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    Leidos Holdings Inc (LDOS)

    Business Description

    Leidos Holdings, Inc. is a Fortune 500 company that specializes in providing innovative technology solutions to address complex issues in the national security and health sectors . With a global workforce of approximately 47,000 to 48,000 employees, Leidos serves a diverse range of customers, including U.S. government agencies such as the Department of Defense, the U.S. Intelligence Community, and NASA, as well as foreign governments and commercial businesses . The company is organized into four reportable segments, focusing on capabilities like digital modernization, cyber operations, and mission software systems .

    1. Defense Systems - Provides advanced systems and services for national security, focusing on mission software systems and integrated systems .
    2. Health & Civil - Delivers healthcare solutions for federal and commercial customers, emphasizing infrastructure modernization and security .
    3. National Security & Digital - Focuses on digital modernization and cyber operations, serving U.S. government agencies and enhancing mission operations .
    4. Commercial & International - Offers IT modernization and security solutions to international customers, including government agencies in the UK and Australia .

    Q2 2024 Summary

    Initial Price$93.15April 4, 2023
    Final Price$88.42July 4, 2023
    Price Change$-4.73
    % Change-5.08%

    What went well

    • Strong Financial Performance and Margin Improvement: LDOS reported a record adjusted EBITDA margin of 13.5% in Q2 2024, with adjusted EBITDA up 33% year-over-year . The Health and Civil segment's non-GAAP operating income margin increased to 24.9%, up from 14% a year ago, driven by higher volumes in managed health services and incentive fee awards . The Defense Systems segment achieved double-digit profitability, marking a significant improvement and signaling future growth potential .
    • Robust Pipeline and Growth Opportunities: The company has a pipeline of nearly $70 billion in the next 12 months and a qualified pipeline approaching $200 billion, positioning it well for future contract awards . LDOS has submitted $15 billion in bids and has $26 billion awaiting customer decisions , indicating strong future revenue opportunities.
    • Strategic Focus on Technological Innovation and Talent Acquisition: LDOS is investing in areas like trusted mission AI, cybersecurity, and quantum technologies to drive future growth . The company is enhancing its business capture performance by hiring dozens of key account managers and frontline growth leaders with deep mission and customer expertise, improving its ability to win new business .

    What went wrong

    • Leidos faced significant write-downs of $39 million in their U.K. business, primarily on two fixed-price mission software development programs due to changing requirements and schedule slippages, suppressing non-GAAP operating income margin in their Commercial and International segment to 0.7% in the quarter.
    • The National Security and Digital segment grew revenues by only 1% year-over-year, and the company anticipates lower margins in the second half, indicating ongoing challenges in accelerating growth and maintaining profitability in this core segment.
    • The company acknowledges that certain parts of their portfolio will not receive differential investment and may not contribute significantly to growth, suggesting potential stagnation or underperformance in those areas.

    Q&A Summary

    1. VBA Exam Business Outlook
      Q: Will health margins decline next year due to VBA contract?
      A: Management is uncertain about margins for the medical exam business next year because they are awaiting the RFP for the VBA contract recompete. While an extension is possible, they do not expect a decrease in profitability and are preparing for various scenarios.

    2. Portfolio Strategy
      Q: Update on portfolio pruning initiatives?
      A: Management is halfway through building their business strategy and focuses on doubling down on core strengths rather than portfolio pruning. They are investing in areas for future growth but currently see no parts of the business that don't belong in Leidos.

    3. National Security Segment Margins
      Q: What's causing lower margins in national security in H2?
      A: Margins were strong in the first half, but management expects them to normalize due to milestone timing and special project work. They emphasize there's no fundamental issue and see upside over time through investments in repeatable models.

    4. Upcoming Recompetes and Pipeline
      Q: Any significant recompetes or new business to watch?
      A: Upcoming recompetes include the VBA exam business, hypersonics contracts, TSA logistics support, and the DHMSM contract in 2025. The pipeline is strong with $26 billion awaiting decisions and nearly $70 billion expected in the next 12 months.

    5. Commercial & International Write-down
      Q: Explain the C&I write-down and margin outlook?
      A: The C&I segment had a write-down due to two fixed-price contracts in the UK affected by changing requirements and schedule slippage. Management is confident in the second-half outlook and highlights strong performance in the commercial energy business.

    6. Book-to-Bill Expectations
      Q: Should we expect book-to-bill to pick up in H2?
      A: Management is committed to a book-to-bill ratio slightly above 1 for 2024, with potential to exceed it depending on contract wins. They emphasize focusing on building quality backlog over time.

    7. Share Buybacks and Capital Return
      Q: Any changes to capital return plans or buyback size?
      A: Management is committed to repurchasing $500 million of shares this year and may revisit the amount depending on cash flow. They emphasize prudent capital allocation in a shareholder-friendly manner.

    8. Cash Flow Outlook
      Q: Any factors affecting cash flow in H2?
      A: Management doesn't foresee major uses of working capital and expects strong performance in Q3 and Q4, which are usually the strongest cash quarters. They remain focused on converting earnings into cash.

    9. Margin Guidance Explanation
      Q: Why will margins be lower in H2 versus H1?
      A: The first half benefited from higher margins, including two quarters' worth of incentives recognized in Q2. Management expects margins to normalize due to anticipated lower activity levels in the VBA exam business and continued investments.

    10. Counter-UAS Business
      Q: Thoughts on the counter-UAS business strategy?
      A: Management is evaluating their capabilities in counter-UAS, including technologies in Dynetics and the Leidos Innovation Center. They are exploring investments to help customers address this challenge.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Thomas A. BellChief Executive OfficerMay 3, 2023Thomas A. Bell serves as the CEO of Leidos. He joined Leidos in this role on May 3, 2023. Previously, he held leadership positions at Rolls-Royce and Boeing, with a career spanning over four decades in aerospace and defense .
    Christopher R. CageExecutive Vice President and Chief Financial OfficerJuly 2021Christopher R. Cage has been the CFO of Leidos since July 2021. He has been with Leidos for 25 years, holding various roles including Senior Vice President, Chief Accounting Officer, and Corporate Controller .
    Carly E. KimballExecutive Vice President, Chief Performance OfficerJanuary 2024Carly E. Kimball has served as the Chief Performance Officer since January 2024. She was previously the Senior Vice President, Chief Accounting Officer, and Corporate Controller .
    Gerard A. FasanoExecutive Vice President, Chief Growth OfficerJanuary 2024Gerard A. Fasano has been the Chief Growth Officer since January 2024. He was previously President of the Defense Group and has a long history with Leidos .
    Jerald S. Howe, Jr.Executive Vice President and General CounselJuly 2017Jerald S. Howe, Jr. has been the General Counsel since July 2017 and became Corporate Secretary in September 2023. He was previously a partner at Fried, Frank, Harris, Shriver & Jacobson LLP .
    Steve CookPresident for Leidos DyneticsApril 2022Steve Cook has been President for Leidos Dynetics since April 2022. He joined Dynetics in 2009 and has held various roles, including at NASA .
    Elizabeth M. PorterPresident for the Health and Civil SectorJanuary 2024Elizabeth M. Porter has served as President for the Health and Civil Sector since January 2024. She was previously President for the Health Group .
    Roy StevensPresident for the National Security SectorJanuary 2024Roy Stevens has been President for the National Security Sector since January 2024. He was previously President for the Intelligence Group .
    Thomas C. SanglierSenior Vice President and Chief Audit ExecutiveJuly 2022Thomas C. Sanglier has been the Chief Audit Executive since July 2022. He was previously Senior Director of Internal Audit at Raytheon Technologies .
    Maureen WaterstonChief Human Resources OfficerMarch 2022Maureen Waterston has been the Chief Human Resources Officer since March 2022. She previously held similar roles at Pratt & Whitney and United Technologies .
    James F. CarliniChief Technology OfficerJune 2019James F. Carlini has been the CTO since June 2019. He founded a national security consultancy and worked at Northrop Grumman and DARPA .
    M. Victoria SchmanskePresident of the Commercial and International SectorJanuary 2024M. Victoria Schmanske has served as President of the Commercial and International Sector since January 2024. She was previously Executive Vice President of Leidos Corporate Operations .
    Cindy GruensfelderPresident of the Defense System SectorJanuary 2024Cindy Gruensfelder has been President of the Defense System Sector since January 2024. She has extensive experience in the Aerospace and Defense industry, having worked at Boeing .
    Steve HullPresident for the Digital Modernization SectorJanuary 2024Steve Hull has served as President for the Digital Modernization Sector since January 2024. He was previously Executive Vice President and Operations Manager for Enterprise and Cyber Solutions .
    Tina JonasDirector, Member of Audit and Finance CommitteeSeptember 25, 2024Tina Jonas was appointed to the Board of Directors on September 25, 2024. She has extensive expertise in military, defense, and aerospace issues, with a career in the federal government and executive positions in the aerospace and defense industry .

    Questions to Ask Management

    1. With the upcoming recompete of the VA medical exam contract and uncertainty around future RFPs, how are you preparing to mitigate potential impacts on margins and profitability in your healthcare segment?

    2. You've mentioned a war for talent in hiring account managers and solution architects; what specific challenges have you faced in attracting and retaining top talent, and how might this impact your ability to enhance business capture performance?

    3. Despite earlier discussions on portfolio pruning, it appears no part of the business has been identified for divestiture; can you clarify your strategy on portfolio optimization and how you plan to address underperforming assets?

    4. With $26 billion in bids awaiting adjudication and a target book-to-bill ratio slightly above 1, what risks do you foresee in achieving your growth targets, and how confident are you in converting your pipeline into actual wins?

    5. Given the evolving DoD strategies around counter-UAS and your upcoming classified briefing, how is Leidos positioning itself to capitalize on this market, and do you have the necessary technologies to meet emerging needs?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateFebruary 2022
    End Date/DurationNot explicitly stated; may be suspended or discontinued at any time
    Total additional amount20 million shares
    Remaining authorization amount9,819,502 shares as of September 27, 2024
    DetailsShares may be repurchased in open market or privately negotiated transactions, including accelerated share repurchase transactions. The program's timing, number, and value of shares repurchased depend on market price, conditions, legal requirements, and compliance with outstanding indebtedness.

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Accenture Federal Systems
    • Amentum Services Inc.
    • BAE Systems
    • Booz Allen Hamilton Inc.
    • CACI International Inc.
    • General Dynamics Corporation
    • IBM
    • Jacobs Engineering Group Inc.
    • KBR Inc.
    • L3Harris
    • Lockheed Martin Corporation
    • ManTech
    • Northrop Grumman Corporation
    • Peraton
    • Raytheon Technologies Corporation
    • SAIC

    These companies span across sectors that include engineering and technical services divisions of large defense contractors, diversified U.S. and international IT providers, and contractors focused solely on technical services, supply chain management, other logistics services, major systems operations and maintenance, homeland security, and health solutions .