DLH(US:DLHC)2023-08-01 16:00markdown [Part I — Financial Information](index=3&type=section&id=Part%20I%20%E2%80%94%20Financial%20Information) Presents the unaudited consolidated financial statements and management's discussion and analysis for DLH Holdings Corp [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Presents the unaudited consolidated financial statements, including operations, balance sheets, cash flows, equity, and detailed accounting notes [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Details revenues, operating costs, income, interest expense, net income, and earnings per share for the three and nine months ended June 30 Consolidated Statements of Operations (Three Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :-------------------------- | :------------------ | :------------------ | :----------- | | Revenue | $102,241 | $66,440 | +$35,801 | | Total operating costs | $95,134 | $59,326 | +$35,808 | | Income from operations | $7,107 | $7,114 | -$7 | | Interest expense | $4,917 | $512 | +$4,405 | | Net income | $1,738 | $4,864 | -$3,126 | | Net income per share - diluted | $0.12 | $0.34 | -$0.22 | Consolidated Statements of Operations (Nine Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :-------------------------- | :------------------ | :------------------ | :----------- | | Revenue | $274,385 | $327,940 | -$53,555 | | Total operating costs | $257,465 | $299,352 | -$41,887 | | Income from operations | $16,920 | $28,588 | -$11,668 | | Interest expense | $11,512 | $1,739 | +$9,773 | | Net income | $4,090 | $19,846 | -$15,756 | | Net income per share - diluted | $0.28 | $1.40 | -$1.12 | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Provides a snapshot of assets, liabilities, and shareholders' equity as of June 30, 2023, and September 30, 2022 Balance Sheet Highlights (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | Change | | :---------------------------------- | :------------------------------- | :------------------------------- | :------- | | Total assets | $359,375 | $169,012 | +$190,363 | | Total liabilities | $254,209 | $76,952 | +$177,257 | | Total shareholders' equity | $105,166 | $92,060 | +$13,106 | | Goodwill | $138,301 | $65,643 | +$72,658 | | Intangible assets, net | $128,891 | $40,884 | +$88,007 | | Debt obligations - long-term, net | $159,379 | $20,416 | +$138,963 | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Details cash flows from operating, investing, and financing activities, highlighting shifts and GRSi acquisition impacts Cash Flow Highlights (Nine Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | | :-------------------------------------- | :------------------ | :------------------ | :----------- | | Net cash provided by (used in) operating activities | $14,997 | $(4,759) | +$19,756 | | Net cash used in investing activities | $(181,291) | $(244) | -$181,047 | | Net cash provided by (used in) financing activities | $166,596 | $(17,988) | +$184,584 | | Net change in cash | $302 | $(22,991) | +$23,293 | | Cash - end of period | $530 | $1,060 | -$530 | - Key Investing Activity: **Business acquisition, net of cash acquired: $(180,711) thousand in 2023**[16](index=16&type=chunk) - Key Financing Activities (2023): **Proceeds from revolving line of credit: $144,697 thousand**; **Proceeds from debt obligations: $168,000 thousand**[16](index=16&type=chunk) [Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Shareholders%27%20Equity) Outlines changes in shareholders' equity, reflecting net income, stock issuances for acquisitions, and stock-based compensation Shareholders' Equity (Nine Months Ended June 30, 2023) | Metric | September 30, 2022 (in thousands) | June 30, 2023 (in thousands) | | :------------------------------------------------ | :-------------------------------- | :----------------------------- | | Balance | $92,060 | $105,166 | | Issuance and fair value adjustment of common stock in business combination | — | $6,539 | | Net income | $990 (Retained Earnings) | $4,090 (Retained Earnings) | [Notes to Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(Unaudited)) Provides detailed explanations and disclosures for the consolidated financial statements, covering accounting policies and key financial areas [1. Basis of Presentation and Principles of Consolidation](index=8&type=section&id=1.%20Basis%20of%20Presentation%20and%20Principles%20of%20Consolidation) States that financial statements include DLH Holdings Corp. and subsidiaries, prepared in accordance with GAAP for interim information - The financial statements are **unaudited** and include normal recurring accruals[22](index=22&type=chunk) - Operating results for the period ended June 30, 2023, are not necessarily indicative of the full year or future periods[22](index=22&type=chunk) [2. Significant Accounting Policies](index=8&type=section&id=2.%20Significant%20Accounting%20Policies) Details critical accounting policies, including estimates, revenue recognition, fair value, long-lived assets, leases, goodwill, and derivatives - Revenue is derived from technology-enabled business process outsourcing, program management, and public health research for the U.S. government, recognized over time based on progress[24](index=24&type=chunk)[26](index=26&type=chunk) - Revenue recognition methods include: **Time and material** (invoiced amount), **Cost reimbursable** (costs incurred plus estimated fee), and **Firm fixed price** (straight-line measure of progress)[29](index=29&type=chunk)[36](index=36&type=chunk) - **Goodwill** is reviewed for impairment annually and quarterly for macroeconomic impacts; **no material adverse effect on valuation identified** as of June 30, 2023[38](index=38&type=chunk)[170](index=170&type=chunk) - The Company uses derivative financial instruments (**interest rate swaps**) to manage interest rate risk, not for trading or speculative purposes[47](index=47&type=chunk) [3. New Accounting Pronouncements](index=12&type=section&id=3.%20New%20Accounting%20Pronouncements) Discusses the adoption of ASU 2020-04 and ASU No. 2021-01 (Topic 848) related to Reference Rate Reform, with no material impact - The Company adopted optional expedients and exceptions provided in **Topic 848 (Reference Rate Reform)** in the first quarter of fiscal 2023[50](index=50&type=chunk) - The adoption of Topic 848 did not have a **material impact** on the Company's consolidated financial statements[50](index=50&type=chunk) [4. Business Combination](index=14&type=section&id=4.%20Business%20Combination) Details the **GRSi acquisition** on December 8, 2022, for **$188.0 million**, financed by debt and common stock, diversifying contracts and capabilities - Acquisition of **Grove Resource Solutions, LLC ("GRSi")** completed on **December 8, 2022**[51](index=51&type=chunk) - Purchase price was **$188.0 million**, financed by **$181.5 million** from credit facility and **$6.5 million** in common stock[51](index=51&type=chunk)[55](index=55&type=chunk) - Acquisition rationale: contract diversification, addition of key capabilities, and increased presence in the military health market[51](index=51&type=chunk) GRSi Contribution (Nine Months Ended June 30, 2023) | Metric | Amount (in millions) | | :-------------------- | :------------------- | | Revenue | $73.9 | | Income from operations | $4.1 | [5. Revenue Recognition](index=16&type=section&id=5.%20Revenue%20Recognition) Provides disaggregation of revenue by customer, contract type, and contractor role, showing significant increases from HHS and DoD Contract Assets (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :-------------- | :------------------------------- | :------------------------------- | | Contract assets | $19,300 | $7,682 | Revenue by Customer (Three Months Ended June 30) | Customer | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :-------------------------------- | :------------------ | :------------------ | :----------- | | Department of Veterans Affairs | $35,898 | $33,344 | +$2,554 | | Department of Health and Human Services | $44,536 | $27,741 | +$16,795 | | Department of Defense | $21,003 | $8,272 | +$12,731 | | Department of Homeland Security | $256 | $(4,908) | +$5,164 | Revenue by Contract Type (Three Months Ended June 30) | Contract Type | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :---------------- | :------------------ | :------------------ | :----------- | | Time and Materials | $51,572 | $44,672 | +$6,900 | | Cost Reimbursable | $29,110 | $11,979 | +$17,131 | | Firm Fixed Price | $21,559 | $9,789 | +$11,770 | Revenue by Contractor Role (Three Months Ended June 30) | Role | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :---------------- | :------------------ | :------------------ | :----------- | | Prime Contractor | $97,885 | $58,743 | +$39,142 | | Subcontractor | $4,356 | $7,697 | -$3,341 | [6. Leases](index=17&type=section&id=6.%20Leases) Details operating lease balances, showing increases in right-of-use assets and liabilities, with future minimum payments and weighted-average terms Lease Balances (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Operating lease right-of-use assets | $17,911 | $16,851 | | Total operating lease liabilities | $19,963 | $18,696 | Total Lease Costs (Nine Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------- | :------------------ | :------------------ | | Total lease costs | $2,995 | $2,670 | - As of June 30, 2023, total future lease payments are **$24,703 thousand**, with a present value of **$19,963 thousand**[63](index=63&type=chunk) - Weighted-average remaining lease term: **6.3 years**; Weighted-average discount rate: **6.4%**[63](index=63&type=chunk) [7. Supporting Financial Information](index=18&type=section&id=7.%20Supporting%20Financial%20Information) Provides detailed breakdowns of accounts receivable, other current assets, equipment, intangible assets, goodwill, and accounts payable Accounts Receivable (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :---------------- | :------------------------------- | :------------------------------- | | Billed receivables | $48,582 | $32,814 | | Contract assets | $19,300 | $7,682 | | Total | $67,882 | $40,496 | Intangible Assets, Net (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :------------------------------------ | :------------------------------- | :------------------------------- | | Customer contracts and relationships | $113,622 | $47,044 | | Trade name | $13,034 | $3,051 | | Backlog | $37,249 | $15,237 | | Total intangible assets, net | $128,891 | $40,884 | - **Goodwill increased by $72,658 thousand** from the GRSi acquisition, totaling **$138,301 thousand** as of June 30, 2023[70](index=70&type=chunk) - Amortization expense for the nine months ended June 30, 2023, was **$10.7 million**, up from **$4.9 million** in the prior year[68](index=68&type=chunk) [8. Credit Facilities](index=20&type=section&id=8.%20Credit%20Facilities) Details secured term loan and revolving line of credit, including SOFR-based interest rates, maturity dates, and compliance with covenants Credit Facilities (June 30, 2023) | Arrangement | Loan Balance (in millions) | Interest | Maturity Date | | :-------------------------------------- | :------------------------- | :--------------- | :-------------- | | Secured term loan | $179.3 | SOFR* + 4.2% | December 8, 2027 | | Secured revolving line of credit | $16.4 | SOFR* + 4.2% | December 8, 2027 | *SOFR as of June 30, 2023 was 5.2%. - Total notional amount of floating-to-fixed interest rate swaps is **$112.2 million** as of June 30, 2023[77](index=77&type=chunk) - The Company is in **compliance with all loan covenants and restrictions**[79](index=79&type=chunk)[83](index=83&type=chunk) - Unused borrowing capacity on the revolving line of credit was **$32.9 million** as of June 30, 2023[82](index=82&type=chunk) [9. Stock-Based Compensation and Equity Grants](index=22&type=section&id=9.%20Stock-Based%20Compensation%20and%20Equity%20Grants) Outlines stock-based compensation expense, types of equity grants, unrecognized expense, and stock option activity Total Stock Option Expense (Nine Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------- | :------------------ | :------------------ | | DLH employees | $1,481 | $1,466 | | Non-employee directors | $539 | $486 | | Total | $2,020 | $1,952 | - **Unrecognized stock-based compensation expense totaled $7,513 thousand** as of June 30, 2023, expected to be recognized over **4.1 years**[88](index=88&type=chunk) - **Stock options outstanding** as of June 30, 2023, were **2,241 thousand shares** with a weighted average exercise price of **$8.36**[90](index=90&type=chunk) [10. Earnings Per Share](index=25&type=section&id=10.%20Earnings%20Per%20Share) Explains the calculation of basic and diluted earnings per share and presents figures for the three and nine months ended June 30 Earnings Per Share (Three Months Ended June 30) | Metric | 2023 | 2022 | | :---------------------- | :----- | :----- | | Basic EPS | $0.13 | $0.38 | | Diluted EPS | $0.12 | $0.34 | Earnings Per Share (Nine Months Ended June 30) | Metric | 2023 | 2022 | | :---------------------- | :----- | :----- | | Basic EPS | $0.30 | $1.55 | | Diluted EPS | $0.28 | $1.40 | [11. Commitments and Contingencies](index=25&type=section&id=11.%20Commitments%20and%20Contingencies) Outlines contractual obligations, including debt and operating leases, and addresses workers' compensation accruals and legal proceedings Total Contractual Obligations (as of June 30, 2023) | Obligation Type | Total (in thousands) | | :---------------------- | :------------------- | | Debt obligations | $195,760 | | Facility operating leases | $24,636 | | Equipment operating leases | $67 | | **Total** | **$220,463** | - **Accrued liability for workers' compensation claims development was $2.7 million** as of June 30, 2023, down from **$4.9 million** at September 30, 2022[99](index=99&type=chunk) - The Company is not aware of any pending or threatened litigation likely to have a **material adverse effect** on its financial results[101](index=101&type=chunk) [12. Related Party Transactions](index=26&type=section&id=12.%20Related%20Party%20Transactions) States that no significant related party transactions occurred during the periods ended June 30, 2023 and 2022 - **No significant related party transactions** occurred during the three and nine months ended June 30, 2023 and 2022[102](index=102&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Provides management's perspective on financial performance, condition, and outlook, including revenue drivers, costs, and liquidity [Forward-Looking and Cautionary Statements](index=26&type=section&id=Forward-Looking%20and%20Cautionary%20Statements) Warns that the report contains forward-looking statements subject to risks and uncertainties, where actual results may differ materially - The report contains **forward-looking statements** that involve risks and uncertainties, which could cause actual results to differ materially[103](index=103&type=chunk) - Key risk factors include failure to achieve anticipated benefits of acquisitions, inability to retain employees and customers, contract award competition, increased debt obligations, and changes in client budgetary priorities[103](index=103&type=chunk) [Business and Markets Overview](index=26&type=section&id=Business%20and%20Markets%20Overview) Describes DLH's core business of enhancing public health and national security missions for federal agencies, with 99% of revenue from the U.S. government - DLH enhances public health and national security readiness missions through science, technology, cyber, and engineering solutions and services[104](index=104&type=chunk) - **99% of revenue** is derived from U.S. federal government agencies[104](index=104&type=chunk) Revenue by Customer (Three Months Ended June 30, 2023) | Customer | Revenue (in thousands) | Percent of total revenue | | :-------------------------------- | :--------------------- | :----------------------- | | Department of Health and Human Services | $44,536 | 43.6% | | Department of Veterans Affairs | $35,898 | 35.1% | | Department of Defense | $21,003 | 20.5% | [Acquisitions](index=27&type=section&id=Acquisitions) Reaffirms the **GRSi acquisition** as a strategic move to boost organic growth, diversify customers, and expand into adjacent federal markets - Acquired **Grove Resource Solutions, LLC. ("GRSi")** on **December 8, 2022**[106](index=106&type=chunk) - Acquisition aimed to increase future organic growth, diversify customer base, and expand into adjacent markets[106](index=106&type=chunk) - GRSi provides R&D, systems engineering, and digital transformation solutions to federal agencies including NIH, U.S. Navy, and U.S. Marine Corps[106](index=106&type=chunk) [Major Contracts](index=28&type=section&id=Major%20Contracts) Discusses reliance on prime contracts with VA and HHS, noting VA's CMOP program is under bridge agreements and subject to re-compete - VA contracts for pharmacy and logistics services (**CMOP program**) are operating under **bridge contracts through October/November 2023**[108](index=108&type=chunk)[110](index=110&type=chunk) - VA procurement for CMOP services is set-aside for **Service-Disabled Veteran Owned Small Business (SDVOSB)** prime contractors; DLH expects to continue as a subcontractor or compete in unrestricted solicitations[109](index=109&type=chunk) - HHS Head Start program contract generated **$27.1 million** for the nine months ended June 30, 2023, with performance through **April 2025**[110](index=110&type=chunk) - The Company remains dependent upon the continuation of its relationships with the **VA and HHS**[111](index=111&type=chunk) [Backlog](index=28&type=section&id=Backlog) Reports a significant increase in total backlog to **$817.8 million** and funded backlog to **$147.3 million** as of June 30, 2023 Backlog (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 (in millions) | September 30, 2022 (in millions) | Change | | :---------- | :-------------------------- | :-------------------------- | :------- | | Total Backlog | $817.8 | $482.5 | +$335.3 | | Funded Backlog | $147.3 | $98.9 | +$48.4 | - Backlog is defined as the estimate of remaining future revenue from existing signed contracts, including all options and executed task orders[113](index=113&type=chunk) - Funded backlog is the portion of backlog for which funding is appropriated and allocated by the customer[114](index=114&type=chunk) [Forward-Looking Business Trends](index=29&type=section&id=Forward-Looking%20Business%20Trends) Highlights the company's mission to expand as a trusted provider of technology-enabled healthcare and public health services, focusing on military, veterans, and civilian populations - Mission: Expand position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services[118](index=118&type=chunk) - Focus areas include telehealth, behavioral healthcare, medication therapy management, process management, clinical systems support, and healthcare delivery for military service members and veterans[118](index=118&type=chunk) - Civilian agency focus includes compliance monitoring, technology-enabled program management, consulting, and digital communications solutions for underserved and at-risk populations[118](index=118&type=chunk) [Federal budget outlook for 2024](index=29&type=section&id=Federal%20budget%20outlook%20for%202024) Discusses President Biden's FY2024 budget request and the Fiscal Responsibility Act, noting potential impacts from spending reductions or delayed appropriations - President Biden's **FY2024 budget request** focuses on lowering healthcare costs, expanding access to early child care, investing in cutting-edge technologies, and improving global security[119](index=119&type=chunk) - The **Fiscal Responsibility Act caps national defense spending at $886 billion for FY2024 and $895 billion for FY2025**, and suspended the debt ceiling until January 1, 2025[120](index=120&type=chunk) - Adverse changes in fiscal and economic conditions, such as spending reductions, delayed appropriations, inflation, or government shutdowns, could **materially impact the business**[121](index=121&type=chunk) [Industry consolidation among federal government contractors](index=29&type=section&id=Industry%20consolidation%20among%20federal%20government%20contractors) Anticipates continued consolidation and M&A activity among federal government contractors, driven by companies seeking to augment capabilities and diversify contracts - **Active consolidation and strong increase in M&A activity** among federal government contractors is expected to continue[122](index=122&type=chunk) - Acquisitions are often driven by the desire to augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and higher margin/revenue streams[122](index=122&type=chunk) [Potential impact of Federal Contractual set-aside Laws and Regulations](index=29&type=section&id=Potential%20impact%20of%20Federal%20Contractual%20set-aside%20Laws%20and%20Regulations) Addresses federal small business contracting goals, particularly the VA's "Rule of Two" for SDVOSB set-asides, which may limit DLH's prime contractor role - Federal government has an overall goal of **23% of prime contracts** flowing through small businesses[123](index=123&type=chunk) - The VA's **"Rule of Two"** restricts competition for certain contracts to service-disabled or other veteran-owned businesses[123](index=123&type=chunk) - Set-aside provisions may limit DLH's ability to compete for prime contractor positions, potentially requiring the company to join teams with eligible contractors as subcontractors[124](index=124&type=chunk)[125](index=125&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) Analyzes financial performance for the three and nine months ended June 30, 2023, attributing changes to the GRSi acquisition and FEMA COVID-19 task orders [For the Three Months Ended June 30, 2023 as Compared to the Three Months Ended June 30, 2022](index=30&type=section&id=For%20the%20Three%20Months%20Ended%20June%2030%2C%202023%20as%20Compared%20to%20the%20Three%20Months%20Ended%20June%2030%2C%202022) Revenue increased by **$35.8 million** due to GRSi, while net income decreased by **$3.1 million** from higher costs and interest expense - Revenue increased by **$35.8 million to $102.2 million**, primarily driven by a **$34.4 million contribution from the GRSi acquisition**[128](index=128&type=chunk) - **Net income decreased by $3.1 million to $1.7 million**[126](index=126&type=chunk) - **Total operating costs increased by $35.8 million**, mainly due to the inclusion of GRSi[126](index=126&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk) - **Interest expense increased significantly by $4.4 million to $4.9 million**, due to borrowing for the GRSi acquisition[133](index=133&type=chunk) - Q3 FY22 included approximately **($5.1) million in revenue from FEMA COVID-19 task orders**, with no comparable revenue in Q3 FY23[129](index=129&type=chunk) [Results of Operations for the Nine Months Ended June 30, 2023 and 2022](index=31&type=section&id=Results%20of%20Operations%20for%20the%20Nine%20Months%20Ended%20June%2030%2C%202023%20and%202022) Revenue decreased by **$53.6 million** due to FEMA contract completion, offset by GRSi, leading to a **$15.8 million** net income decrease - Revenue decreased by **$53.6 million to $274.4 million**, primarily due to the completion of **$125.8 million in FEMA COVID-19 task orders** in the prior year, partially offset by a **$73.9 million contribution from GRSi**[137](index=137&type=chunk) - **Net income decreased by $15.8 million to $4.1 million**[135](index=135&type=chunk) - **Contract costs decreased by $54.4 million**, principally due to the completion of FEMA task orders[138](index=138&type=chunk) - **Interest expense increased by $9.8 million to $11.5 million**, primarily due to borrowing for the GRSi acquisition[141](index=141&type=chunk) [Non-GAAP Financial Measures](index=32&type=section&id=Non-GAAP%20Financial%20Measures) Presents and reconciles non-GAAP measures like Adjusted Revenue and Adjusted EBITDA to provide a clearer view of ongoing operating performance - Non-GAAP measures include **EBITDA, EBITDA Margin on Revenue, Adjusted Revenue, Adjusted Operating Income, Adjusted EBITDA, and Adjusted EBITDA Margin on Adjusted Revenue**[143](index=143&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk) - Adjustments exclude FEMA task orders and include GRSi acquisition corporate development costs to reflect ongoing operating performance[144](index=144&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk) Adjusted Revenue and Adjusted EBITDA (Three Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | | :------------------------------------ | :------------------ | :------------------ | :------- | | Adjusted Revenue | $102,241 | $71,556 | +$30,685 | | Adjusted EBITDA | $11,387 | $8,379 | +$3,008 | | Adjusted EBITDA Margin on Adjusted Revenue | 11.1% | 11.7% | -0.6% | Adjusted Revenue and Adjusted EBITDA (Nine Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | | :------------------------------------ | :------------------ | :------------------ | :------- | | Adjusted Revenue | $274,385 | $202,167 | +$72,218 | | Adjusted EBITDA | $29,937 | $21,849 | +$8,088 | | Adjusted EBITDA Margin on Adjusted Revenue | 10.9% | 10.8% | +0.1% | [Liquidity and capital management](index=35&type=section&id=Liquidity%20and%20capital%20management) Assesses liquidity, highlighting cash from operations, accounts receivable, and **$32.9 million** available on the revolving line of credit - Immediate sources of liquidity include cash generated from operations, accounts receivable, and access to a secured revolving line of credit facility[153](index=153&type=chunk) - As of June 30, 2023, the Company had **$32.9 million of available borrowing capacity** on its revolving line of credit[153](index=153&type=chunk) - **Cash provided by operating activities was $14,997 thousand** for the nine months ended June 30, 2023[155](index=155&type=chunk) - Operating cash flow is expected to be sufficient to support capital requirements and debt reduction goals for the next twelve months[154](index=154&type=chunk)[156](index=156&type=chunk) [Sources of cash](index=35&type=section&id=Sources%20of%20cash) Reiterates cash position of **$0.5 million**, accounts receivable, and **$32.9 million** in unused borrowing capacity, affirming sufficient liquidity - As of June 30, 2023, immediate liquidity sources include **$0.5 million in cash**, accounts receivable, and **$32.9 million in unused borrowing capacity** on the secured revolving line of credit[156](index=156&type=chunk) - Planned operating cash flow is believed to be sufficient to support operations for twelve months from the issuance date of the financial statements[156](index=156&type=chunk) [Credit Facilities](index=35&type=section&id=Credit%20Facilities) Summarizes secured term loan (**$179.3 million**) and revolving line of credit (**$16.4 million** outstanding), both SOFR-based and maturing in December 2027 Credit Facilities Summary (June 30, 2023) | Arrangement | Loan Balance | Interest* | Maturity Date | | :-------------------------------------- | :----------- | :-------- | :-------------- | | Secured term loan | $179.3 million | SOFR* + 4.2% | December 8, 2027 | | Secured revolving line of credit | $16.4 million | SOFR* + 4.2% | December 8, 2027 | *SOFR as of June 30, 2023 was 5.2%. - The Company has floating-to-fixed interest rate swaps with a total notional amount of **$112.2 million** as of June 30, 2023[157](index=157&type=chunk) - Both the secured term loan and revolving line of credit are secured by liens on substantially all of the Company's assets[158](index=158&type=chunk)[159](index=159&type=chunk) [Contractual Obligations as of June 30, 2023](index=36&type=section&id=Contractual%20Obligations%20as%20of%20June%2030%2C%202023) Presents future payments for debt obligations and operating leases, totaling **$220.5 million**, with significant portions due in 2-5 years Contractual Obligations (as of June 30, 2023, in thousands) | Obligation Type | Total | Next 12 Months | 2-3 Years | 4-5 Years | More than 5 Years | | :---------------------- | :------ | :------------- | :---------- | :---------- | :---------------- | | Debt obligations | $195,760 | $14,250 | $36,813 | $144,697 | — | | Facility operating leases | $24,636 | $3,501 | $7,963 | $5,668 | $7,504 | | Equipment operating leases | $67 | $17 | $50 | — | — | | **Total** | **$220,463** | **$17,768** | **$44,826** | **$150,365** | **$7,504** | [Critical Accounting Policies and Estimates](index=36&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Discusses key accounting policies and estimates requiring significant management judgment, including revenue recognition, long-lived assets, and income taxes [Use of Estimates](index=36&type=section&id=Use%20of%20Estimates) Highlights that financial statement preparation involves significant management estimates and assumptions, with actual results potentially differing - Preparation of financial statements requires management to make **significant estimates and assumptions**[161](index=161&type=chunk) - Significant estimates include valuation of goodwill and intangible assets, stock-based compensation, and measurement of loss development on workers' compensation claims[161](index=161&type=chunk) [Revenue Recognition](index=36&type=section&id=Revenue%20Recognition) Explains revenue recognition over time for U.S. government contracts using cost-based input and time-based output methods - Revenue is recognized over time for U.S. government contracts when there is a **continuous transfer of control** to the customer[162](index=162&type=chunk) - Progress is measured using **cost-based input and time-based output methods** for time and materials, cost-reimbursable, and firm fixed price contracts[162](index=162&type=chunk)[163](index=163&type=chunk) [Long-lived Assets](index=37&type=section&id=Long-lived%20Assets) Describes accounting for long-lived assets, including equipment, right-of-use assets, and intangibles, depreciated/amortized over useful lives - Long-lived assets include equipment and improvements, right-of-use assets, and intangible assets[165](index=165&type=chunk) - Assets are reviewed for impairment at least annually or more frequently if circumstances indicate a loss of value[165](index=165&type=chunk) - Intangible assets are recorded at fair value and amortized on a **straight-line basis over their estimated useful lives of 10 years**[169](index=169&type=chunk) [Goodwill](index=37&type=section&id=Goodwill) States that goodwill is reviewed for impairment annually, with **no impairment loss warranted** as of June 30, 2023, despite future risks - Goodwill is reviewed for impairment at least annually or more frequently upon the occurrence of an event or change in circumstances[170](index=170&type=chunk) - **No impairment loss was warranted** as of June 30, 2023, as no material adverse effect on valuation occurred[170](index=170&type=chunk) - Factors like non-renewal of major contracts or substantial changes in business conditions could **materially affect goodwill valuation** in future periods[171](index=171&type=chunk) [Provision for Income Taxes](index=37&type=section&id=Provision%20for%20Income%20Taxes) Explains income taxes are accounted for using the liability method, recognizing deferred tax assets if realization is more likely than not - Income taxes are accounted for using the **liability method**, determining deferred tax assets and liabilities based on differences between financial statement and tax bases[172](index=172&type=chunk) - **Deferred tax assets are recognized** when it is more likely than not that the asset will be realized[172](index=172&type=chunk) [Stock-based Equity Compensation](index=37&type=section&id=Stock-based%20Equity%20Compensation) Details the fair value-based method for stock-based compensation, expensed over vesting periods using a Monte Carlo method - The Company uses the **fair value-based method** for stock-based compensation[173](index=173&type=chunk) - Awards are recorded at fair value on the grant date and expensed over the vesting period, using a **Monte Carlo method** to estimate fair value[173](index=173&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Discloses exposure to interest rate risk on variable-rate debt, partially mitigated by **$112.2 million** in interest rate swaps - The Company's primary market risk exposure is to **interest rate fluctuations** on its variable-rate debt[174](index=174&type=chunk) - Interest rate risk is partially mitigated by floating-to-fixed interest rate swaps with a total notional amount of **$112.2 million** as of June 30, 2023[175](index=175&type=chunk) - A **1.0% increase in SOFR** would impact the Company's interest expense by approximately **$0.8 million per year**[176](index=176&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) CEO and CFO evaluated disclosure controls as effective, noting ongoing integration of the GRSi acquisition into the control environment - Disclosure controls and procedures were evaluated as **effective at the reasonable assurance level** as of June 30, 2023[177](index=177&type=chunk) - No material changes in internal control over financial reporting were identified, except for the ongoing integration of **Grove Resource Solutions, LLC** into the existing control environment[179](index=179&type=chunk)[180](index=180&type=chunk) [Part II — Other Information](index=38&type=section&id=Part%20II%20%E2%80%94%20Other%20Information) Presents other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits [Item 1. Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to various claims in the ordinary course of business but is not aware of any material adverse litigation - The Company is subject to various claims and legal actions in the ordinary course of business[181](index=181&type=chunk) - **No pending or threatened litigation** is believed to be reasonably likely to have a **material adverse effect** on results of operations, financial position, or cash flows[181](index=181&type=chunk) [Item 1A. Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) Refers readers to the Annual Report on Form 10-K for risk factors, stating no material changes to previously disclosed risks - Readers should refer to the **"Risk Factors" section in the Annual Report on Form 10-K** for the fiscal year ended September 30, 2022, and interim quarterly filings[182](index=182&type=chunk) - **No material changes** from the risk factors described in previous filings have occurred[182](index=182&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) States that no unregistered sales of equity securities occurred during the reporting period, except as previously reported - The Company did not issue any **unregistered securities** during the period, except as previously reported or disclosed herein[183](index=183&type=chunk) [Item 3. Defaults Upon Senior Securities](index=39&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) Reports no defaults upon senior securities - **No defaults upon senior securities** occurred[184](index=184&type=chunk) [Item 4. Mine Safety Disclosures](index=39&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) States that this item is not applicable to the company - **Mine Safety Disclosures are not applicable** to the Company[185](index=185&type=chunk) [Item 5. Other Information](index=39&type=section&id=Item%205.%20Other%20Information) Reports no other information required to be disclosed - **No other information is required to be disclosed**[186](index=186&type=chunk) [Item 6. Exhibits](index=40&type=section&id=Item%206.%20Exhibits) Lists the exhibits filed with the report, including CEO and CFO certifications and XBRL financial information - Exhibits include certifications of the **Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32)**[189](index=189&type=chunk) - Financial information from the Quarterly Report on Form 10-Q is formatted in **iXBRL (Exhibit 101.0)** and includes Consolidated Balance Sheets, Statements of Operations, Cash Flows, and Notes[189](index=189&type=chunk) [Signatures](index=41&type=section&id=Signatures) Contains the required signatures for the Form 10-Q, certifying its submission by the Chief Financial Officer - The report is signed by **Kathryn M. JohnBull, Chief Financial Officer**, on behalf of DLH Holdings Corp[193](index=193&type=chunk) - The signing date is **August 2, 2023**[194](index=194&type=chunk)