DLH(US:DLHC)2024-12-04 21:30Part I Item 1. Business DLH provides technology-enabled health solutions to federal agencies, facing recompete risks for key VA contracts - DLH delivers health and readiness solutions to federal government customers, focusing on digital transformation, cybersecurity, R&D, and systems engineering11 Revenue by Major Customer (FY 2024 vs. FY 2023) | Customer | Revenue (FY 2024, in thousands) | Percent of Total (FY 2024) | Revenue (FY 2023, in thousands) | Percent of Total (FY 2023) | | :--- | :--- | :--- | :--- | :--- | | Dept. of Health and Human Services | $184,544 | 46.6% | $161,311 | 42.9% | | Dept. of Veterans Affairs | $139,945 | 35.3% | $138,862 | 37.0% | | Dept. of Defense | $64,128 | 16.2% | $70,325 | 18.7% | | Other Customers | $7,320 | 1.9% | $5,374 | 1.4% | | Total Revenue | $395,937 | 100.0% | $375,872 | 100.0% | - The company's major contracts with the VA for the Consolidated Mail Outpatient Pharmacy (CMOP) program, which generated approximately $139.9 million in FY2024, are being re-procured as set-asides for Service-Disabled Veteran-Owned Small Businesses (SDVOSB), posing a significant recompete risk272830 Backlog Summary (as of Sep 30) | Backlog Type | 2024 | 2023 | | :--- | :--- | :--- | | Total Backlog | $690.3 million | $704.8 million | | Funded Backlog | $155.1 million | $169.9 million | - As of September 30, 2024, the company employed approximately 2,800 people47 Item 1A. Risk Factors Reliance on federal contracts, especially VA CMOP, and cybersecurity threats pose significant risks - The company derives 98% of its revenue from federal government agencies, making it highly dependent on government contracts and spending priorities59 - A significant risk is the concentration of revenue in contracts with the VA and HHS. The VA's CMOP contracts are currently subject to renewal solicitations set aside for SDVOSBs, which could materially impact future revenue if the company is not successful in the recompete61 - The business is subject to risks from the U.S. government's annual budget and appropriations process, including potential delays, shutdowns, or funding cuts that could adversely affect revenue and cash flows6770 - Cybersecurity incidents, including data breaches or system shutdowns, pose a significant risk that could lead to reputational damage, loss of clients, and financial liability102104 - The company has substantial debt incurred from acquisitions, which requires adherence to strict financial covenants and dedicates a significant portion of cash flow to debt service123124125 Item 1B. Unresolved Staff Comments The company reports no unresolved comments from the SEC staff - There are no unresolved staff comments157 Item 1C. Cybersecurity DLH's cybersecurity program, aligned with NIST and government standards, is overseen by the Board - The cybersecurity program is designed to align with the NIST Cybersecurity Framework and comply with regulations including FedRAMP, FISMA, and CMMC159 - Oversight is provided by the Board's Cybersecurity, Technology, and Biomedical Research (CTBR) Committee, which receives regular briefings from management161 - To date, the company has not identified any cybersecurity threats that have materially affected or are reasonably likely to materially affect its business162 Item 2. Properties DLH leases all its facilities, totaling 93.7 thousand square feet, with $4.0 million in FY2024 lease expense - The company leases all its facilities, occupying a total of approximately 93.7 thousand square feet across seven U.S. locations and one in Uganda164 - Total lease expense for the fiscal year ended September 30, 2024, was approximately $4.0 million164 Item 3. Legal Proceedings The company is unaware 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 flows165 Item 4. Mine Safety Disclosure This item is not applicable to the company's business - Not applicable166 Part II Item 5. Market For the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities DLH common stock trades on Nasdaq under DLHC, with no history or intent to pay cash dividends - The company's common stock trades on The Nasdaq Capital Market under the symbol "DLHC"169 - DLH has not declared or paid any cash dividends on its common stock and does not intend to in the foreseeable future170 Item 6. Selected Financial Data This item is reserved, indicating no financial data is presented - This item is marked as "RESERVED", indicating no data is presented175 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2024 revenue grew 5.3% to $395.9 million, net income significantly higher from non-recurring charges Consolidated Statements of Operations Summary (in thousands) | Metric | FY 2024 | FY 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $395,937 | $375,872 | $20,065 | 5.3% | | Income from operations | $24,900 | $17,091 | $7,809 | 45.7% | | Net income | $7,397 | $1,461 | $5,936 | 406.3% | | Diluted EPS | $0.51 | $0.10 | $0.41 | 410.0% | - The significant increase in net income was primarily due to the non-recurrence of a $7.7 million impairment loss and $1.7 million in corporate development costs that were recorded in fiscal 2023193 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net income | $7,397 | $1,461 | | Interest expense, net | $17,153 | $16,271 | | Provision for income tax | $350 | $(641) | | Depreciation and amortization | $17,052 | $15,562 | | EBITDA | $41,952 | $32,653 | | Impairment loss of long-lived asset | — | $7,673 | | Corporate development costs | — | $1,735 | | Adjusted EBITDA | $41,952 | $42,061 | Summary of Cash Flows (in thousands) | Cash Flow Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $27,366 | $31,033 | | Net cash used in investing activities | $(836) | $(181,197) | | Net cash (used in) provided by financing activities | $(26,403) | $150,151 | - As of September 30, 2024, the company had $0.3 million in cash and approximately $32.5 million in credit facility availability205 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk on variable debt is partially mitigated by an $80.0 million floating-to-fixed swap - The main market risk is interest rate changes on variable-rate debt. The company uses an $80.0 million floating-to-fixed interest rate swap to mitigate this risk, fixing the rate at 4.10% for that portion233 - A hypothetical 1.0% increase in the SOFR interest rate would result in an approximate $0.7 million increase in annual interest expense234 Item 8. Financial Statements and Supplemental Data Audited financial statements received an unqualified opinion, with revenue recognition noted as a critical audit matter - The independent auditor, WithumSmith+Brown, PC, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of September 30, 2024238 - The auditor identified Revenue Recognition as a critical audit matter due to the high degree of auditor effort required in performing procedures, including the testing of contract assets246247 Key Balance Sheet Data (as of Sep 30, in thousands) | Account | 2024 | 2023 | | :--- | :--- | :--- | | Total Current Assets | $52,957 | $62,401 | | Goodwill | $138,161 | $138,161 | | Total Assets | $314,381 | $339,841 | | Total Current Liabilities | $53,242 | $64,787 | | Total Debt Obligations (net) | $149,374 | $172,335 | | Total Liabilities | $204,249 | $237,402 | | Total Shareholders' Equity | $110,132 | $102,439 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no disagreements with its accountants on accounting or financial disclosure matters - None346 Item 9A. Controls and Procedures Disclosure controls and internal control over financial reporting were effective as of September 30, 2024 - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2024347 - Management's assessment, based on the COSO framework, concluded that internal control over financial reporting was effective as of September 30, 2024351 - No changes in internal control over financial reporting occurred during the fourth quarter that materially affected, or are reasonably likely to materially affect, internal controls354 Item 9B. Other Information The company reports no other information required to be disclosed - None355 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable357 Part III Items 10-14 Information for these items is incorporated by reference from the company's definitive proxy statement - Information for Items 10 (Directors, Executive Officers and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships and Related Transactions), and 14 (Principal Accountant Fees and Services) is incorporated by reference from the company's definitive proxy statement358 Part IV Item 15. Exhibits and Financial Statement Schedules This item lists financial statements and provides an index of exhibits - This item contains the list of financial statements filed with the report and an index of exhibits, such as material contracts and certifications364367 Item 16. Form 10-K Summary The company has not provided a summary of the Form 10-K - None371