What changed in DLH Holdings Corp.'s 10-K — 2023 vs 2024

Business – Major Contracts . 27 Results of Operations Fiscal Year Ended September 30, 2024 as Compared to Fiscal Year Ended September 30, 2023 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, 2024 2023 Change Revenue $ 395,937 100.0 % $ 375,872 100.0 % $ 20,065 Cost of operations Contract costs 317,026 80.1 % 296,016 78.8 % 21,010 General and administrative costs 36,959 9.3 % 37,795 10.1 % (836) Impairment loss of long-lived asset — — % 7,673 2.0 % (7,673) Corporate development costs — — % 1,735 0.5 % (1,735) Depreciation and amortization 17,052 4.3 % 15,562 4.1 % 1,490 Total operating costs 371,037 93.7 % 358,781 95.5 % 12,256 Income from operations 24,900 6.3 % 17,091 4.5 % 7,809 Interest expense 17,153 4.3 % 16,271 4.3 % 882 Income before provision for income tax (benefit) expense 7,747 2.0 % 820 0.2 % 6,927 Provision for income tax expense (benefit) 350 0.1 % (641) (0.2) % 991 Net income $ 7,397 1.9 % $ 1,461 0.4 % $ 5,936 Net income per share - basic $ 0.52 $ 0.11 $ 0.41 Net income per share - diluted $ 0.51 $ 0.10 $ 0.41 Revenue 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. 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, 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.

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. 28 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.

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. 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.

Reconciliation of GAAP net income to EBITDA and Adjusted EBITDA, non-GAAP measures (in thousands): 29 Year Ended September 30, 2024 2023 Change Net income $ 7,397 $ 1,461 $ 5,936 Interest expense, net $ 17,153 $ 16,271 882 Provision for income tax expense (benefit) 350 (641) 991 Depreciation and amortization 17,052 15,562 1,490 EBITDA $ 41,952 32,653 $ 9,299 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) (a): 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. (b): 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.

A summary of the change in cash is presented below for the years ended September 30, 2024 and 2023 (in thousands): Year Ended September 30, 2024 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 Net change in cash $ 127 $ (13) 30 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.

Sources of Cash As of September 30, 2024, our immediate sources of liquidity include cash of approximately $0.3 million, accounts receivable, and access to our secured revolving line of credit. This credit facility provides us with access of up to $32.5 million subject to certain conditions including eligible accounts receivable.

As of September 30, 2024, we had unused borrowing capacity of $18.1 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, 2024 is as follows (in millions): Lender Arrangement Loan Balance Interest * Maturity Date First National Bank of Pennsylvania Secured term loan (a) $ 142.5 SOFR1 + 4.1% December 8, 2027 First National Bank of Pennsylvania Secured revolving line of credit (b) $ 12.1 SOFR1 + 4.1% December 8, 2027 1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2024 was 5.2%.

On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB; the notional amount as of September 30, 2024 is $80.0 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, 2024, interest expense has been decreased by approximately $1.3 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, 2024 the secured revolving line of credit had a borrowing base of $32.5 million.

The Company accessed funds from the secured revolving line of credit during the year, and had $12.1 million outstanding balance at September 30, 2024. 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. 31 Contractual Obligations as of September 30, 2024 Payments Due By Period Next 12 2-3 4-5 More than 5 (Amounts in thousands) Total Months Years Years Years Debt obligations $ 154,558 $ 12,058 $ 42,750 $ 99,750 $ — Facility operating leases 18,538 3,536 6,011 5,203 3,788 Contractual obligations $ 173,096 $ 15,594 $ 48,761 $ 104,953 $ 3,788 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.

DLH submitted revised proposals with its SDVOSB partner as prime contractor on certain of the opportunities. During the fiscal year ended September 30, 2024, the VA awarded one of the task orders to a SDVOSB that is unaffiliated with DLH.

While the acquisition process is being conducted, DLH continues to operate as the prime contractor for the seven CMOP locations that it currently manages.

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.