Leidos preps for some renewed COVID restrictions amid strong results

Leidos' chief executive tells investors some COVID restrictions are coming here and abroad, but he doesn't expect a return to the same conditions of earlier this year.

Leidos’ chief executive got to the point somewhat quickly while opening a Tuesday earnings call with investors: the acceleration of the COVID-19 virus’ delta variant is “disturbing” and the company is watching that closely.

During the second quarter earnings call, CEO Roger Krone said Leidos at this time is not observing agencies scale back operations at their facilities like they did last year.

“We are essentially going back to a mask mandate according to the (Centers for Disease Control and Prevention) guidelines, and we expect all of our customers to do that,” Krone told analysts.

Last year saw many agencies go to shift-based schedules at their classified facilities given much of that work just cannot be done at home. In turn, contractors also billed some customers differently to get reimbursements for costs without fees under a section of the CARES Act economic relief law.

Krone said the bigger concerns for Leidos in a business sense are in other geographic regions that are “hunkering down again” -- namely Australia, the U.K. and Middle East.

Border restrictions are in place in many of those locations and that naturally affects travel, which in turn puts a drag on the security detection and automation businesses acquired last year. Krone said those units are dependent on tariffs on airline tickets, so the money just is not there when travel is down.

Within Leidos itself: the company launched a $1 million sweepstakes a few weeks ago to encourage employees to get a COVID-19 vaccine.

Reston, Virginia-headquartered Leidos held the line on its financial guidance for this year at revenue between $13.7 billion and $14.1 billion, while the bottom line was left at a margin of 10.5-to-10.7 percent adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

Second quarter sales climbed nearly 18 percent year-over-year to $3.4 billion with all but 2 percent of that growth organic. Leidos’ backlog also grew 9 percent year-over-year to $33.5 billion.

Underpinning that growth was Leidos’ ability to start on the $7.7 billion Navy NGEN network services program it secured last year and ramp back up on veteran disability examinations that paused during the pandemic.

Not included in Leidos’ backlog yet is a $2.5 billion NASA IT and communications infrastructure contract the company thought it took away from incumbent Science Applications International Corp. earlier in the summer.

Krone said NASA is taking corrective action on the award following a protest by SAIC and that he suspects the next time he updates Wall Street on the matter will be “through the third and fourth quarter, unfortunately.”

COVID-19 has caused disruptions to the supply chain and is a factor in global shortage of computer chips, though not the only one as great demand for semiconductors is not ceasing. Leidos on Tuesday became the latest government contractor to cite the chip shortage as an item it is dealing with.

As federal technology integrator, Krone said Leidos installs a large amount of end-user equipment and buys from “all of the household names” to get everything from general purpose processors to application-specific circuits.

Leidos has “not seen shortages” but instead “just seen delays” of up to a month as the second half of this year has significant number of material purchases planned, Krone said.

On the more optimistic side: if and when a massive infrastructure bill gets out of Congress, any technology components within that package would certainly be of high interest to Leidos and the government market at-large.

Krone did caution investors that it would take “a long time for money like that to flow through” the federal procurement system to where contracts become a reality.

But the high-level priority areas of where such an infrastructure spending package are more clear even as a final spending number and other specifics are still in the works on Capitol Hill.

As Krone put it: “there is a lot of focus on your roads and public transit and water systems” along with airports and other passenger travel landmarks, plus the security equipment.

Hardening the U.S.’ cybersecurity posture as it relates to physical infrastructure including the electric grid are other watch items on Leidos’ list, Krone told analysts.

Looking beyond just the federal government, Krone also called out the 5G revolution and further adoption of that next-generation connectivity capability by everyone.

“We think that will spur sort of another big investment in IT and IT technology as the ability of all us the ability of all to function from an edge device,” Krone said. “The phones that we have today are just the beginning.

“When we all have 5G, the functionality that you will carry in your pocket is going to increase by an order of magnitude,” Krone added. “That with cloud and as-a-service, we could see that as spurring a whole new round of investment and application, migration, so we are very bullish.”