What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-12-10 compared with 2024-12-04 · 78 added, 85 removed, 141 unchanged (54% of the section changed)

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Our actual results could differ materially from the results contemplated by these forward-looking statements.

Business Overview:

Overview and Background:

DLH Holdings Corp.

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We bring a unique combination of government sector experience, proven methodologies, and unwavering commitment to solve the complex problems faced by civilian and military customers alike, doing so by leveraging a robust capability set, including cyber technology, artificial intelligence, advanced analytics, cloud-based applications, and telehealth systems.

We derive 98% 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, 2024 and 2023, respectively (in thousands):

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

The following table summarizes the revenues by customer for the years ended September 30, 2025 and 2024, respectively (in thousands and percent):

Revenue Percent of total revenue Revenue Percent of total revenue

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We are focused on increasing organic growth across our addressable market and delivering robust cash flow.

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.

Our primary focus within the defense agency markets includes cyber security, digital transformation, Artificial Intelligence/Machine Learning (AI/ML) and data analytics, C5ISR (Command, Control, Communications, Computers, Cyber, Intelligence, Surveillance & Reconnaissance), cloud enablement and migration, telehealth, behavioral health, medication therapy management, and clinical systems support for military service members and veterans Within the civilian agency market, we focus on healthcare and social program delivery, IT modernization, systems engineering and integration, data-driven program management, and technology solutions that improve outcomes for underserved and at-risk populations.

We believe these priorities position the Company to expand within key national programs and mission-critical areas of health and national security.

Federal budget outlook for fiscal year 2026 :

While Congress has not completed the final appropriation bills for the government’s 2025 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 26, 2024, the President signed a continuing resolution (CR, H.R.

The CR extends fiscal year 2025 funding for all 12 annual spending bills, including the Defense, Labor, Health and Human Services, and Education bills, through December 20, 2024.

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.

We are monitoring impact the new Presidential Administration will have on government funding negotiations as their legislative and political priorities .

We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans.

Historically, our customers’ missions have received bipartisan support from the legislative and executive branches of the federal government.

However, we anticipate that the President-Elect and new Congress will seek to implement their budget priorities, which may impact our customers’ projects and budgets.

budget and regulatory landscape remains uncertain, and this uncertainty is expected to continue.

The company’s performance depends on overall federal spending levels and how well its capabilities align with government priorities.

The administration is reviewing agency spending to improve efficiency and productivity, which has already led to some contract reductions, cancellations, and price renegotiations for the company.

Future reviews may cause further adjustments or mandates to cut costs.

The company closely monitors federal budget, legislative, and contracting developments to adapt its strategies accordingly.

While defense and national security spending enjoy bipartisan support amid global tensions, uncertainty persists around the timing and passage of annual appropriations bills.

We continue to align the Company’s capabilities with well-funded budget priorities and take steps to maintain a competitive cost structure in line with our expectations of future business opportunities.

In light of these actions, as well as the budgetary environment discussed above, we believe we are well positioned to continue to win new business in our addressable market.

On October 1, 2025, the U.S.

government entered a shutdown which persisted until November 12, 2025, when Congress passed and the President signed an appropriations bill to fund certain agencies and extend funding at current levels for the remaining agencies until January 30, 2026.

Unless full year appropriation bills or a CR are passed and signed at the end of the current CR, the federal government will shutdown operations until legislation has been enacted.

Industry consolidation among federal government contractors:

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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 U.S, 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.

However, the effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth.

The effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth.

In these cases, the Company may elect to join a team with an eligible contractor as prime for specific pursuits that align with our core markets and corporate growth strategy.

During the fiscal year ended September 30, 2025, we generated revenues of approximately $116.4 million from our set of contracts in support of the VA's Consolidated Mail Outpatient Pharmacy ("CMOP") program.

As previously reported, the VA has been soliciting proposals for new contracts covering this work with a preference for a Service-Disabled Veteran Owned Small Business, or SDVOSB, to perform as the prime contractor.

During the 2024 fiscal year, the VA awarded one contract to a SDVOSB that was not affiliated with DLH.

Should awards for the locations for which we have submitted a proposal be offered to a partner of DLH, we expect to continue to perform a significant amount of those contracts' volume of business as a subcontractor.

While the acquisition process is being conducted, DLH continues to operate as the prime contractor for all CMOP locations other than the Chelmsford location.

For more information concerning the status of this procurement effort, see Item 1.

Business – Major Contracts .

As previously disclosed, the VA issued solicitations for performance of the CMOP program by separate contracts for each of its eight locations, with the awards limited to service-disabled veteran owned small business (“SDVOSB”) prime contractors.

As this acquisition evaluation is continuing with respect to the remaining locations, we were awarded a new sole-source Indefinite Quantity/Indefinite Delivery contract effective October 28, 2025.

The IDIQ has ceiling value of $90.0 million, and a maximum ordering period through October 28, 2026, In addition, we performed monitoring, evaluation and compliance services for the Office of Head Start.

The contract term for these services ended on October 31, 2025 and following the procurement for the renewal of these services on a set aside basis, performance transitioned to unaffiliated contractors at the end of the contract term.

Business – Major Contracts for additional detail

Results of Operations

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General and administrative costs 31,199 9.1 % 35,538 9.0 % (4,339)

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

Corporate development costs — — % 1,735 0.5 % (1,735)

Depreciation and amortization 17,179 5.0 % 17,052 4.3 % 127

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Interest expense 15,031 4.4 % 17,153 4.3 % (2,122)

Income before provision for income tax (benefit) expense 7,747 2.0 % 820 0.2 % 6,927

Provision for income tax expense (benefit)

Income before provision for income taxes 1,755 0.5 % 7,747 2.0 % (5,992)

Provision for income taxes

393 0.1 % 350 0.1 % 43

Net income $ 1,362 0.4 % $ 7,397 1.9 % $ (6,035)

Net income per share - basic $ 0.52 $ 0.11 $ 0.41

Net income per share - diluted $ 0.51 $ 0.10 $ 0.41

For the year ended September 30, 2024 revenue was $395.9 million, an increase of $20.1 million or 5.3% over the prior year period.

The increase in revenue is principally due to the December 2022 acquisition.

Net income per share

$ 0.09 $ 0.52 $ (0.43)

$ 0.09 $ 0.51 $ (0.42)

For the year ended September 30, 2025 revenue was $344.5 million, a decrease of $51.4 million over the prior year period.

The decrease in revenue was due primarily to the conversion of certain contracts in our HHS, VA and DOD portfolios to small business contractors.

The revenue decrease from small business conversion was partially offset by contributions from new contract awards.

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, 2024, the contract costs increased as compared to the prior fiscal year by $21.0 million to approximately $317.0 million primarily due to the increase in revenue volume.

Non-labor costs, which consist primarily of subcontract and other direct costs and inherently carry a lower margin, increased as a percentage of revenue in fiscal 2024 as compared to the prior fiscal year.

For the year ended September 30, 2025, the contract costs decreased as compared to the prior fiscal year by $39.1 million, primarily due to the decrease in revenue volume, most notably non-labor costs.

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 decreased as compared to the prior fiscal year by $0.8 million to approximately $37.0 million as the company achieved operating leverage following the December 2022 acquisition.

In the 2023 fiscal year there were two costs that did not recur in fiscal 2024 which impacted the Company’s operating income and net income.

These costs consisted of an impairment loss of a long-lived asset of $7.7 million and corporate development costs of $1.7 million.

The impairment charge resulted from the consolidation of under utilized real estate assets.

The corporate development costs were incurred to complete the December 2022 acquisition and include legal counsel, financial due diligence, customer market analysis and representation and warranty insurance premiums.

For the year ended September 30, 2024, depreciation and amortization costs were $0.6 million and $16.5 million, respectively, as compared to $0.8 million and $14.8 million for the year ended September 30, 2023, respectively, an aggregate increase of $1.5 million which is primary due to the December 2022 acquisition.

These costs decreased as compared to the prior fiscal year by $4.3 million, primarily due to a reduction in support costs proportionally with the change in revenue volume.

For the year ended September 30, 2025, depreciation and amortization costs were $0.7 million and $16.5 million, respectively, as compared to $0.6 million and $16.5 million for the year ended September 30, 2024, respectively.

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, 2024, interest expense was $17.2 million compared to interest expense of $16.3 million in the prior year, an increase of approximately $0.9 million over the prior year period.

The increase in interest expense was primarily due to the increase in debt associated with the December 2022 acquisition.

Interest expense decreased $2.1 million for the year ended September 30, 2025 compared to the prior fiscal year.

The decrease in interest expense was primarily due to the prepayment of debt and a decrease in the interest rate.

Provision for Income Taxes

Provision for Income taxes for the fiscal year ended September 30, 2024 was a tax expense of $0.4 million, an increase of approximately $1.0 million from the prior fiscal year.

The increase was primarily due to the impairment of real estate assets in fiscal 2023 that did not impact fiscal 2024.

The effective tax rate was a positive 4.5% for the fiscal year ending September 30, 2024 and a negative 72.2% for the fiscal year ending September 30, 2023.

Provision for income taxes for the fiscal year ended September 30, 2025 increased approximately $43.0 thousand from the prior fiscal year.

The effective tax rate was 21.3% for the fiscal year ending September 30, 2025 and 4.5% for the fiscal year ending September 30, 2024.

The tax provision from the prior year period was positively impacted by the exercise of non-qualifying stock options.

Non-GAAP Financial Measures

The Company is presenting additional non-GAAP measures regarding its financial performance for years ended September 30, 2024 and 2023.

The measures presented are Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), and Adjusted EBITDA.

In calculating Adjusted EBITDA, we have added the corporate development costs associated with completing the December 2022 acquisition to our results for fiscal year 2023 and removed the impairment loss on certain real estate assets.

These resulting measures present the annual 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.

EBITDA and Adjusted EBITDA 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, or net income, as measures of operating results, each as defined under GAAP.

We have defined these non-GAAP measures as follows:

"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.

The Company uses Earnings Before Interest, Tax, Depreciation, and Amortization ("EBITDA") as a supplemental non-GAAP measure of our performance.

DLH defines EBITDA as net income excluding (i) depreciation and amortization, (ii) interest expense, and (iii) provision for income tax expense.

On a non-GAAP basis, EBITDA for years ended September 30, 2025 and 2024 was approximately $34.0 million and $42.0 million, respectively.

The decrease was primarily due to the decrease in revenue volume driven by conversion of certain VA and DoD contracts to small business contractors, partially offset by revenue from new contract awards.

This non-GAAP measure of our performance is 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 this non-GAAP measure to make decisions about the use of our resources, analyze performance between periods, develop internal projections and measure management's performance.

We believe that this non-GAAP measure is 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.

EBITDA is not a recognized measurement under accounting principles generally accepted in the United States, or GAAP, and when analyzing our performance investors should (i) evaluate adjustments in our reconciliation to the nearest GAAP financial measures and (ii) use non-GAAP measures in addition to, and not as an alternative to, measures of our operating results as defined under GAAP.

Reconciliation of GAAP net income to EBITDA and Adjusted EBITDA, non-GAAP measures (in thousands):

September 30,

$ 7,397 $ 1,461 $ 5,936

Interest expense, net $ 17,153 $ 16,271 882

Provision for income tax expense (benefit)

350 (641) 991

2025 2024 Change

Net income $ 1,362 $ 7,397 $ (6,035)

Depreciation and amortization 17,179 17,052 127

Interest expense $ 15,031 $ 17,153 (2,122)

Provision for income taxes

$ 33,965 41,952 $ (7,987)

Impairment loss of long-lived asset (a) — 7,673 (7,673)

Corporate development costs (b) — 1,735 (1,735)

Adjusted EBITDA $ 41,952 42,061 $ (109)

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.

Represents corporate development costs we incurred to complete the December 2022 transaction.

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

Liquidity and Capital Management

Cash is approximately $0.3 million and $0.2 million for the period ended September 30, 2024 and 2023 respectively.

Credit facility availability was approximately $32.5 million and $32.0 million for the period ended September 30, 2024 and 2023, respectively.

Cash was approximately $0.1 million and $0.3 million for the years ended September 30, 2025 and 2024, respectively.

Credit facility availability was approximately $23.6 million and $32.5 million as of September 30, 2025 and 2024, respectively.

A summary of the change in cash is presented below for the years ended September 30, 2025 and 2024 (in thousands):

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Net cash used in investing activities (241) (836)

Net cash (used in) provided by financing activities

Net cash used in financing activities

(23,192) (26,403)

Net change in cash $ (217) $ 127

Cash flows from operations totaled approximately $27.4 million and $31.0 million for the years ended September 30, 2024 and 2023, respectively.

The decrease in cash from operations was principally due to a decrease in current liabilities, specifically lease liabilities.

We used $0.8 million and $181.2 million of cash in investing activities during fiscal years 2024 and 2023, respectively.

The cash utilized was predominantly due capital expenditures and the December 2022 acquisition in fiscal years 2024 and 2023, respectively.

Cash used in financing activities during the fiscal year ended September 30, 2024 was approximately $26.4 million and cash provided by financing activities during the fiscal year ended September 30, 2023 was $150.2 million, respectively.

The cash used in financial activities during the fiscal year ended September 30, 2024, was primarily due to the early repayment of principal on our secured term loan.

The activity in the fiscal year ended September 30, 2023 was primarily due to finance the December 2022 acquisition.

Cash provided by operations totaled approximately $23.2 million and $27.4 million for the years ended September 30, 2025 and 2024, respectively.

The decrease in cash provided by operating activities is primarily due to a decrease in revenue volume as compared to the prior year.

Cash used in investing activities totaled $0.2 million and $0.8 million for the years ended September 30, 2025 and 2024, respectively.

The cash utilized was predominantly for capital expenditures in fiscal years 2025 and 2024, respectively.

Cash used in financing activities during the fiscal years ended September 30, 2025 and September 30, 2024 were approximately $23.2 million and $26.4 million, respectively.

The cash used in financing activities was primarily due to the prepayment of term debt.

Sources of Cash

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The assessed useful lives of the assets are 10 years.

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, 2024, 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, 2024, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.

Goodwill Impairment Testing

The qualitative assessment of goodwill at September 30, 2025 determined a triggering event occurred requiring that we conduct additional quantitative analyses.

The triggering event was primarily due to the decrease in the Company's share price resulting in a decline in market capitalization.

Management's assessment was that the market capitalization at the end of the 4th quarter was not indicative of the Company's fair value.

The Company performed a quantitative assessment to determine its fair value.

The quantitative assessment blended multiple methods so as to have a reasonable and complete assessment of fair value.

The methods used included both market and income-based approaches with all methods utilizing publicly available information in their respective calculations.

Management assessed the relevance and reliability of the information utilized in each method.

Significant estimates in the market-based method included identifying similar companies with comparable business factors such as service offerings, customers, size, growth, profitability, risk and return on investment, as well as assessing comparable market multiples and control premiums in estimating the fair value of the Company.

The income-based method is a discounted cash flow analysis and the significant estimates included expected growth rates, profitability and the weighted average cost of capital.

For the market-based methods, the Company used the average market capitalization over the current quarter with the inclusion of a control premium as one estimation of fair value.

The other market-based method used publicly available market multiples of relevant publicly traded companies applied to our EBITDA and revenue for fiscal 2025 to estimate the Company's fair value.

For the income-based method, the Company calculated its expected future cash flows.

Those cash flows were then discounted to present value using a weighted average cost of capital.

The weighted average of the three assessments indicated that the Company's fair value was greater than its book equity value.

As a result of these quantitative assessments, the Company determined that its goodwill was not impaired at the end of the year.

Management will continue to evaluate market conditions and perform qualitative interim assessments to determine if a triggering event has occurred.

Should a triggering event occur, the Company will perform a quantitative assessment to estimate fair value.

Provision for Income Taxes

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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