DLH Holdings Corp. (DLHC) Earnings Call Transcript & Summary

This is the 2023 Annual Meeting of Shareholders of DLH Holdings Corp. I am Rick Wasserman, Chairman of the Board of the company. I would like to take this opportunity to introduce Zachary C. Parker, the President and Chief Executive Officer of DLH Holdings Corp, who will be acting as the Chairman of this meeting.

Good morning, everyone. I am Zach Parker, President and Chief Executive Officer of DLH Holdings Corporation. It is now 10:00 and the meeting will please come to order. First, I'd like to thank all of the shareholders who are in attendance at this annual meeting. As described in our proxy statement, we are holding this annual meeting as a hybrid meeting. And you'll notice the appropriate equipment here, meaning that the shareholders are able to both attend in person or via the internet. We hope that by hosting our annual meeting in this manner that we can increase access and participation. We will begin today's meeting with the formal agenda, which we will immediately be followed by a presentation on the company's business and a question-and-answer session. I will now introduce the directors, nominees and members of senior management of DLH who are attending the meeting here today, either remotely or in person. Martin Delaney; of course, I'm Zach Parker; Dr. Fran Murphy; Chairman, Mr. Rick Wasserman; Mr. Aus Yerks; Stephen Zelkowicz; newest member, Judith Bjornaas; and attending remotely, Dr. Elder Granger. I'd like to also introduce members of my management team. Kathryn JohnBull, our Chief Financial Officer; Mr. Maliek Ferebee, our Chief Capital Manager sic [ Chief Human Resources Officer ]; and also attending is [indiscernible] of WithumSmith+Brown, our independent accountants. They could come in for our current fiscal year, she will also be available to respond to appropriate questions during the general Q&A session. Also joining us today is our host, Victor DiGioia, Michael Goldstein, [ Silla Banco ] of Becker & Poliakoff, our outside Corporate Counsel, Becker Law, [indiscernible]. We will now proceed with the formal business of the annual meeting. Kathryn JohnBull, the Assistant Secretary of the company, will act as Secretary of the meeting. The agenda items for this meeting are determining the presence of a quorum, electing 8 nominees of the Board of Directors to serve until the next Annual Meeting of the Shareholders or until their respective successors shall have been duly elected and qualified. An advisory vote on the compensation of our named executive officers, ratifying our appointment of WithumSmith+Brown as the company's independent registered public auditing accounting firm for the fiscal year ending September 30, 2023. And finally, transactions of any other matters that may be properly brought before this meeting. Shareholders attending in person are requested to ask your questions at the appropriate time during this meeting. For those shareholders attending virtually, you'll have an opportunity to submit written questions via the internet and at any time during this meeting by following the directions on the meeting's website. To submit written questions, shareholders must have their control number. The Q&A session will include both questions submitted in advance off and during today's meeting. The first order of business, as I indicated, is to determine the presence of a quorum. Pursuant to action of the Board of Directors, only holders of record of the company's common stock of the company at the close of business on January 18, 2023, are entitled to vote at this meeting.

Mr. Chairman, I wish to report that I have examined the list of shareholders of common stock entitled to vote at this meeting and have determined that the number of shares of common stock outstanding at the record date January 18, 2023, and entitled to vote is 13,756,969 shares. I am advised by the Inspector of Elections that the number of shares of common stock represented at this meeting in person or by proxy is not less than 6,878,486 shares and a quorum is therefore constituted. Accordingly, the meeting is legally convened.

On that basis of the report of the secretary, a quorum is in attendance. Michael Goldstein of Becker & Poliakoff has been appointed as the Inspector of Election and has sworn to the oath of Inspector of Election. The next order of business is the election of the directors of the company. The Board has nominated 8 individuals to serve as directors of the company for a term of 1 year or again, until their respective successors shall have been duly elected and qualified. I will now entertain nominations for the 8 directors of the company in accordance with the company's bylaws. Are there any nominations to the Office of Director of the company in accordance with the bylaws of the company.

Mr. Chairman, I nominate the following persons to hold office as directors of the company; Martin J. Delaney, Dr. Elder Granger, Dr. Frances Murphy, Zachary C. Parker, Frederick G. Wasserman, Austin J. Yerks III, Stephen J. Zelkowicz and Judith L. Bjornaas.

I second the nominations.

As no other nominations have been received in accordance with the company's bylaws, it is ordered that the nominations be closed. The next order of business is the nonbinding advisory vote to approve the compensation of the company's named executive officers, as described in the proxy statement for this annual meeting, more commonly known as Say-on-Pay. As discussed in our proxy statement, we believe our executive compensation programs and policies provide fair, reasonable and competitive levels of compensation for our executive officers. Accordingly, our Board of Directors recommends a vote in favor of this proposal. The secretary will now present a resolution approving the adoption of the proposal by the shareholders.

Resolved that the company's compensation of its named executive officers is hereby approved, and it is further resolved that the officers of the company are hereby authorized and directed to take any and all actions as such officers of the company shall deem reasonable and necessary in their discretion in order to implement these resolutions.

Will someone move for the adoption of the resolutions.

I so move.

I second the motion.

The next order of business is a proposal to ratify the appointment of WithumSmith+Brown as the company's independent registered public accounting firm for the fiscal year ending September 30, 2023. The secretary will now present a resolution approving the adoption of the proposal by the shareholders.

Resolved that the company's appointment of WithumSmith+Brown PC as its independent registered public accounting firm for the fiscal year ending September 30, 2023 is hereby ratified and approved in all respects.

Will someone move for adoption of the resolutions?

I so move.

I second the motion.

As time progresses, it is now time for the polls for voting on these proposals to open. All DLH shareholders entitled to vote at this meeting and had the ability to do so online or in person. All shareholders who wish to vote in person and who have not voted, please raise your hand to so indicate so we can provide you with a ballot. Please remember that if you have already voted by proxy, it is not necessary to vote again. [Voting]

We will now entertain any questions that have been submitted in advance of and during the meeting relating to the election of directors and other proposals discussed in our proxy statement for this annual meeting. Questions not relevant to these proposals, but relating to general business of the company will not be entertained at this time. Please hold such inquiries for the Q&A session to follow -- to follow after our presentation. Substantially similar questions will be answered once to avoid repetition and allow time for other questions. The time does not permit us to address these questions, the company's answers will be posted to the investors website or review after the meeting. Are there any questions from anyone participating in today's meeting regarding the proposals under consideration.

No questions regarding the proposals have been submitted.

As no questions were submitted regarding the proposal, we will move to the next order of business. As there are no further questions relating to these proposals, we will now move to the presentation of the shareholder's list.

Mr. Chairman, I am in possession of the alphabetical list of shareholders of the company at the close of business on the record date, who are entitled to vote at this meeting. The list of shareholders has been available for inspection at the offices of Counsel, Becker & Poliakoff LLP, located at 45 Broadway, 17th Floor, New York, New York 10006 for a period of 10 days before the annual meeting during ordinary business hours and electronically on the company's Annual Meeting web page.

Each shareholder of record entitled to vote at this meeting was provided with a notice of this meeting and has received a copy of the notice of internet availability for proxy materials, which was distributed to shareholders commencing on January 27, 2023 as evidenced by the affidavit of mailing by the authorized agent of Continental Stock & Transfer Company (sic) [ Continental Stock Transfer & Trust Company ], the transfer agent of the company's common stock. I suggest that a reading of the notice be waived. Without objection, as the polls will close momentarily, if you have not yet voted, please do so now. [Voting]

I now declare the polls closed. The votes will now be tabulated. Is the inspector of election ready to report the preliminary results of the voting on the proposals? If so, please announce the preliminary results.

Thank you, Mr. Chairman. I have tabulated the preliminary results of the votes cast on the proposals at this annual meeting. The preliminary results of the votes cast are as follows. Each of the nominees for Director has received more than 51% of the votes cast in favor of his or her election and has, therefore, been elected as a director of the company to serve for a 1-year term or until their respective successors have duly elected and followed by. Second, the resolution on an advisory basis for the compensation of our named executive officers has received more than 84% of the votes cast in favor of the proposal and has been approved. Third, the ratification of the appointment of WithumSmith+Brown PC as the company's independent registered public accounting firm has received approximately 95% to 96% of the votes in favor, and the appointment has been ratified. Thank you.

As indicated by the report of the inspector, all of the matters voted on by the shareholders has been approved. We will file the report of the Inspector of Election with the records of this meeting. We expect the report -- to report the results of the voting on the Form 8-K to be filed with the SEC within 4 business days of this meeting today. The Secretary will file the report of the Inspector of Elections as part of the records of this meeting. For the purpose of reference, the Secretary is directed to file the following additional papers with the records of the company. A list of shareholders of common stock entitled to vote at this meeting; two, a notice of internet availability of proxy materials and the proxy statement; and three affidavit of mailing; and four, the ballots and proxies presented to this meeting; then five, Inspector's oath; and finally, number six, the report of the Inspector of Election. I and my team will now report on the business of the company, which will be followed by a question-and-answer session. For shareholders attending remotely, please follow the instructions on the Annual Meeting web page to submit questions. Shareholders attending the meeting here in person have an opportunity to ask questions at the allotted time. A copy of presentation materials is available on the Investor page of our corporate website as well as web page with this Annual Meeting. Let's now direct our attention to the presentation. We move to the next slide. Slide #5 intended to give all of you a current view of the new DLH. As you've heard us describe over the last 4 or 5, 6 years, we have had a strategy to build in several key technology areas to help us advance in the areas of scientific research and development as well as expanding our systems engineering integration capability. In serving the agencies and customers that we have continued to deploy these resources, we've really felt that it is important for organic growth to expand our digital transformation technology capabilities in order to supplement that growth for each of those domains in those areas. This graphic is one that is somewhat familiar to what you saw after completion of the acquisition of GRSi and really, there's a strong bandwidth now in our digital transformation and cyber business. And the cyber business is one that just about every federal agency is directed by Congress to expand and enhance their competencies and capabilities. However, the cyber community is not only associated with security. Cyber is now part of the battle space against infectious diseases and ability to counter threats from various forms of adversaries. It is also an important ground to contest in theater by our troops. And so we have -- with the acquisition of GRSi, we've also expanded our cyber engineering and cyber mission support services and those will be very key to help us across the organization where we're again supported our nation's key and leading agencies. As you can see here, the science research and development part of our business is one that entails competencies and capabilities that we've grown organically and acquisitively over the last 6, 7, 8 years, certainly since the acquisition of Danya in 2016. Our epidemiologists and clinical trials expertise was on camera or throughout the pandemic, really demonstrating our ability to raise our profile against the competition in a lot of areas supporting only National Institute of Health, but also our partners across the globe. And we've been able to leverage a very unique network, global network to help counter those kind of threats. The challenge there has been coordination to be able to process this kind of data, collecting in a very real-time arena in a secure environment and allow very quick transaction assessments from a research and data analytics standpoint. With the addition of the capabilities that we acquired in December 8. We're really in a unique position relative to the competitive landscape to really bring together scientists, epidemiologists, the research talent, the biomechanical research teams along with the IT and the technologists to advance that type of research work. So we're really excited about how that across the top, all of those digital transformation capabilities will support each of our key market areas. We've had substantial enhancements in supporting each of the agencies we see around here to the next slide. Each of those 3 agencies that still represent long-term continuity from what we have been addressing for DLH. The DoD, along with its military health system community MHS, and you hear us use the term DHA, Defense Health Agency has continued to enjoy bipartisan support across the board. Even in times of budget pressures. And we feel real strong about the ability to expand our addressable market in a pretty large way in the coming years. Similarly, HHS, as you all know, we've had a number of the divisions within HHS, not only in our long-term book of business but have really been looking to focus on some adjacencies within that community. National Institute of Health was again one of those key areas, Center for Disease Control and CDC, also a key target area and we think we have substantially enhanced our ability to organically develop value propositions that will differentiate us for additional organic growth in that arena. And then lastly, of course, as you know, we've had the VA, the Veterans Administration has been a large book of business for us, continues to be so, particularly as it related to our pharmacy regional distribution center work in the head agency. But we're excited about having advanced our capabilities now into the higher technology side of that arena. We believe with awards such as one of our recent ones with the VA, we call it VA AVAIL, we're now being able to bring some of the best technologists together to advance their technology innovation, and that will be a good shift for us and being able to leverage a long-term relationship with this client. But at the same time, moving up the food chain, if you will, in terms of complexity and mission level support. So we're really excited about where we are today relative to our history. We, of course, have not walked away from any of our legacy capabilities, continue to be very strong, viable contributions to our strategy, but we're really, really excited about what the future holds and our associated addressable market expansion. As I discussed before, we really feel that our addressable market despite headwinds across some of the budgetary cycles as we anticipate over the next year or 2. Of course, I do expect that there will be a continuing resolution pressure over the next cycle -- in my guess is probably throughout the next election cycle in November 24. That always creates some pressures on the ability for our customers to be able to commit new contracts and new funding. But we are as well positioned, if not better positioned than any of the others because of the connectivity of our business to those multiyear budget type of cycles and appropriations. And as I indicated, three of the stronger federal agencies from [indiscernible] a growth standpoint, but a mission support standpoint across the nation. The combination of our enterprise now, transistors the new capabilities on the health IT merit, of course, with the health research. Again, is a differentiator for us, and we expect to leverage that organically in the course of the next year to 2 years. And then lastly for me, the key for differentiation or as we described, really hinges on our ability to have digital transformation and deploy digital transformation capabilities from cyber. All the way through artificial intelligence and delivery and high secure data analytics environment across their spectrum and the unique power of DLH. The new DLH as we go forward to drive that organic growth in areas where we could not have been in a prime position historically.

Another pivot to governance?

And a pivot to governance, Kathryn.

Yes. So since last we met, we did announce in our last shareholder meeting, the establishment of an additional committee of the Board of Directors specifically focused -- you've heard a lot from Zach just now about the intersect between cyber and medical research and really the intersect of those opportunities for the company, but any secure and appropriately monitored environment is really -- we've found more into the establishment of a separate committee. So we did stand up the cybersecurity technology and medical research committee. We're fortunate to have 2 MDs on our Board who are well equipped to address those issues. Dr. Elder Granger, serves as the Committee Chair in partnership with Dr. Fran Murphy. And in addition to their medical focus and backgrounds, Dr. Granger holds a certification from Carnegie Mellon in cybersecurity. So we believe we're well suited and well served by our Board members in providing that oversight and partnering with the management team on these key issues.

And now we'll pivot over to giving you some of our fiduciary reporting requirements and an update on how the integration is going. To provide that for you will be our Head of our Integration Management Office, Maliek Ferebee. Maliek?

Thank you, Zach. Good morning, everyone. We'll start with a little bit of update on ESG reporting. As a publicly traded company, this is an area that we're focusing on. We certainly want to take DLH on a journey to inform our shareholders moving forward on how we plan to do ESG reporting for our organization. We are achieving specific objectives that's currently occurring in the business from a data security standpoint, workforce diversity, professional integrity and human capital management systems. We're pulling that information together in a reporting format that's aligned with professional and commercial services sector guidelines. There's 3 different guidelines that we're working with, we're working through right now. It's a little bit of an [ alphabet soup ], but I'll do my best to explain those. The first one is Sustainability Accountability Standards Board or SASB, the other is International Sustainability Standards Board or ISSB, and finally, the Global Reporting Initiative, or GRI. We're leveraging all 3 to determine the best way to report our ESG reporting that relates to our business and our business model from a commercial and professional services standpoint. In doing so, we're partnering with our Director of Public Relations and ESG initiatives from capital market access to create and sustain a report that we believe is going to help leverage and communicate what we're doing within our organization to all of our stakeholders. In doing so, I think we're at a point where we want to ensure our employees feel comfortable and all of our stakeholders feel comfortable with the different areas of focus that we're going to be looking at as our report gains traction. We're looking to have any initial inaugural report ready for the next time we meet that for annual meeting and for reporting out as an organization. So that's a quick update on the ESG reporting. We can transition to integration. From an integration standpoint, we are approaching our 100-day mark, which is March 18, to be exact. And from where we are as an organization, our focus has been to unite 2 organizations to create, capture and deliver value. I think at this point, we can safely say that we're doing that specifically around how do we want to protect business momentum. That's from an internal standpoint to maintain business base, continue our current contract growth and ensure that we have the minimal impact to the ongoing business but also focus on growth and how we can create and leverage 2 organizations to grow existing business and new business going forward. We certainly want to look at new ways of doing business and acquiring additional organizations. We also are acquiring new processes, procedures, and we're looking at that as an organization. Yet, we're also looking externally on how to benchmark practices, best practices for the business that would work for [ both ] organizations. And finally, we want to certainly catalyze transformation to often go through integration efforts in the past and the integration happens at the top end, and it doesn't flow through the organization, that's something we're consciously aware of. And we need to formulate a specific work stream called culture harmonization to focus on just that. And then finally, how do we accelerate synergy and capture that [indiscernible] ? That's something that we focus on heavily because we want to create a 1 plus 1 equals 3 value creation for the organization. So for today and how we scale that integration synergy or growth in our current customer base and broader customer base that we can now go after with the integration of GRSi. That's my quick overview, and I will hand it over to Kathryn.

Thank you, Maliek. A few context slides for financial performance. So this slide gives you the context of our journey over the last 10-plus years and really shows how we've leveraged acquisitions as a complement to organic growth to really elevate the operating cadence of the company. All at the same time, then the blue bars, of course, show revenue delivery on an annual basis. And the purple bar shows the EBITDA delivery. So you can see that we -- as we've achieved scale and moved upstream in terms of the value and margin delivery of the work we've acquired and the organic growth we've delivered, it's really allowed us to really completely change the financial profile of the company. A couple of key nuggets. You can see a little icons of the companies that we've acquired that would tell you where there was an inflection point resulting from an acquisition. There's the shaded bar there in '22 shows you that very high profile, but short-term work we did for the State of Alaska in response to COVID and then finally, the pro forma bar at the far right really gives you the context of the new operating cadence of the company. So getting really getting ourselves in that zone of coming up hard on the $0.5 billion enterprise that really is in a completely different set from our historical performance. Moving to this slide now shows you in more detail, of course, the features that same pro forma revenue number on a 12-month basis. And of course, we know the deal closed on December 8. But on a 12-month basis shows you a pro forma revenue, operating level of $420 million with an approach $50 million of EBITDA, improving margins at the EBITDA level and then, of course, the noncash things that happen on depreciation and amortization as we amortize some of the intangibles from the acquisition. We're going to next pivot in some detail to debt management and interest expense. But of course, we all know, we're well aware of that interest expense -- interest rates have been increasing and the resulting interest expense on debt taken to do the deal is a key metric of the company that we're monitoring carefully. It is important to note that, of course, the deal was accomplished with very minimal dilution. We did have a piece of the purchase price that was equity, $7 million of the $185 million. Important to align the [indiscernible] about buyer and sellers objectives in that way, but very minimal dilution throughout the tenure of all of the acquisitions we've accomplished, which delivers key value to the shareholders, of course. Next slide. So this is our track record in the past of aggressively delevering. We all know this is a services business and a beautiful thing about services business is a very, very low CapEx, very quick conversion of revenue to cash and that's -- that accelerated in the old days with the NOLs that we carried forward gave us really a very super charged way of being able to manage debt to pay down, extinguish our debt quickly so that we could then approach the next acquisition and then delever again quickly. So that's the historical performance on extinguishing debt. And we think that gives us a reasonable basis for believing that we will be successful in similarly, aggressively deleveraging on the debt that we took on to accomplish the GRSi transaction. So we closed that deal at $207 million. We sit at around -- we closed the quarter at around $203 million. The next milestone we're tracking is getting under $200 million and moving our leverage ratio down quickly as we convert roughly $50 million of EBITDA, we're gauging about a 60% convert rate to debt reduction. Okay, interest rates, boy. It's certainly a different market for interest rates than it has been in our prior deals. So worthy of some pretty significant discussion there. We are obviously monitoring closely the interest rate environment and really felt an appropriate measure for mitigating a lot of the risks around interest rates for the company was to address converting some of our floating rate debt to fixed rate debt with the placement of swap -- interest rate swap agreements. We had some carryover swap arrangements from our prior debt agreement for about $16 million. We augmented that with an additional $96 million of fixed rate debt so that we're roughly 60% fixed rate debt and 20% floating. And of course, what pays down first is the floating. So we're monitoring that. We certainly have an opportunity to further convert, further swaps in places if we deem that appropriate to continue to mitigate and get certainty on the interest rate -- interest expense that we'll be paying. Those are the highlights from a financial perspective.

With that, we will now open the floor to any questions and answers session. We'll turn it over first to those here in the -- in person and then as we indicated, we have folks monitoring the online chat questions, and we'll take those as well. So first, over to the floor here. Yes, we got a hand?

Can you tell us more about the GRSi transaction, how you valued it and sort of the strategy?

Yes. Great question. Yes, so we are in the process of evaluating 4 opportunities throughout much of last year that we considered very strong relative to the strategy that has unfolded here, right? The kinds of capabilities we wanted, the actual customer sets that we're looking for and then how well do we see those fittings so that we can accelerate our growth. And so we were down selecting those companies. It just happened to be coincidental. None of these were [ properties ], all of these were offered by the investment banker community. And as we approached it with the Board before we went into an LOI stage, we were weighing the relative stress of these enterprises. All of them carrying a capability -- some capabilities are very relevant to what we have described over the last few years around strategically. We -- Kathryn and I have always told the Street and most of the suitors that our primary focus now having hit all 3 of our levers of the market folks as we had before was to develop competencies in those technology areas. Once we narrowed that deal, we met with our Board who had asked us about trade-offs, and they began clearly our #1 preference. So we went into a major diligencing relative to that value to answer your question. We have a tremendous A team we brought together for diligence this deal over the 2, 3 months process, and I'll ask Kathryn to give you some characterization around that and ultimately, how we established a value. Kathryn?

Sure. So it is as Zach mentioned, it's an intensive process where we're looking at our contracts in hand, there are opportunities available to them, the quality of those contracts, the duration of those contracts, the margin delivery on those programs, the ability to expand those programs and then there are opportunities in their future pursuits that we -- and are a substantive value that those would deliver. So we understand, we assess what we need to do to compete and win for the opportunity. All of these 4 prospects that we were evaluating were competitive and had a number of suitors pursuing them. And so our -- we assess where we need to be on that scale. We candidly, never have been the highest bidder on any deal we bid, but we do believe it's important to bid very competitively. And so that we secure the opportunity to go forward with them on an exclusive basis. Additionally, we look for -- in this particular case, we look not only at their own set of business, but their ability to really accelerate growth in the rest of the business through that integration that Maliek was describing earlier. We do see a lot of opportunities for the technology component to really provide a nice accelerator particularly to our public health practice. So all of those things, from our perspective, some -- you have to understand, we had to assess what the seller would be willing to accept, but it's always in the context of what it does -- what it is worth to us as an enterprise? How does it change our journey and really allow us to continue to advance DLH as an enterprise? Does that help?

Any other questions?

I had a couple of questions for Maliek. Obviously, HR has become a recently important role in any medium-sized company, especially when you make an acquisition like this. So I actually had 2 questions. One had to do, you're in charge of integration for the whole company. What's it been like to integrate with the HR component of GRSi? Are you on the same wavelength? Are you learning from each other? Are people reporting to -- that's almost the most important part of integration. That's my first question.

Yes. Thank you, [ Mason ]. I appreciate that. And I agree with HRs becoming increasingly more important. And in our organization, we look at HR as human capital. It's vernacular to some, yet for us, it elevates the role of human capital being involved in all of the different functions and supporting the strategy of all of the different [indiscernible]. And incorporating GRSi, one of the key things we did initially is look even before within the due diligence process, we looked at how the human capital functions will work and what are the cultures of those human capital functions? Meaning, how do we execute and provide support to the workforce? And we were very similar. Both organizations were very, very similar, which helped us feel comfortable that the culture was also aligned. Because that is a big part of what the human capital team's going to be responsible for doing, aligning cultures. Some may say culture is in how you operate your own business. Others may say cultures maybe in what benefits you buy, how you pay, when you pay. All that's relevant especially in a market like ours where it's government contracting and everyone is a competitor or [indiscernible]. We are very conscientious of how we look at that and how we look at that initially from a human capital perspective. The human capital team has been meeting consistently on an ongoing basis to create that alignment and integration. Therefore, I head up overarching integration for the company, but I also head up integration for human capital specifically as well.

He owns it.

And in owning that, it helps me feel comfortable that as an organization, yes, we do have very similar processes, procedures and work rules. But how do you align this from a culture standpoint? And I'm here to tell you that the alignment is very, very clear. And to our benefit, whether that's luck or that's just good due diligence, we have very good alignment from a culture standpoint. So I think we're progressing very well from a human capital standpoint and how we want to roll out change management impacts to the workforce, which will create future alignment amongst benefits, pay, titles, things like that, that employees see initially but realize that, that impacts and creates a culture as well.

Second question may be irrelevant, but it does -- it has to do with Gen Z and what [indiscernible] employees that we're hiring from that cohort. The consensus is that they're a breed apart that they have some [ fitbit ]. You can take the boomers and you can take the millennials and you take GenX and put them in one category. And then there's another subcategory still in homo sapiens, but operating -- marching to a different drummer. And I wonder if we're hiring any of those [indiscernible] and whether that requires any special care or a different formulation of how you approach them?

It's interesting. I'm going to try not to go on a soap box here. But what I will say, you're absolutely right. They are a different species, So is any generation when they first come into the workforce. Before Gen Z, and I can say now right before COVID, we were going through unprecedented generational gap in the workforce. We had 5 generations in the workforce. And I think we're approaching 6 because traditionalists are still in the workforce. You have people coming out of retirement coming back to the workforce. And for that reason, each one of those generations want different things from their employer. And as you say, the Gen Zs are very different in how they look at it. We talked about ESG earlier on. That is a very big component from a corporate social responsibility standpoint and the expectations that Gen Z wants their company to look at not only what they can do for them, but what they can do for the community, what they can do for the globe, and we are looking at that as an organization. We are certainly hiring GenZs right now, especially in the type of the industries that we're in. And yes, we have to do special things to align for that generation and all the others. Yet, I think it's an ongoing journey. I think it's a scalable solution that we're going to have to implement. There should be no organization that says they have it right, right now. It's a constant review and overview. And one thing we impress upon our employees and our recruiters, they have to understand the industry. They have to understand where they're recruiting from in talent pools and who they're recruiting for the business base. If we understand those 2 elements, we can mitigate some of the concerns, maintain retention and attract the [ right talent ] . So yes, we are changing the way we do talent acquisition to account for GenZs. Yes, we're trying to realize what are the things that are important to them and implement that in our talent acquisition strategy and workforce planning road map. And I think we're on our way. We don't have all the answers solved because I don't think all the answers are -- all the problems that have been presented yet.

But there's some specific ones now. And I would say Maliek has taken our team and been proactive on that rather than reactive because there's very differences in [ attractions ], right. Those of us boomers and otherwise, our career was looking at grow this way, work hard, you get the corner office and you've gotten there. For this crowd, not only corner office doesn't mean anything. You mean I have to come to the office? Completely different kind of incentives career growth wise, right? So he's got a talent development management resource that's addressing that on each of those [indiscernible] . So -- and many of our folks, we've got General Granger, Dr. Murphy, who and Martin Delaney, who all do service to our military and so forth, right? When you transition over into our workforce, a lot of folks look at doing their job because of the mission. It is the mission [indiscernible] is why they really felt passionate about our business. This generation isn't as committed as [indiscernible] workforce to taking these major steps and risks for the mission as the generation before. And so we're trying to assess, okay, what are those incentives? What is it that helps that retention rate because they're attrition, long-term commitment from a lot of these, even the millennials was 3.5 years, right? It's like, okay, wait a minute, I've got to get out of here. So it is a different -- it is a completely different kind of mix. We've had issues where based upon some of the technology evolution, some of our boomers who've had 15, 20 years experience plus are now working for GenZs and so forth, and we've had to bring in labor law folks to deal with some of those perspectives. So it's real. We're blessed to have the caliber of Maliek really to address that and have put in a team that really is focused on exactly what you described.

How is the general hiring picture trending? I mean, is it easier to hire people now? And I know that's one question across a spectrum of job openings than it was 6 months ago? Or does it continue to be challenging.

It continues to be challenging. I was looking at a report earlier that the job openings have dropped over 2 million in this recent data from the Bureau of Labor Statistics, yet it's still at a record high. So even though it's dropped over 2 million openings, it's still at a record high post-COVID. And for the type of markets that we're hiring in and I'll include the acquisition of GRSi, that the highly technical position and the highly scientific and educational academic positions are very hard to hire for. That hasn't changed for our markets. Therefore, our solutioning is when that will continue. Have we've been getting our fair share? Absolutely. And we've made all attempts to slow turnover because I look at talent management not only as how do you hire folks, but how do you retain the folks you've had? And the retention piece, I think, is just as important and sometimes even more important than how do you attract because you want to maintain the talent that already has gone through the company learning curve and has already mastered how our business works. You want to retain that stack just as much as you want to attract the new talent.

Looked like you had another question. Any other questions from the floor? How about online? Anything [indiscernible] ?

Let's check one more time? No new questions.

Cybersecurity. And frankly, this has been a great investment for me. I looked over Wynnefield Capital's holding. This looks like the cheapest one with the best growing about 200%. I still don't really understand what you do. I actually don't understand what you do. But I do know there's a lot of cyber security companies out there. How do you compete with them, right? I mean...

Yes. Great question. And did you just call Wynnefield cheap? That's a great question. Let me say that Kathryn knows probably more than we can disclose. But there was cyber security, core cyber security businesses in our offerings that we were looking at, right? It is becoming, if not the #1 potential growth focus area across the federal agencies, led by Department of Defense, but not exclusive to part of just the health community as well. And it deals with making sure that you can protect your systems that are under [indiscernible] attack by hackers and things of that nature. It affects the way in which our aircraft are able to fly because in theater, there's jamming capabilities going on based upon the kind of data we're trying to get to our decision makers. And so what we're actually doing is working on methods and techniques to protect those communication systems, satellite transmission, right? You probably have heard, Russia has been putting a lot of emphasis on blocking communications traffic in theaters, right? And so most of the classic ways of doing that kind of better communicating a commander over here needs to say, where is my logistics pipeline, right? If you can't communicate, it affects your ability to deliver. We call that contested logistics in theater. And so [indiscernible] has grown out of that arena and DoD. Similarly, we find a lot of threats, a lot of threats in the biopharmacy arena to our abilities to attack some of these public health challenges, particularly when we're doing clinical trials throughout the world, and everyone is not cooperating, right? The bad guys are just getting very, very sharp with regard to data and data -- means of capturing someone's data. And then secondly is what you've heard of with regard to protecting all of us as attacks -- protecting our data, right? Folks are attacking things, whether it's social security, IRS, et cetera, to gather data for nefarious opportunities. So these are very high-end information technology specialists require a wide range of certifications to be able to design systems to afford protection so that we can accomplish our various missions.

So I mean -- way over my head and most people's head. If all I know it's the [indiscernible] market. I mean this [ checkpoint ], [ CyberArk ] then there's [ CrowdStrike ], other networks in all of the above thing. And is there -- can you just walk us through -- come down in laymen's terms. You go in and say, look, I know you got Crowdstrike and [indiscernible] and us too. And so do they do an all of the above approach?

If I may...

Hold on just a second. I'm going to allow our Board Director to comment on this...

[indiscernible] Everybody says cyber, everybody says cyber securities and can be very, very confusing and it is because it's an amazing set of technology. But if you look at it in 3 things, okay? There are those companies that build products, whether it's a software product, a hardwired product [indiscernible]. They build a box of some kind. And on the other end of the spectrum, there are those companies that service them, okay. They maintain them, they fix them, maintenance oriented. And there is a middle we call it systems integrators. That's where we are. We're in the middle. We take a customer's problem, whatever they're challenged, whatever that might be, whether it's a hacker issue or a security issue, set of medical studies and formulas that we want to keep secret, and we integrate the best products with our engineers and solve that solution. We're not service providers. We don't make anything. We take what people make, utilize it to solve our particular customer's problem. And it can be an acronym soup. But that's what we do from a cyber standpoint. So our engineers understand the communication sense, the software and the security end of it. I think that solution either for each individual. We end up making many products but it's the government, you can't sell them because you use government money to make them. So we are known as problem solvers or system integrators. That's the world [indiscernible].

Any other questions?

That's a great setup, though that [ Oz ] gave. And really, if you heard Zach say earlier that we were looking at 4 opportunities at the time we looked at GRSi. And one of the reasons -- the reason they set themselves apart so well, is their ability to really address the end-to-end servicing system integration services as [ Oz ] just described, we -- for example, 1 of those 4 was very specialized in cyber much more intensely than GRSi is. GRSi has the industry-leading capabilities to be able to be conversant in the context of other service offerings the customer also needs. And so really, they set themselves as part as being the most well rounded, very deeply technical, highly credentialed in many of these service offerings. But not monolithic and very narrowly focused on a capability. So to pick up on a point Maliek raised, which -- and kind of leads back to your earlier question about valuation, that culture [indiscernible] that Maliek described was really the reason why we translate that as why we don't necessarily have to be -- while we have to be extremely competitive in our offer and price. We don't necessarily have to be the highest price because sellers place a value on a culture match for their team that they've worked their lifetime in building a company -- and they often felt quite connected to the people that they're that -- they're offering as a part of the transaction, and they're concerned about what their -- what the path for those people is once they join DLH. And so we've been able to differentiate ourselves because we have many proof points over time of having acquired talent through that acquisition. Yes, we care about the contracts and their profit delivery, of course. For shareholders, we have to care about that. But we always care about the talent we're acquiring. And we've been very fortunate in being able to pick talent up through acquisitions that is really building well and helped to heavily augment capabilities we already have and take it to the next level. And we certainly see GRSi continuing that tradition of providing leaders in the new enterprise now moving from being a leader of GRSi, which was a very, very successful enterprise in its own right to now being capable leaders in DLH more broadly.

But in terms of valuation, obviously, 2.5 years ago, the 10-year treasury stood at 33 basis points. Now you get 5% on 2 years treasury note. So when I'm trying to evaluate the -- this a good investment for [indiscernible], which I am, it's -- I mean -- can you explain something about -- I mean, look, I like the fact that you paid down debt and that you -- you still have any [ wells ] ?

We have fully utilized them.

You're in a recession-resistant industry in the government.

That's exactly right.

But how -- tell me -- can you walk me through some of the valuation you out there? How soon do you think it will as [indiscernible] will translate into something.

Yes. So our current expectation is that in FY '24, it becomes GAAP accretive because we'll be in the progress on paying down the debt that the net of the additional incremental EBITDA minus the debt service cost will be a positive.

But we're asking what kind of valuation these companies get.

I was going to comment on that part. As we looked at the opportunities that were out there before us, including the GRSi and so forth, and we provide to our Board that presentations given to our Board by third parties on what kind of enterprises, what kind of valuations exist. The #1 area across the spectrum of things you hear us talk about over the last year or so has been in [indiscernible] and more importantly, the cyber security. Those have been generally, especially for those that are public acquisition where we do have the numbers recorded, they're double-digit valuations. And we've seen them 13x, 14x.

13x, 14x of what?

EBITDA.

EBITDA. Yes. And you just -- that's when an industry is averaging somewhere around 10 plus or minus, right, over the last 2 years as they're coming out of COVID. So it's really at the high end of the spectrum.

And compared to other companies?

Compared to the industry. Compared to other deals, other acquisitions, which are happening every month, as you well know, in our space. So in terms of our ability to create value with what we're adding to our book of business, it's as good as it gets for that component of our business. And that secure aspect of our business is probably larger than 1/3 of what we did on the acquisition side and in the highest, most exacting science, we're also describing if you do that for the Department of Defense, it's at a higher caliber than just doing electronic health records protection, right? And so we're in a really, really good position as we look at combining that with our DHA, the contract awards we had with -- as part of our IBA acquisition where now we can bring them into the [indiscernible] health community, leveraging that cybersecurity, which otherwise, we did not have that capability internally. So that's where that 1 plus 1 equals 3 that Maliek was talking about. How protected we are to at bottom left quadrant, can see that probably over and over his slide at the address because as we go forward in our go-to-market strategy, bringing those components that are the highest value part of our business are going to be more strategic than some of our other heritage part of the business. And that's why this deal was so important to offset the downside associated with the debt we believe.

We do have a question from the webcast. So the question is, congrats on the nice NCI event we announced last week. I was wondering if you could talk about cadence of that contract coming online and being recognized as revenue as well as DLH's share of the contract win. I understand total value is $1.7 billion over 5 years for 8 winners. Additionally, we're broadly hoping to get some info about the many IDIQs that have been awarded and how you think about those being contributing to revenue over the coming months? And finally, then generally, could you speak to the backlog overall and the growth outlook for the enterprise?

I'll take the first 2 questions. Yes. So first of all, please do not take $1.7 billion and divide it by 8. And prove that to [indiscernible].

[indiscernible]

First of all, some of you that some of those of you online and that have been really follow us know that the NCI, National Cancer Institute has been a strategic focus area for us for some time. So that was a very high valued component of this deal for us. We believe that it's a good pivot from what we're doing across that organization, very complementary of what we've done with the sister of [indiscernible] over a decade with the cancer community within NIH and is very important for us. And so it was an integral part of what we value for this acquisition, that deal, of course, was awarded to our newest family member and GRSi and as they were the bidding entity. And they have been one of the incumbents before. So we get a twofer out of this. A, it protects some of our existing revenue stream that came -- absent that vehicle, we would have had some erosion in relatively near term or task orders issued against that contract. The other good news is we have been one of the better competitors, right, in terms of revenue capture on the task orders over the last several years for this re-compete came forward. So there's reason for us to be really encouraged. We diligenced this very hard during the acquisition because it made so much sense where we have really [indiscernible] makers from NCI. You probably saw a couple of press releases from some folks that we have hired from that organization in the last year on [ Janine Christian's ] team. So this really helps to position us for that synergy that Maliek was talking about very well because there's things they had in their pipeline that are augmented by having our heritage business as part of that business. So yes, so we expect it to, a, first of all, protect revenue that we've had in that book of business immediately, right? There are folks that work were at risk over the last month or so, right, over the last 90 days, I should say, for us, that win puts us in a lot better position. But we do have a really strong sense that there will be good organic growth as those existing opportunities that are usually 3-year contract task orders. It's usually a 3- to 5-year range as some of those come up for re-compete, we expect to be able to take some away from other customers. But more importantly, it also is an agency that's getting added funding, right? And so there will be new opportunities that are not as the same as unseating a long-term incumbent. And the other incumbents that we have been defeating on this before are the big boys. These aren't the -- as [ Oz ] calls it our small, mid tiers. These are the big boys. And we've shown over the last several years, we've been able to compete very favorably in that environment. So we're encouraged about what that pipeline opportunity looks like for us. The other question. The second question, part of that question we had to do with the major IDIQs. That's another area where we really feel good about. We are in a down select mode for probably the #1 biomedical advanced research technology, IDIQ, you've heard us refer to it. I don't do this often, but [indiscernible] before was one of those that's an industry benchmark for growth in the kind of areas that organizations are involved as we go together. And we're in a real, real, real good position for capturing a CIO-SP4. See for that, we believe that our pipeline contingent upon the award has a really good growth prospect. We have some 10 deals from our heritage business and at least that many from the GRSi that we are seeing hopeful of being able to bid on in the next 18 months. And so that bodes very well for 2024 as we start to again delever and start to really come out of this in a great way not only accretive just from the financial engineering side but that term, right but also deliver on that organic opportunities. And that's just maintaining our trajectory. That's not with an accelerator from 1 plus 1 equals 3. Relative to backlog, I'll turn it over to Kathryn.

Yes. So backlog derived from these IDIQs. And just to kind of further context those, IDIQs in this industry are an important part of being able to compete for work. The government uses those as a means of making -- candidly making their job easier because instead of -- if they were having a request for proposal that indiscriminately 1,200 contractors could respond to, they whittle down the field and they narrow the field to only the people who are on that IDIQ. And therefore, their assessment of responses to proposal or proposal submitted is much simpler. They only need to look at those, that small set of IDIQ orders. So we always understood -- Zach, and I've been in the industry for a long time. We always understood that we were -- we needed to have a broader selection of IDIQs available to us. We -- our challenge was we didn't have the requisite skills as a company to compete for those until we did our -- executed our acquisition program and acquired companies with past performance in technology. Built that set of capabilities, and therefore, were able to compete for these IDIQs. So if it seems that suddenly out of nowhere all these IDIQs are coming, it's because it's the fruition of a strategy that really was about getting ourselves prepared to be competitive for those IDIQs. So CIO-SP4 as he mentioned, as the name might suggests, is following CIO-SP3, which came out 10 years ago. Ten years ago, there's no way DLH would have been a viable competitor for that work. And now we're proudly positioned. We think -- we obviously assess ourselves as highly relevant in that space and highly likely to get an award. So how that translates to backlog though is that we saw the headline of $1.7 billion. We obviously don't add that to our backlog. Posting the backlog once an actual cash has been competed and won underneath that -- underneath that big umbrella IDIQ. And once we know we've secured that order, then it adds to our backlog and becomes a basis for revenue growth. But you have to pass that first wicket first. So we've been doing well in that.

Any further questions? Anything else online? There appears to be no other business to come before the meeting. We'll now move to adjourn the meeting. A motion to adjourn is in order.

I second the motion.

Moved and seconded that the meeting be adjourned. All in favor say aye.

Aye.

All opposed say, nay. This concludes the business for the meeting. I declare DLH's 2023 Annual Meeting of the Shareholders adjourned. Thank you all for attending today's meeting.