Ross Wilkers

COMPANY OUTLOOK

Leidos results beg the question: Did the fourth quarter spending spree fizzle?

While final fiscal year tallies of federal contract spending are yet to be tabulated, one indication has already appeared that shows a wide gap between how civilian and defense agencies used their funds before fiscal 2018 ended Sept. 30.

During Leidos’ third quarter earnings call Thursday, CEO Roger Krone put a number on what civilian agencies left on the table during the government’s fiscal 2018: $73 billion.

That figure represents how they “underspent their approved budget authority levels,” while outlays in the civilian realm “increased less than 1 percent over fiscal year ’17 levels,” Krone told analysts.

Defense agencies including intelligence on the other hand posted a 5.3 percent-increase in outlays over the previous fiscal year “versus the 9-to-10 percent approved budget authority increases,” Krone said. And here again, “not all available budget authority was spent” as fiscal 2018 defense spending fell below expectations.

Partly as a result of that slower-than-anticipated spending, Leidos took the midpoint of its revenue forecast for this year down by $250 million to $10.2 billion, or flat compared to last year.

One subtext emerges from Krone's comments: the traditional “fourth quarter spending” spree by agencies to either use or lose their funds may not have happened as much this time around, even as we await final numbers to see how that played out.

(NOTE: Expect commentary and Wall Street analysts to ask about this when fellow government services companies Booz Allen Hamilton, CACI International, Engility Corp., ICF and ManTech International all report their financial results next week. I will be listening.)

Civilian and defense budget caps went up when the fiscal 2018 budget passed in March, but civilian agencies anticipated cuts whereas the Defense Department and intelligence agencies were fairly certain of increases given President Trump’s push to grow military spending.

Given the time crunch of the budget’s late passage with half of the fiscal year gone and the overall funding increases, industry watchers have wondered if agencies would be able to obligate those funds before the end of the fiscal year.

It should also be noted that the current budget agreement expires next Sept. 30 and sequestration cuts as mandated by the 2013 Budget Control Act come back into play unless there is a new deal in Congress.

The White House is due to get a new “skinny budget” blueprint out for consideration in early January. And there is the impact from the midterm elections as well.

Another consideration is that civilian agencies might be more careful to spend their money given the White House’s push to cut their funds and shift them to defense. As Krone pointed out, civilian agencies have been more reluctant to spend their full ceilings on uncertainty of what will happen to them this fiscal year and in fiscal 2020.

Whereas with DOD, Krone said they were “probably more confident and more willing to spend to their authorized and appropriated levels.”

Also during the call, Leidos mentioned a second major headwind that affected results and led to the guidance cut. But it also looms over the entire government services industry: the pool of talent, especially those with security clearances and IT skills.

The ongoing backlog of security clearance approvals did shrink 9 percent in September from an all-time high of 725,000 as of June to 657,000 in September.

Krone told analysts Leidos took in 2,000 new hires during the third quarter and “are pleased with the level,” but the company has “begun to feel some impact from the tight labor market as the structural unemployment across the country is at historic lows.” The Labor Department said earlier this month that nationwide unemployment is the lowest it has been since 1969.

On a macro-economic level, Krone went as far as to say “we're about at structurally zero unemployment and that's going to, at some point, make it more difficult for us to hire or hire at the rate at which we did.”

Leidos and its government peers are all trying different ways to grow the pool of overall talent in a highly-competitive market for those skills. That has included looking outside the Washington, D.C. area through “onshoring” facilities and putting employees on unclassified jobs as they wait to get cleared.

Even still, all market players want that backlog to come down as a starting point to grow that pie for all to eat from.

“We are cautiously optimistic that certainly on renewals, if not on initial clearances that things will get better, but it is still a problem. And it takes a long time, especially for a college hire to get them through the clearance process. And for many of our programs that require a clearance, it does make it more difficult to hire,” Krone said.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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