Leidos confirms, spells out its role on Cerner-VA health record program

Leidos already has the large Defense Department electronic health record implementation project and recently formalized its expected subcontractor relationship to Cerner on the Veterans Affairs Department's EHR effort.

And during Leidos' second quarter earnings call Thursday, CEO Roger Krone for the first time detailed how his company will collaborate with Cerner on the potential 10-year $10 billion contract to install the latter's commercial "Millennium" EHR product at VA hospitals and other facilities.

The VA and Cerner signed the sole-source contract in May, 11 months after former VA Secretary David Shulkin first announced the agency's intent to replace its homegrown VistA EHR system with one provided by Cerner.

Analysts have speculated since that that Leidos would also join the effort as Cerner is a main subcontractor for the DOD Genesis EHR implementation, another multi-billion dollar job Leidos won its prime bid for nearly three years ago.

Reston, Virginia-based Leidos' role for the VA program will be "totally diferent" as the company "will not be the program manager" versus that of the DOD initiative, Krone told investors Thursday. Cerner will buy services from Leidos over the VA program's duration.

"We're going to be in the program office. We're going to do help desk, we're going to do sustainment, we're going to help them with integration, we're going to help them with security and cybersecurity," Krone said. "A lot of the value added that we provided under the (DOD) program.

"We will not be the name on the contract. We will not be prime. But we're going to be fully supportive of Cerner, and we're committed to the success of the program and to make sure that the vets get the best electronic healthcare records system that industry can possibly provide."

Given the size and specs of the VA EHR replacement, it gives Leidos an opportunity to further solidify the leading health IT player among pure-play government services companies.

The undertaking is immense as the VA has the country's largest integrated health care system. It covers more than 9 million beneficiaries across more than 1,200 sites that include 170 large medical centers. Then-acting and now-confirmed VA Secretary Robert Wilkie called the Cerner pact "one of the largest IT contracts in the federal government." when he announced it in May.

Once deployed, the DOD Genesis system is intended to support 9.5 million active duty service members and their dependents, plus 205,000 DOD personnel. But "because of the number of implementations and the size of the VA, it's probably a larger program because there's just more VA facilities out there than there are in the (DOD) environment," Krone told analysts Thursday.

Underpinning both implementations is the focus on interoperability of the DOD's EHR system with the VA and Coast Guard. DOD announced July 24 that it added $1.1 billion in ceiling value to its existing $4.3 billion Genesis contract with Leidos to cover interoperability. That ceiling boost followed an April announcement that the Coast Guard would sign onto the Genesis system.

During the Thursday call, Leidos also gave an update on a massive contract for logistics services to support airport security equipment it had originally lost to Peraton in October of last year but was then canceled.

The Transportation Security Administration canceled that potential five-year, $578 million award to Peraton on May 31 and then issued a two-month extension to Leidos that expires July 31, according to Federal Procurement Data System information. Formerly Harris Corp.'s IT business, Peraton had touted the win as its biggest since it was divested from the former parent and acquired by Veritas Capital last year.

Leidos has performed the work since 2013 and filed three protests to try and keep the contract before it withdrew them in January. Krone told analysts Thursday the company expects to negotiate another bridge with TSA that "could be like a year's worth of business," then the agency will "probably come out with a new procurement" in 2019.

"(It's) a program that we care a lot about. We all travel through airports, we're committed to support the TSA customer and to keep the equipment well-maintained and allow us all to travel," Krone said. "We'll likely bid on it, and we'll see where that goes."

TSA has not said why it canceled the contract. Peraton told WT in a statement in June that it was "engaged in a constructive dialogue with the TSA regarding the contract."

Leidos' second quarter call Thursday came shortly after the start of the federal government's fiscal fourth quarter on July 1. In recent years, the July-September period has seen agencies increasingly rush to obligate their funding on contracts before the next fiscal year.

Spending boosts from the omnibus spending bill signed in March are giving defense agencies more money to buy platforms and other hardware. They're also spending more on research-and-development, readiness and other services, Krone said.

DOD is not necessarily in a rush to obligate all of their funds before Sept. 30, according to Krone. That is because "most of what they got was two-year money, so they don't have to get it obligated before the end of the fiscal year.

"That's not completely true of some of the civil agencies. So we may see a little bit of a push from the civil agencies," Krone said.

Civil agencies have a different dynamic as they prepared for cuts rather than the increases they got from the omnibus. They typically spend between one-third and one-half of their contracting obligations in the July-September period.

Leidos is holding to its current financial forecasts for this year: $10.25 billion-$10.65 billion in revenue and adjusted margins of 10.1-10.4 percent for earnings before interest, taxes, depreciation and amortization expenses.

The company's second quarter book-to-bill ratio came out to 1.4 -- which measures contracts added to the backlog versus drawdowns from it to recognize revenue. Any number above one shows bookings outpace those drawdowns and indicates future revenue growth.

Health segment book-to-bill was the strongest of the three at 1.8 on bookings with DOD, the VA, Centers for Disease Control and Prevention and other customers.