amortization and the corporate costs associated with completing the acquisition, and the impairment loss on the right of use asset less the contribution from FEMA task orders.

“Adjusted EBITDA Margin on Adjusted Revenue” is calculated as Adjusted EBITDA divided by Adjusted Revenue.

Below is a reconciliation of Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue and Adjusted EBITDA Margin on Adjusted Revenue reported for the fiscal years ended September 30, 2023 and 2022 compared to the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands, except for per share amounts):

2023 2022 Change

Adjusted Revenue

Revenue $ 375,872 $ 395,173 $ (19,301)

FEMA task orders to support Alaska (a)

— 125,773 (125,773)

Adjusted Revenue $ 375,872 $ 269,400 $ 106,472

Adjusted Operating Income

Operating Income $ 17,091 $ 33,278 $ (16,187)

Impairment loss of long-lived asset (c)

7,673 — 7,673

Corporate development costs (b) 1,735 614 1,121

FEMA task orders to support Alaska (d)

— 12,479 (12,479)

Adjusted Operating Income $ 26,499 $ 21,413 $ 5,086

Adjusted Net income (e)

$ 1,461 23,288 $ (21,827)

Impairment loss of long-lived asset (c)

7,673 — 7,673

Corporate development costs (b) 1,735 614 1,121

FEMA task orders to support Alaska (d)

— 12,479 (12,479)

Adjustment for tax effect (g)

(2,993) 3,007 (6,000)

Adjusted Net Income $ 7,876 $ 14,430 $ (6,554)

Adjusted Diluted Earnings Per Share (f)

Weighted average diluted shares outstanding

14,431 14,179 252

Diluted earnings per share

$ 0.10 $ 1.64 $ (1.54)

Adjusted Diluted Earnings Per Share $ 0.55 $ 1.01 $ (0.46)

EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue & Adjusted EBITDA Margin on Adjusted Revenue

Net Income $ 1,461 $ 23,288 $ (21,827)

(i) Interest expense 2,215 3,784 (1,569)

(ii) Provision for income taxes 7,775 3,294 4,481

(iii) Depreciation and amortization 7,665 8,115 (450)

Interest expense 16,271 2,215 14,056

Depreciation and amortization 15,562 7,665 7,897

Provision for income taxes (641) 7,775 (8,416)

EBITDA $ 32,653 $ 40,943 $ (8,290)

GAAP revenue, operating income, net income, diluted earnings per share, and non-GAAP EBITDA reported for the years ended September 30, 2022 and 2021 to the same metrics for our contract portfolio less the FEMA task orders (in thousands except for per share amounts):

2022 2021 Change

Total enterprise $ 395,173 $ 246,094 $ 149,079

FEMA task orders to support Alaska 125,773 1,727 124,046

Remaining contract portfolio $ 269,400 $ 244,367 $ 25,033

Operating income (b)

Total enterprise $ 33,278 $ 17,223 $ 16,055

FEMA task orders to support Alaska 12,479 117 12,362

Remaining contract portfolio $ 20,799 $ 17,106 $ 3,693

Net income (c)

Total enterprise $ 23,288 $ 10,145 $ 13,143

FEMA task orders to support Alaska 9,235 117 9,118

Remaining contract portfolio $ 14,053 $ 10,028 $ 4,025

Diluted earnings per share (d)

Total enterprise $ 1.64 $ 0.75 $ 0.89

FEMA task orders to support Alaska 0.65 0.01 0.64

Remaining contract portfolio $ 0.99 $ 0.74 $ 0.25

Total enterprise $ 40,943 $ 25,338 $ 15,605

FEMA task orders to support Alaska 12,479 117 12,362

Remaining contract portfolio $ 28,464 $ 25,221 $ 3,243

Revenue for the Company’s remaining contract portfolio less the FEMA task orders represents our consolidated revenues less the revenues generated from the FEMA task orders.

Operating income attributable to the remaining contract portfolio less the FEMA task orders represents the Company’s consolidated operating income, determined in accordance with GAAP, less the operating income derived from the FEMA task orders.

Similarly, for the year ended September 30, 2022 operating income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders:

Corporate development costs (b) 1,735 614 1,121

Impairment loss of long-lived asset (c)

7,673 — 7,673

FEMA task order to support Alaska (d)

— 12,479 (12,479)

Adjusted EBITDA $ 42,061 $ 29,078 $ 12,983

Net income margin on Revenue 0.4% 5.9%

EBITDA Margin on Revenue 8.7% 10.4%

Adjusted EBITDA Margin on Adjusted Revenue 11.2% 10.8%

Represents revenue adjusted to exclude revenue from the short-term FEMA task orders during the fiscal year ended September 30, 2022.

Represents corporate development costs we incurred to complete the GRSi transaction.

These costs primarily include legal counsel, financial due diligence, customer market analysis and representation and warranty insurance premiums.

Represents impairment loss of certain long-lived real estate assets associated with a reduction of the fair value of an asset prompted by a triggering event.

During the fourth quarter of fiscal 2023, DLH reduced its leased office space requirement by consolidating underutilized premises as part of an ongoing facility rationalization effort, to accurately reflect the operational needs of the business.

As a result, the Company has determined that its Right of Use Assets experienced a reduction in fair value below its associated carrying value and recorded a $7.7 million loss of fair value.

(d):Adjusted operating income represents the Company’s consolidated operating income, determined in accordance with GAAP, adjusted to add the corporate development costs associated with the GRSi acquisition for fiscal year 2023, adjusted to add back the impairment loss of certain real estate assets and adjusted to exclude the operating income derived from the FEMA task orders.

Operating income for the FEMA task orders for the fiscal year ended September 30, 2022, is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders:

contract costs $112.1 million and general & administrative costs of $1.2 million.

Net income attributable to the remaining contract portfolio less the FEMA task orders represents the Company’s consolidated net income, determined in accordance with GAAP, less the net income derived from the FEMA task orders.

For the year ended September 30, 2022 net income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders:

(e) Adjusted net income represents the Company’s consolidated net income, determined in accordance with GAAP, adding back the impairment loss of long-lived assets and corporate development costs as defined, less the net income derived from the FEMA task orders.

There was no net income derived from the FEMA task orders during the fiscal year ended September 30, 2023.

For the fiscal year ended September 30, 2022, net income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders:

contract costs of $112.1 million, general & administrative costs of $1.2 million, and provision for income taxes of $3.2 million.

Diluted earnings per share (diluted EPS) for the FEMA task orders is calculated using the net income attributable to such task orders as opposed to GAAP net income.

Diluted EPS for the remaining contract portfolio (total contract portfolio excluding the FEMA task orders) is calculated by subtracting the diluted EPS for the FEMA task orders from the Company's total diluted EPS.

EBITDA attributable to the FEMA task orders of $12.5 million for the year ended September 30, 2022, is arrived at through the same calculation as operating income as there are not any depreciation and amortization costs attributable to the FEMA task orders.

EBITDA for the remaining contract portfolio is calculated by subtracting the EBITDA attributable to the FEMA task orders from the Company’s total EBITDA.

(f) Adjusted diluted earnings per share (adjusted diluted EPS) is calculated by adding back the effect on the Company's diluted EPS determined in accordance with GAAP, of the impairment loss of long-lived assets and corporate development costs as defined, as well as their tax effect as defined, and subtracting the effect on diluted EPS for the FEMA task orders.

(g) Tax effect is the impact the tax expense per the tax provision

Liquidity and Capital Management

For the year ended September 30, 2022, the Company generated operating income of approximately $33.3 million and net income of approximately $23.3 million.

The Company generated operating income of approximately $17.1 million and $33.3 million for the years ended September 30, 2023 and 2022, respectively and net income of approximately $1.5 million and $23.3 million for the years ended September 30, 2023 and 2022 respectively.

Cash flows from operations totaled approximately $31.0 million and $1.2 million for the years ended September 30, 2023 and 2022, respectively.

The decrease in cash from operations was principally a result of performance of the deferred contract obligations on the FEMA task orders, for which an advance payment was received at the end of fiscal 2021.

We used less than $0.9 million and $0.1 million of cash in investing activities during fiscal years 2022 and 2021, respectively.

The cash utilized was predominantly due to capital expenditures in fiscal year 2022 and 2021.

Cash used in financing activities during the fiscal years ended September 30, 2022 and 2021 was approximately $24.2 million and $22.9 million, respectively.

The activity in each fiscal year was primarily early repayment of principal on our secured term loan.

During the year ended September 30, 2022 and 2021, the Company repaid approximately $24.8 million and $23.3 million of secured term loan principal, respectively.

We expect to continue to use operating cash flow to pay outstanding debt.

The increase in cash from operations was principally a result of a decrease in accounts receivable.

We used $181.2 million and $0.9 million of cash in investing activities during fiscal years 2023 and 2022, respectively.

The cash utilized was predominantly due to the acquisition of GRSi and capital expenditures in fiscal years 2023 and 2022, respectively.

Cash used provided by financing activities during the fiscal year ended September 30, 2023 was approximately $150.2 million and cash used in financing activities during the fiscal year ended September 30, 2022 was $24.2 million, respectively.

The cash provided by financial activities during the fiscal year ended September 30, 2023, was primarily due to the debt incurred to finance the acquisition of GRSi during the fiscal year.

The activity in the fiscal year ended September 30, 2022 was primarily due to the early repayment of principal on our secured term loan.

During the years ended September 30, 2023 and 2022, the Company repaid approximately $20.2 million and $24.8 million of secured term loan principal, respectively.

We expect to continue to use the operating cash flow to pay outstanding debt.

A summary of the change in cash is presented below for the years ended September 30, 2023 and 2022 (in thousands):

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Net cash used in investing activities (181,197) (872)

Net cash used in by financing activities (24,194) (22,927)

Net cash provided by (used in) financing activities 150,151 (24,194)

Net change in cash $ (13) $ (23,823)

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Lender Arrangement Loan Balance Interest * Maturity Date

First National Bank of Pennsylvania Secured term loan (a) $ 22.0 LIBOR* + 2.5% 09/30/25

First National Bank of Pennsylvania Secured revolving line of credit (b) $ — LIBOR* + 2.5% 09/30/25

*LIBOR rate as of September 30, 2022 was 2.52%.

The interest rate spread ranges from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio.

(a) Represents the principal amounts payable on our secured term loan, which is secured by liens on substantially all of the assets of the Company.

The principal of the secured term loan is payable in quarterly installments with the remaining balance due on September 30, 2025.

First National Bank of Pennsylvania Secured term loan (a) $ 169.8 SOFR 1 + 4.1%

December 8, 2027

First National Bank of Pennsylvania Secured revolving line of credit (b) $ 9.5 SOFR 1 + 4.1%

December 8, 2027

1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2023 was 5.3%.

On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party.

The notional amount in the floating-to-fixed interest rate swap as of September 30, 2022 is $16.2 million and matures in 2024.

The notional amount in the floating-to-fixed interest rate swap on September 30, 2023 is $16.2 million and matures in 2024 and the fixed rate of 1.61%.

On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB;

the notional amount as of September 30, 2023 is $96.0 million, it matures in January 2026, and the fixed rate is 4.10%.

The total floating-to-fixed swap balance as of September 30, 2023 is $112.2 million.

The remaining outstanding balance of our secured term loan is subject to interest rate fluctuations.

(b) The secured revolving line of credit has a ceiling of up to $25.0 million and a maturity date of September 30, 2025.

The Company accessed funds from the secured revolving line of credit during the year, but has no outstanding balance at September 30, 2022.

(a) Represents the principal amounts payable on our secured term loan, which is secured by liens on substantially all of the assets of the Company.

The principal of the secured term loan is payable in quarterly installments with the remaining balance due on December 8, 2027.

(b) The secured revolving line of credit has a ceiling of up to $70.0 million and a maturity date of December 8, 2027.

The Company accessed funds from the secured revolving line of credit during the year, but had $9.5 million outstanding balance at September 30, 2023.

The secured term loan and secured revolving line of credit are secured by liens on substantially all of the assets of the Company.

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Equipment operating lease 50 50 — — —

Total contractual obligations $ 45,542 $ 3,299 $ 28,151 $ 5,579 $ 8,513

Contractual obligations

$ 202,898 $ 11,864 $ 45,962 $ 138,714 $ 6,358

Critical Accounting Policies and Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Significant estimates include valuation of goodwill and intangible assets, stock-based compensation, and measurement of loss development on workers' compensation claims.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Significant estimates include valuation of goodwill and intangible assets, and stock-based compensation.

In addition, the Company estimates overhead charges and allocates such charges throughout the year.

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When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.

For services contracts, we satisfy our performance obligations as services are rendered.

For service contracts, we satisfy our performance obligations as services are rendered.

We use cost-based input and time-based output methods to measure progress.

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For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price.

Revenue for our firm-fixed-price contracts is recognized over time using a straight-line measure of progress or using the percentage-of-completion method whereby progress toward completion is based on a comparison of actual costs incurred to total estimated costs to be incurred over the contract term.

Revenue for our firm-fixed-price contracts is recognized over time using a straight-line measure of progress.

Contract costs are expensed as incurred.

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The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value.

Equipment and improvements are stated at cost.

Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements.

Equipment and improvements are stated at cost, less accumulated depreciation and amortization.

Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (P3Y to P7Y) and the shorter of the initial lease term or estimated useful life for leasehold improvements.

Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed.

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Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives.

The assessed useful lives of the assets are 10 years.

The assessed useful lives of the assets are P10Y.

The Company continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value.

At September 30, 2022, we performed an internal goodwill impairment evaluation.

We performed a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test.

At September 30, 2023, we performed an internal goodwill impairment evaluation with a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test.

Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2023, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.

Our assessment incorporated effects of the COVID-19 pandemic, which did not have a meaningful impact on our financial results.

Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods’ results of operations.

Provision for Income Taxes

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Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized.

This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company has fully utilized its net operating loss carryforwards.

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Options issued are designated as either an incentive stock or a non-statutory stock option.

No option may be granted with a term of more than 10 years from the date of grant.

Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board.

No option may be granted with a term of more than P10Y from the date of grant.

Option awards may depend on the achievement of certain performance measures determined by the Compensation Committee of our Board.

Shares issued upon option exercise are newly issued common shares.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis