Leidos resets both security product outlook and company structure

Leidos is still not ready to share every single detail of what its new North Star vision is, even as its new chief executive leads the work to put in place everything that will shape said vision.

One of Tom Bell's main tasks since he joined Leidos as CEO in May has been to analyze the overall structure of the company. That includes improving performances of Leidos' many acquired businesses under expectations and assumptions.

In Leidos' third quarter financial release, Leidos disclosed it is taking a non-cash pretax impairment and restructuring charge of $688 million on the security screening product business. That unit includes the security detection and automation business Leidos acquired in early 2020 from L3Harris Technologies.

Leidos is essentially telling investors that with the writedown, the business it calls Security Enterprise Solutions now has a much lower value than the amount carried on the balance sheet.

Bell told analysts the SES leadership team is working through moves to "right-size the business for the future" that involve exiting certain geographic regions and one unprofitable product line.

During his opening remarks, Bell provided the overall dynamics that Leidos is adjusting to with respect to the business that makes security equipment for airports and other key entry points:

"The market has changed since the SD&A acquisition and won't return to pre-pandemic levels as fast as previously expected. As a proof point, the TSA (Transportation Security Administration) administrator testified to Congress recently that the rollout of CT at the checkpoint would not be completed until 2042 at current funding levels. Broadly, customers are delaying recapitalization decisions and holding on to existing machines longer."

On the other hand, customers in the government and highly regulated verticals will always be concerned about security at ports of entry and critical infrastructure sites. Bell said the way Leidos sees things, "security concerns will be just as, if not more, pervasive going forward."

It's just a matter of changing customer buying behaviors that is leading Leidos to make adjustments even with its outlook of being "bullish about the prospects" of the SES business, as Bell characterized it. Investments in future products are happening and Leidos even displayed two new offerings at a major trade show in Europe, Bell said.

Reston, Virginia-headquartered Leidos' bigger picture for this new era will also involve a move to this new five-segment structure as of Jan. 1, 2024: health and civil, national security, defense systems, commercial and international, and digital modernization.

Putting digital modernization under one umbrella is intended to bring together all Leidos does in the realm of IT and spreading that across its customer base, Bell said.

"Frankly: it's not a reorganization, it's simply a realignment of the existing Leidos business in a post-pandemic, fresh look at the organization for efficiency and effectiveness and that's really the main goal," Bell said before further presenting it in the form of questions:

"How do we increase repeatability, increase our prowess going to the markets? How do we satisfy customers with better products across customers, where they tended to be siloed in the last organizational construct we had?"

Any change to the overall company construct leads to more changes in its leadership structure, which will happen at Leidos.

Bell said announcements are forthcoming on a new chief growth officer and chief performance officer for the company, plus who the segment presidents will be. But he did provide details regarding added responsibilities for the chief technology role currently held by Jim Carlini.

The responsibilities of Leidos' CTO will now also include its Innovation Center dubbed LINC, a move Bell said intends to emphasize an "organization-wide commitment to discovering, developing and deploying market-differentiating technology, golden bolts."

The chief growth officer position encompasses Leidos' strategy, business development, marketing, communications and government relations functions. The chief performance officer will focus on program execution, supply chain management, internal IT resources and real estate.

Third quarter revenue of $3.9 billion was 8.7% higher than the prior year period, while the organic growth rate was 8% after excluding acquired sales. Profit of $451 million showed a 21% year-over-year increase in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization.

Leidos nudged up its full-year financial outlook to new ranges of $15.1 billion-to-$15.3 billion in revenue and an adjusted EBITDA margin of 10.5%-to-$10.7%, up from the prior respective outlooks of $14.9 billion-to-$15.2 billion and 10.1%-to-10.5%.

One other interesting tidbit emerged out of the Tuesday call: longtime incumbent General Dynamics has evidently decided not to protest the Army's choice of Leidos in September for the potential 10-year, $7.9 billion Common Hardware Systems-6 contract.

Leidos and the Army took 19 days to complete the transition to this new iteration of the service branch's "one-stop shop" for acquiring commercial IT products and services.

"Through technology, we'll be streamlining and optimizing complex supply chains and transforming logistics to be a resilient to supply chain disruptions and cyber risks," Bell said of the program.

(EDITOR'S NOTE: This article has been updated to clarify the nature of Leidos' segment realignment)