DLH(DLHC) - 2020 Q4 - Annual Report

Part I Business DLH Holdings Corp. provides technology-enabled services primarily to U.S. federal health and human service agencies, with 98% federal revenue - The company derives 98% of its revenue from U.S. Federal government agencies, with the Department of Veteran Affairs (VA), Department of Health and Human Services (HHS), and the Department of Defense (DoD) being key clients[14] Revenue by Market (FY2020 vs. FY2019) | Market Focus Area | FY2020 Revenue (in thousands) | FY2020 Percent of Total | FY2019 Revenue (in thousands) | FY2019 Percent of Total | | :--- | :--- | :--- | :--- | :--- | | Defense/VA | $101,656 | 49% | $93,412 | 58% | | Human Services and Solutions | $40,962 | 20% | $40,679 | 25% | | Public Health/Life Sciences | $66,567 | 31% | $26,300 | 17% | | Total Revenue | $209,185 | 100% | $160,391 | 100% | Revenue by Major Customer (FY2020 vs. FY2019) | Customer | FY2020 Revenue (in thousands) | FY2020 Percent of Total | FY2019 Revenue (in thousands) | FY2019 Percent of Total | | :--- | :--- | :--- | :--- | :--- | | Department of Veterans Affairs | $100,204 | 48% | $91,949 | 57% | | Department of Health and Human Services | $95,026 | 45% | $62,000 | 39% | | Other Customers (<10%) | $13,955 | 7% | $6,442 | 4% | | Total Revenue | $209,185 | 100% | $160,391 | 100% | - On September 30, 2020, the company acquired Irving Burton Associates, LLC (IBA) to expand its services in artificial intelligence, IT modernization, and program management, particularly within the Defense Health Agency (DHA) and U.S. Army Medical Research and Development Command (MRDC)[23] - Total contract backlog increased to approximately $688.4 million at September 30, 2020, from $414.1 million at September 30, 2019. The 2020 backlog consists of $121.3 million funded and $567.1 million unfunded[35][36] - The company's revenue is primarily from time and materials contracts (70%), followed by cost-reimbursable contracts (28%) and firm-fixed-price contracts (2%). It holds a prime contractor position on contracts representing 92% of its revenue[27][28] Risk Factors The company faces substantial risks from its high dependence on federal government contracts, acquisitions, debt, and concentrated ownership - Business & Industry Risks: The company derives 98% of its revenue from federal government contracts and is highly dependent on its relationship with the VA and HHS. Risks include government budget changes, contract termination for convenience, competition, and the U.S. government's preference for small or veteran-owned businesses, which could limit prime contracting opportunities[52][53][57] - COVID-19 Risk: The pandemic poses risks of economic disruption, potential delays in government decision-making, and reduced demand for services if government spending priorities shift. Increased remote work also elevates cybersecurity risks[95] - Acquisition Risks: The company faces challenges in successfully integrating acquired businesses, such as IBA, which could divert management attention and result in unforeseen operating difficulties. There is also a risk of goodwill impairment, which could negatively affect earnings[107][109] - Indebtedness Risks: The company's credit agreement requires compliance with financial covenants (e.g., minimum fixed charge coverage ratio, maximum leverage ratio). A failure to comply could lead to default and acceleration of debt repayment. The transition away from LIBOR may also affect debt servicing costs[112][113] - Corporate Structure & Stock Risks: A significant concentration of ownership exists, with executive officers, directors, and the largest shareholder (Wynnefield Capital, Inc.) owning approximately 44% of outstanding common stock, which may deter a change in control[124] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[138] Properties DLH operates from leased facilities across seven locations, with its corporate headquarters in Atlanta, Georgia - The company does not own any real estate and operates out of leased facilities. Its corporate headquarters is in Atlanta, Georgia[139] - For the fiscal year ended September 30, 2020, the company's total lease expense was approximately $4.2 million[140] Legal Proceedings The company is not aware of any pending litigation likely to materially affect its financial results - The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows[141] Mine Safety Disclosure This item is not applicable to the company - Not applicable[142] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities DLHC common stock trades on Nasdaq, with no cash dividends paid or planned, and approximately 1,300 beneficial owners - The company's common stock is traded on The Nasdaq Capital Market under the symbol "DLHC"[145] - The company has never declared or paid cash dividends on its common stock and has no present intention of doing so[145] - As of September 30, 2020, there were 12,404,406 shares of common stock outstanding, held by an estimated 1,300 beneficial owners[146] Selected Financial Data As a "smaller reporting company," DLH is not required to provide selected financial data - The company is a "smaller reporting company" and is not required to provide the information contained in this item[150] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2020 revenue grew 30.4% to $209.2 million, driven by acquisitions, with net income rising to $7.1 million Consolidated Statement of Operations Summary (FY2020 vs. FY2019) | Metric | FY 2020 (in thousands) | FY 2019 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Revenue | $209,185 | $160,391 | $48,794 | | Income from operations | $13,461 | $9,968 | $3,493 | | Net income | $7,114 | $5,324 | $1,790 | | Diluted EPS | $0.54 | $0.41 | $0.13 | - Revenue for FY2020 increased by $48.8 million (30.4%) to $209.2 million, primarily due to the inclusion of a full year of results from Social & Scientific Systems, Inc. (S3), which was acquired in June 2019[178] Reconciliation of GAAP Net Income to EBITDA (Non-GAAP) | Metric | FY 2020 (in thousands) | FY 2019 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Net income | $7,114 | $5,324 | $1,790 | | Interest expense, net | $3,441 | $2,473 | $968 | | Provision for taxes | $2,906 | $2,171 | $735 | | Depreciation and amortization | $7,003 | $3,956 | $3,047 | | EBITDA | $20,464 | $13,924 | $6,540 | - Cash flow from operations was $19.5 million in FY2020. The company used $32.8 million in investing activities, primarily for the IBA acquisition, and received $12.9 million from financing activities, mainly from its credit facility[193][194][195] - As of September 30, 2020, the company had a $70.0 million secured term loan and access to a $25.0 million revolving line of credit, with $24.8 million of unused borrowing capacity[197][200][201] - The company believes its key programs benefit from bipartisan support and does not expect a material impact from budget negotiations, though the government was operating under a Continuing Resolution (CR) expiring December 11, 2020[161] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on variable-rate debt, partially mitigated by a swap - The company's main market risk is interest rate risk. A 1.0% increase in the LIBOR rate would increase annual interest expense by $0.2 million[226] - To manage interest rate risk, the company entered into a floating-to-fixed interest rate swap with a notional amount of $36 million[226] Financial Statements and Supplemental Data This item refers to the Consolidated Financial Statements starting on page F-1 - This item directs the reader to the Consolidated Financial Statements beginning on page F-1[227] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on financial disclosure - None reported[228] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[229] - Management concluded that the company's internal control over financial reporting was effective as of September 30, 2020, based on the COSO framework[234] - No material changes in internal control over financial reporting occurred during the fourth quarter of fiscal 2020[237] Other Information No other information is reported for this item - None reported[238] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement - Information is incorporated by reference from the Company's definitive proxy statement[241] Executive Compensation Executive compensation information is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the Company's definitive proxy statement[243] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the Company's definitive proxy statement[244] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the proxy statement - Information is incorporated by reference from the Company's definitive proxy statement[245] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the proxy statement - Information is incorporated by reference from the Company's definitive proxy statement[246] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report - This section provides a list of all exhibits filed with the Form 10-K, including stock purchase agreements, credit agreements, employment agreements, and required certifications[250][252] Form 10-K Summary No summary is provided under this item - None[256] Consolidated Financial Statements Consolidated Statements of Operations FY2020 revenue increased to $209.2 million and net income to $7.1 million, with diluted EPS at $0.54 Statement of Operations Highlights | Metric | Year Ended Sep 30, 2020 (in thousands) | Year Ended Sep 30, 2019 (in thousands) | | :--- | :--- | :--- | | Revenue | $209,185 | $160,391 | | Income from operations | $13,461 | $9,968 | | Net income | $7,114 | $5,324 | | Diluted EPS | $0.54 | $0.41 | Consolidated Balance Sheets As of September 30, 2020, total assets were $183.6 million, total liabilities $130.1 million, and shareholders' equity $53.4 million Balance Sheet Highlights | Metric | As of Sep 30, 2020 (in thousands) | As of Sep 30, 2019 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $37,397 | $26,847 | | Goodwill | $67,144 | $52,758 | | Intangible assets, net | $52,612 | $41,208 | | Total Assets | $183,562 | $129,258 | | Total Current Liabilities | $47,961 | $29,485 | | Total Long-term Liabilities | $82,164 | $54,202 | | Total Liabilities | $130,125 | $83,687 | | Total Shareholders' Equity | $53,437 | $45,571 | Consolidated Statements of Cash Flows FY2020 net cash from operations was $19.5 million, with $32.8 million used in investing and $12.9 million from financing Cash Flow Summary | Cash Flow Activity | Year Ended Sep 30, 2020 (in thousands) | Year Ended Sep 30, 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,451 | $18,039 | | Net cash used in investing activities | ($32,830) | ($67,484) | | Net cash provided by financing activities | $12,946 | $44,880 | | Net change in cash and cash equivalents | ($433) | ($4,565) | Notes to Consolidated Financial Statements Notes detail accounting policies, revenue recognition, lease accounting, credit facilities, and business combinations - Revenue Recognition (Note 5): Revenue is recognized over time as services are rendered, primarily using a cost-based input method. The majority of contracts are with the U.S. government, which allows for termination for convenience, supporting the over-time recognition model[308] Disaggregated Revenue by Contract Type (Note 5) | Contract Type | FY 2020 Revenue (in thousands) | FY 2019 Revenue (in thousands) | | :--- | :--- | :--- | | Time and materials | $147,509 | $134,136 | | Cost reimbursable | $58,091 | $23,200 | | Firm fixed price | $3,585 | $3,055 | | Total Revenue | $209,185 | $160,391 | - Leases (Note 6): The company adopted ASC 842 on October 1, 2019, resulting in the recognition of operating lease right-of-use assets of $17.4 million and lease liabilities of $18.0 million on the balance sheet[285][320] - Credit Facilities (Note 8): As of Sep 30, 2020, the company has a $70.0 million secured term loan maturing in 2025 with an interest rate of LIBOR + 3.5% (subject to a 0.5% floor) and a $25.0 million revolving line of credit. The company is in compliance with all financial covenants[345][346] - Business Combinations (Note 16): The company acquired Irving Burton Associates, LLC (IBA) on September 30, 2020, for a preliminary net purchase price of $32.7 million. The preliminary allocation resulted in goodwill of $14.4 million and intangible assets of $16.2 million[379][339][336]