Leidos CEO quantifies the risks they and others face

Leidos’ chief executive was one of a few who told investors at a virtual conference last week of the factors they see causing an overall slowdown in the government contracting ecosystem.

Now the government services market’s largest company is putting some numbers and more details on how they see stagnation affecting its overall outlook, particularly in the first quarter of 2022 with the COVID-19 pandemic still front-and-center amid the government under a continuing resolution.

During Leidos’ earnings call Tuesday, CEO Roger Krone called the first quarter one with “a lot of risk that needs to be retired, which is why we are where we are.”

Just where is Reston, Virginia-headquartered Leidos? Most likely the same place a lot of other companies said last week: Waiting on everything from appropriations, solicitations, awards and unlocked funding on contracted work.

That is reflected in Leidos’ initial revenue forecast for this year at $13.9 billion-to-$14.3 billion, which indicates organic growth of between 1 and 4 percent. Leidos ended 2021 with $13.7 billion in sales, which was 12-percent total growth and 9 percent of it organic when excluding acquired revenue.

Fourth quarter revenue of $3.4 billion was 7-percent higher over the prior year period with 6 percent organic growth.

So Leidos is still on a growth path, and reported to investors it has hit or exceeded all of its 2019 Investor Day financial targets as the company works on the goals laid out at the 2021 Investor Day.

But Wall Street analysts had modeled $14.38 billion as their revenue expectation for 2022, so that fed into questions about what Leidos sees shaping this year and why.

For one, Krone said Leidos is tracking almost $4 billion in protested awards including this $2.5 billion NASA IT contract that the company received a favorable ruling on within the past week.

Disappointed incumbent Science Applications International Corp. can still take its protest to court though, so Leidos is not yet ready to include that networking infrastructure job in the backlog yet.

Leidos is wearing the hat of protestor for a $4.5 billion cloud services contract with the National Geospatial-Intelligence Agency. A ruling is slated for April.

Civil seems to be the area where Leidos saw the most pronounced delays in the procurement cycle. Leidos is also waiting on the Federal Aviation Administration to award the $3.5 billion recompete of the agency's main telecommunications contract currently held by L3Harris Technologies.

What was once an anticipated award late last year or early this year “now looks like it’s a third quarter” event, Krone said.

“These programs are still going to happen,” Krone said. "The customer just has to get them through the acquisition cycle and they've got to get awarded and then we've got to sort our way through the protest period.”

The same thinking applies to the $12 billion Defense Enclave Services competition, from which the winner will win the position of being lead IT systems integrator for the Defense Department’s “Fourth Estate” agencies outside of the service branches. An award could come in the first quarter event or perhaps not.

One program Leidos has in the portfolio is in the midst of its own delay. The Defense Health Agency is not yet ready to transition the Reserve Health Readiness Program to Leidos. The shift was supposed to happen in January but is now expected in September.

One thing that would make the business environment clearer for Leidos and others is a signed appropriations bill.

“We need to get an omnibus, we need to get some of these programs awarded, as we can release that risk, then we can rebalance where we are throughout the year,” Krone said. “We just want to be in a position where we've got a good range, and we can work away up in the range as these risk items get released.”

Leidos did end 2021 with a backlog of $34.5 billion, or around 2.5 times this year’s expected revenue. 

More frequently an acquirer, this time Leidos’ news on the transaction front is as a seller of a business the company sees as not in the core and potentially conflicting with other work.

Krone said that within its Dynetics subsidiary, Leidos divested the unit known as Aviation & Missile Solutions LLC so the company could better focus on “leading-edge and technologically advanced services, solutions and products that are more in our sweet spot.”

The AMS business was acquired by a group of as-yet unidentified private investors, a Leidos spokesman told WT. AMS will operate as a small business and centers around systems engineering and technical assistance work.

AMS became a subsidiary of Dynetics in late 2016 after being divested by then-owner Camber Corp., which had just been acquired by Huntington Ingalls Industries.