Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking and Cautionary Statements
You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K for the year ended September 30, 2025. This discussion contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management’s Discussion and Analysis are forward-looking statements that involve risks and uncertainties. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Our actual results could differ materially from the results contemplated by these forward-looking statements.
Overview and Background:
DLH Holdings Corp. ("DLH") delivers improved health and cyber readiness solutions for federal government customers through digital transformation, science research and development, and systems engineering and integration. 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 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):
2025 2024
Revenue Percent of total revenue Revenue Percent of total revenue
Department of Health and Human Services $ 171,717 49.8 % $ 184,544 46.6 %
Department of Veterans Affairs 116,422 33.8 % 139,945 35.3 %
Department of Defense 53,241 15.5 % 64,128 16.2 %
Customers with less than 10% share of total revenue 3,117 0.9 % 7,320 1.9 %
Revenue
$ 344,497 100.0 % $ 395,937 100.0 %
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. Through our acquisition program, we have built a platform of technology-powered solutions to enable us to provide an array of innovative, high-value solutions in information technology, public health and digital transformation. 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, 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.
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Federal budget outlook for fiscal year 2026 :
The U.S. 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:
There has been active consolidation and a strong increase in merger and acquisition activity among federal government contractors over the past few years that we expect to continue, fueled by public companies leveraging strong balance sheets. Companies often look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and higher margin and revenue streams.
Potential impact of federal contractual set-aside laws and regulations:
The Federal government has an overall goal of 23% of prime contracts flowing through small businesses. 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 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 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 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. See Item 1. Business – Major Contracts for additional detail
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Results of Operations
Fiscal Year Ended September 30, 2025 as Compared to Fiscal Year Ended September 30, 2024
The following table summarizes, for the years indicated, consolidated statements of operations data expressed (in thousands except for per share amounts, and as percentages of revenue):
Year Ended September 30,
2025 2024 Change
Revenue $ 344,497 100.0 % $ 395,937 100.0 % $ (51,440)
Cost of Operations
Contract costs 279,333 81.0 % 318,447 80.4 % (39,114)
General and administrative costs 31,199 9.1 % 35,538 9.0 % (4,339)
Depreciation and amortization 17,179 5.0 % 17,052 4.3 % 127
Total operating costs 327,711 95.1 % 371,037 93.7 % (43,326)
Income from operations 16,786 4.9 % 24,900 6.3 % (8,114)
Interest expense 15,031 4.4 % 17,153 4.3 % (2,122)
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
$ 0.09 $ 0.52 $ (0.43)
Diluted
$ 0.09 $ 0.51 $ (0.42)
Revenue
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
Contract costs primarily include the costs associated with providing services to our customers. 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, 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 $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. 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.
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Provision for Income Taxes
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 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):
Year Ended
September 30,
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
393 350 43
EBITDA
$ 33,965 41,952 $ (7,987)
Liquidity and Capital Management
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):
Year Ended September 30,
2025 2024
Net cash provided by operating activities $ 23,216 $ 27,366
Net cash used in investing activities (241) (836)
Net cash used in financing activities
(23,192) (26,403)
Net change in cash $ (217) $ 127
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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
As of September 30, 2025, our immediate sources of liquidity include cash of approximately $0.1 million, accounts receivable, and access to our secured revolving line of credit. This credit facility provides us with access of up to $50.0 million subject to certain conditions including eligible accounts receivable. As of September 30, 2025, we had unused borrowing capacity of $23.6 million. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements.
Credit Facilities
A summary of our credit facilities as of September 30, 2025 is as follows (in millions):
Lender Arrangement Loan Balance Interest * Maturity Date
First National Bank of Pennsylvania Secured term loan (a) $ 123.5 SOFR1 + 4.1% December 8, 2027
First National Bank of Pennsylvania Secured revolving line of credit (b) $ 8.1 SOFR1 + 4.1% December 8, 2027
1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2025 was 4.3%.
On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB; the notional amount as of September 30, 2025 is $74.0 million, it matures in January 2026, and the fixed rate is 4.1%. As a result of entering interest rate swap agreements, for the twelve months ended September 30, 2025, interest expense has been decreased by approximately $0.2 million.
(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) As of September 30, 2025 the secured revolving line of credit had a borrowing base of $50.0 million. The Company accessed funds from the secured revolving line of credit during the year, and had $8.1 million outstanding balance at September 30, 2025.
The secured term loan and secured revolving line of credit are secured by liens on substantially all of the assets of the Company. The provisions of the secured term loan and secured revolving line of credit, including financial covenants, as amended, are fully described in Note 8 to the consolidated financial statements.
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Contractual Obligations as of September 30, 2025
Payments Due By Period
Next 12 2-3 4-5 More than 5
(Amounts in thousands) Total Months Years Years Years
Debt obligations $ 131,567 $ 8,067 $ 123,500 $ — $ —
Facility operating leases 20,525 3,993 7,059 6,776 2,697
Contractual obligations
$ 152,092 $ 12,060 $ 130,559 $ 6,776 $ 2,697
Critical Accounting Policies and Estimates
Use of Estimates
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. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. 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.
For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. 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. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
Refer to Note 5 of the accompanying notes to our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K for discussion relative to the Company's revenue recognition in accordance with ASC-606.
Long-lived Assets
Our long-lived assets include equipment and improvements, right-of-use assets, intangible assets, and goodwill. 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, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 years to 7 years) 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. Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software.
Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.
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.
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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
The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. 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 assets will not be realized.
Stock-based Equity Compensation
The Company uses the fair value-based method for stock-based equity compensation. 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 the achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo method to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is credited to capital stock.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 3 of the accompanying notes to our consolidated financial statements contained elsewhere in this Annual Report, and we incorporate such discussion by reference.
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