DLH HOLDINGS CORP. 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 endedSeptember 30, 2021 . 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.
Business Overview:
We are a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics; primarily focused to improve and better deploy large-scale federal health and human service initiatives. We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including theDepartment of Veteran Affairs ("VA"),Department of Health and Human Services ("HHS"), and theDepartment of Defense ("DoD"). In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. OnJune 7, 2019 we acquiredSocial & Scientific Systems, Inc. ("S3") and onSeptember 30, 2020 , we acquiredIrving Burton Associates, LLC ("IBA").
Our business offerings are aligned to three market focus areas within the federal health services market space.
•Defense and Veteran Health Solutions;
•Human Services and Solutions;
•Public Health and Life Sciences.
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Major Customers
Our largest customer is the VA , which comprised approximately $110.1 million and
$100.2 million of revenue for the years ended September 30, 2021 and 2020,
respectively. Our second largest customer, HHS, comprised approximately
$91.5 million and $95.0 million of revenue for the years ended September 30,
2021 and 2020, respectively. We remain dependent upon the continuation of our
relationships with the VA and HHS as a significant portion of our revenue is
concentrated in a small number of contracts with these customers. As described
in greater detail above in "Item 1 - Business - Major Contracts", our contracts
with the VA are currently subject to renewal solicitations.
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. Our primary focus within the defense agency markets include military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets includes healthcare and social programs delivery and readiness. These include compliance monitoring on large scale programs, technology-enabled program management, consulting, and digital communications solutions ensuring that education, health, and social standards are being achieved within underserved and at-risk populations. We believe these business development priorities will position the Company to expand within top national priority programs and funded areas.
Recent significant contract award activity
As previously announced, we were recently awarded two short-term task orders under aFEMA contract to provide support for states seeking temporary medical staffing support and COVID-19 related community testing, vaccination and therapy. The ceiling value of these awards is approximately$107 million over base periods of three months, which will be largely earned in DLH's first quarter of fiscal year 2022. Further, our customer has exercised the first of three one month contract options on the medical staffing task order, which has additional value of approximately$35 million . This option is expected to be earned in DLH's second quarter of fiscal year 2022. Additional options may be exercised, and would be expected to impact the second quarter financial performance. We expect that our operating margin on theseFEMA task orders will be approximately 5% of revenue. TheFEMA contracts provide for advance payments for the substantial staffing resources that are required to be deployed; therefore, we do not expect these contracts to consume operating cash flow.
Federal budget outlook for fiscal year 2022:
The President's budget proposal for fiscal year 2022 outlines many initiatives that include focusing on rebuilding and investing in our country's physical infrastructure; expanding access to early childhood education; improving the affordability of child care and healthcare; and enacting broad tax reform. The budget also details additional proposals to expand economic opportunity, tackle the climate crisis, ensure strong national defense, and invest in public health infrastructure. Specifically, the investment in public health infrastructure involves improving the nation's readiness for future public health crises, expanding access to healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and HIV/AIDs epidemics. We continue to carefully follow federal budget, legislative and contracting trends and activities and evolve our strategies to take these into consideration. WhileCongress has not completed the final appropriation bills for the government's 2022 fiscal year, the Company continues to believe that its key programs benefit from bipartisan support and does not expect a material impact on its current business base from budget negotiations. If the appropriations bills are not timely enacted, government agencies operate under a continuing resolution ("CR"), which may negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors. OnDecember 2, 2021 ,Congress passed and, onDecember 3, 2021 , the President signed, a CR providing funds to the federal government throughFebruary 18, 2022 . When a CR expires, unless appropriations bills have been passed byCongress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity. We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans. Our customer's missions have received broad support from the legislative and executive branches of the federal government. As such, we do not anticipate or expect any significant changes to our operations. 23 --------------------------------------------------------------------------------
The Company continues to see critical need for expanded health care solutions within our sector of the Federal health market, largely focused on the needs of veterans and their families. Serving over nine million veterans each year, theVA operates the nation's largest integrated health care system, with more than 1,700 hospitals, clinics, community living centers, readjustment counseling centers, and other facilities. TheVA is requesting a total of$269.9 billion for fiscal year 2022, a 10% increase above fiscal year 2021 enacted levels. It includes$117.2 billion in discretionary funding, an increase of$9.7 billion , and$152.7 billion in mandatory funding, an increase of$14.9 billion from fiscal year 2021. TheVA research program is expected to allocate increased funding to advance the Department's understanding of the impact of traumatic brain injury and toxic exposure(s) on long-term health outcomes, coronavirus related research and impacts, and precision oncology. The budget also includes$2.6 billion (from all funding sources) for the total telehealth program. TheVA is continuing to expand this program because of its ability to leverageVA providers and to provide better services to veterans. We believe our capabilities and service delivery models are aligned with our customers growth initiatives.
HHS is the principal federal department charged with protecting the health of all Americans and providing essential human services. The Company has existing contracts with multiple agencies under HHS, and we are actively pursuing growth opportunities within this vital agency. The fiscal year 2022 budget request proposes$131.8 billion in discretionary budget authority for HHS, an increase of$25 billion from the fiscal year 2021 appropriated amount, and$1.5 trillion in mandatory funding. The budget includes$52 billion for theNational Institutes of Health ("NIH"), an agency of HHS, an increase of$9 billion above fiscal year 2021 enacted, reflecting the Administration's commitment to increasing investments in transformative biomedical research to advance the health of the nation and promote innovation. The budget requests$37 million for Telehealth which is$3 million above fiscal year 2021 enacted, to promote health services and distance learning with telehealth technologies. The budget also invests in programs that improve the health and well-being of young children and their families. This includes$11.9 billion for theOffice of Head Start . We believe our capabilities and past performance are well aligned with the service sought under this budget increase.
The Military Health System ("MHS") is one of the largest health care systems and a preeminent military medical enterprise, serving over 9 million beneficiaries. As a part of theDoD , theDefense Health Agency manages a global health care network of military and civilian medical professionals, more than 400 military hospitals and clinics around the world, and supports the delivery of health services to MHS beneficiaries. The funding and personnel to support the MHS's mission is referred to as the Unified Medical Budget ("UMB"). The fiscal year 2022 UMB request for the Defense Health Program is$35.6 billion , an increase of$1.5 billion from the fiscal year 2021 appropriated amount.
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 theVA , 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 tothe United States . When two qualifying small businesses cannot be identified, theVA may proceed to award contracts following a full and open bid process. 24
-------------------------------------------------------------------------------- The Company believes that its past performance in this market and track record of success provide a competitive advantage. However, 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 in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.
COVID-19 impact
We are exposed to and impacted by macroeconomic factors andU.S. government policies. Current general economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions due to economic slowdowns and government restrictions on movement. We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential. While the pandemic has had minor offsetting impacts during fiscal 2021 due to social distancing and travel restrictions, we do not expect material adverse impacts from COVID-19 in the next fiscal year. While we have been awarded contracts related to responding to the pandemic, such as awards to provide emergency medical services and community testing, vaccination and therapy services, the pandemic may cause reduced demand for certain services we provide, particularly if it results in a recessionary economic environment or the spending priorities of theU.S. government shift in ways adverse to our business focus. Our ability to continue to operate without any significant negative impacts will in part depend on our continued ability to protect our employees. We have endeavored to follow recommended actions of government and health authorities to protect our employees and were able to broadly maintain our operations. Additionally, we are complying with industry specific government directions that affect government contractors. As such, we have mandated that all employees receive an approved COVID-19 vaccination or apply for and receive an approved vaccine exception. Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we expect to execute on a remainder of our contracts through remote and teleworking arrangements. We intend to continue to work with government authorities and implement our employee safety measures to ensure that we are able to continue our operations during the pandemic. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our operations (for example a closure of a key distribution facility) that may not be fully mitigated. To date we have experienced continuity in the majority of our work for our government clients. While there has been postponements of events and challenges around some project work requiring travel, overall, our government clients have continued to require our services. We are unable to predict whether, and to what extent, this trend will continue. It would be reasonable to expect some deterioration of certain client activities due to COVID-19. The longer the duration of the pandemic, the more likely it is that it could have an adverse effect on our business, financial position, results of operations and/or cash flows. However, we also believe that we are likely to see additional demand from federal agencies such as theFEMA ,CDC and theNIH for our services. Due to our ability to continue to perform under our contracts and our cash flow generation, we do not presently expect material liquidity constraints related to COVID-19. We are presently in compliance with all covenants in our term loan and have access to a revolving line of credit to meet any short-term cash needs that cannot be funded by operations. Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. For additional information on risk factors that could impact our results, please refer to "Risk Factors" in Part I, Item 1A of this Form 10-K. 25
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Results of Operations for Fiscal Year 2021 as Compared to Fiscal Year 2020
The following table summarizes, for the years indicated, consolidated statements of operations data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:
Year Ended Change in
Consolidated Statement of Operations: September 30, 2021 September 30, 2020 $ % of Rev
Revenue $ 246,094 100.0 % $ 209,185 100.0 % $ 36,909 - %
Cost of operations
Contract costs 194,614 79.1 % 163,596 78.2 % 31,018 0.9 %
General and administrative costs 25,054 10.2 % 24,195 11.6 % 859 (1.4) %
Corporate development costs 1,088 0.4 % 930 0.5 % 158 (0.1) %
Depreciation and amortization 8,115 3.3 % 7,003 3.3 % 1,112 - %
Total operating costs 228,871 93.0 % 195,724 93.6 % 33,147 (0.6) %
Income from operations 17,223 7.0 % 13,461 6.4 % 3,762 0.6 %
Interest expense, net 3,784 1.6 % 3,441 1.6 % 343 - %
Income before income taxes 13,439 5.4 % 10,020 4.8 % 3,419 0.6 %
Income tax expense 3,294 1.3 % 2,906 1.4 % 388 (0.1) %
Net income $ 10,145 4.1 % $ 7,114 3.4 % $ 3,031 0.7 %
Net income per share - basic $ 0.81 $ 0.58 $ 0.23
Net income per share - diluted$ 0.75 $ 0.54 $ 0.20 Revenue For the year endedSeptember 30, 2021 revenue was$246.1 million , an increase of$36.9 million or 17.6% over the prior year period. The increase is partially due to the inclusion ofIrving Burton Associates, LLC . ("IBA"), acquired inSeptember 2020 , for the full year in fiscal year 2021. IBA contributed$30.2 of revenue for fiscal year 2021. The remaining net growth was due to contract expansion on existing contracts and new contracts awarded during the fiscal year.
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 endedSeptember 30, 2021 , contract costs increased by approximately$31.0 million consistent with the growth in revenues. The increase in contract costs was due to the IBA acquisition, growth on existing contracts, and new contracts awarded during the fiscal year. General and administrative costs are for those employees not directly providing services to our customers, including but not limited to executive management, bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year by$0.9 million to approximately$25.1 million primarily from the growth in revenues. As a percent of revenue, general and administrative costs decreased as we were able to increase operating leverage due to the acquisition and integration of IBA into the corporate structure. Corporate development costs are incremental due diligence costs, such as legal and accounting fees. Fiscal year 2021 costs were due to a transaction that was evaluated but was not executed. Costs incurred in fiscal year 2020 were due to the IBA acquisition.
For the year ended
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--------------------------------------------------------------------------------Interest Expense, net
Interest expense, net, includes items such as, interest expense and amortization of deferred financing costs on debt obligations. For the year endedSeptember 30, 2021 , interest expense, net, was$3.8 million compared to interest expense, net of$3.4 million in the prior year, an increase of approximately$0.3 million over the prior year period. The increase in interest expense was due to the$33.0 million increase to the senior term loan used to finance the acquisition of IBA. Income Tax Expense Income tax expense for fiscal year endedSeptember 30, 2021 was$3.3 million , an increase of approximately$0.4 million from the prior fiscal year. The effective tax rate was 24.5% and 29% for the fiscal years endingSeptember 30, 2021 and 2020 respectively.
Non-GAAP Financial Measures for Fiscal 2021 and 2020
The Company uses EBITDA as a supplemental non-GAAP measures of our performance.
The Company defines EBITDA as net income excluding (i) interest expense,
(ii) provision for or benefit from income taxes, if any, and (iii) depreciation
and amortization.
On a non-GAAP basis, Earnings Before Interest Taxes Depreciation and
Amortization ("EBITDA") for the year ended September 30, 2021 was approximately
$25.3 million , an increase of approximately $4.9 million , or 23.8%, over the
prior fiscal year. This increase was principally due to the contribution of IBA
and effective management of general and administrative expenses.
We incurred $1.1 million of corporate development costs for the year ended
September 30, 2021 , and $0.9 million in the fiscal year ended September 30,
2020 . We are excluding corporate development costs from this measure because
they were incurred as a result of specific events, do not reflect the costs of
our operations, and can affect the period-over-period assessment of operating
results. We are reporting this non-GAAP metric to demonstrate the impact of
these events.
These non-GAAP measures of our performance are 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 these non-GAAP measures to
make decisions about the use of our resources, analyze performance between
periods, develop internal projections and measure management's performance. We
believe that these non-GAAP measures are 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.
Reconciliation of GAAP net income to EBITDA, a non-GAAP measure (in thousands):
Year Ended
September 30,
2021 2020 Change
Net income $ 10,145 $ 7,114 $ 3,031
(i) Interest expense, net: 3,784 3,441 343
(ii) Provision for taxes 3,294 2,906 388
(iii) Depreciation and amortization 8,115 7,003 1,112
EBITDA $ 25,338 $ 20,464 $ 4,874
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Reconciliation of GAAP net income to net income adjusted for the effect of the
corporate development costs, a non-GAAP measure (in thousands except for per
share amounts):
Year Ended
September 30,
2021 2020 Change
Net income $ 10,145 $ 7,114 $ 3,031
Corporate development costs 1,088 930 158
Tax effect of excluding corporate development
costs (267) (270) 3
Net income adjusted for corporate development
costs $ 10,966 Net income per diluted share$ 0.75 $ 0.54 $ 0.21 Impact of corporate development costs, net 0.06 0.05 0.01 Net income per diluted share adjusted for corporate development costs$ 0.81
Liquidity and Capital Management
For the year endedSeptember 30, 2021 , the Company generated operating income of approximately$17.2 million and net income of approximately$10.1 million . Cash flows from operations totaled approximately$45.7 million and$19.5 million for the years endedSeptember 30, 2021 and 2020, respectively. The increase in cash from operations was principally due to improved collections on key contracts and an advance payment to fund deployment of emergency medical resources under theFEMA contract awarded in late September.
We used less than
Cash used in and provided by financing activities during the fiscal years endedSeptember 30, 2021 and 2020 was approximately$22.9 million and$12.9 million , respectively. The activity in each fiscal year was primarily the sourcing of capital to fund the IBA acquisition and early repayment of principal on our senior term loan. We entered into a$95 million credit facility onJune 7, 2019 which included a$70.0 million term loan. We amended and restated the credit facility onSeptember 30, 2020 in connection with our acquisition of IBA. During the year endedSeptember 30, 2021 , we had repayments of approximately$23.3 million under our credit facility. We expect to continue to use operating cash flow to pay outstanding debt. A summary of the change in cash and cash equivalents is presented below (in thousands): Year Ended September 30, 2021 2020 Net cash provided by operating activities$ 45,665 $ 19,451 Net cash used in investing activities (44) (32,830) Net cash (used in) provided by financing activities (22,927) 12,946 Net change in cash and cash equivalents$ 22,694 $ (433)
Sources of Cash and Cash Equivalents
As ofSeptember 30, 2021 , our immediate sources of liquidity include cash and cash equivalents of approximately$24.1 million , accounts receivable, and access to our secured revolving line of credit facility. This credit facility provides us with access of up to$25.0 million , subject to certain conditions including eligible accounts receivable. As ofSeptember 30, 2021 , we had unused borrowing capacity of$25.0 million . The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements. 28 --------------------------------------------------------------------------------
Loan Facility
A summary of our loan facilities and subordinated debt financing as of
($ in Millions)
As of September 30, 2021
Lender Arrangement Loan Balance Interest * Maturity Date
First National Bank of Secured term loan (a) $ 46.8 LIBOR* + 3.5% 09/30/25
Pennsylvania
First National Bank of Secured revolving line of credit $ - LIBOR* + 3.5% 09/30/25
Pennsylvania (b)
*LIBOR rate as of September 30, 2021 was 0.08%. As of September 30, 2020 , our
LIBOR rate is subject to a minimum floor of 0.5%. The floor affects interest
payments for periods after September 30, 2020 .
(a) Represents the principal amounts payable on our secured term loan. The $70.0
million secured term loan is secured by liens on substantially all of the assets
of the Company. The principal of the term loan is payable in quarterly
installments with the remaining balance due on September 30, 2025 .
The Credit Agreement requires compliance with a number of financial covenants
and contains restrictions on our ability to engage in certain transactions.
Among other matters, we must comply with limitations on: granting liens;
incurring other indebtedness; maintenance of assets; investments in other
entities and extensions of credit; mergers and consolidations; and changes in
nature of business. The loan agreement also requires us to comply with certain
quarterly financial covenants including: (i) a minimum fixed charge coverage
ratio of at least 1.25 to 1.00, and (ii) a Funded Indebtedness to Adjusted
EBITDA ratio not exceeding the ratio of 3.75:1.0 to 2.75:1.0 through maturity.
Adjusted EBITDA ratio is calculated by dividing the Company's total
interest-bearing debt by net income adjusted to exclude (i) interest and other
expenses, (ii) provision for or benefit from income taxes, if any, (iii)
depreciation and amortization, and (iv) non-recurring charges, losses or
expenses to include transaction and non-cash equity expense. The term loan has
an interest rate spread range from 2.5% to 4.5% depending on the funded
indebtedness to adjusted EBITDA ratio. We are in compliance with all loan
covenants and restrictions.
We are required to pay quarterly amortization payments commencing in December
2020 through September 2025 . The annual amount of principal amortization is
based on a percentage of the loan balance at September 30, 2020 . The annual
amortization amounts are $7.0 million for fiscal years 2021 and 2022 and $8.75
million each for fiscal years 2023 - 2025. The quarterly payments are in equal
installments. During the year ended September 30, 2021 , the Company made
voluntary prepayments of $16.3 million , bringing the total amount paid on the
secured term loan to $23.3 million . As of September 30, 2021 , we have satisfied
mandatory principal amortization until December 31, 2023 .
In addition to quarterly payments of the outstanding indebtedness, the loan
agreement also requires annual payments of a percentage of excess cash flow, as
defined in the loan agreement. The loan agreement states that an excess cash
flow recapture payment must be made equal to (a) 75% of the excess cash flow for
the immediately preceding fiscal year in which indebtedness to consolidated
EBITDA ratio is greater than or equal to 2.50:1.0; (b) 50% of the excess cash
flow for the immediately preceding fiscal year in which the funded indebtedness
to consolidated EBITDA Ratio is less than 2.50:1.0 but greater than or equal to
1.5:1.0; or (c) 0% of the excess cash flow for the immediately preceding fiscal
year in which the funded indebtedness to consolidated EBITDA Ratio is less than
1.5:1.0. In addition, the Company must make additional mandatory prepayment of
amounts outstanding based on proceeds received from asset sales and sales of
certain equity securities or other indebtedness. Due to the voluntary prepayment
of term debt, there was no excess cash flow payment required. For additional
information regarding the schedule of future payment obligations, please refer
to Note 11 Commitments and Contingencies .
On September 30, 2019 , we executed a floating-to-fixed interest rate swap,
maturing in 2024, with First National Bank ("FNB") as counter party. The
notional amount in the floating-to-fixed interest rate swap is $22.8 million at
the end of fiscal year 2021 and $28.8 million at the end of fiscal year 2020.
The remaining outstanding balance of our term loan is subject to interest rate
fluctuations and the minimum LIBOR floor of 50 bps. On the notional amount, the
Company pays a fixed rate of 1.61%, plus applicable credit spread. As a result,
for the year ended September 30, 2021 , interest expense increased by
approximately $0.4 million .
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(b) The secured revolving line of credit has a ceiling of up to $25.0 million .
Borrowing on the line of credit is secured by liens on substantially all of the
assets of the Company. The Company accessed funds from the revolving credit
facility during the year, but has no outstanding balance at September 30, 2021 .
The Company's total borrowing availability, based on eligible accounts
receivables at September 30, 2021 , was $25.0 million . As part of the revolving
credit facility, the lenders agreed to a sublimit of $5 million for letters of
credit for the account of the Company, subject to applicable procedures.
The revolving line of credit has a maturity date of September 30, 2025 and is
subject to loan covenants as described above. The Company is fully compliant
with those covenants.
Contractual Obligations as of
Payments Due By Period
Next 12 2-3 4-5 More than 5
(Amounts in thousands) Total Months Years Years Years
Debt Obligations $ 46,750 $ - $ 8,250 $ 38,500 $ -
Facility Operating Leases 27,701 3,418 6,507 6,285 11,491
Equipment Operating Leases 218 83 135 - -
Total Obligations $ 74,669 $ 3,501 $ 14,892 $ 44,785 $ 11,491 Off-Balance Sheet Arrangements
The Company did not have any material off-balance sheet arrangements as of
Effects of Inflation
Inflation and changing prices have not had a material impact on the Company's net revenues, results of operations, and cash flows as inflation has generally been limited. However, we are subject to current inflation pressures which may increase the cost of labor, subcontractors and other direct costs. The Company has been able to modify its prices and cost structure to respond to inflation and changing prices as needed and expects to be able to do so in future periods.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States 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, interest rate swaps, stock-based compensation, right-of-use assets and lease liabilities, valuation allowances established against deferred tax assets, and measurement of loss development on workers' compensation claims. In addition, the Company estimates overhead charges and allocates such charges throughout the year. Actual results could differ from those estimates. In particular, a material reduction in the fair value of goodwill would have a material adverse effect on the Company's financial position and results of operations. For a detailed discussion on the application of these and other accounting policies, you should review the discussion under the caption
Significant Accounting Policies in Note 4 of the notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.
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--------------------------------------------------------------------------------Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For ourU.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow theU.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 services 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 or using the percentage-of-completion method whereby progress toward completion is based on a comparison of actual costs incurred to total estimated costs to be incurred over the contract term. 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. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 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.
Goodwill The Company continues to review its goodwill 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. AtSeptember 30, 2021 , we performed a goodwill impairment evaluation. We performed a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted atSeptember 30, 2021 , as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. Our assessment incorporated effects of the COVID-19 pandemic, which did not have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods' results of operations. 31 --------------------------------------------------------------------------------
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 asset will not be realized. The Company has fully utilized its net operating loss carryforwards.
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 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 aMonte Carlo binomial and Black Scholes option pricing models 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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