On November 1, 2022 Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500 science and technology leader, reported financial results for the third quarter of fiscal year 2022.
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Roger Krone, Leidos Chairman and Chief Executive Officer, commented, "Our third quarter results demonstrate the momentum in our business as we continue to report revenue growth at the upper end of our guidance across our diversified portfolio. In addition, our dedicated team delivered earnings in excess of our forecast and generated the highest quarterly cash flow from operations in our history. These results position us well to deliver on our full-year financial targets as we make the world safer, healthier and more efficient."
Revenues for the quarter were $3.61 billion, up 4% compared to the third quarter of 2021; the largest contributors were continued growth of the Navy Next Generation Enterprise Network Recompete (NGEN-R) Service Management, Integration and Transport (SMIT) contract; ramp-up of the National Aeronautics and Space Administration (NASA) Advanced Enterprise Global Information Technology Solutions (AEGIS) contract; and increased deployments on the Defense Healthcare Management System Modernization (DHMSM) program.
Net income was $164 million and diluted EPS was $1.17. Net income and diluted EPS were down 21% and 18% year-over-year, respectively. Net income and diluted EPS include a $16 million unrealized loss associated with the foreign currency forward contract entered into in order to hedge the preliminary purchase price for Cobham Aviation Services Australia ("Cobham") in Australian dollars. In addition, net interest expense increased to $50 million from $47 million in the third quarter of 2021. Weighted average diluted shares for the quarter were 138 million compared to 143 million in the prior year quarter, which benefited from the Accelerated Share Repurchase (ASR) agreement implemented in the first quarter of 2022.
Adjusted EBITDA was $372 million for the third quarter, down 8% year-over-year, and adjusted EBITDA margin decreased from 11.6% to 10.3% over the same period. Profitability in the year-ago quarter was elevated due to temporarily increased workload and decreased indirect expenses as a result of the COVID-19 pandemic as well as an elevated level of write-ups on certain contracts. Adjusted EBITDA and adjusted EBITDA margin increased $6 million and 10 basis points, respectively, compared to the second quarter of 2022. Non-GAAP net income was $221 million for the third quarter, down 15% year-over-year, and non-GAAP diluted EPS for the quarter was $1.59, down 12% year-over-year.
Cash Flow Summary
In the third quarter net cash provided by operating activities was $748 million, or 462% of net income attributable to Leidos shareholders. After adjusting for payments for property, equipment and software, free cash flow was $721 million, resulting in a free cash flow conversion ratio of 329%. In addition, Leidos used $26 million for investing activities and $217 million for financing activities.
Leidos returned $49 million to shareholders in the third quarter as part of its regular quarterly cash dividend program. As of September 30, 2022, Leidos had $807 million in cash and cash equivalents and $5.0 billion of debt.
On October 30, 2022, Leidos completed the acquisition of Cobham Special Mission, which provides airborne border surveillance and search and rescue services to the Australian Federal Government. Purchase consideration was $305 million Australian dollars, subject to working capital adjustments. At the signing of the definitive agreement, Leidos entered into a forward contract for $215 million to offset foreign currency fluctuations of the full purchase consideration. Based on the exchange rate at the close, the translated purchase price was $196 million. We realized a loss of $18 million associated with the foreign exchange forward contract.
On October 28, 2022, the Leidos Board of Directors declared a cash dividend of $0.36 per share to be paid on December 30, 2022, to stockholders of record at the close of business on December 15, 2022.
New Business Awards
Net bookings totaled $4.1 billion in the quarter, representing a book-to-bill ratio of 1.1. As a result, backlog at the end of the quarter was $35.0 billion, of which $7.4 billion was funded. Notable awards in the quarter include:
Sentinel. Leidos was awarded a prime task order by the Department of Defense to enhance technological innovation with a focus on rapid insertion of technologies across the mission spectrum for multiple services, and integrating new technology with existing and legacy systems for increased effectiveness. Leidos will support the government with rapid technology insertion to enhance Command, Control, Computers, Communications, Cyber, Intelligence, Surveillance and Reconnaissance (C5ISR) missions at a global scale. This award enables Leidos to expand its extensive C5ISR portfolio as well as deliver a critical capability towards improved warfighter support. The contract has a total value of $1.5 billion dollars and includes a one-year base period of performance with four one-year options.
U.S. Naval Sea Systems Command (NAVSEA) Medium Unmanned Undersea Vehicle (MUUV). Leidos was selected by the NAVSEA to design and build a MUUV to support intelligence preparation of the operational environment by providing submarine-based autonomous oceanographic sensing and data collection for the Navy. The MUUV will also provide surface-launched and recovered mine countermeasures. The single award, cost-plus-fixed-fee contract holds an approximate value of $358 million if all options are exercised.
Defense Information Systems Agency (DISA) Defense Enclave Services (DES) Task Order. DISA awarded Leidos a task order contract with a total estimated value of $138 million dollars with a five year period of performance. Through the DES contract, Leidos will consolidate enterprise IT services and provide standardized, responsive and cost-effective solutions for more than 370,000 users spanning 22 Department of Defense (DoD) agencies and field activities with over 500 sites both in the U.S. and abroad. This first task order will lay the framework and begin to consolidate, integrate and optimize five agencies on a common network architecture through digital modernization and transformation. The work will focus on mission value and user experience, while improving cybersecurity, network availability and reliability for Fourth Estate agencies.
Forward Guidance
For information regarding adjusted EBITDA margin and non-GAAP diluted EPS, see the related explanations and reconciliations to GAAP measures included elsewhere in this release.
Leidos does not provide a reconciliation of forward-looking adjusted EBITDA margins or non-GAAP diluted EPS to net income due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation. Because certain deductions for non-GAAP exclusions used to calculate projected net income may vary significantly based on actual events, Leidos is not able to forecast on a GAAP basis with reasonable certainty all deductions needed in order to provide a GAAP calculation of projected net income at this time. The amounts of these deductions may be material and, therefore, could result in projected net income and diluted EPS being materially less than what may be implied by projected adjusted EBITDA margins and non-GAAP diluted EPS.
Conference Call Information
Leidos management will discuss operations and financial results in an earnings conference call beginning at 8:00 A.M. eastern time on November 1, 2022. Analysts and institutional investors may participate by dialing +1 (877) 869-3847 (toll-free U.S.) or +1 (201) 689-8261 (international callers).
A live audio broadcast of the conference call along with a supplemental presentation will be available to the public through links on the Leidos Investor Relations website (View Source).
After the call concludes, an audio replay can be accessed on the Leidos Investor Relations website or by dialing +1 (877) 660-6853 (toll-free U.S.) or +1 (201) 612-7415 (international callers) and entering conference ID 13733461. (Press release, Leidos, NOV 1, 2022, View Source [SID1234622702])