Ross Wilkers

COMPANY OUTLOOK

Leidos keeps a watchful eye on post-election catalysts

Leidos’ initial preview at how the company sees 2021 potentially playing out includes base assumptions that warrant wider consideration for the government market.

Put aside aside how Tuesday’s election shakes out. The market is operating under a stopgap federal funding bill that expires Dec. 11.

Then the next Congress gets seated on Jan. 3 and the presidential term beings Jan. 20. Whether it is a second Trump term or a new Biden administration, there will be vacancies to fill.

Past precedence suggests another extended continuing resolution could go into March or “could be even beyond that,” Leidos CEO Roger Krone said in the company’s third quarter earnings call with investors Monday.

“We've seen it before, so it's fully baked into our thoughts about the future,” Krone added to analysts. “That means you will be halfway through the government fiscal year before you actually get a bill.”

Reston, Virginia-based Leidos saw third quarter revenue climb 14.4 percent (2 percent organic) over the same period last year to $3.24 million, while the company also lifted its sales outlook for this year to $12.3 billion-$12.5 billion.

Leidos nudged up its bottom-line guidance to a margin of between 10.6 percent and 10.8 percent adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

Not to be confused with formal guidance for 2021, Leidos sees as possible both organic revenue growth of 10-to-12 percent and an adjusted EBITDA margin of 10.3 percent or better if three items present the best case scenario.

Item number one is how government agencies have adapted to a new cadence of carrying out their business for however long the COVID-19 pandemic lasts, plus how fast all industry employees can return to working regular hours.

Krone told analysts that 97 percent of Leidos employees are “back at work on regular hours” with another 1.5 percent “at a reduced standing.” Any costs of keeping the latter group in a so-called “ready state” would fall under CARES Act Section 3610 reimbursements. Krone characterized the remaining 1.5 percent of workers as “kind of miscellaneous.”

“There's some things around 3610 that maybe more important for some of the bigger aerospace primes, relative to factories and things, but that doesn't affect many of our programs because of the nature of our work, which is really, people come into work (and) they're writing software and doing mission and things like that,” Krone said.

Industry trade associations representing companies in the government market of all shapes and sizes are continuing to advocate for both a continuation of and dedicated funding mechanism for that provision.

There was still some impact from COVID-19 on Leidos during the third quarter to the tune of $109 million in revenue and $23 million in operating income, though a sharp contrast from the $223 million sales and $78 million profit hits from the second quarter.

Item number two is more unique to Leidos -- the outcome of three particular protests of $9.3 billion in awards the company cannot add to its backlog quite yet until resolution.

Oral arguments at the Court of Federal Claims are scheduled for Nov. 13 regarding the potential $7.7 billion Navy NGEN network services contract that incumbent Perspecta is fighting to at least get a second chance at keeping. A ruling then follows one way or another on the judge’s timing.

Two other protest situations are in the Government Accountability Office’s forum for now. GAO is due on Jan. 27 to decide on a protest by Logistics Health Inc. over the win by Leidos’ QTC Medical Services subsidiary of a $900 million Army medical services contract in March.

Protest number three Leidos is awaiting a GAO ruling on sometime before this year ends is another $600 million-to-$650 million Army contract for special operations support.

Favorable outcomes on all three mean growth to its already company-record backlog of $31.7 billion backlog and eventually the book-to-bill ratio, which is 1.5 times on a trailing 12-month basis.

Item number three of course is how Leidos positioned itself and shifts if a change in administration and hence federal government priorities would take place.

“If you’re in support of legacy programs within the (Defense Department), that’s probably not a great place to be. You want to be in the emerging technologies, I think, regardless of who gets elected,” Krone said.

Whomever gets elected will also have economic recovery front of mind as well, according to Krone.

“Either administration is going to look for another CARES relief Act. I think the tax increase which is reported in a Biden administration will be delayed, because the last thing they want to do is tamp down economic growth,” 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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