Shooting for the moon
Leidos enters 2021 fueled by big contracts, acquisitions
Heading into 2020, plenty of signs pointed to sunny skies ahead for Leidos Holdings Inc.
A few years earlier, the Reston-based science, engineering and technology company had become an IT behemoth. It doubled in size after its 2016 acquisition of Lockheed Martin Corp.’s Information Systems & Global Solutions business segment.
And Leidos continued that trend of growth and acquisition with its $1.65 billion, all-cash acquisition of Dynetics Inc. in January 2020. The move expanded its reach in research and national security solutions, including the aerospace sector. Just days later, Leidos announced it would acquire the security detection and automation businesses of L3Harris Technologies for $1 billion in another all-cash transaction.
The acquisition announcements followed a banner year for the publicly traded company (LDOS on the New York Stock Exchange), which won a $1 billion, 15-year flight services contract from the Federal Aviation Administration in December 2019.
The company was prepping for a March 2020 move into its new, 276,000- square-foot, 17-story headquarters building at Reston Town Center.
And capping off the good news, Leidos reported that its fiscal 2019 earnings of $11.9 billion were up 8.8% from the previous year.
“I am confident that we are growing the company with the right talent, the right capabilities and the right strategy to continue to drive value for our customers, employees and shareholders,” Leidos Chairman and CEO Roger Krone said in a February 2020 statement.
The company’s 2020 outlook projected yearly revenue growing to $12.6 billion to $13 billion.
Then 24 days after Krone’s statement was issued, President Donald Trump declared a national emergency in response to the novel coronavirus that causes COVID-19.
But this isn’t the story you might be expecting. It isn’t one of the many tales about the pandemic stunting a company’s growth or dashing its projections.
Yes, Leidos had adjustments to make and new kinds of business to explore. And maybe all those square feet in its new headquarters weren’t teeming with employees.
Despite the international disruptions and economic upheavals of the last year, Leidos has emerged a year later with muscles to flex. With 38,000 employees worldwide, it is one of Virginia’s biggest companies and most powerful defense contractors. Leidos ranked No. 289 on the 2020 Fortune 500 list and continues to win contracts, make hires and plan new growth. The company made yet another major acquisition in early 2021: 1901 Group LLC.
In a November 2020 report citing Leidos’ competitive advantages and big contract wins, analysts with Stifel Financial Corp. evaluated the company’s fundamental outlook over the next 12 to 24 months as “similar-to/better-than it was in 2019.”
Not everyone has such a sunny take on Leidos. New York-based investment firm Spruce Point Capital Management LLC released a scathing Feb. 16 report about Leidos, alleging potential mismanagement and concerns about its security products. Issuing a “strong sell” opinion, Spruce Point called for the termination of Krone and other top Leidos managers. It also said that Leidos “wasted $1 billion” acquiring L3Harris’ airport security business in January 2020, given the devastating impact that the pandemic has had on air travel. Leidos did not respond to requests for a response to the report.
Speaking at the virtual Cowen Aerospace/Defense & Industrials Conference on Feb. 11, Krone said in mid-February that the company would continue chasing mergers and acquisitions, with an eye on competing for large federal IT contracts. “For us,” he said, “now is not a time to become risk-adverse.”
While some of its federal contracting business was deemed essential and thus was exempt from pandemic concerns, another reason Leidos has held its own may be its wide reach and depth of talent. When it was renamed in 2013, the name Leidos was derived from the word “kaleidoscope.” It was intended, the company says, “to express its ability to solve difficult problems by applying different perspectives and unlocking new insight.”
Leidos offers a market focus based on brainpower rather than a specific product, says defense analyst Loren Thompson, chief operating officer of the Lexington Institute. The company’s size, diverse customers and range of technological solutions reduce risks, he says.
That scale gives it a competitive advantage in how it can invest and bid on work, says Joseph W. DeNardi, managing director at Stifel Financial Corp. “The way that I think about Leidos in terms of what makes them different,” he says, “is that they’ve had tremendous success capturing business that previously was done by some of their competitors.”
Leidos organizes its business into five groups: defense, civil, intelligence, health and an aerospace division, Huntsville, Alabama-based Dynetics. Leidos’ financial reports refine these groups to three: defense solutions, which accounted for about half of its revenue in 2019; civil, which brought in about a third; and health, which earned about 20%.
“Leidos is well on its way to becoming the most important service provider to the federal government,” Thompson says. “Everywhere you look, you find them.” But because much of its work is in the background, in high-end technical services and systems integration, he adds, “it’s almost invisible.”
The company provides data analytics, defense logistics and hardware and software integration. Jobs can involve the digital modernization of health care records, tracking how passengers proceed through an airport, helping manage the Strategic National Stockpile or working on designs for NASA’s next lunar mission.
“Unlike the big defense hardware companies,” Thompson says, “I think Leidos is further down the road in being a true information-age enterprise.”
Thompson attributes that strategy to its CEO.
Krone graduated from Georgia Tech with a bachelor’s degree in aerospace engineering in 1978. He headed for another large Reston-based defense contractor, General Dynamics Corp., where he worked in program management, engineering and finance for 14 years.
During that time, he earned his master’s degree in aerospace engineering from the University of Texas at Arlington and his MBA from Harvard. (In February, Krone was elected to the National Academy of Engineering, one of the profession’s highest honors.)
A pilot, Krone went on to serve as vice president and treasurer for McDonnell Douglas. He was there during its 1997 acquisition by The Boeing Co. and served as Boeing’s president of Network & Space Systems from 1997 to 2014.
Leidos hired him as its CEO in July 2014.
“Roger is an understated, engaging person who had a different idea of how to organize a 21st-century federal contractor,” Thompson says. “He figured out that the internet and other new technologies had made a different kind of enterprise possible. And that’s what he is transforming Leidos into.”
Krone sees Leidos’ people as its primary company asset, Thompson says, and prefers that the business be viewed not as a business of services, but of solutions and missions: “His main idea is that there are competencies that span seemingly different fields, and that it is possible to achieve critical mass while having a role in many different markets.”
As the pandemic dominated 2020, Leidos looked at its $2 billion health group with a fresh perspective. In August 2020, the company promoted Elizabeth “Liz” Porter, its acting health group president since March, to fill the position permanently.
Porter, whose main background is in IT, logistics and engineering, says it’s been an exciting time to apply technology to the life sciences.
“It just was so fascinating,” she says, “and at a time when we knew we could help with the pandemic, [it] kind of made it easy to learn.”
A graduate of Villanova University, Porter has family members connected to the health care space. Her grandfather was a dentist, her father worked for Merck & Co., and her younger sister is a speech language pathologist.
Porter oversees more than 7,500 employees in Leidos’ health group — with plans to add 2,000-plus hires in the works, she says. During the pandemic, Porter continued to go into the Reston office, though most of her employees had shifted to teleworking.
The business world’s new reliance on remote working has opened some eyes to the possibilities of telemedicine in the health space, she says. Citing virtual care solutions and other ways technology helps people interact with the health system, she says, the pandemic situation “actually has sped up some of the capabilities where technology will be able to be applied.”
One example of innovation is how Leidos helps the U.S. Department of Veterans Affairs perform disability exams, she says. Typically, hearing exams are conducted in an enclosed room. But now a Bose headset can be sent to a patient to allow auditory tests to be performed remotely.
This year will see a continuation of those kinds of innovations, Porter says, as well as “expansion on some … capabilities.”
Leidos also serves as a partner in the rollout of the Department of Defense’s Defense Healthcare Management Systems Modernization program, which is digitizing federal health records. In November 2020, Leidos won an $82 million contract from the Naval Medical Logistics Command to study warfighter performance and operational medicine. Other large contracts are on the horizon for this year.
Porter’s charge is to merge managed services and modernization to be more of a “health care solution provider,” she says. “The company looks to us to expand in that health space in a very structured way.”
Among other areas, the company’s medical exam business saw some negative financial impact when clinics had to temporarily close during the early stages of the pandemic. In the third-quarter conference call, Leidos Chief Financial Officer James Reagan told investors the company was able “to both reopen and ramp the medical exam business back to pre-COVID levels faster than previously forecasted.” In October 2020, analysts with JPMorgan Chase & Co. said that Leidos’ health group appeared “to have recovered almost fully,” allaying concerns it previously had with the segment.
And in February, Leidos Health Group snagged a $2 billion contract to provide nonmedical counseling to military service members and their families through the Department of Defense’s Military and Family Life Counseling (MFLC) program.
It’s one of several recent successes for Leidos, including landing what DeNardi refers to as one of its “elephants,” the U.S. Navy’s $7.7 billion Next Generation Enterprise Network Re-Compete Service Management, Integration and Transport (NGEN-R SMIT) contract. The IT services contract “was one of the largest awarded in the past couple of years,” he says. Leidos prevailed over a legal challenge from Chantilly-based competitor Perspecta Inc. to secure the contract in December 2020.
In January, Leidos announced its $215 million, all-cash acquisition of 1901 Group, a growing Reston-based IT company founded in 2009. Leidos says the new subsidiary will bulk up its technical talent, adding 400 “IT, cloud and cyber specialists.”
And Leidos isn’t stopping there. The company is literally shooting for the moon, with its Dynetics division competing against Blue Origin and SpaceX to build the human lunar lander for NASA’s Artemis moonshot program.
Like many companies, Leidos faced challenges in fiscal 2020, but its trajectory appears to be trending upward. Overall, Leidos’ third-quarter fiscal 2020 revenue, reported in November 2020, was up 14.4% from the previous year.
“Adjusting for acquisitions and divestiture activity,” Krone said during the quarterly conference call, “organic revenue grew by almost 2%, demonstrating the declining effects of COVID-19 as our teams diligently executed their recovery plans. For the quarter, COVID-19 impacts to the overall business were approximately $109 million in revenue and $23 million in operating income, representing a significant decline from the prior quarter’s impact of $223 million and $78 million, respectively.”
Leidos was scheduled to announce its fiscal 2020 annual revenue in late February, after press time for the issue. In November 2020, the company was predicting its 2020 annual revenue would come in between $12.3 billion and $12.5 billion, about $500 million less than projected before the pandemic but still an increase of 4% to 6% over 2019 revenues.
Before the COVID-19 pandemic, DiNardi says, Leidos stock was considered “one of the highest-quality assets in the industry.” As the pandemic subsides, he says, he’s optimistic that that Leidos will emerge as “the fastest-growing government services company in the industry.”