Ross Wilkers

COMPANIES

How Leidos views the health market from its perch

New CFO to start in July

The release of Leidos’ first quarter financial results on Tuesday morning coincided with Booz Allen Hamilton’s announcement that it agreed to acquire Liberty IT Solutions for $725 million and add more digital transformation services.

Pretty much all of Liberty’s work is in the Veterans Affairs Department and much of that focus is on opportunities related to health care, which Leidos touts as its highest-margin and fastest-growing area.

So what does Leidos make of the health market’s broad landscape in light of that deal and expected funding increases there? That was part of question number one to Leidos executives during their quarterly conference call with investors.

“It’s not surprising to us that others have seen the market as attractive as we have, and the interesting thing about the health market is, it's always been highly competitive,” CEO Roger Krone said to analysts on Tuesday. “Whether it's one of our competitors getting into one of our traditional businesses, it's just changing the name of the competitor.”

One point of broader context mentioned by Krone is the Biden administration’s push for more public health funding in its fiscal year 2022 budget blueprint unveiled in April.

The Centers for Disease Control and Prevention would see its discretionary spend grow by nearly one quarter to $8.7 billion in one example, while its parent agency in the Health and Human Services Department was allotted a 23.5-percent increase to $131.7 billion.

While those obviously have to work through the appropriations process, they are certainly indicators of where the administration’s priorities are and give contractors such as Leidos an early glimpse.

“That's going to attract maybe some new competitors and maybe some non-traditional competitors which in our strategic view of the market, we have always expected,” Krone said. “We believe we are successful in that market because we offer value added service to our customers, and we are sharpening our tools and getting ready for what we think will be a significant growth in the top line in the market overall.”

Health is not the only area of non-defense spending growth Leidos has in its sights even with the final figures still TBD and whatever comes out of the proposed $2 trillion infrastructure bill, which would come on top of the $6 trillion in coronavirus economic relief aid already enacted.

Krone cited as potential examples upgrades to airports and greater emphasis on research-and-development at civil agencies, not unlike what the Defense Advanced Research Projects Agency does.

Cybersecurity could also “get money in the base (budget) bill and money in the infrastructure bill,” added Krone.

Reston, Virginia-headquartered Leidos reported first quarter revenue of $3.3 billion, up 14.7 percent from the prior year period and 8.9 percent when excluding acquired sales.

The company left this year’s sales outlook at $13.7 billion-to-$14.1 billion, but nudged up its bottom line outlook to a margin of 10.5-to-10.7 percent adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

Alongside the earnings release, Leidos said Reagan will retire from the company and be succeeded as CFO on July 5 by current Chief Accounting Officer Christopher Cage.

Cage joined Leidos in 1999 and his career includes roles such as senior vice president for operations finance and CFO of a former health and engineering division. Reagan will act as an adviser to Leidos through the rest of this year.

Reagan’s six-year tenure as Leidos’ CFO included the merger with the former Lockheed Martin IT services business in 2016 followed by several other major acquisitions such as Dynetics in 2019 and the L3Harris Technologies security detection business in 2020.

This year will see Leidos integrate the 1901 Group and Gibbs & Cox, a deal that should close in the current quarter.

For context: Leidos posted $4.7 billion in revenue for 2015 and $12.3 billion in sales last year.

Here is part of how Krone spoke of Reagan during the scripted remarks:

“Jim and his team has grown the business over 160 percent, built an investment grade balance sheet and delivered significant total shareholder return.

While Jim's contributions were critical in strategic planning and M&A deal structuring for key transactions, value creation takes place in successful business transformations and building and nurturing culture and talent.

“That is where Jim made the biggest impact for our employees, our customers, and our shareholders. Thank you, Jim. However, I will save my goodbye since you'll be continuing to be an adviser through year end.”

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 connect with him on LinkedIn.

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