Leidos sees temporary COVID hit and a quick recovery

The federal government is open and fully funded even though the coronavirus pandemic has created a different kind of shutdown. And the effects are not as predictable as when the doors are completely locked when a more traditional shutdown occurs.

During Leidos’ first quarter earnings call Monday, the government services market’s largest company outlined the impacts it has seen so far and gave a slight glimpse at what could potentially happen, even as some states and jurisdictions move toward partial re-openings.

Leidos estimates it took a $50 million hit in first quarter revenue from slowdowns in programs. Around $270 million, or 2 percent of total sales, will be impacted by COVID-19 this year but the company expects to recover much of that next year. New top-line guidance for this year is slightly lower to $12.5 billion-$12.9 billion in revenue from $12.6 billion-$13 billion, which includes $290 million in added sales from Leidos' acquisition of the former L3Harris security product business that closed Monday.

Included in that revised outlook is $100 million in expected revenue impacts from “other associated market uncertainties.” Some of that is Leidos’ natural conservatism in how it does guidance and delays in the Defense Department electronic health record rollout, where military hospitals are obviously diverting their attention toward the pandemic.

But there are other possible market-wide factors at play the company is preparing for.

“I actually thought we were going to get an NDAA (National Defense Authorization Act) this year, and now I don't think we will. I think we will be in a continuing resolution,” Leidos CEO Roger Krone told analysts Tuesday. “So our forecasts are seeing a continued growing federal budgets and things operating in a normal way. Now I don't think that is going to happen, I think procurement will slow down. Things will take longer, meetings take an extra week or two, there is no travel.”

Today’s acquisition dynamic inside agencies has not affected the finish line aspect so far. Contracts have been “awarded pretty much on time,” Krone said, and the three awards NASA made last week to Leidos’ Dynetics subsidiary and two others for the new Moon landing program were “really right on schedule.”

But that trend may not last, according to Krone.

“The RFP (request for proposals) process where maybe we used to do oral (presentations) face-to-face and now we are going to have to do orals by video. We just think that is going to take longer,” he said.

Krone’s comments on the acquisition dynamic inside federal agencies echo some of what other government services CEOs said last week, namely that there is certainly a new operating environment that all have for the most part adjusted to with some exceptions.

“April must be the worst month, given what we all have been through,” Krone said “We think that May will be better and June will be even better,” he added as regions such as the Washington, D.C. region begin easing toward a reopening of some sort.

One notable exception without much room for adjustment is work on classified programs. Leidos’ expected revenue hit likely includes that aspect, where employees cannot get to their designated secure government facility because of shelter-in-place or other on-site restrictions to limit the number of people in one place.

A section in the CARES Act economic relief law is designed to give agencies the ability to reimburse contractors for paid leave and keep the workforce at home in a ready state. But some intelligence customers are apparently reimbursing Leidos for only costs and not fees for certain programs.

Because of that, Leidos also lowered its bottom-line forecast for the year. The company now sees a 9.8-to-10 percent adjusted EBITDA margin -- earnings before interest, taxes, depreciation and amortization expenses -- versus the previous outlook of 10-to-10.2 percent.

Krone also outlined some of what Leidos is doing to support the overall response to the crisis and get the company through it. Leidos’ board of directors has reduced its pay and that amount plus Krone’s salary is going to the Leidos Relief Foundation to support affected employees.

Some employees have been placed on furlough in “a few minor areas where we have seen reduced business volumes,” Krone said.

Leidos also reduced discretionary spending, implemented a hiring freeze for non-essential positions and mandated mandatory time off on alternating Fridays for indirect staff.