A day after closing its $1 billion acquisition for the security detection and automation businesses of L3Harris Technologies [LHX], Leidos [LDOS] Chief Roger Krone said the business case for the deal remains strong and the outlook even brighter despite the crippling blow the air transport industry is suffering from the coronavirus pandemic.
Airport and airline customers now want a “touchless” experience at airport security checkpoints, Krone said during the company’s first quarter earnings call on Tuesday.
From the time Leidos agreed in early February to acquire the L3Harris business units until completing the purchase on May 4, the company met with its legacy customers in these areas and its incoming customers to learn their “capital spending plans and views on technology,” Krone said.
“If you were to take a word out of what we have heard, the word ‘touchless’ is what we’re hearing from customers about the transit of passengers through security checkpoints and every customer we have talked to has said ‘We have been doing this in a highly personal, highly contacted environment and going forward we don’t want to put,’ for instance in the U.S., ‘our TSA agents at risk and we don’t want to contact the traveling public,” Krone said.
“World events have only made us more excited” about the acquisition, he said.
Customers “across the board” want new technologies such as computed tomography (CT) scanners at checkpoints for carry-on luggage, biometrics, temperature screening, and even ways to automatically cleanse the bins that travelers place some of their personal items in before going through an inspection system, Krone said.
He said TSA agents aren’t going to want to touch driver’s licenses, which means finding a different way to verify someone’s identity, and agents aren’t going to want to do pat down searches, which puts a premium on more effective primary screening, hence more urgent demand for checkpoint CT.
“I think this is going to spawn a recapitalization of checkpoints,” he said. “We were talking to one customer that said, ‘Can we put ultraviolet lights in the tray return conveyor so that we could sanitize the tray as it comes back around and is presented to the next traveler?’ All of that is capital investments.”
In the security detection space, Leidos already has strong positions providing products worldwide for scanning vehicles and cargos at ports and borders. The company also has CT systems used at smaller airports to automatically scan checked baggage for explosives.
The L3Harris security detection and automation businesses give Leidos a slew of new aviation and critical infrastructure security products, including body scanners used at airport checkpoints worldwide, CT systems for screening checked bags at large and medium-sized airports, new checkpoint CT systems that the U.S. Transportation Security Administration and airport authorities elsewhere want to purchase, explosive trace detection systems used at checkpoints and in checked baggage screening, and Automated Screening Lanes for use at checkpoints and that feature automated tray return systems, mechanized rollers, multiple divestment stations, automated divert systems for suspect bags, and the ability to collect more data about travelers and their bags to help create a more comprehensive security profile of individuals.
As aviation security authorities roll out checkpoint CT systems, which offer operators three dimensional views of a bag’s contents, travelers increasingly don’t have to remove their personal electronics and laptops from their carry-on bags, and the technology eventually is expected to allow passengers to leave their liquids in their bags as well. Just as with checked bags, the CT systems are expected to eventually automatically screen carry-on items for threats.
Krone said that the impact of the pandemic is also accelerating demands for inspections at ports and borders, to include not just identifying individuals but “do they have a temperature, things like that.”
In addition to its legacy equipment for border security, Leidos is also a strong player in federal identity solutions arena helping key departments and agencies operate and upgrade their biometric record repositories.
Leidos expects the L3Harris businesses to contribute about $290 million in sales for the remaining eight months of this year. When Leidos announced the deal in February, it said annual sales for the businesses are around $500 million.
There “undoubtedly will be some slowdown” in security detection and automation sales this year due to COVID-19, James Reagan, Leidos’ chief financial officer, said on the earnings call. But, he said, before the pandemic the businesses were “outperforming our own projections” and the “pipeline and backlog” of business “still looks good.”