Growth looks certain, but Leidos keeps 'careful eye' on broader trends

Its own financial picture aside, Leidos sees the macro environment all government contractors participate in as giving at least one year of budget certainty with a watchful eye on other dynamics much less in their control.

During Leidos’ fourth quarter earnings call Tuesday, CEO Roger Krone indicated the company’s analysis of past history regarding budget negotiations in an election year foreshadows a conclusion before the current fiscal year ends Oct. 31.

“(At) the end of a first term in the White House, there is a reason to kind of get the budget done before we enter the election cycle in the fall,” Krone told investors. “I don’t see a lot of appetite for having the budget process roll through the election season. There are other people who think we’ll be in a CR (continuing resolution) through the end of the year, but I’m more optimistic than that.”

The Trump administration’s proposed fiscal year 2021 budget is on the table as of Feb. 10. In that request, the administration planned for relatively flat defense spending at $740.5 billion but with a $2.1 billion-boost to research-and-development funds. Non-defense spending would see a 5-percent cut to around $590 billion.

But if past is prologue, the Democratic-led House will likely not agree to the planned cuts for civilian agencies.

With that optimism comes a semblance of possible skepticism about the overall economic environment and risks to it. The U.S. economy is in the midst of its longest-ever streak of expansion at 126 months of gross domestic product growth, which exceeds the prior record of March 1991-to-March 2001.

“All of us in business look at that with a careful eye and thinking, ‘Okay, what could be out in front of us,’” Krone said. “We look at the coronavirus, we keep an eye on interest rates. The economy is running well and we continue to see economic growth, but I think we’re all being thoughtful.”

Reston, Virginia-based Leidos’ outlook for itself on the financial front is slightly more straight-forward by comparison. Revenue climbed 8.8-percent last year to $11.1 billion and the company sees $12.6 billion-$13 billion in sales this year, well above the consensus analyst expectation of $12 billion and including $900 million in acquired revenue from Dynetics.

That forecast includes around 7-percent organic growth, excluding Dynetics and the pending acquisition of L3Harris Technologies' security detection and automation businesses.

Contract bookings totaled $14.5 billion for a trailing 12-month book-to-bill ratio of 1.3 times, which means the backlog grew faster than sales were booked against it. Total backlog hit a record $24.1 billion versus the $20.8 billion recorded for last year.

Not included in that and still to be determined are Leidos’ three biggest wins of late at $18 billion in total ceiling value. Those include two Government Accountability Office rulings to come in April on protests over the company’s largest recompete wins.

A third possible protest could come regarding its takeaway of the Navy NGEN network services contract from incumbent Perspecta, whose debrief with the Navy is set for Feb. 24.

Leidos’ outlook for its bottom line is somewhat different. The company sees this year’s adjusted EBITDA margin (earnings before interest, taxes, depreciation and amortization) at 10.0-10.2 percent compared to last year’s 10.5 percent. Early investments in new programs such as NGEN, pending the protest scenario, are a part of that as are the sizes of the two acquisitions.

But Krone sounded quick to note that the company is not lowering the bar in terms of its business development pursuits.

“There may be people who feel like we have to bid on a broad array of programs even if they don’t meet our expectations for return,” Krone said. “Even at the size we are today, we have the opportunity to pick and choose what we go after. If we don’t see the potential for our corporate average return on a program, we have the strength and the will to not bid those programs.”

The company separately announced Monday that James Moos has been appointed full-time president of its civil group, which he has led on an acting basis since October after then-group president Angela Heise left the company.

In that release, Moos was credited with spearheading efforts related to Leidos’ pending acquisition of the L3Harris airport security technology businesses. Moos was the civil group’s chief operating officer and deputy president prior to Heise’s departure from Leidos.