On August 3, 2021 Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500 science and technology leader, reported financial results for the second quarter of fiscal year 2021 (Press release, Leidos, AUG 3, 2021, View Source [SID1234585614]).

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Roger Krone, Leidos Chairman and Chief Executive Officer, commented, "Our results in the second quarter reflect our leadership position in the government technology market. I am tremendously proud of the way Leidos has responded throughout the pandemic, as our employees and business partners continually delivered for our customers and shareholders. While we remain vigilant with the recent uptick in COVID-19 cases, Leidos is stronger than ever, with new quarterly record levels of revenue and backlog consistent with our industry-leading organic growth."

Revenues for the quarter were $3.45 billion, up 18% compared to the prior year quarter. Excluding acquired revenues of $58 million, revenues increased 16% organically. Revenues grew across all reportable segments; the largest contributors were the increase in veterans’ disability examinations after the pause from the COVID-19 pandemic and the start-up of the Navy Next Generation IT contract.

Operating income for the quarter was $269 million, up 8.0% from the prior year quarter. Operating income margin decreased from 8.5% to 7.8% year-over-year as a result of the $81 million net gain recognized upon the receipt of proceeds related to the VirnetX, Inc. ("VirnetX") legal matter in the second quarter of fiscal year 2020. Net income attributable to Leidos shareholders was $169 million, or $1.18 per diluted share. Net income attributable to Leidos shareholders was up 10% and diluted EPS was up 11% from the second quarter of fiscal year 2020. The weighted average diluted share count for the quarter was 143 million compared to 144 million in the prior year quarter.

Adjusted EBITDA was $359 million for the second quarter, up 5% year-over-year; adjusted EBITDA margin decreased from 11.8% to 10.4% over the same period. Excluding the VirnetX gain in the prior period, adjusted EBITDA margin increased by 140 basis points in the quarter, primarily due to strong program management and better direct labor utilization. Non-GAAP net income was $218 million for the second quarter, which was down 2% year-over-year, and non-GAAP diluted EPS for the quarter was $1.52, which was down 2% compared to the second quarter of fiscal year 2020. Excluding the VirnetX gain, non-GAAP net income and diluted EPS were both up 37%.

Cash Flow Summary

Leidos generated $17 million of net cash provided by operating activities, used $396 million in investing activities, and provided $313 million by financing activities in the second quarter of fiscal year 2021. After adjusting for payments for property, equipment and software, quarterly free cash flow was an outflow of $4 million. The accounts receivable sale program decreased operating and free cash flow by $94 million. In addition, consistent with the high levels of organic growth, operating and free cash inflows ran below their typical levels to fund the start-up of new programs and the expansion of existing programs.

During the second quarter of fiscal year 2021, Leidos paid net consideration of $376 million to acquire Gibbs & Cox, Inc. ("Gibbs & Cox"), the largest independent ship design firm focused on naval architecture and marine engineering. The acquisition positions Leidos to provide a broad set of engineering solutions to the U.S. Navy and to an expanding set of foreign navies. To finance the acquisition, on May 7, 2021, Leidos entered into a senior unsecured term loan facility in an aggregate principal amount of $380 million with a maturity of 364 days.

In addition, Leidos paid down $27 million of debt and returned $48 million to shareholders as part of its regular quarterly cash dividend program. As of July 2, 2021, Leidos had $338 million in cash and cash equivalents and $5.1 billion of debt.

On July 30, 2021, the Leidos Board of Directors declared that Leidos will pay a cash dividend of $0.36 per share on September 30, 2021 to stockholders of record at the close of business on September 15, 2021. The $0.02 per share increase in the quarterly dividend reflects Leidos’ confidence in the future outlook and commitment to shareholder returns.

New Business Awards

Net bookings totaled $3.8 billion in the quarter, representing a book-to-bill ratio of 1.1. As a result, backlog at the end of the quarter was $33.5 billion, of which $7.2 billion was funded. Included in the quarterly bookings were several particularly important awards:

En Route Automation Modernization (ERAM) System. The Federal Aviation Administration (FAA) has awarded initial tasking as part of a single source contract award to Leidos for the continued system integration, sustainment, and enhancement of the En Route Automation Modernization (ERAM) system. The ERAM system is critical for continued operations in the National Airspace System (NAS) and provides automation services for the en route domain at the 20 Continental United States Air Route Traffic Control Centers. This potential contract has a ten-year base period followed by two five-year option periods and a total estimated value of approximately $6.8 billion, if all options are exercised.

Reserve Health Readiness Program III. Leidos was awarded a new prime contract by the U.S. Army Contracting Command-New Jersey to provide commercial health services to all U.S. military reserve component forces. Under the contract, QTC Medical Services, a Leidos company, will work with the Defense Health Agency program office to help ensure service members meet health requirements before, during and after deployment. Services will include physical, mental health and dental assessments along with laboratory and diagnostic services supported by a secure IT infrastructure and customer service call center. The single award, firm-fixed-price, cost-no-fee contract has a one-year base period of performance followed by four one-year options and a total estimated value of approximately $999 million, if all options are exercised.
In addition, Leidos received prime positions on several indefinite delivery/indefinite quantity (IDIQ) contracts that provide competitive differentiation and channels for future growth but are not included in bookings or backlog beyond any awarded task orders. The largest of these IDIQs were:

Transportation Security Administration Screening Equipment Deployment Services. Leidos was awarded a prime contract by the Transportation Security Administration (TSA) to provide services related to the deployment of Transportation Screening Equipment (TSE). Under the contract, Leidos will conduct surveys while providing on-site coordination, design support, planning and execution for screening equipment installations, relocations and removals. In addition to airports, the contract includes security support for special events, such as presidential inaugurations and spectator events, along with international efforts. The single-award IDIQ award has a total ceiling value of $470.7 million.

U.S. Air Force Intelligence Surveillance Reconnaissance Support. Leidos has been awarded a prime contract by the U.S. Air Force to provide solutions for a broad spectrum of aviation requirements for the Intelligence Surveillance Reconnaissance & Special Operations Forces (ISR/SOF) Directorate (WI), Sensors Division (WIN) Non-Standard Foreign Military Sales (FMS) branches. Under the contract, Leidos will provide a cadre of professionals and tools from across the industry to improve both U.S. and allied ISR capabilities. Leidos will also provide full aircraft and ISR sensor integration, procurement of hardware and spares, sustainment support and inspections for airworthiness/configuration. The multi-award IDIQ contract has a total estimated value of $950 million and includes a 13-year base period of performance with a 10-year ordering period and options up to three years, if exercised.
Non-GAAP diluted EPS excludes amortization of acquired intangible assets, acquisition, integration and restructuring costs and other tax adjustments. For additional information regarding non-GAAP diluted EPS and Leidos’ other non-GAAP financial measures, 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 attributable to Leidos shareholders, 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 attributable to Leidos shareholders 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 attributable to Leidos shareholders at this time. The amounts of these deductions may be material and, therefore, could result in projected net income attributable to Leidos shareholders and diluted EPS being materially less than 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 August 3, 2021. 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 13720806.