Leidos [LDOS] in 2024 will reorganize into five operating sectors to improve operations and unlock top and bottom-line growth opportunities and the company will also upgrade and add to its leadership team to better focus research and development, improve quality, and better understand customer needs, Tom Bell, the company’s CEO, said on Tuesday.
The forthcoming restructuring is part of the a new “strategic sharpening” under Bell’s Leidos Next initiative that Bell began to publicly sketch in August.
“The goal of Leidos Next is to create a company with a much clearer and even more inspiring vision, our new North Star,” Bell said Oct. 31 during the company’s third quarter earnings call. “We want to become the best company in the world at solving a core set of problems for our customers. And the best employer in the world, hiring and retaining the most talented people.”
The new five sector alignment will speed decision-making, better focus the company around its technology discriminators, and lead to the right growth strategies for each business, all enabling Leidos Next, he said.
The five sector alignment consists of: Health and Civil, which will consolidate the company’s work in public health and healthcare coordination, life and environmental sciences, and transportation; National Security, which brings together services and mission software in cyber, logistics, security operations, and decision analytics for defense and intelligence community customers; Commercial and International will focus on security and detection solutions and products, energy, and businesses in Australia and the United Kingdom; Digital Modernization will allow Leidos to scale, speed and create repeatable solutions in information technology and digital transformation efforts; and Defense Systems incorporates the Dynetics business unit and legacy defense businesses for space, aerial, surface and subsurface manned and unmanned systems. Leidos is adding technical and financial expertise to Dynetics, Bell said.
“By streamlining the organization and encouraging the decision-making at the appropriate levels, we’ll be more efficient and responsive to market changes and customer needs,” he said.
The heads of each sector will be announced later this week. Currently, Leidos consists of three operating segments, Defense Solutions, Civil, and Health.
Bell is adding two new positions to the corporate leadership team, a chief performance officer and a chief growth officer, and adding to the responsibilities of his chief technology officer (CTO). The Leidos Innovation Center will now report to the CTO, which Bell said boosts “technology innovation and development and making a profound organization-wide commitment to discovering, developing, and deploying market differentiating technology golden bolts.”
During the second quarter earnings call in August, Bell said that Leidos’ golden bolts include artificial intelligence, secure software, cybersecurity, and signal processing.
The chief performance officer will lead program execution, and manage the supply chain, internal information technology, and real estate portfolio to “drive cost efficiencies,” he said.
The chief growth officer leads business development, marketing, communications, and government relations to “rejuvenate our customer-centric business approach,” he said.
Business development is now tuned clearly to opportunities that are more clearly aimed at top and bottom-line growth, Bell said.
Bell joined Leidos in May, taking over for Roger Krone who retired.
During the third quarter, Leidos focused its capital spending on reducing debt, achieving its target, Bell said. Given that acquisitions are not a near-term priority, he said the company approved a 6 percent increase in its shareholder dividend and that share repurchases will be a priority in the near-future for spending excess cash.
Leidos swung to a loss in its third quarter due to $699 million in charges, mostly in the security detection business, stemming from impairments. Bell said the company reduced costs in the business by right-sizing operations, halting sales of an unprofitable product line, and exiting “higher risk, lower return geographies.”
Sales and margin were higher at the security business and orders were strong but the post-COVID rebound is progressing slower than expected and customers and delaying equipment replacements, Bell said. He cited the low spending plans by the U.S. Transportation Security Administration for checkpoint computed tomography scanners as one example of a customer delaying equipment recapitalizations.
Overall, in the quarter, sales increased 9 percent to a record $3.9 billion from $3.6 billion a year ago, driven by gains in the Health segment followed by Defense and Civil. Leidos reported a loss of $396 million, $2.91 earnings per share, versus net income of $164 million ($1.59 EPS) a year ago. Excluding the impairment and other non-recurring charges, adjusted earnings of $2.03 EPS smashed consensus estimates of $1.67 per share.
Given results ahead of the company’s own plans so far this year, Leidos raised its sales guidance to between $15.1 billion and $15.3 billion from the prior range of $14.9 billion to $15.2 billion. Adjusted earnings are forecast to be $6.80 to $7.10 EPS versus the previous outlook of $6.40 to $6.80 EPS. Cash flow is expected to be at least $850 million, $150 million above prior guidance.
The forecast assumes a potential 45-day government shutdown beginning in mid-November that would drive annual results to the low-end of the guidance range, Chris Cage, the company’s chief financial officer, said during the call. A short shutdown could lop $100 million off the top-line and $10 million to $15 million from operating income, Leidos officials said.
Orders in the quarter were a record $7.9 billion, driving backlog to a record $38 billion, up 11 percent from $35 billion a year ago. Free cash flow was $745 million.